COURT FILE NO.: CV-20-00647789
DATE: 20210315
ONTARIO SUPERIOR COURT OF JUSTICE
RE: OXYGEN WORKING CAPITAL CORP., Plaintiff
-and-
MIKE MOUZAKITIS and ANGELA MOUZAKITIS, Defendants
BEFORE: F.L. Myers J.
COUNSEL: Maya Poliak and M. Himel (student), for the Plaintiff
John Contini, for the Defendants
Heard: March 10, 2021
ENDORSEMENT
The Motion
[1] The plaintiff moves for summary judgment on guarantees signed by the defendants. The defendants guaranteed the repayment of amounts owing by Scoby Kombucha Inc. to the plaintiff.
[2] For the reasons that follow, the motion is granted.
The Facts
[3] The plaintiff is a factor. That means that it lends money based on the security of the borrower’s accounts receivable. In this case, if Scoby made a sale and wished to get paid before the customer paid its bill, it could sell the account to the plaintiff at a negotiated discount and then the plaintiff would collect the bill.
[4] The factoring agreement (or loan agreement in common language) provides that if Scoby’s customer contests or does not pay its bill, then the plaintiff can require Scoby to re-purchase the debt. Factors lend against the customer’s credit. Factors do not generally take the risk of the adequacy of the debtor’s performance of its business. They do not insure their borrowers against disputes that may arise between the borrower and its customers. It is just a form of lending to improve the borrower’s liquidity and cash flow.
[5] Scoby and the plaintiff entered into a Master Factoring Agreement dated November 20, 2019. Under article 2.1 of the agreement, the plaintiff agreed to establish “a factoring facility” under which Scoby may offer to sell accounts to the plaintiff.
[6] Article 3.1 of the agreement provides the terms by which Scoby may offer to sell accounts to the plaintiff. It is written in the plural and anticipates multiple offers. Article 3.2 incorporates a Schedule “A” that is a list of various accounts subject to the agreement. On the date the agreement was entered into, the schedule was blank. The first transaction under the factoring facility occurred later.
[7] Under article 8.1 of the agreement, Scoby agreed to notify its customers whose accounts have been factored that they should pay the plaintiff only. Article 8.2 authorized the plaintiff to collect factored accounts from the customers directly. In the event that a customer paid Scoby, it agreed to hold the funds received in trust for the plaintiff.
[8] The defendants signed guarantees and postponement agreements containing their unconditional and absolute promises to pay the plaintiff all amounts owing to it by Scoby. The guarantees were unlimited in scope. That is, they did not refer to any one debt instrument or any one advance. Rather, each guarantor promised to guarantee “all indebtedness, liabilities and obligations of any kind whatsoever…which [Scoby] has incurred or may incur or be under to the [plaintiff]”.
[9] Para. 2 of the guarantees provides that they are “continuing” guarantees. A continuing guarantee, “covers a series of transactions, and the surety will be liable in respect of any of those transactions (subject to any overall limit in the amount of the guarantee)”. See: Dhawan v. Shails et. al., 2018 ONSC 7116, citing K. McGuiness, The Law of Guarantee, 3d ed (Toronto: LexisNexis Canada, 2013), at para. 7.5., p. 324.
[10] The defendants acknowledge that they read and understood the guarantees. They both received independent legal advice prior to signing the guarantees.
[11] On December 20, 2019, Scoby made its first borrowing under the Master Factoring Agreement. The customer did not pay its invoices when due. But after some effort, the customer paid and the plaintiff’s advance was repaid in full.
[12] In June, 2020, Scoby factored a second account under the Master Factoring Agreement. Like the first draw on the facility, Scoby delivered documents referring to the Master Factoring Agreement and provided an updated Schedule “A” listing the factored accounts.
[13] This time, Scoby’s customer did not pay Scoby’s invoices as required. The plaintiff is suing Scoby’s customer in Scoby’s name as it is entitled to do under the Master Factoring Agreement. The plaintiff is seeking default judgment in that action.[^1]
[14] On the face of the guarantees, the defendants’ liability seems straightforward.
The Defendants’ “Understanding”
[15] In para. 13 of their statement of defence, the defendants plead:
- It was the understanding of the defendants that the Guarantees applied solely to the receivables which were the subject of the November 2019 Transaction, and not to any subsequent transactions between Oxygen and Scoby.
[16] They say that they thought the guarantees applied only to the first draw under the Master Factoring Agreement in December 2019 and not to later draws.
[17] This is a plea of the defendants’ subjective intention. That term is not found anywhere in the guarantee documents or the Master Factoring Agreement. In fact, it is inconsistent with and undermines the plain wording of the guarantee as a continuing guarantee of all debts Scoby had or may have to the plaintiff.
[18] The defendants do not plead that the plaintiff agreed to the limitation that the “understood”. They simply say it is what they thought the guarantee meant.
[19] In his affidavit, Mike Mouzakitis says that while the defendants were provided with the opportunity to obtain independent legal advice, they did not understand that the lenders’ form of guarantee was open for negotiation. He does not say that the plaintiff refused to negotiate the guarantee terms or that the defendants tried to negotiate, or even wanted to negotiate, the terms of the guarantee. He just says that they did not know that they could.
[20] In para. 13 of his affidavit Mike Mouzakitis swears:
As indicated in paragraph 13 of our Statement of Defence, it was my and Angela's understanding throughout that the Guarantees applied solely to the receivables which were the subject of the November 2019 Transaction, and not to any subsequent transactions between Oxygen and Scoby, including the June 2020 Transaction described in paragraph 14 of the Statement of Defence. Prior to the commencement of this action, no one at Oxygen ever suggested otherwise.
[21] To that end, in para. 16 of his affidavit, he says:
However, if Oxygen had intended that the Guarantees would apply to the June 2020 Transaction, I would have expected that Oxygen would have communicated that expressly to me and particularly to Angela (given that she is not involved in Scoby's business), or to our respective lawyers, and that we would have been asked to confirm or renew the Guarantees.
[22] Again, the defendants assert a unilateral “understanding” and expectation that ignores the plain wording of the guarantees that they signed with ILA.
[23] Were this the extent of the evidence, the motion would be over. The subjective intention of a party is not admissible evidence for the interpretation of a contract. Under the parol evidence rule, oral evidence cannot contradict the plain meaning of a written contract. The personal knowledge, understanding, or expectation of one side of a negotiation does not form part of the objectively known factual matrix to which resort can be had to assist with interpretation of an agreement. See: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53.
The New Evidence
[24] Under cross-examination, for the first time, Mr. Mouzakitis advised that he had been told that the guarantees were limited to the first draw under the Master Factoring Agreement by Mr. Sab Ravalli, the President of the plaintiff.
[25] Under further cross-examination, Mr. Mouzakitis volunteered that his conversation with Mr. Ravalli occurred before the June, 2020 second factoring draw. It arose during a discussion of the terms under which that draw was to be made.
[26] Despite not pleading any pre-contractual representation, misrepresentation, inducement, collateral agreement, or reliance, the defendants now say that there is a triable issue on the meaning of the guarantees because the second draw in June 2020 draw was not subject to guarantees.
[27] The plaintiff did not seek leave to file a late affidavit of Mr. Ravalli concerning this evidence. However, there is a hearsay denial of any representation about the limitation of the guarantees in the plaintiff’s original affidavit material that is expressly based on inquiries from Mr. Ravalli and others.
Summary Judgment
[28] The defendant submits that in the recent decision of Royal Bank of Canada v. 1643937 Ontario Inc., 2021 ONCA 98, a panel of the Court of Appeal held that similar evidence raised a genuine issue requiring a trial.
[29] However, what the court held was more nuanced. At paras. 39 to 41, the Court of Appeal directed motions judges to follow the analytical process set out in Hryniak v Mauldin, 2014 SCC 7, at para. 66. The Court of Appeal emphasized the need for motion judges to analyze carefully all evidence relied upon by the responding party to show that there is a genuine issue requiring a trial. To that end, the Court of Appeal directed judges to pay particular care to explain any proposed rejection of unchallenged evidence utilizing the enhanced powers under Rule 20.04 (2.1) of the Rules of Civil Procedure, RRO 1990, Reg. 194.
The Hryniak Ladder – Step One
[30] The first step is to consider whether there is a genuine issue requiring a trial based on the record alone and without utilizing the enhanced fact-finding powers in Rule 20.04 (2.1) of the Rules of Civil Procedure.
[31] In Hryniak, the SCC directs the following inquiry:
[49] There will be no genuine issue requiring a trial when the judge is able to reach a fair and just determination on the merits on a motion for summary judgment. This will be the case when the process (1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result.
[32] On the pleading and the affidavit evidence of Mr. Mouzakitis, I would readily find that there was no genuine issue requiring a trial. The subjective, internal “understanding” of Mr. and Ms. Mouzakitis is not admissible to contradict the plain wording of the guarantees. They are not limited to one draw or even to the one contract. They apply by their clear and unambiguous terms to all indebtedness ever owing by Scoby to the plaintiff.
[33] How then do I analyze Mr. Mouzakitis evidence that he was told one year after the guarantee was signed that it did not apply? Post-contractual conduct is admissible to assist in the interpretation of an agreement but guardedly so. In my view however, a conversation about the terms of a subsequent draw says nothing about the meaning of the guarantees assessed at the time they were signed. Nor is a cause of action pleaded that would or could undermine the plain meaning of the guarantees.
[34] The debt was a factoring facility. It anticipated multiple draws like a line of credit. The two draws were both made under the same agreement with the same contemporaneous documents as contemplated and required by the agreement.
[35] I do not see a credibility issue requiring resolution, nor any conflict in the evidence, to undermine the interpretation of the scope of the guarantees on the plain meaning of their words as at the date they were signed. On that basis, I would and do make the findings in para. 49 of Hryniak set out above.
[36] But, there is another analysis possible. It too is not pleaded.
[37] The evidence of Mr. Mouzakitis is that Mr. Ravalli told him that the guarantees would not apply to the second advance because the amount being advanced was only 50% and 70% of the respective invoices being factored. The prior advance was for 80% of the invoice amount.
[38] Could the parties have agreed that despite the wording of the Master Factoring Agreement and the guarantees, because the lender was more secured or taking less risk on the second advance, it would not rely on the guarantees? This is an argument in contract law: that the guarantees were amended, novated, or a super-added agreement was entered into to override the guarantees for that advance. Perhaps it could be an estoppel: that the lender agreed it would not enforce it strict rights under the guarantees to induce Scoby to enter into the second transaction and the defendants relied on this representation by enabling Scoby to do so.
[39] This argument runs into the provision of the Master Factoring Agreement requiring that amendments be in writing. The guarantees require that any waiver both be in writing and be signed by the plaintiff. Moreover, the degree of discount to the face amount of an invoice and other issues that determine the amount of an individual advance are determined under the Master Factoring Agreement. There is no evidence nor indication that the reduced percentage of the second advance was something additional, unusual, or outside the agreement. There is no pleading or hint in the evidence of consideration, inducement, or reliance.
[40] If however, Mr. Mouzakitis’s evidence, if believed, is capable of amounting to a defence to the applicability of the guarantees to the second draw, even if they are interpreted as absolute on their face, then I would not be able to decide the motion on the record without resolving the apparent conflict on the evidence as to whether the plaintiff said or agreed it would limit the reach of the guarantees.
The Hryniak Ladder – Step Two
[41] At para., 66 of Hryniak, the Supreme Court of Canada described the inquiries to be made by a judge concerning the use of the enhanced powers under Rules 20.04 (2.1), (2.2), and 20.05:
If there appears to be a genuine issue requiring a trial, she should then determine if the need for a trial can be avoided by using the new powers under Rules 20.04(2.1) and (2.2). She may, at her discretion, use those powers, provided that their use is not against the interest of justice. Their use will not be against the interest of justice if they will lead to a fair and just result and will serve the goals of timeliness, affordability and proportionality in light of the litigation as a whole.
[42] It seems to me that the following questions are among those that the court ought to consider at this stage:
a. Will making findings of fact on the evidence before the court provide a fair and just result as compared to a mini-trial or a trial?
b. Does the material before the court illuminate the factual issue sufficiently to allow the judge to make findings of fact and credibility?
c. Is there something missing that is needed for basic fairness despite the fact that the parties chose not to put that evidence forward?
d. Do considerations of the litigation as a whole mandate some further process before making factual or credibility findings?
[43] Ms. Poliak points to two inconsistencies in Mr. Mouzakitis’s cross-examination evidence. He first said that he was told that the guarantees did not apply in response to a question about the late first advance in November or December, 2019. It was several minutes later that he said that the conversation dealt with the terms of the second advance in June, 2020. Mr. Mouzakitis’s evidence change and evolved as counsel explored the issue further.
[44] Second, Mr. Mouzakitis testified that he believed that he had written confirmation of the conversation. At q.80 of his cross-examination transcript he undertook to produce the written confirmation. He has yet to do so. So, he was either mistaken or not truthful in trying to bolster his oral evidence with reference to a non-existent email.
[45] In addition, both sides understand their obligations to put their best foot forward. Yet Mr. Mouzakitis’s fundamentally important piece of evidence (that Mr. Ravalli told him that the guarantees did not apply to the second draw under the Master Factoring Agreement) was not pleaded nor sworn to in Mr. Mouzakitis’s affidavit.
[46] Had counsel not asked the proverbial one question too many, the evidence that the plaintiff told the defendants that the guarantees did not apply would never have been adduced. I would not invade the privileged solicitor client space, but is it not obvious that a lawyer would ask a client “where did you get the understanding that the guarantee did not apply”? No one wants to plead a unilateral, subjective understanding to interpret a contract.
[47] In my view this is a case in which utilizing the enhanced powers will lead to a fair result. It seems to me that an inference is safely available that had Mr. Mouzakitis ever mentioned this evidence before his cross-examination, it would have been pleaded front and centre. In addition, the evidence as adduced is uncertain as to time and unsupported despite an indication that there is documentary support. There is no evidence of reliance, inducement, or a written amendment or waiver. Finally, the notion that a lender whose first advance was not repaid on time as required, would agree to forgo its security in a simple, unrecorded, undocumented conversation, does not accord with my understanding of business common sense or lending logic.
[48] Is there a need for a trial or a mini-trial on this point? I do not see how it will help. Mr. Ravalli’s denial, although hearsay, is already recorded. Mr. Mouzakitis will be impeached whether he says the conversation was in November, 2019 or in June, 2020. If he tries to say there were two conversations, he will be impeached for that.
[49] When witnesses are already pinned to sworn testimony about an event or conversation and there is no additional documentary evidence or other witnesses who saw the event or heard the conversation, that can be a good time for use of the enhanced powers. Holding a live proceeding just to repeat testimony to which a witness is already pinned is not a productive process. It is not an affordable, efficient, proportional process.
[50] Finally, in my view, using the enhanced powers is not against the public interest and will serve the interest of the civil justice system in light of the litigation as a whole. This is not a case where an affidavit might not have captured the affiant’s true voice. There is no issue of multiplicity, inconsistent verdicts, or missing evidence. The defendants pleaded and swore to their best case and then, in response to a question offering an opportunity, Mr. Mouzakitis gave an answer that the defendants are now trying to massage into a defence.
[51] In this case, I find that I can fairly make the finding of fact and credibility under Rule 20.04 (2) in light of: the suspect timing of the evidence; Mr. Mouzakitis’s inconsistency in the dates of the alleged conversation; the lack of documentary support for the conversion despite Mr. Mouzakitis’s evidence that there was some; and the inconsistency of the evidence with business common sense in the circumstances. These concerns all lead me to conclude that Mr. Mouzakitis’s evidence should not be accepted as credible on this point. See: Faryna v. Chorny (1951), 1951 CanLII 252 (BC CA),
Other defences
[52] In all, the evidence of Mr. Mouzakitis does not satisfy the writing requirement of the agreements, does not amount to a contract, and does not include the reliance required for an estoppel. In any event, were it necessary to do so, I would find it incredible for the reasons discussed above.
[53] The defendants plead that the plaintiff’s efforts to enforce their invoices interfered with their relationship with their customer and this prejudiced their own ability to get paid. The evidence is bald and, to the extent it purports to say that the customer is unhappy or unwilling to pay its invoices because of something said or done by the plaintiff, it is inadmissible hearsay. There is no source of information identified nor is a belief testified to. The defendants produced no documents to support this argument. The evidence is a simple adoption of the statement of defence. There is no basis in the bald and unsupported allegations on which to find a genuine issue requiring a trial that anything done by the plaintiff so seriously enhanced the guarantor’s risk as to release the guarantees.
[54] Finally, the guarantors raise an issue about an ambiguity in the interest calculation under the Master Factoring Agreement. They are correct that it appears that the interest rates were reversed so that a higher rate is charged when Scoby is not in default and a lower rate applies on default. Holding the plaintiff to the lower rate of 27% resolves that concern.
Outcome
[55] I grant summary judgment to the plaintiff for the amount sought in the statement of claim with prejudgment interest at 27% pursuant to the Master Franchise Agreement.
[56] The plaintiff is also entitled to costs of a substantial indemnity basis under the agreements. Costs are fixed at $16,000 all inclusive.
F.L. Myers J.
Date: March 15, 2021
[^1]: By their terms, the plaintiff is entitled to enforce the guarantees without reference to other enforcement actions it is pursuing. Ms. Poliak rightly acknowledges that the plaintiff’s recovery is limited to 100% of the outstanding principal, interest, and costs owed to it. How subrogation might apply to any further recovery is not an issue at this stage.