COURT FILE NO.: CV-19-00616237; CV-19-00616232; CV-19-00616243

DATE: 20210205

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Lin Yin, Ning Lee Don, and Ran Liao, Applicants

AND

2580702 Ontario Ltd., 2570396 Ontario Ltd., 2417324 Ontario Ltd., Jie Tang, Wenxin Huang, and Mingshan Wei., Respondents

BEFORE: Mr. Justice Chalmers

COUNSEL: S. Juzkiw for the Applicants

P. D. Kim and R. An for the Respondents

HEARD: January 21, 2021, by videoconference

ENDORSEMENT

OVERVIEW

[1] The Applicants bring this motion for an order enforcing the Minutes of Settlement dated May 3, 2019 and the consent order of Hainey, J. dated November 14, 2019 (the “Hainey, J. Order”). They say that the Respondents failed to pay to the Applicants the amount of $274,570.38 by November 28, 2019 and are thereby in breach of the Hainey, J. Order. The Respondents bring a cross-motion to set aside the Minutes of Settlement, the order of Conway, J. dated May 6, 2019, which endorsed the settlement (the “Conway, J. Order”), and the Hainey, J. Order. The Respondents take the position that they agreed to settle based on a misrepresentation of a material fact made by the Applicants.

[2] For the reasons set out below, I find that the Applicants did not make a misrepresentation to the Respondents. The Respondents are in breach of the settlement and I order them to pay the amount set out in the Hainey, J. Order, plus interest and costs.

BACKGROUND FACTS

Gong Cha Business

[3] The Applicants, Lin Yin (“Yin”), Ning Lee Don (“Don”), and Ran Liao (“Liao”), had a business relationship with the individual Respondents, Jie (Anne) Tang (“Tang”), Wenxin Huang (“Huang”), and Mingshan Wei (“Wei”). Together, they incorporated three separate companies which operated three restaurants: Tasty Hut, Manchu Wok, and Gong Cha. This motion primarily involves 2570396 Ontario Ltd. (“257”), which operated Gong Cha, a Bubble Tea restaurant. Yin, Tang, Don, and Wei were shareholders of 257. Liao was an employee of the company.

[4] On March 30, 2017, Liao and Yin entered into a lease agreement with Markham Centre Real Estate Ltd. (the “Landlord”) to lease premises at 117-3621 Highway 7 East, Markham (the “Lease”). Gong Cha was operated out of this location. At the time the Lease was entered into, 257 had not been incorporated. Yin and Liao agreed to have their names on the Lease for the benefit of the company to be incorporated later. 257 was incorporated on April 4, 2017. On April 11, 2017, the Lease was amended to substitute Liao’s name with 257 (the “Lease Amendment”).

[5] Tang was responsible for managing Gong Cha. On May 26, 2017, Tang prepared a Supplementary Agreement which confirmed that 257 was the lessee. 257’s status as lessee was also confirmed in the draft Franchise Agreement prepared in June 2017. Although these documents were drafted by Tang or on her behalf, she takes the position that she believed Yin and Liao were the only lessees. She denies being aware of the Lease Amendment, which transferred Liao’s interest to 257.

[6] 257 entered into an agreement with Royal Bank of Canada for a line of credit in the amount of approximately $285,000. Yin and Tang jointly gave a personal guarantee in the amount of $76,500. The loan was secured with a lien over the equipment of Gong Cha.

[7] Yin and Liao stopped being involved in Gong Cha on August 26, 2018. After they left the business, Tang was in control of all its financial and corporate documents. The Applicants state that the corporate documents included the Lease Amendment dated April 11, 2017.

[8] The Gong Cha business was not successful. It could not make the loan or Lease payments. In October 2018, the parties agreed to sell the business. In November 2018, Going Cha ceased operations and 257 stopped paying rent.

[9] Susan Wang (“Wang”) was the principal of the Landlord. On December 17, 2018, Wang advised Tang that the Lease was signed by Yin and Liao. Tang stated that Liao was to transfer the Lease to 257, but Wang replied that it was not necessary. She noted that the Lease was signed by Yin, who is a shareholder of 257, and therefore the company was bound. It appears that Wang had forgotten that on April 11, 2017, Liao executed the Lease Amendment in which his interest was transferred to 257. Although Tang allegedly believed that Yin and Liao were the lessees, she did not ask Liao to transfer his interest to 257.

[10] Wang is a real estate agent. Tang engaged Wang to assist in the sale of the business. In December 2018, a potential buyer, 2676975 Ontario Limited (“267”), was identified. An Agreement of Purchase and Sale was entered into with 267 on January 31, 2019. The purchase price was $90,000. To complete the sale, it was necessary to have the Lease assigned to the purchaser. RBC agreed to discharge its lien on the equipment with the payment of $90,000.

[11] On February 1, 2019, Tang e-mailed the shareholders of 257 and stated that the rent was in arrears of three months, which she said amounted to $16,025.23. On February 15, 2019, Tang contacted Wang and asked that the Lease be terminated. Wang would not agree to terminate or assign the Lease because of the rent owing; the Landlord was not prepared to assign or terminate the Lease until the arrears were paid.

[12] Tang states that on March 27, 2019, she brought a cheque in the amount of $15,008.91 to Wang, which she had calculated was the amount of the arrears. It is not clear from the evidence why Tang took the position that the outstanding rent was $15,008.91 when, on February 1, 2019, she told the shareholders of 257 that the outstanding amount was $16,025.23. Wang did not accept the cheque.

[13] In the e-mail correspondence between Wang and Tang on March 28, 2019, Wang said that the Lease was signed by two individuals, that it was in default, and that she did not owe anything to Tang or 257. Wang took the position it was unfair to be asked to terminate the Lease before she received the cheque for the arrears. She stated that if she did not receive the cheque by March 29, 2019, she would consider herself free to do with the property as she wishes, including to relist it.

[14] The arrears were not paid and the Lease was terminated. After the mediation on May 3, 2019, Yang learned that the Landlord had leased the premises to another business known as Bubble Lee Canada.

The Minutes of Settlement

[15] In March 2019, Don, Yin, and Liao brought three separate applications for oppression remedies under ss. 207 and 248 of the Ontario Business Corporation Act, R.S.O. 1990, c. B.16, against the Respondents. Each application involved one of the three businesses operated by the parties. Liao also commenced an action against 257 in the Small Claims Court for wrongful dismissal.

[16] On May 3, 2019, a mediation was held between the parties with Cunningham, J. as mediator. At the mediation, the parties settled the three applications and the Small Claims Court action. The parties entered into Minutes of Settlement dated May 3, 2019.

[17] The parties agreed that the Respondents would pay: (1) $162,000 to the Applicants for their shares in 2417324 Ontario Ltd., c.o.b. as Tasty Hut; (2) $17,046.92 to Yin and $8,523.46 to Don for the Applicants’ share of profits earned by Tasty Hut from September 2018 to March 2019, plus an additional $18,000; (3) $50,000 to the Applicants for their shares of 2580702 Ontario Ltd., c.o.b. as Manchu Wok; and (4) $4,000 to Liao for the discharge of his wrongful dismissal action. All payments were to be made by the Respondents by June 30, 2019.

[18] The Minutes of Settlement did not require a payment to the Applicants for Gong Cha. That business had not been successful and approximately $70,000 was still owed to RBC. It was a term of the settlement that the Applicants would pay $35,000 to the Respondents. The Applicants agreed that the amount of $35,000 would be deducted from the amounts to be paid by the Respondents.

[19] On May 6, 2019, Conway, J. confirmed the settlement and granted an order in accordance with the Minutes of Settlement.

[20] It was a term of the settlement that the parties and Liao would contact the Landlord for her agreement to assign the existing Lease to the purchaser of Gong Cha. The parties also agreed that, if the Lease was not assigned, they would instruct counsel to commence an application against the Landlord for relief from forfeiture. The Respondents were to be responsible for the first $30,000 in legal fees associated with the application against the Landlord, and the parties agreed that each would pay 50 percent of any expenses or costs in excess of $30,000.

[21] On May 6, 2019, counsel for the Respondents drafted a letter to the Landlord on behalf of Liao, Yin, and 257, which enclosed a cheque in the amount of the rent in arrears. In the draft letter, counsel takes the position that if the Landlord does not agree that the Lease is current, an application would be brought for relief from forfeiture. The demand letter was not sent.

[22] On May 10, 2019, counsel for the Respondents wrote to counsel for the Applicants and asked that Yin and Liao arrange a meeting with the Landlord, the Gong Cha franchisor, the potential purchaser, RBC, and the Respondents, to discuss the assignment of the Lease to the new purchaser. On May 14, 2019, counsel for Yin and Liao advised that they would give their consent or sign any document to transfer the Lease but did not wish to attend the meeting. In response, counsel for the Respondents stated that his clients did not believe the Landlord would meet without Yin and Liao present. Later that day, Yin and Liao agreed to attend the meeting. Apparently, the Landlord did not respond to counsel for the Respondents and, on May 16, 2019, counsel for the Respondents asked Yin and Liao to contact the Landlord directly. On May 17, 2019, Yin advised that she had been in contact with Wang on May 6, 2019. Wang told Yin that she had decided to cancel the Lease because of “what Tang had done”.

[23] It was also a term of the Minutes of Settlement that Yin, Don, and Liao would provide statutory declarations that they have not assigned or encumbered the assets of 257. The statutory declarations were signed on July 18, 2019. On July 19, 2019, the statutory declarations, consent to transfer or terminate the Lease, and resignation letters were sent to the Respondents.

Motion to Enforce the Settlement

[24] Pursuant to the Minutes of Settlement, payments were to be made to the Applicants by June 30, 2019. Those payments were not made. On July 3, 2019, an e-mail was sent to Tang’s previous lawyer advising that the settlement funds had not been received. The Respondents took the position that the settlement payment was not due because they had not received the statutory declarations and the letters of resignation from the Applicants. The statutory declarations and letters of resignation were sent to the Respondents on July 19, 2019.

[25] After receiving the statutory declarations, the Respondents did not make the payments that were due pursuant to the Minutes of Settlement. The Respondents did not provide a reasonable explanation for why the settlement funds were not paid after the statutory declarations were sent on July 19, 2019.

[26] The Applicants brought a motion to enforce the settlement. The motion was returnable on November 14, 2019. On the consent of the parties, Hainey, J. granted an order to enforce the Minutes of Settlement. The Respondents were ordered to pay the sum of $259,570.38, plus costs of $15,000, by November 28, 2019. The Applicants were required to pay the Respondents the amount of $35,000. It was also a term of the Hainey, J. Order that the Applicants co-operate and give reasonable consent to execute documents and provide the documentation necessary to effect the purpose of the Minutes of Settlement.

[27] The Applicants provided documents to the Respondents on November 28, 2019. These included the Lease Amendment dated April 11, 2017, in which Liao transferred his interest in the Lease to 257. The Respondents take the position that they did not know about this document. They refused to pay the amount set out in the Minutes of Settlement and the Hainey, J. Order on the basis that the Applicants failed to disclose the Lease Amendment before the settlement and misrepresented the fact that Liao was a lessee. The Respondents take the position that the failure to disclose the Lease Amendment is a material misrepresentation which vitiates the settlement agreement.

[28] After receiving the Lease Amendment, the Respondents did not proceed against the Landlord for relief from forfeiture.

THE ISSUES

[29] The following issues will be addressed in this endorsement:

a. Did the Applicants misrepresent that Liao was a lessee?

b. If so, was the misrepresentation material?

c. Should the Minutes of Settlement and Hainey, J. Order be set aside? and

d. Are the Respondents in breach of the Minutes of Settlement and the Hainey, J. Order?

ANALYSIS

Did the Applicants misrepresent that Liao was a lessee?

[30] The Respondents submit that the Applicants fraudulently or, alternatively, negligently misrepresented that Liao was a lessee. They argue that as a result, the Minutes of Settlement, and the Conway, J. and Hainey, J. Orders should be set aside.

[31] The Respondents state that at the mediation, the Applicants failed to disclose that Liao had executed the Lease Amendment on April 11, 2017 and maintained the position that Liao was a lessee. The Applicants raised a preliminary objection that statements made at the mediation are governed by settlement privilege and should not be considered on this motion. The Respondents argue that settlement privilege does not apply in the case of fraud or threats.

[32] I heard argument with respect to the Applicants’ preliminary objection. It is my view that it is not necessary to decide this issue. The misrepresentation alleged by the Respondents is the fact that Liao was a lessee. This statement was allegedly made before the mediation. The Respondents are not relying on any new statement or omission that may have been made at the mediation.

[33] The alleged misrepresentation is that Liao was a lessee and 257 was not. Although Liao initially signed the Lease, his interest was transferred to 257 pursuant to the Lease Amendment dated April 11, 2017. The Respondents claim not to have known that Liao was not a lessee until they received the Lease Amendment on November 28, 2019.

[34] To establish a misrepresentation, whether fraudulent or negligent, the party making the allegation has the onus to prove that a statement was a false representation: see Bruno Appliance and Furniture, Inc. v. Hryniak, 2014 SCC 8, [2014] 1 S.C.R. 126, at para. 21.

[35] The Applicants argue that the statement that Liao was a lessee is true. He signed the original Lease, which continues to be a binding document notwithstanding the fact that Liao entered into the Lease Amendment. The Respondents argue that at all times they were led to believe that Liao was a lessee and 257 was not. The Respondents take the position that the representation was not true.

[36] I conclude that the Applicants did not make a misrepresentation. Liao and Yin executed the original Lease. Liao and Yin continued to be lessees under the Lease. The fact that Liao entered into a Lease Amendment does not change the fact that he signed the Lease and is listed on that agreement as a lessee. There is no evidence that the Applicants stated to the Respondents that Liao was a lessee or that 257 was not a lessee

[37] The Respondents state that the Applicants omitted to advise that Liao had signed the Lease Amendment and as a result they were unaware that 257 was a lessee until they received the Lease Amendment on November 28, 2019. This is not supported by the evidence. Yang was the president of 257. After August 2018, she had possession of the corporate documents. These included the Lease and the Lease Amendment. I also find that during the relevant period, 257 was acting as the lessee. In the draft Supplementary Agreement and Franchise Amending Agreements prepared in the spring of 2017, Tang states that 257 is the lessee. 257 made all rent payments. Tang dealt directly with the Landlord on behalf of 257. Both the Landlord and the Respondents, in their correspondence, treated 257 as the lessee. On December 17, 2018, Wang advised Tang that it was not necessary to have the Lease transferred in name because it had been signed by Yin, who is a shareholder of 257, and therefore the company was bound by the terms. In the e-mail exchange on March 28, 2019, Tang wrote to Wang and confirmed that the Landlord acknowledged that the Lease is a lease of the company.

[38] I find that the Applicants did not misrepresent that Liao was a lessee or that 257 was not.

Was the misrepresentation material?

[39] Had I found that the Applicants made a misrepresentation, I would have concluded that it was not material.

[40] The Respondents must prove that the misrepresentation was material in the sense that it influenced their conduct or affected their judgment: see White v. Colliers Macaulay Nicholls Inc., 2009 ONCA 444, 95 O.R. (3d) 680, at para. 25. The misrepresentation must be so fundamental or material that it goes to the root of the contract.

[41] It is the Respondents’ position that, as a result of the misrepresentation, Tang was unable to compel the Landlord to accept payment of the arrears and could not require the Landlord to either assign the Lease to the purchaser of Gong Cha or terminate the Lease. The Respondents also argue that they believed 257 could not bring an action against the Landlord for relief from forfeiture because it was not a lessee.

[42] There is no evidence that the Landlord would have agreed to assign or terminate the Lease if the Respondents knew of the Lease Amendment showing 257 as a lessee. Wang stated in her e -mails on February 15 and March 28, 2019 that she was not prepared to terminate or transfer the Lease because it was in default. With the Lease in default, the Landlord was under no obligation to consent to an assignment. The Landlord would not terminate the Lease when several months of rent was owing. This would be the case whether the Respondents believed the lessee was Liao or 257.

[43] In addition, there is no materiality with respect to 257’s ability to commence an action against the Landlord for relief from forfeiture. 257 believed it required Liao’s co-operation to bring such an action. Yet the Respondents did not ask Liao to execute any documentation to transfer his interest to 257. If the Respondents had asked Liao to transfer his interest, I am satisfied that he would have agreed. It was in his interest to have the Lease assigned or terminated to avoid personal liability under the Lease. In any event, at the mediation, Liao agreed to co-operate. Still, after obtaining Liao’s agreement, 257 did not commence the action against the Landlord. Importantly, after 257 received the Lease Amendment on November 28, 2019, which confirmed that 257 was the lessee and could bring an action, it did not do so. I can only conclude that the reason the Respondents did not commence an action against the Landlord is because they did not believe it was in their best interests, not because of their belief that 257 was not a lessee.

Should the Minutes of Settlement and Hainey, J. Order be set aside?

[44] Rule 59.06(2) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, provides that a party may seek to have an order set aside or varied on the grounds of fraud or of facts arising or discovered after the order was made. As a matter of public policy, finality of litigation is important and to be encouraged. As noted in Mohammed v. York Fire and Casualty Insurance Company, 2006 3954 (ON CA), [2006] O.J. No. 547, at para. 34:

[M]inutes of settlement are a contract. A consent judgment is binding. Both are final, subject to reasons to set them aside. Finality is important in litigation. This is so for the sake of the parties who reached their bargain on the premise of an allocation of risk, and with an implicit understanding that they will accept the consequences of their settlement. Finality is also important for society at large, which recognizes the need to limit the burdens placed on justice resources by re-litigation, a limitation reflected in the doctrine of res judicata.

[45] As set out in Huron-Perth Children’s Aid Society v. R.C.K., et al., 2015 ONSC 5023, at para. 56, on a motion to set aside an order on the basis of new evidence, the court must consider:

i. Whether the evidence probably would have changed the result had it been presented to the court at first instance; and

ii. Whether the evidence could have been obtained by the exercise of reasonable diligence before the original hearing and disposition of the motion.

[46] Here, the Respondents argue that the orders and settlement agreement should be set aside because of the material misrepresentation made by the Applicants that Liao was a lessee and 257 was not. The Respondents take the position that the Lease Amendment showing that Liao transferred his interest to 257 was new evidence obtained after the settlement. They state that they agreed to pay more in the settlement because they believed they needed to secure Liao’s co- operation to have the Landlord assign or terminate the Lease, or to bring an action against the Landlord for relief from forfeiture.

[47] I am of the view that the Respondents could have obtained the Lease Amendment through the exercise of reasonable diligence. Yang was the president of 257 and had control over the corporate documentation, which included the Lease Amendment. No explanation has been provided for why Yang was not aware of the Lease Amendment when it was a document within her control.

[48] In addition, there is no evidence that the settlement would have been different if the Respondents were aware of the Lease Amendment. The Respondents argue that an additional amount was paid because they believed Liao was a lessee. But while the Respondents state that they believed Liao was a lessee before the mediation, they made no request that he sign any documents to transfer his interest to 257. There is no evidence that Liao refused to transfer his interest or required payment to do so. In fact, he transferred his interest to 257 in April 2017 without receiving payment.

[49] I find that the transfer of Liao’s interest to 257 was not a material term of the settlement. After getting Liao’s agreement to co-operate at the mediation (in other words, after getting what it allegedly paid for), the Respondents did not commence an action against the Landlord. Even after receiving the Lease Amendment, which provided that no co-operation was required from Liao, 257 did not bring an action against the Landlord.

[50] The Applicants note that the settlement also involved the Manchu Wok and Tasty Hut businesses. The three companies were each valued separately. For the settlement of Tasty Hut, the Respondents agreed to purchase the Applicants’ shares for $162,000, plus pay a share of profits in the amount of $17,046.62 to Yin and $8,523.46 to Don, plus pay an additional amount of $18,000. With respect to Manchu Wok, the Respondents agreed to purchase the Applicants’ shares for $50,000. The Gong Cha business was not successful, and the Applicants agreed to pay the Respondents $35,000 to cover the personal guarantee with RBC.

[51] I conclude that the settlement was fairly reached by the parties to bring an end to three separate applications and the Small Claims Court action brought by Liao. Although the Respondents argue that an additional amount was paid to secure Liao’s co-operation to commence an action against the Landlord, this is not reflected in the evidence. Even after obtaining Liao’s co-operation and after receiving the Lease Amendment, the Respondents did not commence an action against the Landlord.

[52] I find that there is no basis to set aside the Minutes of Settlement or the Hainey, J. Order.

Are the Respondents in breach of the Minutes of Settlement and Hainey, J. Order?

[53] Pursuant to the Minutes of Settlement, the Respondents were required to pay the Applicants by June 30, 2019. The Minutes required the Applicants to deliver statutory declarations and letters of resignation. Those documents were not delivered to the Respondents until July 19, 2019. I find that as of July 19, 2019, the Applicants had complied with their obligations under the Minutes of Settlement and the settlement funds were owing.

[54] The Respondents argue that they were not required to make the payments set out in the Minutes of Settlement because there had been a misrepresentation that Liao was a lessee. The Respondents state that they did not learn that Liao was not a lessee until after they received the Lease Amendment on November 28, 2019. They provided no explanation for why the settlement funds were not paid after July 19, 2019 and before receiving the Lease Amendment on November 28, 2019.

[55] The Applicants were required to bring a motion to enforce the settlement. The parties consented to the Hainey, J. Order on November 14, 2019. The Respondents argue that they would not have consented to the order if they knew that Liao had executed the Lease Amendment. But the Respondents did not demonstrate how this information would have changed their position. There is no evidence that Liao refused to co-operate in the assignment or termination of the Lease before the mediation. As stated above, it was to his benefit to reduce his personal exposure.

[56] I am of the view that the Respondents did not want to complete the settlement and were looking for an excuse not to do so. I find that the Respondents’ position that they are not bound by the settlement because of a misrepresentation that Liao was a lessee is not bona fide. If that was the reason for not settling, the Respondents would have paid the settlement after receiving the statutory declarations on July 19, 2019 and before receiving the Lease Amendment on November 28, 2019. If the Respondents paid extra in the settlement to secure Liao’s co-operation to commence an action against the Landlord, there is no reason why the Respondents did not bring the action after obtaining Liao’s agreement to co-operate at the mediation, or after they had received the Lease Amendment on November 28, 2019.

[57] I find that the Respondents are in breach of the Minutes of Settlement and the Hainey, J Order.

DISPOSITION

[58] I grant the Applicants’ motion for an order that the Respondents are liable to pay the amounts set out in the Minutes of Settlement dated May 3, 2019 and the costs awarded by Hainey, J. in his order dated November 14, 2019. I make the following order:

(a) The Respondents shall comply with their obligations set out in the Minutes of Settlement and shall pay to the Applicants the following amounts:

i) The sum of $259,570.38, in the manner set out in the Minutes of Settlement;

ii) Interest on the amount of $259,570.38, at the rate prescribed by the Courts of Justice Act, R.S.O. 1990, c. C.43, of two percent per annum from July 19, 2019 to the date of this endorsement;

iii) Costs of $15,000 as set out in the Hainey, J. Order; and,

iv) Interest on the costs of $15,000.00 at the rate of two percent per annum from November 14, 2019 to the date of this endorsement.

(b) After the amounts set out in item (a) have been paid in full, the Applicants shall pay to the Respondents the amount of $35,000. I exercise my discretion pursuant to s. 130 of the Courts of Justice Act and disallow interest on this payment.

(c) The Respondents shall pay post-judgment interest on the amounts set out above from the date of this endorsement to the date of payment at the rate prescribed in the Courts of Justice Act.

[59] The Applicants were successful on this motion and are presumptively entitled to their costs. If the parties are unable to come to an agreement, the Applicants are directed to provide written cost submissions of no more than three pages in length, excluding the Bill of Costs and case law, within 14 days of the date of this endorsement. The Respondents may provide their written submissions in response on the same basis within 14 days of receiving the Applicants’ submissions.

DATE: February 5, 2021