2021 ONSC 1246

Court File and Parties

Court File No.: CV-19-632418-0000 Date: 20210218

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

2712349 Ontario Incorporated Applicant – and – 2473056 Ontario Inc. and Crystal Louis Respondents

Counsel: Tamara Ramsey, for the Applicant Taayo Simmonds, for the Respondents

Heard: February 11, 2021

J.T. Akbarali J.

Overview

[1] The corporate parties to this application were parties to a failed asset purchase agreement under which the applicant, 2712349 Ontario Incorporated (“271”) was to purchase the assets of a homecare franchise, Right at Home Canada, owned and operated by 2473056 Ontario Inc. (“247”). The personal defendant, Crystal Louis, is the sole director and shareholder of 247.

[2] Before the failure of the transaction, 271 made a $65,000 “down payment” pursuant to its agreement with 247, although the payment was made to Ms. Louis personally. When 271 failed to obtain financing to close the transaction, it relied on the financing condition in the agreement to terminate the transaction. The parties disagree about whether the financing condition was exercised reasonably and in good faith, and whether the $65,000 payment is refundable to 271. If it is refundable, they disagree about whether Ms. Louis bears joint responsibility with 247 for repaying it.

Issues

[3] The issues I must determine on this application are:

a. Was 271 entitled to rely on the financing condition to terminate the agreement? This requires a determination of whether 271 acted reasonably and in good faith in its efforts to obtain financing.

b. Was the $65,000 payment advanced under the agreement refundable or non-refundable?

c. If the $65,000 payment was refundable, is Ms. Louis jointly and severally liable with 247 for its repayment to 271 on the basis of the doctrine of unjust enrichment?

[4] For the reasons that follow, I conclude that 271 acted reasonably and in good faith in seeking financing, and it was entitled to invoke the financing condition to terminate the agreement when it failed to obtain financing. I find that the $65,000 payment is refundable, and that Ms. Louis is jointly and severally liable for its repayment to 271 on the basis of unjust enrichment.

The Terms of the Agreement

[5] After discussions and negotiations during the summer of 2019, the corporate parties signed the asset purchase agreement on September 6, 2019, using a template provided by the franchisor which they modified without legal advice. It provided that 271 would purchase “all of the assets” of 247, including, but not limited to “all goodwill,” which the agreement described as including, among other things, employee records, and customer lists. The agreement did not specifically identify any other assets that were to be purchased beyond goodwill. It specifically excluded from purchase cash on hand, receivables, and deferred income taxes and income taxes recoverable.

[6] The agreement provided that the purchase price for the goodwill was $165,000. Payment was to be made by way of a “down payment” of $65,000 upon execution of the agreement, and by delivery of $100,000 on closing.

[7] The agreement provided that 271’s obligation to complete the purchase “shall be subject to the satisfaction of, or compliance with” a number of conditions precedent “each of which is hereby acknowledged to be inserted for the exclusive benefit of [271] and may be waived by it in whole or in part.” Those conditions included (i) the truth and accuracy of 247’s representations, (ii) 247’s performance or compliance with all its obligations, covenants, and agreements, (iii) the franchisor’s consent to the purchase and sale transaction, (iv) 247’s delivery of a restrictive covenant, and (v) no material adverse change, among others. Of particular importance here is 271’s financing condition precedent that provided that it “shall have been successful in securing financing of the purchase price from its lender.”

[8] The agreement also identified the vendor’s conditions, of which there were two: the truth and accuracy of 271’s representations at the closing date, and 271’s performance or compliance with all its other obligations, covenants, and agreements. If the vendor’s conditions were not met, 247 had no obligation to complete the sale.

[9] In the event of a failure to satisfy conditions, the agreement provided that the party entitled to the benefit of the condition may send notice in writing to the other party, “without releasing the other party from any liability arising from any breach, default or non-performance arising under or in respect of [the] agreement, that [the] agreement is terminated effective immediately.”

[10] The agreement also included an entire agreement clause, confirming that it:

constitutes the entire agreement between the parties pertaining to the subject matter of this Agreement and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the Parties, and there are no representations, warranties or other agreements between the Parties in connection with the subject matter of this Agreement except as specifically set out in this Agreement.

Did 271 act reasonably and in good faith in terminating the agreement?

[11] The parties agree that 271 had the obligation to act honestly and in good faith when exercising the financing condition precedent to terminate the agreement. There is a general duty of honesty in contractual performance; parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of a contract: Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, at para. 73.

[12] In cases where a party seeks to avail itself of a financing condition to avoid closing the transaction, the party must have made good faith, reasonable efforts to obtain financing; perfection is not demanded: Grand v. Richcraft Homes Ltd., 1994 CarswellOnt 3081, 49 A.C.W.S. (3d) 404, (Ont. S.C.), at para. 15; Kapetanios v. Cooper, 2001 CarswellOnt 332, [2001] O.J. No. 399 (Ont. S.C.), at para. 8; Wypych v. McDowell, 1990 CarswellOnt 530, [1990] O.J. No. 674 (Ont. S.C.), at paras. 11-12.

[13] The respondents argue that 271 did not act reasonably and in good faith in its attempts to obtain financing. They argue that during the original negotiations, the principals of the corporate parties - Ms. Louis for 247 and Mayo Hawco for 271 - had discussed a price for the asset purchase of $180,000. In mid-August 2019, Ms. Hawco advised that 271 could not obtain financing at a level that would allow her to purchase at that price. She thought $160,000 was the best it could do.

[14] According to Ms. Louis, Ms. Hawco represented that she had funds available to her in her bank account from the sale of her home, and she, and therefore 271, could afford to pay $160,000. Eventually, the parties agreed on $165,000. On cross-examination, Ms. Hawco confirmed she had sold her home and netted just over $700,000. She also indicated that she had purchased a pre-construction condominium, but the purchase had not yet closed.

[15] Ms. Hawco argues that she needed a significant portion of the funds in her bank account for her condominium purchase, and she was clear that 271 required financing to close the transaction at a purchase price of $165,000. She intended to use some of her savings towards the purchase of the franchise, but she did not intend to pay the entire amount from her savings. Contemporaneous text messages between Ms. Hawco and Ms. Louis support the conclusion that Ms. Louis knew that, even at the lower purchase price of $165,000, Ms. Hawco was seeking to secure financing for 271 to close the transaction.

[16] The evidence in the record establishes that Ms. Hawco had been speaking to her bank, and that Ms. Louis was aware that those discussions were ongoing. Ms. Hawco had originally understood from her banker, Minh Le, that 271 could probably borrow in the range of $60,000-$65,000 for the purchase. However, when Mr. Le actually reviewed the agreement, he advised Ms. Hawco that the bank would not lend 271 any funds, because the only asset being purchased was goodwill. Mr. Le gave affidavit evidence on the motion confirming that the bank declined the loan. He was cross-examined on his affidavit, and gave evidence that he had reviewed the assets of the company, and spoken to his manager about the loan request. He stated that all banks – not just the bank he works for – will not finance on goodwill alone. “Nothing – nothing for us to secure, in other words.”

[17] Ms. Hawco asked Mr. Le to provide a letter indicating that 271 had been refused financing and setting out the reason. In an email, she provided Mr. Le with the wording she wanted him to use. Mr. Le used the wording provided by Ms. Hawco. The respondents argue that the email suggests that Ms. Hawco engineered the failure of the financing because she wanted to purchase a different homecare franchise instead – ComForCare, which she purchased in January 2020.

[18] I do not accept that argument. Mr. Le is an independent witness. He explained that he does not usually send letters confirming the denial of financing unless the client requests it. The emails between Ms. Hawco and Mr. Le were to ensure the required information was provided to Ms. Louis and 247, but the information in the letter reflected the truth of what occurred. Mr. Le’s evidence that a bank will not lend based on goodwill, which cannot be secured, is commercially reasonable. In contrast, the theory that Mr. Le participated in a scheme to extricate Ms. Hawco and 271 from an agreement so they could enter into another transaction is not only speculative, it is unrealistic.

[19] Moreover, I accept 271’s argument that purchasing the ComForCare franchise was a natural next step for it. Ms. Hawco had been seeking franchise opportunities in the homecare industry, and had investigated several franchises. Once the agreement with 247 failed, there is no reason to suppose that Ms. Hawco would not have continued to pursue other opportunities. There is no reason to infer any bad faith or malintent from 271’s subsequent purchase of a different homecare business.

[20] Nor do I accept that the fact that Ms. Hawco had funds in the bank indicates that 271 failed to exercise the financing condition reasonably or in good faith. Ms. Louis was aware throughout that Ms. Hawco was looking to finance part of the purchase of the franchise. The contract the corporate parties signed – after the price was lowered – included a financing condition. It was clear on the face of the agreement that if 271 could not obtain financing, it would have the option to terminate the agreement.

[21] The contract included an entire agreement clause. There was thus no enforceable representation (if there even was a representation) that if 271 could not obtain financing, Ms. Hawco would fund the purchase entirely through her savings. There is no basis to look beyond the financing condition that existed for 271’s sole benefit.

[22] In the end, 271 could not obtain financing, despite making reasonable, good faith efforts to do so. It was entitled to exercise the right it had contracted for to terminate the agreement.

Was the $65,000 payment refundable if the contract was terminated?

[23] The parties disagree about whether the $65,000, described in the contract as a “down payment” was a refundable payment in the event the transaction did not close. The contract does not describe the payment as either refundable, or non-refundable.

[24] The modern approach to contractual interpretation requires the court to read 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 the contract was formed: Creston Molly Corp. v. Sattva Capital Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 47. The overriding concern is to determine the intent of the parties and the scope of their understanding: Sattva, at para. 47.

[25] While a court must consider the surrounding circumstances when interpreting a contract, in Goodlife Fitness Centres Inc. v. Rock Developments Inc., 2019 ONCA 58, the Court of Appeal cautioned against looking to negotiations to interpret a contract. It summarized the basic principles of commercial contract interpretation, at para. 15, 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 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 underlining the negotiation of the contract, but not the subjective evidence of the intention of the parties.

[26] 271 argues that down payments are generally refundable, in the absence of evidence to the contrary. It argues that down payments are a partial payment of the purchase price and are therefore recoverable if a transaction does not close: Dovbush v. Mouzitchka, 2016 ONCA 381, at para. 31; Stevenson v. Colonial Homes Ltd., [1961] O.R. 407 (Ont. C.A.). In Jensen v. Chicoine, 2018 ONSC 95, at para. 25, the court explained that:

if the initial payment is solely a partial payment of the purchase price rather than a deposit, the buyer is entitled to recover the initial payment, subject to the seller’s entitlement to damages if the buyer failed to perform the contract. However, if the initial payment is both a partial payment of the purchase price and a deposit, it is not recoverable if the buyer fails to perform.

[27] A deposit made to secure the buyer’s performance is not recoverable if the buyer fails to perform the contract. In Jensen, at para. 24, the court explained that:

if upon the making of a contract the buyer makes a payment to the seller to guarantee the buyer’s performance of the contract, the payment is not recoverable if the buyer fails to perform the contract. The seller is entitled to retain the payment, without proving loss equal to or greater than that amount. … “[A] deposit, if nothing more is said about it, is, according to the ordinary interpretation of business men, a security for the completion of the purchase.”

[28] “If the documents evidencing the initial payment do not make clear whether the payment was intended to be a deposit or partial payment, the court is entitled to infer the intent from all the surrounding circumstances”: Jensen, at para. 26.

[29] The respondents argue that the $65,000 payment was intended to be a non-refundable deposit. They note Ms. Hawco’s evidence that she did not know there was any legal difference between a down payment and a deposit, and argue that in these circumstances, the identification of the payment as a “down payment” cannot be determinative. Rather, they argue that I must infer the intent from all the surrounding circumstances which, in their view, support a conclusion that the payment was meant to be non-refundable.

[30] They argue that in view of the negotiations between the parties that led to a reduction in the purchase price from $180,000 to $165,000, 247 would not have proceeded with the agreement if the $65,000 payment were not non-refundable. They point to steps taken by Ms. Louis to notify clients and employees of the change in ownership of the franchise, to prepare to move to British Columbia, and to have knee surgery, which would have left her unable to work for some time. They argue that she would not have taken these steps without some guarantee that the transaction would close, and that guarantee was in the form of the $65,000 payment. They note that the template received from the franchisor did not include an advance payment, but contemplated that the entire payment would exchange hands at closing. They state that the amendment to the template to include the $65,000 payment is indicative of the fact that they wanted a non-refundable deposit as security that 271 would perform its obligations under the agreement. Ms. Louis also gave evidence that she had a verbal discussion with Ms. Hawco about the $65,000 payment being non-refundable.

[31] In my view, applying the legal principles of contractual interpretation to the factual matrix in this case leads to a conclusion that the $65,000 payment was a refundable down payment. I reach this conclusion for the reasons that follow.

[32] First, there are many conditions precedent set out in the agreement which could lead to its termination. Some of those would arguably be the fault of the purchaser, some would arguably be the fault of the vendor (such as failing to deliver the restrictive covenant or failing to meet other obligations under the agreement), and some would arguably be neither party’s fault, such as if the franchisor failed to agree to the transaction. It would make little sense for the payment to be non-refundable in all of the circumstances that could lead to a termination of the agreement.

[33] Second, the agreement provides for no release of liability in the event of the termination of the agreement, suggesting that the return of the $65,000 was a separate matter from either party being able to hold the other responsible for any actionable wrongs.

[34] Third, the evidence indicates that Ms. Louis was not prepared to allow Ms. Hawco access to all of 247’s records to do full due diligence until after some money had changed hands. It is not commercially reasonable to conclude that 271 would make a non-refundable payment for a business without having been able to complete proper due diligence. Moreover, the fact that Ms. Louis was not prepared to allow Ms. Hawco to complete her due diligence until money changed hands provides a more likely explanation for the modification of the contract template to include a down payment than the explanation that the template was modified to provide security that the transaction would close.

[35] Fourth, Ms. Louis’s evidence that she and Ms. Hawco discussed that the payment would be non-refundable is disputed by Ms. Hawco, and even if true, was never memorialized in the agreement which includes an entire agreement clause. I place little weight on this evidence.

[36] Fifth, the parties elected to use the term “down payment,” not “deposit.” Words to a contract should be given their ordinary and grammatical meaning. In Jensen, the court recognized that “deposit” ordinarily refers to security for the completion of the purchase, while a “down payment” is ordinarily meant to be an initial, partial, payment towards the purchase price. A deposit is not non-refundable and a down payment refundable at law, not because there is some magic to the terms, but because that is the understanding that ordinary people have of those terms.

[37] Sixth, the steps Ms. Louis took in anticipation of the transaction being completed – such as notifying clients and employees, and preparing to move – do not indicate that the $65,000 payment was non-refundable, but rather demonstrate her assumption that the transaction would close without incident. Having taken the steps she did, I have no doubt that the failure of the transaction caused Ms. Louis difficulties, but she chose to act assuming the transaction would close before that was a certainty. In taking these steps, she acted unilaterally, without Ms. Hawco’s participation.

[38] Seventh, the reduction in purchase price from $180,000 to $165,000 was a matter of negotiation between the parties, and as such, in view of the jurisprudence that does not support considering negotiations when interpreting contracts, I do not consider it relevant to the question before me. In any event, this is not a situation where the parties had an agreement for the sale of the franchise for $180,000 and subsequently negotiated a reduction in purchase price due to 271’s problems obtaining financing. There was no previous agreement – there were only negotiations. The idea that Ms. Louis and 247 would have required a non-refundable payment as security because of successful price negotiations on the part of 271 is far less likely than the opposite conclusion, that the payment was intended to be refundable, for all the reasons I have set out herein.

[39] I thus conclude that the parties intended the $65,000 payment would be refundable if the transaction failed, with each party reserving its rights against the other to address any actionable wrongs. This conclusion is commercially sensible in view of the fact that 247 would not allow 271 to complete its due diligence before paying something towards the purchase, and in view of the fact that the contract could be terminated for any number of reasons, including some for which the fault would lie with 247.

[40] I thus find that 247 is contractually obliged to return the $65,000 payment to 271.

[41] I note that 247 also seeks pre-judgment and post-judgment interest under the Courts of Justice Act, R.S.O. 1990, c. C.43, which are appropriately ordered.

Is Ms. Louis jointly and severally liable on the basis of unjust enrichment?

[42] The question of Ms. Louis’s joint and several liability with 247 arises from the undisputed fact that the $65,000 payment was made by 271 to Ms. Louis directly.

[43] It is clear that Ms. Louis was enriched by the receipt of $65,000, and that 271 suffered a corresponding deprivation. In view of my conclusion that the down payment is refundable, there is no juridical reason for the enrichment.

[44] I thus find it is appropriate that Ms. Louis be jointly and severally liable with 247 for the return of the $65,000 down payment to 271, together with interest under the Courts of Justice Act.

Costs

[45] At the hearing of the motion, the parties advised me that offers had been made that were relevant to costs. I proposed that each party upload their bill of costs and any offers to caselines, for my review after I wrote my reasons on the merits. I proposed that I would deal with costs at that time, on the basis of those bills of costs and offers, without receiving submissions. The parties indicated they agreed with my proposal.

[46] It is apparent that the applicant is the successful party and is entitled to its costs.

[47] The applicant’s bill of costs discloses partial indemnity costs of $26,030.29, substantial indemnity costs of $38,098.00, and full indemnity costs of $42,119.23, inclusive of HST and disbursements.

[48] In contrast, the respondents’ bill of costs discloses partial indemnity fees of $5,531.16, substantial indemnity fees of 8,296.74, and full indemnity fees of $9,218.60, inclusive of HST and disbursements.

[49] The applicant served an offer to settle, offering to settle the proceeding for $65,000 without costs. The offer was served on January 26, 2021, and is an offer to settle under r. 49.10 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. By the operation of r. 49.10, the applicant is entitled to its partial indemnity costs to January 26, 2021, and its substantial indemnity costs thereafter, unless the court orders otherwise. Unfortunately, it is not possible from the bill of costs for me to precisely discern which costs were incurred after January 26, 2021. However, I can presume that most of the costs were incurred before January 26, 2021, as the motion record and factums are dated prior to that time. This suggests that it is the applicant’s preparation for, and attendance at, the hearing which post-dates the offer. By my calculation, costs calculated on this basis would amount to about $27,000, all inclusive.

[50] The respondents also made an offer to settle for $37,500. It appears this offer was made twice, in April 2020 and again in December 2020. It is apparent that the respondents did not beat their offer.

[51] Subject to the provisions of an Act or the rules of court, costs are in the discretion of the court, pursuant to s. 131 of the Courts of Justice Act, R.S.O. 1990, c. C.43. The court exercises its discretion taking into account the factors enumerated in r. 57.01 of the Rules of Civil Procedure, including the principle of indemnity, the reasonable expectations of the unsuccessful party, and the complexity and importance of the issues. Overall, costs must be fair and reasonable: Boucher v. Public Accountants’ Council for the Province of Ontario, 71 O.R. (3d) 291, at paras. 4 and 38. A costs award should reflect what the court views as a fair and reasonable contribution by the unsuccessful party to the successful party rather than any exact measure of the actual costs to the successful litigant: Zesta Engineering Ltd. v. Cloutier, 2002 CarswellOnt 4020, 118 A.C.W.S. (3d) 341 (C.A.), at para. 4.

[52] In determining the quantum of costs, I note the following:

a. The applicant is the successful party and is entitled to some measure of indemnity;

b. The applicant has recovered the entirety of the amount it claimed in the proceeding, against both respondents on a joint and several basis;

c. The proceeding was not complex;

d. The applicant’s materials were well-organized and well-researched. The respondent’s materials were also well-prepared.

e. The respondent’s bill of costs reflects significantly less time spent than the applicant’s bill reflects. However, the applicant’s bill does not reflect unreasonable time spent on the steps taken in this proceeding. The respondent’s bill records significantly less time for many steps in the proceeding than one would expect, and includes no time for certain steps altogether, including attendance at the hearing.

f. In considering the reasonable expectations of the unsuccessful parties, I find that their own bill of costs is not an appropriate measure. Perhaps it reflects the respondents’ subjective expectations, but the time spent is too little to reflect objective expectations about the time required to prepare and argue a motion such as this one; and

g. The issue was very important to the parties.

[53] Having regard to these factors, and the overarching consideration that costs must be fair and reasonable, I conclude that costs in the amount of $18,000, all inclusive, are fair and reasonable in the circumstances. The respondents shall be jointly and severally liable to the applicant for this amount which shall be paid within thirty days of the release of this decision.

Summary of Order

[54] In summary, I grant the following relief:

a. A declaration that the applicant is entitled to the return of the $65,000 down payment paid to the respondents under the agreement dated September 6, 2019;

b. A declaration that the respondent, Crystal Louis, was unjustly enriched by the receipt of the $65,000 payment;

c. An order that the respondents are jointly and severally liable to the applicant for payment of $65,000 plus pre-judgment and post-judgment interest pursuant to ss. 128 and 129 of the Courts of Justice Act;

d. An order that the respondents are jointly and severally liable to the applicant for its costs of this proceeding, in the amount of $18,000 all inclusive, to be paid within thirty days of the release of this decision.

e. This endorsement is an order of the court, enforceable by law from the moment it is released.

J.T. Akbarali J.

Released: February 18, 2021