Jonathan Agg et al. v. John Watson et al., 2021 ONSC 3068

CITATION: Jonathan Agg et al. v. John Watson et al., 2021 ONSC 3068

COURT FILE NO.: CV-21-00655956-00CL

DATE: 2021-04-26

SUPERIOR COURT OF JUSTICE – ONTARIO (Commercial List)

RE: JONATHAN DAVID AGG, PRISTINE PROPERTY MANAGEMENT LTD., 2592188 ONTARIO LTD. o/a GARY’S LANDSCAPING, 2513978 ONTARIO LTD., 2592114 ONTARIO LTD. and 2382843 ONTARIO INC., Plaintiffs

– AND –

JOHN ADAM WATSON, 177077 ONTARIO INCORPORATED and ADAM WATSON FLOWERS LIMITED, Defendants

BEFORE: Koehnen J.

COUNSEL: Robert Klotz, for the Plaintiffs Simon Bieber and Michael Darcy for the Defendants

HEARD: April 19, 2021

ENDORSEMENT

1There are two motions before me. The defendants move for an order dismissing this action as an abuse of process because the complaint n which it is based was allegedly settled and released when earlier litigation was resolved. The plaintiffs move for an interlocutory injunction to prevent the defendants from enforcing the settlement agreement that they rely on to strike the action because the settlement was allegedly induced by fraud and the claim in this proceeding was not contemplated by the parties when they settled the first proceeding.

2For the reasons set out below I dismiss the defendant’s motion to strike and grant the injunction. On the record before me, the plaintiffs have made out a strong prima facie case to the effect that the earlier settlement was induced by fraud and that the facts alleged in this action were not contemplated by the parties when they settled the first action.

I. Background Facts

3The motions arise out of a landscaping business known as Pristine Property Management Ltd. that was owned and operated by the plaintiff Jonathan Agg and the defendant John Watson. Each held a 50% interest. Messrs. Agg and Watson had operated the business for approximately 16 years. In 2019, Mr. Agg came to believe that Mr. Watson was misappropriating funds from the business. This led to litigation, an interlocutory injunction removing Mr. Watson from the business, and the appointment of Grant Thornton as an Inspector.

4That litigation was resolved by way of a settlement pursuant to which Mr. Agg purchased Mr. Watson’s 50% interest in the business for approximately $4,000,000 to be paid by installments between March 2020 and early 2027.

5Mr. Agg says that the injunction is appropriate because he recently discovered that Mr. Watson had overstated the income of Pristine by $3,177,000 and, had he known that at the time of the settlement, he would not have paid $4,000,000 for Mr. Watson’s shares. Mr. Agg’s affidavit says that Mr. Watson falsified the income of the business by going into Pristine’s accounting system on August 30, 2019 between 5:53 AM and 6:42 AM to add the $3.1 million of revenue.

6According to Mr. Agg, the overstated income was critical to him because he had assumed that the business earned revenue of approximately $14,800,000 and had expenses of $12,000,000. The difference of $2,800,000 allowed Mr. Agg enough of a cushion to pay the purchase price of the business.

II. Mr. Watson’s Motion to Strike the Statement of Claim

7On the motion before me, Mr. Watson does not deny fraudulently increasing Pristine’s revenue. Mr. Watson did not file any affidavit on this motion or in the original litigation. Instead, Mr. Watson argues that the parties signed a full and final release as part of the settlement which should lead me to strike Mr. Agg’s claim as frivolous, vexatious and an abuse of process.

8The release that settled the original litigation was broadly worded to release Mr. Watson from:

any and all actions, causes of action, suits, …. or demands of every nature and kind whatsoever, …. known or unknown, which the Parties or a Party now has, ever has had or may hereafter have against the other Parties or a Party in respect of: (a) the claims that were or could have been made in the Action and/or the Application; (b) any claims that relate in any way to the relationship between the Parties, (the matters released as described above are referred to collectively as the “Released Matters”).

2. Without limiting the generality of the foregoing, the Parties declare that the intent of the Release is to conclude all issues arising from the matters set forth above and from the Application, and it is understood and agreed that this Release is intended to cover, and does cover, not only all known injuries, losses and damages, but also injuries, losses and damages not now known or anticipated but which may later develop or be discovered with respect to any matters and dealings that have existed between the Parties up to and including the date of this Release, including all the effects and consequences thereof. (Emphasis added)

9Mr. Watson argues that the release specifically contemplated the possibility of unknown claims but that Mr. Agg was nevertheless prepared to release such claims. Moreover, Mr. Watson points to numerous examples in the record to demonstrate that Mr. Agg was settling in circumstances of considerable uncertainty. The original action was based on allegations of accounting irregularities, misrepresentation and Mr. Watson’s alleged dishonesty in respect of those matters. The Inspector appointed to investigate Pristine noted:

The inaccurate accounting records (mainly from the significant cash transactions and comingling of transactions between PPM and the Subject Parties) will make it difficult to complete a proper valuation of the Shared Businesses. In an ideal circumstance, the Shared Businesses would be operated for at least 12 months going forward to remedy the accounting issues and ensure all revenue and expenses are properly recorded in QuickBooks. This would allow an independent valuator to properly value the Shared Businesses based on the operating income from the previous 12 months. However, this approach may be impractical if the Shareholders cannot agree on a process to operate the Shared Businesses for 12 months.

10Mr. Watson also points to what he submits is the general unreliability of Mr. Agg’s evidence. By way of example, on this motion, Mr. Agg originally claimed that, apart from the overstated revenue, he had been misled into settling the original action because he was unaware of significant liabilities to the Canada Revenue Agency. Mr. Agg and his lawyers did in fact know about the CRA liabilities. Mr. Agg has since withdrawn those allegations on this motion.

11Mr. Watson relies on a body of cases which hold that the court will not set aside a release for failure to disclose information if the information relates to an issue about which the “innocent” party was already suspicious. By way of example, in Isailovic v. Gertner,¹ 1537, Herman J. noted,

Nondisclosure, fraud or misrepresentation can vitiate a release. However, the nondisclosure, fraud or misrepresentation must be material to the person entering into the agreement. Furthermore, an agreement cannot be set aside for failure to disclose what one suspected, even if the party had a duty to disclose.²

12In a similar vein, in Bittman v. Royal Bank,³ the Alberta Court of Appeal stated:

The release signed by the appellant is not vitiated by the alleged fraud. It was executed by the appellant at a time when he had suspicions of what he supposed to be fraudulent conduct through the alteration of loan documents. The fact that he now thinks he has been able to gather evidence to prove his suspicions does not entitle him to undo the release.⁴

13Mr. Watson submits that this case falls into the same category as Bittman v. Royal Bank and should be dismissed.

14Finally, Mr. Watson points to cases that dismiss proceedings as vexatious or an abuse of process where the proceeding re-litigates allegations or issues that were raised, or could have been raised, in previous litigation or that have been settled.⁵

15I am not prepared to dismiss Mr. Agg’s claim at this stage based on the settlement. There is a competing line of cases to keep in mind when interpreting releases and settlements. This competing line holds that general words in a release are limited to the things in contemplation of the parties at the time the release was signed, and do not release disputes that had not emerged, or questions that had not arisen.⁶

16In determining what was contemplated by the parties, the words used in a document should not be looked at in a vacuum. The specific context in which a document was executed may help in understanding the words used. The court may examine the surrounding circumstances to ascertain what the parties were really contracting about. ⁷

17In the first action, the inquiry focussed on improper expenses that Mr. Watson had charged to Pristine and on money that Mr. Watson had allegedly taken out of Pristine improperly. The current statement of claim complains that Mr. Watson fraudulently inflated Pristine’s income at a time outside of the period that the Inspector was investigating. Mr. Agg says he had no reason to believe that the income of the business was inflated.

18At a minimum, the facts before me give rise to an issue about how specific a party’s knowledge of a claim has to be before it falls into the category of a claim that is released as opposed to falling into the category of a claim that has not yet emerged. Given the presence of at least an issue in this regard, I do not believe it would be appropriate to dismiss Mr. Agg’s action at this early stage.

19In that sense, the Bittman line of cases is distinguishable. They are based on the plaintiff having a suspicion of something and releasing the claim of which he was suspicious. Mr. Agg says he knew Mr. Watson was improperly taking money but never suspected that he was fraudulently inflating revenue.

20In addition, both parties agree that a fraud that causes parties to enter into a settlement, vitiates the agreement.⁸ There is again, at least an issue about the extent to which Mr. Agg was induced to enter into the settlement based on a fraudulent misrepresentations by Mr. Watson.

21Mr. Watson had told Mr. Agg on various occasions that the income of the business was $15,000,000. He appears to have prepared a confidential information memorandum for a potential purchaser which set out revenue at $15,000,000. During the course of settlement discussions, Mr. Watson’s counsel wrote to Mr. Agg’s counsel stating:

It appears that A. Farber and Associates has spent considerable time working with Pristine, Mr. Agg, and other individuals at Pristine to put together this proposal. While Mr. Watson was not involved in the compilation of this proposal, he is in agreement with the figures determined and outlined within it. As a result, we believe this proposal should serve as the starting point for valuing Pristine.

22That statement is designed to induce confidence in the Farber report. The Farber report was, however, based on the revenue numbers that Mr. Watson is alleged to have fraudulently increased (although it put revenue at $13.8 million). I underscore here that I am not in any way criticizing Mr. Watson’s lawyer for making the statement he did. He was simply passing on information that he had received from Mr. Watson.

23Mr. Watson was a director of Pristine. As such, he owed the company a fiduciary duty not to fraudulently misrepresent its income. On the limited record before me, I infer that Mr. Watson knew or ought to have known that Mr. Agg would be relying on income from the business to pay for Mr. Watson’s shares. There is no evidence before me that Mr. Agg had any means to pay Mr. Watson $4 million apart from income from the business. The seven year payment schedule for Mr. Watson’s shares is consistent with that inference.

24These circumstances are enough to take Mr. Agg’s claim out of the category of frivolous, vexatious or abusive claims. There is enough of a record to demonstrate that it would be open to a trial judge to set the settlement aside by reason of Mr. Watson’s alleged conduct. I am not saying that the trial judge will necessarily come to that conclusion; that will obviously depend on the specific nature of the evidence tendered at trial. All I am saying is that the current record is sufficient to show that there is a real issue in this regard.

III. The Plaintiffs’ Motion for an Injunction

25The plaintiffs commenced this action on January 29, 2021 to, among other things, rescind settlement and amend the share sale price. Under the settlement agreement, Mr. Agg or Pristine were obliged to pay an initial installment of $25,000 on March 5, 2020 with the next payment due on February 1, 2021 in the amount of $175,000. Mr. Agg and Pristine did not make that payment but informed Watson on that day that they would not be making any further payments under the settlement.

26The settlement documents provide that, if Mr. Agg and Pristine defaulted on any one of his payments, then Mr. Watson is entitled to get his shares back and resume his role as a shareholder, officer and director of Pristine. As a result, on this motion, the plaintiffs seek an injunction to restrain Mr. Watson from enforcing his remedies for non-payment, pending the adjudication of action.

27The test for an interlocutory injunction is well known. The moving party must establish that:

(a) there is a serious issue to be tried; (b) they will suffer irreparable harm if the injunction is not granted; and (c) the balance of convenience favours granting the injunction.

28In my view, each branch favours the plaintiffs.

29On the record before me, the plaintiffs have established both a serious issue to be tried and a strong prima facie case in the event that this more stringent test were applied. The evidence before me discloses that Mr. Watson fraudulently inflated revenue by going into the accounting records outside of business hours to falsify the books. He has not denied doing that. Through his counsel, Mr. Watson represented that the Farber report was reliable. It was based on Mr. Watson’s manipulated accounting records. Mr. Watson made other representations to the effect that the income of Pristine was $15 million. He has not denied those representations on this motion. Those representations were based on fraudulent records.

30With respect to irreparable harm, Pristine’s lender and a number of its employees have indicated that they are no longer prepared to work with Pristine if Mr. Watson returns to the business. That creates significant disruption for Pristine. To re-introduce into Pristine someone who, on the record before me, has fraudulently manipulated its accounting records, creates irreparable harm for both Mr. Agg and for Pristine.

31The balance of convenience also favours the plaintiffs. The harm Mr. Watson suffers by granting the injunction is relatively minor. The only prejudice to Mr. Watson in the record before me is that he was not paid $175,000 of February 1, 2021 as the settlement agreement called for. While everyone would like to be paid money they were expecting, Mr. Watson has introduced no evidence of any prejudice he will suffer as a result of the lack of the payment. Moreover, to the extent Mr. Watson suffers prejudice, he is, on the record before me, the author of his own misfortune. Had he not fraudulently and surreptitiously increased revenues, he would not be facing this problem.

32Before the settlement Mr. Watson had already been removed from Pristine by an interlocutory order of Justice Dietrich. His continued separation from the business therefore simply continues the pre-settlement status quo. Pursuant to Justice Dietrich’s order, Mr. Watson was entitled to certain information about Pristine. Mr. Watson’s right to such information is reinstated as part of the injunction I grant.

33The consequences to Mr. Agg, however, are far more serious if I do not grant the injunction. He will once more have to deal with an apparently fraudulent business partner, suffer the loss of employees and the loss of financing. As a practical matter it would be impossible for the business to function effectively in these circumstances. There is a serious prospect that the disruption will lead the business to fail entirely. That is a consequence a court cannot repair.

34The harm to Mr. Watson in having payments delayed is a harm the court can address. I am prepared to work with the parties to develop an expedited timetable to ensure that the action is resolved before, or very shortly after, the next payment is due in January 2022. The issues are not unduly complex. They focus on the activities of the parties and their understanding within a relatively short period of time and the value of the business in its true state.

35I have considered whether I should require Mr. Agg to make the payment that was due on February 1, 2021 on the theory that even a business with the lower revenues he asserts is worth something. If a business with the $15 million in revenues that Mr. Agg anticipated was worth $4 million, then a business with revenue of $12million would still be worth at least $175,000 or even $350,000 if one takes into account the payment due in January 2022. I have, however, decided against that option. Mr. Agg noted that he was going to pay the purchase price from profits from the business. At $12 million in revenue, the business has no profit. I was not taken to any conflicting evidence on this point. Had Mr. Agg known he was buying a business with no profit, he could have adjusted the payment schedule to allow him time to restructure the business to make it profitable. He has been denied that opportunity. Forcing Mr. Agg to pay the $175,000 now, takes money away from him that he could use to advance the action and gives money to Mr. Watson that he can use to defend the action. That strikes me as putting a thumb on the scale to favour Mr. Watson. I have concluded that it would be most fair if I did not intervene to favour one party financially but that I address any potential financial prejudice by designing a proportionate, expedited process to have the matter adjudicated as quickly as possible.

36There is potentially a different legal test to apply to determine whether to enforce the settlement at this time. The court has broad discretion determining whether to enforce a settlement.⁹ In Milios v. Zagas,¹⁰ the Court of Appeal, set out four factors to consider when deciding whether to do so. Although developed in the context of a final ruling, they could also be applied to an interlocutory ruling. The factors are as follows:

(a) Has an order had been taken out or do the parties’ pre-settlement positions remain intact? (b) Would the defendant be prejudiced if the settlement was not enforced, apart from losing the benefit of the settlement? (c) To what degree would the plaintiff be prejudiced if judgment were granted in relation to the prejudice the defendant would suffer? (d) Are third parties affected if the settlement is not enforced?

37When applying this test, I arrive at the same result as I do when applying the test for an interlocutory injunction.

38With respect to the parties’ pre-settlement positions, Mr. Watson submits that if the settlement is not enforced, the pre-settlement status quo should prevail. That was one in which Mr. Watson was a 50% shareholder and participated in the business. He submits that Mr. Watson should be reinstated in the business. I do not agree with that position. Before the settlement was entered into, an injunction was in place that restrained Mr. Watson from participating in the business but entitled him to financial information about the business.

39With respect to prejudice to Mr. Watson, Mr. Watson has introduced no evidence about prejudice to him that would arise in allowing the action to go forward apart from the potential prejudice that he may lose the benefit of the settlement.

40As noted when discussing the balance of convenience, the degree of respective prejudice favours Mr. Agg.

IV. DISPOSITION

41For the reasons set out above I dismiss Mr. Watson’s motion to strike the statement of claim and grant Mr. Agg’s motion for an interlocutory injunction to restrain enforcement of the settlement agreement pending final determination of this action. Whatever rights Mr. Watson had to information about Pristine under the interlocutory order of Justice Dietrich is reinstated as a part of the injunction I grant.

42The parties were not in a position to argue costs at the conclusion of the hearing. While I will still hear the parties on costs, my initial inclination is to have costs be in the cause. There may be reasons for which this is inequitable. If either party believes it is not equitable, they may make written submissions on costs within 10 days of release of these reasons, responding submissions to follow 1 week later, reply to follow 5 days after that.

43The parties are to arrange a case conference before me to create an expedited litigation timetable which will see this matter adjudicated as quickly as possible and before the next payment is due under the settlement agreement.

Koehnen J.

Footnotes

1. 12008 1537
2. 2Isailovic v. Gertner, 2008 1537 at para 64, aff’d at 2008 ONCA 895.
3. 3Bittman v. Royal Bank, 2007 ABCA 102
4. 4Bittman para 8.
5. 5Gravelle v. Ontario, 2021 ONSC 5149 at para 190; Isailovic para 27; affm’d 2008 ONCA 895; Butera v. Fragale, 2010 ONSC 3702 at paras 19-20; Sinclair-Cockburn Insurance Brokers Ltd. v. Richards, 2002 CarswellOnt 2784 at para 16.
6. 6Metcalfe & Mansfield Alternative Investments II Corp., (Re), 2008 ONCA 587, para. 111; Hill v Nova Scotia (Attorney General), 1997 401 (SCC), [1997] 1 S.C.R. 69, paras. 18 – 21.
7. 7Mildren v Mildren, 2016 ONSC 8076, at paras. 8, and 13 - 14
8. 8York University v. Markicevic, 2018 ONCA 893 at para 11, 21-22 leave to appeal denied, 2019 64819 (SCC).
9. 9Srebot v. Srebot Farms Ltd., 2011 ONSC 4512, at para. 71.
10. 10Milios v Zagras (1998), 1998 7119 (ON CA), 38 O.R. (3d) 218 (C.A.) at para. 21.