St. Takla Hemanote Drugs Ltd. v. Pharmoy Distributing Inc., 2017 ONSC 4471
CITATION: St. Takla Hemanote Drugs Ltd. v. Pharmoy Distributing Inc., 2017 ONSC 4471
COURT FILE NO.: CV-09-379032
DATE: 20170725
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
ST. TAKLA HEMANOTE DRUGS LTD.
Plaintiff
– and –
PHARMOY DISTRIBUTING INC.
Defendant
Michael A. Katzman, for the Plaintiff
J. Sebastian Winny, for the Defendant
HEARD: March 13, 14, 15, 16, 20, 21, 22 and 23, 2017
LEDERER J.
[1] Some cases are not as complicated as they are made to appear through the evidence called during the trial. This is one.
[2] When stripped to the essentials it is neither difficult to understand nor hard to resolve.
BACKGROUND
[3] The plaintiff, St. Takla Hemanote Drugs Ltd., owns a pharmacy located in the City of Hamilton. It was purchased from the defendant, Pharmoy Distributing Inc., for a price of $2,250,000. The agreement outlining the terms for the sale was executed by the parties on May 5, 2008. The transaction closed either on June 14, 2008 or June 16, 2008. There was some confusion about the actual date of closing. Nothing turns on it.
THE AGREEMENT AND THE CLOSING DOCUMENTS
[4] The contract and closing documents include a series of provisions which are relevant to the action. The representations and warranties made by the vendor included:
VENDOR REPRESENTS, WARRANTS and undertakes to the Purchaser in consideration of Purchaser’s offer to Purchase and completion of same that:
That the Vendor has no information or knowledge of any fact not generally known to the public relating to the business (or to the premises in which the business is to be carried out) which, if known to the purchaser, might reasonably be expected to deter the Purchaser from completing the transaction herein contemplated.[^1]
[5] The plaintiff (purchaser) says that the defendant (vendor) breached this warranty. It alleges that the principal of the vendor (the defendant, Faruq Ladhani[^2]) became aware that a significant source of business to the pharmacy (a fertility clinic) was going to be closed which posed a threat to the business and lowered its value. He did nothing to advise the plaintiff. Two of three principals of the plaintiff gave evidence. They believe that this was information that would have deterred the purchaser from completing the transaction.
[6] The agreement includes a clause which limits those involved on behalf of the vendor from competing or being involved with a business that competed with the business being sold:
That the Vendor, and Farouq Ladhani, and any undersigned principles or officers signing this agreement on behalf of the Vendor jointly and severally covenant that they will not carry on or be engaged in, or concerned with, (either directly or indirectly in any manner whatsoever including without limitations as a principal, agent, partner or shareholder) any business competitive with or similar to the Business as presently carried on within a radius of ten miles (10) of the premises for a period of five (5) years from the closing date and will not solicit any customers of the Business for the above-noted time period.[^3]
[7] The plaintiff further says that the defendant has also breached this term of the agreement. The pharmacy, before the sale, employed a driver (the defendant Ian James) with a personal and loyal customer base to whom he regularly delivered prescriptions and other pharmaceutical needs. After the sale, for a brief period, he stayed with the pharmacy. He had a falling out with the new owners and left. The defendant, Faruq Ladhani, using a corporation (the defendant Pharmoy Distributing (Two) Inc.), had opened a new pharmacy. This one was not in Hamilton but in Guelph, approximately 45 kilometers away. The driver went to work at the pharmacy in Guelph. The plaintiff believes that, with the knowledge if not the approval of Faruq Ladhani, the driver made it known to his clients, some living within 10 miles of the pharmacy that been sold, that he could service their needs from Guelph.
[8] There is a further term which is part of the agreement that has significance in this action. It says:
THIS OFFER IS CONDITIONAL upon the following:
that all of the representations, warranties and covenants contained in the agreement and made by the Vendor shall be true and correct at the date of the closing and shall survive closing of this transaction, remaining in full force and effect;[^4]
[9] The significance of this provision is that the warranties, representations and obligations found in the contract would not merge upon closing. The obligations they represent and any liability for their breach would continue.
[10] The closing documents confirm the various obligations and understanding the terms referred to provide. They include a Statutory Declaration of the defendant Faruq Ladhani. It states the following paragraph:
I confirm that the representations and warranties in the Agreement of Purchase and Sale are true as of the closing date and shall not merge on closing and shall survive same and remain in full force and effect thereafter.[^5]
[11] There is a Non-Competition Agreement that was also signed on the day of the closing. It says:
In consideration of closing the above-noted transaction, the undersigned hereby jointly and severally covenant and agree with the purchaser, that for a period of five (5) years subsequent to the date of closing, the undersigned will not within a radius of ten (10) miles from the business being purchased, will not carry on or be engaged in, or concerned with, (either directly or indirectly in any manner whatsoever including without limitations as a principal, agent, partner or shareholder) any business competitive with or similar to the business as presently carried on and will not solicit any customers of the business for the above-noted time period.[^6]
[12] There is a further document to which I should refer. It is an Allocation Agreement. It allocates the purchase price between “Equipment, fixtures” and “Goodwill”. The former at $176,000 and the latter at $2,074,000. This was relied on by the plaintiff (the purchaser) as confirming that the essential value of the business was in the goodwill it had garnered. This document was dated the 16th day of June, 2008, and was signed on behalf of the corporate vendor (Pharmoy Distributing Inc.) and the corporate purchaser (St. Takla Hemanote Drugs Ltd.).
DID THE VENDOR KNOW THE FERTILITY CLINIC WAS TO BE CLOSED?
[13] The building in which the pharmacy was located included two medical clinics. The first a family practice operated through approximately eight physicians. The second was the fertility clinic. Both were operated under the auspices of the Hamilton Health Sciences which was identified as a public agency that operates hospitals and medical facilities in the City of Hamilton.
[14] As explained by Faruq Ladhani the presence of these clinics was a major consideration in his decision to open a pharmacy in the building. The presumption was that they raised the prospect of an immediate and regular stream of customers.[^7] As reported by Magid Labib, one of the principals of the plaintiff, the location and the perceived contribution the patients of the fertility clinic made to the revenue of the pharmacy played a large role in the decision to buy and in the way the amount the plaintiff was prepared to pay was calculated. As these reasons will show, given the information that was available at the time, one has to wonder whether this was wise.
[15] A letter dated August 20, 2008 (two months after the closing) was delivered to the pharmacy. It was sent from Hamilton Health Sciences and advised that the “Centre for Reproductive Care” (the fertility clinic) would be closing on March 31, 2009. The future occupancy of the space taken up by the clinic had not been decided. The letter explained that it would be “…by a service or program of [Hamilton Health Sciences].”
[16] The first issue to be determined is whether, before the sale was completed, the defendant had information suggesting that the fertility clinic would close and, if so, whether the failure to advise the plaintiff was a breach of the warranty that it be informed of any fact that could have deterred the plaintiff from completing the transaction as it had been contemplated (see: para. [4] above).
[17] There is little doubt that Faruq Ladhani knew the clinic was to be closed and that he had that knowledge before the sale of the pharmacy was completed. Karlee Dockstater worked at the fertility clinic. She had been so employed for 25 years. At the time of her retirement she was its business manager. Karlee Dockstater explained that initially the fertility clinic had been located in a nearby hospital. The space was required. The clinic moved out in 2002. At the outset there was no pharmacy at its new location. It was approximately one year later that Faruq Ladhani, seeing an opportunity opened the pharmacy.
[18] Prior to the arrival of the pharmacy, the patients of the clinic had to go elsewhere. The clinic served couples who came from all over southern Ontario. For practical reasons they tended to go home and search out the required drugs in the areas where they lived. Filling these prescriptions on site was a good idea. Karlee Dockstater facilitated the opening of the pharmacy. She established a good working relationship with Faruq Ladhani. She said he was a nice man and helpful to the patients. Karlee Dockstater testified that she helped Faruq Ladhani get better discounts from companies that supply the drugs. The evidence of Karlee Dockstater suggested that the pharmacy was a success. Certainly, no one who gave evidence said otherwise. As she understood it a significant amount of the pharmacy revenue came from the patients of the fertility clinic.
[19] It was the evidence of Karlee Dock Dockstater that she advised Faruq Ladhani of the coming closure of the fertility clinic. There was uncertainty with respect to the timing of some of those conversations. One thing is clear, prior to the closing, she visited the pharmacy. She saw two men talking with Faruq Ladhani. As it happens, these individuals were two of the principals of the plaintiff. Karlee Dockstater wondered if the pharmacy was being audited. Faruq Ladhani told her it was not. She asked if it was being sold. He said it was. She was surprised. Why would he sell when he knew the clinic would be closing? Faruq Ladhani explained that he had been approached to sell. Not only was she surprised, she was angry. She wanted to know: “Did you tell them it was closing?” Rather than answer directly Faruq Ladhani asked: “Is it?”
[20] This exchange was witnessed by Julie Prokopetz. She was employed at the pharmacy when it was owned by Faruq Ladhani and continued on after it had been sold to the plaintiff. Julie Prokopetz recalled the confrontation when Karlee Dockstater asked: “Why are you selling when you know the clinic is to close?” As recalled by Julie Prokopetz this conversation took place after the agreement to sell but before the closing. It was before she had met Magid Labib who, upon the purchase, took responsibility for the day-to-day operation of the pharmacy.
[21] Faruq Ladhani also recounted the incident. He recalled it as having taken place during May 2008, which confirms that it was prior to the closing of the transaction in mid-June 2008. He remembered it as being after the contract to sell had been made; which is to say after May 5, 2008. This is the same time frame referred to by Julie Prokopetz. The representations and warranties included in the contract were in place. As Faruq Ladhani remembered the discussion, Karlee Dockstater wondered if he had sold the pharmacy and if he had advised the buyer that the fertility clinic was closing. He said, he asked: “Is it?” and reported that Karlee Dockstater was upset and walked away. He said that he did not understand why she was upset.
[22] The question: “Is it?” suggests that Faruq Ladhani was unaware of the coming closure of the clinic or that he did not necessarily accept that this was so. To that point he had received no direct communication from the hospital or Hamilton Health Sciences. The importance of the conversation involving Karlee Dockstater and Faruq Ladhani is not just the substance of what was said but the timing it sets in place. There were other discussions between Faruq Ladhani and Karlee Dockstater concerning the limited future of the fertility clinic. While Karlee Dockstater did exhibit some uncertainty as to when these conversations took place, it is clear, they occurred before the conversation prompted by the presence of the two principals of the purchaser.
[23] Karlee Dockstater testified that she first heard of the possibility that the fertility clinic would close early in 2007. The clinic was not meeting expectations. It was not generating enough capital. The initial proposal was that it would close during November 2007. This was postponed to April 2008. As Karlee Dockstater understood it, this would be important to the pharmacy. A significant part of the revenue of the pharmacy came from the patients of the fertility clinic. She did not speak to Faruq Ladhani about this during 2007. She planned to raise the issue within the new year. In her evidence Karlee Dockstater was uncertain as to whether she advised Faruq Ladhani of the second prospective date of closure: April 2008. What she does remember is that she told him about the closing of the clinic well before being told that Faruq Ladhani had sold the pharmacy which is to say well before the incident in which she witnessed the buyers at the pharmacy and mistook them for auditors. She said she made a point of keeping him up to date on the issue.
[24] This was not the only indication that the closure of the fertility clinic was in the offing.
[25] The clinic receptionist approached Faruq Ladhani about a job. She was worried. She had heard that the clinic would be closing. As he recalled it, this was in late 2006, even before the 2007 meeting at which Karlee Dockstater was introduced to the possibility. In early 2007, in a discussion he had with a nurse from the clinic the possible closure of the clinic was raised. Still in 2007, Faruq Ladhani was asked by a nurse practitioner who worked whether he had heard that the clinic would be closing.
SHOULD THE PLAINTIFF HAVE BEEN ADVISED OF THE PROSPECTIVE CLOSING?
[26] For his part Faruq Ladhani did not recall when he first heard of a date on which the clinic was to be closed. To my mind this misses the point. The clause does not deal with the narrow question of closure of the clinic. The general issue was whether the prospective closure was information a purchaser would want. In another case the point was made as follows:
Any purchaser would want that information before entering a transaction, before waiving the conditions of a transaction, and before closing. Pizzey had that information and apparently did not consider it significant or important enough to pass on.[^8]
[27] Was the information such that Faruq Ladhani was required to advise the purchasers?
[28] The pharmacy was not formally told of the coming closure until the letter of August 20, 2008, was delivered (see: para. [15] above). The agreement entered into between the parties, however, did not specify that formal notification was to be the catalyst requiring the purchaser to be advised. Rather, it says that the vendor has “no information or knowledge” that was “not generally known to the public” that “might reasonably be expected to deter the purchaser from completing the transaction...” (see: para. [4] above). There was information which originated with the manager of the fertility clinic, Karlee Dockstater. At that point, the suggestion of a coming closure ceased to be a rumour as claimed by Faruq Ladhani. It was substantive information supplied by a manager of the clinic which could impact the pharmacy and its value.
[29] It was not information that was generally known to the public. The only suggestion that it might have been was the reference to the coming closure supposedly made in newspaper articles. The only newspaper article provided to the court was dated August 1, 2008. This was a month and a half after the sale of the pharmacy.
WOULD THE PLAINTIFF HAVE BEEN DETERRED?
[30] What is meant by deter? The following phrase expresses the broad intention encompassed by that word:
Had St. Pierre had that information he may have made further inquiry, not entered into the transaction or not waived the conditions of the transaction.[^9]
[31] In this case the issue is whether the purchaser would have been deterred “from completing the transaction herein contemplated” (see: para. [4] above). The question is reduced to whether the purchaser might not have completed the transaction. Was the prospective closing of the fertility clinic information which “might reasonably be expected to deter the purchaser from completing the transaction”? It is important to understand the standard being set. The words “might reasonably be expected to deter” raise the possibility, not that a purchaser would be deterred, but only that it would be reasonable to expect the purchaser to be deterred. In other words, thinking reasonably, with the information in hand, might a purchaser be expected to be deterred?
[32] I return to the thought expressed at the outset of these reasons. Time was spent examining what happened to the business following January 2009, when the clinic ceased being active. While what happened later is interesting as context and might contribute to an understanding of any loss, it has nothing to do with whether the purchaser might reasonably have been expected to be deterred from closing the sale had it known that the fertility clinic was going to close. This should be analyzed prospectively accounting only for what was known at the time the sale was completed.
[33] The fertility clinic was seen as an important part of the business of the pharmacy. Was the perception justified? I begin by going back to the Allocation Agreement. Of the total value of the purchase of $2,250,000 fully $2,074,000 was allocated on account of goodwill. How is goodwill to be valued? The plaintiff retained Michael Dobner, an Associate Partner at PricewaterhouseCoopers LLP and John Siegal who was identified as Senior Vice-President, Valuation Forensics & Dispute Group.[^10] They produced a report which was referred to and included documents exhibited at the trial. Michael Dobner was produced as a witness. He was accepted as an expert in the quantification of losses resulting from alleged misrepresentation by vendors. The report deals with damages (the value of the alleged loss). With respect to goodwill, it says the following:
The value attributed to Goodwill relates principally to the profitability of the business…[^11]
[34] The quotation goes on to broaden the understanding of how goodwill would be valued in this case:
…which in turn is dependent on the volume of prescriptions dispensed. It follows that the asset impacted is goodwill.[^12]
[35] How could this have been measured in the anticipation of the fertility clinic being closed? The number of prescriptions that were sourced from the fertility clinic for the 12 months ended March 31, 2008 (2.5 months before the transaction was completed) was 4,777. The average for those 12 months was 398 per month. The total dollar volume for these sales was $910,974. The cost of these drugs was $763,317 demonstrating a profit of $147,657 which is 16.2% percentage of the revenue generated.[^13] This figure would have to be reduced. Pursuant to an arrangement with the fertility clinic the profits were shared in that 8% of the sales value was paid directly to it. Thus, the gross profit for the pharmacy was, in fact, 8.2%. I calculate 8.2% of $910,974 to be $74,699.87. There is a further reduction to be made. The profits being considered are those associated with the sale of fertility drugs. The question is whether there are any incremental costs associated with those sales. That is, are there costs that were uniquely associated with the sale of such drugs that would be eliminated if those products were not offered and the sales were not made? The report from PricewaterhouseCoopers considered this question:
We reviewed the financial statements of the Pharmacy to identify any other costs which might vary with the volume of sales. We identified “pharmaceutical services”, “salaries, wages and services” and “pharmacy supplies”. For the year ended April 30, 2009, these costs represented 13.6% of the sales but the average for the three subsequent years was around 10% (see Schedule 2). It is likely that there was a fixed component to these costs, for example there is a basic complement of pharmacists required at all times regardless of volume. For purposes of this report we assume that these costs were fully variable and accordingly deducted 10% as additional variable cost, leaving a net contribution of 10% from the CRC [the fertility clinic] prescriptions (this assumption reduced our calculated loss amount).
[36] In calculating the loss said to have been suffered by the plaintiff, the report from PricewaterhouseCoopers, on account of incremental costs, reduced the profit by a further 10% of the revenue. This being so, there would be no profit from the sale of fertility drugs for the year ended March 31, 2008. As we have seen, the profit remaining prior to this deduction was $74,699.87. The amount to be subtracted would be $91,097.40. There would be nothing left.
[37] Given these calculations there would be no reason for the purchaser to be deterred from completing the transaction when the closure of the fertility clinic would, in effect, increase the profits from the preceding year albeit by a small amount. What this shows is that at the time of the sale the goodwill was overvalued.
[38] How did this happen?
[39] In the main body of their report the consultants from PricewaterhouseCoopers make this statement:
As shown in schedule two, the gross profit on the sale of prescriptions was approximately 31% in the first fiscal year ended April 30, 2009. We were advised by Messrs. Labib and Tadros that the gross profit on CRC prescriptions was a 28%, which is slightly lower than for the Pharmacy overall…[^14]
[40] This proposes that in the year following the purchase, the plaintiff obtained higher profit margins from the sale of fertility drugs than had been the case in the year before. This suggests that the profit margins went up as the closure of the fertility clinic was made public and as the volume of business was going down. This seems unlikely. The report contains no chart such as the one demonstrating the profit margins for the sale of these products for the year ending March 31, 2008. It appears that the consultants accepted this out of hand as told to them by their clients.[^15]
[41] In a discussion of whether the purchaser would have been deterred from completing the transaction, it must be understood that the proposition is not only that the profit margins went up but that the purchaser, looking forward from the time leading up to the sale, foresaw that this would happen and that having seen it, the prospect of the closure and the loss of this enhanced profit would have deterred it from completing the transaction. The underlying idea must be that the purchaser knew or at least was confident of a future with a higher profit margin for the sale of the infertility drugs. Looking forward no one can be that certain about virtually anything in the context of a business. For the increased profit margins to be accomplished presumably costs would have to come down or the prices charged go up. There is no suggestion as to how the first would be accomplished or whether the second was possible. Generally, prices pharmacies can charge for drugs are set by the provincial government. There was some suggestion that as a result of a new purchasing arrangement some costs might come down but this was already in place at the time of the sale and not quantified in any meaningful way.
[42] What the plaintiff is seeking is not the loss of value but compensation for a bet it made and lost. In arriving at the value it was prepared to pay it, accounted for profit margins for sale of fertility drugs at 28%. There is no evidence that, looking forward, this was a reasonable value or had ever been obtained in the past. Nonetheless, the position of the plaintiff is that when it calculated the value it was prepared to offer, it treated the goodwill associated with the sale of fertility drugs based on a profit margin of 28%. Relying on this as the profit margin PricewaterhouseCoopers calculated that the contribution to the sale price of this goodwill to be $455,487. It reduced this amount based on the sale of fertility drugs after the sale and proposed a loss of value to the plaintiff at the time of the sale of $400,000. This was the amount claimed by the plaintiff as its loss.[^16] If this value had been calculated based on a gross profit margin of 16.2%, with no profit that remained after the deduction of other costs (in this case the contribution of profit to the clinic and the incremental costs associated with the sale of fertility drugs) this value would have been $0.00. There would have been no loss. Instead the $400,000 would have been revealed as an overpayment. It would represent a payment for goodwill that had not been achieved.
[43] In this situation the question is not whether the plaintiff reasonably might have been expected to be deterred. We cannot know the answer to that question because the price offered was based on an evaluation of the goodwill that was not reasonable. It was based on speculation of what that value might become. There was no analysis or demonstration presented as to the foundation for the speculation that the gross profit margin for the sale of fertility drugs would climb to 28%. Rather, what is relied on is what the plaintiff told the consultant happened after the sale. I repeat that it is not proper to assess the reasonable expectation of what the plaintiff would have done in the past by looking backwards taking into account what has happened since. Even so there were no financial records relied on to confirm or validate the enhanced profit margin that is said to have occurred after the sale. In the circumstances there is no loss of actual value attributable to any failure of Faruq Ladhani to advise the plaintiff of the coming closure of the fertility clinic.[^17] Thus it does not matter whether the court finds that he should have or was not required to so advise the plaintiff. Either way the information that the clinic was to close was not the cause of any loss. The intention behind the term of the contract cannot have been to give the buyer an opportunity to rethink the contract it made so much as it was to account for information it did not have when the contract was made. To my mind it would not be proper to reward a plaintiff for a loss attributable to its over-assessment of value, on the basis of information that was not provided but was also not the cause of the loss being claimed. Here the loss was not founded on the fact that the clinic closed but on the fact that, in assessing what to pay, the profit margin of sales to the patients of the fertility clinic was too high. To put it differently if the clinic had not closed but the profit margins remained as they were for the year ended March 31, 2008, the plaintiff would have paid too much but would have had no recourse to the vendor as it does not now.
[44] There is one further factor that requires mention. In the course of his evidence, Michael Dobner explained that the deduction of the 8% profit to be directed to the clinic from the revenue represented by sales of $910,974 to patients of the fertility clinic was an error. This deduction had already been made. This is confirmed in the report he produced:
… as noted previously, the Pharmacy paid additional rent of 8% of the sales value of CRC [fertility clinic] prescriptions, leaving a net gross profit of 20%.[^18]
[45] From this Michael Dobner observed that the further deduction of 8% was double-counting that value. Despite this, in an effort to be conservative in his valuing of the loss, he did not change the overall result. In dealing with the question of profit margins I have done nothing different. To reassess the calculation taking into account the double-counting it would be wrong to deduct 8% from the gross profit of $147,675 as I have done (see: para. [36] above). It would still be necessary to deduct the 10% for the incremental cost of selling fertility drugs. This calculation would result in a profit for the year ended March 31, 2008, of ($147,657 minus $91,097.40) $56,559.60. This would be the profit projected to be lost each year as a result of the closure of the fertility clinic. I find, taking into account the overall size of the business and the value of the transaction, this was not enough such that a finding could be made that the buyer might reasonably be expected to be deterred from closing the transaction as contemplated. A buyer might be unhappy but could not be expected to go that far. The result would be the same.
[46] I dismiss this aspect of the claim.
[47] I add the following. The approach to this part of the claim does not come from the submissions that were made. In particular the calculation of the expected loss in value attributable to gross profit of 16.2% is mine. If it is correct it confirms the opening observation that much of the evidence was unnecessary. If I am mistaken there is always r. 59.06(1) or it may be that the matter will have to resolved by a higher court.
BREACH OF THE NON-COMPETITION CLAUSE AND AGREEMENT
[48] This leaves the issue of whether the defendant breached its obligation not to compete with the plaintiff by selling to customers within 10 miles of its location. Any claim for this breach was the result of the activities of Ian James. He has been delivering drugs to patients in the Hamilton area for over 25 years. He has worked for a variety of pharmacies located there. Over time he has taken on a series of loyal clients. They have moved with him from pharmacy to pharmacy. At the time of the sale he was working for Faruq Ladhani at the pharmacy that was sold. Ian James was not happy. He was concerned he would have to leave. In fact, he stayed on for a short period. He left at some point towards the end of December 2008. Ian James testified that even before he left, Faruq Ladhani offered him a job at the new pharmacy he had opened in Guelph. As Ian James saw it, there was no sense in going to Guelph; his clients were in Hamilton.
[49] Ian James did not work during January 2009. In evidence he said that Faruq Ladhani actively sought to have him come to work in Guelph. According to Ian James he was offered all manner of inducement to move. Eventually, in early February he went. Ian James told the court that Faruq Ladhani asked him to approach his clients to see if they would take deliveries from his new pharmacy. Some would and did. He delivered to them from Guelph. He also said that some of these clients asked him to tell them where he would be working. At least some of those to whom he delivered from Guelph to Hamilton lived within 10 miles of the pharmacy that had been sold. Ian James said he was unaware of any of his clients having made this change on their own. He did not stay at the Guelph pharmacy for long. Faruq Ladhani did not follow through on the promises he had made. As a result Ian James left during June 2009. He returned to the pharmacy in Hamilton. Most, as he testified, but not all of his clients returned with him.
[50] Faruq Ladhani denies that he offered anything special to Ian James. To the contrary he was trying to help a past employee who was not working. There were no inducements. He hired Ian James on the same terms that he had employed him in Hamilton. Ian James had been in an accident. Faruq Ladhani did help with the purchase of a new vehicle but on the basis that the money would be paid back. Faruq Ladhani testified that he did nothing to encourage the clients of Ian James to move to the Guelph pharmacy. He was attempting to build goodwill in Guelph. He did not think to ask Ian James to move his clients. The distance between Hamilton and Guelph was too great. Faruq Ladhani acknowledged that some of the clients of Ian James did move and were serviced by the pharmacy in Guelph. Some of them lived within 10 miles of the pharmacy that had been the subject of the sale.
[51] I accept the evidence of Faruq Ladhani with respect to this issue. There was no reason for him to search out or seek clients from Hamilton. It was too far away. It does not seem realistic and I do not accept that Faruq Ladhani offered Ian James the range of favours the latter said were intended to attract him to go to work in Guelph. Moreover, Ian James testified that he was only paid $4 for each delivery.[^19] He was clear that his first reaction to being invited to work at the pharmacy in Guelph was that it would not be worth his while. The rate he was paid stands to confirm that conclusion.
[52] I return to the observation made at the outset of these reasons. At the trial, time was taken examining the process by which clients that had been served by Ian James at the pharmacy in Hamilton transferred their business to Guelph, how many of them lived within 10 miles of the pharmacy in Hamilton, the circumstances through which Ian James left one and moved to the other and the value of the business involved.
[53] The issue is not that difficult.
[54] The limitations as expressed, although somewhat differently, in the Agreement of Purchase and Sale and in the Non-Competition Agreement were that the vendor (1) will not “carry on”, “be engaged in”, or “concerned with”…(2) any business competitive with or similar to the Business as presently carried on …(3) within a radius of ten miles (10) of the premises…(4) and will not solicit any customers of the Business for the above-noted time period (see paras. [6] and [11] above). (Emphasis added).
[55] There is ambiguity in this. It reflects on the phrase “any business” and whether it is to be understood to refer to a place (a noun) or as an activity (associated with a verb).
[56] It is clear that the defendant Faruq Ladhani “carried on”, was “engaged in” and “concerned with” the pharmacy in Guelph. It is equally clear that its business was “similar to” that carried on by the pharmacy in Hamilton. It was also competitive with that pharmacy in that, with the arrival of Ian James, it took business away from the pharmacy in Hamilton and did so actively. In this regard, I note that in his evidence Faruq Ladhani acknowledged that Ian James arranged for 25 to 42 patients to move with him to be serviced by the pharmacy in Guelph. He did this by having them sign a form and, as a result, new prescriptions being received from the applicable physicians. Ian James was described in a letter written by a solicitor acting for the Guelph pharmacy as an “independent contractor”. Without getting into the legal prerequisites of such a relationship (no submissions were made on that account) to my mind his activities fall under the rubric of competition as understood in both the Agreement of Purchase and Sale and the Non-Competition Agreement. Those agreements demonstrate that the defendant was not to be “concerned with…either directly or indirectly…any business competitive with or similar to” the pharmacy in Hamilton. Even if Ian James was an independent contractor, Faruq Ladhani, as the operator of the pharmacy in Guelph was concerned with the business of Ian James and benefited from it. I point out that Faruq Ladhani testified that in hiring Ian James he had no expectation of any of the Hamilton patients transferring their business which is to say that the employment of Ian James or the work he received from the pharmacy in Guelph were not dependent on his bringing these customers with him. Nonetheless the activities of Ian James were competitive with the pharmacy in Hamilton.
[57] This leaves the question of whether the “similar” or “competitive” business was “carried on” …“within a radius of ten (10) mile of the premises” (or “from the business being purchased”).[^20] This is where the ambiguity arises. The word “Business” (with the upper case letter “B”) as it appears in the Agreement of Purchase and Sales is a defined term. It is:
…the business known as WEST END PHARMACY (including the chattels furniture, [sic] and fixtures of the business as are now located upon the premises and are listed in Schedule “A” attached hereto, situated at 690 Main St., Hamilton, Ontario, (the “Business”)
[58] The “Business” is a place. It is the place from which the 10 mile radius within which the vendor is not to “carry on”, “be engaged in” or “concerned with” a similar or competitive business is to be measured. In the Non-Competition Agreement the wording is different; the effect is the same. There the limitation is a radius of ten miles “from the business being purchased.”
[59] The question is, whether, when both the Agreement of Purchase and Sale and the Non-Competition Agreement refer to the vendor not “carry[ing[ on”, being “engaged in” or “concerned with”… “any business competitive with or similar to” [emphasis added] are they referring to a place or to an activity. If it is the former there can be no breach. The pharmacy in Guelph is outside the ten mile radius around the pharmacy in Hamilton. If it is the latter the delivery of prescriptions to patients within ten miles of the pharmacy in Hamilton would be in breach of the non-competition provisions of both the Agreement of Purchase and Sale and the Non-Competition Agreement. Making such deliveries are part of “carrying on” or being “engaged in” a competitive or similar business.
[60] How is the ambiguity to be resolved?
[61] In interpreting contracts we are, in all cases, searching for the intention of the parties at the time they entered into the agreement. The more categorical approach holds that if the words of the contract were clear there was no need to go further or beyond them:
The cardinal interpretive rule of contracts, including guarantee contracts, is that the court should give effect to the intention of the parties as expressed in their written agreement. Where that intention is plainly expressed in the language of the agreement, the court should not stray beyond the four corners of the agreement.[^21]
[62] It has been suggested that in most, if not all cases, it is necessary to go further and consider the words in the context in which they are used and the contract was made. With respect to the first the contract in which the words appear should be considered as a whole:
It is unquestionable that the object of interpretations of all written instruments is to ascertain the intention of the parties thereto as expressed in the instrument itself. To ascertain the true intention of the parties, however, one must look at each provision in the context in which it is found and, in construing it, regard must be had to the language used in that and other parts of the document to avoid inconsistency. [^22]
and, as to the second:
[I]n determining what was contemplated by the parties, the words used in a document need not be looked at in a vacuum. The specific context in which a document was executed may well assist in understanding the words used. It is perfectly proper, and indeed may be necessary, to look at the surrounding circumstances in order to ascertain what the parties were really contracting about.[^23]
[63] In this case, the context is the sale of a business. The value of the business, virtually in its entirety, was assessed based on the goodwill it had accumulated. The value of the goodwill was a measure of the number of prescriptions filled and the profits generated. Competition (or a similar business) which affects the worth of the goodwill runs to the core of the contract. The idea that a new pharmacy set-up 11 miles from the business being sold could freely compete for the same customers is not what the parties intended. Such a provision would offer little protection to the purchaser. This becomes apparent with the realization that a new pharmacy placed 11 miles from pharmacy that was the subject of the sale could be closer to many of the patients to be served than the pharmacy that was sold. Looked at from another perspective, an appreciation of the context of the sale makes clear that “any business” as that term appears in the Agreement of Purchase and Sale and in the Non-Competition Agreement means exactly what it says. It refers to “any business” be it descriptive of a place or an activity.
[64] I find that to the extent that the defendant filled and delivered prescriptions to patients of the pharmacy in Hamilton who were serviced by Ian James and were within ten miles of that pharmacy, the Agreement of Purchase and Sale and the Non-Competition Agreement were breached.
[65] What is the value of the ensuing damages?
[66] The loss as originally claimed was in excess of $30,000. As the trial proceeded it became clear that this took into account all of the clients in Hamilton and not just those who lived within 10 miles of the pharmacy that was the subject of the sale. The assessment of the value of any lost business associated with a breach of the non-competition clause and contract was determined through agreement between the parties. The costs paid by the Guelph pharmacy for the drugs to be delivered had to be deducted from the revenue as did the other incremental costs associated with this income. The calculation that results from the values the parties agreed to demonstrates a loss to the Hamilton pharmacy was $11,600.[^24]
[67] I award the plaintiff $11,600 plus pre-judgment and post-judgment interest pursuant to the Courts of Justice Act.[^25]
COSTS
[68] No submissions were made as to costs. If the parties are unable to agree I will consider written submissions as follows:
(1) On behalf of the plaintiff within 15 days of the release of these reasons, such submissions to be no longer than 4 pages double spaced not including any Costs Outline, Bill of Costs or case law that may be provided.
(2) On behalf of the defendants within 10 days thereafter, such submissions to be no longer than 4 pages double spaced not including any Costs Outline, Bill of Costs or case law that may be provided.
(3) On behalf of the plaintiff, in reply, if necessary, within a further 10 days thereafter, such submissions to be no longer than 2 pages double spaced.
Lederer J.
Released: July 25, 2017
CITATION: St. Takla Hemanote Drugs Ltd. v. Pharmoy Distributing Inc., 2017 ONSC 4471
COURT FILE NO.: CV-09-379032
DATE: 20170725
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
ST. TAKLA HEMANOTE DRUGS LTD.
Plaintiff
– and –
PHARMOY DISTRIBUTING INC.
Defendant
REASONS FOR JUDGMENT
Lederer J.
Released: July 25, 2017
[^1]: Offer to Purchase Under the Bulk [sic] Sale Act (Ontario) at para. 6 (g) [^2]: The name of the defendant Faruq is also spelled Farouq. For each document in which it appears I have spelled it as it appears there. [^3]: Offer to Purchase Under the Bulk [sic] Sale Act (Ontario) at para. 17 [^4]: Ibid at para. 3(f) [^5]: STATUTORY DECLARATION dated the 14th day of June, 2008 (sworn to by Faruq Ladhani) at para. 8 [^6]: NON-COMPETITION AGREEMENT dated the 14th day of June, 2008 (signed by Farouq Ladhani both as President of Pharmoy Distributing Inc. and personally) quoted in its entirety. [^7]: I refer to this as a presumption only because Faruq Ladhani was clear that there was nothing scientific in his determinations of where to open pharmacies. It was intuitive from general observation. In the case of the pharmacy which he sold to the plaintiff the presence of the two clinics was a significant factor. [^8]: Crestwood Lake Ltd. v. Pizzey Estate 1998 CarswellOnt 1157, 57 O.T.C. 395, 78 A.C.W.S. (3d) 55 at para. 10 appeal allowed as to the interest to be awarded on a promissory note that had been dishonoured 2004 CanLII 36108 (ON CA), 69 O.R. (3rd) 306 [^9]: Ibid at para. 5 [^10]: John Siegal has since retired. [^11]: PWC Expert Report (December 2, 2102) at para. 28 [^12]: Ibid (The second quote follows immediately from the first.) [^13]: Ibid Schedule 3 [^14]: Ibid at para. 40 In a footnote the only attribution that appears in the report is noted as; “Based on discussions with Maged Labib and Maged Tadros.” [^15]: See footnote 12 immediately above. [^16]: The idea that at least one aspect of the loss (damages) can be expressed as a calculation of the lower amount the buyer would have paid had the contractual requirement to provide information not been breached has been noted to as follows:
In determining the appropriate damages for breach of contract the approach of the court should be to consider first what reduced amount the purchaser should have paid having received less than he believed he was purchasing. …
(Crestwood Lake Ltd. v. Pizzey Estate, supra (fn. 8) at para. 11) [^17]: In fairness I should say that in his evidence Magid Labib testified that the pharmacy made profits of $3,000 per day through the sale of fertility drugs. The problem is that there were no financial records pointed to as confirming this or any explanation provided as to how this change from the past profits was effected. [^18]: PWC Expert Report (December 2, 2102) at para. 40. This is the concluding sentence in this paragraph of the report the rest of which is quoted at para. [40] above and referred to at fn. 14. [^19]: During submissions, as reported at fn. 17 below counsel presented a calculation which relied on the premise that the cost of each delivery was $11. So far as I can recall there is no evidence confirming this value. Even at $11 per delivery it would be difficult for someone in the position of Ian James to earn very much delivering from Guelph to Hamilton. [^20]: The quotation without parenthesis is from the Agreement of Purchase and sale. The quotation within parenthesis is from the Non-Competition Agreement [^21]: KPMG Inc. v. Canadian Imperial Bank of Commerce, 1998 CanLII 1908 at para. 3 leave to appeal to S.C.C. refused [1999] S.C.C.A. No. 36, [1999] 2 S.C.R. vi (S.C.C.) as quoted in Geoff R. Hall, Canadian Contractual Interpretation Law, Second Edition LexisNexis 2012 at p. 11 [^22]: Bowater Newfoundland Ltd. v. Newfoundland & Labrador Hydro 1978 CarswellNfld 26, [1978] N.J. No. 14, 15 Nfld. & P.E.I.R. 301 at para. 8 as quoted in Geoff R. Hall, Canadian Contractual Interpretation Law, Second Edition, supra (fn. 21) at p. 12 which continues with and relies on:
The deed must be read as a whole in order to ascertain the true meaning of its several clauses, and the words of each clause should be so interpreted as to bring them into harmony with the other provisions of the deed if that interpretation does no violence to the meaning of which they are naturally susceptible.
(Chamber Collier Co. v. Troyerould (1915) 1 Ch. 268 at p. 272) [^23]: White v. Central Trust Co. 1984 CanLII 3002 (NB CA), 1984 CarswellNB 38, [1984] N.B.J. No. 147, 140 A.P.R. 293, 17 E.T.R. 78, 25 A.C.W.S. (2d) 258, 54 N.B.R. (2d) 293, 7 D.L.R. (4th) 236 at para. 33 as quoted in Geoff R. Hall, Canadian Contractual Interpretation Law, Second Edition, supra (fn. 21) at p. 13 [^24]: This figure comes from a calculation presented and agreed to by both counsel, after the evidence was complete and during their submissions, as follows: revenue for deliveries from Guelph to places in Hamilton that were within 10 miles of the Hamilton pharmacy: $25,000 minus the cost of delivery being 165 deliveries times the cost of $11.00 per delivery ($1,815.00 rounded by counsel to $1,800 subtracted from $25,000) $23,200. Counsel then “eyeballed” the “variable costs at ½ the remaining value leaving a claim arising from the alleged breach of the non-competition clause of $11,600. [^25]: R.S.O. 1990, c. C. 43