CITATION: 1802248 Ontario Ltd. v. 2487048 Ontario Limited, 2017 ONSC 7041

COURT FILE NO.: 16-0813-SR

DATE: 2017-11-27

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

1802248 Ontario Ltd. c.o.b. as Anytime Fitness, Ryan Johnson and Tatiana Johnson

Plaintiffs

– and –

2487048 Ontario Limited, Mike Allen, Clark Kent and Orion Fitness Inc.

Defendants

Joshua A. Valler for the Plaintiffs

Edward G. Spong for the Defendants

HEARD: November 2, 2017

Ruling on summary judgment motion

Boswell J.

[1] The plaintiffs operated a fitness club. They sold it to the numbered company defendant (“248”). They didn’t use a lawyer. That was probably a bad idea. They haven’t been paid anything in connection with the sale, despite the fact that the defendants have been operating the club since November 1, 2015. They sue for the compensation they say is due to them. In their view there are no live issues that require a trial to determine, so they move for summary judgment on their claim.

[2] The dispute requires the court to answer three questions:

(a) What is the proper interpretation of the payment provision of the Asset Purchase Agreement (“APA”) that formed the basis of the sale?

(b) What amount, if any, is owed by 248 to the plaintiffs for rent paid by the plaintiffs on account of the business premises after November 1, 2015?

(c) Do the personal defendants have any liability for any part of the plaintiffs’ claims?

[3] Whether the court is able to answer any given question depends on whether there is a genuine issue requiring a trial in relation to that question.

[4] Before I examine the questions one-by-one, I will provide the factual context in which the dispute arose, followed by a brief review of the legal principles that guide the disposition of the motion.

THE FACTS

The Franchise

[5] Ryan and Tatiana Johnson purchased a franchise of Anytime Fitness and opened their club in Bradford, Ontario in March 2010. They incorporated a numbered company (“180”) to operate it.

The Lease

[6] 180 entered into a lease agreement for space in a commercial plaza on the main thoroughfare through town. The lease was for just over 10 years, with a termination date of June 30, 2020. The Johnsons were required to personally guarantee the lease. The monthly rent payable in the first five years of the lease was comprised of a basic rent of $5,666.67 plus the tenant’s proportionate share of operating costs and realty taxes. The basic rent rose to $6,000 per month in year six and after.

The Small Business Loan

[7] The Johnsons made significant improvements to the leased premises and acquired training equipment commensurate with a fitness club. They funded the improvements and equipment acquisition by way of a business improvement loan advanced by the Bank of Nova Scotia under the provisions of the Small Business Financing Act, S.C. 1998, c. 36. The loan was in two parts: $91,800 for leasehold improvements; and $90,726.81 for equipment.

The Rent Deferment Agreement

[8] In March 2015 the plaintiffs entered into an agreement with their landlord that allowed them to defer a portion of their monthly rent. In effect, the agreement provided for a reduction in the basic monthly rent equal to $2,460 per month. The term of the agreement was April 1, 2015 to March 31, 2016.

[9] The deferment agreement provided that if the plaintiffs paid all of their rent owing during the term of the agreement, in a timely way, the landlord would waive the deferred amount altogether. On the other hand, if the plaintiffs defaulted in the payment of their rent under the deferment agreement, the rent would revert to the original rent provided for in the lease and the deferred amount would become due and payable.

The Asset Purchase Agreement

[10] The plaintiffs entered into an agreement with 248 on October 30, 2015 – the APA – selling all of the assets of their Anytime Fitness franchise to 248. Of particular interest to this litigation is section 3 of the APA which provided as follows:

A. Purchase Price: The purchase price for the Assets and the Assigned Contracts as well, (“Purchase Price”) shall be (i) the sum of $1.00 plus (ii) the total of 2 loans/lease with respect to certain Equipment being assumed by the Buyer in the amount of approximately Fifty Eight Thousand Dollars ($58,000), with the exact amount to be determined by a current statement to be provided by the Seller at the Time of Closing. The purchase price shall be paid as follows:

(i) The sum of $1.00 shall be paid on closing;

(ii) The balance of the purchase price shall be paid by way of a promissory note, which promissory note will reflect the loan/lease payments being assumed. The payment of the monthly payments under the promissory note may be made to the seller or alternatively to the lender/lessor in the sole discretion of the Buyer.

[11] At October 31, 2015, the amounts owing to the Bank of Nova Scotia were $40,114.19 for the leasehold improvements loan and $18,582.87 for the equipment acquisition loan. The total was $58,697.06.

[12] The plaintiffs paid the loans out in full by the end of 2015.

The Lease Assignment

[13] On November 12, 2015 the plaintiffs and 248 entered into an Assignment and Assumption Agreement and Consent to Assignment of Lease with the landlord (the “Assignment Agreement”). The agreement had an effective date of November 1, 2015, which was the date that 248 went into possession of the Anytime Fitness premises.

[14] The Assignment Agreement provided, amongst other things, that:

(a) The tenant’s rights and obligations under the lease were assigned to 248. 180 remained jointly and severally liable, however, for the obligations of the tenant for the remainder of the term of the lease;

(b) The payment of rent for the months of November 2015, December 2015 and January 2016 was restructured. It was fixed at $27,818.34, including basic and additional rent that was otherwise payable under the deferment agreement. It was to be paid over six months in equal instalments of $4,636.39 commencing November 1, 2015;

(c) The Johnsons, who guaranteed the obligations of 180 under the lease, were to be released from their personal liability, provided the six monthly payments were made in a timely way by April 2016. Orion Fitness Inc. – another company controlled by the principals of 248 – was to assume the Johnsons’ place as an indemnifier (guarantor) under the lease;

(d) In the event of a default in payment of the amounts referenced in para. (b), the full balance owing under the deferment agreement would become due and payable and the Johnsons would remain personally responsible for that sum.

The Statement of Adjustments

[15] Had lawyers been involved in this transaction, I suspect it may have been conducted differently. There are some strange aspects to the way this deal progressed. Most peculiar is the fact that there was no particular fixed closing date. It seems the transaction rolled out incrementally.

[16] The APA was signed on October 30, 2015 and 248 went into possession of the business virtually immediately. At the time they took possession, the landlord had not yet consented to the assignment of the lease. The plaintiffs had not received a penny for the assets of the business and the secured promissory note they were to receive had not yet even been drafted.

[17] Essentially, 248 began to operate the business as of November 1, 2015 – and to realize an income stream from it – while the plaintiffs remained liable for a number of the ongoing expenses.

[18] Tatiana Johnson deposed in an affidavit that she understood that the various costs she and Ryan Johnson were incurring in relation to the operation of the business after November 1, 2015 would be reflected in a Statement of Adjustments that would be completed on the date of the execution of the assignment of the lease.

[19] Her evidence gets a little difficult to understand after this point. She deposed that there was an agreement between the plaintiffs and the defendants that 180 would remit payment to the landlord for the months of November and December 2015 and the defendants would remit payment for the month of January and thereafter. This agreement does not appear to have been reduced to writing. Moreover, I am not clear on how this arrangement was to be reflected in the six equal instalments to be paid to the landlord between November 2015 and April 2016.

[20] In any event, Ms. Johnson went on to depose that she understood that any rent the plaintiffs paid after November 1, 2015 would be reflected in the Statement of Adjustments. Without a particular closing date, it is unclear when accounts were to be adjusted.

[21] According to Ms. Johnson, the Statement of Adjustments went through a number of iterations until it reached its final form on December 8, 2015. As of that date, it reflected a sum of $14,941.04 as owing from 248 to 180.

[22] The adjustments are not entirely clear to me. For instance, the statement makes reference to a rental deposit of $6,300 which should have been a credit to the vendor, but it was not included in the calculation for some reason. There is a credit to 180 for the payment of rent in December 2015, in an amount equal to two of the six instalments provided for in the Assignment Agreement. This entry is consistent with Ms. Johnson’s evidence that any rent was to be the ultimate responsibility of 248 after November 1, 2015. On the other hand, a short schedule attached to the Statement of Adjustments appears to reflect that rent for November and December 2015 was to be paid by the plaintiffs.

[23] On December 31, 2015, 248 provided 180 with a cheque in the amount of $14,941.04 in accordance with the Statement of Adjustments prepared by the Johnsons. It is common ground that 248 asked, however, that the cheque not be cashed immediately. According to Ms. Johnson, the reason was because 248 was awaiting proof that the Scotiabank loans to be assumed by 248 actually related to the operations of Anytime Fitness. According to Mr. Kent, however, he asked that the cheque not be cashed until he had a chance to review the Statement of Adjustments with his lawyer.

[24] Mr. Kent deposed that he received advice from his lawyer that the adjustments were not justified under the agreement. He did not elaborate on why that was, nor did he give any indication as to what items on the Statement he agreed with and what items he disputed.

[25] Mr. Kent went on to depose that it was the responsibility of the plaintiffs to pay rent for the months of November 2015 through to and including January 2016 under the Assignment Agreement. He did not explain why that was, other than to say, “it was the intention of the parties that the vendor would pay three months’ rent and the purchaser would be responsible for the balance of the lease term.” No such provision appears in the APA or the Assignment Agreement.

The Default Under the Lease

[26] 248 put a stop payment on its cheque for $14,941.04. It paid no rent for the months of November 2015 through January 2016. It did not execute a promissory note as required by the APA, nor did it make any payments on the loans referenced in the APA. In other words, it paid nothing to the plaintiffs for its acquisition of Anytime Fitness.

[27] Tatiana Johnson said the plaintiffs provided the landlord with six post-dated cheques. Two were honoured, but they did not have the funds to honour the third or subsequent cheques. The lease agreement went into default in January 2016. In the result, the landlord triggered the default clause in the deferment agreement.

[28] The landlord subsequently commenced a claim against the Johnsons on their guarantee. The Johnsons settled the claim for the rental arrears plus $10,000 in costs, for a total of $52,259.25.

GENERAL POSITIONS OF THE PARTIES

[29] I will elaborate on the parties’ positions with respect to each of the live issues as I address them. But their positions generally may be briefly stated.

[30] The plaintiffs seek summary judgment for the amounts they remitted to Scotiabank to pay out the two business loans, totalling just over $58,000, plus a franchise transfer fee of $2,500, plus the amount they paid to settle the landlord’s claim.

[31] The plaintiffs assert that they divested themselves of the fitness club by way a deal that essentially involved the purchaser taking over all of their financial obligations in relation to the business. They say the APA is clear that 248 was to assume the two loans totalling roughly $58,000. They say it is equally clear that 248 should be responsible for the rent owing under the lease from and after the date that they took occupation. They submit that 248 has breached the APA by paying nothing to them.

[32] The plaintiffs seek judgment against 248, but also against Mike Allen and Clark Kent personally. The route to personal liability is based on the allegation that the personal defendants have committed the tort of conversion. The plaintiffs allege that the personal defendants utilized an impecunious corporate entity to acquire their assets, knowing that the company had no money and never having any real intention of paying for those assets. The plaintiffs assert that the facts of this case justify the imposition of liability on the personal defendants as the operating minds of 248.

[33] The defendant, 248, contends that the purchase price stipulated in the APA was restricted to the assumption of the equipment loan only. It accepts that it is liable for the sum of $18,582.87, but denies that it ever agreed to assume responsibility for the leasehold improvement loan.

[34] 248 further contends that the plaintiffs assumed responsibility for the payment of rent for the months of November 2015 through January 2016. They have no claim against 248, or any of the defendants, for any amounts they paid in rent to the landlord for that period. Moreover, 248 says that the lump sum triggered under the deferment agreement is not their responsibility. Even if 248 is found to have been in breach of the APA, the claw-back of deferred rent was not a foreseeable consequence of the breach and, in the result, not recoverable as damages against 248.

[35] Finally, the defendants strongly oppose the assertion that there is a basis to find liability against the personal defendants for any reason. The personal defendants were not parties to any of the agreements in dispute. There is no evidence, they argue, that the personal defendants, or either of them, made any misrepresentations to the plaintiffs, or acted in any way that would trigger personal liability.

THE GOVERNING PRINCIPLES

Summary Judgment

[36] The Rules of Civil Procedure are organized around a principle, expressed in Rule 1.04, that civil cases in our courts should be determined justly and in the most expeditious and cost-efficient way possible. Guided by this organizing principle, the Rules provide the court with mechanisms to resolve actions summarily, where it is in the interests of justice to do so.

[37] The plaintiffs’ motion is brought pursuant to one of those mechanisms, Rule 20, which permits a plaintiff to move for summary judgment on all or part of its claim following the delivery of a statement of defence.

[38] Pursuant to Rule 20.04(2)(a), the court is directed to grant summary judgment if it is satisfied that there is no genuine issue with respect to a claim that requires a trial to resolve.

[39] Rule 20 has been around, in one iteration or another, for decades. In 2010 it underwent a revision that enhanced the powers of the motion judge to make findings of fact on contested evidence. The obvious purpose was to expand the ambit of cases where summary judgment may be an available mechanism for early and efficient resolution of an action.

[40] The court’s enhanced powers are set out in Rule 20.04(2.1) which provides as follows:

In determining under clause (2)(a) whether there is a genuine issue requiring a trial, the court shall consider the evidence submitted by the parties and, if the determination is being made by a judge, the judge may exercise any of the following powers for the purpose, unless it is in the interest of justice for such powers to be exercised only at a trial:

1. Weighing the evidence.

2. Evaluating the credibility of a deponent.

3. Drawing any reasonable inference from the evidence.

[41] Rule 20 was recently considered by the Supreme Court in Hryniak v. Mauldin, 2014 SCC 7. In Hryniak the court expressly confirmed that the ability to grant summary judgment is an important tool; one that significantly enhances the court’s ability to provide timely and cost-effective justice to litigants.

[42] Hryniak instructs that Rule 20.04(2) should be applied in two stages.

[43] First, the motions judge must determine if there is a genuine issue requiring a trial based only on the evidence filed on the motion, without resort to the enhanced fact-finding powers described in Rule 20.04(2.1).

[44] No genuine issue requiring a trial will exist if the evidence permits the motions judge to fairly and justly adjudicate the dispute in a timely, affordable and proportionate manner. If no genuine issue requiring a trial exists, judgment should be rendered accordingly.

[45] If the motions judge concludes at the first stage that a genuine issue for trial exists, then stage two is triggered. At stage two, the motions judge is directed to consider whether the need for a trial may be avoided by resort to the enhanced fact-finding powers set out in Rule 20.04(2.1). The motions judge may utilize those powers, in his or her discretion, unless doing so would be contrary to the interests of justice.

[46] As I noted, Rule 20 has been around for a long time. A significant body of case law developed under older versions of the rule. Some of that case law provided guidance as to the obligations of parties engaged in a Rule 20 motion. A good deal of it remains good law. As Diamond J. recently observed in Penretail Management Ltd. v. 2380462 Ontario Inc. (o/a Bolton Health Centre), 2016 ONSC 600, at para 10:

…The motions judge must still take a "hard look" at the evidence to determine whether it raises a genuine issue requiring a trial, and as a result each party must still put its "best foot forward" and submit cogent and compelling evidence to support or oppose the relief sought. A moving party has both a legal and evidentiary onus to satisfy the Court that there is no genuine issue requiring a trial. It is the moving party's obligation to present a record that can enable the Court to avail itself of the enhanced powers under Rule 20.04 if the record warrants the exercise of such discretion.

Contract Interpretation

[47] The leading case on the proper approach to be taken in contract interpretation is Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53. In Sattva, the Supreme Court observed that modern courts take a practical, common-sense approach and eschew technical rules of construction.” The central concern is to identify the objective intent of the parties. To do so, the court must review the contract “as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract.” (Para. 47).

[48] Sattva is consistent with the Court of Appeal’s 2007 ruling in Ventas, Inc. et.al. v. Sunrise Senior Living Real Estate Investment Trust et. al., (2007), 2007 ONCA 205, 85 O.R. (3d) 254, at page 10. In Ventas the Court of Appeal gave the following directions as to how a court should approach the interpretation of a commercial agreement. Specifically, a contract should be interpreted:

(a) as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;

(b) by determining the intention of the parties in accordance with the language they have used in the written document and based upon the “cardinal presumption” that they have intended to say what they have said;

(c) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties; and,

(d) in a fashion that accords with sound commercial principles and good business sense, and that avoids a commercial absurdity.

The Assessment of Damages

[49] Damages payable as a result of a contractual breach are calculated according to the well-established rule in Hadley v. Baxendale, (1854) 9 Exch 341. Specifically, the measure of damages is the amount required to put the non-breaching party in the position it would have been in had the contract been performed as agreed: see also BG Checo International Ltd. v. British Columbia Hydro & Power Authority, 1993 CanLII 145 (SCC), [1993] 1 S.C.R. 12, at para. 12.

[50] Having said that, there are limits to a plaintiff’s recoverable losses. In Hadley v. Baxendale the English Court of Exchequer attempted to define those limits by use of the concept of foreseeability. The value of the performance promised is generally limited to the damages that would fairly and reasonably be considered to arise naturally from the breach or which may reasonably have been in the contemplation of the parties themselves. In other words, the damages sought must have either:

(a) arisen naturally, according to the usual course of things; or

(b) been in the contemplation of both parties at the time they made the contract.

[51] The first test is objective; the second subjective.

[52] Cory J.A., as he then was, phrased the objective test as follows, in Canlin Ltd. v. Thiokol Fibres Canada Ltd. (1983), 1983 CanLII 1603 (ON CA), 22 B.L.R. 193 (Ont. C.A.), at para. 30:

[A]re the consequences of the breach of contract such that a reasonable man at the time of the making of the contract would contemplate them as being liable to result or to be a serious possibility?

[53] According to the first (objective) prong of the rule in Hadley v. Baxendale, damages that extend beyond the normal, foreseeable consequences of a breach are generally considered too remote to be recoverable.

[54] There may, however, be special circumstances present at the time the contract was formed that justify more extensive damages. This is where the second (subjective) prong of the test in Hadley v. Baxendale applies. Where the likelihood of otherwise unforeseeable damages is actually known to or within the contemplation of the parties when they entered the contract, they may be recoverable in the result of a breach.

Piercing the Corporate Veil

[55] A well-settled and cornerstone principle of corporate law is that a corporation is a separate legal entity: see Salomon v. Salomon & Co. Ltd., [1897] A.C. 22 (H.L.). It flows from this principle that shareholders, officers, directors and employees are generally insulated from liability for acts of the corporation. Like most legal principles, however, this one is not inviolable.

[56] Sometimes exceptional circumstances will be present, such that a strict application of the principles from Salomon would be “flagrantly unjust”. In those cases, the court may look beyond the corporate entity and impose liability on those involved in its operation: see 642947 Ontario Ltd. v. Fleischer, 2001 CanLII 8623 (ON CA), 2001 CarswellOnt 4296, [2001] O.J. No. 4771.

[57] In this case 248 appears to be a closely held corporation, created by the personal defendants to operate the Anytime Fitness business. In these circumstances, the court will typically ask two questions: (1) whether the personal defendant controls the corporation; and (2) whether that control has been exercised for a fraudulent or improper purpose: see Terra Farm Ltd. v. Stud Farm Inc. 2010 ONCA 422 at para. 34.

[58] The basis for piercing a corporate veil was put succinctly by Justice Sharpe in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 1996 CanLII 7979 (ON SC), 28 O.R. (3d) 423 (Ont. Gen. Div.), at 433-434, affirmed [1997] O.J. No. 3754 (Ont. C.A.):

[C]ourts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct.

[59] It is of considerable note that the Supreme Court recently recognized an organizing principle of good faith that informs a variety of specific doctrines governing contractual performance: Bhasin v. Hrynew, 2014 SCC 71. Simply put, this principle provides that parties must generally “perform their contractual duties honestly and reasonably and not capriciously or arbitrarily.” (Bhasin, para. 63).

[60] In addition, the Supreme Court established that there is a general duty of honesty in contractual performance. As Cromwell J. held, “This means simply that parties must not lie or knowingly mislead each other about matters directly linked to the performance of the contract.” (Bhasin, para. 73).

[61] In my view, any argument about imposing personal liability on officers or directors for a corporation’s breach of contract must now be considered in the context of the organizing principle of good faith.

DISCUSSION

[62] Having set out the applicable legal framework, I will consider each of the three questions raised on the motion in turn.

Question One: What is the proper interpretation of the payment provision in the Asset Purchase Agreement?

[63] The APA must be interpreted in the context of the circumstances that existed when it was formed. The plaintiffs were getting out of the fitness club business. The defendants were getting into it. The defendants were getting a turnkey operation with no money up front. The plaintiffs were essentially looking for a clean break from the business.

[64] The APA referenced two loans/leases, totaling roughly $58,000. The reference to leases is puzzling because there were none. But that said, the defendants could not have been under any misapprehension about what they were agreeing to do. They agreed to assume two loans with a total outstanding balance of roughly $58,000.

[65] On October 1, 2015, Ryan Johnson emailed Clark Kent and advised him as follows:

As requested, our 2 Small Business loans are the following:

Leasehold Improvements, Balance 42,074.48, payments 771.43 mth

Equipment, Balance 19,675.96, payments are 1093.04 mth

[66] Mr. Kent’s only response, sent October 1, 2015 as well, was to ask for the landlord’s contact information.

[67] The dispute arises, apparently, because the APA refers to “the total of 2 loans/lease with respect to certain Equipment being assumed by the Buyer”. The defendants’ counsel contends that this provision is patently clear on its face and that it inexorably leads to the conclusion that only the equipment loan of some $18,000 was being assumed by the defendants. I disagree.

[68] The reference to certain Equipment being purchased does inject the provision with some ambiguity. But considering the circumstances, the ambiguity is more apparent than real. In my view, the defendants are merely attempting to take advantage of some poor draftsmanship.

[69] The APA refers to two loans. It identifies the total payable at $58,000. The defendants, who were in possession of information breaking down the $58,000 total between the two loans, clearly would have understood the amount they were agreeing to pay. Moreover, in the overall context of the agreement, they could not reasonably assert that they were walking into a turnkey operation, taking over an equipment loan and leaving the plaintiffs to pay for the leasehold improvements loan without any revenue stream to draw from.

[70] This is an easy decision. There is no genuine issue engaged by this first question that requires a trial. It can be resolved without resort to the court’s enhanced fact-finding powers. The APA obliges 248 to assume responsibility for two loans: the leasehold improvements loan and the equipment loan, totaling $58,697.06. In my view, that is the only commercially reasonable interpretation available.

Question Two: What amount, if any, does 248 owe to the plaintiffs for rent paid by the plaintiffs on account of the business premises after November 1, 2015?

[71] This question is more difficult than the first one to answer. There are really two questions. First, who is liable for the rent for the period November 1, 2015 through to January 31, 2016? Second, having found that 248 has breached the APA by not assuming the two Small Business Loans, was it reasonably foreseeable that the plaintiffs’ damages would include the claw-back of all deferred rent?

[72] The first question is more difficult to answer than it may seem at first blush. One might instinctively take the view that 248 should be responsible for the rent from and after the date it took occupation of the premises. In my view, that finding would be consistent with the language and intent of the APA.

[73] But the evidentiary record makes the determination a little trickier. Mr. Kent deposed that the parties agreed that the plaintiffs would pay the rent for November 2015 through January 2016 and then 248 would pay from February 1, 2016 onwards. There is no support for Mr. Kent’s position in the APA or the Assignment Agreement. Moreover, it seems to run afoul of common sense.

[74] But Tatiana Johnson also deposed that she and Mr. Johnson agreed to remit rent to the landlord for at least the months of November and December 2015. She said the intent was to allow 248 an opportunity to get established in the business and to generate revenue before it had to start making rent payments. She further said that the Johnsons’ expectation was that the amounts they paid in rent would be adjusted for in the Statement of Adjustments.

[75] The Statement of Adjustments did contain a credit to the Johnsons for the December 2015 rent in the amount of $9,272.78. It also contained a short schedule which indicates that the Johnsons are to be responsible for the rent for November 2015 and January 2016, while the defendants are to be responsible for the rent for December 2015.

[76] I frankly lack sufficient evidence upon which to make a determination as to what the specific agreement was in relation to the rent for the three month period in issue. There is nothing in the APA or the Assignment agreement that documents any kind of split of the rent between the plaintiffs and defendants. But it does appear that they may have had an oral side agreement as to how the rent was to be paid in that period.

[77] I am unable to resolve this issue even resorting to my enhanced fact-finding powers because the evidentiary record is simply not sufficient. In the result, it will regrettably be necessary to have a mini trial of the issue of who was responsible, as between the plaintiffs and defendants, for the payment of the rent during the period November 1, 2015 to January 31, 2016.

[78] I will be seized of the issue. The parties may arrange a date for trial of the issue before me through the trial co-ordinators’ office. Tatiana’s affidavit sworn September 6, 2016 shall be her evidence in chief. Clark Kent’s affidavit sworn October 14, 2016 will be his evidence in chief. Each side shall have a maximum of 15 minutes to amplify their evidence in chief and 30 minutes to cross-examine the opposing witness.

[79] In terms of the issue of foreseeability, I find as follows:

(a) 248 breached the APA by failing to make any payments on account of the assumed business loans. Even though they did not dispute responsibility for at least the equipment loan, they paid nothing for it;

(b) The principals of 248 were aware that they did not make rental payments to the landlord in November, December or January. On their evidence their expectation what that that plaintiffs were making those payments;

(c) It was reasonably foreseeable, in my view, that if 248 defaulted on its obligations under the APA, the plaintiffs would in turn default on their obligations to the landlord and/or their lender;

(d) The principals of 248 executed the Assignment Agreement on or about November 12, 2015. There were numerous provisions in that agreement that referred to the deferred rent. 248 must have been aware, upon reading that agreement, that a default in the payment of rent would result in all of the deferred rent becoming immediately due and payable by the Johnsons;

(e) In the circumstances, 248 would reasonably have contemplated the coming due of all deferred rent as a likely result in the event of a breach of their obligations under the APA.

[80] In the result, I find that 248 is liable to the plaintiffs for the amount required to settle the landlord’s claim for deferred rent. There is no triable issue with respect to the liability of 248 for this sum.

[81] I am satisfied that the plaintiffs reasonably settled the landlord’s claim. The defendants argue that the costs paid - $10,000 – were unreasonable. I do not have a sufficient evidentiary record to persuade me that they were not. There is nothing prima facie unreasonable about the number in my view.

[82] Liability – as between the plaintiffs and 248 – for the rent payable for the months of November 2015, December 2015 and January 2016 remains a live issue. That rent totals $27,818.34. The total paid to the landlord on its claim was $52,259.25. Deducting the rent that remains in issue, I find 248 liable to the plaintiffs for $24,440.91 on account of deferred rent and costs payable as a foreseeable result of the breach by 248 of the payment provisions of the APA.

Question Three: Do the personal defendants have any liability for any part of the plaintiffs’ claims?

[83] 248 is a closely-held corporation, dominated by the two personal defendants. Through the use of that corporation, they have gone into possession of the Bradford Anytime Fitness location. They paid no rent for three months, leaving the vendors in a precarious financial position. More importantly, they have paid nothing on account of the purchase price. They have, it would appear, taken the position that they have a natural entitlement to take someone else’s business for free: the equipment, the leasehold improvements, the memberships and the goodwill, all theirs for the taking.

[84] They provided a cheque for the closing adjustments, which they promptly stopped payment on, without any meaningful explanation. They claim that their lawyer advised them that the adjustments were not justified, but they have not identified that lawyer, nor indicated what adjustments were not justified or why. They have not proposed a revised statement of adjustments.

[85] During oral argument, their lawyer conceded that, based on what he called the plain reading of the APA, 248 clearly owed the plaintiffs the balance of the equipment loan. He offered no explanation for why a liability that is without doubt has not been paid.

[86] The law of contracts respects private ordering. It respects the right of parties to act in their own self-interest. It respects the art of the deal and supports the notion that parties are entitled to secure the best deal that they can for themselves. But, as Bhasin makes clear, it does not respect dishonesty or capricious dealings. As Cromwell J. described it, “deceitful conduct flies in the face of the expectations of the parties”. (Bhasin, para. 60).

[87] The plaintiffs’ counsel characterized the conduct of the personal defendants as amounting to the tort of conversion. Tortious conduct on the part of the directors or officers of a corporation is another route to personal liability.

[88] The difficulty I have with this aspect of the plaintiffs’ claim relates to the inadequacy of their pleadings. Nowhere in the pleadings is the tort of conversion mentioned. Nowhere is there an assertion of a breach of the duty of honest dealing. In fact, the claim is silent in terms of any alleged conduct on the part of the individual defendants that would support a finding of personal liability.

[89] As a matter of procedural fairness, parties are entitled to insist that cases be disposed of on the basis of issues raised in the pleadings. As the Court of Appeal held in 460635 Ontario Ltd. v. 1002953 Ontario Inc., 1999 CanLII 789 (ON CA), 1999 CarswellOnt 3428 at para. 9, “A finding of liability and resulting damages against a defendant on a basis that was not pleaded in the statement of claim cannot stand. It deprives the defendant of an opportunity to address that issue in the evidence at trial.”

[90] In the absence of a pleaded allegation of misconduct on the part of the principals of 248, I am unable to grant judgment against them. This part of the motion fails. The plaintiffs may, of course, elect to amend their pleadings and, should they do so, they may reassert this issue at the time that the mini trial is conducted in accordance with the process I described in paragraph 78 above.

CONCLUSIONS

[91] In the result:

(a) The plaintiffs shall have judgment against 248 in the amount of $85,637.97[^1];

(b) The issue of liability for the rent during the period November 2015 to January 2016 requires a mini trial to resolve and will tried in accordance with the procedure I described in para. 78 above;

(c) The issue of personal liability of Mr. Kent and Mr. Allen shall be adjourned to the mini trial; and,

(d) If the parties are unable to agree on the issues of pre-judgment interest and costs, they may make written submissions, not to exceed three pages in length (excluding Cost Outlines) on the following turnaround. The plaintiffs shall serve and file their submissions by December 15, 2017 and the defendants shall serve and file their submissions by January 5, 2018. All submissions shall be filed electronically with my assistant, Diane Massey, by email to diane.massey@ontario.ca.

Boswell J.

Released: November 27, 2017

[^1]: The judgment is made up of the value of the two small business loans ($58,697.06), the amount paid on the landlord’s claim, not including the rent for November 2015 to January 2016 ($24,440.91) and the franchise transfer fee of $2,500