COURT FILE NO.: CV-16-565954
DATE: 20191104
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
HAO WEN Plaintiff
– and –
SHI GU, ROBERT CHOI AND ROBINS APPLEBY LLP Defendants
COUNSEL: Y. Wang, for the Plaintiff J. Stanleigh, for the Defendants
HEARD: May 21-24 and June 24, 2019
CHALMERS, J
REASONS FOR JUDGMENT
OVERVIEW
[1] The Plaintiff, Hao Wen, purchased the LOL Grill and Bar (the “Restaurant”), from the Defendant, Shi Gu, pursuant to a written agreement dated August 29, 2016 (the “Agreement”). Ms. Wen alleges that she agreed to purchase the Restaurant because of representations made by Mr. Gu which she says were false. Mr. Gu states that he provided the actual sales and expense records regarding the financial status of the Restaurant and that he made no misrepresentations.
[2] Ms. Wen argues that she is entitled to damages in fraudulent misrepresentation. In the alternative, she seeks a declaration that the Agreement was frustrated and, as a result, she is entitled to a return of the payments she made to Mr. Gu, in the amount of $242,500. Mr. Gu claims that the Plaintiff failed to close the transaction and is thereby in breach of the Agreement. He brings a counterclaim in which he is seeking damages for breach of contract.
[3] Robert Choi is a lawyer with Robins Appleby LLP. He was retained by the landlord of the property to negotiate the terms of a lease with Ms. Wen. The amount of $160,955.08 was paid into the Robins Appleby trust account for the credit of this action. The Plaintiff advised at the commencement of trial that no claim is being advanced as against Mr. Choi or Robbins Appleby. Robbins Appleby has agreed to be bound by whatever order is made with respect to the money held in its trust account.
[4] For the reasons that follow, I find that Mr. Gu did not make any misrepresentations to Ms. Wen which induced her to enter into the Agreement. Ms. Wen failed to close the transaction and breached the Agreement. I grant judgment on the counterclaim and award damages to Mr. Gu.
FACTUAL BACKGROUND
The Parties
[5] Ms. Wen is an accomplished businesswoman. Her business background includes being involved in a business which developed computer applications. She testified that in 2012, the revenue generated from this business was $18 million. From 2014 to 2018 she was involved in a business which bought and renovated houses. The annual profit from the renovation business was between $1 and 2 million. Ms. Wen confirmed that she did not have any prior experience with the ownership or operation of restaurants.
[6] Mr. Gu has been the owner and operator of restaurants since 2013. In 2016, he owned two restaurants; one is Scarborough, and the Restaurant which is the subject matter of this action, in Markham. He purchased the Restaurant in the fall of 2015. He completed renovations and opened the Restaurant in the spring of 2016.
Pre-Agreement Discussions
[7] On July 20, 2016, Ms. Wen had dinner with her friend, Xiang Chen at the Restaurant. Ms. Chen knew Mr. Gu. As they were leaving the Restaurant, they met Mr. Gu in the parking lot and had a brief discussion. Ms. Wen was at the Restaurant around 7 or 8 pm. There were few customers. Ms. Wen asked Mr. Gu if the Restaurant was profitable. He said it was profitable, but the summer was slow because many of the customers are international students who return to China in the summer months.
[8] Ms. Wen stated to Mr. Gu that she may be interested in purchasing the Restaurant. They exchanged contact information. The parties agreed that this discussion was 3 to 5 minutes in length.
[9] A few days later, Ms. Wen contacted Mr. Gu for the purpose of arranging a meeting to continue their discussions. She asked to see the financial records for the business. In particular, she requested the sales records for the previous six months. Ms. Wen stated that she wanted to move quickly with respect to the purchase. They agreed to meet on August 29, 2016.
Meeting on August 29, 2016
[10] Ms. Wen attended the meeting on August 29, 2016 with her friend, Gong Hai Xiang. They met Mr. Gu at the Restaurant. Mr. Gu showed them around the Restaurant. He stated that he had put in $100,000 in decorations and leasehold improvements. He also advised that he had spent over $100,000 in equipment. After the tour of the Restaurant, they went to a local Starbucks coffee shop. The meeting at Starbucks lasted 20 to 30 minutes.
[11] At the meeting, Ms. Wen reviewed the sales records which had been provided by Mr. Gu. Ms. Wen had requested sales records for the preceding six months; however, the Restaurant had only been operating since May 2016. Mr. Gu produced to Ms. Wen the sales receipts for the period from May 7, 2016 to July 31, 2016.
[12] The daily sales records include the cash, debit and credit sales. Over the period from May 7 to July 31, 2016, there were 16 days missing from the sales records. The evidence indicates that the sales were not always closed on the point of sale (POS) system at the end of each day. If the POS is not closed, the sales are recorded on the following day. Although some days are missing, the total revenue is reflected in the daily sales records provided by Mr. Gu.
[13] Ms. Wen appeared to be satisfied with the daily sales records produced. Mr. Gu testified that Ms. Wen reviewed the daily sales records at the meeting at Starbucks. She did not have any questions about the sales records or request further information with respect to the revenue of the Restaurant.
[14] In addition to providing the daily sales records, Mr. Gu made the following statements to Ms. Wen at the time of the meeting;
- The month of August was the slowest month because most of the customers were international students who returned to China in the summer;
- The Restaurant was operating at a profit in August 2016;
- Daily revenue for the Restaurant in August was on average $1,000 on weekdays and between $2,000 to $2,800 on weekends.
[15] Mr. Gu also provided a list of suppliers. He stated that the food cost was approximately 20 to 25% of the revenue. He estimated the labour costs to be $20,000 a month. The monthly rent was $8,500 for minimum rent and $4,500 for TMI. Ms. Wen did not request any further information or supporting documentation with respect to the expenses from Mr. Gu. She has not taken the position that Mr. Gu made any misrepresentations with respect to the expenses.
[16] Mr. Gu testified that he told Ms. Wen that the profit was 20 to 25% of the monthly sales revenue.
[17] With respect to the lease, Mr. Gu stated that the landlord is an elderly Korean couple. He stated that he was on good terms with them and he did not expect any difficulty in obtaining their consent to transfer the existing lease to Ms. Wen. He agreed to arrange a meeting between the landlord and Ms. Wen.
[18] Ms. Wen made some calculations of revenue and expenses based on the documentation and information provided by Mr. Gu. She believed the Restaurant was profitable. She asked Mr. Gu why he would sell a profitable restaurant. He stated that he had another restaurant and could not manage both and still see his children.
The Agreement of Purchase and Sale
[19] At the conclusion of the meeting, Ms. Wen stated that she wanted to proceed with the purchase of the Restaurant. After some back and forth, the parties agreed on a price of $425,000. Ms. Wen paid a deposit of 10% at the time the Agreement was executed on August 29, 2016.
[20] Ms. Wen handwrote a one-page agreement, which was signed by the parties. The Agreement in its entirety is:
Business Transfer Agreement
Gu, Shi (1986/06/30) received from Hao Wen (1987/11/23) $42,500 CAD by BMO Branch Transfer.
Deal with total $425,000 price transfer the restaurant LOL Grill and Bar (including [all] equipments, liquor license, property leasing agreement). The balance is $382,500 must be pay off in two months. Otherwise Gu, Shi should keep the deposit.
Date: August 29, 2016
Gu, Shi:______________
Wen, Hao:____________
[21] The Agreement is amended with the word “all” inserted before the word, “equipments”. The change is initialed by Ms. Wen, but not Mr. Gu. Ms. Wen and Mr. Gu both testified that the transfer of the equipment in the Agreement referred to the transfer of all the equipment owned by Mr. Gu. According to Ms. Wen, Mr. Gu did not disclose that some of the equipment was leased.
[22] Ms. Wen was anxious to close the transaction. She was of the view that the Restaurant was profitable, and she wanted to start making money as soon as possible.
Transfer of the Master Business Licence and Liquor Licence
[23] After the Agreement was signed, Ms. Wen spent about a week in the Restaurant with Mr. Gu. She advised that she wanted to make some renovations. She planned on changing the menu and the name of the Restaurant.
[24] Over the next two weeks, Ms. Wen and Mr. Gu exchanged WeChat text messages regarding the transfer of the Restaurant. On August 30, 2016 she texted Mr. Gu and asked if he had a menu and logo design company to recommend. On August 31, 2016, Mr. Gu asked when Ms. Wen wanted to start training. He also asked if she plans on changing the name of the Restaurant. He asked about the employees. Ms. Wen texted Mr. Gu and stated that she wanted to keep the existing employees. She stated that she wanted to finish the transfer by next week. On the same day, Mr. Gu advised Ms. Wen that he will collect documents for the transfer of the utilities. On September 2, 2016, Ms. Wen asked that the utilities be transferred to her company, Wolf in Bar and Grill.
[25] On September 2, 2016, Ms. Wen sent a text to Mr. Gu stating that she will take over the Restaurant on September 15, 2016 and will pay $150,000 as the transfer fee at that time. She stated that she will pay the balance once the landlord signs the lease. She advised that she will be in China on September 15, 2016, but that Gong Hai Xiang can run the business until she returns.
[26] In the first week of September 2016, Ms. Wen and Mr. Gu met at Mr. Gu’s lawyer’s office for the purpose of preparing a formal set of documents for the transfer of the Restaurant. Ms. Wen expressed some concern about using Mr. Gu’s lawyer for the transaction. She was told that his fee was $5,000 and each party would pay $2,500. According to Mr. Xiang, who was present at the meeting, Ms. Wen said she thought the lawyer was too expensive. She did not agree to retain the lawyer. No formal set of documents was prepared.
[27] Ms. Wen and Mr. Gu next met on September 8, 2016. At that time, the parties signed the documents necessary to transfer the Master Business Licence and the Liquor Licence to Ms. Wen. The parties, along with Mr. Xiang, went to City Hall to file the transfer of the Master Business Licence. It was Ms. Wen’s evidence that the transfer was initially rejected because the public officials required a copy of the lease. Ms. Wen testified that the lease was provided by Mr. Gu to allow for the transfer of the Master Business Licence.
[28] Ms. Wen testified that at the time Mr. Gu provided the lease to her for the purpose of transferring the Master Business Licence, he said the landlord had approved the transfer of the existing lease. Mr. Gu denies stating that the landlord had approved the transfer of the existing lease.
[29] At the time the parties signed the document for the transfer of the Liquor Licence, Mr. Gu requested an additional payment of $50,000. According to Ms. Wen, he requested the additional payment because the Liquor Licence was worth “a lot of money”. Ms. Wen paid $50,000 to Mr. Gu on September 8, 2016.
[30] On September 11, 2016, Ms. Wen travelled to China. Mr. Gu was advised that in her absence, Mr. Xiang would be acting on her behalf. Ms. Wen asked Mr. Gu to assist Mr. Xiang with respect to the transfer of the utilities because he did not speak English and would not know where to sign. Ms. Wen provided Mr. Xiang with a cheque in the amount of $150,000 which was to be paid to Mr. Gu at the time of the transfer of the Restaurant.
[31] On September 14, 2016, Mr. Gu sent to Mr. Xiang the documents required for the transfer of the Waste Management and Rogers Cable accounts to Ms. Wen’s company Wolf in Bar and Grill. The transfers were signed by or on behalf of Ms. Wen. By e-mail dated September 14, 2016, Mr. Xiang returned the executed Waste Management agreement to Mr. Gu.
[32] On September 14, 2016, Mr. Gu removed the POS machine from the Restaurant. Mrs. Gu attended at the Restaurant on that date to ensure that all employees were fully paid up to September 15, 2016. She removed some personal items from the Restaurant.
Transfer of the Restaurant September 15, 2016
[33] On September 15, 2016, the Restaurant name changed to Wolf in Bar & Grill. The menu was changed. Ms. Wen had not installed a credit card machine and as a result only cash sales were accepted after that date. A new bank account was opened for the Restaurant.
[34] Early on the morning of September 15, 2016, Mr. Xiang attended at the Restaurant. Ms. Wen and Mr. Xiang testified that he attended at the Restaurant that morning to begin his training. Mr. Gu testified that Mr. Xiang was at the Restaurant for the purpose of transferring the Restaurant to Ms. Wen.
[35] Mr. Gu showed Mr. Xiang around the Restaurant and provided him with the keys. Mr. Xiang gave Mr. Gu the cheque in the amount of $150,000 that Ms. Wen had given him before she left for China. This is consistent with the content of the text message sent by her to Mr. Gu on September 2, 2016 in which Ms. Wen stated that she will take over the Restaurant on September 15, 2016 and make an additional payment of $150,000 at the time of transfer.
[36] On September 15, 2016, Mr. Xiang provided a cheque to Mr. Gu in the amount of $13,000. This is the amount of the monthly rent plus TMI. Mr. Xiang sent a text message to Ms. Wen on September 16, 2016 in which he confirms that the rent for that month had been paid.
[37] According to Mr. Gu this cheque was provided to him to pass on to the landlord for rent for the period from September 15 to October 15, 2016. The evidence of Ms. Wen and Mr. Xiang is quite different. Ms. Wen testified that she had not taken over the Restaurant as of September 15, 2016 and therefore was not responsible for the rent. The cheque in the amount of $13,000 was instead a loan to Mr. Gu to allow him to pay the rent. According to Ms. Wen, Mr. Gu did not have the money to pay the rent because his money was tied up in a crawfish farming operation. Mr. Gu denied that he has ever been involved in a crawfish farm.
[38] Although Ms. Wen characterized the payment of $13,000 as a loan to Mr. Gu, there is no documentation which supports her position that this is a loan. Mr. Gu has not repaid this amount to Ms. Wen. The Plaintiff did not provide an explanation as to why a claim for the repayment of the loan has not been made in this action.
[39] I find the explanation by Ms. Wen with respect to the payment to Mr. Gu is not credible. The evidence supports the finding that Ms. Wen took over the Restaurant on September 15, 2016 and was responsible for payment of the rent after this date.
[40] Ms. Wen testified that after September 15, 2016, Mr. Xiang collected the revenue for the Restaurant. Mr. Xiang testified that after September 15, 2016 he paid the employees and paid for the food supplies. Mr. Gu testified that after September 15, 2016, he did not collect any revenue from the Restaurant and did not pay any salaries, taxes, suppliers or the equipment leases.
Renegotiation of the Purchase Price
[41] In the text message sent on September 20, 2016, Ms. Wen stated to Mr. Xiang that she felt the price she agreed to pay for the Restaurant was too high. She stated that she had visited surrounding stores and felt the price should be $350,000. Ms. Wen does not state that the purchase price should be reduced because misrepresentations had been made by Mr. Gu.
[42] In the text message Ms. Wen states to Mr. Xiang that if Mr. Gu does not agree to renegotiate the price, she will withhold the unpaid balance and will not give, “even one cent. That is it.” Mr. Xiang asks if they “can find someone to go to his home to collect debt?” It does not appear that this suggestion was taken seriously by Ms. Wen.
[43] Ms. Wen testified that on September 26 or 28, 2016 she had a face-to-face meeting with Mr. Gu at the Restaurant. She testified that she requested a reduction in the purchase price at that time. He told her there would be no refund of any part of the purchase price. The meeting lasted only a few minutes. Ms. Wen left the meeting very angry. Mr. Gu denied that there was a request for a reduction in the purchase price. There is no evidence that Ms. Wen advised Mr. Gu that the request to reduce the purchase price was because of his misrepresentations.
Transfer of the Equipment
[44] In the text message sent September 20, 2016, Mr. Xiang advised Ms. Wen that a “lot of the kitchen equipments are leased”, and that $1,000 per month was spent on equipment leases. Ms. Wen did not request any further information from Mr. Gong with respect to the equipment. She did not ask Mr. Gu about the equipment leases.
[45] Ms. Wen takes the position that Mr. Gu misrepresented that all of the equipment used in the Restaurant was owned by him and would be transferred on closing. There is nothing in the Agreement which states that all of the equipment was owned by Mr. Gu.
[46] The draft Asset Purchase Agreement which was prepared for the closing of the transaction, lists the equipment owned by Mr. Gu. The list of the equipment to be transferred to Ms. Wen is as follows: 20 BBQ tables, 25 BBQ stoves,5 patio tables,14 cassettes, 36 chairs, 2 baby chairs, 2 tower fans, 2 fans, 1 walk-in cooler, 1 walk-in freezer, 1 grill, 1 draft beer machine, 1 six-burner stove, 1 ice machine, 1 rice cooker, 1 microwave, 1 bowl sink, 2 refrigerators, 6 televisions, 2 cashier machines, 1 grill stove, 1 oil stove, 1 air conditioner, 4 speakers, 1 audio mixer, 1 robot, and 5 stainless steel tables.
[47] The draft Asset Purchase Agreement also lists the following equipment which was leased: 2 bar coolers, 1 glass washer, 1 dishwasher, 1 ice maker, and 2 ovens. The monthly cost for the leased equipment was $606 for the bar coolers, ice maker and ovens, and $287.04 per month for the dishwasher and glass washer.
Transfer of the Lease and Asset Purchase Agreement
[48] Before September 15, 2016, Mr. Xiang was having discussions with the landlord regarding the assignment of the Lease. Ms. Wen had requested some changes to the existing lease. She planned on renovating the washrooms. She also wanted parking spaces dedicated to the Restaurant.
[49] Ms. Wen testified that on September 16, 2016, Mr. Xiang advised that the landlord had demanded from Mr. Gu a fee of $35,000 to have the lease transferred. Mr. Gu denies that he was required to pay a transfer fee, or that he requested Ms. Wen to pay a transfer fee. There is no documentation which refers to a transfer/assignment fee. Ms. Wen insists that the transfer fee was in addition to the security deposit.
[50] Over the period from September 16 to 20, 2016, Ms. Wen was in communication with Mr. Xiang regarding the transfer of the lease. Ms. Wen expressed concern about paying a fee to the landlord for the transfer of the lease. On September 20, 2016, Mr. Xiang advised Ms. Wen that the landlord was being difficult and would not reduce his demand for a transfer fee.
[51] After her return to Toronto on September 26, 2016, Ms. Wen began dealing with counsel for the landlord, Robert Choi. She advised Mr. Choi that she wanted changes to the existing lease, particularly with respect to the issue of dedicated parking spaces. Mr. Choi agreed to prepare a draft lease. On October 4, 2016, Ms. Wen received an e-mail from Mr. Choi. She was told that before any new offer was made, the landlord wanted to make sure she could pay the rent. The landlord requested information about the properties she owned.
[52] Mr. Choi sent the draft lease to Ms. Wen on October 15, 2016. Ms. Wen testified that the draft lease was different from the existing lease. The lease amount was increased to $9,000 a month, from $8,500. Also, the landlord had decided to rent the basement although she believed the basement was part of the leased premises. There was also no provision that the parking spaces after 5 p.m. were to be allocated to the Restaurant.
[53] There continued to be discussions between Ms. Wen and Mr. Choi with respect to the lease terms. By e-mail sent October 19, 2016, Mr. Choi advised that there was an agreement with respect to the minimum rent. It was set at $9,000 as adjusted for inflation at 3%, plus HST. The security deposit is $30,000 if the amount is paid in full, or $35,000 if she pays $15,000 with the rest by letter of credit. Further discussions were to take place with respect to the parking.
[54] Later on October 19, 2016, Mr. Choi sent an e-mail to Ms. Wen in which he included wording with respect to the parking rights. He noted that everything is done with the exception of including her mother on the lease. On the same day, Ms. Wen sent to Mr. Choi the address for her mother so she could be included in the lease. Mr. Choi wrote back on October 19, 2016 and stated that they should be “pretty much ready on this end.”
[55] On October 19, 2016, Mr. Choi wrote to Greg Wu, counsel for Mr. Gu, and advised that Ms. Wen and the landlord had worked out all issues as between them. Mr. Choi advised that he will be drafting the final lease. He stated that he will also draft the mutual termination of the lease between the landlord and Mr. Gu. He stated that all that remains to be done is to finalize the sale agreement for the sale of the assets of the Restaurant.
[56] On October 19, 2016, Ms. Wen advised Mr. Choi that her lawyer needed more time to prepare the Asset Purchase Agreement and she requested an extension of the closing to between November 2 and 5, 2016. To avoid a delay, Mr. Wu agreed to draft the Asset Purchase Agreement. Mr. Wu proposed a closing date of October 25, 2016.
[57] Ms. Wen testified that by October 20, 2016, she was concerned about the revenue of the Restaurant. She asked her lawyer to negotiate a lower price.
[58] On October 20, 2016, Mr. Wu sent the draft Asset Purchase Agreement to Ms. Wen’s lawyer, Shao Ye Dai for his review. On October 20, 2016, Mr. Choi sent the final version of the lease to Mr. Dai.
[59] By e-mail sent October 21, 2016 to Mr. Choi and Mr. Wu, Mr. Dai stated that the behaviours of the seller were “very questionable”. He took the position that there are serious misrepresentations. He did not set out what those misrepresentations were. According to Mr. Gu this was his first notice of any allegations of misrepresentations.
[60] In the e-mail sent October 21, 2016, Mr. Dai set out his position:
- he did not believe October 25, 2016 was a possible date for the closing;
- he requested full disclosure of the agreement between Mr. Gu and the landlord. Although he recognized that there will be a new lease, he wanted to make sure there is a good standing lease;
- the Agreement is not binding, and Ms. Wen is not obliged to close a business transaction based on just one piece of paper;
- he required time to review the draft lease with his client.
[61] On October 21, 2016, Mr. Choi wrote to Mr. Dai and advised that Mr. Gu had a valid lease with the landlord. He also stated that because of certain litigation issues, the landlord cannot push the closing past October 28, 2016.
[62] On October 24, 2016, Mr. Wu provided the latest version of the Asset Purchase Agreement to Mr. Dai. He proposed a closing date of October 28, 2016.
Ms. Wen Fails to Close the Transaction
[63] On October 25, 2016, Mr. Dai wrote to Mr. Wu and stated that there were material misrepresentations made by Mr. Gu which induced Ms. Wen to purchase the Restaurant. He referred to three representations, that the Restaurant would earn above $1,000 a day for weekdays and between $2,000 to $8,000 for weekend days, that the business was profitable, and that only a few items of the equipment were subject to rental fees, the total of which did not exceed a few hundred dollars. Mr. Dai stated that because of the material misrepresentations, Ms. Wen is entitled to terminate the Agreement. On a without prejudice basis, he advised that Ms. Wen would be prepared to proceed with the purchase if the price was reduced to $325,000.
[64] Mr. Gu did not agree to lower the purchase price. Mr. Gu was ready, willing and able to proceed with the closing of the transaction on October 28, 2016. On that date, Ms. Wen’s litigation counsel advised that Ms. Wen will not be proceeding with the closing.
[65] On October 26, 2016, Mr. Gu learned that the Restaurant had been abandoned. Mr. Dai advised that the management of the Restaurant will be returned to Mr. Gu. The keys were returned to Mr. Gu on October 27, 2016. Mr. Gu went into the Restaurant. He testified that it was left in a very poor condition. He cleaned the Restaurant and did an inventory.
[66] Mr. Gu decided to resell the Restaurant. He was eventually successful in selling the Restaurant for $330,000. This was the only offer he received. He was required to pay a commission in the amount of 20% or, $66,000.
[67] The resale of the Restaurant closed on December 22, 2016. Mr. Gu was required to pay the rent and other expenses from the date the Restaurant was abandoned until the closing of the transaction.
THE ISSUES
[68] The following issues are to be decided:
(a) Did Mr. Gu make fraudulent misrepresentations to Ms. Wen?
(b) Was the Agreement to purchase the Restaurant frustrated?
(c) Is Mr. Gu entitled to judgment on the counterclaim and, if so, what is the amount of damages?
ANALYSIS
(a) Fraudulent Misrepresentation
[69] Ms. Wen takes the position that she entered the Agreement to purchase the Restaurant as a result of fraudulent misrepresentations made by Mr. Gu.
[70] There are four elements of civil fraud:
(a) a false representation made by the Defendant;
(b) some level of knowledge of the falsehood of the representation on the part of the Defendant (whether through knowledge or recklessness);
(c) the representation caused the Plaintiff to act; and,
(d) the Plaintiff’s action resulted in a loss: Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, at para. 87.
[71] Ms. Wen, as the Plaintiff in this action, has the onus of proving on a balance of probabilities that all four elements of fraud are established. Ms. Wen failed to meet this onus.
[72] Ms. Wen takes the position that Mr. Gu made fraudulent misrepresentations with respect to the following:
(a) Sales revenue and profitability of the Restaurant;
(b) Silence with respect to the ongoing dispute he had with the landlord; and
(c) Existence of leased equipment.
Sales Revenue and Profitability
[73] Before the Agreement was signed on August 26, 2016, Mr. Gu produced the daily sales records from May 7 to July 31, 2016. Ms. Wen argues that the sales records were not complete because there were 16 missing days of receipts for the period from May 7 to July 31, 2016. She also argues that the sales records were falsified.
[74] The explanation for the “missing” entries is that for some days the daily sales were not settled on the POS system at the end of the day. The sales were registered on the following day. As a result, the sales information was not “missing” but was allocated over different days. I find that the daily sales records produced by Mr. Gu disclose the total sales over the period from May 7 to July 31, 2016.
[75] The Plaintiff argues that the daily sales records are fraudulent. She did not put forward any evidence to support this position. She did not call a forensic accountant to provide evidence that the sales records were false or that the Restaurant was not profitable before it was sold.
[76] The Plaintiff argues that the sales records must have been falsified because the Restaurant was not profitable for the period after September 15, 2016. The Plaintiff did not put forward any evidence as to the sales revenue or profit of the Restaurant for the period after September 15, 2016 when the Restaurant was being operated by her and Mr. Xiang.
[77] The Plaintiff complains that the revenue as set out in the sales records produced by Mr. Gu is less than his oral representations. Mr. Dai, in his letter dated October 25, 2016, stated that Ms. Wen relied on Mr. Gu’s representation that the Restaurant would earn above $1,000 a day for weekdays and between $2,000 to $8,000 for weekend days.
[78] Based on the actual sales receipts, which were produced by Mr. Gu, the total revenue for the period from May 7 to July 31, 2016, was $190,069.19. This results in average monthly revenue of approximately $68,000, or approximately $16,000 a week. This is equivalent to $1,000 for four weekdays and $4,000 for three weekend days.
[79] Even if Mr. Gu had made an inaccurate estimate of revenue, he provided the actual sales receipts to Ms. Wen, which disclosed all sales at the Restaurant from May 7 to July 31, 2016. If it was his intention to deceive Ms. Wen the actual receipts would not have been produced. Ms. Wen had the actual sales receipts before she entered the Agreement. She had the opportunity to review the records in detail. She did not ask any questions or request further information.
[80] In argument, Plaintiff’s counsel took the position that Ms. Wen did not have time to add up the daily sales records and relied on Mr. Gu’s representation as to the total amount of sales. There is no evidence that Ms. Wen did not have time to add up the sales records. With a calculator it would not have taken more than a few minutes to add approximately 80 numbers. If, in fact, Ms. Wen relied on Mr Gu’s totals when the actual sales records had been provided, it was not reasonable for her to do so.
[81] With respect to the profitability of the Restaurant, Mr. Gu testified that the profits of the Restaurant were approximately 20% of sales. Although no expert evidence was called by either party at the trial, I am satisfied that Mr. Gu’s estimate of profit was accurate. Based on the daily sales records for the period from May 7 to July 31, 2016, the average monthly revenue was $68,000. Based on expenses of $20,000 per month in labour costs, 25% for the cost of food ($17,000), $13,000 a month in rent and $2,000 a month in utilities, the average profit is $16,000 per month or 23.5% of the average monthly revenue.
[82] There is no evidence that Mr. Gu made any misrepresentations, fraudulent or otherwise with respect to the revenue or profitability of the Restaurant. In fact, the evidence is to the contrary. Before the parties entered into the Agreement, Mr. Gu produced the daily sales records for the Restaurant which set out the total revenue for the period from May 7 to July 31, 2016. There is no evidence that the sales information provided by Mr. Gu was false.
Mr. Gu’s Dispute With the Landlord
[83] The Plaintiff also argues that there was a misrepresentation made by Mr. Gu with respect to the lease. Mr. Gu advised Ms. Wen that he had a good relationship with the landlord. The Plaintiff argues that this was not a true statement because Mr. Gu owed $100,000 to the Landlord pursuant to one or two loan agreements. She also argues that is evidence of a dispute between Mr. Gu and the landlord in the past.
[84] The Plaintiff relies on an agreement which was entered into between Mr. Gu and the landlord dated October 12, 2016. The agreement acknowledges that Mr. Gu is contemplating the sale of the Restaurant to Ms. Wen. The landlord agrees that if it consents to the assignment/granting of the lease to the purchasers, Mr. Gu will pay out of the proceeds of the sale, $100,000, to repay the principal amount owing on a loan agreement dated December 1, 2015. In addition, Mr. Gu agreed to pay $25,000 to the landlord to indemnify the landlord for legal costs incurred with respect to the parties’ various past disputes. A total of $160,955.08 was to be paid by Mr. Gu to the trust account of Robins Appleby LLP, counsel for the landlord.
[85] In his e-mail sent to Mr. Dai on October 21, 2016, Mr. Choi referred to “certain litigation issues”, which had settled. Mr. Choi took the position that the details of the settlement were not within Ms. Wen’s purview.
[86] Even if the statement that Mr. Gu had a good relationship with the landlord was untrue, there is no evidence that the statement was material. The dispute, if any, between the landlord and Mr. Gu has no impact on Ms. Wen. The fact that Mr. Gu intended to use the proceeds from the sale to resolve any liabilities he may have with the landlord is not relevant to the sale of the Restaurant.
[87] The Plaintiff did not adduce any evidence that a dispute between Mr. Gu and the landlord was material. Ms. Wen did not call either the landlord or counsel for the landlord to provide evidence that the dispute between Mr. Gu and the landlord affected her ability to negotiate a new lease.
[88] In fact, based on the evidence, Ms. Wen and the landlord had successfully negotiated the terms of a new lease. By letter dated October 19, 2016, Robert Choi advised that Ms. Wen and the landlord had worked out all issues as between them, and that he will be drafting the final lease.
Existence of Equipment Leases
[89] The Plaintiff argues that Mr. Gu misrepresented that he owned all of the equipment when some of the equipment was leased. Mr. Dai, in his letter dated October 25, 2016, stated that Ms. Wen relied on Mr. Gu’s representation that only a few items of the equipment were subject to rental fees, the total of which did not exceed a few hundred dollars.
[90] Mr. Gu denies making any representation that he owned all the equipment. The fact that he leased some of the equipment was known to Ms. Wen. In Mr. Dai’s letter dated October 25, 2016, he stated that Mr. Gu had represented that only a few items of the equipment were subject to rental fees, the total of which did not exceed a few hundred dollars. This representation was true. Of the equipment used in the Restaurant, only five items were leased. The monthly lease cost was less than $1,000.
[91] Ms. Wen was advised by Mr. Xiang on September 20, 2016, that “a lot” of the kitchen equipment was leased. In fact, most of the equipment used in the Restaurant was owned by Mr. Gu and was to be transferred to Ms. Wen on closing. Ms. Wen did not request any further information from Mr. Xiang with respect to the equipment. Ms. Wen did not raise the issue of the equipment leases with Mr. Gu when she requested a decrease in the purchase price.
Summary
[92] I conclude that there is no evidence that Mr. Gu made a fraudulent misrepresentation to Ms. Wen. In fact, the evidence is to the contrary. He provided the actual daily sales receipts to Ms. Wen before the Agreement was entered into. She had the opportunity to review the records. She could have asked questions about the revenue or requested further information. She did neither.
[93] The Plaintiff argues that the Restaurant was not as profitable as suggested by Mr. Gu. Mr. Gu testified that he told Ms. Wen that the profit was 20% to 25% of revenue. The Plaintiff did not adduce any evidence which establishes that this figure is not accurate. Based on the daily sales records and the monthly expenses, the average monthly profit from the period from May 7, to July 31, 2016 was approximately 23.5% of revenue.
[94] The Plaintiff has the onus of showing that the representations with respect to revenue and profitability were untrue. She has not met this onus. The Plaintiff did not call a forensic accountant to provide an expert opinion that the revenue or profit as disclosed by Mr. Gu was false.
[95] I am of the view that shortly after entering into the Agreement, Ms. Wen believed she had overpaid for the Restaurant. Based on the text message exchange with Mr. Xiang on September 20, 2016 she may have come to this conclusion after she had gone to other stores in the area. When Mr. Gu refused to reduce the price which had been negotiated, Ms. Wen took the position he had made misrepresentations, and refused to complete the transaction.
[96] The Plaintiff may have had buyer’s remorse or felt she had proceeded too hastily. She decided to purchase the Restaurant after meeting with Mr. Gu on two occasions for a total of approximately 35 minutes. She had a brief tour of the Restaurant and quickly reviewed the daily sales receipts. She did not examine the records in any detail before deciding to purchase the Restaurant.
[97] The Plaintiff has not proved any of the elements of fraudulent misrepresentation. I find that she is not entitled to rescission of the Agreement. She is not entitled to a return of the amounts paid to Mr. Gu.
(b) Frustration of Contract
[98] The Plaintiff argues in the alternative, that the Agreement was frustrated. The law of frustration of contract requires there to be a radical change in the nature of the parties’ contractual obligations, arising from a situation which the parties had not contemplated at the time the contract was formed: ACT Greenwood Ltd. v. Desjardins-McLeod, 2019 ONCA 158, at para. 17.
[99] If the contract is frustrated, both parties are discharged from the performance of the contract. The Plaintiff is entitled to recover the full amount paid if the Defendant did not incur any expenses in connection with the performance of the contract prior to the frustration: Capital Quality Homes Ltd. v. Colwyn Constructions Ltd., 1975 CanLII 726 (ON CA), 9 O.R. (2d) 617 (C.A.), at p. 630.
[100] The Plaintiff argues that the agreement was frustrated by the landlord’s refusal to approve the transfer of the existing lease. The Plaintiff argues that the refusal to transfer the lease was a “radical change” in the nature of the Agreement that had not been contemplated by the parties.
[101] The Plaintiff did not want a transfer/assignment of the existing lease. She wanted a new lease to reflect the renovations she was doing to the premises and to allocate parking spaces for the Restaurant. In any event, Ms. Wen and the landlord were able to agree on the terms for the new lease. On October 19, 2016, Mr. Choi advised that Ms. Wen and the landlord had worked out all issues as between them, and that he would be drafting the final lease
[102] I find that the Plaintiff has not established a radical change such that the Agreement is frustrated. The Plaintiff is not entitled to a return of the amounts paid to Mr. Gu.
(c) The Counterclaim
[103] Ms. Wen purchased the Restaurant for $425,000. Mr. Gu was ready, willing and able to transfer the Restaurant to Ms. Wen on the date selected for closing, October 28, 2016. Mr. Gu had complied with the terms of the Agreement. The Master Business Licence and the Liquor Licence had been transferred to the Plaintiff. He provided the keys and vacated the premises on September 15, 2016.
[104] Ms. Wen failed to complete the transaction and was in breach of the Agreement. As a result, Mr Gu is entitled to an award of damages for breach of contract.
[105] Mr. Gu took reasonable steps to mitigate his damages. He was successful in selling the Restaurant to a new purchaser, for $330,000. This was the only offer he received. The sale of the Restaurant closed on December 22, 2016. Mr. Gu is entitled to the difference between the price Ms. Wen agreed to pay and the amount received on the sale of the Restaurant.
[106] Mr. Gu sold the Restaurant for $330,000, a deficit of $95,000 from what Ms. Wen had agreed to pay. Mr. Gu was required to incur a sales commission of 20% or $66,000. In addition, he was required to pay the rent in the amount of $13,000 per month for the two-month period after Ms. Wen abandoned the premises and the date the transaction closed.
[107] I find that Mr. Gu’s damages are as follows:
Shortfall in purchase price: $95,000
Commission: $66,000
Rent (two months): $26,000
Total: $187,000
[108] The amounts paid by Ms. Wen are deducted from Mr. Gu’s damages. She paid $242,500. This results in an overpayment by Ms. Wen, and therefore she is entitled to a credit of $55,500.
(d) Costs
[109] Ms. Wen alleged that Mr. Gu made fraudulent misrepresentations with respect to the revenue and profitability of the Restaurant. I find that Ms. Wen failed to prove the allegations of fraud. Failure to prove allegations of fraud is a factor that may be taken into account when assessing costs: Homelife Realty Services Inc. v. Homelife Performance Realty Inc., [2005] O.J. No. 4125 (S.C.), at paras. 22, 23.
[110] Mr. Gu is entitled to his costs of the action. I encourage the parties to reach an agreement with respect to costs. If they are unable to do so, I direct Mr. Gu to serve on the Plaintiff, a Bill of Costs accompanied by written submissions of no more than 3 pages in length within 30 days of the release of these reasons.
[111] The Plaintiff shall serve her reply within 20 days of receiving Mr. Gu’s costs submissions, also limited to no more than 3 pages in length.
[112] After the Plaintiff delivers her cost submissions to counsel for Mr. Gu, counsel for Mr. Gu shall deliver the costs submissions from both parties to me in care of the Judges’ Administration, Room 170, at 361 University Avenue.
DISPOSITION
[113] For the reasons set out above, I make the following order:
(a) The Plaintiff’s action is dismissed.
(b) The Defendant’s counterclaim is granted. Mr. Gu is entitled to damages in the amount of $187,000, plus costs which, if the parties cannot agree, will be determined by me following receipt of written submissions.
(c) The Plaintiff paid a total of $242,500, and is therefore entitled to a credit of $55,500.
(d) $160,955.08 is currently in the trust account of Robins Appleby LLP for the credit of this action. Once costs have been determined, an order will be made with respect to the disbursement of the funds in the trust account.
Chalmers, J.
Released: November 4, 2019