COURT FILE NO.: CV-16-0407 DATE: 2017-05-17

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

LAKEHEAD IRONWORKS INC. and UWE QUAST Plaintiffs

D. Matson, for the Plaintiffs

• and -

183340 ONTARIO LTD. and ANDREW LOCKE Defendants

E. Juurakko, for the Defendants

HEARD: April 19, 2017, at Thunder Bay, Ontario

Mr. Justice D.C. Shaw

Reasons On Motion for Judgment

[1] This motion was originally brought as a summary judgment motion. However, at the beginning of the hearing of the motion, counsel agreed that it should be treated as a motion under Rule 49.09 to enforce what the plaintiffs submit was a settlement agreement.

[2] The issue is whether a binding agreement for the purchase and sale of shares in a private corporation was reached in an exchange of e-mails between the plaintiff, Uwe Quast, and the defendant, Andrew Locke.

Background

[3] Lakehead Ironworks Inc. was incorporated in 1990. Its head office is in Thunder Bay. It carries on business as a manufacturer and installer of steel and iron products. Mr. Quast was the sole shareholder.

[4] In 2008, Mr. Locke became an employee of the company. In lieu of paying Mr. Locke a larger salary, Mr. Quast transferred to Mr. Locke 20% of the shares in Lakehead Ironworks Inc.

[5] In 2011, Mr. Quast and Mr. Locke transferred their shares into their respective holding companies. Mr. Locke’s shares were held by his holding company, the defendant 183340 Ontario Ltd.

[6] The parties never executed a shareholders agreement.

[7] The relationship between Mr. Quast and Mr. Locke deteriorated. In August 2014, Mr. Locke quit his employment with Lakehead Ironworks Inc.

[8] In September 2014, Mr. Quast offered to buy Mr. Locke’s shares for $50,000, with taxes to be covered by Mr. Quast. Mr. Locke did not accept the offer.

[9] In December 2014, Mr. Locke, together with his holding company, brought an application against Lakehead Ironworks Inc. and Mr. Quast under s. 248 and s. 207 of the Ontario Business Corporations Act, R.S.O. 1990, c.B.16, seeking a remedy for alleged oppression.

[10] In February 2015, Mr. Quast met with Mr. Locke’s counsel, Mr. Evan Juurakko, regarding possible settlement of the application. The next day, February 18, 2015, Mr. Quast sent an e-mail to Mr. Juurakko:

Hey Evan

The meeting yesterday was quite informative. I think that Andy is under the impression that the value of the corporation is much larger than it actually is.

Andy was my partner for six years and during that time, I’ve learn [sic] a bit of his mentality. I believe that once he gets something in his mind, he will not sway no matter how irrational it is. I believe the moneys [sic] he’s expecting is far from the actual value of the shares. Peter is an expert in the evaluation of minority share purchases. The maximum I’m will [sic] to pay taking all parameters into play, including Minority shareholder discount is $100,000.00.

I have retained my longtime friend, Gavin Freitag. I have a meeting tomorrow, and I am preparing for this proceeding to go to court.

[11] Mr. Juurakko responded to Mr. Quast by e-mail on February 25, 2015 and advised that Mr. Locke had instructed him to decline the $100,000 offer. He further advised that Mr. Locke had instructed him to propose that the parties enter into a consent order whereby Mr. Locke would pay for a valuation and Mr. Quast would purchase Mr. Locke’s share based on the valuation without a minority shareholder discount.

[12] Mr. Locke’s February 25, 2015 offer was not accepted by Mr. Quast.

[13] The oppression application was heard in December 2015 by Justice Pierce. Judgment was released on March 16, 2016. Justice Pierce dismissed the application for a declaration of oppression. Justice Pierce ordered that the parties were to agree on a business valuation to determine the fair market value of Mr. Locke’s shares, with the valuation to be paid, in the first instance, by Lakehead Ironworks Inc. She ordered that there be a trial of an issue to determine the time and conditions for the purchase of the shares. Costs of the application were reserved to the judge disposing of the application.

[14] On March 30, 2016, two weeks after Justice Pierce released her judgment, Mr. Quast sent an e-mail to his lawyer, Mr. Dan Matson, and to Mr. Juurakko and Mr. Locke. In part, the e-mail stated:

Now my counsellor Dan Matson had repeatedly stated, offer the $100,000 again. I say “Fuck that”, I paid Andy the same wage as I paid myself and he brought minimal stuff to the table. I gave, for $1.00 20% of a company that I have been involved in for 43 years, a family borne company and now I’m obligated to buy back the shares that I gave him, screw that…. Come April 18th the offer will stand at $80k.

[15] On April 5, 2016, Mr. Locke sent the following e-mail to Mr. Quast:

Hey Uwe

I’ve thought it over and you are right.

Us being on good terms is important to me. I will accept your offer of $100,000 for my shares.

I will have Evan draw up an agreement and send it to Dan.

[16] Approximately ten minutes later, Mr. Quast e-mailed back to Mr. Locke:

Hey Andy

How about I pass it on to John Luft. Let him draw something up, I’ll cover the costs for accountant, and you have your lawyer review.

[17] Mr. Luft was an accountant with LCPS, Chartered Accounts, the accountants for Lakehead Ironworks Inc., Mr. Quast and Mr. Locke.

[18] On April 8, 2016, Mr. Locke sent Mr. Quast an e-mail, asking if Mr. Quast would like to join him for lunch on the following Monday. Mr. Quast declined the invitation by return e-mail that day, saying that they could have lunch some other time. Mr. Locke replied by e-mail on April 8, 2016:

No problem.

I just want to apologize to you in person for what I put you through and to make sure that we are cool moving forwards.

Andy

[19] Mr. Quast e-mailed a response that same day, setting out at some length that he was not ready to have lunch. He concluded with:

Let’s get through this last deal of me buying back something I gave for free… perhaps some time in the future we can sit back and talk as friends…. I’m curious on how the Alpacas are doing.

Uwe

[20] Mr. Quast retained a lawyer, Mr. Brian MacIvor, to complete the share transfer in conjunction with the accountants, LCPS.

[21] Mr. Quast deposes that he was advised by Mr. Bert Watts of LCPS that Mr. Watts on multiple occasions requested that Mr. Locke provide him with the minute book for Mr. Locke’s holding company, 183340 Ontario Inc., with no response.

[22] On April 25, 2016, Mr. Watts sent an e-mail to Lakehead Ironworks Inc. and Mr. Locke:

Good Day Gentlemen,

I want to ensure that everyone is going to be on the same page with regards to the share purchase transaction. After speaking with Brian Maclvor, the following should occur:

• If not already done, the minute books for Lakehead Ironworks, 1833339 Ontario Ltd. and 1833340 Ontario Ltd. need to get to Brian’s office (1151 Barton Street) as soon as possible as they need at least a weeks time to prepare the paperwork and cannot proceed without the minute books;
• The shares of 1833340 Ontario Ltd. (Andy’s Corp) will be purchased by 1833339 Ontario Ltd. (Uwe’s Corp) for $100,000;
• Once the shares are purchased, 1833339 Ontario Ltd. will own 1833340 Ontario Ltd. and Andy will no longer have ownership of that corporation;
• Andy will receive the $100K from the share purchase, which in turn will be reported on his tax return. The shares are anticipated to be QSBC (Qualified Small Business Corporation) shares which would make them eligible for the lifetime capital gain deduction and therefore this amount should essentially be received tax free;

It would be best for the transaction to occur as of May1, 2016, as the “change in control” would be aligned with the year end date and would allow 1833340 Ontario Ltd. to avoid additional filing requirements (i.e. upon the deemed year end at the time of acquisition of control).

If anyone has any questions, please do not hesitate to let me know.

Take care,

Bert.

[23] Mr. Quast e-mailed Mr. Juurakko that same day:

Hi Evan

Can you get Andy to get this together? Not sure what the issues are now as Bert (accountant) has asked for this previously.

Uwe

[24] On April 28, 2016, Mr. Quast e-mailed Mr. Watts to inquire if Mr. Locke had gotten back to him.

[25] Mr. Watts replied by e-mail on April 28, 2016:

Hey Uwe

Andy gave me a call earlier this week and it appears that the minute book is not going to be going over to MacIvor’s office.

Take care

Bert.

[26] Mr. Quast sent an e-mail the next day, April 29, 2016, to Mr. Juurakko:

Hi Evan

So Dan tells me you had a conversation. And Andy will proceed with the accountant’s plan if he receives a letter of guarantee from Dan, is that correct?

Ok the offer is now $98,800 to cover wasteful expenses. I’m tired of dishing out monies for nothing.

Uwe

[27] The transfer of Mr. Locke’s shares did not take place.

[28] Mr. Quast submits that there was a binding settlement created when, on April 5, 2016, Mr. Locke accepted Mr. Quast’s offer of February 18, 2015 to purchase Mr. Locke’s shares for $100,000. Mr. Quast submits that all the essential terms of a settlement were agreed to and that Mr. Locke failed to comply with the terms of the settlement. Mr. Quast submits that pursuant to Rule 49.09, this court should grant judgment requiring Mr. Locke to transfer his shares from his holding company to Mr. Quast’s holding company.

[29] Mr. Locke submits that there was no settlement. Mr. Locke emphasizes that in his April 5, 2016 e-mail, when he stated that he would accept Mr. Quast’s offer of $100,000 for his shares, he also said that he would have Mr. Juurakko draw up an agreement and send it to Mr. Matson. Mr. Locke submits that a further written agreement was an essential term of a settlement.

[30] In cross-examination on his affidavit filed on the motion, Mr. Locke agreed that he did not have a problem with Mr. Quast’s suggestion in Mr. Quast’s April 5, 2016 e-mail that Mr. Luft would draw something up for Mr. Locke’s lawyer to review and that Mr. Quast would cover the costs of the accountant.

[31] Mr. Locke also agreed in cross-examination that Mr. Watts had asked him a couple of times to drop off his minute book. He said that he would not do so until he had read a draft agreement. He agreed that he did not tell anyone that he would only drop off his minute book if he received a draft agreement. He acknowledged in cross-examination that one of the reasons he did not drop off the minute book was because he was having second thoughts about the $100,000 purchase price. He agreed that it was possible that even if he had an agreement drawn up, he might still refuse to close for $100,000. He said that he was waiting for a draft agreement that he would review and that any items that were missed or needed to be changed would have to be addressed.

[32] Mr. Locke submits:

1. There was no mutual intention to create a binding agreement;
2. There was no agreement on all essential terms of the alleged settlement;
3. The alleged settlement was an unenforceable agreement to agree;
4. The parties did not act as if a settlement had been reached in the immediate aftermath of the April 5, 2016 e-mail from Mr. Locke;
5. If there was a settlement, it was either repudiated or rescinded by Mr. Quast; and
6. If there was a settlement, this court should exercise its discretion not to enforce it.

Discussion

[33] The test to be applied on a motion under Rule 49.09 is: (1) was an agreement to settle reached and, (2) if so, should it be enforced on all the evidence: Milios v. Zagas (1998), 38 OR. (3d) 218 (C.A.); Bank of Montreal v. Ismail, 2012 ONCA 129.

[34] The first step of the test should be approached like a summary judgment motion.

[35] The principles in determining whether a settlement agreement was concluded are set out in Olivieri v. Sherman et al. (2007), 2007 ONCA 491, 86 OR. (3d) 778 (C.A.) at para. 41:

A settlement agreement is a contract. Thus, it is subject to the general law of contract regarding offer and acceptance. For a concluded contract to exist, the court must find that the parties: (1) had a mutual intention to create a legally binding contract; and (2) reached agreement on all of the essential terms of the settlement: Bawitko Investments Ltd. v. Kernels Popcorn Inc., 79 D.L.R. (4th) 97 (C.A.), at pp. 103-104 D.L.R.

[36] I am satisfied that the first requirement of a mutual intention to create a legally binding contract was met. Mr. Locke wanted to sell his shares. Mr. Quast wanted to buy them. Mr. Quast made a written offer to purchase the shares at $100,000. Mr. Locke wrote that he would accept Mr. Quast’s offer of $100,000 for his shares.

[37] A determination of the second requirement of a meeting of the minds on the essential terms of a settlement does not require an inquiry into the parties’ subjective intentions. Because in this case there was an exchange of e-mails, the issue is to be determined by an objective reading of the contents of the e-mails. As observed in Olivieri, at para. 44, where the language in question is in writing, the law judges a person’s intentions by his outward expressions: “If his words or acts, judged by a reasonable standard manifest an intention to agree in regard to the matter in question, that agreement is established, and it is immaterial what may be the real but unexpressed state of mind on the subject.”

[38] Mr. Locke submits that there was no agreement on all the essential terms because one of the essential terms was a requirement for a written contract to deal with issues of costs of the outstanding oppression application, costs of preparing the shareholders agreement, the tax implications of the share transfer, timelines regarding the completion of the transfer, release of Mr. Locke from a personal guarantee and general mutual releases.

[39] I conclude from an objective reading of the February 18, 2015 e-mail from Mr. Quast and the April 5, 2016 e-mail from Mr. Locke that there was a binding offer and acceptance of the essential terms of a contract between them, namely that Mr. Quast would purchase Mr. Locke’s shares for $100,000. I do not read Mr. Locke’s words, “I will have Evan draw up an agreement and send it to Dan”, as rendering the e-mail exchange an agreement to agree or a conditional agreement. As observed by the Court of Appeal in Olivieri, at para. 46, if Mr. Locke had intended that his acceptance of Mr. Quast’s $100,000 was only conditional, “…one would have expected to see language that expressly made one or more terms ‘subject to’ further agreement.”

[40] In my opinion, Mr. Locke’s submissions that items such as costs, taxes, timelines for completion and releases had to be agreed upon before there was a contract relate to the completion or implementation of the agreement, not to whether there was an agreement.

[41] In Perri v. Concordian Chesterfield Co., [2003] O.J. No. 5852 (S.C.J.), Himel J. held that on a motion for judgment, the court will enforce a settlement where the parties have agreed on the essential times of the settlement. However, she observed, at para. 8:

The terms regarding the method of payment, the exchange of releases and the allocation of funds were merely matters incidental to the essential terms of the agreement which were to pay $50,000 to the plaintiff in full satisfactions of the claim. In that there was an unconditional offer and acceptance, I exercise my discretion and grant judgment in favour of the plaintiff in accordance with the offer of settlement made by the defendants and accepted by the plaintiff.

[42] In my view, when Mr. Locke agreed to accept $100,000 cash for his shares, it is reasonable to imply that the parties would, in the usual course, execute mutual releases and that payment of the $100,000 would be made within a reasonable time. Mr. Watts in fact suggested a closing date of May 1, 2016 to align with Lakehead Ironworks Inc.’s year end, approximately three weeks after Mr. Locke’s acceptance.

[43] Mr. Locke did not make the agreement conditional upon income tax implications, costs of the oppression application or an indemnity agreement.

[44] Mr. Watts’ e-mail of April 25, 2016 indicates that although Mr. Locke would have to report the $100,000 on his income tax return, the amount would essentially be received tax free because the shares were eligible for the lifetime capital gains exemptions.

[45] With respect to Mr. Locke’s submission that the parties did not act as if there was a settlement, Mr. Locke wrote Mr. Quast on April 8, 2016, three days after he accepted Mr. Quast’s offer, asking Mr. Quast to join him for lunch. After Mr. Quast declined, Mr. Locke wrote Mr. Quast again that day saying that he just wanted to apologize to Mr. Quast in person “…for what I put you through and to make sure that we are cool moving forward.” Mr. Quast responded on April 8, 2016, “Let’s get through this last deal….”. These e-mails do not indicate that either party was acting as if there was no settlement. To the contrary, the e-mails read as if both parties accepted that there was an agreement and that they would be moving on.

[46] I conclude that after April 8, 2016, Mr. Locke began to reconsider what he had agreed upon and declined to act upon Mr. Watts’ requests to deliver his minute book. One can reasonably gather from Mr. Locke’s cross-examination that he had second thoughts about the $100,000 purchase price and now wanted to proceed with a valuation of the shares as Pierce J. had ordered. In my view, there was a binding agreement that Mr. Locke breached. Mr. Locke signalled his breach in failing or refusing to take reasonable steps to implement the agreement by delivering his minute book as requested by the parties’ mutual accountant, Mr. Watts.

[47] The issue then becomes what was the legal effect, if any, of Mr. Quast’s e-mail of April 29, 2016 to Mr. Juurakko. I will repeat, the salient part of that e-mail for ease of reference.

So Dan tells me you had a conversation. And Andy will proceed with the accountant’s plan if he receives a letter of guarantee from Dan, is that correct?

Ok the offer is now $98,800 to cover wasteful expenses. I’m tired of dishing out monies for nothing.

Uwe

[48] Mr. Locke submits that if I find that there was an agreement, this e-mail constituted a repudiation of the agreement. I disagree. In my view, it was Mr. Locke who breached the agreement by failing to take reasonable steps to implement it.

[49] In the alternative, Mr. Locke submits that if there was an agreement, and Mr. Quast is the innocent party, Mr. Quast’s April 29, 2016 e-mail rescinded the agreement.

[50] On that issue, Mr. Quast submits that the breach of the agreement by Mr. Locke crystalized on April 28, 2016 when Mr. Locke made it clear that he was not going to complete the agreement and, that on that date, Mr. Quast had a cause of action. Mr. Quast submits that his April 29, 2016 e-mail stating that “…the offer is now $98,800…”, was an offer to settle the cause of action that had arisen on April 28, 2016.

[51] In Guarantee Co. of North America v. Garden Capital Corp., [1999] 3 S.C.R. 423 (S.C.C.), the Supreme Court of Canada discussed the distinction between rescission and repudiation, at paras. 39 and 40:

39 A fundamental confusion seems to exist over the meaning of the terms “rescission” and “repudiation”. This confusion is not a new one, as it has plagued common law jurisdictions for years. [page 440] Rescission is a remedy available to the representee, inter alia, when the other party has made a false or misleading representation. A useful definition of rescission comes from Lord Atkinson in Abram Steamship Co. v. Westville Shipping Co., [1923] A.C. 773 (H.L.), at p. 781:

Where one party to a contract expresses by word or act in an unequivocal manner that by reason of fraud or essential error of a material kind inducing him to enter into the contract he has resolved to rescind it, and refuses to be bound by it, the expression of his election, if justified by the facts, terminates the contract, puts the parties in status quo ante and restores things, as between them, to the position in which they stood before the contract was entered into.

See similarly G. H. L. Fridman, The Law of Contract in Canada (3rd ed. 1994), at p. 807.

40 Repudiation, by contrast, occurs “by word; or conduct evincing an intention not to be bound by the contract. It was held by the Privy Council in Clausen v. Canada Timber & Lands, Ltd., [1923] 4 D.L.R. 751], that such an intention may be evinced by a refusal to perform, even though the party refusing mistakenly thinks that he is exercising a contractual right” (S. M. Waddams, The Law of Contracts (4th ed. 1999), at para. 620). Contrary to rescission, which allows the rescinding party to treat the contract as if it were void ab initio, the effect of a repudiation depends on the election made by the non-repudiating party. If that party treats the contract as still being in full force and effect, the contract “remains in being for the future on both sides. Each (party) has a right to sue for damages for past or future breaches” (emphasis in original): Cheshire, Fifoot and Furmston's Law of Contract (12th ed. 1991), by M. P. Furmston, at p. 541. If, however, the non-repudiating party accepts the repudiation, the contract is terminated, and the parties are discharged from future obligations. Rights and obligations that have already matured are not extinguished. Furmston, supra, at pp. 543-44.

[52] The Court observed at para. 41 that problems have arisen from misuse of the word “rescission” to describe an accepted repudiation.

[53] In the instant case, there was a binding agreement which Mr. Locke breached when he made clear by his conduct that he did not intend to be bound by the contract. Mr. Quast was then put to his election as the non-repudiating party. He could treat the contract as still being in force and sue for damages for the breach. Or, Mr. Quast could accept the repudiation, in which case the contract was terminated and he and Mr. Locke would be discharged from their respective future obligations, namely to effect the transfer of Mr. Locke’s shares in consideration of the payment of $100,000.

[54] In my view, when Mr. Quast wrote on April 29, 2016 that “…the offer is now $98,800….”, he was evincing his intention to treat the contract to purchase Mr. Locke’s shares for $100,000 as at an end. He accepted Mr. Locke’s repudiation with both parties then being discharged from further performance under the agreement.

[55] Payment of $100,000 was an essential term of the agreement. When Mr. Quast informed Mr. Locke that he would now only pay $98,800 for the shares, Mr. Quast effectively told Mr. Locke that he no longer considered himself bound to pay the agreed upon price. This was a communication by Mr. Quast that he regarded the agreement as at an end because of Mr. Locke’s conduct and that he was now proposing a new contract, an essential term of which was payment of an amount reduced from the original amount upon which the parties had agreed.

[56] I cannot accept Mr. Quast’s submission that his April 29, 2016 offer of $98,800 was only an offer to settle his cause of action for a breach of contract which had crystalized on April 28, 2016. There is nothing in Mr. Quast’s e-mail of April 29, 2016 to support an interpretation that Mr. Quast was electing to treat the contract to purchase the shares for $100,000 as still being in full force and effect, but that in lieu of damages for the breach he would pay $98,800. The reasonable interpretation of the e-mail is that Mr. Quast accepted Mr. Locke’s repudiation of their agreement and regarded his obligation under the agreement to pay $100,000 as at an end. If the shares were to be transferred there would be a new agreement for payment of $98,800.

[57] I appreciate that the e-mails which resulted in the formation on the contract and the acceptance of the repudiation were authored by the parties and not by their lawyers. Nevertheless, I am satisfied that the intentions of the parties can reasonably be determined from an objective reading of their e-mails.

Conclusion

[58] For the reasons given, the plaintiffs’ motion for judgment is dismissed.

[59] The parties have agreed that this action should be consolidated with the application in No. CV-14-0520, which is the oppression application that was before Justice Pierce and which involves the same parties. An order shall go, on consent, that this action, No. CV-16-0407, and the application in No. CV-14-0520, be heard at the same time.

Costs

[60] If the parties are unable to agree upon costs, the defendants shall deliver written submissions within 20 days. The plaintiffs shall deliver their written submissions within 15 days of service of the defendants’ submissions. Submissions shall not exceed five written pages, exclusive of Bills of Costs.

[61] When discussing possible resolution of costs, I would note for the benefit of the parties, that although the defendants were successful in the issue of repudiation resulting in the dismissal of the motion, the plaintiffs were successful on the issue of whether there was an agreement.

[62] If the defendants’ submissions are not received within 20 days, the issue of costs will be deemed to have been resolved.

The Honourable Justice D. C. Shaw

Released: May 17, 2017