CITATION: Mohan Roopchand et al v. Kim Chau et al, 2015 ONSC 2890
COURT FILE NO.: CV-12-9610-00CL
DATE: 20150504
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
BETWEEN:
MOHAN ROOPCHAND, MEJJ ENTERPRISES INC and MONDAY’S CHOICE MANAGEMENT CORPORATION
Plaintiffs, Defendants by Counterclaim
AND:
KIM CHAU and CENTURY 21 LEADING EDGE REALTY INC.
Defendants, Plaintiffs by Counterclaim
R. Trent Morris, for the Plaintiffs and Defendants by Counterclaim
Lou Brzezinski and Chad Kopach, for the Defendants and Plaintiffs by Counterclaim
HEARD: April 29 and 30, 2015
SUPPLEMENTAL REASONS FOR JUDGMENT
Newbould J.
[1] This is further to my reasons for judgment of March 5, 2012 in which I declared a shareholders’ agreement between Mr. Chau and Mr. Roopchand was valid and binding and that Mr. Chau was the owner of 20% of the shares of MEJJ Enterprises Inc. and Monday’s Choice Management Corporation. I further ordered that the plaintiffs and defendants by counterclaim purchase Mr. Chau’s interest in those corporations at fair market value to be determined pursuant to a procedure which I set out in my reasons.
[2] On April 11, 2013 I ordered that the buy-out provision in my reasons for judgment be deleted for reasons set out in my endorsement of that date. The parties had agreed that the property in question was worth $3.2 million and that at the trial no buy-out order had been requested. As Mr. Chau at that time wanted the buy-out order to stand without the valuation directions that I had ordered, I ordered that Mr. Chau should deliver a brief pleading setting out what relief he wanted and that Mr. Roopchand should deliver a brief responding pleading, with both being able to provide affidavit evidence in support. They have done this. Further I have heard evidence from each of them.
[3] Mr. Chau seeks a judgment requiring Mr. Roopchand or the two companies to buy his interest in the two companies at 20% of the value of $3.2 million. In his defence, Mr. Roopchand pleaded that Mr. Chau is entitled only to 20% of any profits if the property is sold for more than it was purchased for. At the hearing, however, his position was that any buy-out of Mr. Chau’s shares should recognize the expenses incurred by Mr. Roopchand of $450,000 and the outstanding mortgage on the property of $1.326 million. These figures are agreed. If these expenses are deducted from the value of the property of $3.2 million, 20% of the balance of $1.424 million is $284,800.
[4] Thus the issue is whether Mr. Chau is entitled to $640,000 or $284,800 for his shares in the companies that are to be bought by Mr. Roopchand. For the reasons that follow, I hold that Mr. Roopchand is to buy-out Mr. Chau’s shares of MEJJ Enterprises Inc. and Monday’s Choice Management Corporation for $640,000.
[5] The shareholders’ agreement in question is entitled SHAREHOLDERS PRELIMINARY AGREEMENT. It is a binding agreement and I refer to it as the shareholders’ agreement. It provided that a further shareholders’ agreement in accordance with the agreed terms was to be made, but that never occurred.
[6] At the time the shareholders’ agreement was signed at the end of October, 2007, an agreement to buy the property in question was under negotiation. Mr. Chau was negotiating on behalf of a purchaser named Jensen but when that fell through, he brought the possible deal to the attention of Mr. Roopchand. Mr. Roopchand agreed to give Mr. Chau 20% of the company that would purchase the property in return for Mr. Chau not charging a commission. The details of this are contained in my earlier reasons for judgment. In essence, the 20% figure was the percentage that Mr. Chau’s anticipated foregone commission bore to the anticipated down payment that Mr. Roopchand would have to put into the deal.
[7] The shareholders' agreement provided that the shares and equity in the company at the completion of the purchase of the property was to be 80% for Mr. Roopchand and 20% for Mr. Chau.
[8] The agreement to buy the property was made on November 1, 2007, one day after Mr. Roopchand had signed the shareholders' agreement. The balance of the purchase price after the deposit was by way of a ten year vendor take back mortgage for the balance, with no interest payable for the ten year period of the mortgage. The land was to be used for a driving range and a 10 year lease was made with the Jensens who were to operate the driving range. The lease payments were intended to be the source of the funds needed to pay the vendor take back mortgage. The transaction as a whole, therefore, was that the lands were to be purchased by a down payment of $850,000 to be paid by Mr. Roopchand and Mr. Chau was to obtain his 20% interest in lieu of a broker’s commission. No further funds were expected to be paid by either Mr. Chau or Mr. Roopchand as the lease was to look after the balance of the purchase price payable under the vendor take back mortgage over ten years.
[9] At the earlier trial, Mr. Roopchand asserted that the shareholders' agreement was never signed by him, which assertion I did not accept. He also asserted that the reason for his buying the property was that he hoped to flip it rather than keep it for the longer-term and that the deal he made with Mr. Chau was that Mr. Chau would obtain a 20% interest in the property only if he succeeded in finding a buyer for Mr. Roopchand on a flip. I did not accept that assertion. Rather, I accepted Mr. Chau’s evidence that he told Mr. Roopchand that their exit strategy was that at the end of the ten-year lease the property would be owned debt-free because of its operation by the Jensens under the ten-year lease.
[10] Unfortunately, the Jensens were not able to successfully operate the driving range business. They were evicted in January, 2010. The vendor take back mortgage eventually was paid out by a refinancing and the current mortgage on the property calls for interest at 8.5% and the outstanding amount as of now is $1.326 million. Mr. Roopchand arranged for others to operate the driving range for a short period but it kept losing money. There is no driving range there now and the only income is from Bell Mobility which has leased a small parcel for a transmission tower and a sign company that operates signage on the property. It does not cover the mortgage expenses or taxes. Mr. Roopchand has paid these from sources of his own, although he was not able to be precise as to exactly where the money has come from. It is apparent from the evidence that he has considerable means.
[11] The shareholders' agreement contained the following clause relied on by Mr. Chau, who asserts that it is unambiguous and clear that he is entitled to 20% of the $3.2 million without any deduction for expenses of Mr. Roopchand:
- And it is further understood and agreed by [Roopchand] and [Chau]…that the Shares of [Chau] have been allocated free and clear of all encumbrances. [Roopchand] guarantees, indemnifies and save harmless [Chau] from and against all past, present and future indebtedness, liabilities and expenditures related to the Company and its ownership of the Property as referred to herein and the Business operation thereon, including but not limited to the costs and or fees associated with closing, document preparations, mortgages, loans, holding costs, property taxes, income taxes, liens, legal, accounting, construction, development or environmental. Should earnings of the Company be not sufficient to pay its debts or liabilities, then [Roopchand] covenants to pay [Chau’s] proportionate expenses as they become due, with no lien or charge made against [Chau] or [his] shares.
[12] Mr. Roopchand contends that this provision is unambiguous. He asserts that the first sentence just says that the shares of Mr. Chau must be free of encumbrances, and it has nothing to do with the property. He asserts that the second sentence means only that Mr. Chau is not required to pay for any expenses and if he does Mr. Roopchand has to repay him. It does not mean, he asserts, that Mr. Roopchand cannot be given credit for the outstanding mortgage and expenses he has incurred in the purchase price to be paid to Mr. Chau. The third sentence he says only means that there can be no lien against Mr. Chau’s shares.
[13] As a 20% shareholder in the company that acquired the property, Mr. Chau would have no personal liability for any expenses incurred by the company regarding the property. The second sentence was not necessary for that purpose. I read the second sentence to clearly say that Mr. Chau is to be indemnified by Mr. Roopchand for all indebtedness and expenditures related to the company and to the operation of its business, not just those expenditures that Mr. Chau may have paid but also those that Mr. Roopchand has paid. Included in the description of expenses are mortgage expenses and taxes, the very things Mr. Roopchand wants to deduct from what Mr. Chau is to be paid for his shares.
[14] The third sentence contemplates that if there is a shortfall in the earnings of the company that leave it unable to pay its liabilities, Mr. Roopchand will pay Mr. Chau’s' proportionate expenses. The anticipated earnings at the time of the shareholders' agreement were the rental payments to be received from the property. It is the failure of the tenant to pay its rent that has caused the shortfall, which the third sentence has dealt with. If Mr. Roopchand were correct that Mr. Chau should pay his share of the expenditures incurred by the company and paid for by Mr. Roopchand, that would be directly contrary to this third sentence which states that Mr. Roopchand will pay Mr. Chau’s' proportionate expenses.
[15] In my view, the paragraph in its entirety is clear that Mr. Chau is not required to pay for any expenditures related to the property and that its effect is that Mr. Roopchand has no right to deduct from the payment to be made to Mr. Chau for his shares the amount of the mortgage against the property or the expenditures paid for by Mr. Roopchand.
[16] Mr. Roopchand contends in the alternative that this result is commercially unreasonable and that the paragraph should not be construed in a commercially unreasonable manner. I do not agree.
[17] The time to consider whether an agreement is commercially unreasonable must be when the agreement was made. The factual matrix may be looked at in construing the agreement.
[18] In Kentucky Fried Chicken v. Scott's Food Services Inc. (1998), 1998 4427 (ON CA), 41 B.L.R. (2d) 42 (Ont. C.A.) Goudge J.A. stated the following regarding the interpretation of a commercial agreement at para. 27:
Where, as here, the document to be construed is a negotiated commercial document, the court should avoid an interpretation that would result in a commercial absurdity. [City of Toronto v. W.H. Hotel Ltd. (1966), 1966 8 (SCC), 56 D.L.R. (2d) 539 at 548 (S.C.C.)]. Rather, the document should be construed in accordance with sound commercial principles and good business sense; [Scanlon v. Castlepoint Development Corporation et al. (1992), 1992 7745 (ON CA), 11 O.R. (3d) 744 at 770 (Ont.C.A.)]. Care must be taken, however, to do this objectively rather than from the perspective of one contracting party or the other, since what might make good business sense to one party would not necessarily do so for the other.
[19] Regarding the factual matrix or surrounding circumstances, Rothstein J. in Sattva Capital Corp. v. Creston Moly Corp. 2014 SCC 53 referred to the use of surrounding circumstances and cautioned as to the extent they can be considered:
57 While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement (Hayes Forest Services, at para. 14; and Hall, at p. 30). The goal of examining such evidence is to deepen a decision-maker's understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract (Hall, at pp. 15 and 30-32). While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement (Glaswegian Enterprises Inc. v. B.C. Tel Mobility Cellular Inc. (1997), 1997 4085 (BC CA), 101 B.C.A.C. 62).
58 The nature of the evidence that can be relied upon under the rubric of "surrounding circumstances" will necessarily vary from case to case. It does, however, have its limits. It should consist only of objective evidence of the background facts at the time of the execution of the contract (King, at paras. 66 and 70), that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting. Subject to these requirements and the parol evidence rule discussed below, this includes, in the words of Lord Hoffmann, "absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man" (Investors Compensation Scheme, at p. 114). Whether something was or reasonably ought to have been within the common knowledge of the parties at the time of execution of the contract is a question of fact.
[20] In this case, the mutual intention of the parties was that the property would be self- sustaining by virtue of the lease. It is argued on behalf of Mr. Roopchand that the lease could have been terminated on six months’ notice, and if a purchaser was found and notice given to terminate the lease, there may have been expenses to be paid. It is said that it would make no sense in that circumstance to not require Mr. Chau to pay any share of expenses. However, the intention of the parties was that the lease was to last ten years. In my earlier reasons for judgment, I referred to Mr. Roopchand’s evidence in which he first denied that he purchased the property on the strength of the lease and that he had purchased the property on the strength of being able to flip it but in which on his cross-examination acknowledged his examination for discovery in which he had said that he purchased the property on the strength of the lease.
[21] The clause in question made sense to Mr. Chau. His evidence was that he did not want to have any costs against his shares or obligations for the business. It may not seem now to Mr. Roopchand to be wise to have taken the risk, although there was no evidence from him regarding the agreement as he asserted at the first trial, and again on this hearing, that his signature was a forgery and that he never saw the agreement until troubles arose when a copy was sent to his lawyer.
[22] I cannot find that the clear language of the clause should be interpreted as Mr. Roopchand now asserts on the basis that it otherwise would be a commercial absurdity.
[23] Finally, Mr. Roopchand relies on an e-mail from Mr. Chau to his lawyer Ms. Yee whom he had retained to draft a further shareholders' agreement as contemplated in the shareholders' agreement signed by Mr. Chau and Mr. Roopchand. He says that it is evidence of an agreement collateral to the signed shareholders' agreement. Ms. Yee had drafted a form of a unanimous shareholders' agreement which Mr. Chau thought incorrect. He e-mailed Ms. Yee and said “I have gone over the shareholder agreement and here are my thoughts”. Mr. Chau in his evidence said he was referring to the earlier signed shareholders' agreement and not the new draft. I am not sure he is correct in that but I do not think it makes a difference.
[24] In the draft unanimous shareholders' agreement that Ms. Yee drafted, it provided that each of Mr. Chau and Mr. Roopchand would be responsible for the expenses of the corporation proportionate to their share holdings and that Mr. Roopchand would at first pay the expenses and collect them from the sale or refinancing of the property. This was directly contrary to the shareholders' agreement that had been signed.
[25] In his e-mail to Ms. Yee, Mr. Chau made a number of statements. Mr. Morris contends that one paragraph is evidence of an agreement between Mr. Roopchand and Mr. Chau that effectively is the same as what was in the draft prepared by Ms. Yee. It starts “I will however receive 20% of the ‘Net’ proceeds from any sale or disposition of the property” which will be ‘after all costs whether it be mortgages/expenses/liabilities’. An example is then given. Mr. Chau testified that this portion of the e-mail was a mistake on his part.
[26] I do not think the e-mail is of assistance to Mr. Roopchand. First, for an agreement to be made, there has to be an offer communicated by the offeror and an acceptance communicated by the offeree. There is no evidence at all that this occurred with respect to the portion of the e-mail relied on by Mr. Roopchand. Thus there is no evidence of an agreement that could be collateral to the signed shareholders' agreement. The passage could not have referred to what was in the signed shareholders' agreement as it was inconsistent with that signed agreement. Also, if it had been such a reference, it would amount to the subjective view of the meaning of a signed agreement which is inadmissible evidence.
[27] Moreover, there is support for Mr. Chau’s evidence that the paragraph in the e-mail was a mistake. There are several statements in the e-mail that Mr. Roopchand is to pay all costs. The very first sentence states “My understanding with Mohan is that he will pay all costs associated with my 20%”. I cannot read the e-mail to indicate any clear statement that either the signed shareholders' agreement or some other “understanding” with Mr. Roopchand constituted an agreement that Mr. Roopchand was entitled to subtract from the price he is to pay for Mr. Chau’s
shares the expenses he has incurred or will incur under the mortgage if he chooses to pay them.
Conclusion
[28] I direct Mr. Roopchand to purchase Mr. Chau’s shares in MEJJ Enterprises Inc. and Monday’s Choice Management Corporation at a purchase price of $640,000.
[29] Mr. Chau is entitled to his costs. If they cannot be agreed, brief written submissions may be made by Mr. Chau within 10 days along with a proper cost outline and Mr. Roopchand shall have 10 further days to make brief written reply submissions.
[30] Mr. Brzezinski asked for an interim protective order that could be registered on title to protect Mr. Chau’s interests, particularly regarding the way the property has been dealt with in spite of my earlier reasons for judgment. Mr. Morris said his client is content with such an order. An order shall go as requested. If the parties cannot agree on the form of the order, it can be settled at a 9:30 am appointment.
Newbould J.
Released: May 4, 2015
CITATION: Mohan Roopchand et al v. Kim Chau et al, 2015 ONSC 2890
COURT FILE NO.: CV-12-9610-00CL
DATE: 20150504
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
BETWEEN:
MOHAN ROOPCHAND, MEJJ ENTERPRISES INC and MONDAY’S CHOICE MANAGEMENT CORPORATION
Plaintiffs, Defendants by Counterclaim
AND:
KIM CHAU and CENTURY 21 LEADING EDGE REALTY INC.
Defendants, Plaintiffs by Counterclaim
SUPPLEMENTAL REASONS FOR JUDGMENT
Newbould J.
Released: May 4, 2015