CITATION: Allied Track Services Inc. v. Jeffery Swift et al, 2015 ONSC 3455
COURT FILE NO.: CV-15-10896-00CL
DATE: 20150601
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
BETWEEN:
ALLIED TRACK SERVICES INC.,
Applicant
– and –
JEFFREY SWIFT, SUZANNE SWIFT AND DEBORAH JOAN FIRMIN, TRUSTEES, for and on behalf of the Trust known as THE 2012 JEFF SWIFT FAMILY TRUST, RODNEY SWIFT, ALAINE REIDPATH AND DEBORAH JOAN FIRMIN, TRUSTEES, for and on behalf of the Trust known as THE 2012 ROD SWIFT FAMILY TRUST, JOHN SWIFT, DOREEN SWIFT, JEFFREY SWIFT, RODNEY SWIFT, and 2109123 ONTARIO INC.
Respondents
Martin J. Henderson and Brian Chung, for the Applicant
Morris Manning, Q.C. and Theresa R. Simone, for the Respondents
HEARD: May 27, 2015
Newbould J.
[1] The applicant applies for a declaration that the parties are required to engage in binding arbitration pursuant to a Share Purchase Agreement dated March 21, 2014 (the “SPA”) and an order vacating or varying an interim order of Justice Spence in an earlier application brought by the applicant. The applicant also seeks a declaration that it is the owner of inventory of the business acquired by the applicant under the SPA. The respondents resist this relief and by way of a motion request various orders, including converting the application into an action and directing a timetable to advance resolution of issues they raise. Essentially, the position of the respondents is that it is premature to appoint an arbitrator because of issues they say must be first resolved by the court.
[2] In my view, the position taken by the respondents is completely without merit and an order is to issue directing arbitration in accordance with the SPA and for other relief sought by the applicant.
Relevant background
[3] On March 21, 2014, 2408122 Ontario Limited (the “Buyer”) purchased all of the shares of Swift Railroad Contractors Corporation (“Swift Co.”) from the 2012 Jeff Swift Family Trust, the 2012 Rod Swift Family Trust, John Swift and Doreen Swift (the "Seller"), pursuant to the SPA. The Buyer and Swift Co. then amalgamated. On March 10, 2015, the applicant changed its name to Allied Track Services Inc. (“Allied”).
[4] The Swift Co. was is in the business of providing services to the railroad industry, such as track and turnout installations, emergency and routine rail repairs, thermite welding, surfacing and regulating, bridge repairs, railway production and rehabilitation, tie and rail laying, and production surfacing. Allied has carried out the same business.
[5] On March 21, 2014, the Buyer also entered into an Asset Purchase Agreement (the “APA”) with the respondent, 21093123 Ontario Inc., for the purchase of certain additional assets which were owned separately. 21093123 Ontario Inc. is controlled by the respondent Swift interests.
[6] The SPA and APA were both required to effect the overall transaction because 21093123 Ontario Inc. had leased certain equipment to Swift Co. to use in its business. It was, therefore, the intention of the parties that all of the assets owned by Swift Co., as well as by 21093123 Ontario Inc., would become the property of the Buyer on closing. The total purchase price paid for the acquisition of the shares of Swift Co. and the assets was $14 million subject to post-closing adjustments and the operation of a post-closing workout in favour of the Sellers.
[7] Nearly all of the equipment and inventory used in the business of Swift Co. was situated on the premises of the respondent 21093123 Ontario Inc. Therefor at the time of the SPA, Allied entered into a lease with 21093123 Ontario Inc. for a term ending March 21, 2015.
[8] The SPA provided for three different post-closing adjustments. One related to inventory. In the SPA it was agreed that the estimated fair value of the inventory was $1,750,000. A procedure was set up in the SPA for the actual value of the inventory to be established post-closing and an adjustment to be made to the purchase price based on the actual value. If the actual value of the inventory was more that the estimated value, the Buyer was required to pay the extra to the Seller and if it was less the Seller was required to pay the difference to the Buyer.
[9] The procedure for valuing the inventory post-closing provided for in article 2.8(a) of the SPA was that within 60 days after the closing, the Buyer was to deliver to the Seller an inventory listing of the Company (Swift Co., now Allied) as of the closing date, a calculation of the fair market value of the inventory net of costs to obtain and recover the inventory and the costs to refurbish it for sale.
[10] The SPA also provided for post-closing Working Capital and Holdback A/R adjustments.
[11] The SPA provided for a procedure to determine what the three adjustments should be if the parties could not agree. The parties have not been able to agree on any of the adjustments. It is agreed that the procedure is an arbitration procedure. Allied has served a notice pursuant to the SPA for the disputes to be arbitrated. The Sellers have refused to participate.
[12] The dispute settling procedure does not refer to “arbitration”, but rather to a Designated Accountant. Articles 2.5(e) and 2.8(c) of the SPA contain the provisions. They are both the same except the first deals with disputes regarding the Working Capital and Holdback A/R adjustments and the second deals with the inventory adjustment. Article 2.8(c) dealing with the inventory adjustment provides:
If the Buyer and the Sellers are unable to resolve the Dispute within the 10-day period after the Buyer's receipt of the Dispute Notice, the Buyer and the Sellers shall jointly engage the Designated Accountant. The Designated Accountant's function shall be to review only those items that are in Dispute with respect to the determination of the Inventory Adjustment Amount and to resolve the Inventory Dispute in accordance with the requirements of this section. The Designated Accountant shall, as promptly as possible and in any event within thirty (30) days after the date of its appointment, render its decision on the Inventory Dispute in writing to the Buyer and the Sellers, together with a revised Inventory Adjustment Amount reflecting its decision with respect to each of the items in Dispute. The date on which the Inventory Adjustment Amount is finally determined in accordance with this section is referred to as the "Determination Date". The Designated Accountant's decision shall be final and binding upon the parties, and the Inventory Adjustment Amount, as revised pursuant to the Designated Accountant's decision, shall be final and binding, barring manifest error. The Designated Accountant, in its sole and absolute discretion, shall determine the proportion of its fees and expenses to be paid by the Sellers and the Buyer, respectively, based primarily on the degree to which the Designated Accountant has accepted the positions of the respective parties in relation to the Inventory Dispute.
[13] The SPA named Mr. Stan Zinman at BDO Canada Limited as the Designated Accountant. Allied delivered notices under the SPA requiring the three disputed adjustments to be arbitrated, but Sellers who are respondents have refused to participate.
[14] After the dispute arose between the parties, 21093123 Ontario Inc. locked Allied out of the leased premises that contained the inventory and equipment used by Allied. On February 9, 2015, Spence J. on an application by Allied made an interim order permitting Allied to remove the gate barrier preventing it access to the leased premises. Certain other orders were also made.
Analysis
[15] The agreement of the parties that the dispute provisions of the SPA are arbitration provisions precludes the necessity of considering whether the provisions are arbitration provisions as opposed to a valuation procedure short of arbitration. However the legal principles to determine whether an dispute resolution clause can be an arbitration provision would appear to comfortably include the provisions of the SPA as arbitration provisions.
[16] Whether a person called upon to value an asset is acting as an arbitrator or a valuator was dealt with at length by L’Heureux-Dubé, J. in Sport Maska Inc. v. Zittrer, 1988 CanLII 68 (SCC), [1988] 1 S.C.R. 564. More recently it has been dealt with in Concord Pacific Developments Ltd. v. British Columbia Pavilion Corporation (1991), 1991 CanLII 5733 (BC CA), 85 D.L.R. (4th) 402 (B.C.C.A.) and in Canada Acquisition Co. v. Ivaco Inc., 2005 Carswell Ontario 10249 (Farley, J.). The principles are well established. There must be a dispute that the parties agree is to be sent to someone for adjudication in order for there to be arbitration. If there is such a dispute, the precise function intended to be given to the third party must be looked at and various criteria are to be weighed in considering whether that third party is acting as an arbitrator or a valuator. The language used is important to the analysis but the courts are not bound by the terms chosen if the terms do not correspond to the true intent appearing from other criteria. See Sport Maska, supra.
[17] The respondents say that there is a dispute as to what constitutes inventory. They say the SPA does not define inventory but only equipment. In their factum, they state that while the intention of the parties was that the inventory was to be acquired by the Buyers from the Sellers, “it was subject to the operation of a post-closing purchase price mechanism”. In oral argument Mr. Manning said that the position of the Sellers is that the inventory was not sold to the Buyers and that it belongs to the Sellers. The respondents say that the arbitrator lacks jurisdiction to deal with the inventory adjustment until after the inventory issue has been decided.
[18] I do not accept this position of the respondents. What constitutes inventory and the jurisdiction of the arbitrator are matters that are to be deal with by the arbitrator. In Dell Computer Corp. v Union Des Consommateurs, 2007 SCC 34, 2007 S.C.C. 34, a case dealing with a class action under the Civil Code of Quebec, the claim was referred to arbitration. While that case did not expressly purport to be a case decided under common law principles, it is a case of our Supreme Court and therefore instructive, and it is consistent with common law principles. Deschamps J. for the majority laid down a general rule that a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator unless the issue is based solely on a question of law. She stated:
First of all, I would lay down a general rule that in any case involving an arbitration clause, a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator. A court should depart from the rule of systematic referral to arbitration only if the challenge to the arbitrator’s jurisdiction is based solely on a question of law.
If the challenge requires the production and review of factual evidence, the court should normally refer the case to arbitration, as arbitrators have, for this purpose, the same resources and expertise as courts. Where questions of mixed law and fact are concerned, the court hearing the referral application must refer the case to arbitration unless the questions of fact require only superficial consideration of the documentary evidence in the record.
[19] What Dell decided, and which a number of other cases have said in the common law provinces, is in accordance with the competence-competence principle that it is for the arbitrators to decide on their jurisdiction. It is also consistent with the Ontario Arbitration Act, 1991, which provides in section 17(1) that an arbitral tribunal may rule on its own jurisdiction to conduct the arbitration and may in that connection rule on objections with respect to the existence or validity of the arbitration agreement.
[20] What constitutes inventory and its value as of the closing date are matters for the arbitrator in this case. That is what the arbitrator is required to decide under the SPA. There is no basis to prevent the arbitration from proceeding because of the issues raised by the respondents.
[21] Who owns the inventory is a matter of contract, which since Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 is a question of mixed fact and law. Allied submits that it is the owner of the inventory. I agree with Allied.
[22] The inventory was owned by the Swift Co. Pursuant to the SPA, the shares of Swift Co. were sold to the Buyer. The Buyer and Swift Co. amalgamated and changed its name to Allied. The inventory of Swift Co. remained the assets of Swift Co., now Allied. In the SPA, there was no provision that the inventory would not remain an asset of Swift Co. I see no basis to contend that the inventory somehow became the property of the Sellers.
[23] The Sellers in the SPA represented certain things about the inventory. Article 3.1(20) provided:
- Inventories
All inventories of the Company are either currently used or required in the provision of services by the Company, all of which…are of a quality useable for sale in the Ordinary Court of Business …The Company's current inventory level is consistent with past practice and is sufficient to satisfy the Company's current sales forecasts.
[24] This clause is completely contrary to the notion that the inventory did not continue as an asset of the business that was sold. It would also make no sense if the inventory did not remain with the business sold that there would be a post-closing adjustment for the actual inventory value as at the closing with a requirement that the Buyer pay more if that value was higher than estimated. The SPA contained an entire agreements clause and there was no provision in the SPA that the inventory was not to remain an asset of Swift Co.
[25] The respondents say that the SPA did not define inventory but did define equipment, and that inventory was not included in the definition of equipment. Equipment was defined as:
Equipment means all of the Company’s furniture, fixtures, machinery, equipment, motor vehicles, office equipment, computers, tools, replacement parts and other tangible personal property now or hereafter owned or used in connection with the operation of the Business wherever located, including, without limitation, the Equipment described on Schedule 3.1(18).
[26] Provisions regarding Equipment were contained in article 3.1 of the SPA which contained a representation that the Equipment was in good operating condition and was reasonably fit to be used in the business of the Company. Allied says that the definition of Equipment is broad enough to include inventory because inventory is used in connection with the business. In my view, whether that is so is irrelevant. Even if the definition of Equipment does not include inventory, it does not at all mean that the inventory did not remain an asset of the business acquired by the Buyer.
[27] In my view, it is clear and I find that none of the respondents have any legal interest in the inventory or equipment of Swift Co. that was acquired by the Buyers through their purchase of the shares of Swift Co.
[28] The respondents raise an issue regarding “C.P. equipment”. They say that some of the equipment belonged to C.P. and that C.P. should be added as a defendant to the Allied application. I see nothing in this point and there is no basis to add C.P. to the proceedings.
[29] The “C.P. equipment” consisted of surplus equipment derived from repairing railway tracks. C.P. invoiced Swift Co., and later Allied after the completion of the SPA, as consignee of this surplus equipment. The equipment was either sold by Allied as consignee of C.P. or purchased by Allied for its own use. The evidence is that Allied paid C.P. for the equipment. There is no evidence that any equipment is owned by C.P. and there is no cogent evidence at all that the equipment somehow belonged to any of the respondents. To the contrary, on March 5, 2015, C.P. confirmed to Allied that payment to C.P. had cleared, that the contract between C.P. and Swift Co., now Allied, had been fulfilled, and that Allied was the owner of the equipment. Any such “C.P. equipment”, if it still exists, is the property of Allied.
[30] On the application made before Justice Spence by Allied for access to the leased premises, Mr. Manning told Spence J. that his clients were going to claim that they owned the inventory and that the inventory included the equipment. As a result, Spence J. ordered that while Allied could have access to the leased premises, it could not sell, destroy or remove any of the inventory and that it could use the equipment in the business and for that purpose remove the equipment from the leased premises, but it could not sell the equipment. The order provided that its provisions applied to “the present interim Application for relief only”.
[31] It is important to observe that the interim application was for relief to permit Allied access to the leased premises owned by the respondent 21093123 Ontario Inc. under a lease that was known to expire on March 21, 2015, some six weeks after the interim order of Spence J. was made. By the end of the six weeks, Allied was able to remove its equipment from the leased premises but unable to sell it. Allied was not able to obtain the inventory and it remains on the premises of 21093123 Ontario Inc.
[32] Although Spence J. was told that the respondents were going to make a claim for the inventory, they have commenced no application to do so. They have asserted in this application by Allied that they, or one or more of them, own the inventory, but I have held against them.
[33] In my view, the order of Spence J. is spent and it should now be vacated in so far as the continuing terms in it regarding the inventory and equipment are concerned. By its terms, the order applied only to the interim application by Allied for relief which was known could only be available until the lease terminated on March 21, 2015. Moreover, Spence J. did not purport to determine rights with respect to the ownership of the inventory or equipment and was merely trying to maintain the status quo on an interim basis.
[34] Allied is entitled to now have possession of the inventory currently on the premises of 21093123 Ontario Inc., if it so wishes. Mr. Henderson for Allied advised that Allied has no intent to sell the inventory or equipment pending a determination of the post-closing inventory adjustment. I see no need for an order to that effect but the orders I make are on the basis of what amounts to an undertaking by Allied not to sell any of the inventory or equipment prior to the determination of the arbitrator of the post-closing inventory adjustment without either the consent of the respondents or a court order.
[35] The respondents assert that the arbitration should not proceed before a number of other matters are determined by a court, including claims that Allied has said it will make against one or more of the respondents for breach of contract relating to alleged breaches of the SPA and allegations by the respondents of wrongdoing on the part of Allied regarding the SPA. I do not see these as any impediment to the arbitration.
[36] The respondents have not commenced any action of any kind against Allied arising from anything to do with the SPA or the APA, nor have they undertaken to do so. What they seek is in effect an injunction preventing the arbitration from taking place without commencing any action and without providing any meaningful undertaking as to damages. Moreover, whether or not they commenced any action, the arbitration regarding the post-closing adjustments should proceed so that those value issues are determined.
[37] Mr. Manning asserted that there is an issue as to whether the SPA should be rescinded because of alleged breaches of it by Allied. I would not stop the arbitration from proceeding on such an assertion. The Seller has not given any notice that because of alleged breaches, the SPA should be rescinded. Nor has the Seller indicated that it is in a position to return the $14 million paid to it by the Buyer. Even if it did take this position in an action, it would need to convince a court that an injunction should issue preventing the arbitration from taking place until all those issues were finally determined. It appears to me that the prospects of such an injunction would be slim indeed.
[38] Finally, I see no basis for converting this application into an action. There is no purpose in doing so.
Conclusion
[39] An order is to go:
(a) Requiring the disputes regarding the three post-closing adjustment disputes to be arbitrated, in accordance with paragraphs 1 (a), (b) and (c) of the amended notice of application.
(b) Declaring that Allied is the owner of the inventory and equipment of the business of Swift Co. acquired by Allied, including all inventory currently on the premises of 21093123 Ontario Inc. and all equipment referred to by the respondents as the “C.P. equipment”.
(c) An order vacating the orders of Spence J. dated February 9 and 23, 2015.
(d) An order that Allied is forthwith entitled to remove the inventory from the premises of 21093123 Ontario Inc.
(e) An order that subject to retaining the inventory and equipment until the post-closing inventory adjustment has been determined by the arbitrator, Allied has the right to sell or dispose of the inventory and equipment.
[40] Allied has requested in its application an order transferring application CV-15-520803 to the Commercial List and consolidating it with this application CV-15-10896-00CL. I am not sure what is to be served by this request in light of the orders now made. If Allied wishes to proceed with this request, it can be discussed at a 9:30 am conference.
[41] Allied is entitled to the costs of this application. If costs cannot be agreed, brief written submission not exceeding three pages along with a proper cost outline may be made by Allied
within 10 days and the respondents shall have 10 further days to make brief written responding submissions not exceeding three pages in length.
Newbould J.
Released: June 1, 2015
CITATION: Allied Track Services Inc. v. Jeffery Swift et al, 2015 ONSC 3455
COURT FILE NO.: CV-15-10896-00CL
DATE: 20150601
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
BETWEEN:
ALLIED TRACK SERVICES INC.,
Applicant
– and –
JEFFREY SWIFT, SUZANNE SWIFT AND DEBORAH JOAN FIRMIN, TRUSTEES, for and on behalf of the Trust known as THE 2012 JEFF SWIFT FAMILY TRUST, RODNEY SWIFT, ALAINE REIDPATH AND DEBORAH JOAN FIRMIN, TRUSTEES, for and on behalf of the Trust known as THE 2012 ROD SWIFT FAMILY TRUST, JOHN SWIFT, DOREEN SWIFT, JEFFREY SWIFT, RODNEY SWIFT, and 2109123 ONTARIO INC.
Respondents
REASONS FOR JUDGMENT
Newbould J.
Released: June 1, 2015