Court File and Parties

COURT FILE NO.: 07-CL-6873 DATE: 201604 28 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

801Assets Inc., formerly King Colony Holdings Inc., formerly LDR Properties Inc. Plaintiff – and – 605446 Ontario Limited, Angelo Carlucci and 751518 Ontario Limited, Giulio DeFilippis, 675590 Ontario Limited, Rachele Chetti and Schwartz Levitsky Feldman Inc., in its capacity as trustee in bankruptcy of Giulio DeFilippis Defendants – and – Nicholas Tibollo, Michael Tibollo and John Rizakos Third Parties

Counsel: Robert D. Malen and Robert Drake for the Plaintiff Ron Chapman for 605446 Ontario Limited and Angelo Carlucci Peter Wardle and Alex Fidler-Wener for the Third Parties

HEARD: April 6 to 8, 11 to 13 and 15, 2016

BEFORE: Penny J.

Overview

1In this action, the plaintiff sues for specific performance of an agreement of purchase and sale under which it bought a 75% interest in 200 acres of land bordering on Hwy # 400 in Innisfil, north of Toronto.

2The agreement of purchase and sale, signed in October 2006, was scheduled to close on February 2, 2007. It did not close. The reasons for the failure to close are in dispute and lie at the heart of this lawsuit.

3The land was owned by a joint venture. The beneficial interest in the land was owned by three joint venture partners:

• 605446 Ontario Limited 50% (the principals of 605 are Jesse Copolla and Silvio Marsili)
• Angelo Carlucci 25%
• Giulio DeFilippis 25%

4Title to the land was held by the joint venture’s corporate vehicle, 751518 Ontario Limited, as bare trustee. The shareholders of 751 are the joint venture partners:

• 605 50%
• Carlucci 25%
• DeFilippis 25%

5The agreement was for the plaintiff to buy the 75% interest of 605 and Carlucci (land and shares), such that the plaintiff would become the joint venture partner with DeFilippis in the ownership of the land and the shares of the bare trustee, 751.

6The defendants 605 and Carlucci plead that they did not breach the contract and that no remedy is available to the plaintiff.

7These defendants also issued third party proceedings against their lawyers on the transaction, Michael Tibollo and John Rizakos. [1] If 605 and Carlucci are liable to the plaintiff, they say it is the fault of their lawyers. They seek an indemnity for any loss they may suffer as a result of this action.

8The defendants DeFilippis, 675590 Ontario Limited, Rachele Chetti and Schwartz Levitsky Feldman Inc. were added as parties after the claim was initially brought. They have settled with the plaintiff and consent to the order sought. They are no longer defendants. The third party solicitors defended the third party claim but not the main action. They too consent to the orders sought by the plaintiff.

9The parties have agreed to bifurcate the trial. The claims for breach of contract and specific performance in the main action, and the liability of the lawyers in the third party claim, are being resolved as part of this trial. Depending on the outcome of these issues, damages in the main action and in the third party claim are being left for future determination in phase 2 of this proceeding, if and when necessary.

10The issues for determination, therefore, are:

(1) did the defendants breach the contract when the deal failed to close on February 2, 2007? (2) if yes, is specific performance the appropriate remedy? and (3) if the answer to (1) above is yes, did the third party lawyers breach duties owed to the defendants by a reasonably prudent solicitor in a transaction of this kind, thereby causing loss to the defendants?

Background

11The joint venturers, 605, Carlucci and DeFilippis, acquired the Property in the name of 751 in 1987 for $810,000. There was a joint venture agreement signed in 1989. It is both an agreement between the joint venturers and a unanimous shareholders’ agreement between the shareholders of 751. It contains an arbitration clause.

12The plaintiff (then a corporation called LDR Properties Inc.) is 100% owned and controlled by Vince DeRosa. DeRosa is a real estate developer.

13In 2002, DeRosa offered to purchase the entire Property for $4 million. The deal did not close because one of the beneficial owners, DeFilippis, would not consent to sell.

14For several years thereafter, 605 and Carlucci engaged in litigation with DeFilippis in an effort to force him to sell his interest in the Property. Because of the arbitration clause in the JVA, that litigation was conducted by way of arbitration, initially before The Honourable Patrick Galligan. He dismissed 605 and Carlucci’s claims, including a post-hearing gambit for an order winding up 751. Mr. Galligan found that Carlucci, Marsili and Coppola were acting reasonably in their desire to sell the Property but that DeFilippis was also acting reasonably in his desire not to sell. DeFilippis could not, therefore, be compelled to sell his interest in the joint venture.

15Proceedings moved into court when Carlucci’s wife, Paula Warner (the purported indirect beneficial owner of Carlucci’s interest in 751 through a company called 675590 Ontario Limited), brought application on the Commercial List to wind up 751 and 675. Campbell J. stayed that proceeding on the basis that there were “unresolved issues” in the arbitration.

16The new issue boiled down to the effect, if any, of a trust agreement whereby Carlucci and DeFilippis purported to transfer their shares in 751 to 675, which was owned 50/50 by their wives. That issue proceeded before The Honourable Coulter Osborne.

17Mr. Osborne found these trust agreements were for “external (potential creditors) consumption only.” He noted that if the trust agreements were relevant to the JVA, the JVA would have reflected those arrangements. He held that the wives were not joint venture members. He therefore gave “no effect to the contention that Carlucci held his interest in the joint venture land in trust for his wife.” The applicants’ claims were, once again, dismissed.

18To further complicate matters, it became known in 2006 that DeFilippis had filed an assignment in bankruptcy in October 1994 and had been discharged in 1996. The trustee in bankruptcy, Schwartz Levitsky Feldman Inc., brought application on the Commercial List in June 2006 to be re-appointed based on the allegation that DeFilippis’s interest in the joint venture had not been disclosed to the trustee or to DeFilippis’s creditors.

19In response to that application, DeFilippis took the position that he had no interest in the Property because he too had transferred his shares in 751 to 675. DeFilippis’s wife, Rachele Chetti, held (like Paula Warner) 50% of the 675 shares.

20Cumming J. rejected DeFilippis’s argument on the basis that whatever the status of his shares in 751, the 25% interest in the Property was unambiguously held by DeFilippis personally. This was, Cumming J. said, “straightforward and certain.”

21As a result, Cumming J. found that DeFilippis had an undivided, 25% beneficial interest in the Property which vested in the trustee on DeFilippis’s date of bankruptcy. Because this asset was omitted from DeFilippis’s statement of affairs, the trustee was reappointed nunc pro tunc.

22It is common ground that the order of Cumming J. finding that DeFilippis’s 25% interest in the Property vested in the trustee was set aside by the Court of Appeal for Ontario, which ordered the trial of an issue on the question of DeFilippis’s ownership interest in the joint venture. That trial was never held so the issue was never resolved.

23Following the unsuccessful attempt by 605 and Carlucci to force DeFilippis to sell, DeRosa took another tack. In October 2006, he offered to purchase only the 75% interest of 605 and Carlucci. The offer price was $3 million.

24The theory behind this offer turned on the provisions of the JVA. Section 8.01 of the JVA contains a general prohibition against the sale, assignment, transfer or other disposition of an interest in the joint venture without prior written consent. This is qualified, however, by the phrase, “except as specifically provided for or pursuant to any other provision of this Agreement.” Section 8.01 provides:

Except with the prior written consent of all the Members of the Joint Venture, the respective undivided interest of any Member in the Joint Venture Lands and in all the other property, assets and rights of the Joint Venture and in all benefits derived or derivable therefrom and the interest of any Member in its loans to the Joint Venture shall not be transferred, assigned, sold, mortgaged, charged or in any other manner encumbered, disposed of or dealt with, except as specifically provided for in or pursuant to any other provision of this Agreement and, none of the shares of the Trustee Company held by any member shall be transferred, assigned, sold, mortgaged, charged or in any other manner encumbered, disposed of or dealt with.

25Section 8.03 goes on to provide for a right of first refusal. Under s. 8.03, a joint venture member who wishes to sell his interest may give notice in writing to the non-selling member of any offer received. The non-selling member has 30 days to purchase at the offer price or to consent to the sale. If the non-selling member declines to purchase at the offer price, he is conclusively deemed to have consented to the sale. Section 8.03 is, like s. 8.01, infelicitously drafted, but provides:

In the event that any of the Joint Venture Members wishes at any time to sell all, but not less than all, its/his undivided proportionate interest in the Joint Venture Lands or such part thereof as has not at that time been previously sold by the Joint Venture, and in all the property, assets and rights of the Joint Venture, such Member (hereinafter referred to as the “Offeror”) shall give to the other member or members (hereinafter referred to as the “Offeree”) notice in writing thereof, (hereinafter referred to as the “Notice”), which Notice shall contain an offer by the Offeror to sell to the Offerees pro rata all its/his undivided proportionate interest for the purchase price and on and subject to such other terms and conditions, fixed by the Offeror and set forth in the Offer contained in the Notice. For the purposes of this section, the undivided proportionate interest of a Member shall be equal to the respective proportion of the interest of the Member in the Joint Venture as set out in Section 1.03 hereof. The Offeree shall, withi thirty (30) days after receipt of the Notice, either unconditionally accept the Offer and, where the Offeree is more than one of the Joint Venture Members, such acceptance shall be in the respective proportionate interest of the Offerees and shall give notice in writing to the Offeror of its or their acceptance thereof, or give to the Offeror the consent in writing of the Offeree, pursuant to which consent the Offeror shall have the right, for a period of six (6) calendar months after receipt of such consent to sell to any person, firm or corporation all the undivided proportionate interest of the Offeror, for the purchase price not lower and on and subject to such other terms and conditions not less favourable to the Offeror than those set forth in the Offer contained in the Notice, provided that such person, firm or corporation, as a condition of the completion of such purchase, executes a covenants agreeing to be bound to all the provisions of this Agreement and to assume all the obligations of the Offeror hereunder. In the event that the Offeree does not, within such thirty-day period, either unconditionally accept such Offer and give notice in writing thereof to the Offeror, or give to the Offeror the consent in writing of the Offeree hereinbefore referred to, the Offeree shall, for all purposes of this Section 8.03, be deemed conclusively to have given such consent.

26The LDR offer, therefore, contemplated that 605 and Carlucci would give notice of the offer to DeFilippis. DeFilippis would then either have to purchase their interest at the offer price or consent to the sale to LDR. Failing a purchase or written consent, DeFilippis would be deemed by s. 8.03 to have consented conclusively to the sale after the expiry of 30 days.

27Following receipt of the offer, the agreement of purchase and sale was negotiated and drafted by William Friedman, solicitor for LDR, and John Rizakos, with some involvement from Michael Tibollo, the solicitors for the defendants.

28Among other things, under the APS the defendant vendors promised to deliver on or before closing a transfer, assignment and sale of all of the vendors’ shares in 751, the vendors’ share certificates in 751 as well as the consent of the Board of Directors of 751 to the sale, transfer and assignment of the shares. This was item 4(c) to the APS.

29Schedule A to the APS contained the vendors’ condition stipulating that the APS would be conditional for a period of 45 days after the vendors provided notice to DeFilippis of the LDR offer and the vendor “obtaining the consent, written or otherwise,” of DeFilippis to the sale of the vendors’ interest as set out in the APS. [2] If the vendors were satisfied that they had the requisite consent, they would advise the purchaser in writing that the condition had been satisfied or waived. If no written notice were provided to the purchaser confirming satisfaction of the vendors’ condition, the agreement would be deemed terminated by the vendor and the deposit monies returned with interest.

30The APS was signed by all parties on October 3, 2006. The scheduled closing date was January 18, 2007.

31The transaction proceeded in the usual way. Notice of the offer was served on both DeFilippis and his re-appointed trustee in bankruptcy. The notices specifically referenced the defendants’ offer to sell by right of first refusal “all of their undivided proportionate interest in the JV Lands and Joint Venture.” Neither DeFilippis nor the trustee took up the right of first refusal. Accordingly, 30 days after notice was served, DeFilippis (and his trustee) was deemed to have consented to the transaction. Once the 30 days had expired, on the strength of the deeming provision in s. 8.03 of the JVA, the vendors, through their solicitors, waived their condition and the deal went “firm.” Waiver of the vendors’ condition took place by way of letter from Rizakos to Friedman on December 4, 2006.

32The attention of the solicitors for both parties then turned to the myriad details required to close a transaction of this kind. The “details” relevant to this action involved the transfer of the vendors’ shares in 751.

33Mr. Friedman wanted to inspect the 751 minute book. That was in the possession of yet another solicitor who acted for the corporation. There was some delay in the production of a copy of the minute book because the corporate solicitor insisted upon having Mr. DeFilippis’s consent, which was ultimately given.

34On January 3, 2007, Friedman delivered a requisition letter. Among other things, he required the transfer, sale and assignment to the purchaser of the shares of 751 held by 605 and Carlucci. He also required resignations of the nominees of 605 and Carlucci to the 751 board and the appointment of at least two nominees of the purchaser to the board and as officers of 751.

35In response, Rizakos drafted a beneficial transfer and general conveyance for the shares and resignations and other corporate resolutions for the changes in shares, directors and officers. He sent these to Friedman on January 17, 2007, the day before the scheduled closing.

36The issue upon which this deal ultimately faltered came up the following day in an email from Friedman to Rizakos. The documents drafted by Rizakos contemplated signatures of three directors, Carlucci, Copolla and Marsili. This was on the basis that, due to his bankruptcy, DeFilippis had been removed as a director by virtue of s. 118(1)4 of the OBCA and, post-discharge, had never been re-appointed, such that the only directors of 751 were Carlucci, Copolla and Marsili.

37Friedman pointed out in his email to Rizakos that under s. 5.02 of the JVA, 751 was to have four directors and that Carlucci, Coppola, DeFilippis and Marsili, it seemed, had to be those directors. Similarly, Friedman pointed out that the JVA required there to be four officers and that DeFilippis had to be the vice president. Finally, Friedman pointed out that the articles of incorporation of 751 required the consent of all the directors to any transfer of shares and that the language of the JVA appeared to include DeFilippis as a director. To cure these problems, Friedman required evidence from the vendors that the JVA “had been properly amended” to provide for three directors and officers, none of which had to be DeFilippis.

38On January 18, 2007, it was mutually agreed between the solicitors, on instructions from their clients, that given the late delivery of the minute book and draft documents, etc., and the issues still to be resolved, the closing should be extended to February 2, 2007.

39The problem of 751’s officers and directors and whose signatures were required, for example, to authorize the transfer of the vendors’ 751 shares to the purchaser prompted a great deal of work by Rizakos and Friedman, both looking for solutions to this issue.

40Amending the JVA was obviously potentially problematic as it would likely require DeFilippis’s consent, could engage all kinds of other issues and could be very time-consuming.

41Rizakos proposed demanding that the trustee in bankruptcy nominate an individual to the board to make it four directors or execute an acknowledgment that it had the right to appoint a nominee on the board but was foregoing that right and consenting to have the three existing directors authorize the transfer.

42In this regard, Rizakos communicated with counsel for the trustee in bankruptcy on January 29 but she only raised additional problems. By reply email on January 30, she explained that, although DeFilippis had been disqualified as a director on his bankruptcy, he had been discharged and was no longer disqualified. She also indicated that DeFilippis may have held his 751 shares in trust for his wife or may not own the shares at all. It was also by then known that DeFilippis had appealed Justice Cumming’s order (that DeFilippis’s interest in the joint venture had vested in the trustee) and that the appeal was scheduled to be heard in March 2007. She indicated that, in the circumstances, the trustee was not prepared to purport to exercise the rights associated with DeFilippis’s 751 shares as requested by Rizakos.

43By January 25, 2007, Rizakos had come to realize that it was unlikely these problems would be resolved in time for a February 2 closing. He had preliminary discussions with Coppola on January 25, alerting Coppola to this issue. Rizakos was told that if DeRosa was not satisfied with the interest the vendors were prepared to convey, Coppola would prefer not to close the deal on February 2. Rizakos testified that on January 26, he also had a telephone conversation with Carlucci. Carlucci did not want to give any more extensions. On January 29, Rizakos had another telephone conversation with Coppola and the vendors’ real estate agent, Mario Salerno. Rizakos explained to Coppola that the vendors “must satisfy Friedman that shares are transferred free and clear.”

44On January 31, after hearing from counsel for the trustee, Rizakos had further telephone conversations with his clients. Carlucci reiterated that he did not want to extend beyond February 2. Coppola told him that he “did not want to close.” None of this evidence is contested.

45Rizakos (and Tibollo) were now in a difficult position. They had both been instructed that their clients to refuse to extend the closing any further such that, if the issues relating to the transfer of the 751 shares were not resolved by the close of business on February 2, they were to terminate the APS. Rizakos and Tibollo had advised their clients that the purchaser had to be satisfied that it was getting the shares free and clear and that the resolution signed by only three directors was not satisfactory to the purchaser. They both believed there were solutions to this problem. They both advised the clients to extend the closing in order to gain time to explore those solutions.

46Their clients refused to take that advice. Carlucci and Copolla thought that DeRosa did not have the money and was in no position to close. There was absolutely no evidence given at trial by Carlucci, Copolla or Marsili to support this suspicion. Marsili testified at trial that they did not close because the land value had increased. All three of them also seemed to hold the belief that there had been “enough” extensions and that they were in a position to refuse to grant any more.

47At about midday on January 31, Rizakos received an e-mail from Friedman proposing a three-week extension to allow time to try to get the trustee and/or DeFilippis on board or to find another solution. At about 8 p.m. that evening, Rizakos replied to Friedman. While still promoting possible solutions, he began “positioning” for his clients in the event no solutions were found in the next two days. Rizakos indicated that the vendors were prepared to provide appropriate “comfort” in lieu of a resolution signed by four directors and suggested an undertaking, release and indemnity, although he presented no draft documents in this regard. Rizakos concluded his e-mail to Friedman by saying that if an acceptable structure could not be reached before the scheduled closing, “perhaps it is in the best interests of all the parties that the agreement be terminated.”

48On February 1 there was a discussion between Friedman, Rizakos and Tibollo. Rizakos and Tibollo did not rule out the possibility of recommending alternate solutions but said they needed draft documents to “sell” their clients on a further extension.

49There seems to have been a misunderstanding at this stage. Friedman thought an extension had been granted and that he would get to the drafting shortly. Rizakos and Tibollo thought Friedman was going to send draft documents right away, which they could then take to their clients to seek instructions for a further extension in order to negotiate the language of the draft documents.

50In the event, no draft documents arrived. No signed resolution of directors (with three or four signatures) was ever delivered to the purchaser authorizing the share transfer.

51Instead, on February 2, Rizakos wrote to Friedman setting out his version of events and concluding that it was unlikely the vendors could ever get DeFilippis’s signature on the directors’ resolution such that “the agreement is frustrated and will not be able to be completed in accordance with” its terms. The APS, he wrote, was therefore at an end.

52Friedman naturally responded with a letter setting out the purchaser’s position. Friedman reiterated the need for a valid directors’ resolution authorizing the transfer of the 751 shares. He also outlined various steps that could be taken to work towards a closing of the deal on other terms. He concluded, however, that if the vendors continued to take the position that the APS was at an end, the purchaser would have “no alternative except to seek redress in the courts for the wrongful termination.” Within the week, this litigation was instituted, seeking specific performance.

53The plaintiff did not tender on February 2, 2007 because it was advised by the vendors’ lawyers that the required resolution approving the transfer of the plaintiff’s shares in 751 would not be forthcoming and that the deadline for closing would not be extended.

54The vendors never formally took the position that the draft directors’ resolution which contemplated the signatures of Carlucci, Coppola and Marsili fulfilled the vendors’ obligations under both the APS and 751’s articles of incorporation. Instead, the vendors’ lawyers simply took the position that what the plaintiff wanted – a directors resolution approving the share transfer signed by Carlucci, Coppola, Marsili and one of the trustee in bankruptcy or DeFilippis – was not possible to obtain and that the APS had therefore been frustrated.

55As noted above, there are three basic issues arising out of this situation:

(i) did the defendants breach the contract when the deal failed to close on February 2, 2007? (ii) if yes, is specific performance the appropriate remedy? and (iii) if the answer to (1) above is yes, did the third party lawyers breach duties owed to the defendants by a reasonably prudent solicitor in a transaction of this kind, thereby causing loss to the defendants?

Did the Defendants Breach the Agreement by Failing to Close?

56The plaintiff argues there were three ways in which the defendants breached the APS:

(1) the vendors, through their counsel, agreed to extend the closing date and then breached that agreement by insisting on closing on February 2; (2) the vendors had a contractual obligation to make bona fide efforts to close and were in breach of that obligation by refusing to extend the closing so that the problems could be resolved; and (3) in any event, the vendors had a contractual obligation to deliver a valid directors’ resolution authorizing the transfer of shares and never did so.

57The defendants argue that:

(1) there was no agreement to an extension on February 2; (2) the defendants were not obliged to grant any further extension on February 2; (3) there was a mutual mistake at the time the contract was formed concerning the directors’ consent to the share transfer which vitiated the contract; and (4) the Purchaser did not have the money and was in no position to close in any event.

There Was No Agreement to Extend the February 2 Closing

58I do not think the evidence supports the conclusion that there was an agreement to extend the February 2, 2007 closing. Although Friedman initially gave evidence of his understanding that he and Rizakos had verbally agreed to an extension, he later resiled, saying, “It turned out I was wrong but I thought we’d agreed to extend.” There is no contemporaneous written confirmation of any extension.

59Rizakos’s notes are consistent with his evidence that there was no agreement to extend. What Rizakos agreed to was that Friedman would prepare drafts dealing with the potential alternative solution and that Rizakos and Tibollo would take those drafts to their clients and use them as a basis for encouraging the vendors to extend the closing as requested.

60This was Tibollo’s evidence as well.

61It is clear from the evidence that all three lawyers thought the deal could and should close. It is also clear that all three lawyers thought an extension of the February 2 closing date was required to accomplish this. However, it is also clear that Rizakos and Tibollo had their marching orders –“no more extensions.”

62I find that there was simply a misunderstanding between the lawyers on this point. There was no agreement to extend. Thus, there could be no breach of an agreement to extend. This conclusion, however, leads to the next question – were the defendants nevertheless under an obligation to extend?

The Defendants Breached Their Obligation to Extend the February 2 Closing

63Parties to a contract have an obligation of good faith that compels them to honestly conclude a bargain that has honestly been made, Walker v. Jones, 2008 CarswellOnt 5518 (S.C.J.) at para. 143 (citing Bank of America Canada v. Mutual Trust Co. (1998), 18 R.P.R. (3d) 213 (Gen. Div.)[Commercial List]). A vendor is under a duty to act in good faith and to take all reasonable steps to complete the contract. Where a vendor has acted contrary to good faith in his performance of the contract, the law precludes him from relying on the ‘time of the essence’ provision to terminate the contract, Walker v. Jones, supra, at para. 145; see also Morgan v. Lucky Dog Ltd., [1987] O.J. No 647 (Ont. H.C.).

64I agree with the plaintiff that the evidence supports a lack of good faith on the vendors’ part in trying to close the deal. There are several grounds to support this conclusion. First, the vendors were in no position to refuse an extension. This is because it was they who were delinquent in fulfilling a promise to provide a valid directors’ resolution authorizing the share transfer. Whether Mr. Friedman was correct in his conclusion that the signature of DeFilippis was necessary is a subject to which I will return below. It was, in the circumstances, at least a valid concern which had to be addressed. The vendors never formally advanced the position that a signed resolution by three directors was legally sufficient to fulfill the vendors’ promise and never tendered that resolution signed.

65Further, Carlucci, Coppola and Marsili all took the position that they had already granted “too many extensions”. They seemed to be under the mistaken impression that there had already been two extensions before February 2. The evidence supports the conclusion that there was only one prior extension. More importantly, Carlucci and Coppola formed the view that DeRosa did not have the money to pay the purchase price on closing. They offered no evidence in support of that suspicion at trial, however. As will be explained below, the evidence is, indeed, to the contrary. Marsili candidly admitted during his examination in chief that he did not want to close because he thought the value of the property had gone up. Finally, there is evidence that, within one week of the aborted closing, the vendors instructed their lawyers to contact the lawyer for the trustee in bankruptcy to inquire about purchasing DeFilippis’s 25 % interest from the trustee.

66In addition, Rizakos had explained to them the need to transfer the 751 shares “free and clear.” Both Rizakos and Tibollo recommended extending the closing to enable the vendors to fulfill their obligations, perhaps in some other way. This included not only further discussions with the trustee and DeFilippis directly but the consideration of alternative measures such as an indemnity and voting trust agreement. They both thought the deal should and could close given a little more time. The vendors refused to take their lawyers’ advice.

67In summary, the vendors did not have the right to insist upon a February 2, 2007 closing date. There is evidence that their motivations for doing so were, at the very least, ill-considered and unsupported and perhaps even motivated by economic self-interest in wishing to reap the benefits of any post-APS increase in value. In any event, I am not satisfied that the vendors took their good faith obligations seriously. Rather, they imposed an arbitrary constraint on the deal, which they had no right to do. Acting on instructions, Rizakos did the best he could, claiming that the APS was at an end because it had been “frustrated.” The vendors’ failure to take their lawyers’ advice resulted in a breach of their obligation to take all reasonable steps honestly to conclude the bargain which had honestly been made.

The Defendants Failed to Deliver a Valid Directors’ Resolution

68The articles of incorporation of 751 provide that no shareholder shall be entitled to transfer any shares without either: (a) the previous express sanction of the holders of more than 51% of the shares; or (b) the sanction of the directors of 751 expressed by resolution passed by a majority of directors or by an instrument in writing signed by all the directors. Item 4(c) of the APS required the vendors to deliver the “consent” of the board of directors of 751 to the sale, transfer and assignment of the vendors share to the purchaser.

69Under the JVA, s. 8.01 provides that written consent of the joint venture members is required for any transfer of an interest in the joint venture land or other property, assets and rights of the joint venture. That written consent, however, is subject to the proviso, “except as specifically provided for in or pursuant to any other provision of this Agreement.” Section 8.03 provides an exception. When notice is given, and the recipient does not exercise his right of first refusal within the specified time, he is deemed conclusively to have given his consent to the transfer.

70Sections 8.01 and 8.03 are not felicitously drafted. There are several possible ambiguities in the interpretation and application of these provisions, particularly when read in light of ss. 2.04 and 5.02 dealing with the number and identity of the directors. Does “property, assets and rights” include the shares in the joint venture corporation, 751? Are share transfers prohibited under 8.01 even with consent? Could the requirement for four directors’ signatures on an authorization be used to thwart the substantive provisions of the JVA deeming consent to a transfer?

71There are many useful formulations outlining the basic principles of contract interpretation. I find the decision of the Court of Appeal for Ontario in Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673 particularly helpful (at para. 16):

When interpreting a contract, the court aims to determine the intentions of the parties in accordance with the language used in the written document and presumes that the parties have intended what they have said. The court construes the contract 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. In interpreting the contract, the court must have regard to the objective evidence of the “factual matrix” or context of the underlying negotiation of the contract, but not the subjective evidence of the intention of the parties. The court should interpret the contract so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity.

72A purposive interpretation of s. 8 of the JVA, conducted in accordance with these principles, reads sections 8.01 and 8.03 together so as to avoid inconsistency and to give both sections meaning. This is also produces a result which is consistent with commercial efficacy and good business sense. This approach leads to the conclusion that the right of first refusal and deemed consent for which provision is made in s. 8.03 apply equally to both the joint venture land and the shares of the joint venture corporation. The deemed consent cannot be thwarted by an uncooperative director who, although qua joint venture member has conclusively been deemed to have consented to the transfer of both the land and the shares, might seek to defeat the transfer by refusing to sign an authorizing resolution while still a director.

73Friedman was concerned with the apparent conflict between the deemed consent in 8.03 and the language of 2.04 and 5.02, investing certain individuals with specified status and roles. This was complicated by the fact that DeFilippis had been bankrupt and therefore ineligible to serve as a director due to s. 118(1)4 of the OBCA. There was no indication in the minute book, however, or any other evidence that DeFilippis had ever been reappointed as a director after his discharge.

74The vendors’ lawyers appear to have assumed DeFilippis was not a director and prepared draft resolutions on the basis that only the three directors appointed by the vendors needed to sign the authorization.

75They may well been right but the fact remained that the situation was unclear. A solution was required so that no one would have to take unreasonable risks of a problem surfacing later. Solutions were readily available. Perhaps DeFilippis would agree to waive or sign. If not, a court application to establish that DeFilippis was not a director or to require or dispense with his signature could have been brought. Likewise, resort might have been had to s. 126(5) of the OBCA which provides that where there is a vacancy on the board of directors, the remaining directors may exercise all the powers of the board so long as a quorum of the board remains in office. Or, as the lawyers discussed, perhaps an entirely different solution might have been worked out. The vendors might even have been entitled to tender the resolution signed by the three clearly incumbent directors. But they did not.

76The vendors had a clear obligation to deliver a valid directors’ resolution authorizing the transfer of their shares to the purchaser. They failed to do so. This, by itself, was a clear breach of their obligations under the APS.

There Was No Mutual Mistake

77Mr. Chapman argues that the APS was vitiated by mutual mistake. Mutual mistake arises where the obligation which is sought to be enforced is fundamentally different from that which was originally contemplated in the agreement. If the terms of the contract construed in light of the circumstances existing at the time it was made do not indicate that one or other of the parties took a particular risk that the facts might be otherwise than both had assumed them to be, the contract will be void for mutual mistake.

78In this case, is it is submitted on behalf of the defendants that the mutual mistake was the omission of a specific requirement for DeFilippis’s consent to the transfer of shares. Mr. Chapman argues that neither of the two lawyers put their minds to this question and, because s. 8.01 of the JVA required DeFilippis’s consent, there was a mutual mistake.

79I am unable to lend any credence to this argument. There was no mutual mistake. DeFilippis’s consent to the transaction under s. 8.01 was dealt with in the context of the notice and potential right of first refusal available to him under s. 8.03 of the JVA. There is no issue that neither the trustee nor DeFilippis responded to the notice by offering to purchase the vendors’ interest. Thus, DeFilippis was deemed conclusively to have consented to the transaction including both the sale of the land and the 751 shares. The issue on which the transaction foundered was not DeFilippis’s consent to the transaction but ambiguity about whether DeFilippis’s signature, qua director, was required on the directors’ resolution authorizing the share transfer from the vendors to the purchaser. There simply was no mistake on this issue, there was a disagreement; a disagreement, however, which all of the solicitors involved thought was amenable to a resolution. It is the failure of the vendors to pursue that resolution, against the advice of their lawyers, which gives rise to their breach of the APS.

The Purchaser Was in Funds

80Anticipatory breach occurs when one party manifests, through words or conduct, an intention not to perform or not to be bound by provisions of the agreement that require performance in the future. When the anticipated future non-observance relates to important terms of the contract or shows an intention not to be bound in the future, anticipatory breach gives rise to anticipatory repudiation. There will be an anticipatory repudiation if the words and conduct evince an intention to breach a term of the contract which, if actually breached, would constitute repudiation of the contract, Potter v. New Brunswick (Legal Aid Services Commission), 2015 SCC 10 at para. 149.

81The plaintiff was advised by the vendors’ lawyers on January 31 and again on February 2 that the vendors were not in a position to close because, among other things, they did not have a signed resolution of 751’s directors authorizing the share transfer. I agree with the plaintiff that Rizakos’s communications constituted anticipatory breach and anticipatory repudiation of an important term of the APS.

82As a result, the purchaser was under no separate obligation to tender in order to pursue his rights for breach of contract. In such a case, the purchaser need only show that it could close “in the reasonable future.” There is ample evidence that the purchaser stood ready, willing and able to close for a period of time on, and following, the aborted closing on February 2, 2007. The defendants, in particular, however, rely on an allegation that the purchaser did not have the $3 million required to close.

83Both DeRosa and the purchaser’s banker, Mr. Choma, testified that a wholly-owned corporation of DeRosa’s, Fercan Developments Inc., had almost $4.4 million in a savings account on February 2, 2007 and that there were no constraints on DeRosa’s ability to transfer those funds to LDR at any time. DeRosa testified that it was his intention to make such a transfer to LDR in order to close the transaction on February 2.

84Mr. Chapman argues that there was no evidence of any binding commitments from Fercan to LDR in this regard. I do not think such extraneous evidence is required. We are dealing here with one individual who unambiguously owned and controlled both companies. His intentions utterly governed. There was no need for legal documents between DeRosa’s two wholly-owned corporations to give effect to DeRosa’s intentions.

85I find that LDR had the necessary funds required to close the transaction and stood ready, willing and able to do so on, and after, February 2, 2007. Because of the anticipatory breach, however, LDR was not required to actually tender payment of those funds to preserve its rights.

Is Specific Performance the Appropriate Remedy?

86Sharpe J.A. writes of specific performance in his text, Injunctions and Specific Performance:

An award of damages presumes that the plaintiff’s expectation can be protected by a money award which will purchase substitute performance. If the item bargained for is unique, then there is no exact substitute. The lack of an available substitute produces two problems. First, it makes the purely monetary loss caused by the defendant’s breach very difficult to measure. There are no comparable sales to which reference may be made in order to establish an objective estimate of the value of the promised item or performance. Secondly, even if an objective value of some sort can be found, the effect of denying specific performance and granting damages is to force the plaintiff to settle for some inexact substitute.

87This passage, and the case law, makes it clear that the concept of “uniqueness” in specific performance has more to do with the court’s inability to make the plaintiff whole by way of an award of money damages than with the particular features of property that make it sui generis. As Lax J. wrote in John E. Dodge Holdings Ltd. v. 805062 Ontario Ltd., (2001) 56 O.R. (3d) 341 (S.C.J.) at para. 60:

It is important to keep in mind that uniqueness does not mean singularity. It means that the property has a quality (or qualities) that makes it especially suitable for the proposed use that cannot be reasonably duplicated elsewhere. To put this another way, the plaintiff must show that the property has distinctive features that make an award of damages inadequate. [Emphasis added]

88In this case, both the defendants and the third parties concede that the Property is unique in the relevant legal sense. In addition, the plaintiff led the evidence of two planners, the effect of which was to demonstrate that this property represents highly unique development opportunities and potential. Its location, size, proximity to existing strategic settlement areas, and a whole host of other factors, all contribute to the unique qualities of this property. None of this evidence was challenged in cross-examination and there is no contrary evidence. In the circumstances, therefore, I have no hesitation in finding that damages would not be an adequate remedy; specific performance is the appropriate remedy in the circumstances of this case.

89The defendants did not argue at trial that the purchaser’s acceptance of the return of its deposit constituted an election to sue for damages and a waiver of the right to specific performance. In any event, I agree with and adopt the plaintiff’s submission, presented in anticipation of such an argument, at paragraphs 38 to 49 of its written closing submissions at trial.

Were the Vendors’ Lawyers Negligent?

90The third party claim pleads essentially two acts of negligence on the part of the vendors’ lawyers in the advice given on this transaction. First, the vendors plead that it was negligent for their lawyers to agree to an unconditional obligation on the part of the vendors in item 4(c) of the APS to deliver a transfer of their shares in 751 to the purchaser in light of the history of acrimony between the vendors and DeFilippis and the fact that DeFilippis’s consent would be required for any share transfer.

91Second, the vendors plead that the waiver of the vendors’ condition, requiring the consent, written or otherwise, of DeFilippis, was negligent given that DeFilippis had not given express consent to the transfer of the land or shares.

92Wayne Gray prepared an expert’s report and testified at the trial on behalf of the vendors. Mr. Gray was qualified as an expert in the duties of a corporate commercial solicitor acting on transactions of this kind.

93The standard of care is not in dispute. Mr. Gray articulated the standard of care as follows:

(a) a solicitor has a duty to act in a prudent and competent manner and to exercise the same degree of skill as other lawyers, similarly situated, with exercise in comparable circumstances; but (b) a solicitor is not negligent for mere mistakes or errors in judgment unless the mistake or error in judgment is one that a reasonably competent solicitor in comparable circumstances would not have made.

94Mr. Gray expressed the opinion that a reasonably prudent solicitor acting for the vendors in the course of this transaction would have:

(a) included a mutual condition in the purchase agreement whereby either the vendors or the purchaser could clearly terminate their respective obligations under the purchase agreement if the trustee in bankruptcy failed to consent to the transfer of the purchased interests or amend the JVA on or before the closing; (b) advised the vendors that the purchase agreement should not stipulate an unqualified or unconditional obligation of the vendors to deliver the purchased interests to the purchaser or to replace the nominees of the vendors as directors and officers of the trustee company with nominees of the purchaser without first having made satisfactory arrangements with the trustee in bankruptcy in those respects; and (c) advised the vendors not to waive their unilateral right to terminate the purchase agreement without having a binding commitment in writing from the trustee in bankruptcy to: (i) consent to the transfer of the purchased shares to the purchaser; and (ii) replace the nominees of the vendors as directors and officers of the trustee company with replacement nominees of the purchaser.

95Mr. Gray conceded in his report (and in his evidence at trial) that a plausible, objective interpretation of the vendors’ condition, Schedule A, in light of the JVA, is that the vendors’ interest referred to in the notice related not only to the lands but also to the shares. However, Mr. Gray opined that the waiver of the vendors’ condition eliminated any further possibility of relying on the vendors’ condition to terminate the purchase agreement if the other deliverables required under the purchase agreement (in particular, the consent of the remaining member to the transfer of the purchaser’s shares) would not be forthcoming. Thus, he said, as a result of either not including an explicit consent to the transfer of the purchaser’s shares as part of the vendors’ condition or, if it was indeed already included by virtue of the language used, waiving it before the consent of the non-transferring member was in hand, the purchasers exposed the vendors to two risks:

(1) a claim by the purchaser if the vendors were unable to deliver the purchased shares; and (2) in exchange for this avoidable risk, the vendors would have no offsetting advantage because, without the consent or agreement of the trustee, they would be unable to sell the purchased interests to the purchaser.

96Thus, Mr. Gray concluded that the vendors’ solicitors were negligent because: (i) they failed to include as a vendors’ condition obtaining an explicit consent from the non-selling joint venture member to the transfer of the shares; and (ii) they waived the vendors’ condition without obtaining adequate assurances from the non-selling joint venture member that it would consent to the transfer of the shares and the appointment of the purchaser’s nominees.

97Mr. Gray’s opinion is fine as far as it goes but, in my view, it assumes an interpretation of the JVA which is not consistent with the interpretation I have referred to and outlined above.

98In response to s. 8.01, which enables the joint venture members to veto attempts by the others to exit the joint venture, s. 8.03 ensures that the joint venture members could not hold each other hostage to the joint venture. It enables a joint venture member to sell his interest without the others’ prior express consent, so long as the latter are first given the opportunity to purchase the former’s interest on the same or better terms.

99Although s. 8.03 does not explicitly address the shares, a purposeful, commercially sensible interpretation directed at giving meaningful substance to the right of first refusal mechanism requires that it be so interpreted.

100751 holds all the property, assets and rights of the joint venture and is responsible for managing the joint venture lands. Therefore, to participate in the management of the lands, one must have the right to appoint a nominee to 751’s board of directors. Accordingly, no member could reasonably expect to be able to sell their interest in the land without also conveying their interest in the shares, because no prospective buyer would be interested in such a deal.

101Therefore, if the right of first refusal provided for in s. 8.03 does not provide a mechanism for receiving a deemed consent to the sale of both the land and the shares, any attempt by a joint venture member to sell could be held hostage to the other joint venture members’ veto power in s. 8.01.

102Put another way, since no purchaser would be willing to buy the land without the shares, if there can be no deemed consent to the transfer of the shares, any sale of the joint venture land would remain subject to the members’ prior written consent. This would deprive s. 8.03, and the right of first refusal mechanism, of any meaning or function.

103This is clearly not what the parties intended when they drafted the JVA. They went to the effort of drafting an intricate right of first refusal mechanism in s. 8.03 precisely for the purpose of avoiding a situation where one member could hold the other hostage. This evidences their intention to ensure that there was a meaningful mechanism through which they could sell their interests in the joint venture that would not be subject to a veto by the other joint venture members. To give effect to this clear intention, the deemed consent provided for in s. 8.03 must be read as applying to the shares as well as the land.

104This interpretation of the JVA disposes of both of Mr. Gray’s points. His first complaint, that the vendors’ condition contained no exit clause in the event of the vendors being unable to obtain the other member’s consent, is not correct on a proper interpretation of the JVA. DeFilippis’s rights under the JVA were, within 30 days of receipt of the notice, to purchase both the vendors interest in the land and their 751 shares. When DeFilippis did not do so within the requisite timeframe, he was conclusively deemed to have consented to both the vendors’ transfer of their interest in the land and the transfer of their shares to the purchaser.

105The vendors’ solicitors were also acting correctly when they waived the vendors’ condition once the 30 days had expired and the deemed consent became effective. They had the consents they needed to satisfy that condition by virtue of the operation of s. 8.03 of the JVA and the notice. The vendors’ solicitors could not reasonably have refused to waive that condition, once the right of first refusal was not exercised, based on an argument that DeFilippis had not signed the directors’ resolution authorizing the share transfer. This is because, accepting the admitted “mess” the minute book was in, they reasonably took the view that DeFilippis was no longer a director and that, as such, his signature was not required. As noted above, whether they were entitled to insist upon this as a basis of closing became moot because they did not do so. In any event, as also noted above, there were a number of available solutions to the directors’ resolution problem which were, unfortunately, not pursued by the vendors contrary to their solicitors’ advice.

106There is a subtler point in Mr. Gray’s report which addresses the solicitors’ failure to put in place a mechanism under the APS for the appointment of the purchaser’s nominees to the board of directors and as officers of 751.

107Again, however, this point is disposed of by the interpretation of s. 8.03 outlined above. I say this because DeFilippis (or the trustee), having already “given” consent to the transfer of shares (by virtue of the deeming provision), would never have been in a position to dispute the appointment of the purchaser’s nominees to 751’s board or as officers. Mr. Gray effectively conceded this point in cross examination.

108For these reasons, on the grounds pleaded and advanced by the vendors’ expert, Mr. Gray, I am unable to conclude that there is sufficient evidence to warrant a finding, on a balance of probabilities, that the third party solicitors were negligent in the performance of their obligations to the vendors on this transaction.

Conclusion

109In conclusion, the plaintiff’s claim is allowed, specific performance of the APS is ordered and the third party claim against the vendors’ solicitors, Rizakos and Tibollo, is dismissed.

Costs and Other Issues

110It occurs to me there may be implementation issues to be spoken to, particularly in light of the passage of so much time since this transaction was scheduled to close. For example, is the plaintiff entitled to both specific performance and the benefit of the time value of the money associated with the purchase price he has had the use of since February 2, 2007? Or, is that a value that ought rightly to be paid to the vendors on closing?

111The disposition of costs also raises potentially unusual issues in this case. For example, although I have found that the conduct of the vendors’ solicitors, as pleaded and advanced by Mr. Gray, was not negligent, is the solicitors’ conduct nevertheless relevant to the allocation of the costs of these proceedings?

112In my view, before making the usual disposition requiring brief cost submissions in writing, counsel should, after considering the consequences of these Reasons and discussing it among themselves, attend at a 9:30 appointment on a mutually convenient date where a comprehensive process for the resolution of any loose ends can be adopted.

Penny J.

Released: April 28, 2016

COURT FILE NO.: 07-CL-6873 DATE: 20160428 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: 801Assets Inc., formerly King Colony Holdings In., formerly LDR Properties Inc. Plaintiff – and – 605446 Ontario Limited, Angelo Carlucci and 751518 Ontario Limited, Giulio DeFilippis, 675590 Ontario Limited, Rachele Chetti and Schwartz Levitsky Feldman Inc., in its capacity as trustee in bankruptcy of Giulio DeFilippis Defendants – and – Nicholas Tibollo, Michael Tibollo and John Rizakos Third Parties

REASONS FOR JUDGMENT Penny J. Released: April 28, 2016

1The third party claim against Nick Tibollo was dismissed on motion for summary judgment.

2In these reasons, references to DeFillipis’s interest in the joint venture in 2006 and 2007 should typically be read to mean DeFillipis and/or his trustee in bankruptcy, depending on the context.