And KGC Industrial Gases v. Air Liquide Canada Inc., 2015 ONSC 7343
COURT FILE NO.: 2142/13
5424/13
DATE: 2015-11-30
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
1483489 Ontario Inc.
Applicant
- And –
Air Liquide Canada Inc.
Respondent
AND BETWEEN:
KGC Industrial Gases Inc.
Applicant
- And –
Air Liquide Canada Inc.
Respondent
Robert A. Watson, Counsel for the 1483489 Ontario Inc.
Aaron Kreaden, Counsel for Air Liquide Inc.
HEARD: October 27 and 29, 2015
THE HONOURABLE MR. JUSTICE P.B. HAMBLY
Corrected decision: The text of the original judgment was corrected on
February 4, 2016 and the description of the correction is:
February 4, 2016: In paragraph 5 the phrase “for $1,740,000.” is added at the end of the first sentence.
In paragraphs 11 and 12 “KCL” is replaced with “KGC”. Also in paragraph 11, at the end of the second sentence, improper” is replaced with “improper”.
Judgment
[1] These are 2 applications brought by related vendor companies to recover from a purchaser company the full amount for which they agreed to sell their land, building and business by having holdbacks paid to them.
Background
[2] Sunox Industrial Gases Inc. (“Sunox”) was incorporated in 1997. It sold welding equipment and industrial gases. 1483489 Ontario Inc. (“148”) is a holding company. Both Sunox and 148 have the same shareholders. In 2002 148 purchased the land at 440 Sheldon Drive (“Sheldon”) in the City of Cambridge (“the City”) from the City. It erected a building on the land. Sunox commenced doing business there in 2003. Claude Chabot (“Chabot”) was the president of both 148 and Sunox.
[3] In 2012 Sunox and 148 through Chabot entered into negotiations with Air Lquide Canada Inc. (“Air Liquide” or “AL”) through Ross Fuller (“Fuller”) for the sale of the land and building at Sheldon and of the business of Sunox to AL. Fuller was a vice-president of AL. Sunox and 148 each entered into letters of intent with AL on May 3, 2012. They expressed intent to complete the transactions by July 31, 2012. Sunox and 148 agreed not to sell to anyone else before then. AL was to have until then to exercise due diligence.
[4] Sunox and AL entered into an agreement for AL to purchase the business of Sunox on July 31, 2012 in the amount of $13,875,000 (“Asset Purchase Agreement”). It provided for an Indemnity Holdback (“IHB”) by AL of $750,000 for a period of 1 year. The agreement stated the following:
4.6 (1) The Indemnity Holdback Amount shall be applied towards satisfaction of any claims of the Purchaser [Air Liquide] or any of the Purchaser’s Indemnified Persons against the Vendor including a claim pursuant to Article 11.
11.1 (1) … the Vendor will indemnify … the purchaser … and will pay for any damages suffered by … (the purchaser) … pursuant to:
a) any breach or inaccuracy or warranty given by the Vendor (or 1483489 Ontario Inc. with respect to the Purchased Real Property) contained in this Agreement or in the purchase agreement relating to the purchase of the Purchased Real Property;
b) any failure of the Vendor (or 1483489 Ontario Inc. with respect to the Purchased Real Property) to perform or fulfill any of their covenants or obligations under this Agreement or in the purchase agreement relating to the purchase of the Purchased Real Property.
[5] 148 and AL entered into an agreement on August 1, 2012 for AL to purchase the land and building at Sheldon (“Property Purchase Agreement”). AL was concerned that the zoning at Sheldon might not permit it to carry on the business that it was purchasing. AL insisted that a clause be inserted into the property agreement as follows:
Section 7.9
(1) The Vendor and Purchaser acknowledge that the current uses of the Land and Buildings may not be permitted pursuant to the City of Cambridge zoning by-law and that further post-Closing investigations are required in order to determine the extent of said compliance. In this regard, the Vendor agrees and undertakes to cooperate fully with the Purchaser, at its sole expense, and to use its best efforts to assist the Purchaser in obtaining a Zoning Designation and Permitted Use Compliance Letter from the Planning Services Department of the City of Cambridge as to the current use of the Property by the Vendor (the “Zoning Letter”) on or before the date that is six (6) months next following the Closing Date and the Vendor shall provide the Purchaser with its undertaking in this regard on closing.
(2) Forthwith following Closing, the Vendor covenants and undertakes to apply to, and obtain from, the City of Cambridge (the “City”) the Release (as defined in Section 8.4(s)) on or before the date that is six (6) months next following the Closing Date and the Vendor shall provide the Purchaser with its undertaking in this regard on Closing.
(3) The Purchaser and Vendor hereby agree that the sum of Five Hundred Thousand Dollars ($500,000) (the “Holdback Amount”) shall be held back in the trust account of Stikeman Elliott LLP (the “Escrow Agent”) on account of the Vendor’s obligations pursuant to this Section 7.9, which sum shall be released to the Vendor on the later of: (i) the date upon which the Purchaser receives the Zoning Letter, satisfactory to the Purchaser; and (ii) the date upon which the Release is registered on title to the Property. On Closing, the Purchaser and Vendor agree to enter into an escrow agreement with the Escrow Agent to govern the terms of this holdback. In the event that (i) and (ii) are not satisfied or fulfilled on or before the date that is six (6) months next following the Closing Date, the Escrow Agent shall release the Holdback Amount to the Purchaser as payment on account of liquidated damages and not as a penalty. (emphasis added)
Section 8.4
(s)the Vendor’s undertaking to provide a full and final release from the City of Cambridge in respect of its options to purchase the Property and rights of first refusal to purchase the Property, as such options and rights are more particularly detailed in Instrument No. 1561466 registered on October 22, 2002 (the “Release”);
[6] Stikeman Elliott as the law firm representing AL and the escrow agent under the Property Purchase Agreement held back $500,000 (“the Holdback”) from the sale price. It later on consent paid this amount into court. 148 obtained the release contemplated by s. 7.9(2) of the Property Purchase Agreement and registered it.
[7] The difficulty was with the zoning letter. AL states that it never received a zoning letter satisfactory to it. 148 states that the letter from the City that the City provided should have been satisfactory to AL. It also states that Sheldon was properly zoned for the business that it had carried on there and which it sold to AL. It carried on the business without complaint from the City from 2003.
[8] 148 commenced an application against AL on April 17, 2013. 148 requests an order that the $500,000 in court be paid to it with interest. AL requests an order that the holdback be paid out of court to it with interest and that the application of AL be dismissed.
[9] AL moved from Sheldon. It states that it moved because of its concern that the business which it had purchased could violate the zoning by law and because of its concern about safety. It retained $250,000 from the IHB in the Asset Purchase Agreement to cover its cost of moving over the $500,000 holdback. If the $500,000 that it held back from the Property Purchase Agreement is paid out of court to it the result will be that it will have received the property at Sheldon and the Sunox business for $750,000 less than it agreed to pay assuming the zoning was satisfactory.
[10] Sunox changed its name to KGC Industrial Gases Inc. (“KGC”). It commenced an application against AL on October 2, 2013. It requests an order that AL pay to it the $250,000 which it retained from the IHB in the Asset Purchase Agreement with interest. AL requests that the application be dismissed.
[11] 148 and KCL (“the applicants”) assert that the position of AL is “false and dishonest”. It states that AL has “reneged”. It states that “Air Liquide’s attempt after having acquired land and business to get away with not paying $750,000 of its purchase price is improper”.
[12] O’Connor MacLeod Hanna represents 148/Sunox/KCL and Stikeman Elliott represents Air Liquide.
Air Liquide’s Concerns Prior to the Agreements Regarding Whether the Business of Sunox Complied With the Zoning Bylaw
[13] On July 3, 2012 Stikeman Elliott sent a letter to the building department of the City in which it asked whether the primary use of the Sheldon property complied with the City’s bylaw. On July 16, 2013 Annie Pyke, a lawyer with Stikeman Elliott sent James McAskill (“McAskill”), a lawyer with O’Connor McLeod Hanna a list of requisitions including the following:
The appraisal zoning report, prepared for the Purchaser indicates that the current uses of the Property are for storage and distribution of welding products, storage of bulk gas including liquid nitrogen oxygene, argon, carbon dioxide and propane. Based on our zoning review it appears that some of the current uses may be non-compliant or non-conforming.
REQUIRED: On or before closing, evidence satisfactory to the Purchaser that the Property complies with all municipal and zoning by-laws, that it is current uses are permitted and that the Vendor has not received any notice from any governmental authority with respect to any violation, deficiency or non-compliance relating to the Property and there are no outstanding work orders.
[14] Sheldon is in the M3 zone as defined in the City zoning bylaw. General industrial uses and accessory uses as defined in the by law are permitted. Heavy industrial use is not permitted. Amy Didrikson, a Stikeman Elliott employee, provided Nili Birshtein, a lawyer with Stikeman Elliott, with an opinion dated July 4, 2012 on whether the business of Sunox complied with the zoning bylaw. The information with which she was provided as she noted in her report to Mr. Birshtein as to the use to which the land was being put was the following:
Sale and distribution of welding equipment (which may include items such as welding equipment, torches, safety equipment, etc.) to the metal fabrication industry;
Warehousing/storage (including some outdoor storage) of bulk gas in storage tanks and cylinders including:
o Liquid Nitrogen;
o Oxygen, Argon;
o Carbon Dioxide; and,
o Propane.
Accessory office area.
She also took into account the following:
Based on a review of Sunox’s website, it appears that in addition to the gases noted above, that storage tanks and cylinders of the following gases are stored on site in bulk, and that there is on-site filling of gas cylinders on the Property:
Helium
Methane
Propylene / Flamex
Acetylene
Propane
Hydrogen
Collectively, the above-noted uses are herein described as the “Current Uses”.
[15] She refers to Heavy Industrial uses which are not permitted in the M3 zone. These include the uses listed at s. 3.4.2.3 of the bylaw as follows:
(j) an establishment for the storage or distribution of inorganic liquids or gases in a battery or tank farm at low or atmospheric pressure;
She noted the following:
s. 1.1.1 of the By-Law defines tank farm as follows:
… a facility having two or more storage containers for the transfer of inorganic liquids or gases and from which no retail sale of fuel to the public is or may be effected;
And accessory use as follows:
… a use which is incidental, subordinate and exclusively devoted to the principal uses of the land upon which, or of the building or structure within which the accessory use is located but does not include an amenity area or private amenity area;
The primary use of the property was for the sale and distribution of welding equipment. She expressed the opinion that the bulk storage of gases including liquid nitrogen, propane and carbon dioxide was not permitted on the property as a primary use and could not be classified as an accessory use.
[16] On July 19, 2012 the City sent a letter to Stikeman Elliott in which it stated under the heading Zoning that “The use can not be confirmed as the information provided was not sufficient”. McAskill sent an E mail dated July 23, 2012 to Nili Birshstein and Annie Pyke, lawyers with Stikeman Elliott, in which he stated regarding the zoning issue the following:
I have also consulted with my client with respect to the zoning “issue” and have the following comments:
The list of gases mentioned in your memorandum is incorrect. Of those listed, only propane, carbon dioxide, oxygen, argon and liquid nitrogen are stored on site in bulk.
The main use of the property is the sale and distribution of welding supplies. Any sale, warehousing or storage of gas is an ancillary use. If a number were to be put on the use, approximately 75% of our client’s business relates to welding supplies.
With respect to the storage of propane in particular, there is one 10,000 tank and there is no retail sales to the public, so it would qualify as a propane transfer facility under general industrial uses. I am advised that the property complies with the conditions as in secti0n 2.5.1 f the by-law.
With respect to heavy industrial uses and the bulk storage of gas, while the use may qualify as a tank farm since there are two or more storage containers, the gases are stored at “high”, not low or atmospheric pressure, therefore, the use is not heavy industrial and, as per item 2 above, the use is accessory to the man welding supply use. No fuels or fuel oil are stored on the property.
With respect to outdoor storage, I am advised that the property complies with section 3.4.1.4 of the by law.
Garbage and refuse are stored inside the building.
Based on the foregoing, please confirm that you are satisfied that the use complies with the zoning by-law.
Negotiations Regarding Zoning Between the Parties Following the Signing of the Agreements
[17] McAskill in an E mail dated September 11, 2012 to Amy Didrikson stated that “25% of the sales and the building space is used for gas”. Stikeman Elliott provided this information to the City. Chris Dewar, a planning technician with the City sent an E mail to Amy Didrikson dated September 17, 2012 to which he attached a memorandum addressed to Stikeman Elliott setting out the City’s position.
[18] In his E mail he stated that “Planning staff determined that the use is permitted with propane and gas sales to industry as an accessory use.” The memorandum addressed to Stikeman Elliott dated July 19, 2012 (Counsel agreed that this date is incorrect. The date of the memorandum should reflect the date of the E mail, namely September 17, 2012) stated the following:
Zoning
This property is zoned M3 industrial.
Based on planning staff review of the information provided, the use, Industrial – Provision of welding equipment and accessory gas and propane sales to Industry, is permitted, subject to the provisions of gas sales being limited to approximately 25% of the business and that no retail sales of gas or propane (is) provided to the general public. Popane uses must also comply with section 2.5.1 of the Zoning By-law.
It contained a caveat in capital letters as follows:
THE FOREGOING INFORMATION IS SUPPLIED ON THE BASIS THAT IT IS BELIEVED TO BE
ACCURATE BUT IS NOT GUARANTEED. IT IS GIVEN FOR YOUR CONVENIENCE ONLY
AND IT SHOULD BE CLEARLY UNDERSTOOD THAT YOU MUST SATISFY YOURSELF AS
TO WHETHER THE PREMISES AND EXISTING OR PROPOSED USE THEREOF IS OR
WOULD BE IN CONFORMITY WITH ALL APPLICABLE BY-LAWS AND REGULATIONS OF
THE CITY OF CAMBRIDGE.
[19] Amy Didrikson sent an E mail to McAskill dated September 19, 2012 in which she stated the following:
We received the attached response from the City of Cambridge on the use compliance matter at 440 Sheldon. City of Cambridge Planning Staff have interpreted based on information provided that the storage of gasses is permitted as an accessory use, provided any storage of propane complies with section 2.5.1. of the Zoning By-Law.
The attached information does not change our interpretation of the zoning by-law, which would be more conservative - typically uses that are not permitted in a zone as a principal use are also not permitted as an accessory use. However, there is no clause in the by-law that provides clarity on how to interpret accessory use permissions in industrial areas, and therefore the issue is open to interpretation. We note that the attached letter from the municipality is not a legal opinion, but merely current Planning Staff's interpretation, and is not guaranteed.
Negotiations Between the Parties Following The E Mail of Amy Didrickson Dated September 17, 2012 With the Attached Memorandum
[20] The sales records of Sunox showed for the year June 1, 2010 to May 31, 2011 that the sales of industrial gases were 29.5% of total sales and for the year June 1, 2011 to May 31, 2012 were 29.3 % of total sales.
[21] An E mail dated January 3, 2013from Benoit Chagnon- Philogone (“Philogone”), an in house lawyer with Air Liquide, to McAskill stated the following:
The Escrow agreement conditions was based on the representation by Sunox that the proportion of cylinder/propane business to the total business at the property was 25%. It now appears that the actual proportion of such business is significantly higher than that.
The City’s letter provided the following: “Based on planning staff review of the information provided, the use industrial – Provision of welding equipment and accessory gas and propane sales to industry, is permitted, subject to the provisions of gas sales being limited to approximately 25% of the business”.
On November 22nd 2013, (now agreed to be October 22nd 2012) Mr. Ross Fuller (VP Metal fabrication at Air Liquide) met with Mr. Claude Chabot (Sunox previous owner) regarding the zoning and Mr. Chabot was to undertake that issue with the City and get back to us. (emphasis added)
We are still expecting him to get back to us with the outcome of the discussions with the City and a solution before agreeing to release the funds. Basically, we need to be satisfied that the current use, i.e. 40-50% use of the building for Cylinder gases, is not in breach of the zoning by-laws.
[22] On January 9, 2013 McAskill responded as follows:
We have consulted our client and he has advised that the proportion of sales attributable to industrial gases is slightly higher than his estimate of 25% - it was actually 29.3% last year and 29.5% for the previous year. For your reference, attached please fund Sunox's Sales Analysis for the previous 2 years.
As the difference is not significant, we propose extending the holdback and escrow period for an additional six (6) months (to August 1, 2013) to allow for our client to obtain a minor variance permitting the accessory use of gas sales to a maximum of 30% of sales. If successful, this would satisfy the zoning issue and the holdback would then be able to be released to our client. Of course we would require your cooperation in obtaining the variance and trust it would be forthcoming.
We believe this is a reasonable request and solution, especially since we have been requesting a response and proposal for a resolution since the end of September.
Your prompt attention to this matter would be greatly appreciated.
Thank you for your continued cooperation in this matter. (emphasis added)
[23] Philogone in an E mail dated January 30, 2013 responded as follows:
We reviewed Sunox's sales analysis for the two previous years.
After five months (August 2012 to December 2012) of operation by Air Liquide and without making any significant or material changes to the business, our calculation for the percentage of cylinder sales (1.915 M$) on Sunox total sales (4.38M$) is 43.72%, which is significantly higher than the 30% you mentioned in your email and the 25% acknowledged by the city.
Since we consider that our numbers are more consistent with Sunox past and actual volume of cylinder sales, we consider that the confirmation from the city should reflect such volumes.
In a spirit of cooperation, Air Liquide agrees to extend the holdback and escrow period for an additional two (2) months, in order to allow your client to obtain a confirmation from the city of Cambridge reflecting at least 43.72% of cylinder sales.
[24] McAskill sent an E mail dated March 14, 2013 to Philogone as follows:
We recently met with our client following his vacation and he confirms that the proportion of sales attributable to industrial gases was approximately 29% for the 2 years preceding closing (see attached which was previously, provided to you in January) and remained at that rate during the period he ran the business following closing. This rate should not be in dispute and is not significantly higher than the 25% permitted by the City of Cambridge and as such we again ask that you confirm that our client's undertaking has been satisfied and that you direct Stikeman Elliott LLP to prepare the release direction for execution by the parties to allow for release of the holdback funds.
Please respond as soon as possible as the holdback deadline pursuant to the Escrow Agreement is March 31, 2013.
[25] Philogone sent an E mail to McAskill dated March 27, 2013 as follows:
We have been discussing this issue for months now and we are very disappointed that there has been no progress regarding Sunox's discussions with the City. Air Liquide was not satisfied with the City's letter dated July 19th 2012, (this must be the memorandum now agreed to be properly dated September 17, 2012) and our position remains unchanged.
We still consider that the cylinder gas sales volume is much higher than the 29% mentioned in your March 14th 2013 email and the 25% acknowledged by the city. If we review the numbers provided with your March 14th email, we are at 37.5% for FY2011 and 37.1% FY2012, if we consider the delivery, hazmat and cylinder rental fees — which are part of the industrial gases total sales.
Thus, after five months (August 2012 to December 2012) of operation by Air Liquids and without making any significant or material changes to the business, our calculation for the percentage for the total cylinder business is 43.72% in average, which is also significantly higher than the 29% / 25% stated before.
Given the lack of progress, we believe that there are no reasons for Air Liquide to further extend the delay ending March 31st, 2013.
In order to resolve this issue promptly, we are proposing the following settlement options:
Air Liquide keeps the holdback funds ($500k); or
Sunox buys back the building at ALC's purhcase price + $250k and assumes all the legal and transfer fees. The closing would take place on October 31st, 2013, in order to allow ALC to vacate the premises.
Please confirm in writing by end of the day Sunday March 31st which option Sunox whishes to select.
[26] McAskill responded with an E mail dated March 28, 2013 as follows:
Further to your e-mail correspondence of even date, we wish to restate our position that the proportion of sales attributable to industrial gases has been approximately 29% for the 2 years preceding closing and is not significantly higher than the approximate 25% permitted by the City of Cambridge in their letter dated July 19, 2012.(properly dated September 17, 2012)
We are advised by our client that this percentage comes directly from the GL line of gas sales and does not include delivery, hazmat or cylinder rental fees as these are additional costs, not gas sales. We invite your senior financial person to contact our client directly to attempt to reconcile the numbers as he has been advised by Air Lquide that all correspondence is to be processed between the parties’ lawyers.
In short, our client has fairly satisfied its obligations pursuant to the Escrow Agreement and the holdback should be released to our client,
However, without prejudice to our client’s position on this matter, we are prepared to apply for a minor variance or rezoning for the property and will require an extension of the Escrow Agreement to December 31, 2013 in order to pursue this resolution. In this regard, we will require Air Liquide’s consent to bring the application and ask that you confirm same will be forthcoming once requested. We think this represents a very reasonable means in which to resolve this matter.
Please provide us with your response as soon as possible and in in any event prior to the March 31, 2013 expiry of the escrow agreement as any release of the holdback by the escrow agent without our client’s consent will result in legal action by our client. (emphasis added)
[27] Philogone responded the same day as follows:
Air Liquide Canada disagrees with Sunox's position as stated in your March 28, 2013 letter.
Since the Escrow agreement was already extended to allow Sunox to obtain an acceptable resolution from the City, without any results, we still believe that there are no reasons for Air Liquide to further extend the delay ending March 31st, 2013.
Air Liquide is still not satisfied with the City's letter dated July 19th 2012, and our position remains unchanged. Moreover, Air Liquide does not agree with Sunox regarding the calculation of the percentage of the industrial gases on the total business. Even if we exclude the deliveries, hazmat and cylinder rental fees, while comparing industrial gases sales with welding products sales, we arrive at 32.1% for FY2011 and 31.9% for FY2012 (see attached table). Those numbers are still far from the approximately 25% tolerated by the City.
In order to resolve this Issue promptly, we maintain our March 27th proposal regarding the settlement options:
Air Liquide keeps the holdback funds ($500k); or
Sunox buys back the building at ALC's purchase price + $250k and assumes all the legal and transfer fees. The closing would take place on October 31st, 2013, in order to allow ALC to vacate the premises.
Please confirm in writing by end of the day Sunday March 31st which option Sunox wishes to select.
[28] Philogone in an E mail dated April 4, 2013 to McAskill gave notice to Sunox that AL would claim the Holdback if Sunox did not accept its offer by the end of the business day on Friday, April 5. He stated the following:
As discussed many times with Sunox’s representatives prior to Closing, Air Liquide’s intention was to use the 400 Sheldon Drive building to develop and expand its industrial gases business in the Cambridge area. Your client was well aware of our business model and knew that our industrial gases sales normally exceed 40%, yet he is the one that provided the number of “approximately 25%” to the City. This percentage does not even reflect past sales of Sunox and falls way short of our needs.
Air Liquide is still not satisfied with the Cambridge City’s letter dated July 19th 2012, because it creates a serious threat to the existing business and prevents any growth. We believe that there is no point in further extending the Escrow Agreement to let Sunox try to obtain a re-zoning, since the Escrow Agreement was already extended without any results. In addition, we do not know for sure if, when and under which conditions such a re-zoning would occur.
Air Liquide cannot afford to wait anymore and must take immediately the appropriate measures to protect its investments and its business. Such measures include relocating its business outside of the 400 Sheldon Drive building.
As you (k)now, the Escrow Agreement was intended to be a cash collateral security to cover Air Liquide’s moving and relocation costs if Sunox was unable to obtain, within six (6) months of the Closing date, the Release of Cambridge City and Zoning letter, each satisfactory to Air Liquide.
Because it did not accomplish its portion of the deal, Sunox is acting unreasonably by suggesting that the Holdback should not be released to Air Liquide.
Accordingly, we are reiterating our offer of March 27th, which offer is open until the end of business in Friday April 5th. Should you(r) client still refuse, we reserve all our rights and recourses, including taking steps to obtain the release of the Holdback in a timely fashion, without further notice.
[29] 148 commenced its application against Air Liquide soon after this on April 17, 2013 to obtain the Holdback which had been paid into court.
Air Liquide’s Assetion of its Right to Retain $250,000 of the Indemnity Holdback in the Asset Purchase Agreement.
[30] The 1 year period for KCG (formerly Sunox) to hold the Indemnity Holdback in the Asset Purchase Agreement expired on July 31, 2013. By E mail dated August 2, 2013 Liz Freedman, in house counsel at AL advised Chabot that AL would be retaining $250, 000 of the Indemnity Holdback of $750,000. She stated the following:
Thank you for the reminder of the Indemnity Holdback due date.
Under Section 11.3 of the Asset Purchase Agreement in the Sunox deal, you will note the indemnifications in relation to the Purchased Real Property sold by 1483489 Ontario Inc. (the "Property Vendor"), which indemnifications exist notwithstanding the language found in the general survival and limitations of liability clauses. As you are aware, the parties are in dispute over one of the undertakings of the Property Vendor under the Agreement of Purchase and Sale for the Purchased Real Property, namely pursuant to Section 7.9 of that agreement.
Since Air Liquide Canada Inc. believes that the damages resulting from the Property Vendor's failure of this undertaking will exceed the Holdback Amount set forth in subsection 7.9(3) of the Agreement of Purchase and Sale for the Purchased Real Property, we will be deducting that excess amount from the Indemnity Holdback, as per Section 4.6(1) of the Asset Purchase Agreement. We estimate that differential to be approximately $250,000, which includes, but is not limited to, predicted losses on the sale of the Purchased Real Property by us, costs related to dismantling and relocation of the operations to another site, real estate fees, and time spent on this by members of our management.
The $500,000 balance of the Indemnity Holdback with corresponding interest will be paid on or before August 15, 2013. I believe that we have the wire transfer information that we need, but I will contact you if that is not the case.
[31] In his affidavit sworn March 16, 2014 at para. 17 Fuller stated the following:
In particular, Air Liquide has been forced to vacate the Cambridge Property after spending considerable resources to upgrade the facility of its own use. Air Liquide estimates that it has incurred losses in the amount of approximately $750,000 as a result of the Applicants’ failure to resolve the zoning compliance issue in respect of the Cambridge Property, which damage includes:
• Estimated costs to dismantle and move the filling equipment;
• Estimated costs to move the bulk tanks;
• Estimated costs to build new tank farm for bulk tanks;
• Estimated costs to move administration and warehouse;
• Estimated costs related to engineering and sub-contractors used for the relocation;
• Estimated costs for the representation to the city to obtain the permits;
• Estimated costs to make the improvement to the new building; and
• Estimated costs related to the environmental report.
He was cross examined on his affidavits on July 16, 2915. Pursuant to an undertaking he produced an internal memorandum dated August 16, 2013 from AL which stated the following:
Primarily, due to safety and zoning issues, ALC has to exit the recently acquired Sunox building (August 2012). Note that a holdback provision of 500k is currently in escrow to offset the cost related to this move.
Pursuant to another undertaking he produced a spreadsheet from the records of Air Liquide which showed the actual cost to Air Liquide of the move to be $1,098,137.
[32] On August 15, 2013 internal E mails within AL confirms that $505,400 which represented $500,000 plus interest thereon of the $750,000 of the Indemnity Holdback was transferred to the account of the lawyers for Sunox/148. On October 2, 2013 KGC commenced its application against AL for judgment for $250,000.
Position of 148, KGC and Sunox
[33] The City had never taken the position with Sunox during the 9 years that it operated its business at Sheldon that its sale of gas violated its zoning by law. If it was necessary to consider the sale of gas as an accessory use to its primary use of the sale of welding equipment its volume of the sale of gas to its total sales was less than 25% which was acceptable to the City. However there was no need to consider the sale of gas as an accessory use as it qualified as a general industrial use.
[34] AL included delivery fees, charges for dealing with hazardous materials and charges for renting out cylinders as part of gas sales to be included for determining whether gas sales exceeded 25% of total sales and hence qualified as an accessory use. These items should not be included as gas sales.
[35] The zoning by law s. 3.4.2.2 specifically authorized the sale of propane. It was, therefore, incorrect to include the sale of propane as part of gas sales to determine whether gas sales exceeded 25% and hence qualified as an accessory use. Propane sales constituted about 5% of gas sales. If propane sales are removed from gas sales then gas sales stated to be 29.5% in 2011 and 29.3% in 2012 in Sunox’s records are reduced to below 25%.
[36] The sale of the other 4 specified inorganic gases of oxygen, nitrogen, argon and carbon dioxide are below 20% of total gas sales. This was less than the 25% which the City was prepared to accept as accessory use.
[37] The sale of oxygen, nitrogen, argon and carbon dioxide were authorized as general industrial uses. Sunox was not holding these gases in tanks at low atmospheric pressure. They were not operating a tank farm which is defined in the bylaw as “an establishment for the storage or distribution of inorganic … gases in … a tank farm at low or atmospheric pressure.” These gases were held in containers designed to hold gases under high pressure. The containers were regulated by regulations passed under the Technical Standards and Safety Act, 2000. This legislation applies to containers holding gas at over 15 pounds per square inch to a maximum allowable working pressure of 175 pounds per square inch for nitrogen, argon and oxygen and 350 pounds per square inch for carbon dioxide. The containers in use by Sunox had these ratings. There was no need to qualify the sale of these gases as an accessory use to the sale of welding supplies. The City bylaw authorized the sale of these gases as General Industrial Use.
[38] In April, 2013 AL announced that it was consolidating its operations in south west Ontario at a new Regional Super Facility. It claimed that because of the restrictions in zoning it could not expand its business. AL opened this facility on October 29, 2014. Sunox made no promise to AL that it would be able to conduct an expanded sale of gas from Sheldon. The $500,000 hold back in the property agreement was not tied to potential moving costs of AL. The IHB of $750,000 was for the purpose of protecting AL from any breaches of warranty by Sunox or 148 arising out of the 2 agreements. There were none. The 1 year for AL retaining the IHB expired on July 31, 2013. AL has no claim to any part of the IHB.
[39] 148 submits that AL’s claim to keep the holdbacks and thus to obtain the property and business at Sheldon for $750,000 less that it had contracted is dishonest, invalid, contrived and improper. Its use of the holdback provisions in the agreement was a means to get the property at Sheldon for less than its true value.
Analysis
[40] 148/Sunox provided information to Air Liquide that the proportion of its gas sales to its total revenue was 25%. Air Liquide gave this to the City and requested confirmation that the business of Sunox complied with its zoning by law. The City responded with an opinion that if the sale of gas were no more than 25% of its total sales and its main business was the sale of welding equipment that the sale of gas was an acceptable accessory activity. However this was false information. Its own records for the 2 years preceding the agreements showed that the sale of gas was just under 30% of its total sales. The experience of Air Liquide in running the business with the assistance of Chabot who stayed on to facilitate the transition was that the sale of gas was over 40% of the business. Clearly if the zoning by law required the sale of gas to be an accessory use to the main use of the sale of welding equipment the business of Sunox as asserted in a preliminary opinion provided by the City’s planning department the business of Sunox did not comply with the City zoning bylaw.
[41] The applicants submit that the proportion of gas sales to total sales of the business of Sunox was in fact less than 25% by reason of AL in its calculations including irrelevant items and the sale of propane which the zoning bylaw authorized. They allege separately that it was less than 20%. These are simple bald assertions. They present no analysis of financial statements to support these assertions.
[42] They also submit that Sunox was selling gas at high pressure rather than atmospheric pressure which complied with the bylaw as a general industrial use. This is an issue that requires expert evidence. In R. v. Mohan. 1994 SCC 80, [1994] 2 S.C.R. 9 the Supreme Court of Canada in the judgment of Justice Sopinka with respect to when a party is under an obligation to introduce expert evidence stated the following:
21 In R. v. Abbey, supra, Dickson J., as he then was, stated, at p. 42:
With respect to matters calling for special knowledge, an expert in the field may draw inferences and state his opinion. An expert's function is precisely this: to provide the judge and jury with a ready-made inference which the judge and jury, due to the technical nature of the facts, are unable to formulate. "An expert's opinion is admissible to furnish the Court with scientific information which is likely to be outside the experience and knowledge of a judge or jury. If on the proven facts a judge or jury can form their own conclusions without help, then the opinion of the expert is unnecessary" (Turner (1974), 60 Crim. App. R. 80, at p. 83, per Lawton L.J.)
22 This pre-condition is often expressed in terms as to whether the evidence would be helpful to the trier of fact. The word "helpful" is not quite appropriate and sets too low a standard. However, I would not judge necessity by too strict a standard. What is required is that the opinion be necessary in the sense that it provide information "which is likely to be outside the experience and knowledge of a judge or jury": as quoted by Dickson J. in R. v. Abbey, supra. As stated by Dickson J., the evidence must be necessary to enable the trier of fact to appreciate the matters in issue due to their technical nature. In Kelliher (Village of) v. Smith, 1931 SCC 1, [1931] S.C.R. 672, at p. 684, this Court, quoting from Beven on Negligence (4th ed. 1928), at p. 141, stated that in order for expert evidence to be admissible, "[t]he subject-matter of the inquiry must be such that ordinary people are unlikely to form a correct judgment about it, if unassisted by persons with special knowledge". More recently, in R. v. Lavallee, supra, the above passages from Kelliher and Abbey were applied to admit expert evidence as to the state of mind of a "battered" woman. The judgment stressed that this was an area that is not understood by the average person.
[43] I would have thought as a matter of common sense that gas being held at high pressure rather than atmospheric pressure was more dangerous and hence its sale would be subject to restriction by way of zoning rather than gas being held at atmospheric pressure. Sunox/148 in the affidavit of Chabot states that the opposite is true. I cannot simply accept this on the basis of the affidavit of the president of the applicants.
[44] The requirements for the court receiving expert evidence were set out in Mohan by Justice Sopinka as relevance, necessity to assist the trier of fact, an absence of an exclusionary rule and a properly qualified expert. Chabot seeks to qualify himself as an expert by reason of his being a chemical engineer and his long experience in the field. However he is not a properly qualified expert for the purpose of his giving evidence in a court proceeding where he is the controlling mind of the applicants by reason of his lack of independence. In White Burgess v. Abbott, 2 S.C.R. 182 the Supreme Court of Canada in the reasons of Justice Cromwell in relation to the duty of an expert to the court stated the following:
27 One influential statement of the elements of this duty are found in the English case National Justice Compania Naviera S.A. v. Prudential Assurance Co., [1993] 2 Lloyd's Rep. 68 (Q.B.). Following an 87-day trial, Cresswell J. believed that a misunderstanding of the duties and responsibilities of expert witnesses contributed to the length of the trial. He listed in obiter dictum duties and responsibilities of experts, the first two of which have particularly influenced the development of Canadian law:
Expert evidence presented to the Court should be, and should be seen to be, the independent product of the expert uninfluenced as to form or content by the exigencies of litigation ... .
An expert witness should provide independent assistance to the Court by way of objective unbiased opinion in relation to matters within his [or her] expertise ... . An expert witness in the High Court should never assume the role of an advocate. [Emphasis added; citation omitted; p. 81.]
(These duties were endorsed on appeal: [1995] 1 Lloyd's Rep. 455 (C.A.), at p. 496.)
[45] The arguments of the appliants are advanced long after the expiration of the 6 month period extended on consent by 2 months in the Property Purchase Agreement and of the 1 year period in the Asset Purchase Agreement.
[46] The important words of s 7.9 of the Property Purchase Agreement are as follows:
(1) The Vendor and Purchaser acknowledge that the current uses of the Land and Buildings may not be permitted pursuant to the City of Cambridge zoning by-law and that further post-Closing investigations are required in order to determine the extent of said compliance. In this regard, the Vendor (i.e. 148) agrees and undertakes to cooperate fully with the Purchaser (Air Liquide), at its sole expense, and to use its best efforts to assist the Purchaser (Air Liquide) in obtaining a Zoning Designation and Permitted Use Compliance Letter from the Planning Services Department of the City of Cambridge as to the current use of the Property by the Vendor (the “Zoning Letter”) on or before the date that is six (6) months next following the Closing Date and the Vendor shall provide the Purchaser with its undertaking in this regard on Closing.
(2) The Purchaser and Vendor hereby agree that the sum of Five Hundred Thousand Dollars ($500,000.00) (the “Holdback Amount”) shall be held back in the trust account of Stikeman Elliott LLP (the “Escrow Agent”) on account of the Vendor’s obligations pursuant to this Section 7.9, which sum shall be released to the Vendor on the later of: (i) the date upon which the Purchaser receives the Zoning Letter, satisfactory to the Purchaser; (emphasis added)
[47] The important words in the Asset Purchase Agreement are as follows:
4.6 (1) The Indemnity Holdback Amount shall be applied towards satisfaction of any claims of the Purchaser [Air Liquide] …
11.1 (1) … the Vendor (i.e. Sunox) will indemnify … the purchaser (i.e. Air Liquide) … and will pay for any damages suffered by … (the purchaser) … pursuant to:
c) any breach or inaccuracy or warranty given by the Vendor (or 1483489 Ontario Inc. with respect to the Purchased Real Property) contained in this Agreement or in the purchase agreement relating to the purchase of the Purchased Real Property; (emphasis added)
[48] In Re Polywheels Inc. 2010 ONSC 1265, [2010] O.J. NO. 950 Justice Karakatsanis (as she then was) stated the following:
4 The legal test to be applied is well settled. Where a party seeks to avoid obligations in a contract under a clause inserted for its benefit, the general principle is that this must be exercised reasonably and in good faith and not in a capricious or arbitrary manner. Mason v. Freedman, 1958 SCC 7, [1958] S.C.R. 483 at 487. A condition subject to the 'discretion' or 'satisfaction' of a party is generally construed as imposing an objective standard of reasonableness, in addition to the requirement of honesty and good faith. However, where an agreement states that the development is to be "suitable to the purchaser," the purchaser has some discretion in defining what development or project it wishes to build. It can pursue a particular type of development and require that the development contemplated be economically viable, provided that "the discretion ... [is] exercised in a reasonable way, not arbitrarily or capriciously but for good reasons." Greenberg v Meffert et al, 1985 ONCA 1975, [1985] O.J. No. 2539 (C.A.) at para. 24.
5 The court will consider the totality of the evidence in assessing the actions and reasonableness of the purchaser. Where the evidence shows that there has been substantial due diligence and investigation and that the decision was taken in reasonable reliance on the results of the due diligence, the court will not second guess the decision not to proceed after the fact, on a suggestion that it could have proceeded differently. A purchaser is entitled to rely on the opinion of its experts and consultant, as long as it does so reasonably "even if they were not as adroit as the plaintiff would have wished them to be:" (citations omitted)
[49] Air Liquide never obtained a “zoning letter” from the City that was satisfactory to it. In the January 9, 2013 E mail of McAskill to Philogone he asked for an extension of the period of the holdback “to allow for our client obtain a minor variance permitting the accessory use of gas sale to a maxium of 30% of sales.” AL agreed to the extension although not for as long as McAskill requested. Sunox never applied for the minor variance. The only zoning letter from the City was the non-binding July 19, 2012 (incorrectly dated and incorrectly referred to by the partes in correspondence, the correct date being September 17, 2012) memorandum from Chris Dewar who was in the City Planning Department which expressed approval of gas sales as an accessory use if they were no more than 25% of the business. Clearly gas sales were more than 25% - slightly less than 30% on Sunox’s own documents and over 40% in the experience of Air Liquide in running the business with the assistance of Chabot. The holdback provisions in the agreements were for the benefit of Air Liquide. Air Liquide relied on the opinion of its lawyers that the business of Sunox did not comply with the zoning bylaw. As Justice Karakatsanis explains in Polywheels by doing so it was acting reasonably. Prior to receiving the affidavits of Chabot they never received a contrary opinion from an expert or professional speaking for the applicants. Chabot is an interested party and cannot testify as an expert.
[50] Air Liquide has presented evidence that the result of the business of Sunox not complying with the zoning bylaw required that it sell the land, building and business at Sheldon and move. The cost of this to Air Liquide was in excess of $1,000,000. It was reasonable for Air Liquide to seek to retain the Holdback of $500,000 from the Property Purchase Agreement and to also to retain $250,000 of the Indemnity Holdback from the Asset Purchase Agreement for a total of $750,000 which still left Air Lquide short by over $ 250,000. The clauses under examination in the 2 agreements were inserted for the benefit of Air Liquide. I find that in asserting their right to the holdbacks in these 2 agreements that Air Liquide has acted reasonably within the meaning of the principles referred to in Polywheels.
Result
[51] The application of 148 and the application of KGC are dismissed. There will be an order that the $500,000 in court be paid to Air Liquide.
[52] Air Liquide may make submissions in writing on costs within 10 days and 148 and KGC may have 10 days to reply.
P.B. Hambly, J.
Released: November 30, 2015
AND KGC Industrial Gases v. Air Liquide Canada Inc., 2015 ONSC 7343
COURT FILE NO.: 2142/13
5424/13
DATE: 2015-11-30
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
1483489 Ontario Inc.
Applicant
- and –
Air Liquide Canada Inc.
Respondent
AND BETWEEN:
KGC Industrial Gases Inc.
Applicant
- and –
Air Liquide Canada Inc.
Respondent
REASONS FOR JUDGMENT
P.B. Hambly J.
Released: November 30, 2015