SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 15-53350 and 15-53508
DATE: 2015-09-11

RE: Neelands Refrigeration Limited, Applicant (Respondent to cross-application) and Ola Remme and The Ola Remme Family Trust, Respondents (Cross-applicants)

BEFORE: Mr Justice Ramsay

COUNSEL:
Mr M. Abradjian and Mr S. Nash for the Applicant

M. L. Secord for the Respondent

HEARD: September 10, 2015 at Hamilton

E N D O R S E M E N T

[1] Neelands (the Applicant, Respondent to the cross-application) agreed to purchase and the Remme parties (Respondents and cross-applicants) agreed to sell the shares in a corporation. The agreement of purchase and sale provided for a purchase price of $1.7 million, with $400,000 to be held in escrow by the law firm of Ross & McBride as a deposit against an adjustment of the purchase price based on evaluation of working capital, and tax. According to Article 2, clause 5 of the agreement, the purchasers were to determine the working capital of the corporation. Under clause 2.6 the purchaser was to prepare and deliver financial statements to the vendor within 40 business days of closing, i.e. by January 28, 2015. Either the vendor or the purchaser had the right to be paid from escrow an amount corresponding to an adjustment of purchase price based on value of working capital “not later than five business days from the date that the adjusted purchase price is finally determined pursuant to this Article 2.”

[2] Clause 2.7 of Article 2 provides that within 20 days of the determination the vendors could dispute the adjustment. If the parties could not agree, the parties “shall” jointly choose a qualified CPA who has 10 years’ experience in arbitrating commercial disputes in Ontario to determine the dispute. The arbitrator’s decision was agreed to be final and not subject to appeal. “Except as otherwise provided in this clause, this arbitration shall proceed according to Section 8.10 of this agreement.”

[3] Section 8.10 provides that except for any application for an injunction or equitable remedy, “all disputes arising between the parties in respect of this agreement or any document delivered pursuant to this agreement shall be settled by arbitration according to this section.” [I do not know why the parties call the division a section here, but a clause elsewhere.]

[4] Section 8.10 provides further for appointment of an arbitrator who is at arm’s length from the parties and who has at least 10 years’ experience arbitrating commercial disputes in Ontario.

[5] In clause 1.8 of the contract it was agreed that all times are of the essence. Clause 9.4 provides that a party may only waive a provision of the agreement in writing.

[6] The sale closed on November 30, 2014. According to Ola Remme the vendors had access to the company records for some months before that. According to Neelands’ Controller, Joyce Jones, the calculation took some time because the corporation’s books were in disarray and full of errors which needed to be corrected. During the earlier period Neelands did not have enough of the relevant documents, which needed in any event to be looked at by an accountant and checked against inventory.

[7] In December 2014 Mr Remme and Ms Jones exchanged emails on the subject of the calculation. Initially she was under the mistaken impression that the vendor had to do the calculation. That was corrected in the exchange, whereupon Mr Remme asked, “Is it still 40 days?” Ms Jones replied, “Yes, I’m going to give Penny a call this afternoon to discuss the requirements from BDO to complete. I think we should be good.” Mr Remme replied, “About the 40 days, I was just turning your crank! A little more time won’t matter to me.”

[8] Neelands provided the calculation of the adjustment in mid-April 2015, claiming a deficiency of working capital that would entitle them to an adjustment in excess of the amount held in escrow. The Remme parties gave notice of dispute on May 12, 2015 and a calculation of working capital under which there was no deficiency.

[9] On May 25, 2015 Neelands demanded payment of the deficiency or appointment of an arbiter. An exchange of emails ensued in which Remme asked for an extension to June 1 for the time to provide the vendor’s final calculation of the adjustment, and Neelands agreed to this extension.

[10] On June 8, 2015 Neelands wrote to say that unless a response was forthcoming, they would apply to court for appointment of an auditor.

[11] On June 9, 2015 Ms. Secord on behalf of the Remme parties wrote to Neeland’s counsel to say that the expiry of the 40 days before the statements were delivered extinguished Neeland’s right to arbitration and demanded immediate payment of $200,000 from escrow. Neelands brought the present application. The Remme parties filed an action for breach of contract against Neelands and the escrow agent, as well as a cross-application seeking a stay of the Neelands application pending disposition of the action.

[12] In the action, the Remme parties sue Neelands and the escrow agent for the amount in escrow and for damages for bad faith in the execution of a contract. They say that Neelands intended to keep the entire amount in escrow all along, regardless of the outcome of any accounting. They also plead that the right to arbitration is excluded by the breach of the time limit of 40 days.

[13] The Remme parties say that the matter should not go to arbitration for the following reasons:

a. The expiry of the 40 business days extinguished Neelands’ right to arbitrate under clause 2.7.

b. Determination of its allegations of bad faith raise credibility issues.

c. The escrow agents are not parties to the arbitration clauses, but they are necessary parties to the action because an arbitrator would not be able to make an order against them.

d. Allowing arbitration to proceed would result in multiplicity of proceedings while allowing the action to proceed could obviate the necessity for arbitration.

The effect of late delivery of the adjustment calculation by Neelands

[14] The arbitration clauses in the agreement are strongly worded. They evidence a clear intention to submit every dispute that could arise under the contract, and in particular any dispute about adjustment of the purchase price, to an arbitrator and not to the court. They could be said to have contemplated multiplicity of proceedings in that there are two provisions for arbitration, one for disputes about price adjustment, which have to go to a CPA, and one for everything else, which can go to any experienced arbitrator, whether a CPA or not. It does not seem so clear to me, however, that the parties meant that failure to comply with the 40 day deadline in clause 2.6 extinguishes the right to arbitration.

[15] First, while the contract says that time is of the essence, it nowhere says what should happen when a deadline is missed. It seems to me that this is one of the many possible items of dispute that the parties agreed to submit to arbitration.

[16] Second, it is impossible to make sense of the provision for adjustment of purchase price and the escrow agreement without reference to the arbitration provision. The agreement of purchase and sale and the escrow agreement both contemplate payments out of escrow upon final determination of relevant amounts. There is no way finally to determine disputed amounts without the arbitration provision. The Remme parties’ position that $200,000 is automatically paid out after the expiry of 40 days is not supportable. And the contention that once arbitration rights under clause 2.7 are extinguished, resort must be had to the courts does violence to section 8.10.

[17] Finally, looking at the plain words of the contract in the context of the rest of the contract and the associated escrow agreement together with the factual matrix, it seems unlikely that the result now desired by the Remme parties was agreed by the parties. Even assuming that “caus[ing] the Corporation to prepare or cause to be prepared” the relevant statements within the 40 business days mentioned in clause 2.6 meant completing and delivering the statements within that period of time, the parties did not conduct themselves as if the passing of the 40 days extinguished the provision for arbitration. They both followed the provisions of clause 2.7 until June 9, 2015 when Ms Secord first propounded the view that since times are of the essence, there was no more room for arbitration and $200,000 had to be handed over immediately.

[18] There is no need for me to deal with Neelands’ submissions about waiver and estoppel, all of which are arguable. I conclude that the contract does not provide that Neelands’ right to arbitrate under clause 2.7 is extinguished in the circumstances. In my view, this question could have been decided by the arbitrator, but since it has been placed before me I have decided it. The arbitrator can decide the adjustment of the purchase price.

The Respondents’ allegations of bad faith require findings of credibility and arbitration could lead to multiple proceedings

[19] I cannot find any support in the materials for the Respondents’ allegations that Neelands acted in bad faith. At most, some agents of Neelands thought that money might be payable to the Remme parties out of escrow before the accountants had finished their work. In any event the question has no bearing on calculation of the sale price adjustment. If the Respondents wish to pursue their claim for damages, Neelands’ pleaded contention that it, too should be arbitrated seems likely to succeed. That could possibly result in two arbitrations, but that is what the parties contemplated. Arbitrators are capable of resolving questions of credibility. I would add that the alleged questions of credibility in the present case seem to me to have been contrived for the sole purpose of avoiding a quick resolution. The real issue is how much is the company worth and to what extent should the sale price be adjusted, which will be determined by looking at records and inventory and applying accounting principles.

The escrow agents are not parties to the arbitration clauses

[20] The escrow agents are a firm of lawyers. They are not parties to the arbitration clauses. In their defence and counterclaim to the action, all they are saying is that they have no part of the dispute and they would like to take advantage of interpleader. The notion that they would not disburse the money upon determination of the rights of the parties is not serious. It is another contrivance designed to avoid a quick resolution. The misguided joinder of the escrow agents is no reason to deny the Applicant the arbitration to which the parties agreed.

Success of the action would obviate the necessity for arbitration

[21] So it would, but arbitration is the avenue chosen by the parties and arbitration will obviate the need for an action.

Conclusion

[22] The application is allowed. Michael Carnegie is appointed arbitrator. The cross-application is dismissed. The parties may make submissions to costs in writing, Neelands within 7 days and the Remme parties within 7 days thereafter.

Mr Justice Ramsay

DATE: 2015-09-11