Li v. Che, 2021 ONSC 3250

COURT FILE NO.: CV-18-00602128

DATE: 20210423

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

RICHARD LI

Plaintiff

– and –

LINGYUN CHE

Defendant

A. Ostrom for the Plaintiff

X. Wang for the Defendant

HEARD: by videoconference on March 23-25, 2021

chalmers, J.

REASONS FOR DECISION

OVERVIEW

[1] The Plaintiff, Richard Li (“Li”), entered into an oral agreement with the Defendant, Lingyun Che (“Che”), to purchase the commercial/residential property located at 1726-1728 Eglinton Ave. West, Toronto (the “Property”). They agreed to incorporate LY&C Holdings Corp. (“LY&C”) for the purpose of purchasing the Property. LY&C entered into an Agreement of Purchase and Sale with the vendors of the Property, Eugenio and Franca Grachelli, on January 8, 2018. The purchase price was $2.7 million. The deposit was $200,000.

[2] The Property is a mixed-use building. There are seven residential units on the second and third floors. The main floor is a commercial unit, which was vacant at the time of purchase. According to Li, a mortgage was not available from a commercial lender because of this vacancy. As a result, the purchase had to be in cash.

[3] Li states that his agreement with Che required him to make a capital contribution of $400,000, for which he received 51 percent of the shares of LY&C. He also states that Che was required to make a capital contribution of $384,313.73 for 49 percent of the shares of the company. In addition, Che was to provide a shareholder’s loan of up to $2 million to purchase the Property. According to Li, after the purchase of the Property, they intended to lease the main-floor unit. Once leased, they could apply for a mortgage, which would be used to repay Che’s shareholder’s loan.

[4] Che agrees that LY&C was incorporated to purchase the Property, but her evidence differs from Li with respect to the contributions of the parties. According to Che, she agreed to contribute $800,000 in capital to LY&C, for which she would receive a 49 percent share in the company. Li would contribute capital of $400,000 for a 51 percent share. Li was entitled to a larger interest in the company despite a lower capital contribution because he was responsible for carrying out all steps necessary to purchase the Property. Che denies that there was an agreement that she would provide a shareholder’s loan of up to $2 million to purchase the Property. She believed the purchase would be financed by a mortgage on the Property.

[5] Che states that Li first told her that a mortgage was unavailable on February 13, 2017. On February 17, 2017, Che advised Li that she was not prepared to advance the funds necessary to purchase the Property beyond her $800,000 capital contribution. Li was unable to raise the funds. On February 23, 2017, the purchasers requested an extension of the closing. The extension was granted to February 27, 2017, but the transaction did not close. The $200,000 deposit was forfeited.

[6] Li paid the $200,000 deposit. Che made no payments towards the purchase of the Property. The vendors, Mr. and Mrs. Grachelli, brought an action against LY&C and Li for damages arising out of the breach of the Agreement of Purchase and Sale. On November 27, 2018, Mr. and Mrs. Grachelli settled their claim for $165,000, inclusive of claims, interest, costs and disbursements. The $200,000 deposit was disbursed, $35,000 to Li and $165,000 to Mr. and Mrs. Grachelli.

[7] Li seeks damages from Che in the amount of $165,000, plus the costs and expenses related to the failed transaction. For the reasons set out below, I grant judgment in favour of Li and award damages in the amount of $184,230.42.

PRELIMINARY ISSUE

[8] At the commencement of trial, the Defendant brought a motion to amend the Statement of Defence to add the following paragraphs:

23. The Defendant is not a shareholder of LY&C, because there was no payment for subscription of the shares as required by Section 23(1) of Ontario Business Corporation Act, RSO 1990, c B. 16 (“the Act”).

24. Alternatively, if the Defendant is a shareholder of LY&C, which is not admitted but denied, the Plaintiff has no cause of action against the Defendant for damages caused to LY&C of which the Plaintiff is a shareholder. Section 92(1) of the Act prohibits claims against shareholders.

25. No unanimous shareholder agreement was ever entered between the parties because unanimous shareholder agreements must be in writing pursuant to Section 1 and 108(2) of the Act. The Defendant relies on the provisions of the Act.

26. No duty was owed by the Defendant in contract or tort.

[9] The Plaintiff did not oppose the motion. I granted the order to amend the Statement of Defence.

THE ISSUES

[10] The following issues are to be determined:

a. Was there a valid contract between Li and Che and if so, what are the terms of the contract?

b. Is Li’s action permitted pursuant to the Statute of Frauds, R.S.O. 1990, c. S.19 and the principle in Foss v. Harbottle (1843), 67 E.R. 189 (U.K.H.L.)? and

c. Did Che breach the contract and if so, what damages flow from the breach?

THE EVIDENCE

Witness Evaluation

[11] Only two witnesses testified at trial: Li and Che. Of the two, I found Li to be the more credible and reliable witness.

[12] Che candidly admitted that she has had memory issues since the birth of her daughter in 2015. On several occasions during the trial, she admitted that she had no independent knowledge of the events. With respect to key areas, she changed or corrected her discovery evidence the day before trial. By contrast, I found Li provided consistent evidence throughout. He had a good recollection of the key events. His credibility was not called into question in cross-examination in any meaningful way.

The Parties

[13] Li is a real estate agent. He has worked in this capacity since May 2013. Che is a resident of China. She came to Canada in 2014. She described herself as a homemaker with very little work experience. She is not proficient in English. In January 2017, she moved back to China.

[14] Li and Che met in 2014. Che was looking to buy a residential property and Li helped her purchase a home in King City in 2015. In addition to that residence, Che was involved in another investment in Canada; she was interested in purchasing a hotel in Niagara Falls. After the offer was accepted, she realized that she could not run a hotel because her English was too poor. Also, she had a young daughter and did not feel she could work long hours. Shortly after the purchase agreement was signed, she decided she did not want to proceed with the transaction. Li was able to have the deposit of $100,000 returned to her.

[15] After Che purchased her home, she told Li that she was interested in buying a commercial property. She told him she had up to $2.5 million that could be invested. She stated that she would invest in a commercial property on the condition that Li also invested money.

The Property

[16] In December 2016, Li learned that the Property was for sale. It was located on the north side of Eglinton Ave. between Dufferin St. and Bathurst St. It had seven residential units on the second and third floors. The main floor was commercial space, which had formerly been used as a bakery. The main floor was not leased. The Property was sold in December 2016, but the deal fell through. It went back on the market in January 2017. The list price was $2.798 million.

[17] In January 2017, Che was living in China. The best way for Li to communicate with her was by WeChat text or voice messages. Li told her of the Property on January 2, 2017. Che testified that Li told her that the return on her investment would be six to seven percent. She thought it sounded promising. He told her the first floor was vacant. The upper units were residential apartments. Li sent Che the listing on January 4, 2017.

[18] Li carried out his due diligence to determine whether the Property was a good investment. He met with a land use planner. They discussed the fact that the Property is on Eglinton Ave. and would be serviced by the new subway/LRT. The new Dufferin Station was only a few minutes’ walk away. The street traffic was good. The seven residential units were all leased on a month to month basis. There were no written leases. Li was of the view that with some renovations, the unit sizes could be reduced, and more units could be rented. The main floor could be turned into two commercial units. Li also retained a building inspector who attended at the Property with him on January 6, 2017. Based on the building inspector’s report dated January 7, 2017, Li understood that the Property needed some maintenance and repair.

[19] Li and Che had a phone conversation on January 4 or 5, 2017. Li told Che about the location, size and current conditions of the Property. Li testified that during the first phone call, he advised Che that the main floor was vacant, and he knew from experience that a mortgage would not be available. He testified that he made it clear to Che that it had to be a 100 percent cash purchase. According to Li, Che did not have an issue with this. Che’s evidence is quite different. Although she knew the main floor was vacant, she testified that Li did not tell her that, as a result, a mortgage would be unavailable. She believed that they would have a mortgage, which would be used to fund the purchase. There is nothing in writing in which Li advises Che of the difficulty in obtaining a mortgage.

Agreement to Purchase the Property

[20] Li and Che agreed to proceed with the purchase of the Property. A company would be incorporated for this purpose. Li testified that the parties agreed he would contribute $400,000 for a 51 percent interest in the company. This was his life savings. Che would contribute $384,313.73 for a 49 percent interest. The balance of the purchase price would be financed by a loan to the company from Che, which was expected to be in the amount of up to $2 million. According to Li, once the Property was purchased, the main-floor commercial space would be leased. They could then obtain a mortgage, which would be used to pay back Che’s shareholder’s loan. In cross-examination, Li testified that he believed Che had sufficient funds to finance the purchase.

[21] Che agreed that it was necessary to reach an agreement with Li with respect to payment for the Property before proceeding. Che testified that Li’s contribution was $400,000 for a 51 percent interest in the company and that she agreed to contribute $800,000 for a 49 percent interest in the company. Her interest was less than Li’s even though she made a larger contribution because Li did most of the work to find the Property and she expected him to take the steps necessary to secure a mortgage for the purchase. She also expected Li to develop and manage the Property.

[22] On January 5, 2017, Li proceeded with the corporate registration. On that date, he advised Che that the name of their company, LY&C, had been approved. Both Li and Che were listed as directors of the company. On the same day, Li advised the selling agents that he was interested in purchasing the Property. He asked to meet with the seller when the offer was presented.

Offers to Purchase

[23] On January 5, 2017, Li prepared the first draft offer. The purchase price was $2.58 million. The deposit was $100,000. The offer had a mortgage/financing condition. Li testified that he knew a mortgage could not be obtained on the Property because the main floor was vacant, but he included the condition as a bargaining chip that could be removed later. By e-mail dated January 5, 2017, Li sent the draft offer to Che to review. She signed the agreement where indicated and returned it to Li.

[24] At the same time as the draft offer was sent, Li sent Che an application for a mortgage with Mortgage Alliance. Li had partially completed the information on the form based on his knowledge of Che’s finances. There is no reference to the Property on the form. Li testified that he expected they would apply for the mortgage only after the Property was purchased and the main floor leased. He stated that he prepared the mortgage document in advance because he was concerned that there may be delays in having Che execute the documents for the mortgage because she was living in China. In cross-examination, Li was challenged on this point. He conceded that he had asked Che to sign a number of documents and she printed, scanned and returned them quickly. Che signed the mortgage application and returned it to Li.

[25] In the evening of January 5, 2017, Li discussed the response from the seller’s agent with respect to the proposed offer with Che. The agent stated that the sellers would not go below $2.7 million. Li and Che decided to not formally present the offer.

[26] On January 6, 2017, Li prepared a second draft offer. The deposit was increased to $200,000 and the purchase price was lowered to $2.55 million. There was no change to the terms of the offer, including the mortgage/financing condition. Li sent the draft offer to Che for her review. She signed the offer and returned it to Li. Li had a discussion with the selling agent and was told that the offer would be rejected if presented to the sellers. The offer was not presented.

[27] Li and Che exchanged WeChat messages on January 6, 2017. There were some difficulties with LY&C opening a bank account since Che was in China. It was expected that her bank manager at RBC, Martin Gu, had all of Che’s information and could do what was necessary to open the bank account. In the WeChat message on January 6, 2017, Li states that the purchase could be done in two steps. The first step was to get the money to purchase the Property. The second step was to obtain the mortgage. In cross-examination, Li conceded that in his WeChat message there was no reference to applying for the mortgage only after purchase was completed and the main floor leased. Li testified that he did not feel it was necessary to review the entire deal again. On January 6, 2017, Li asked Che to forward a cheque for the deposit.

[28] A third offer was prepared on January 6, 2017. The deposit remained at $200,000 but the purchase price was increased to $2.7 million. The Property was to be purchased “as is”, without conditions, including the mortgage/financing condition. The mortgage condition was deleted from the offer. The draft was provided to Che, who approved of the changes to the agreement. She admitted that she did not read the document before signing. Li stated in cross-examination that he told Che that all conditions had been deleted. He admitted that there was no specific discussion about the mortgage condition. There is nothing in writing that states that the mortgage condition was discussed or that Che agreed to the deletion of the condition. Che testified that she believed the third offer also had a mortgage/financing condition.

[29] On January 8, 2017, the vendors accepted the offer and signed the Agreement of Purchase and Sale. The signed agreement was sent to Che on January 9, 2017. She was enthusiastic about the purchase for $2.7 million. She thought Li did a great job in getting the Property for that price. She expected the offer of $2.7 million to be rejected and that there would be a counteroffer. On January 9, 2017, Li paid the deposit in the amount of $200,000 from his personal bank account.

Funding the Purchase

[30] There was a further exchange of voice messages on January 9, 2017. In the message at 7:37 p.m., Che states:

Hanqing, yesterday I was with that eh … Martin [Gu] … Martin, he said he’d give me that, from that account but he said the two million should be separately in my mom’s account. Why did he say it’d be better to be in the joint account. I, in that case, find a way to transfer it out. I’ll let … I just got up. Well, just got up. I’ll check.

Hanqing, I saw the 600,000 he transferred out for me. In that case, I still have that 270,000, give or take. Well, he, I don’t know about him. He said he’d try to transfer for me, transfer this much, but may not be able to transfer all in one transaction. Will have to wait for his return. If so, it’s enough for us. What do you think?

[31] Li testified that he understood this to mean that Che had enough money to complete the transaction. He believed it was necessary for Mr. Gu to make the additional transfers from Che’s mother’s account into Che’s account. Due to the size of the transfer, it could not be done in one transaction. At this time, Mr. Gu was vacationing in China and it was necessary to wait for him to return to Canada to make the additional transfers.

[32] Che’s evidence is that she transferred $600,000 into her account, which already had $270,000, so she could pay the $800,000 required for her investment in the Property. She stated that she did not expect to make any additional payments towards the purchase of the Property. On cross-examination, she was asked why she had to wait for Mr. Gu to make additional transfers if her investment was limited to $800,000. She stated that she needed additional funds to pay her living expenses. In chief, she stated that her annual expenses were $100,000. In cross-examination, she stated that her expenses are at least $200,000 a year. She did not tell Li how many more transfers were required or the amount of the transfers.

[33] On January 10, 2017, Che left a voice message for Li in which she states that money should not be a problem.

[34] Li retained Jim Zhang, a lawyer, to act on the real estate transaction. By e-mail sent January 16, 2017, Mr. Zhang’s assistant, Sandy, asked Li if there would be a mortgage. Li responded that there was no mortgage. On cross-examination, Li testified that he does not believe Che was aware that he told the lawyer that there would be no mortgage on the property. On February 9, 2017, Mr. Zhang prepared the special resolution of the directors with respect to the purchase of the Property. The corporate documents included the certificate as to the shareholdings of the corporation. Li’s personal company, RHDL Inc., held 51 percent and Che held 49 percent.

[35] Che testified that she proceeded on the basis that her contribution was limited to $800,000. She assumed that Li was obtaining the mortgage on the Property. She testified that she learned that there would be no mortgage on the Property during a phone call with Li on February 11, 2017. She testified that this was the first time Li told her she had to pay the full amount of the purchase price because it would be difficult to get a mortgage with the first-floor unit vacant. Che did not have an independent recollection of a call on February 11, 2017, but she made this assumption following her receipt of the WeChat message from Li on February 13, 2017, in which Li states that his discussion with the RBC mortgage person was not brought up with her two days ago.

[36] On February 13, 2017, there were a number of voice messages between Li and Che. In the voice message sent at 8:51 p.m., Che states:

But if that is the case, let me take a look at it. Ha. I have done the math. Here, I have done some calculation of my money. I have to think about it. I have to secure at least one side and can’t rely on mortgages on both sides, as there may not be enough for this side to pay it off, not really enough. I do need to keep some for spending. Not really enough. I am thinking to prioritize one side if the situation does not allow it. So, on this side, if the company, if the mortgage, if the company uses the mortgage, I’ll pay my money on my side. I will just pay it all with my money. Can’t get mortgages on both sides, right? I feel stressed by just hearing about it. As for this side, I am thinking … with the company side, I was to put in 1.2 million.

[37] Li testified that Che’s statement that she would have to think about her contribution to the purchase came “out of the blue”. He realized there may be a problem. He responded at 8:51 p.m. as follows:

Lingyun, how about asking Martin about this matter. I asked around on my end and found a mortgage person from RBC, in terms of the business mortgage, they are saying that it will be a bit tough for the mortgage, as the 1^st floor is now vacant. So, he is saying that this may only be solved with a cash payment in advance before proceeding. This was not brought up with you two days ago. This is the situation. Because, you, at that time, said that, to prepare, try as much as…. Put the funding here. Then, that property payment is not going to be made. So, what’s the arrangement? If, let’s say, this end gives 1.2 million, it will be a bit tough to get back this property, especially now, as time is limited.

[38] At 8:58 p.m., Che left the following WeChat voice message:

Hanqing, how about this? Tell me if this works. I will transfer the money first. That is, we will get it with the full amount … just like what you said, get it with the full amount. Then, we have this property in possession. Then, we will lease it as soon as possible. Then we will get a mortgage after getting someone to appraise the property. When the mortgage is granted, it will be based on … this. I … I, for now, will put some, let’s say 1.2 million. As for the remaining part of the money, the mortgage, transfer the the money to my personal account. Repay the money to my personal account.

[39] On the same date, Che left the following voice message to Li:

Well, what do you think of this, let’s say, I will send the money over first, and then, let’s obtain it at its full price, as you said, take it at the full price and then get the house. After we get it, we will waste no time to rent it out, and have it appraised. Then we’ll apply for the loan, regarding the loan, if we get it, let’s say, how much should I put down first? If I put down 1.2 million, for the rest of the money – the loaned money, let’s put it into my personal account, that is, to repay it to my personal account.

The loan itself could be more or less, that is to say, my 1.2 million is in it, if it is like, according to our shares, the extras … The interest, simply give me the interest and that’s it, am I right?

The thing is, I don’t want to have mortgages on both sides, that is, to have housing loans on both sides. If you say to get it at full price first, that’s fine, I can make up the full amount, that’s OK, I can make it, but if so, the money that is in my possession, or, the money in my personal account will definitely be a little tight, in case I need to travel to there, my spending capacity will be quite limited, because as you know, for now, transferring money is not easy, yes indeed, transferring money from China is really like.… Afterwards, the next is….

[40] Li understood this to mean that Che would pay the full amount of the purchase. He also believed that after the mortgage was obtained, Che would leave $1.2 million in the company with the balance paid to her personal account. Che testified that she had not agreed to pay the full amount of the purchase price. In cross-examination, she testified that her statement that she could “make up the full amount” was a hypothetical. Che testified that in this voice message, she stated that she was prepared to increase her contribution from $800,000 to $1.2 million.

[41] After the exchange on February 13, 2017, Li realized that he had not documented the agreement. On February 17, 2017, he forwarded the draft shareholders’ agreement to Che, which set out the capital contributions of the parties and their respective share ownerships. The draft agreement provided that Li would contribute $400,000 for a 51 percent share and Che would contribute $384,313.73 for a 49 percent share. In cross-examination, Li was asked why he provided detail at this point, only a few days before the transaction was to close. In the e mail, he does not state “as we previously discussed.” There is no reference to the fact that he provided detail about the transaction in the past. Li testified that he was concerned that Che would not pay what was agreed and he wanted to document the agreement. Li did not receive a response from Che to the draft shareholders’ agreement.

[42] Che testified that after the discussions on February 13, 2017, she prepared handwritten notes to summarize what she was told by Li. The notes are undated. She writes as follows:

1. The equity distributed, as per the plan from the lawyer.

2. 13% tax (included).

3. Full payment in advance. Mortgage appraisal will be performed after one floor is leased. When the funding is approved, it will be repaid to my personal account. I plan to put 1.2 million into the company. (1.2 million: to be paid a return on the investment, as equity contributed. As for the remaining funds invested, to be paid at the loan interest rate).

4. This property, subway is to open in 2020.

[43] On discovery, Che testified that the handwritten note was prepared at an early stage. She also testified on discovery that before she signed the offer to purchase, she knew the mortgage would be obtained after the Property was purchased and the commercial unit was leased. She corrected those answers the day before trial. She stated that the handwritten note must have been prepared after her phone call with Li on February 13, 2017. She said that she changed her evidence because she listened to the WeChat recording and, based on what was discussed, realized she must have prepared the notes after the call. She did not have the WeChat recording at the time of her discovery. She conceded on cross-examination that she did not have a specific recollection of when she prepared the notes. She also agreed that it was more logical that she would have prepared the notes when she was first told of the structure of the transaction and not one month later.

[44] On February 17, 2017, Che and Li had a phone conversation. Li recorded the conversation. Che asked about the property tax for the Property. She expressed concern about funding the purchase. She then stated that she could only pay $800,000 towards the purchase of the Property. She stated as follows:

9:09 a.m. - Ah Qing, I am really sorry, scold me. Whatever you want. Now, on my side … you, should contact the lawyer immediately to change the terms. I can only pay $800,000. And I can’t pay any more. If we can’t work it out, let’s take a loan. If necessary, we can get another bank and see if we can get the loan.

9:18 a.m. - Ah, Qing, please use voice message.

9:40 a.m. - Qing, it is like, $800,000 is the maximum I can pay, and even for $800,000 I am quite tight. Well, something happened on my side. Then if it is like, you’re afraid I may change again. We can do it this way: if I have to, on Saturday, I’ll tell my son to go to the bank and transfer one hundred thousand dollars to your account, so you can rest assured. I will not, say, letting you pay the down payment, and act irresponsibly from my side. Don’t worry about this. If anything happened, I will definitely take care of it, I will not…. Then, however, in other respects, please continue, I think should still try to get a loan. Get this done, get this thing done for now.

[45] By text message sent at 9:30 a.m., Li asked Che to make the funds available. He stated the following in the phone call with Che:

9:40 a.m. - Ah, I will do my best to arrange it. Then, at this point, I can only say that I’ll try my best to find a solution. Depend on your situation, if possible, please make the funds available as soon as possible. Because today, I’ll have to talk to them right away. They will look at the balance of these funds in the account. So, a portion of my funds will also be deposited into it. Therefore, let’s see, that is, if possible, better do it today. I don’t know if you have enough funds in your account for now. Then, is it possible to arrange the deposit today, because, after all, to the 27^th, there are only ten days left, ah, for applying a loan, I guess the time is not enough. Maybe we have to postpose the handover time, once postponed, other expenses may occur, so I’m trying my best to avoid those things now. So, if you can, please cooperate to the greatest extent.

[46] In cross-examination, Che stated that between February 13 and 17, 2017, she told her husband about the transaction. She agreed that she said in her voice message on February 17, 2017 at 9:40 a.m. that “something happened on my side” because her husband was not in favour of the transaction. She admitted that her husband did not allow her to proceed with the transaction. In a voice message on February 17, 2017, she stated she could not pay more than $800,000. In cross-examination, it was suggested that she would not have apologized if the original deal called for a contribution from her of $800,000. She said she was apologizing because she could not make the contribution of $1.2 million she said she would make on February 13, 2017.

[47] Li took steps to obtain financing. He could not obtain a mortgage through regular financing because the commercial unit was vacant. On February 18, 2017, Li made enquiries of a mortgage broker, John Schipani, to see if a mortgage could be obtained. In the e-mail, Li states that they had planned to close on 100 percent cash but one of the partners changed her mind. He also contacted Esi Ghassemi. She requested further information and Li was advised that a mortgage was not doable.

[48] Li and Che spoke by phone on February 22, 2017. Li recorded the call. Li advised Che that the sellers were in position to close. He was seeking her input on what to say to the sellers about why they were unable to close. He said that there would be consequences if the deal did not close; he expected a lawsuit and that they would lose the entire deposit. Che stated that she would arrange to transfer money to reimburse Li for his expenses.

Breach of the Agreement of Purchase and Sale

[49] The closing was to take place on February 22, 2017. The purchasers were unable to pay the full amount of the purchase price and the transaction did not close. The vendors brought a lawsuit against LY&C and Li personally. The parties settled on the basis that $35,000 of the deposit would be paid to Li, with the balance of $165,000 paid to the vendors in settlement of their claim. Here, in addition to the amount paid in settlement of the vendors’ action, Li is claiming for the expenses incurred in incorporating LY&C, the expenses with respect to the due diligence and the legal fees of defending the vendors’ action. Li was not cross-examined with respect to the damages claim.

[50] Che testified that she paid some of the expenses incurred by Li. She did not provide any documentation with respect to the payments. It was determined that most of the expenses were related to the purchase of her home in King City. The parties agreed that Che paid $43.31 to Li with respect to the expenses related to the purchase of the Property.

ANALYSIS

A. Was there a valid contract between Li and Che and if so, what were the terms of that agreement?

Position of the Parties

[51] According to Li, the parties agreed to purchase the Property for $2.7 million. The price was to be paid with the capital contributions to the company. Li’s contribution was $400,000 for a 51 percent share in the company. Che’s contribution was $384,313.79 for a 49 percent share. The balance of the purchase price, of up to $2 million, was to be paid by Che; this would be a shareholder’s loan. The purchase had to be structured this way because a mortgage could not be obtained from commercial lenders while the first-floor commercial unit was vacant. Once the Property was purchased, the parties agreed to lease the commercial unit, obtain a mortgage and repay Che’s shareholders’ loan.

[52] Che does not dispute the fact that the parties agreed to purchase the Property for $2.7 million. However, she states that her capital contribution was $800,000 and Li’s was $400,000. She would receive a 49 percent share in the company and Li would receive a 51 percent share. Che states that Li was entitled to a greater share in the company because he was doing the leg work in completing the purchase. The balance of the purchase price would be funded by a mortgage on the Property. Che states that she was not advised that a mortgage was unavailable because the first-floor commercial unit was vacant until February 11 or 13, 2017. Che also argues that Li did not advise her of this fact until just a few weeks before closing to put pressure on her to pay the balance of the purchase price.

Reasonable Bystander Test

[53] There is no written agreement setting out the arrangement. Although the parties exchanged e-mails and WeChat messages, those messages are somewhat ambiguous. To determine if the parties came to an agreement and what terms they agreed to, it is necessary to consider all the circumstances surrounding the alleged agreement: Brownlee v. Kashin, 2015 ONSC 1035, at paras. 47 and 49.

[54] The court is to apply the “reasonable bystander” test to determine if, on an objective basis, the parties entered into an agreement and if so, on what terms. As stated in Picavet v. Clute, 2012 ONSC 2221, at para. 10:

It is trite law to say that the absence of assent to an agreement prevents the creation of a legally enforceable contract. Far more complicated is the countervailing question: How does the court satisfy itself that both parties intended to bring an agreement into existence, an agreement containing the terms sought to be enforced? In the Law of Contract in Canada, 5^th ed. (Toronto, Carswell, 2006), at p. 15, Professor G.H.L. Fridman describes the approach as follows:

Constantly reiterated in the judgments is the idea that the test of agreement for legal purposes is whether parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract. The law is not concerned with the parties’ intentions but with their manifested intentions. It is not what an individual party believed or understood was the meaning of what the other party said or did that is the criterion of agreement; it is whether a reasonable man in the situation of that party would have believed and understood that the other party was consenting to the identical terms. As Fraser C.J.A. said in Ron Ghitter Property Consultants Ltd. v. Beaver Lumber Co.:

The parties will be found to have reached a meeting of the minds, in other words be ad idem, where it is clear to the objective reasonable bystander, in light of all the material facts, that the parties intended to contract and the essential terms of that contract can be determined with a reasonable degree of certainty.

Facts not in Dispute

[55] I start the analysis with a review of the facts that are not in dispute:

1. After Che purchased her residential home, she advised Li that she was interested in purchasing a commercial property. She stated she had $2-2.5 million to invest. Her investment was premised on the condition that Li would also invest money in the venture;

2. Li and Che spoke on the phone on January 4 or 5, 2017 to discuss the Property;

3. By the time the parties entered into the Agreement of Purchase and Sale, they both knew the first-floor commercial unit was vacant;

4. The parties agreed that the purchase would be made by a corporation. Li would have a 51 percent share and Che’s interest would be 49 percent. Li would contribute $400,000. He would act as the realtor and take the steps necessary to complete the purchase. After the purchase, Li would seek a tenant for the first-floor unit;

5. Che agreed to contribute at least $800,000 towards the purchase;

6. Li acted as the real estate agent on the purchase and prepared the offers;

7. Che signed the offers and, after it was accepted, was enthusiastic about the purchase price of $2.7 million;

8. Li paid $200,000 for the deposit. Che did not pay any part of the deposit and made only a small payment towards the expenses;

9. On January 16, 2017, Li wrote to his lawyer, Jim Zhang, and advised him that there would be no mortgage;

10. Li took no steps to apply for a mortgage until after February 18, 2017;

11. Che had enough money to pay the balance of the purchase price; and

12. At some point after February 13 and before February 17, 2017, Che told her husband about the transaction. He did not approve and did not allow her to proceed.

[56] It is my view that the parties conducted themselves in a manner consistent with Li’s position that Che would pay $2.3 million towards the purchase of the Property.

Li’s Conduct

[57] Li understood that Che would pay $2.3 million towards the purchase of the Property. He testified that he knew that a mortgage could not be obtained on the Property because the first-floor commercial unit was vacant. He was not challenged on this point in cross-examination. He removed the mortgage financing condition in the offer. Presumably he would not have removed that condition if he thought the purchase was not going to be funded by Che and a mortgage would be necessary. He advised Mr. Zhang on January 16, 2017 that there would be no mortgage. He did not take any steps to obtain financing for the purchase until after Che told him she could not pay more than $800,000 on February 17, 2017. If Li knew mortgage financing was required, there was no reason for him to not take earlier action to obtain financing. Also, he would not have invested his life savings and then removed the mortgage/financing condition in the offer.

[58] Li testified that he told Che on January 4 or 5, 2017 that a mortgage was not available because the commercial unit was vacant and that the purchase would not be financed. Li must have been satisfied that Che understood and agreed to fund the purchase. If there was any doubt in his mind, he would not have conducted himself in the manner set out above.

Che’s Conduct

[59] The evidence with respect to Che’s understanding is not as clear. Her evidence on key points is inconsistent and equivocal. The lack of clarity in her evidence may be related to her admitted memory issues.

[60] Che denies that before the Agreement of Purchase and Sale was entered into, she was told by Li that a mortgage could not be obtained and therefore she would be required to fund the purchase with a contribution of up to $2.4 million. In cross-examination, she conceded that she could not be certain about this and that there may have been discussions about her funding the purchase before the offer was accepted by the vendors.

[61] Che states that she believed that the purchase would be funded with a mortgage. She points to the fact that Li prepared a mortgage application in her name on January 5, 2017. The mortgage application does not refer to a mortgage on the Property, or the amount required. I accept Li’s explanation that the application was prepared at an early stage so the parties could move quickly to apply for a mortgage after the purchase of the Property. Che also argues that she believed the accepted offer contained a mortgage condition. This is based on the fact that the two draft offers included this condition. Che conceded that she did not read or understand any of the offers. I do not accept that she knew the draft offers included the mortgage condition and as a result, this cannot be a reason for why she believed the accepted offer had a mortgage condition. The offer without the mortgage condition was provided to Che and signed by her before it was presented to the vendors.

[62] In late 2016, Che advised Li that she had $2-2.5 million to invest in a commercial project. Li thought the Property may be of interest to her and brought it to her attention. Li and Che agreed to offer to purchase the Property. Che agreed that it would be purchased by a corporation. She testified that she agreed to a capital contribution of $800,000 for a 49 percent share and that Li’s contribution was $400,000 for a 51 percent share. On cross-examination, Che conceded that she did her best to recall the amount of the capital contributions but does not actually remember. She stated that she came to her understanding of the capital contributions when she read documents after the fact.

[63] It is not consistent with common sense that Che would contribute twice as much capital as Li and have a share interest less than his. Li’s evidence as to the capital contributions is more reasonable. In the draft share agreement provided to Che on February 17, 2017, Li’s contribution was $400,000 for a 51 percent share and Che’s contribution was $384,313.73 for a 49 percent share. If in fact the arrangement was that Che would contribute $800,000 for a 49 percent share, it is unlikely that on February 17, 2017, Li would forward a draft share purchase agreement which is less favourable to him than Che’s understanding.

[64] On January 9, 2017, Che made arrangements to transfer $600,000 from her joint account with her mother into an account she controlled. The joint account with her mother had a balance of $2 million. She advised Li that she would have to wait until Mr. Gu returned from vacation before additional transfers could be made from her mother’s account. There would have been no need to make additional transfers if she was only required to contribute $800,000 towards the purchase price. Her explanation was that she required additional transfers so she would have enough money to pay her expenses. There was no reason to tell Li about the need to transfer funds to pay her personal expenses. Also, there was no reason for her to state to Li that if there were additional transfers, “it’s enough for us. What do you think?”

[65] No additional transfers were made into Che’s account after January 9, 2017. Sometime in mid-February, there was a discussion between Li and Che about the financing of the purchase. Che states that Li first told her that a mortgage could not be obtained, and it would be necessary for her to fund the purchase during a phone call on February 11, 2017. She admitted that she does not have a recollection of the date of the call. She believes it was on February 11, 2017 because Li, in the voice message on February 13, 2017, states that he did not tell her about his discussions with RBC about the mortgage two days earlier.

[66] Li denies that there was a phone call on February 11, 2017. Li and Che’s practice was to schedule phone calls in advance through e-mail or WeChat. The was no e-mail or text scheduling a call for February 11, 2017. Although there is a dispute as to whether there was a call on February 11, 2017, the parties agree there was a discussion and exchange of messages on February 13, 2017. Che was told by Li that the mortgage would be obtained after the Property was purchased and the first-floor unit was leased. In her voice and e-mail messages, she confirms that the Property would be purchased, the first floor leased and then the mortgage obtained. The mortgage would be used to pay back her shareholder’s loan. Li testified that after this exchange, he believed Che would fund the purchase. She had sufficient money in her mother’s account to pay the balance of the purchase price. In the multiple text and voice messages on February 13, 2017, Che did not tell Li that she was not prepared to proceed with the transaction.

[67] Li points to the undated handwritten notes as proof that Che understood the structure of the transaction before the Agreement of Purchase and Sale was entered into. Che testified on discovery that the notes were prepared early in the transaction. She also testified on discovery that she understood that they would apply for the mortgage after the Property was purchased. Che changed that answer just before trial. On cross-examination, she conceded that she has no specific recollection of when the handwritten notes were prepared. She also conceded that it was more logical that she would have completed the notes when she was first made aware of the transaction and not one month later.

[68] At trial, Che testified that after listening to the voice message recording, she believed she did not have the information referred to in the handwritten note until sometime after February 13, 2017. The handwritten note generally follows the information set out in the voice messages. There is reference in the handwritten note to obtaining a mortgage once the Property is in their possession. The voice message recording refers to the 13 percent tax and the fact that the subway would open in 2020. In the WeChat message, this appears to be the first time Che became aware of the 13 percent tax issue. The handwritten note also refers to the equity distributed, as per the plan from the lawyer. Che did not receive the shareholders’ funding agreement prepared by Mr. Zhang until February 17, 2017.

[69] I am unable to determine when the handwritten note was prepared. But even if the note was prepared after the February 13, 2017 exchange, Che does not state in that note that the information received from Li was new or contrary to what was initially agreed to. There is no indication in this note that Che was not prepared to proceed with the transaction.

[70] In her voice message on February 13, 2017, Che describes the transaction. She states that she will send the money over first and, after the purchase, she and Li will rent out the main floor, have the Property appraised and then take out the loan. Che testified that her statement that she could “make up the full amount” was a hypothetical. I am of the view that this was not a hypothetical statement and instead was confirmation of Che’s understanding of the transaction and her agreement to fund the purchase.

[71] Che’s position changed between February 13 and February 17, 2017. On February 17, 2017, Che apologized and advised Li that she would be unable to pay more than $800,000. This is the first time Che stated her refusal to fund the transaction. If the parties had initially agreed that her contribution was limited to $800,000, she would have likely referred to that fact in the e mail. It is also unlikely she would have been apologetic if she was confirming what she had originally agreed to contribute. In her message on February 17, 2017, she states that something happened at her end. She testified that what had happened was that she advised her husband of the transaction. He did not approve and did not allow her to proceed with the purchase of the Property.

Summary

[72] On the totality of the evidence, I am satisfied that to the objective reasonable bystander, the parties intended to enter into an agreement and its essential terms can be determined with a reasonable degree of certainty. I conclude that the parties intended to purchase the Property for $2.7 million, and that Li would contribute $400,000 and Che would contribute $2.3 million towards the purchase price. The parties also agreed that after the purchase, they would lease the first-floor commercial unit and obtain a mortgage on the Property, which would be used to pay off Che’s shareholder’s loan.

[73] Che’s position changed sometime after February 13, 2017 and before February 17, 2017. During this period, she told her husband about the transaction. He did not approve. On February 17, 2017, Che told Li that she would not contribute more than $800,000. She was apologetic. She knew at that time that the transaction would not close. She knew after their phone call on February 22, 2017 that litigation was likely. Che walked away from the transaction leaving Li to deal with the litigation on his own. Despite stating on several occasions that she would pay her share of the deposit and expenses, she paid only $43.31 towards the expenses incurred by Li.

B. Is Li’s action permitted pursuant to the Statute of Frauds and the principle in Foss v. Harbottle?

[74] Che takes the position that even if there was an oral agreement between the parties that she would contribute $2.3 million towards the purchase price, Li cannot pursue an action against her because the action is based on a guarantee. The Statute of Frauds provides that a guarantee must be in writing to be enforceable. Che also argues that the action involves an agreement to purchase real property, which is not enforceable unless it is in writing.

[75] I am of the view that the agreement between Li and Che to purchase the Property is not a guarantee. Che agreed to pay certain amounts on closing. She did not agree to guarantee a loan or other debt. Che does not plead that the action is based on a guarantee in her Statement of Defence. I am also of the view that the agreement between Che and Li was to collaborate in a business and was not an agreement between a purchaser and seller of real property. I conclude that Li’s action is not barred pursuant to the Statute of Frauds.

[76] At the commencement of trial, the Statement of Defence was amended on consent to plead that a shareholder cannot be liable for the acts of a corporation. Che argues that the Plaintiff’s claims are derivative to the corporation in which Che is a shareholder and therefore the action is barred by the rule in Foss v. Harbottle. Che argues that LY&C entered into the Agreement of Purchase and Sale, did not close the transaction and was required to pay damages to the vendors. Che relies on s. 45(1) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (CBCA), which provides that the shareholders of a corporation are not, as shareholders, liable for any default by the corporation: see Addison Chevrolet Buick GMC Ltd. v. General Motors of Canada Ltd., 2015 ONSC 3404, at para. 94, rev’d on other grounds, 2016 ONCA 324.

[77] The action against Che was brought by Li, not LY&C. The action is based on an agreement between Li and Che, which was entered into before the corporation was in existence. As a result of Che’s breach of the agreement, the transaction did not close, and the vendors brought an action against the corporation and Li personally. Li paid the deposit, which was forfeited when the transaction did not close. He personally incurred expenses with respect to the purchase of the Property. I am satisfied that this is a personal action between Li and Che and therefore the cases involving actions brought by corporations against shareholders are not applicable.

C. What damages flow from the breach of contract?

[78] Che did not pay $2.3 million towards the purchase price and is therefore in breach of the oral agreement of the parties with respect to funding the purchase of the Property. As a result of her breach, the transaction did not close.

[79] There is no serious dispute with respect to the issue of damages. Li was not cross-examined on the damages claim. Although Che testified that she paid some of the expenses incurred by Li, it was determined and agreed by the parties that she paid only $43.31 towards the expenses.

[80] Although Li could pursue expectation damages, he has limited his claim to reimbursement of the losses and expenses that flow from the failure to close the transaction. I am satisfied that the losses and expenses claimed, including the cost to settle the action brought by the purchasers, are damages that fairly and reasonably flow from the breach and were in the contemplation of both parties: see 1250364 Ontario Ltd. b. Townend, 2012 ONSC 3576, at para. 76.

[81] Li proved the following damages:

a.

The amount paid to settle the action brought by the vendors

$165,000.00

b.

Legal fees incurred in defending the action brought by the vendors

15,269.26

c.

Legal fees incurred in the purchase of the Property

2,808.97

d.

Incorporation fee

200.00

e.

Property inspection

452.00

f.

NUANS corporation name search

27.60

g.

Annual corporate filing fees

64.00

h.

Accounting fees for the corporation

452.00

Subtotal

$184,273.83

Credit

(43.41)

Total

$184,230.42

DISPOSITION

[82] I grant judgment in favour of the Plaintiff and order the Defendant to pay $184,230.42, plus pre-judgment interest.

[83] The Plaintiff is successful in this action and presumptively entitled to his costs. Before this decision was released, I received Bills of Costs from the parties. The Plaintiff submitted a Bill of Costs in the amount of $22,125.60 for the counsel fee on a partial indemnity basis, $2,876.33 for HST and disbursements of $4,543,08. The Defendant submitted a Bill of Costs in the amount of $32,890 for the counsel fee on a partial indemnity basis, $4,275.70 for HST and disbursements of $4,914.40.

[84] If the parties are unable to agree on the amount of pre-judgment interest or costs, the Plaintiff may make written submissions of no more than five pages, not including case law, within 20 days of the date of this endorsement. The Defendant may deliver written submissions in response on the same basis within 20 days of receiving the Plaintiff’s submissions. The Plaintiff may deliver reply submission of no more than three pages in length within ten days of receiving the Defendant’s submissions.

DATE: APRIL 23, 2021