JJAB Holdings Inc. v. FirstOnSite G.P. Inc., 2016 ONSC 1896
CITATION: JJAB Holdings Inc. v. FirstOnSite G.P. Inc., 2016 ONSC 1896
Court File No. CV-14-10810-00CL Court File No: CV-14-10811-00CL
DATE: 20160317
ONTARIO SUPERIOR COURT OF JUSTICE COMMERCIAL LIST
BETWEEN:
JJAB HOLDINGS INC. Applicant/Respondent in Counter-Application
- and –
FIRSTONSITE G.P. INC. and FIRSTONSITE RESTORATION L.P. Respondents/Applicants in Counter-Application
COUNSEL: Alfred J. Esterbauer and Kalev Anniko, for the Applicant Samaneh Hossein, for the Respondents
HEARD: March 14, 2016
BEFORE: Newbould J.
REASONS FOR JUDGMENT
[1] The applicant JJAB Holdings Inc. (“JJAB”) brings this application to rectify a deferred payment formula in connection with the sale of a business by JJAB to the respondent FirstOnSite Restoration L.P. (“FOS”).
[2] JJAB also seeks a declaration regarding the method of calculating working capital for a working capital adjustment to the purchase price. The respondents brought a cross-application for rectification of the agreement regarding this working capital adjustment provision, but have decided not to proceed with it. The issue on this application is what document was in the closing room when signature pages were signed. At the conclusion of the hearing I directed a trial of the issue regarding the working capital issue. What remains is the deferred payment formula.
Factual history
[3] FOS is a disaster restoration firm which was established as a limited partnership on December 22, 2006. FirstOnSite G.P. Inc. is the general partner of FOS and is responsible for carrying on the business of FOS. In 2007, FOS began acquiring a number of regional disaster restoration businesses in order to establish a national company. From 2007 to 2009, FOS completed 11 such transactions including the JJAB transaction which was the 9th transaction that closed. Gabriel Becher, who was FOS’s Director of Corporate Development from 2007 to 2010, was involved in a number of these transactions and took the lead as the main negotiator on behalf of FOS in the JJAB transaction.
[4] JJAB is a corporation owned by Robert Prescott. He was the owner of a number of local disaster restoration businesses in Eastern Ontario, which JJAB was incorporated to sell. In 2007, it was known in the industry that Mr. Prescott was interested in selling the businesses referred to as the General Maintenance business. In September, 2007, Mr. Prescott met with Ken Woodhouse and Lyle Kerr of E.W. Restorations (a predecessor of the respondents) who approached him to discuss the sale of the General Maintenance businesses. E.W. Restorations was interested in building a nationwide restoration firm and was interested in acquiring General Maintenance, as it was a leading restoration firm in Eastern Ontario.
[5] On September 17, 2007 Mr. Kerr sent to Mr. Prescott a non-binding letter of intent signed by Mr. Kerr for the purchase of the General Maintenance business. It contemplated a purchase price of 4.75 times EBITDA, with 70% payable on closing with 30% payable on a deferred basis contingent on the General Maintenance results compared to a defined profit target over a three-year period. The letter of intent was not signed by Mr. Prescott. The performance target was based on aggregate profitability over the three years following closing, and required General Maintenance to meet a business plan projecting 5% growth in profits per year over that period. If this target was not met, the deferred payment would be adjusted according to a formula expressed in the letter of intent as follows:
if the business plan is not met the amount of the deferred payment will be reduced by a percentage that is based on the percentage difference between the sum of the actual gross profit for the next three years compared with the sum of the gross profit for the business plan.
[6] In early 2008, discussions regarding the sale of General Maintenance took place with FOS. On June 2, 2008, FOS sent by email a letter of intent to Mr. Prescott, JJAB’s principal, which set out the proposed terms of FOS’s offer to purchase the assets of the General Maintenance Contractors companies which were later amalgamated as JJAB. The LOI provided that it was non-binding and contemplated that FOS would complete due diligence and the parties would execute transaction documentation. The email made reference to the prior letter of intent sent by Mr. Kerr to Mr. Prescott and stated that the terms of the offer were the same as the previous term sheet with the exception of changes to the deferred calculation.
[7] The letter of intent, which was signed by Mr. Prescott, provided for 70% cash on closing and 30% by way of a deferred payment. It was different from the previous letter of intent in that instead of gross profit being the benchmark for the target, EBITDA was provided. Also it required a minimum 70% performance requirement before the 30% deferred payment would be payable. The formula described in the letter of intent was as follows:
• 30% will be made as a deferred payment with the following terms:
• The amount will be payable in full in 3 years if General Maintenance achieves a conservative business plan averaging 5% growth in EBITDA per year over the next 3 years. If the business plan is not met, a percentage of the deferred payment will be paid that is equal to the percentage of the cumulative 3-year business plan target that is achieved to a minimum of 70%. If less than 70% of the 3 year business plan target is reached than [sic] none of the deferred payment will be paid. For greater clarity and to serve as an example, in the case that the current sustainable EBITDA used to calculate the purchase price is $1,000,000, then the target business plan will have cumulative EBITDA of $3,310,125 (year 1 of $1,050,00, year 2 of $1,102,500 and year 3 EBITDA of $1,157,625) and would thus be adjusted according to the following hypothetical examples:
▪ If year 1 EBITDA was $1,040,000, year 2 EBITDA was $1,200,000 and year 3 EBITDA was $1,160,000, the deferred payment would be paid in full because cumulative EBITDA ($3,400,000) was greater or equal to $3,310,125.
▪ If year 1 EBITDA was $1,050,000, year 2 EBITDA was $1,100,000 and year 3 EBITDA was $829,113 then 90% of the deferred payment would be paid because that is the percentage of the 3 year cumulative target that was achieved.
▪ If less than $2,317,088 in cumulative EBITDA is earned over 3 years than [sic] none of the deferred payment would be paid because the business failed to achieve 70% of its business plan.
[8] FOS retained Stikeman Elliott LLP to assist in closing the deal. Nathalie Mercure and Anna Stewart were the lawyers at Stikemans who were involved in the transaction. JJAB retained George Crossman of Beard Winter LLP.
[9] Following Mr. Prescott’s acceptance of the LOI in June 2008, FOS conducted due diligence which included on-site due diligence in the fall of 2008. Mr. Becher and Mr. Prescott negotiated terms of the transaction, including the purchase price and the calculation of the EBITDA as a component of the purchase price. The negotiations went both ways. JJAB got some terms favourable to it and FOS got some terms favourable to it.
[10] The basis on which the deferred payment was to be calculated was contained in a schedule to the limited partnership agreement (LPA) for FOS. The formula for the prior acquisitions by FOS up to the Class J units was consistent with the formula contained in the LOI. It changed for the Class K units, which was the acquisition by FOS just prior to the acquisition from JJAB which became the Class L units.
[11] On November 13, 2008, Mr. Becher of FOS instructed Ms. Mercure of Stikemans to draft the Class L language on the basis of the Class K language, which was different from the proposed deferred payment formula in the LOI. On November 17, 2008 Ms. Mercure sent a one page rider with the draft terms for the Class L units to be included in the LPA to Mr. Crossman at Beard Winters for his review and comments. The rider contained the following clause dealing with the formula in the case that the performance of the business over three years was between 70-100% of the targeted EBITDA. It provided:
each Class L Unit will be entitled to receive an amount equal to the Class L Unit Maximum Distribution (A) multiplied by the sum of the Cumulative JJAB EBITDA (B) minus the JJAB EBITDA Base (C) divided by the JJAB EBITDA Target (D) minus the JJAB EBITDA Base (C) (i.e. A*((B-C)/(D-C)).
[12] Both the LOI and LPA provided that if after three years, the business did not deliver more than 70% of the target EBITDA, there would be no entitlement to any of the deferred payment, as FOS had already paid for 70% of the EBITDA it was purchasing. The LOI and LPA also both provided that if the business achieved 100% of the target EBITDA or more, the entire deferred amount would be payable and the vendor would be entitled to the entire purchase price.
[13] The difference between the LOI and LPA formulas was in relation to the amount of the deferred purchase price payable if the business delivered more than 70% but less than 100% of the target EBITDA, which is what occurred in relation to JJAB. Under the LOI, if the company achieved more than 70% but less than 100% of the target EBITDA, the percentage of the deferred amount payable would be the same as the percentage of the target EBITDA achieved. This means if the business achieved 69% of the target EBITDA, the vendor would receive none of the deferred payment but if it exceeded the 70% minimum EBITDA by only 1% the vendor would be entitled to 71% of the deferred amount. If JJAB achieved 81% of its target EBITDA it would under the LOI result in entitlement to 94.3% of the purchase price (i.e. the initial 70% + 81% of the deferred amount). From FOS’ point of view, this was too favourable to the vendor and would result in FOS paying a disproportionate amount of the deferred payment when the business had failed to deliver 100% of the target EBITDA. That is what led to the change in the formula for the Class K units and which led Mr. Becher instructing Stikemans to draft the schedule to the LPA for the Class L units to reflect the change that had commenced with the Class K units.
Analysis
[14] The equitable remedy of rectification is available to relieve against mistake in a document. The basis for this remedy is the protection of an applicant, so that he or she is not prejudiced by the existence of a document, reliance upon which would, without rectification, be unconscionable. See Spry, The Principles of Equitable Remedies, 6th edition, at p. 607.
[15] In Council of the Wasauksing First Nation v. Wasausink Lands Inc. (2004), 2004 CanLII 15484 (ON CA), 43 B.L.R. (3d) 244 (Ont. C.A.), Laskin J.A. summarized the principles as follows:
As relevant to the appellants' rectification claim, the following principles concerning equitable rectification emerge from the foregoing authorities. Rectification is available in the exercise of the court's discretion. Such discretion is not to be exercised lightly but, rather, only where it is demonstrated that, by mistake, a written document or instrument does not accord with or accurately reflect the agreement or arrangements intended by the parties. Rectification is not used to vary the intentions of the parties, or to speculate on the substance of those intentions; rather, it is designed to correct a mistake in carrying out the settled intentions of the parties as established by the evidence. As well, and importantly, rectification is not available to correct erroneous assumptions or beliefs as to what was intended; the remedy seeks to effect the actual intentions of the parties which, by mistake, were not accurately recorded.
[16] In this case, the LOI was by its terms not a binding agreement and both sides recognized the need for legal input and in Mr. Prescott’s case it was also subject to accounting approval. There is no consistent evidence, however, that when the LPA was negotiated, both sides thought that the payout formula should be as contained in the LOI. Mr. Becher of FOS certainly did not. Thus for rectification in this case, the principles governing rectification if there is a unilateral mistake must be considered.
[17] In Performance Industries Ltd. v Sylvan Lake Golf and Tennis Club, [2002] 1 S.C.R. 278 Justice Binnie summarized the law in the case of alleged unilateral mistake in arm’s length commercial agreements such as the one at issue in this case:
31 …The traditional rule was to permit rectification only for mutual mistake, but rectification is now available for unilateral mistake (as here), provided certain demanding preconditions are met. Insofar as they are relevant to this appeal, these preconditions can be summarized as follows. Rectification is predicated on the existence of a prior oral contract whose terms are definite and ascertainable. The plaintiff must establish that the terms agreed to orally were not written down properly. The error may be fraudulent or it may be innocent. What is essential is that at the time of execution of the written document the defendant knew or ought to have known of the error and the plaintiff did not. Moreover, the attempt of the defendant to rely on the erroneous written document must amount to "fraud or the equivalent of fraud". The court’s task in a rectification case is corrective, not speculative. It is to restore the parties to their original bargain, not to rectify a belatedly recognized error of judgment by one party or the other.
[18] There are other passages from the decision of Binnie J. in Sylvan Lake that need be considered in this case:
29 When reasonably sophisticated businesspeople reduce their oral agreements to written form, which are prepared and reviewed by lawyers, and changes made, and the documents are then executed, there is usually little scope for rectification.
66 I conclude, therefore that due diligence on the part of the plaintiff is not a condition precedent to rectification. However, it should be added at once that rectification is an equitable remedy and its award is in the discretion of the court. The conduct of the plaintiff is relevant to the exercise of that discretion. In a case where the court concludes that it would be unjust to impose on a defendant a liability that ought more properly to be attributed to the plaintiff's negligence, rectification may be denied.
[19] Binnie J. said that the proof must be convincing proof that may well fall short of the criminal standard but must be higher than the civil balance of probabilities standard. However, the Supreme Court in C.(R) v. McDougall, 2008 SCC 53, [2008] 3 S.C.R. 41 established that the only civil standard of proof in Canadian common law is on a balance of probabilities. That is the standard to be applied to rectification cases. See McLean v. McLean 2013 ONC 788.
[20] The evidence of Mr. Prescott is that he never had any discussion with anyone at FOS prior to the closing that suggested that the formula for the deferred payment was changed from the method in the LOI. The evidence of Mr. Becher of FOS is that he did discuss the change during negotiations with Mr. Prescott. On his cross-examination, Mr. Becher said he could not recall precisely the time or place of his conversation but believed he had a conversation with Mr. Prescott more than once and during the due diligence period in the fall. He could not recall what response he got back from Mr. Prescott. Unfortunately, although Mr. Becher made notebooks of his dealings at the time, FOS was unable to locate any notebook of Mr. Becher, who has not been with FOS since 2010. Also, FOS did not have an email archiving system in place at the time of the negotiations and when FOS attempted to retrieve emails for this litigation, very few emails were available.
[21] On the state of the record, I am not in a position to decide whether the evidence of Mr. Prescott or of Mr. Becher on this point should be accepted.
[22] There are other reasons however to conclude that there should be no rectification of the schedule to the LPA.
[23] Ms. Mercure of Stikemans sent a one page rider with the draft terms for the Class L units to be included in the limited partnership agreement to Mr. Crossman at Beard Winters on November 17, 2008 for his review and comments. Mr. Crossman forwarded the email and draft rider to Mr. Prescott. Mr. Prescott forwarded the email and draft rider to his accountant that same day.
[24] Mr. Prescott’s evidence is that he looked at the draft rider but did not consider it in any detail and did not discern a change from the formula in the LOI. I find that evidence surprising and a little difficult to credit. Mr. Prescott’s evidence is that he had read the LOI received from Mr. Becher and had noticed the change in the formula from the formula in the earlier LOI he had received from E.W. Restorations, being the use of EBITDA rather than gross profits in the target formula and a 70% floor. He had to know from reading the LOI that it was not binding and he had been told by Mr. Becher that the wording for the deferred units schedule in the LPA would be sent to him. That wording was important to Mr. Prescott as it represented an ability to receive a substantial sum from his sale of his business. It is surprising that he would not read it carefully and consider its terms. If he did not, he was cavalier about it.
[25] Mr. Prescott sent the draft rider to his accountant. His evidence on cross-examination was that he did not get any advice from his accountant. No evidence was provided by the applicant from the accountant. Mr. Prescott presumably had a reason to have his accountant look at the draft and it is somewhat surprising that he would not have followed up with his accountant on the point. If in fact he did not talk to his accountant about the formula, it is another indication of being cavalier about it.
[26] So far as Mr. Crossman is concerned, Mr. Prescott said on his cross-examination that if there was some difference between the LOI and the draft rider, he expected that he would be so advised by Mr. Crossman, but that he never was provided with any advice that it was different.
[27] The evidence of Mr. Crossman is that he looked at the draft rider and the LPA that recorded the prior units. He noticed the change in the language in the draft rider from the LOI and noticed in the LPA that the Class K and L units used different language from the earlier Class units. He said he noticed that the formulas for the deferred payments were different but did not raise that with Stikemans. He said he was not sure that he pointed out the difference to Mr. Prescott but thinks he told Mr. Prescott that the deal was the same as in the LOI. Some of his evidence on cross-examination was as follows:
Q. Now, in paragraph 13 of your affidavit, you say, "...I had no reason to believe or expect that there was any operative difference between this draft language and the formula agreed to in the letter of intent..." And the question I have is, did you read the draft language when you received it?
A. Yes, I did.
Q. And you read the November 21st draft limited partnership agreement?
A. Yes.
Q. And did you compare it to the letter of intent?
A. I did.
Q. So, we have the final language there, and we have the letter of intent at Exhibit A. And if you just, sort of, look at the two side by side, you would agree with me that the deferred purchase price formula is less than a page long?
A. Agreed.
Q. And do you agree with me that on their face, they use different words?
A. Yes.
Q. And the structure is not the same, the way they're framed? Do you agree with...
A. Agreed.
Q. Okay. And none of the defined terms that appear in the limited partnership agreement appear in the letter of intent, correct?
A. That's correct.
Q.….And looking at...I just want you to...we were on Exhibit C, which is the limited partnership agreement. And if you look at the end of paragraph (c), there is a formula in brackets, "(A x B - C)". Do you see that formula?
A. Sorry in bracket (c)?
Q. Subparagraph (c), right at the end.
A. Yes.
Q. Okay. And if you turned a few pages back, let's look at some of the other...so, if you go to page 20, the class D units.
A. Yes.
Q. Do you agree that that formula doesn't appear in respect of the class D units?
A. I agree.
Q. And if we keep going forward, you look at class E, you don't see that formula, or F, G, H. Do you agree that that formula doesn't appear?
A. I agree.
Q. And you didn't raise that as an issue when you reviewed this document, when you received drafts?
A. I knew the formulas were different. I can't say I raised it with anyone at Stikeman.
Q. Okay. So, you knew the way the class L units were described in the draft agreements you received were different from some of the earlier classes?
A. Correct, except for the K units.
Q. And did you point that out to your client?
A. I'm not sure.
Q. Okay. So what advice did you give your client with respect to the earnout provisions of the limited partnership agreement?
A. I said to my client, "We're in the chain. This is an acquisition by a purchaser which is part of a larger picture acquisition", and that, "It's my understanding we're going to be treated similar to the last deal", and that, "We're going to be going forward based on what I believed was the terms in the LOI".
Q. Okay. So, you said you believed that the vendors would be treated similar to the last deal, correct? And when you say "last deal", are you talking about a specific deal, or are you talking about all the ones that came before?
A. No. What I was looking at at that time was that the formula was the same as the Spring Fresh formula, which was the K class, the K units.
Q. And you provided that advice knowing that the L and K units were worded differently than all the ones that came before, correct?
A. That's correct.
[28] Mr. Crossman has been sued by FOS for negligence, and I hesitate to draw any conclusion on that issue. It is clear, however, from the evidence that both Mr. Prescott and Mr. Becher left it up to the lawyers to “paper” the transaction and when Stikemans sent the draft rider by itself to Mr. Crossman, he saw that the formulas were different. There is no evidence at all that Stikemans meant to somehow hide that fact. Mr. Crossman also saw in the draft LPA that the prior Class K unit formula had been changed from the formula in the prior Class unit purchases and that it was the same as the formula for the Class L units being acquired from Mr. Prescott. There is no evidence as to whether Mr. Prescott read the LPA agreement before he signed it but had he, and he should have, he too would have had to see that the formula was changed for the Class K unit and for the Class L unit which was for the purchase from FOS.
[29] This is not a case in which drafts were exchanged and changes were not noticed by one side’s lawyers. It is a case where the lawyer for FOS saw the change and he thinks he may have discussed it with Mr. Prescott.
[30] Mr. Becher’s evidence is that he had no reason to believe that Mr. Prescott did not know that the formula for the deferred payment in the LPA was different from the LOI. It was not unreasonable for him to think that as the formula had been sent to Mr. Prescott’s lawyer, he would hear back if there was an issue with it. Even it were the case that Mr. Becher did not discuss the change from the LOI with Mr. Prescott, he could expect that Mr. Prescott, an obviously successful businessman, and his lawyer would read the document and let him know of concerns. I do not accept that Mr. Becher ought to have known that Mr. Crossman would give wrong advice to Mr. Prescott or that Mr. Prescott would not pay much attention to the formula when he saw it or would be mistaken in his belief as to what the formula meant. I cannot find that Mr. Becher knew or ought to have known of JJAB’s mistake and that he took advantage of it by remaining silent.
[31] I do not think it helpful to review how the principles in question were applied in other cases. Each case depends on its own facts. JJAB relies on the case of Stepps Investments Ltd. v Security Capital Corp. (1976), 1976 CanLII 648 (ON SC), 14 O.R. (2d) 259, a decision of Justice Grange. FOS relies on the case of Downtown King West Development Corp. v Massey Ferguson Industries Ltd., 1996 CanLII 1232 (ON CA), [1996] O.J. No. 926 (C.A.). Had I to choose, I see this case as closer to Downtown King than to Stepps.
[32] In the circumstances the claim by FOS for rectification of the LPA rider to replace the deferred payment formula with the formula in the LOI is dismissed.
[33] Costs should await the determination of the issue of the working capital adjustment which I have ordered should be dealt with by way of a trial of the issue.
Newbould J.
Released: March 17, 2016