COURT FILE NO.: CV-11-442675

MOTION HEARD: 20150820
REASONS RELEASED: 20150826

SUPERIOR COURT OF JUSTICE – ONTARIO

BETWEEN:

UNIVERSAL FOREST PRODUCTS OF CANADA INC.
Plaintiff

and

EDWARD DAVIS. MICHAEL SALO, TRS COMPONENTS LTD., WHIRL HOLDINGS LTD., 2070400 ONTARIO LTD. and UFP THORNDALE PARTNERSHIP
Defendants

BEFORE: MASTER D. E. SHORT

COUNSEL:
William A. Bortolin Fax (416) 863-1716
-for the Plaintiff (Moving Party)

Wade W. Sarasin Fax: 519-660-7889
for Defendants

RELEASED: August 26, 2015

Reasons for Decision

26.01 On motion at any stage of an action the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.

[1] The plaintiff seeks to amend its statement of claim. The defendants state that they will be prejudiced by some of the amendments sought in light of pending proceedings in related matters now scheduled to be heard within the next month by a judge of this court sitting in London, Ontario.

[2] The general rule is that amendments to a Statement of Claim are presumptively approved. There are normally two possible grounds for rejecting amendments, regardless of the stage of the proceeding:

(a) the proposed amendment would cause an injustice not compensable in costs; or

(b) the proposed amendment is not tenable at law, i.e.:

(i) the proposed amendment does not disclose issue that is worthy of trial and prima facie meritorious;

(ii) the proposed amendment, if originally pleaded, would have been struck; or

(iii) the proposed amendment does not contain sufficient particulars.

[3] The present motion raises further issues as to the timing and potential prejudicial consequences of the granting of the contested amendments now. Because of the urgency for my delivering a decision, I regret that portions of these reasons may be somewhat disjointed.

I. Overview

[4] The plaintiff had a business. It was failing financially. The individual defendants, who were involved in the original business, believed it was a business that could be saved. A consequence they made a proposal that would allow them to continue to operate the business and could potentially provide a return to the plaintiff corporation.

[5] One of the difficulties for lawyers drafting commercial agreements is endeavouring to foresee every possible future situation and then trying to draft the contracts in such a way as to best protect their client in any of those eventualities.

[6] The ultimate issue between the parties is whether there was an implied condition in various agreements dealing with an agreed pre-condition for the exercise of various options to purchase, which options were clearly documented in the existing written contracts.

[7] The plaintiff, Universal Forest Products of Canada Inc. ("Universal") commenced the present action, 2011 and now seeks leave to make amendments to its statement of claim, and its reply and defence to counterclaim.

[8] The defendants oppose a portion of the proposed additions to the claim.

[9] The basis for the opposition is that the defendants have recently commenced application for specific relief before a judge of this court in London, Ontario. The issues on the Applications and the subject matter of the present action all flow from a series of commercial transactions between the same parties.

[10] The defendants assert that it is inappropriate to permit amendments to the 2011 action prior to the London issues being resolved.

[11] Counsel for the plaintiff asserts that the amendments “which are modest”, fall into one three categories:

(1) clarifying and particularizing the legal basis of Universal's claims;

(2) pleading a limitations defence; and

(3) allowing for determination of an additional issue (the "Option Issue"), which is intimately connected with the subject matter of the proceeding, and would be most expeditiously and efficiently resolved as part of the proceeding.

[12] In my view the amendments proposed by Universal are legally tenable.

[13] However, I have some difficulty with the plaintiffs assertion that the amendments “do not significantly alter the underlying factual matrix of its claims”

[14] As well, the plaintiff asserts that the amendments “will not prejudice or disadvantage the defendants in any way.” There position concludes with an assertion that “the court is mandated to grant the leave sought by Universal”.

[15] The extent of that mandate requires further analysis.

II. Current Issues

[16] In order to appreciate the scope of the present dispute a somewhat detailed description of the factual matrix is required.

[17] The UFP Thorndale Partnership (the “Partnership”) was established by an agreement dated January 1, 2008 and carried on business as a manufacturer, supplier and distributor of wood component products (such as assembled roof trusses) from the property known municipally as 16783 Thorndale Road, Thorndale, Ontario (the "Property"). Universal owned 70% of the Partnership.

[18] Prior to the Partnership, Universal carried on a similar business from the Property since in or about 2000. The defendants, Edward Davis (“Davis”) and Michael Salo (“Salo” were employees of Universal before entering into the Partnership.

[19] The plaintiff’s factum asserts :

“3. This action arises from the ashes of a failed partnership venture. The UFP Thorndale Partnership ("UFP'') was formed on January I, 2008, with three partners: Universal; Whirl Holdings Ltd. ("Whirl"); and 2070400 Ontario Inc. ("207"). The defendants Edward Davis and Michael Salo are the controlling shareholders and directing minds of Whirl and 207, respectively. In addition to being a partner, Universal is also the sole creditor of UFP, and bankrolled UFP's operations with a secured $2 million revolving line of credit.

4. UFP's business, located in Thorndale, Ontario, was involved in the manufacture, assembly and distribution of construction lumber products. UFP did not operate profitably, and exceeded its $2 million credit limit within two years of being formed. In order to prevent UFP from suffering further losses, the defendants Davis and Salo agreed to assume full ownership of UFP's business. The defendant, TRS Components Ltd. ("TRS") is the entity that assumed operation of the lumber business. Davis is the controlling shareholder and directing mind of TRS. Whirl also continued to be involved in the business as the holding company for real estate assets.” [my emphasis]

[20] The claims and counterclaims in this action each involve alleged obligations falling into one of two categories:

(a) The obligations of the parties to pay down the outstanding balance of the line of credit debt; and

(b) The obligations of the parties arising out of the transfer of business from UFP to TRS and Whirl (the "Transaction").

[21] Universal claims payment for amounts owing by the defendants pursuant to the line of credit (being 30% of the balance, in total), and compensation for the inventory received and used by TRS (valued at the cost to UFP, or alternatively on the basis of an accounting of profits).

[22] The defendants assert that the agreement does not say that anywhere. As a consequence, they take the position that they are entitled to exercise the option and pay $1.5 million to the plaintiff, in exchange for the land.

[23] Based on its position on the unmet precondition, the plaintiff refused to set a closing date with the result that a stalemate has been reached.

[24] The defendants' counterclaims each relate to amounts that they are allegedly owed in connection with the Transaction: for employee severance costs; for account receivable collection services allegedly provided to UFP; and for management services allegedly provided to UFP.

III. The Options Issue

[25] UFP was operated on real estate in Thorndale, Ontario, which was owned by Universal and leased to UFP (the "Leased Premises"). As part of the Transaction, Whirl entered into a new lease agreement with Universal, and thereby assumed UFP's place as tenant (the "Real Estate Lease Agreement").

[26] The Real Estate Lease Agreement, commenced January 1, 2010, has a five-year term, which expired December 31, 2014. The Lease Agreement contains, at section 5(i), an option for the tenant to purchase the Leased Premises at a price of $1,400,000 CDN with closing to take place within 60 days of Whirl Ltd. delivering notice that it was exercising its option (the "Real Estate Purchase Option").

[27] As part of the same Transaction, TRS also entered into lease agreements with Universal for equipment (the “Equipment Lease”) and rolling stock (the “Rolling Stock Lease”): that had been used by UFP in the course of its business (the three lease agreements are referred to collectively below as the "Lease Agreements"). Similar to the Real Estate Lease, the Equipment Lease and Rolling Stock Lease each commenced January 1, 2010, expired December 31, 2014, and included a purchase option (the purchase options contained in the three Lease Agreements are referred to collectively below as the "Purchase Options").

[28] Whirl has purported to exercise the Purchase Options. In its argument, Universal takes the position that the Purchase Options cannot be validly exercised until the inventory is paid for, on the basis that:

“(a) the Lease Agreements and inventory sale were both integral components of the same Transaction to transfer UFP's business:

(b) the parties to the Transaction each understood and expected that the inventory would be paid for prior to the exercise of the Purchase Options, and this assumption was fundamental to the agreement to include the Purchase Options;

(c) the necessity of prior payment in respect of the inventory was so obvious that it went without saying, and such a requirement is necessary for the business efficacy of the Purchase Options; and

(d) prior payment in respect of inventory falls within the scope of the "additional terms and conditions as the parties shall reasonably agree" that are expressly contemplated by the Purchase Option in the Real Estate Lease Agreement.”

[29] Whirl insists that it is entitled to exercise the Purchase Options regardless of whether the inventory has been paid for.

[30] Universal states that it has has thus far allowed Whirl to remain in possession of the Leased Premises as an over-holding tenant, on a month-to-month basis, with a continuing obligation to pay rent.

[31] With respect to the other options, the Equipment Lease sets out a purchase price of $120,000 with closing to take place no later than 30 days after the end of the term; and the Rolling Stock Lease sets out a purchase price of $ 100,000 with closing to take place no later than 30 days after the end of the term.

[32] The Equipment Lease and Rolling Stock Lease each contain "entire agreement" clauses.

[33] The defendants acknowledge that the Lease does not contain an entire agreement clause, howeverthey note that it:

(a) Sets out its consideration as the "rent and covenants contained in this Lease ... ":

(b) Contains express covenants of the tenant and landlord; and

(c) Sets out that Universal had an entitlement to terminate the Lease in the event of a default of the tenant in paying rent or in complying with any other covenant or agreement in the Lease, if such default was not cured within the prescribed time.

[34] Counsel for the Defendants asserts that the Lease, Rolling Stock Lease and Equipment Lease were drafted by Universal and/or its legal representatives and that Whirl Ltd. and TRS did not obtain legal advice with respect to these Agreements due to the deadlines imposed by Universal at the time of the transaction. In particular they assert that as a consequence the doctrine of contra proferendum applies

[35] Thus the defendants submit that if the option to purchase contained in the Agreements intended to be conditional upon payment to Universal for "inventory" acquired by the Partnership, they would have expressly stated such.

[36] Their counsel submits that Whirl Ltd. and TRS made the required payments to Universal under these lease agreements throughout with the expectation that they had the option to purchase the Property, equipment and rolling stock at the end of the terms as provided for under each agreement."

[37] TRS and Whirl Ltd. Assert that they validly exercised their options to purchase pursuant to the Agreements by notices dated December 16, 2014.

IV. Status of the Action

[38] Universal commenced this action on December 22, 2011. The defendants served their statement of defence on June 1, 2012, and Universal served its reply and defence to counterclaim on July 9, 2012.

[39] Following an extended period of inactivity, a Status Hearing was held on November 6, 2014. The court ordered that the action proceed on the following timetable:

(a) Parties will conduct mandatory mediation on or before January 31, 2015;

(b) Parties will complete examinations for discovery by March 16, 2015;

(c) The parties shall answer any undertakings arising from the examinations for discovery by April 15, 2015; and

(d) The action shall be set down for trial by May 30, 2015

[40] Following receipt of the option exercise notices, Universal sent the defendants draft amendments to its statement of claim on January 9, 2015, incorporating the Option Issue with respect to the Real Estate Lease.

[41] An all-day mediation was held before former Justice Colin Campbell on January 15, 2015.

[42] Examination for discovery were carried out in April of 2015.

[43] Counsel mutually agreed to permit examination for discovery regarding the Option Issue, subject to the proviso that the answers provided could only be relied upon at trial if Universal was granted leave to amend its statement of claim to include the Option Issue.

[44] Apparently In the course of discoveries, it became apparent that the allegations supporting the defendants' other three counterclaims might also fall outside the limitations period.

[45] The plaintiff asserts pleading of a more comprehensive limitations defence should not come as a surprise to the defendants, and and that the proposed amendments do not introduce new factual issues into the proceeding. “It is purely a function of the calendar.”

[46] On this issue I see no real prejudice to the defendants if leave is granted to make the limitation related amendments. It would seem that arguably the amendment is more in the nature of a defence rather than a new claim.

[47] On the non-option issues I am prepared to permit the amendments sought, but on terms.

[48] The Loan Agreement referred to above was between Universal and the Partnership. Davis and Salo signed conditional guarantees with respect to the Loan Agreement. There are a number of issues to be determined in this proceeding with respect to the Loan Agreement and Guarantees and their enforceability with respect to any alleged Partnership debt to Universal.

[49] The defendants do not oppose the proposed amendments in paragraph 1 which particularize the damages claimed against certain defendants, however, the defendants submit that “the proposed amended claim does not contain adequate particulars to support a cause of action by Universal against each of those defendants for payment of "inventory" which, according to paragraphs l(a)(iii), 23 and 26 of the proposed amended claim, were previously purchased and paid for by the UFP Partnership, which is not a plaintiff in this proceeding.”

[50] I am allowing the sought amendments in this regard on the condition that the requested particulars are provided.

V. Proposed Amendments to Add Option Issues

[51] In the Defendants’ factum it is asserted that the plaintiff responded to the December 16, 2014 notices by taking positions including:

(a) There is a court ordered timetable requiring that this action be set down for trial by May 30, 2015;

(b) the appropriate forum to resolve the lease issues is in this action; and

(c) “It was Universal's position that the purchase options contained in the Agreements contemplate prior payment in respect of the $750,402.49 ( +GST) of inventory and that same was a fundamental component of the Agreements.”

[52] Counsel for the defendants reports that Plaintiff’s counsel asserted:

“…that no rent had been paid under the Agreements in 2015 which placed our clients in default of the Agreements, which was an.

unequivocal ground for eviction [He] further suggested that, if rent was not paid, "the Option Issue will rapidly become moot.".

[53] Counsel for the Defendants responded by letter dated April 24, 2015 which set out that:

“(a) Whirl Ltd. and TRS have continuously requested a closing date for the purchase transactions;

(b) The lease agreements have no relevance to the Partnership dispute;

(c) If the Options to Purchase contained in the leases were conditional upon payment of inventory then they would have clearly stated such;

(d) It was inappropriate to have Universal's motion to amend heard in advance of the London Application and confirmed that the defendants would consent to an Order extending the deadline to set the action down for trial, if necessary (but that it likely was not required since a motion to amend may be brought anytime); and

(e) That an application for the determination of the over-holding tenant issue must be brought in London (the Property is located in the County of Middlesex) pursuant to section 74 of the Commercial Tenancies Act.”

[54] The Facts portion of the Defendants’ Factum concludes:

“On or about April 24, 2015, Universal demanded payment of rent from Whirl Ltd. from January 1, 2015 to present. Further, Universal suggested that Whirl Ltd. is an over-holding tenant. Universal demanded payment of rent in the amount of $24,000 within 15 days, failing which, it would regard Whirl Ltd. as a trespasser. Universal has further suggested that any rent for the period of March 1 2015 onward would be applied towards the purchase price, notwithstanding that TRS and Whirl exercised their respective options to purchase in December, 2014.”

VI. Contract Law Positions

[55] Plaintiff’s factum asserts in part:

39. Universal's position on the Option Issue is supported by foundational tenets of contract law. In particular:

(a) Where parties contract under a false and fundamental assumption, going to the root of the contract, and which both of them must be taken to have had in mind at the time they entered into it as the basis of their agreement, the contract is void. [see Lee v 1435375 Ontario Ltd, 2013 ONCA 516 at para 39]

(b) Contractual terms may be implied based on the presumed intentions of the parties, where it is necessary to give business efficacy to an agreement or as otherwise meeting the "officious bystander" test as a term which the parties would say, if questioned at the time, they had obviously assumed.[see Energy Fundamentals Group Inc. v Veresen lnc., 2015 ONSC 692 at para 83]

(c) The existence of an "entire agreement clause" does not preclude the recognition of implied terms into a contract, particularly where implied terms are not expressly excluded. "Indeed, it would be difficult to set out every aspect of the expectations of the parties to a contract.”[see Civiclife.com Inc. v Canada (AG), 2006 20837 at para 52 (Ont CA); High Tower Homes Corporation v Stevens, 2014 ONCA 911 at para 39]

[56] The Defendants position is summarized:

Universal has refused to complete the transfers to TRS and Whirl Ltd. as required by the Agreements. According to Universal, TRS and Whirl Ltd. are required to pay the amounts claimed in this proceeding for "inventory" as a condition of their entitlement to exercise their options to purchase. TRS and Whirl Ltd. made several requests for Universal to complete the transactions before commencing an application for specific performance in London.”

[57] As well they argue that contrary to the submissions of Universal, it is not necessary to imply a condition into the Agreements requiring TRS and/or Whirl Ltd. to pay Universal for the "inventory" that was owned by the Partnership in order to give business efficacy to the Agreements. “If the Agreements intended to contain such a condition they would have expressly stated such.”

[58] Relying upon Forest Hill Real Estate Inc. v. Harvey Kalles Real Estate Limited, 2010 ONCA 884 at para. 10. Macourtice Developments Inc. v. Clarington (Municipality), 2005 46400 (ON SC) at para. 34. Defendants say:

The law is clear that when interpreting the provisions of a contract, the court first looks at the language used to express the intention of the parties. If the language is not ambiguous, then the interpretive process ends there. No extrinsic evidence is admissible to interpret clear terms in a contract."

VII. Pending Application by TRS and Whirl Ltd. for Specific Performance

[59] TRS and Whirl Ltd. have commenced an application in the Ontario Superior Court of Justice at London for, inter alia, an Order for specific performance of the options to purchase contained in the Agreements ("London Application").

[60] Plaintiff’s counsel asserts that the London Application should have no impact on the proposed option related amendments:

“40. The determination of the Option Issue in the context of this action will not prejudice the defendants in any way. The prompt and economical resolution of the Option Issue is in the interests of all parties.

41. If the Option Issue were litigated in a separate proceeding, it would inevitably require the duplication of fact-finding or legal analysis. The surrounding circumstances of the Transaction, and the various obligations of the parties arising out of that Transaction, are relevant to resolving the Option Issue, and also of central importance to Universal's inventory claim, and each of the defendants' counterclaims.

42. There is no need for further discovery or documentary production relating to the Option Issue, as this has already taken place. It would be a waste of judicial resources to require that the Option Issue be determined in a separate proceeding.”

VIII. Relief Against Joinder

[61] Rule 5.05 provides:

Where it appears that the joinder of multiple claims or parties in the same proceeding may unduly complicate or delay the hearing or cause undue prejudice to a party, the court may,

(a) order separate hearings;

(b) require one or more of the claims to be asserted, if at all, in another proceeding;

(c) order that a party be compensated by costs for having to attend, or be relieved from attending, any part of a hearing in which the party has no interest;

(d) stay the proceeding against a defendant or respondent, pending the hearing of the proceeding against another defendant or respondent, on condition that the party against whom the proceeding is stayed is bound by the findings made at the hearing against the other defendant or respondent; or

(e) make such other order as is just.

[62] I agree with the Defendants’ submission that allegations with respect to the Agreements and options to purchase are contained in paragraphs l(c), and 28A to 28E. deal with the issue of whether TRS and Whirl Ltd. are entitled to exercise their options to purchase the Property, Rolling Stock and Equipment pursuant to the Agreements should be determined in the London Application.

[63] In the proposed draft Amended Claim, Universal is seeking an Order determining that the lease for the Property has expired and that Universal is entitled to possession of the Property. It is the defendants' position that these issues are better treated as separate from the Partnership dispute and should be determined in the London Application.

[64] The plaintiff says, the defendant is not paying rent. The defendant says it does not have to pay rent because it wants to buy the land and will be the owner of the land would have already being the owner of the land but for the plaintiff’s failure to close.

[65] The plaintiff now wants to add a number of provisions to its claim to address the issues that have arisen by virtue of the purported exercise of the option to purchase some four years after the claim was originally issued.

[66] I am not satisfied that allowing those amendments to become effective at this time is appropriate in this case.

[67] The claim seems to be being reconstructed to address issues that were never pleaded in the old pleading. Admittedly, the issues with respect to the lease have arisen recently and so there is no real limitation issue.

[68] However, the existing action was close to trial. There is a timetable and is set down date has been established.

[69] Rule 26, is set out at the beginning of these reasons and makes it clear that in the normal case, the court “shall” allow the amendment.

[70] Rule 1.05 gives the court discretion with respect to the timing of the applicability of orders, etc. That rule reads as follows:

“when making an order under these rules the court may impose such terms and give such directions as are just.”

[71] I do not interpret the “shall” in rule 26.01 as preventing the exercise of a degree of control on the amending process, utilizing rule 1.05.

[72] As a consequence I have determined that the plaintiff can amend to roll all the disputes between the parties into one “ball of wax” but only after there is a final determination of the issues now scheduled before the the London Judge hearing the Application for a declaration that the moving defendant is entitled to exercise the option to purchase.

[73] The plaintiffs raise a number of potential issues with respect to whether or not the judge in London, ought to make such a finding. For example, questions of the applicability of parole evidence rule, and also issues related to the Statute of Frauds may have some impact on the interpretation of the agreement between the parties.

[74] Conceivably, the judge in London, may order trial of an issue with respect to some or all of the matters before him.

[75] The defendant asserts that it will be prejudiced if it is not in a position to exercise the purchase and utilize the financing that is presently available to acquire the land. This will permit the business to be able to be continued. Without the premises, the business is likely to die and a number of employees may well lose their jobs.

[76] As a consequence, it may ultimately turn out to be more efficient to let the sale proceed since the plaintiff will be getting the $1.5 million purchase price, which is the amount for which the Plaintiff corporation originally agreed to sell the land.

[77] I see no need to add complexity to the existing case by importing, at this time, the matters that are already before a judge of this court, on a tight timetable that has been established, leading to a hearing in the very near future.

IX. Prejudice?

[78] In coming to this conclusion I am taking into account the affidavit of Edward Davis in support of the London Application in which he describes the irreparable harm and prejudice to TRS and Whirl Ltd. if the relief in the London Application is not granted.

[79] On May 5, 2015, counsel for Universal delivered a motion for an Order to stay the London Application pending determination of this proceeding. Universal has again alleged that it was an implied term of the Agreements that TRS and/or Whirl Ltd. were required to pay for the "inventory".

[80] I do not feel it is appropriate for me to pre-empt the consideration of this issue by the Judge hearing the Applications.

[81] Regardless of how the London application turns out there potentially be an order for trial together of the question of further damages arising from the sale, in the event the Court permits the exercise of the option at this time.

[82] In light of the foregoing, I have determined to grant leave to amend the pleading, but only after a final resolution of the London Application with respect to a declaration of with respect to a determination and a declaration as to whether or not the option can be exercised at this time.

[83] To the extent that there may well be an appeal of any such finding, I am of the view that leaving the single narrow interpretation issue to be resolved outside omnibus litigation will provide for a much more simple and focused appeal and laughed in my view will comply with the direction of rule 1.04 that the Rules are to be liberally construed to secure the just, most expeditious and least expensive determination of this civil proceeding on its merits.

[84] As well, it seems to be that rule 1.04 (1.1), dealing with proportionality has an applicability. That overriding principle indicates that the court should make orders and give directions that are proportionate to the importance and complexity of the issues. In my view, my determination as to the order in which the amendment is to be made meets the requirement of a proportional resolution.

X. Disposition

[85] In the result I am granting leave to the plaintiff to amend to its statement of claim but on terms which include a recognition of the Defendants ‘ position that plaintiff will be required to plead material facts to support a cause of action by Universal against each of the defendants for "inventory" that was owned by the Partnership before granting the proposed amendments at paragraph 1 (a), 22A, 24A and 26;

[86] The proposed amendments at paragraphs 1(e), 28A to 28E of the draft amended claim shall not be permitted at this time. They are however being granted leave to amend in the regard on a basis that reflects the final resolution of the London Applications.

[87] The other proposed amendments to the Claim are granted.

[88] The Defendants are granted leave to file an amended statement of defence and counterclaim within 30 days of delivery of any issued amended claim.

XII. Costs

[89] Counsel agreed that costs for either side would be fixed at $4500 on an all in basis. Each may take the view that they were successful in obtaining something on this motion. Both may take the view that I was wrong. In my view having regard to the outcome, the Defendants ought to have their costs. However, t seems to me that the fairest result would be to only award any costs of this motion if the Defendants are ultimately successful on the Application and thus establish an entitlement to exercise the option to purchase at this time. I am thus deferring the payment of costs in the sum of $4500 to be paid to the Defendants in the event they are successful in establishing the enforceability and availability of the alleged option to purchase.

[90] I would be remiss if I did not acknowledge the skilled, and helpful advocacy from counsel on both sides on what is somewhat of an unusual problem requiring urgent attention.

R.111/DS __________________

Master D.E. Short