ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: CV-14-512016
DATE: 20151102
BETWEEN:
CIRCOR INTERNATIONAL INC. and
SPENCE ENGINEERING CO., INC.
Plaintiffs
– and –
VALVSOURCE EQUIPMENT LIMITED and VALTROL EQUIPMENT LTD.
Defendants
Neil A. Paris, for the Plaintiffs
George Limberis, for the Defendants
HEARD: October 14, 2015
REASONS FOR DECISION
Diamond J.:
Overview
[1] The plaintiffs are related companies incorporated pursuant to the laws of the State of Delaware, and carry on business collectively as designers and manufacturers of valves and other high engineered products used in the energy and aerospace industry.
[2] The defendants are, respectively, related Alberta and Ontario corporations carrying on business in the sale and distribution of valves to the oil, gas and mining industries.
[3] After approximately four months of negotiations, on February 20, 2014 the plaintiffs and defendants executed an Asset Purchase Agreement (“the Agreement”) which contemplated a very quick closing date. Pursuant to the Agreement, the defendants agreed to purchase various assets relating to the plaintiffs’ specific valve product line. The purchase price was set at $650,000.00 USD.
[4] The Agreement provided for a potential adjustment to the purchase price based upon a further valuation, on closing, of the plaintiffs’ inventory to be included in the purchase of assets.
[5] Payment of the purchase price was to be made by way of (a) an initial deposit of $50,000.00 USD; (b) a payment of $450,000.00 USD on closing; and (c) 12 post-dated monthly cheques in the amount of $12,500.00 USD each month, totaling $150,000.00 USD.
[6] Prior to closing, the defendants certified that the value of the inventory was, at a minimum, $650,000.00 USD. As such, the purchase price was not adjusted. The transaction closed as scheduled.
[7] Within one week of closing, the defendants took the position that the plaintiffs had misrepresented the actual value of the inventory (and in particular the slow moving inventory), and claimed that they had overpaid for the plaintiffs’ assets. The defendants stated that the wording of the clause in the Agreement relating to the adjustment of the purchase price supported the defendants having made this overpayment.
[8] The plaintiffs disagreed and demanded payment of the balance of the $650,000.00 USD purchase price. When the defendants held firm in their position, the plaintiffs commenced this proceeding.
[9] The plaintiffs have now brought a motion for summary judgment claiming that there are no genuine issues requiring a trial of this proceeding. The defendants resist the motion and submit that a trial is required in order to determine the presence of the following issues: (a) contractual ambiguity, (b) misrepresentation, and (c) unilateral mistake.
Preliminary Issue
[10] In their factum, the defendants raised an additional issue of the “applicability of foreign law” given that clause 7.1 of the Agreement mandated it to be construed under the laws of the State of New York.
[11] As held by Justice Farley in ABN Amro Bank N.V. v. BCE Inc. 2003 64276 (S.C.J.), absent proof of a foreign law by expert evidence, the foreign law is presumed to be identical to the Ontario law. On this motion for summary judgment, if the defendants were relying upon the law of the State of New York, they had an obligation to put their best foot forward and present expert evidence to that effect.
[12] The defendants failed to do so, and as such the motion proceeded upon the legal presumption that the relevant law of the State of New York was identical to the Ontario law.
The formation of the Agreement
[13] Negotiations between the parties commenced in the fall of 2013, and took place primarily between Ryan Nelson (“Nelson”, the plaintiffs’ manager of business development) and David Terry (“Terry”, the president of the defendants). The defendants were interested in purchasing some of the plaintiffs’ businesses and product lines.
[14] The assets being discussed between the parties included the plaintiffs’ inventory. If the parties could come to an agreement, the plaintiffs wanted the defendant to purchase all existing inventory on closing. In an email dated November 20, 2013 from Nelson to Terry, Nelson attached a “detailed inventory list” which Terry had previously requested. It is important to recognize that this inventory list provided the following particulars: item number, item descriptions (product number and name), quantity on hand, and unit cost (acquisition cost, both per item and in total). There was no information on this inventory list as to the date of purchase of any of the listed items.
[15] By around mid-December 2013, the parties had begun discussing the presence of slow moving inventory. In an email dated December 11, 2013 from Nelson to Terry, Nelson asked for Terry to send over the defendants’ working list of inventory which the defendants had identified as “unsellable”, as Nelson believed that the defendants’ valuation of that unsellable inventory (approximately $250,000.00 USD) was too high. While Nelson agreed that the plaintiffs did have slow moving inventory, he estimated its value to be 50% of the defendants’ valuation.
[16] In that same email, Nelson stated as follows:
“Also, we would assume that you wouldn’t want that inventory as part of the transaction? I’ve attached an excel version of the inventory listing to make it simpler to mark up.”
[17] This “excel inventory list” essentially contained the same information as the original inventory list.
[18] Terry responded to Nelson later that same afternoon. In Terry’s email, he reiterated that the defendants believed the slow moving inventory to total approximately $250,000.00 USD, and even expressed concern that the slow moving inventory may be part of a “larger pool” of slow moving inventory “likely in the $400,000.00 USD range”. Terry claimed it was impossible for the defendants to separate the $250,000.00 USD from the total, but that their “offered amount involves purchasing the entire inventory”.
[19] The next day, Nelson provided Terry with a different inventory list known as an “aged inventory report”, which considered the on hand quantity of inventory and estimates, based on the last two years’ usage, when the plaintiffs expected the inventory to ship. The aged inventory report set out any inventory which was in stock for up to 24 months. Nelson described those items to Terry as “reserved and considered slow moving”.
[20] According to Terry’s evidence, the aged inventory report valued the slow moving inventory at $145,717.04 USD, while the balance of the on hand inventory was valued at $634,505.13 USD. This, and not the defendants’ own analysis of the slow moving inventory, is what Terry claims to have relied upon in causing the defendants to offer and ultimately agree to purchase the plaintiffs’ assets for $650,000.00 USD.
The Agreement
[21] Both parties were represented by counsel during the negotiations and the time leading up to and including the Agreement, which was signed on February 20, 2014. The scheduled closing date was February 28, 2014. For the purposes of this motion for summary judgment, I rely upon the following portions/sections of the Agreement which I summarize as follows (emphasis underlined):
Clause 1.1
The defendants agreed to purchase more than just the plaintiffs’ inventory. Included in the list of purchases assets were the plaintiffs’ stock in trade, finished goods and raw materials, machines, drawings, manufacturing fixtures, equipment used to manufacture the product lines, customer lists, supplier lists and common law rights in the plaintiffs’ non-stylized “SSI” trademark.
Of importance is the fact that the purchased inventory is identified as “more specifically listed on Schedule 1.1(a)(i), and that Schedule is the same format as the original inventory list (and not the aged inventory report). The Schedule was updated to list the inventory on hand as at February 19, 2014.
Clause 1.5
The parties acknowledged that the $650,000.00 USD purchase price was based, in part, on the value of the on hand inventory as at closing being transferred as reflected in the plaintiffs’ books and verified pursuant to the process set out in clause 1.6 (described below) to be a minimum of $650,000.00 USD.
At closing, the plaintiffs agreed to present the defendants with an updated inventory schedule in the same format as Schedule 1.1(1)(a) (ie. the original inventory list) updating the actual value of the inventory on hand on closing as reflected in the plaintiffs’ books excluding Accounting Reserves (this updated schedule is referred to as the “Actual Inventory Value”). The term “Accounting Reserves” is not defined or explained anywhere in the Agreement.
If, on closing, the Actual Inventory Value is less than $650,000.00 USD, the purchase price is to be reduced by the amount by which the Actual Inventory Value is less than the inventory value as at February 19, 2014.
Clause 1.6
For the purpose of determining the Actual Inventory Value, on or immediately prior to closing, the parties were to conduct a joint, complete count of the on hand inventory. Of note, the Actual Inventory Value was to be determined at the plaintiffs’ cost.
Clause 2.6
The plaintiffs provided the limited warranty that the inventory set out in Schedule 1.1(a)(i) complies with the descriptions and specifications therein.
Clause 4.1
All representations and warranties, including clause 2.6, may be relied upon the party receiving them and shall survive closing for a period of one year.
Clause 7.3
The Agreement is subject to an “Entire Agreement” clause. The Agreement supersedes all prior oral or written negotiations and reflects the entire agreement of the parties.
The defendants sign off
[22] As contemplated and mandated by clause 1.6, on February 28, 2014 (the closing date) the defendants sent over their authorized representative Richard Yin (“Yin”, described as a “Business Improvement Specialist”) to review and verify the Actual Inventory Value.
[23] The plaintiffs provided Yin with an updated inventory list as of February 28, 2014 in the same format as Schedule 1.1(a)(i). Together with the plaintiffs’ authorized representative Stephen Gross, Yin conducted the physical inspection of the on hand inventory, and signed a Memorandum of Agreement confirming (a) the plaintiffs’ inventory as at closing is accurately and completely described in the updated inventory list, and (b) the Actual Inventory Value was $670,503.13 USD.
[24] The transaction then closed on February 28, 2014 as scheduled.
Post-closing issues
[25] According to Terry, shortly after the transaction closed, the defendants discovered that due to the presence of slow moving inventory valued at $154,410.00 USD, the Actual Inventory Value was in fact $495,590.00 USD and thus the defendants overpaid as the purchase price ought to have been reduced in accordance with clause 1.5.
[26] Through their counsel, the defendants advised the plaintiffs of their position, namely that the defendants were not going to honour the balance of the purchase price and would seek reimbursement of what they claimed to be an overpayment described above.
[27] The plaintiffs commenced this proceeding on September 11, 2014. The defendants delivered their Statement of Defence and Counterclaim on November 25, 2014. While the plaintiffs move for summary judgment on their claim, there is no formal request for an order dismissing the defendants’ Counterclaim (although the Counterclaim would presumably prove to be moot in the face of the plaintiffs’ being awarded summary judgment based upon the parties’ joining of issues).
Summary judgment
[28] Rule 20.04(2)(a) of the Rules of Civil Procedure provides that the Court shall grant a summary judgment if the Court is satisfied that “there is no genuine issue requiring a trial with respect to a claim or defence”. As a result of the amendments to Rule 20 introduced in 2010, the powers of the Court to grant summary judgment have been enhanced to include, inter alia, weighing the evidence, evaluating the credibility of a deponent and drawing any reasonable inference from the evidence.
[29] In Hryniak v. Mauldin 2014 SCC 7, the Supreme Court of Canada held that on a motion for summary judgment the Court must first determine whether there is a genuine issue requiring a trial based only upon the record before the Court, without using the fact-finding powers set out in the 2010 amendments. The Court must review the factual record and only grant summary judgment if there is sufficient evidence to justly and fairly adjudicate the dispute, and summary judgment would be an affordable, timely and proportionate procedure.
[30] If the Court determines the presence of a genuine issue requiring a trial, the inquiry does not end there as the analysis proceeds to whether a Court can determine if a need for a trial may be avoided by use of the aforesaid fact-finding powers.
[31] The overarching principle is proportionality, and summary judgment ought to be granted unless the added expense and delay of a trial is necessary for a fair and just adjudication of the case. For the reasons which follow, and on the record before me, I am able to find the necessary facts and apply the relevant legal principles to conclude that there are no genuine issues requiring a trial.
Contractual ambiguity
[32] The defendants’ argument on this purported issue is very focused. In Clause 1.5, the calculation of the Actual Inventory Value includes a step to determine the value of the on-hand inventory at closing excluding Accounting Reserves, and that term is not only undefined but capable of multiple meanings. As a result, the defendants contend that the subject clause is ambiguous and a trial is necessary to resolve that ambiguity.
[33] The defendants submit that in order to establish the existence of a contractual ambiguity, the Court may examine and admit extrinsic evidence. I disagree. As summarized by Justice Brown (as he then was) in Siskinds LLP v. Canadian Imperial Bank of Commerce [2014] O.J. No. 2458 (S.C.J) affirmed [2015] O.J. No. 1987 (C.A.), the Court is to bear the following relevant principles in mind when interpreting commercial contracts:
i) a commercial contract is to be interpreted as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective,
ii) the Court must determine the intention of the parties in accordance with the language they have used in the written document and based upon the “cardinal presumption” that they intended what they said,
iii) a contract should be interpreted in a fashion which accords with sound commercial principles and good business sense, and that avoids a commercial absurdity,
iv) where the language of a written contract is unambiguous, extrinsic evidence is not admissible to alter, vary, interpret, or contradict the words used in the contract, and
v) the Court should interpret a commercial contract with regard to objective evidence of the circumstances underlying the negotiation of the contract, but without reference to the subjective intention of the parties.
[34] It is thus clear that, if possible, the Agreement is to be interpreted as a whole so as to give meaning to all of its terms. As well, I must first be satisfied on the construction of the Agreement itself that Clause 1.5 is ambiguous before I am to admit and consider any potential relevant evidence of the parties.
[35] There is no doubt that at some point during the negotiations, the parties were discussing the presence of slow moving inventory and how to factor that into the Agreement (if at all, as Terry was clear that the defendants wanted to purchase “all the inventory”). However, in my view, clause 1.5 does not render the Agreement ambiguous. The inventory was one of several assets being purchased by the defendants, and was explicitly listed on the accompanying Schedule which was based on the original inventory list. Whatever the Actual Inventory Value was at closing, it was to be determined at the plaintiffs’ cost. This is exactly what was set out in the Schedule (both the February 19, 2014 version and the updated version on closing).
[36] If the valuation of the inventory was to be based upon the plaintiffs’ cost, and Terry gave evidence that the defendants allegedly relied upon the plaintiffs’ valuation of the slow moving inventory, why would Clause 1.6 be inserted into the Agreement at all? More importantly, if Clause 1.6 was purportedly inserted into the Agreement to permit the defendants to assess the value of the inventory, including the slow moving inventory, how would that have been accomplished using the agreed upon Schedule which was not the aged inventory report? The plaintiffs were under no contractual obligation to provide the defendants with an aged inventory report, which never formed part of the Agreement in any event.
[37] The defendants have not provided much evidence to support how they arrived at the $154,410.00 USD post-closing valuation of the slow moving inventory. It appears from Terry’s evidence that the $154,410.00 USD figure was calculated by the defendants after the transaction closed. The Agreement does not permit such a step. The Agreement mandated the parties to assess the Actual Inventory Value at closing at the plaintiffs’ cost. The defendants are trying to resile from their contractual obligations by seeking to re-write the terms of the Agreement.
[38] In my view, the term “excluding Accounting Reserves” is to be interpreted in its simplest meaning, namely to exclude them from the analysis. Inventory at the plaintiffs’ cost means what the plaintiffs paid for the inventory.
[39] Further, the defendants have not filed any evidence on behalf of Yin. It is trite to state that on a motion for summary judgment, a responding party has an onus to “lead trump or risk losing”. If the defendants believed that Clauses 1.5 and 1.6 meant that they were entitled to exclude the slow moving inventory from their valuation on closing, why would the Agreement not have insisted upon an aged inventory report? Why would Yin not have demanded a copy of the aged inventory report, and when he received something different why did he not object? Why did Yin sign the Memorandum of Agreement?
[40] While the legal onus to show the absence of genuine issues requiring a trial rests on the plaintiffs, the defendants are still under an evidentiary onus as described above. I must assume that the parties have put their best foot forward and placed all relevant evidence in the record. As such, I draw an adverse inference against the defendants that Yin’s evidence would have not supported their position on this motion. This defence fails.
Misrepresentation
[41] The defendants submit that the Agreement was induced by a misrepresentation, and thus is subject to rescission. Their Statement of Defence and Counterclaim does not seek rescission of the Agreement, and such a remedy would not be available on the facts before me in any event.
[42] While I agree with the defendants that a misrepresentation need not take the form of an explicit statement, even a vague statement on the part of the offending party must still be untrue, inaccurate or misleading. The defendants point to the November-December 2013 emails between Nelson and Terry as amounting to representations that the “slow moving inventory would not be included in the sale”.
[43] To begin, Terry’s own email confirms that the defendants wanted to purchase all of the inventory, including the slow moving inventory. The Agreement contained an entire agreement clause, and such clauses are inserted into contracts for a reason. While the existence of an entire agreement clause does not preclude the recognition of implied terms into a contract, there are no such implied terms and the defendants do not advance such an argument.
[44] I do not find the presence of any misrepresentation on the part of the plaintiffs. Negotiations culminated into a formal Agreement between parties represented by lawyers. The plaintiffs delivered the Schedule in the form of an updated inventory list, and not any aged inventory report, because that is what the Agreement mandated. Once again, the defendants are seeking to re-write the terms of the Agreement, and this defence fails.
Unilateral Mistake
[45] In McLean v. McLean 2013 ONCA 788, [2013] O.J. No. 5956, leave to appeal refused [2014] S.C.C.A. No. 76 (S.C.C.), the Court of Appeal for Ontario summarized the doctrine of unilateral mistake as follows:
“With respect to unilateral mistake, the question as set out in Sylvan Lake, at para. 31, is whether one party knew or ought to have known of the other party’s mistake, sought to take advantage of it, and whether permitting that party to take advantage of the mistake would amount to unfair dealing.”
[46] Terry’s evidence is that the defendants were unilaterally mistaken when they entered into the Agreement. As stated, they were represented by legal counsel and there is no evidentiary basis to support the defendants’ contention other than Terry’s self-serving statement. The defendants cannot show that they were not at fault. As set out above, there is no evidence form Yin explaining how or why he accepted the inventory list and signed the Memorandum of Agreement on closing.
[47] However, more importantly, there is no evidence that the plaintiffs knew or ought to have known about the defendants’ alleged mistake. Once the Agreement was signed, the defendants did or said nothing (other than Yin’s confirmation of the Actual Inventory Value at $670,503.13 USD) which could have led the plaintiffs to believe that the defendants had signed the Agreement under any misapprehension. In the absence of evidence that (a) the defendants were in fact mistaken and not at fault, and (b) the plaintiffs knew or ought to have known of the defendants’ mistake, this defence fails.
[48] Accordingly, for the reasons set out herein, I grant the plaintiffs’ motion for summary judgment.
Costs
[49] I would urge the parties to agree upon the costs of this motion. In the event that such an agreement cannot be achieved, I would ask that the plaintiffs serve and file their written submissions, limited to four pages in length including a Costs Outline, within ten business days of the release of these Reasons. The defendants shall have a further ten business days to serve and file their responding costs submissions again limited to four pages in length including a Costs Outline.
Diamond J.
Released: November 2, 2015
COURT FILE NO.: CV-14-512016
DATE: 20151102
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
CIRCOR INTERNATIONAL INC. and
SPENCE ENGINEERING CO., INC.
Plaintiffs
– and –
VALVSOURCE EQUIPMENT LIMITED and VALTROL EQUIPMENT LTD.
Defendants
REASONS FOR DECISION
Diamond J.
Released: November 2, 2015