CITATION: Brompton Corp. v. Tuckamore Holdings LP, 2017 ONSC 775
COURT FILE NO.: CV-16-11299-00CL
DATE: 20170201
ONTARIO
SUPERIOR COURT OF JUSTICE
(Commercial List)
BETWEEN:
BROMPTON CORP.
Plaintiff
– and –
TUCKAMORE HOLDINGS LP, TUCKAMORE CAPITAL MANAGEMENT INC., TUCKAMORE GP INC. and TUCKAMORE GP TRUST
Defendants
Christopher P. Naudie, Al-Nawaz Nanji, Sonja Pavic and Stephanie Henry, for the Plaintiff
Jennifer Teskey and Kristine Spence, for the Defendants
HEARD: August 17 and September 6, 2016
HAINEY J.
Introduction
[1] Brompton Corp. (“Brompton”) moves for summary judgment seeking indemnification by the defendant, Tuckamore Holdings LP (“Tuckamore”) for a percentage of taxes, interest, penalties and costs resulting from a review by the Canada Revenue Agency (“CRA”) of the use of tax pools by Brompton, a business they once both owned.
Facts
[2] Tuckamore (formerly “Newport” and referred to hereinafter as “Tuckamore”) has interests in other partnerships and in a variety of businesses. Brompton is an investment funds manager.
[3] In April 2008, Brompton had $48.8 million in tax pools which it planned to use to offset future taxable income. Pursuant to an Acquisition Agreement, Tuckamore acquired a 40.94% interest in Brompton.
[4] Under the terms of the Acquisition Agreement, Brompton gave Tuckamore certain representations and warranties. Specifically, in relation to the tax pools, Tuckamore received the following representation and warranty from Brompton under s. 5.1(l) of the agreement:
5.1 Representations and Warranties of the Purchaser.
The Purchaser represents and warrants as follows to the Vendor and acknowledges and confirms that the Vendor is relying on such representations and warranties in connection with the sale by the Vendor of the Purchased Securities:
(l) Taxes. Immediately prior to Closing and after giving effect to the transactions contemplated by this Agreement, the Purchaser will have tax pools as described in the Purchaser Disclosure Letter.
[5] On February 26, 2008, Tuckamore received the Purchaser Disclosure Letter from Brompton. The letter stated that “All of the tax losses, deductions and credits referred to in Section 5.1(1) are set forth in Exhibit “A” to this Purchaser Disclosure Letter.” Exhibit “A” itemized all of the tax pools specifying their amounts and expiry dates.
[6] Section 10.2(b) of the Acquisition Agreement provided that Brompton would indemnify Tuckamore in relation to “any breach or inaccuracy of any representation or warranty given by the Purchaser.” There is no dispute that the amounts and expiry dates of the tax pools set out in Exhibit “A” to the Purchaser Disclosure Letter were accurate.
[7] Tuckamore owned its shares in Brompton from April 2008 to September 2011. During this period, it received about $3.5 million in dividends from Brompton.
[8] In February 2010, Tuckamore decided to sell its shares in Brompton. Following a transaction between Brompton and a third party, Tuckamore signed a contract on July 5, 2011 (the “Share Put Agreement”) pursuant to which Tuckamore could require BGL, a company related to Brompton, to buy all of its shares in Brompton (the “Put Option”). In ss. 5.1(c) and 5.3(c) of the Share Put Agreement, Tuckamore provided the following indemnity to Brompton:
5.1 Indemnification by Newport
(c) If the Put Shares are sold to BGL and/or any company or other entity owned by a director (or a related party of such director) of Brompton, Newport shall indemnify and save harmless Brompton from and against 40.94% of (i) any taxes assessed against Brompton under the Income Tax Act (Canada) and any taxes assessed against Brompton under the analogous provisions of any provincial income tax statute; and (ii) any interest or penalties imposed by any taxation authority in respect of the assessment of taxes (collectively, “Income Taxes”), to the extent that such Income Taxes are assessed in respect of the period starting when Newport became a Shareholder and ending on the Closing Date. If Newport pays an amount to Brompton pursuant to this Section 5.1(c) and Brompton subsequently receives or is granted a refund of any Income Tax described above, Brompton shall promptly after receipt of such refund reimburse Newport with its pro-rata share of the amount of the refund, whether or not such refund was received by Brompton in cash.
5.3 Indemnification Procedures
(c) Upon receipt of written notice of a Party or Parties seeking indemnification hereunder, the indemnifying Party or Parties shall provide prompt payment to the Party or Parties seeking indemnification under this Agreement in immediately available funds no later than 5 Business Days following receipt of such notice.
[9] The Share Put Agreement also included the following entire agreement clause:
6.10 Entire Agreement
This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof and supersede[s] all prior negotiations, undertakings, representations and understandings between the Parties.
[10] The Put Option was never exercised by Tuckamore. Instead, the Share Put Agreement was terminated except for certain provisions outlined in s. 4.1 of a subsequent agreement through which Tuckamore’s shares were sold to BGL and two other parties (the “BGL Purchase Agreement”). Section 4.1 of the BGL Purchase Agreement provided that ss. 5.1(c) and 5.3(c) of the Share Put Agreement were to remain in “full force and effect for the benefit of the Parties hereto”. Section 6.10 of the Share Put Agreement (the entire agreement clause) was not listed in s. 4.1.
[11] The parties to the BGL Purchase Agreement were Tuckamore and BGL. Brompton only executed s. 4.1 of the agreement.
[12] The BGL Purchase Agreement also included the following entire agreement clause:
6.9 Entire Agreement
This Agreement (and the surviving provisions of the Put Agreement) constitutes the entire agreement between the Parties with respect to the subject matter hereof and supersede[s] all prior negotiations, undertakings, representations and understandings between the Parties.
[13] In 2014, the CRA reviewed Brompton’s use of the tax pools. It did not accept the application of the tax pools during the 2009-2013 tax years. As a result, on March 4, 2015, the CRA assessed Brompton for about $11.8 million in additional taxes, interest and penalties. According to Brompton Tuckamore’s 40.94% share of this liability pursuant to s. 5.1(c) of the Share Put Agreement was $3.9 million as of the date of the CRA’s assessment and it has since increased to $4.4 million. These amounts are not in dispute.
[14] On March 20, 2015, Brompton delivered an indemnification notice to Tuckamore demanding payment of Tuckamore’s share of the taxes, interest and penalties assessed by the CRA. To date Tuckamore has not made any payments to Brompton.
[15] Although Brompton has appealed the CRA’s assessment, it has made payments to the CRA to reduce its financial exposure to potential punitive interest penalties. So far, Brompton has paid $9.2 million to the CRA in relation to the assessment and has incurred related legal costs.
Issues
[16] The parties submit that summary judgment is appropriate. I agree that it is appropriate because there are no material facts in dispute, no credibility issues, and the motion turns on the interpretation of a commercial agreement.
[17] Subject to the defences raised by Tuckamore there is no dispute as to the amount of the CRA tax assessment or that the assessment is covered by the indemnity contained in s. 5.1(c) of the Share Put Agreement.
[18] However, because of the defences raised by Tuckamore, I must decide the following issues:
Was Tuckamore given a representation and warranty by Brompton that the tax pools would be available for future use?
If so, is this representation and warranty excluded by the entire agreement clause in the Share Put Agreement and/or the BGL Purchase Agreement?
Is Tuckamore entitled to legal or equitable set-off against Brompton’s claim for indemnity as a result of Brompton’s breach of its representation and warranty regarding the future use of the tax pools?
Is Tuckamore liable for Brompton’s legal costs because of the “save harmless” wording in s. 5.1(c) of the Share Put Agreement?
Should a stay of execution be granted until the CRA appeal is completed?
Positions of the Parties
[19] Brompton submits that it has a contractual right to indemnification from Tuckamore under s. 5.1(c) of the Share Put Agreement for 40.94% of the amounts assessed by the CRA. It submits that Tuckamore is precluded from relying on any previous contractual agreements or representations to affect its right to indemnification because of the entire agreement clauses in s. 6.10 of the Share Put Agreement and s. 6.9 of the BGL Purchase Agreement. Tuckamore was a party to both of these agreements. As a result, Brompton submits that the indemnification provision in the Share Put Agreement applies. According to Brompton, the parties’ inclusion of clause 5.1(c) in the Share Put Agreement does not make commercial sense if it was negated by an earlier representation or warranty regarding the future use of the tax pools.
[20] Tuckamore submits that it was indemnified by Brompton in relation to the future use of the tax pools as a result of a specifically negotiated representation and warranty in the Acquisition Agreement which referenced Brompton’s Purchaser Disclosure Letter. Tuckamore submits that this representation and warranty was not limited to the simple disclosure of the amounts and expiry dates of the tax pools but included a representation and warranty as to the future use of the tax pools.
[21] Tuckamore further submits that the representation and warranty relating to the future use of the tax pools in the Acquisition Agreement has been breached due to the CRA’s assessment. It argues, therefore, that Brompton’s claim for summary judgment must fail since the amount claimed for indemnification is subject to legal or equitable set-off against the damages Tuckamore incurred as a result of Brompton’s breach of its representation and warranty respecting the future use of the tax pools.
[22] Brompton denies that it ever guaranteed the successful use of the tax pools and submits that Tuckamore has mischaracterized the Acquisition Agreement and the Purchaser Disclosure Letter. Brompton submits that there was no representation that the tax pools would be available for future use but only that they existed in the amounts and for the periods specified in the Purchaser Disclosure Letter.
[23] Brompton argues that its representations were accurate because the tax pools existed and the amounts of the pools and their expiry dates were correct. According to Brompton, since there was no breach of a representation or warranty respecting the future use of the tax pools there can be no set-off. Brompton also submits that legal set-off is not available since Tuckamore’s claim is for unliquidated damages and it would be unjust to grant equitable set-off because the mutuality requirement is absent.
[24] Brompton also submits that the “save harmless” wording in s. 5.1(c) of the Share Put Agreement requires Tuckamore to pay for 40.94% of the legal costs incurred by Brompton in challenging the CRA assessment and in enforcing its indemnity. Tuckamore submits that despite the term “save harmless” in s. 5.1(c) of the Share Put Agreement, no legal costs are owed to Brompton.
[25] Tuckamore argues, in the alternative, that if Brompton succeeds in obtaining summary judgment, execution of the judgment should be stayed under s. 106 of the Courts of Justice Act, R.S.O. 1990, c. C.43, until the CRA appeal is completed.
Analysis
Was Tuckamore given a representation and warranty that the tax pools would be available for future use?
[26] To decide this question I must interpret the contracts between the parties. The Supreme Court of Canada provided guidance on the interpretation of commercial contracts in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53. At para. 50, the Supreme Court explained that “the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix.”
[27] At para. 48, the Supreme Court stated that “The meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement”.
[28] The Ontario Court of Appeal summarized the principles applicable to the interpretation of commercial contracts in Salah v. Timothy's Coffees of the World Inc., 2010 ONCA 673, at para. 16 as follows:
When interpreting a contract, the court aims to determine the intentions of the parties in accordance with the language used in the written document and presumes that the parties have intended what they have said. The court construes the contract as a whole, in a manner that gives meaning to all of its terms, and avoids an interpretation that would render one or more of its terms ineffective. In interpreting the contract, the court must have regard to the objective evidence of the “factual matrix” or context underlying the negotiation of the contract, but not the subjective evidence of the intention of the parties. The court should interpret the contract so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity. If the court finds that the contract is ambiguous, it may then resort to extrinsic evidence to clear up the ambiguity. Where a transaction involves the execution of several documents that form parts of a larger composite whole—like a complex commercial transaction—and each agreement is entered into on the faith of the others being executed, then assistance in the interpretation of one agreement may be drawn from the related agreements.
[29] Applying these principles to the interpretation of s. 5.1(l) of the Acquisition Agreement, I have concluded that Brompton did not give Tuckamore a representation and warranty that the tax pools would not be subject to a future tax assessment by the CRA. The Purchaser Disclosure Letter does nothing more than list the amounts of the tax losses on a yearly basis specifying when each tax pool will expire. The Purchaser Disclosure Letter says nothing about the future use of the tax pools and there is no mention of whether they could be assessed by the CRA.
[30] Brompton and Tuckamore are both sophisticated investors who carried out their own due diligence in respect of the tax pools. Commercial reality dictates that they both had to know that there was a risk that their intended tax applications of the tax pools could be assessed and disallowed by the CRA in the future. Neither could definitively predict what the CRA would decide if there was an assessment.
[31] Under these circumstances it does not make commercial sense that Brompton would provide Tuckamore with a guarantee as to how the CRA would assess the use of the tax pools in the future. Considering the plain meaning of s. 5.1(1) of the Acquisition Agreement and the Purchaser Disclosure Letter against the factual matrix and the commercial reality of the transaction, I have concluded that Brompton’s representation and warranty was only as to the existence, amount and expiry dates of the tax pools and did not guarantee their availability for future use without the risk of a CRA assessment. If Tuckamore truly wanted a guarantee that the future use of the tax pools would not be subject to an assessment by the CRA, the Acquisition Agreement could easily have specified this in clear unequivocal language. It did not do so.
[32] For these reasons, I find that Tuckamore was not given a representation and warranty that the tax pools would be available for future use.
Is Brompton’s representation and warranty excluded by the entire agreement clauses in the Share Put Agreement and/or the BGL Purchase Agreement?
[33] In view of my conclusion that Brompton did not give Tuckamore a representation and warranty regarding the future use of the tax pools, it is not necessary to decide this issue. However, I have concluded that if Brompton had made the alleged representation and warranty, it would be excluded by the entire agreement clauses.
[34] Tuckamore, Brompton and BGL all agreed to an entire agreement clause in s. 6.10 of the Share Put Agreement, which reads as follows:
This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof and supersede[s] all prior negotiation, undertakings, representations and understandings between the Parties.
[35] I agree with Brompton’s submissions at paras. 63-69 of its factum that the entire agreement clause at s. 6.10 of the Share Put Agreement was not terminated as Tuckamore asserts. Brompton was not a party to the BGL Purchase Agreement and its rights under the Share Put Agreement were not affected by it.
[36] The Ontario Court of Appeal made it clear in Soboczynski v. Beauchamp, 2015 ONCA 282 at para. 59 that in adopting an entire agreement clause, contracting parties have agreed that “These are the terms of our agreement and nothing that was said beforehand is relevant. You have no basis for relying on anything other than the terms of the agreement. The agreement stands on its own.”
[37] On the strength of this principle, s. 5.1(c) of the Share Put Agreement stands on its own and supersedes any other representations by Brompton that Tuckamore attempts to rely upon. For this reason I have concluded that any representations or warranties alleged to have been made by Brompton are excluded by this clause. Tuckamore, therefore, cannot rely upon them to escape liability under s. 5.1(c) of the Share Put Agreement.
Is Tuckamore entitled to legal or equitable set-off?
[38] Again it is not necessary for me to decide this issue because of my conclusion that Brompton did not breach any representations or warranties. However, if it had done so, I am of the view that legal set-off would not be available to Tuckamore but equitable set-off would be available.
[39] Legal set-off is available under s. 111 of the Courts of Justice Act if there are mutual debts that are liquidated amounts.
[40] Tuckamore’s claim for damages for Brompton’s breach of its representation and warranty regarding the future use of the tax pools is not a debt but a claim for an unliquidated amount of damages. Tuckamore’s damages would have to be assessed before they could become a liquidated debt. Legal set-off is, therefore, not available.
[41] However, equitable set-off would be available. The Ontario Court of Appeal summarized the applicable principles for equitable set-off in Algoma Steel Inc. v. Union Gas Ltd., 2003 CanLII 30833 (ON CA), 2003 CarswellOnt 115, at para. 26 as follows:
The party relying on a set-off must show some equitable ground for being protected against the adversary’s demands.
The equitable ground must go to the very root of the plaintiff’s claim.
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.
Unliquidated claims are on the same footing as liquidated claims.
[42] Tuckamore’s claim for set-off is based upon its allegation that Brompton breached a representation and warranty regarding the future use of the tax pools. It is clearly connected to and goes to the root of Brompton’s claim for indemnity arising from the CRA’s assessment. It also raises equitable grounds for protecting Tuckamore from Brompton’s claim for indemnity. If I had concluded that Tuckamore did have such a claim against Brompton, I am of the view that equitable set-off would have been available to Tuckamore.
Is Tuckamore liable for Brompton’s legal costs because of the “save harmless” wording in s. 5.1(c) of the Share Put Agreement?
[43] Matheson J. held in UPS Supply Chain Solutions, Inc. v. Airon HVAC Service Ltd., 2015 ONSC 1734, at para. 101, that the phrase “shall indemnify and save harmless” does not automatically mean there is a duty to defend and pay for legal costs. However, she had concluded at para. 100 that although words do not have an immutable or absolute meaning they should be interpreted in light of the purpose of the agreement and the nature of the relationship created by the agreement. I agree with her conclusion.
[44] Considering the words in s. 5.1(c) of the Share Put Agreement against the purpose of the agreement, the factual matrix, and commercial reality, I have concluded that the parties intended that Tuckamore would be responsible for its portion of all the costs directly associated with an adverse tax assessment by the CRA. This includes the legal costs of appealing the assessment. This makes commercial sense since Tuckamore will benefit from a successful appeal of the assessment. However, I do not agree that this clause also includes Brompton’s legal costs of this motion. The costs of this motion would not have been within the reasonable contemplation of the parties when the Share Put Agreement was entered into. The costs of this motion should be determined by the court in the ordinary manner.
[45] Tuckamore is, therefore, responsible for 40.94% of the costs incurred to date by Brompton in relation to its challenge to the CRA’s assessment and any costs incurred in the future for this purpose.
Should a stay of execution be granted until the CRA appeal is completed?
[46] Tuckamore submits that I should exercise my discretion under s. 106 of the Courts of Justice Act and stay judgment pending the determination of the CRA appeal. It argues that it is in the interest of justice to maintain the status quo pending determination of this other proceeding.
[47] Cunningham A.C.J. considered this section of the Courts of Justice Act in 1247902 Ontario Inc. v. Carlisle Power Systems Ltd., 2003 CarswellOnt 6433 (Ont. Div. Court) and held as follows:
… in very rare circumstances there is discretion under section 106 of the CJA to stay the enforcement of a final judgment. This discretion ought to be used very sparingly and only in circumstances where it could be found that not only would it be oppressive or vexatious or an abuse of process of the court, but also in circumstances where it would not cause injustice to the plaintiff.
[48] In my view, Tuckamore has not met this test. There is nothing oppressive, vexatious or abusive about Brompton’s request for summary judgment. It cannot be oppressive to enforce an indemnity that two sophisticated parties negotiated in a commercial agreement. Tuckamore has not provided any evidence of hardship or prejudice that would arise from the execution of the judgment. Further, to grant a stay would be unfair to Brompton which has to date paid $9.2 million to the CRA in respect of the assessment and has incurred all of the costs of appealing the assessment. Tuckamore is liable for 40.94% of these amounts and should be required to reimburse Brompton without further delay.
[49] For these reasons I decline to order a stay pursuant to s. 106 of the Courts of Justice Act.
Conclusion
[50] Brompton’s motion for summary judgment is granted. There shall be an order in substantially the same form as paras. (a) to (g) of Brompton’s Notice of Motion for Summary Judgment.
Costs
[51] I urge counsel to settle costs. If they cannot they may schedule a 9:30 a.m. appointment with me to deal with costs.
[52] I thank counsel for the professional and efficient manner in which they conducted this motion.
HAINEY J.
Released: February 1, 2017
CITATION: Brompton Corp. v. Tuckamore Holdings LP, 2017 ONSC 775
COURT FILE NO.: CV-16-11299-00CL
DATE: 20170201
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
BROMPTON CORP.
Plaintiff
– and –
TUCKAMORE HOLDINGS LP, TUCKAMORE CAPITAL MANAGEMENT INC., TUCKAMORE GP INC. and TUCKAMORE GP TRUST
Defendants
REASONS FOR JUDGMENT
HAINEY J.
Released: February 1, 2017