ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
LEE-ANNE ARKELL, THE ARKELL FAMILY TRUST, 2268987 ONTARIO INC. and PAIGUS INVESTMENTS PTY LTD.
Peter Callahan and James Smith, for the plaintiffs
- and -
BRIGHTPATH KIDS CORP.
Mel Hogg and Michael Mestinsek, for the defendant
HEARD: March 30, June 9, June 26 and July 31, 2017, at Brampton
REASONS FOR DECISION
Emery J.
1The defendant Brightpath Kids Corp. (“Brightpath”) is in the business of operating early learning and childcare centres in various parts of Canada.
2On June 21, 2016, Brightpath entered into a Share Purchase Agreement (“SPA”) to purchase all shares in the corporations Peekaboo Child Care Centres Inc. (“PCCCI”) and Peekaboo Adventures Ltd. (collectively, “Peekaboo”) from the plaintiffs. Peekaboo owned and operated 18 daycare centres in Ontario at the time the parties entered the SPA.
3Brightpath agreed to pay $21,993,150 for the shares it was purchasing from those parties selling their shares (the “Vendors”) under the SPA. As security that warranties and representations made by the vendors in the SPA were accurate and to ensure the continued performance of Peekaboo as a going concern, the SPA required that certain parts of the purchase price be held in escrow for stipulated times.
4Under paragraph 2.6 of the SPA, one million dollars is currently held by RZCD Law Firm LLP as a “Holdback Escrow Amount” as the Escrow Agent. Those funds were deposited in escrow should they be required to indemnify Brightpath as the purchaser against the warranties and representations given by the Vendors in the SPA. This Holdback Escrow Amount was constituted, and is intended to operate on the following terms:
2.6 Holdback Escrow Amount
On Closing, the Purchaser shall deliver the Holdback Escrow Amount to the Escrow Agent in trust, which shall be placed into an interest bearing trust account and, subject to reduction and set-off as herein provided, paid in accordance with the Holdback Escrow Agreement as follows:
(a) the Purchaser shall be entitled to set-off and deduct from the Holdback Escrow Amount (which shall be a reduction of the Purchase Price payable hereunder) any amounts on account of Claims to which the Purchaser Indemnified Parties are finally determined to be entitled pursuant to the provisions of this Agreement (including, without limitation, as a result of any breach of any representation, warranty or covenant, pursuant to any indemnity or any costs of expenses incurred by the Purchaser as a result of the failure of the Vendors to rectify the Property Deficiencies in accordance with the provisions of Section 9.1(1) or for any amount by which the Closing Statement is less than the Balance Sheet, as finally determined in accordance with Section 2.5. Such entitlement shall not limit any other rights or remedies which the Purchaser may have under this Agreement, at law, in equity or by statute with respect to such matters. If the Purchaser determines that any defects in the real property which raise material health and safety, fire prevention, electrical or safety concerns in respect of the operation of a child care facility are of a nature that can be rectified by the Vendors, it will offer to the Vendors to rectify such defects at the Vendors’ sole cost and expense; provided, however, that such defects must be rectified to the satisfaction of the Purchaser, in its sole and absolute discretion;
(b) provided there are no Claims made by any of the Purchaser Indemnified Parties during the Holdback Escrow Period and subject to the Holdback Escrow amount being paid by the Escrow Agent pursuant to the provisions of Section 2.5(c), the Holdback Escrow Amount shall to be paid to the Vendors as follows:
(i) One Hundred and Fifty Thousand Dollars ($150,000.00) shall be paid to the Vendors on the date which is six (6) months following the Closing Date;
(ii) One Hundred and Fifty Thousand Dollars ($150,000.00) shall be paid to the Vendors on the date which is the first (1st) anniversary of the Closing Date;
(iii) Three Hundred Thousand Dollars ($300,000.00) shall be paid to the Vendors on the date which is eighteen (18) months following the Closing Date;
(iv) the remainder of the Holdback Escrow Amount, if any, shall be paid to the Vendors on the expiry of the Holdback Escrow Period; and
(c) in the event that a Claim is made by any of the Purchaser Indemnified Parties during the Holdback Escrow Period, then no amount (or no further amount if any amount has already been paid pursuant to Section 2.6(b)) of the Holdback Escrow Amount shall be paid to the Vendors pursuant to Section 2.6(b) above and such amount of the Holdback Escrow Amount as is remaining after reduction and set-off as herein provided or payment in accordance with the Holdback Escrow Agreement, will be paid to the Vendors upon the latter of the expiry of the Holdback Escrow Period and the date upon which the Purchaser confirms in writing that such Claims have been fully and finally determined.
5A second escrow amount of $1,750,000, known as the “Revenue Escrow Amount” is currently held by RZCD Law Firm LLP as Escrow Agent. The Revenue Escrow Amount was constituted and is intended to operate under paragraph 2.7 of the SPA, which reads, in part, as follows:
2.7 Revenue Escrow Amount
On Closing, the Purchaser shall deliver the Revenue Escrow Amount to the Escrow Agent in trust, which shall be placed into an interest bearing trust account and, subject to reduction and set-off as herein provided, paid in accordance with the Revenue Escrow Agreement and as follows:
(d) if on or before October 31, 2016 the Purchaser determines that based upon the audited financial statements of PCCCI for the fiscal year ended August 31, 2016 that the adjusted revenue of PCCCI for the fiscal year ended August 31, 2016 is:
(i) equal to or greater than the amount of the total adjusted revenue baseline for the fiscal year ended August 31, 2016 as set forth on Schedule C (being an amount of Seventeen Million Nine Hundred and Twenty Seven Thousand Three Hundred and Seventy Three Dollars ($17,927,373.00)), then a portion of the Revenue Escrow Amount equal to Eight Hundred and Seventy Five Thousand Dollars ($875,000.00) shall be paid to the Vendors upon receipt by the Escrow Agent of a written notice from the Purchaser directing that such payment shall be made by the Escrow Agent; or
(ii) less than the amount of the total adjusted revenue baseline for the fiscal year ended August 31, 2016 as set forth on Schedule C (being an amount of Seventeen Million Nine Hundred and Twenty Seven Thousand Three Hundred and Seventy Three Dollars ($17,927,373.00)), then a portion of the Revenue Escrow Amount equal to Eight Hundred and Seventy Five Thousand Dollars ($875,000.00) shall be paid to the Purchaser upon receipt by the Escrow Agent of a written notice from the Purchaser directing that such payment shall be made by the Escrow Agent; and
(e) if on or before January 31, 2017 the Purchaser determines that based on the audited quarterly financial statements of PCCCI for the fiscal quarter ended November 30, 2016 that the adjusted revenue of PCCCI for the fiscal quarter ended November 30, 2016 is:
(i) equal to or greater than the amount of the total adjusted revenue baseline for the three calendar months ended November 30, 2016 as set forth on Schedule C (being an amount of Five Million Five Hundred and Fourteen Thousand Nine Hundred and Eleven Dollars ($5,514,911.00)), then a portion of the Revenue Escrow Amount equal to Eight Hundred and Seventy Five Thousand Dollars ($875,000.00) shall be paid to the Vendors upon receipt by the Escrow Agent of a written notice from the Purchaser directing that such payment shall be made by the Escrow Agent; or
(ii) less than the amount of the total adjusted revenue baseline for the three calendar months ended November 30, 2016 as set forth on Schedule C (being an amount of Five Million Five Hundred and Fourteen Thousand Nine Hundred and Eleven dollars ($5,514,911.00)), then a portion of the Revenue Escrow Amount equal to Eight Hundred and Seventy Five Thousand Dollars ($875,000.00) shall be paid to the Purchaser upon receipt by the Escrow Agent of a written notice from the Purchaser directing that such payment shall be made by the Escrow Agent.
6Brightpath paid the purchase price for the Peekaboo shares when the transaction closed on or about September 8, 2016. That purchase price was paid to the Vendors, less $50,000 for the deposit and the two amounts totalling $2,750,000 that were deposited in escrow pursuant to the SPA.
7Pursuant to the SPA, the payment of $875,000 under paragraph 2.7 (a), commonly referred to as tranche one, would be released to the Vendors by the Escrow Agent on October 31, 2016 upon receiving written notice from Brightpath. It was up to Brightpath to give that written notice once Brightpath was satisfied that the total adjusted revenues for PCCCI was equal to or greater than $17,927,373 at its year end on August 31, 2016, being the revenue milestone the parties agreed upon.
8The second payment of $875,000, commonly referred to as tranche two, would be released to the Vendors by the Escrow Agent on January 31, 2017 upon receiving written notice from Brightpath. As with tranche one, Brightpath was required to give this written notice upon being satisfied that the adjusted revenues for PCCCI were equal to, or greater than the total adjusted revenue baseline of $5,514,911 in this respect for the three calendar months ending on November 30, 2016. This adjusted total and baseline amount was set out in Schedule “C” to the SPA.
9Brightpath has refused to issue either written notice under paragraph 2.7 to the Escrow Agent.
10The plaintiffs commenced this action on December 15, 2016 to seek payment of tranche one and tranche two, or mandatory orders requiring Brightpath to give written notice to the Escrow Agent to release those amounts pursuant to paragraph 2.7 of the SPA.
11Brightpath has not delivered a statement of defence in this action.
12The solicitors for Brightpath sent a letter containing a notice of indemnity claim under paragraph 10.1 of the SPA on October 31, 2016. In that letter, Brightpath seeks indemnity for two breaches of the vendors’ warranties and representations. After the plaintiff’s commenced their action, Brightpath served a formal Notice of Arbitration dated January 12, 2017 that set out the issues for arbitration. In the Notice of Arbitration, Brightpath makes a claim for indemnification against the Holdback Escrow Amount, and claims for legal and equitable set-off against the Revenue Escrow Amounts. Brightpath does not seek arbitration to determine if tranche one was, in fact, owing as of October 31, 2016.
13The plaintiffs contend that the revenue milestone for the release of tranche two from escrow under the SPA was met by November 30, 2016. Brightpath disagrees. Brightpath submits that this conclusion depends on the adjudication of two issues: certain adjustments that remain in dispute, and the interpretation of the phrase found in Schedule “C” that actual revenue for the same period from the previous year will “likewise be adjusted.”
14There are two competing motions before this court with respect to the conduct of the action. Another two procedural motions have been brought by Brightpath relevant to the evidence given in respect of those motions.
15Brightpath brought the first motion to seek an order to stay this action under section 7 (1) of the Arbitrations Act, 1991 because the SPA contains an arbitration clause. Brightpath argues that this arbitration clause was intended to govern the adjudication of any dispute between the parties under that agreement, and is binding upon them. Paragraph 12(1) of the SPA effectively defines any controversy, indemnity claim, question or difference that arises with respect to the SPA as a “dispute” that would qualify for arbitration under paragraph 12 (2).
16The second motion is brought by the plaintiffs for summary judgment. The plaintiffs initially brought the motion for summary judgment to compel the release of the first tranche that should have been paid from the funds in escrow on October 31, 2016. That motion for summary judgment has now been amended to claim the release from escrow of both tranche one and tranche two funds.
17The plaintiffs take the position that the claims for payment of the two amounts from the Revenue Escrow Amount are discrete and straightforward enough to qualify under the statutory exceptions provided in section 7 (2) to a motion for a stay. Section 7 (2) reads as follows:
Exceptions
(2) However, the court may refuse to stay the proceeding in any of the following cases:
A party entered into the arbitration agreement while under a legal incapacity.
The arbitration agreement is invalid.
The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law.
The motion was brought with undue delay.
The matter is a proper one for default or summary judgment.
18The plaintiffs’ claim the facts in evidence make this case a proper one for summary judgment. They are not only resisting the Brightpath motion for a stay; they have brought their motion seeking judgment under Rule 20.
The Brightpath Motion for a Stay
19The plaintiffs commenced their action for the release of tranche one and tranche two funds despite the presence of paragraph 12 in the SPA to consult and negotiate with each other in good faith about any dispute that arises under the SPA, and to arbitrate that dispute if it cannot be resolved. The plaintiffs seek relief from the court because they are of the view that Brightpath has not dealt with contentious matters in a forthright and responsive manner. They are confident that bringing this action instead of submitting their claim for payment of the revenue escrow amounts to arbitration was appropriate as they argue the action would be a proper one for default or summary judgment.
20Rather than delivering a statement of defence, Brightpath served the notice of motion dated January 17, 2017 to seek an order to stay the extant action on the grounds the subject matter of the claim is subject to an agreement to arbitrate between the parties. That notice of motion was initially returnable on February 21, 2017.
21The plaintiffs do not argue that the subject matter of the action and all or part of the relief claimed in the amended motion for summary judgment do not fall within the definition of the term “dispute” or generally within the scope of paragraph 12 of the SPA. Instead, the plaintiffs argue that the court should refuse to stay the action because it is a matter that is a proper one for summary judgment. This would be the first question for the court to determine.
22The legislature has provided the court with the discretion to refuse a stay under section 7(2) of the Arbitrations Act, 1991. However, the authorities are clear that this discretion is narrow. The court has discretion limited to the specific circumstances enumerated under that subsection as exceptions to the mandatory provision requiring the court to stay proceedings where a dispute would fall under an agreement to arbitrate. The specific exception that the plaintiffs rely upon here is found under section 7 (2) 5 in that the matter is a proper one for default or summary judgment.
23The plaintiffs bear the onus of satisfying the court that any exception to the stay provisions under section 7 (1) of the Arbitrations Act, 1991, applies: Lee Sand and Gravel v. Lee, 2007 CarswellOnt 1409. The plaintiffs in this case are asking the court to exercise that narrow discretion in their favour. They must show in clear and definitive terms that this case is a matter that comes within one of the enumerated exceptions. To qualify as a matter that is a proper one for default or summary judgment under subsection 7 (2) 5, the plaintiffs must satisfy the court that the facts would entitle the plaintiffs to default judgment under Rule 19.06 if undefended, or that there would be no genuine issue requiring a trial under Rule 20.04 if the plaintiffs brought a motion for summary judgment and the claims were defended or the basis for the action was challenged.
24The Court of Appeal held in MDG Kingston Inc. v. MDG Computers Canada Inc., 2008 ONCA 656 that the purpose behind section 7(2) of the Arbitration Act 1991 was to provide “limited exceptions to the mandatory requirement that courts enforce arbitration clauses” where it would be “either unfair or impractical to refer the matter to arbitration.” The Court of Appeal further explained the purpose for extending the exception to a matter that is a proper one for summary judgment under ss. (5) in the following terms:
[37] The purpose of s. 7(2) of the Arbitration Act is to provide a limited exception to the mandatory requirement that courts enforce arbitration clauses and not take jurisdiction where the parties have legitimately agreed to arbitrate their disputes. One of those exceptions arises when one party defaults and there is therefore no need to enlist an arbitrator to make any findings. Another is where the case is properly one for summary judgment, i.e., there are no genuine issues for trial, and therefore, as with a default situation, there are no issues that require the assistance of an arbitrator.
25In Allen v. McMaster Trust (Trustee of), 2011 ONSC 584, Justice Mesbur held, in a case where a party was claiming payment under certain promissory notes in the context of a partnership agreement that contained an arbitration clause, that the discretion to find an exception applied under ss. 7(2) 5 should be “sparingly exercised”. Justice Mesbur further explained that this discretion “should only be exercised in the simplest and clearest of cases where it is readily and immediately demonstrable on the record that the responding party to the proposed summary judgment motion has no basis whatsoever for disputing the claim or claims of the moving party.”
26Justice Pattillo put it this way in Apotex Inc. v. Virco Pharmaceuticals (Canada), 2007 CarswellONT 7895 (SCJ) at paragraph 19:
19 Given the policies at play in respect of this issue and having regard to Dewshaf, supra, it is my view that the discretion granted to the court to refuse to grant a stay of an action in respect of the summary judgment exception should only be exercised in the simplest and clearest of cases where it is readily and immediately demonstrable on the record that the responding party to the proposed summary judgment motion has no basis whatsoever for disputing the claim or claims of the moving party. It is only in such circumstances, in my view, that a party should be deprived of it's agreed to arbitration rights.
27In Allen v. McMaster Trust, neither party disputed there was money owning to the plaintiff under the promissory notes. Justice Mesbur agreed that the claim was clearly a proper one for summary judgment. However, Her Honour recognized that there was a policy issue involved that she must consider because the partnership agreement contemplated a set off between the repayment of a partner’s capital, and that partner’s obligation to repay any overpayment to the partnership that may have been paid and received on account of a share of partnership income.
28Justice Mesbur found that on the facts that the two competing claims were bound together, and that they should be arbitrated at the same time and in the same forum according to the agreement between the parties. Her Honour stated the parties must be held to the bargain. Consequently, she declined to exercise her discretion to refuse a stay under s. 7(2) 5 of the Arbitrations Act 1991.
29Since Brightpath admits the required milestone for the payment of tranche one was reached by the required date, the plaintiffs claim that part of the action would undoubtedly be a proper matter for default judgment if undefended, or summary judgment was determined on the merits.
30The president of Brightpath, Dale Kearns acknowledged in his affidavit sworn on March 29, 2017 that the revenue milestone for the release of tranche one from escrow under paragraph 2.7(1) of the SPA was met by August 31, 2016. However, Brightpath disputes that the plaintiffs are entitled to payment of tranche one because of the two claims that it seeks to set off against any amounts owing to the Vendors from those amounts under paragraphs 2.6 or 2.7 of the SPA.
31The principles that apply to a claim or defence of equitable set-off were established by the Supreme Court in Telford v. Holt, 1987 CanLII 18 (SCC), [1987] 2 S.C.R. 193:
The party relying on a set-off must show some equitable ground for being protected against his adversary's demands;
The equitable ground must go to the very root of the plaintiff's claim before a set-off will be allowed;
A cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross claim;
The plaintiff's claim and the cross-claim need not arise out of the same contract; and
Unliquidated claims are on the same footing as liquidated claims.
The Brightpath Claims for Set-off
32The basis for Brightpath to seek a set-off flows from paragraph 10.1 of the SPA, where the Vendors agreed to indemnify and save harmless Brightpath for claims that were not disclosed according to the warranties and representations made by the Vendors.
33The first claim for a right to set off involves a service agreement between PCCCI and the Region of Halton which provides annual wage subsidies to PCCCI in the amount of $521,000. The Halton service agreement contained a term that the agreement was subject to termination on a change in control of PCCCI, a corporation that Brightpath purchased under the SPA. Once Brightpath purchased the shares in PCCCI from the Vendors, a change of control occurred. Brightpath states that the Region of Halton will no longer pay the wage subsidy because of this change in control.
34Brightpath refers to paragraph 3.1 (1) of the SPA that contains the Vendors’ representation that there is no contractual or regulatory approval required to avoid a loss to either of the purchased companies, except for those contracts listed under Schedule 3.1 (b). The plaintiffs admit they did not list the Halton service agreement that provided the wage subsidy in that schedule.
35According to the evidence of Dale Kearns, Brightpath anticipates that it will suffer damages of approximately $2.73 million due to the loss of the Halton wage subsidy.
36Brightpath made a second claim to a right of set-off after it received a demand from a property owner and landlord, Swisscan Properties Inc. with respect to an alleged offer to lease from PCCCI. Swisscan claims that PCCCI made an offer to lease dated November 17, 2015 to lease premises at 280 Coxwell Avenue in Toronto for a 20 year term. Notice of that claim was given in a letter from the solicitors for Swisscan Properties Inc. to Mr. Kearns, dated February 9, 2017, along with a copy of the offer to lease. The letter from Swisscan’s solicitors advised Brightpath that it intends to pursue all legal remedies against PCCCI in respect of the alleged breach of that obligation.
37Brightpath estimates that the rent for the remaining term under the Swisscan offer to lease is approximately $4.5 million.
38Brightpath states that the Swisscan offer to lease was not disclosed by the plaintiff in the SPA, contrary to the provisions of subparagraphs 3.1 (ff) and (nn) of the SPA. The plaintiffs do not dispute this evidence.
39No other evidence was provided to support any claim Swisscan was making with respect to the Swisscan offer to lease. Nor, as of the date the motions were argued, had Swisscan commenced an action for the recognition or enforcement of any rights with respect to it.
Brightpath’s Motion to Strike
40The plaintiffs rely on the evidence given by Lee-Anne Arkell on June 16, 2017 about the Swisscan offer to lease at her cross examination. This examination was arranged between counsel, although it was never specifically characterized as a cross-examination under Rule 30.02. At the conclusion of the cross examination by Ms. Hogg, Mr. Callaghan conducted a re-examination of Ms. Arkell that took the form of a cross examination. Ms. Hogg objected to this form of examination as being contrary to Rule 34.11 (3). Rule 34.11 reads as follows:
34.11 (1) A person being examined for discovery may be re-examined by his or her own lawyer and by any party adverse in interest to the examining party.
(2) A person being cross-examined on an affidavit or examined in aid of execution may be re-examined by his or her own lawyer.
(3) The re-examination shall take place immediately after the examination or cross-examination and shall not take the form of a cross-examination
41The re-examination continued with Ms. Arkell answering the questions asked by Mr. Callahan, with the admissibility of those answers reserved under Rule 34.12(2) for a later ruling on the proprietary of those questions. Mr. Callahan argued that he was entitled to cross examine his own witness in the course of a re-examination under Rule 39.03 (2). Brightpath subsequently brought a motion to determine the proprietary of those questions relating to the Swisscan issue.
42This examination was not conducted under Rule 39.03, as it related to the cross-examination of Ms. Arkell on her several affidavits she had sworn. She is also a party to the action. In my view, Ms. Arkell attended the examiner’s office on that occasion to be cross-examined as a party and on her affidavits by opposing counsel under Rule 39.02.
43I do not see Rule 39.02 as allowing counsel to cross examine his own witness in the course of a re-examination. The purpose of a re-examination is to ask open-ended questions about matters raised in cross examination that are outside the evidence given in his or her affidavit. A re-examination cannot used as an opportunity to introduce evidence through the witness that could have been included in the affidavit of that person: Monarch Marketing Systems Inc. v. Glenwood Label and Box Manufacturing Ltd., 1988 CarswellNAT 577 (Fed. Ct. T.D.).
44I have reviewed the transcript of Mr. Callahan’s re-examination of Ms. Arkell on June 16, 2017. The majority of his questions are formulated as leading questions that amount to cross-examination, which is contrary to Rule 34.11 (3). Further, Mr. Callahan asked Ms. Arkell questions that were outside the parameters of the facts set out in her affidavit or raised in cross-examination. In my view, questions that offended either rule were improper for re-examination.
45The motion brought by Brightpath for this ruling is granted. The questions and corresponding in Ms. Arkell’s re-examination between numbers 99 to 130 are hereby struck.
Should the Stay be Refused
46Since Brightpath agrees that the revenue milestone has been reached for the Escrow Agent to release tranche one to the plaintiffs were it not for the set-off claims, the veracity of the set-off claims must be considered to determine if the plaintiffs’ claim for partial summary judgment is a proper one to stand as an exception to section 7(1).
47In Ontario, a party is not entitled to execute on the property of another property against whom a claim is made before judgment. The exceptions to the rule are where the court has granted a Mareva injunction restraining a party from removing goods, or in the instance of fraud. Neither of those exceptions apply to the matter between the plaintiffs and Brightpath under the SPA or the revenue escrow agreement. See Chitel v. Rothbart, 1982 CanLII 2031 (ON SC), [1982] O.J. No. 3197, Iraco Ltd. v. Staiman Steel Ltd. (1986), 1986 CanLII 2739 (ON SC), 54 O.R. (2nd) 488 (High Court), and L.A. v. J.B., [2002] O.J. No. 4157 (SCJ).
48Each claim made by Brightpath to set-off its liability under paragraph 2.7 is advanced as a proposed defence to the action. The evidence filed by Brightpath in support of those claims does not prove that Brightpath or PCCCI will actually suffer loss for which Brightpath must be indemnified or saved harmless.
49Brightpath is actually seeking execution before judgment, to preserve an exigible asset to execute against should it be granted an arbitral award. It is seeking to use equitable set-off as the basis to seek a stay by stating it has a valid defence to the action, while making its claims in another forum.
50There is no equitable ground to make the Revenue Escrow Amount available for set-off. The Brightpath claim for indemnification is not so clearly connected with the plaintiffs’ claim that it would be manifestly unjust to allow the plaintiffs their claim without considering Brightpath’s position.
51Nor does the Brightpath claim for set-off go to the very root of the plaintiffs’ claim. A claim for equitable set-off is one that goes to the root of the claim of the adverse party: Telford v. Holt, and CBS Outdoor Canada v. Clarity Outdoor Media Inc., 2012 ONSC 2547.
52On the facts given in evidence and on the particular terms of this Share Purchase Agreement, the Brightpath claims for indemnification and set-off belong in arbitration, and the Vendors pursuit of the escrow funds under paragraph 2.7 of the SPA belongs in the court. The Brightpath claims for set-off is a remedy arising from equity, not the SPA. The right to indemnity for which the remedy of set-off is requested is already accommodated under the SPA by the Holdback Escrow Amount in paragraph 2.6.
53I am exercising my discretion, as narrow as that discretion may be, to refuse the Brightpath motion to stay the action. I find on the evidence that the action fits within the limited exception provided by section 7(2)5, and that it would be unfair to refer the plaintiffs’ claims for the release of revenue escrow payments to arbitration: MDG Kingston Inc. Viewed from a dispassionate perspective, this is one of the simplest and clearest of cases where there is no basis on the record to dispute the claim made by the moving party. This finding is subject to the plaintiffs’ burden to prove all allegations of material fact pleaded that would entitle them to judgment.
The Plaintiffs motion for Summary Judgment
54Once Brightpath served its notice of motion to seek a stay, the plaintiffs had the right to bring their motion for summary judgment under Rule 20.01.
55The plaintiffs have the onus as the moving parties to satisfy the court that, on the evidence, there is no genuine issue requiring a trial to adjudicate their claims for the release of tranche one and tranche two made in the statement of claim on their merits. If the plaintiffs discharge this onus, the evidentiary burden shifts to the responding party to establish, on the evidence, that there is a genuine issue that requires a trial after all.
56The purpose behind the onus of proof on the moving party and evidentiary burden on the responding party is clear: to ensure that the motions judge has a full record that contains the best evidence available. It is this obligation imposed on each party to provide a full record that enables the motions judge to assess from the motion materials whether he or she is confident that the factual record provides the evidence required by the court to make findings of fact to which the law can be applied to adjudicate a claim or defence justly without a trial.
57Since the amendments to Rule 20 in January, 2010, various judges have examined this evidentiary burden. In examining the burden of proof on the moving party and the evidentiary burden on the party responding, Justice Karakatsanis, as she then was, utilized the metaphor that each party must “put its best foot forward” in Hino Motors v. Kell, 2010 ONSC 1329 in the following way:
[9] The new Rule does not change the burden in a summary judgment motion. The moving party bears the evidentiary burden of showing that there is no genuine issue requiring a trial. The moving party must prove this and cannot rely on mere allegations or the pleadings. Pursuant to Rule 20.02(2), a responding party “may not rest solely on the allegations or denial in the party’s pleadings but must set out in affidavit material or other evidence, specific facts showing there is a genuine issue requiring a trial.” In other words, consistent with existing jurisprudence, each side must “put its best foot forward” with respect to the existence or non-existence of material issues to be tried. The court is entitled to assume that the record contains all the evidence which the parties would present if there were a trial.
Tranche One
58The fundamental position Brightpath has taken to justify its refusal to permit the release of tranche one is that its claim for equitable set-off exceeds the total escrow amounts payable under paragraphs 2.6 or either part of 2.7. Since the subject matter of those claims arise under the SPA, Brightpath argues both that the subject matter of those claims, as well as the issue that they should be set-off against all amounts held in escrow, are subject to the arbitration provisions found in the SPA.
59With respect, I disagree. The plaintiffs claim for the release of $875,000 under paragraph 2.7 (a) in the action, and for which it now seeks summary judgment, is an admitted fact. There is no issue, let alone a genuine issue that requires a trial with respect to that part of the claim, except for the Brightpath claim for set-off. Yet those claims for equitable set-off have not been litigated, or reduced to an amount to apply against any funds in escrow. What Brightpath actually seeks is the preservation of all amounts held in escrow as security or execution for any judgment it might recover to be indemnified or held harmless.
60I find that this court has jurisdiction to authorize and direct the Escrow Agent to release the amount payable under paragraph 2.7(a) of the SPA by virtue of the power and priority given to the court under the Revenue Escrow Agreement.
61I am drawn to the argument enforced by Justice Mesbur in Allen that the parties must be held to their bargain, except with a different result. The Escrow Agent derives its power and authority from the Revenue Escrow Agreement. Although that copy of the Revenue Escrow Agreement is not executed, I find that it is incorporated by reference in paragraph 1.4 that provides that the schedules and exhibits to the SPA listed below are an integral part of the agreement, where the Revenue Escrow Agreement is listed as Exhibit B.
62When looking at the Revenue Escrow Agreement, the duties and liabilities of the escrow agent are set out in section 7. Section 7(5) and (6) reads as follows:
(5) In the following circumstances, the Escrow Agent may (i) refrain from taking any action under this Agreement until it is authorized or directed otherwise in writing by both Party A and Party B, or by an order of a court of competent jurisdiction from which no further appeal may be taken or (ii) deposit the Escrowed Property with a court of competent jurisdiction in Toronto, Ontario:
(b) The Escrow Agent is uncertain as to its duties or rights under this Agreement,
(c) The Escrow Agent receives instructions, claims or demands from any party to this Agreement or from a third Person with respect to any matter under this Agreement which, in its opinion, are in conflict with this Agreement,
(d) There is a disagreement between any of the parties to this Agreement which, in the reasonable opinion of the Escrow Agent, may result in adverse claims or demand with respect to the Escrowed Property, or
(e) Any of the parties to this Agreement, including the Escrow Agent, disagree about the interpretation of this Agreement or about the rights and obligations of the Escrow Agent or the propriety of an action contemplated by the Escrow Agent under this Agreement.
63Under subparagraph 7(5), the Escrow Agent may refrain from taking any action under the agreement unless authorized or directed otherwise by order of a court of competent jurisdiction. There is no mention of an agreement to arbitrate how the Escrow Agent is to perform, or to refrain from taking any action under the agreement.
64The Revenue Escrow Agreement implicitly excludes an agreement to arbitrate the rights and obligations of the Escrow Agent on behalf of the parties to the SPA. Section 16, being the “entire agreement” provision, acknowledges that the escrowed property in the amount of $1,750,000 is to be delivered to the Escrow Agent, and that the Escrow Agent is willing to act for the sole purpose of accepting, holding and releasing the escrowed property in accordance with this agreement. Section 16 makes specific reference to section 2.7 of the SPA and provides as follows:
“If there is any conflict or inconsistency between the provisions of this agreement and the provisions of the purchase agreement, which cannot be resolved by both provisions being complied with, the provisions of this agreement will prevail to the extent of such conflict.”
65In my view, the agreement of the parties in section 7(5) of the Revenue Escrow Agreement that the Escrow Agent may refrain from taking any action under the agreement until it is authorized or directed either in writing, or by a court of competent jurisdiction is mutually exclusive from the arbitration clause found in paragraph 12 of the SPA. According to section 16 of the Revenue Escrow Agreement, in the event of a conflict, the provisions of the Revenue Escrow Agreement shall prevail.
66I find that the Revenue Escrow Agreement, when read as a whole, provides this court with jurisdiction to authorize or direct the release of all or part of the revenue escrow amount held by the Escrow Agent. It follows from the Brightpath admission that the revenue milestone for the release of tranche one has been met that it is open for this court to grant summary judgment in the form of an order directing Brightpath to give written notice authorizing the Escrow Agent to release funds from escrow.
67Rule 20.01 permits a plaintiff to move for summary judgment on part of a claim in the statement of claim. Although Brightpath has not filed a statement of defence, it has made claims for indemnity and for equitable set-off against the holdback escrow amount and the revenue escrow amount in its notice to arbitrate for the Halton subsidy and the Swisscan offer to lease.
68The availability of partial summary judgment was considered recently by the Court of Appeal in Butera v. Chown Cairns LLP, 2017 ONCA 783. In Butera, the court reiterated its views on the availability of partial summary judgment in practical terms expressed in Baywood Homes Partnership v. Haditaghi, 2014 ONCA 450 and in Canadian Imperial Bank of Commerce v. Deloitte & Touche, 2016 ONCA 922. In each of those cases, the court considered the risk of duplicative or inconsistent findings at trial if a partial summary judgment was granted, and whether granting partial summary judgment was advisable in view of the litigation as a whole.
69I conclude that the Brightpath claim for equitable set-off as the only defence to payment of the tranche one funds makes this one of those cases. In the context of the claim for the release of those funds from escrow, there is no risk of any duplication or inconsistent findings. The merits of any claim for equitable set-off will attach to the Holdback Escrow Amount should that set-off be proven through arbitration. There is simply no basis for any other finding of fact with respect to the plaintiffs entitlement to the tranche one funds other than what this court is able to grant to them at this time. Granting partial judgment for the release of tranche one is the most expeditious and cost effective way to provide relief to the plaintiffs’ claims for the release of tranche one funds.
70I do not consider it inadvisable to provide the mechanism for the plaintiffs to receive payment of the tranche one funds through granting partial summary judgment. Summary judgment will provide them with receipt of funds they should have received on January 31, 2017 pursuant to the SPA. Granting this relief does not interrupt the flow of the arbitration process for a very simple reason: neither party has pleaded in their Notice for Arbitration that the arbitrator is to decide whether the revenue escrow funds are payable now under paragraph 2.7 (a) or (b) of the SPA.
71The Brightpath evidence filed in response to the Plaintiff’s motion for summary judgment does not provide the basis for this court to find a genuine issue requiring a trial based on claims for equitable set-off. Those claims are unsecured in nature. To hold up judgment on tranche one would effectively be to grant Brightpath execution before judgment or give Brightpath a form of security that the commercial relationship between the parties did not contemplate.
72I find there are no facts in evidence on the plaintiffs’ motion to raise a genuine issue requiring a trial with respect to the plaintiffs entitlement to the funds held in escrow under paragraph 2.7 (a) of the SPA. Therefore, the plaintiffs are granted partial summary judgment and Brightpath is ordered to provide written notice to the Escrow Agent to release $875,000 to them forthwith.
Tranche Two
73I have not reached the same conclusion with respect to the entitlement of the plaintiffs to the release of funds under paragraph 2.7(b) of the SPA.
74One of the most obvious features of Rule 20, emphasized by the Supreme Court of Canada in Hryniak v. Mauldin, 2014 SCC 7, [2014] S.C.J. No. 7, is that a motion for summary judgment must be granted by the court whenever there is no genuine issue requiring a trial. The court defined the circumstance in which there will be no genuine issue requiring a trial as when the judge is able to reach a fair and just determination on the merits where the summary judgment procedure: (1) allows the judge to make the necessary findings of fact; (2) allows the judge to apply the law to the facts; and (3) is a proportionate, more expeditious and less expense means to achieve a just result.
75The parties are in agreement that the calculation of the revenue milestone for the release of tranche two starts with the revenues shown by the audited financial statement for the period ending November 30, 2016. They agree with the notional removal of the amounts paid by parents and the regional fee subsidies related to the Charolais location for the purpose of any calculation under paragraph 2.7 (b) as it was added to the business after the closing date.
76After the Charolais entries are removed, the total revenues, as adjusted, fall short of the revenue milestone by $26,422.92. However, there is evidence from Jonathon Black that he has added a change in security deposits in the amount of $42,289.22, a change in deferred revenue in the amount of $17,551.99 and subtracted staff child care fees of $23,536.30 as adjustments. These adjustments result in revenues exceeding the revenue target of $5,514,911 under paragraph 2.7 (b) by $9,881.99.
77The accounting in Schedule C to the SPA requires evidence from the parties and various sources, including Jonathon Black, to determine whether those adjustments Lee-Anne Arkell instructed him to make to the revenue calculation for November 30, 2016, were proper and in accordance with generally accepted accounting principles. The applicability of those accounting principles, and how the calculation should be made is subject to expert evidence, including the opinion of Paul Mandel expressed in his report, and any expert that the plaintiffs engage. The court cannot make a determination on if and how generally accepted accounting principles should be applied to the analysis without this evidence. This analysis includes, but is not limited to the question of whether those adjustments requested by Ms. Arkell are properly made for the purpose of the calculation of revenue for the three months ending November 30, 2016, or if they are properly applied at the year-end for the corporation.
78I also have insufficient evidence before me to determine how the parties are to make “likewise adjustments” pursuant to Schedule “C” from the same time period of the preceding year.
79This leads me to conclude that I do not have the evidence required to make the necessary findings of fact on which to apply the law, and to adjudicate entitlement issues under paragraph 2.7 (b) of the SPA on the merits. Accordingly, I find there is a genuine issue requiring a trial with respect to the calculation of what revenue was earned by PCCCI as of November 30, 2016, and whether it fell short of, or exceeded the revenue milestone the parties agreed upon for the release of the second tranche of the revenue escrow amount.
80Given my involvement through these motions, I consider it appropriate and in keeping with the direction of the Supreme Court in Hryniak that I remain seized for the purpose of adjudicating the balance of the action. I am therefore invoking the enhanced fact finding powers given to a motions judge under Rule 20.04 (2.1), and ordering the parties to give oral evidence at a mini-trial on the terms and directions set out below to exercise those powers.
Conclusion and Orders
81Accordingly, I make the following orders:
The Brightpath motion for a stay of the action is dismissed.
Partial summary judgment on the plaintiffs’ motion is granted for an order that Brightpath Kids Corp. provide the written notice required by the Revenue Escrow Agreement to authorize and direct the Escrow Agent to release $875,000 to the plaintiffs as Vendors from the revenue escrow amount pursuant to paragraph 2.7(a) of the Share Purchase Agreement.
An order directing a trial of the action as it relates to the entitlement of either party to those funds in escrow payable under paragraph 2.7 (b) of the Share Purchase Agreement, to be heard by me on a date to be fixed by the trial coordinator at Brampton.
The motion brought by Brightpath for an order striking those parts of the examination of Lee-Anne Arkell on June 16, 2017, where her counsel re-examined her in the form of a cross-examination, or on issues that were not raised in the cross-examination by counsel for Brightpath, is granted.
The motion of Brightpath seeking leave to file the affidavit of Paul Mandel sworn on May 2, 2017, with the report of Collins Barrow Toronto Valuations Inc. containing the expert opinion of himself and Craig Ross attached as exhibit “A”, is granted.
An order under Rule 20.05(2) that:
(a) The parties shall file a statement setting out what material facts are not in dispute, by November 30, 2017;
(b) that the affidavits and any other evidence filed on the plaintiffs motion and any cross-examinations on those affidavits may be used at trial in the same manner as an examination for discovery;
(c) that the oral examination of any witness at trial be limited to 60 minutes in chief and 60 minutes in cross-examination;
(d) that any experts engaged by or on behalf of the parties in relation to the action meet on a without prejudice basis in order to identify the issues on which the experts agree and the issues on which they do not agree, to attempt to clarify and resolve any issues that are the subject of disagreement, and to prepare a joint statement setting out the areas of agreement and any areas of disagreement and the reasons for it;
(e) that each party deliver a concise summary of that party’s opening statement at least seven days before trial; and
(f) at the request of any party, a conference call or court attendance in person shall be arranged to speak to any trial management issues remaining, and to set a trial date.
82In view of the result achieved on all motions to date, costs are reserved to the trial so ordered.
Emery J.
Released: November 2, 2017