Court File and Parties

Date: 2022 0413 Superior Court of Justice - Ontario

Re: EDWARD GROVES ET AL., Plaintiffs And: UTS CONSULTANTS INC., Defendant

Before: Vella J.

Counsel: Benjamin Salsberg, for the Plaintiffs Orie Niedzviecki, for the Defendant

Heard: October 19, 2021

Endorsement: Motion for Summary Judgment

[1] The plaintiffs, collectively referred to as the “Groves Group”, seek summary judgment in the sum of $1,333,333.33, plus interest, from the defendant, UTS Consultants Inc. (“UTS”) under the “earn out” provisions of a Share Purchase Agreement made November 3, 2014 (the “SPA”). In the alternative, at the motion, the Groves Group sought partial summary judgment in the principal sum of $491,010.83 plus interest, and directions as to a trial to determinate what further sum, if any, is due under the SPA’s earnout provisions.

[2] UTS responds that there are genuine issues that require a trial and therefore this motion should be dismissed. Furthermore, UTS submits that partial summary judgment is not suitable in this matter as it would not shorten the trial, the same evidence will have to be called and the same fundamental issue determined: namely, whether any sum is due under the earn-out provisions of the SPA and if so, how much.

[3] UTS also raises defences that it says have a good chance of success and therefore raise genuine issues that require a trial including a limitation period defence, a waiver defence and a bad faith defence. UTS has also pleaded in its statement of defence that the court was the wrong forum for this dispute as s. 2.2.2(8) of the SPA requires that any disputes relating to the earn out provisions are to be referred to an accounting firm for resolution. However, it did not pursue the forum argument at the motion.

[4] For the reasons that follow, the plaintiffs have not demonstrated on the evidentiary record adduced that there are no genuine issues requiring a trial and the motion is dismissed.

Background

[5] Briefly, the Groves Group is Wayne Groves, Julie Groves, 2240452 Ontario Limited (also known as “Grovesco”), 2440450 Ontario Limited (“450”), and 1985353 Ontario Limited (“353”).

[6] On November 3, 2014, all of the shares of 1223099 Ontario Ltd. operating as UTS Consultants (“122”) were purchased by 2436952 Ontario Inc. (“243”) pursuant to the terms of the SPA.

[7] By articles of amalgamation dated November 12, 2014, 122 and 243 were amalgamated. The amalgamated company’s name is UTS (the defendant).

[8] By articles of amalgamation dated November 1, 2017, Grovesco, 450 and 353 were amalgamated and those amalgamated entities are now known as 353.

[9] On November 3, 2014, all of the shares of 122 were purchased by 243 pursuant to the terms of the SPA.

[10] Pursuant to the terms of the SPA, the purchase price for 122’s shares were to be paid to certain of the plaintiffs as follows:

(a) A purchase price of up to six million dollars ($6,000,000), of which Wayne Groves received 10.51%, Julie Groves received 10.51% and Grovesco received 45.69% of the closing cash proceeds;

(b) The purchase price included an upside of up to two million dollars ($2,000,000) called an “earn out” amount which was dependent on the performance of UTS’s Bell Canada Contracts.

[11] The essence of the dispute is whether anything is payable to the plaintiffs under the earn out provisions, and if so, how much is due.

[12] UTS claims that the subject Bell Contracts that drive the “earn-out” calculation performed very poorly over the two-year period stipulated under the SPA such that there were no profits, and indeed there was a net loss. In other words, the revenues generated by the Bell Contracts were less than the expenses incurred to provide those services. As the earn out was based on a multiple of the profit earned, no sum is due.

[13] The Groves Group states that they disbelieve UTS and believe that the expenses claimed were inflated or improperly transferred from other contracts to the Bell Contracts to make them look like they were unprofitable. They further say that they were not provided with the back-up documentation and data necessary for them to confirm whether or not the revenues and expenses attributed by UTS to the subject Bell Contracts were accurate, contrary to the express terms of the SPA.

[14] UTS responds that it sent out multiple Earn Out Reports, including on February 10, 2017, march 21, 2017 and December 12, 2017.

[15] Furthermore, the Groves Group state that UTS failed to deliver an Earn Out Report in the form and content required by the SPA, and used the example of the a one-page table dated December 12, 2017 which is essentially a conclusionary document without any back up documentation to support its conclusions.

[16] Relevant, from UTS’ perspective, is the fact that Wayne Groves accepted the role of president of UTS after the purchase in November 2014. However, he was dismissed in or around September 16, 2017. This is relevant, says UTS, because from November 2014 to September 2017, Wayne Groves in his role as President had access to all the requisite financial information relating to the Bell Contracts and so would have been aware of their poor performance before he left UTS. UTS states that from November 2014 to October 2016, Wayne Groves was provided with monthly income statements related specifically to the Bell Contracts, upon which the earn out was calculated. Also, in November 2015, Wayne Groves and UTS agreed that only one earn out report would be generated rather than the two required under the SPA. That report would be prepared within 90 days from the second year following the closing date of November 3, 2014 and it met that requirement.

[17] Also relevant from UTS’ perspective was, on or about August 30, 2016, Wayne Groves’ partner in the predecessor business prior to the subject sale, Mr. Uyede, resigned and allegedly advised UTS that he understood that there was no earn out owing to him due to the poor performance of the Bell Contracts.

[18] UTS also contends that the Groves Group failed to give a notice of objection to the calculations in the Earn Out Report and are therefore deemed to have accepted the calculations contained therein pursuant to s. 2.2.2(2) of the SPA.

[19] The Groves Group responds that in fact it is UTS who has failed to provide the requisite underlying documentation associated with the Earn Out Reports, including interim financial reports and expense reports related to the Bell Contracts, and therefore under the SPA, the earn out amount of $2,000,000 is deemed to be owing to them.

[20] The dismissal of Wayne Groves was the subject of a hotly contested lawsuit and competing summary judgment motions. UTS contended that Wayne Groves resigned, and he contended that he was dismissed without cause. Wayne Groves was ultimately successful.

[21] The action was started by Notice of Action issued March 1, 2019. Pleadings have been exchanged, as have affidavits of documents though the Groves Group dispute the adequacy of UTS’s documentary production. It is UTS’ position that it need only produce the thousands of documents attached to its supplementary affidavit of documents for inspection and not provide any duplicates for Groves Group. The Groves Group claims it needs copies of these documents in order to have them properly scrutinized.

[22] Examinations for discovery have been conducted.

[23] In support of this motion, the Groves Group filed an affidavit and reply affidavit of Wayne Groves, an affidavit of their personal accountant, Frederick Richardson (in their reply record), transcripts from the examination for discovery and cross examination of Scott Mudie (UTS’ Chief Operating Officer) and the cross examination transcript of Laura Wilson (UTS’ acting Chief Financial Officer).

[24] UTS filed an affidavit of Scott Mudie and affidavit of Laura Wilson. It also relies on transcript excerpts of the examination for discovery of Wayne Groves and transcript excerpts from its cross examination of Wayne Groves.

Analysis

Test for Summary Judgment

[25] Under r. 20.02(2), the court shall grant summary judgment if it is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence, based on the evidentiary record before the motion court (Hryniak v Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87 at para. 66).

[26] In Hyrniak, at para. 5, the Supreme Court of Canada emphasized the need for a broad interpretation of r. 20 in keeping with the principles of proportionality and access to justice.

[27] The test for determining whether there is “no genuine issue requiring a trial” is three-fold and summarized in Hyrniak, at para. 49:

There will be no genuine issue requiring a trial when the judge is able to reach a fair and just determination on the merits on a motion for summary judgment. This will be the case when the process (1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result.

[28] If it appears to a judge that there is a genuine issue requiring a trial, the judge can resort to the fact finding powers provided under r. 20.04(2.1) and (2.2) unless it is in the interest of justice for these powers to be exercised only at trial (Hryniak, at para. 66).

[29] While not every issue of credibility will raise a genuine issue requiring a trial, serious credibility concerns relating to material facts can support a finding that a genuine issue requiring trial is warranted. Bald allegations without supporting evidence do not raise a genuine issue requiring a trial.

[30] The initial onus on a motion for summary judgment is on the moving party. If the moving party discharges that onus, then it shifts to the responding party to persuade the court that there is a genuine issue requiring a trial, including whether the claim or defence, as the case may be, has a real chance of success.

[31] The moving and responding parties must put their best foot forward in terms of adducing an evidentiary record. The responding party, in particular, cannot rely on bald assertions and the promise of more evidence to come at trial.

Key Contractual Provisions and the Evidence

[32] The key contractual provisions of the SPA at issue are:

2.2 Purchase price The aggregate purchase price for the Shares shall be Six Million Dollars ($6,000,000) (which includes an Earn-Out Amount of Two Million Dollars ($2,000,000) which Earn-Out Amount and Purchase Price are subject to downward adjustment as provided in Section 2.2.1) minus (i) the amount of the Closing Debt, plus or minus (as the case may be) (ii) the Closing Working Capital Adjustment; (the “Purchase Price”); provided, however, that the Purchase Price shall be subject to the Purchase Price Adjustments. The Purchase Price and the Earn-Out Amount shall be subject to the downward adjustment as set out in Section 2.2.1. The Earn-Out Amount, if any, as adjusted, shall be payable in accordance with Section 2.2.1. The Parties hereby agree that, as of Closing, they have estimated the Purchase Price (“Estimated Purchase Price”) for the Shares to be the sum of $5,623,441.36 (which includes an Earn-Out Amount of Two Million Dollars ($2,000,000) which Earn-Out Amount and Purchase Price are subject to downward adjustment as provided in Section 2.2.1) based on the following calculation: Six Million Dollars ($6,000,000) minus (i) the amount of the Estimated Closing Debt, plus or minus (as the case may be) (ii) the Estimated Closing Working Capital Adjustment.

2.2.1 Earn-Out Amount (a) The Purchase Price includes an earn-out amount in the amount of $2,000,000 (“Earn-Out Amount”) subject to Section 2.2.1(e) and subject to downward adjustment in accordance with the following formula:

The Purchase Price and the Earn-Out Amount shall be reduced by an amount equal to the difference between (a) $2,000,000 and (b) the amount determined by multiplying (A) the Earn-Out Multiple (as hereafter defined) times (B) fifty percent (50%) of the Profit (as hereinafter defined) earned by the Corporation on: (i) the contract entered into as of August 1, 2014 between the Corporation and Bell Canada, General Agreement- Access Network Structures Design, and (ii) the contract entered into as of August 1, 2014 between the Corporation and Bell Canada, General Agreement – Access Network Cable Design (together, the “Bell Contracts”) during the first and second year following the date of Closing. In the event the amount determined in accordance with multiplying (A) by (B) in the above calculation is greater than or equal to $2,000,000, it shall be deemed to be $2,000,000 and the Earn-Out Amount shall not be subject to any adjustment pursuant to this Section 2.2.1(a).

For greater certainty, the Earn-Out Amount shall be capped at and shall in no event or circumstance exceed the sum of $2,000,000. Notwithstanding anything to the contrary in this Agreement, the Earn-Out Amount means the Earn-Out Amount subject to the downward adjustment outlined above as finally determined in accordance with this Section 2.2.1 including, without limitation, the downward adjustments outlined in this Section 2.2.1(a) and in Section 2.2.1(e).

(b)(5) “Incremental overhead” means any indirect costs that are incurred, during the relevant period, by or on behalf of the Corporation to service the Bell Contracts, pro-rated (as applicable) for the portion attributable to the Bell Contracts including, without limitation, the follow costs:

(D) General office expenses incurred specifically to service the Bell Contracts including but not limited to office supplies, safety supplies, phone charges, printing, laptops and IT/server expenses; and (E) To the extent the capital purchases or expenditures are required to service the Bell Contracts, the lease, depreciation or amortization expense with respect to those capital purchases or expenditures using amortization for accounting purposes if a capital lease. Note that IT related capital purchases or expenditures will be amortized on a straight line basis over 3 years and vehicle related capital purchasers purchases expenditures will be amortized on a straight line basis over 8 years.

2.2.2 Earn Out Payment Mechanics (1) The Purchaser shall deliver to the Vendors the calculation of the Profits determined as at the first and second anniversary of the Closing Date, together with the internally prepared financial reports of the Corporation, and all interim financial reports and working papers used by the Corporation in its calculation of Profit, including the financial documents to be prepared respecting the business carried on solely related to the Bell Contract (the “Earn Out Report”). The Purchaser shall calculate Profit in accordance with Schedule 2.2.1 in accordance with GAAP, consistently applied with prior periods, and deliver the Earn-Out Report within 90 days of the first and second anniversary date of the Closing.

(2) If the Vendors or any of them does not give a notice of objection to the calculation of the Profit as set out in the Earn-Out Report for a particular year in accordance with this Section 2.2.2, the Vendors shall be deemed to have accepted the calculation of the Profit for such year, which shall be final and binding on the Parties.

(8) The Corporation shall, and Purchaser shall cause the Corporation to, give the Vendors and their accountants all access to the Books and Records and working papers of the Purchaser and/or the Corporation used in each determination of the Profit as reasonably necessary to enable the Vendors to exercise the rights of the Vendors under this Section 2.2.1. If any Vendor objects to the calculations of Profit pursuant to Section 2.2.1, any Vendor shall give notice to the Purchaser no later than 30 days after the delivery of the Profit calculation. Any notice given by a Vendor shall set forth in reasonable detail, to the extent ascertainable by the Vendor, the particulars of such objection. The Parties shall then use reasonable efforts to resolve such objection for a period of 30 days following the given of any such notice. If the matter is not resolved by the end of such 30 day period, then the calculation of Profit for the applicable year shall be submitted by the Parties to an accountant associated with an Accounting Firm determined in accordance with Section 2.8 mutatis mutandis . The Accounting Firm shall, as promptly as practicable, make a determination of the Profit for the applicable year based on the profit calculated prepared by the Purchaser and written submissions of the Parties given by them to the Accounting Firm…..The decision of the Accounting Firm as to the Profit calculation shall be final and binding upon the Parties…

[33] The parties agreed that the Earn-Out Report referenced in section 2.2.2 would only be produced with respect to the second anniversary following the closing date. Focusing on the December 12, 2017, UTS provided a one-page document to Wayne Groves, Julie Groves and 244 (collectively, the “Vendors”) in purported satisfaction of section 2.2.2’s requirement to produce an Earn-Out Report. It listed total revenues and costs in a summary table form for years 1 and 2 relating to the Bell Contracts. It showed a negative profit for year 1 of -$357,170 and a profit for year 2 of $49,115, for a two-year average of -154,028.

[34] A focus of the dispute between the parties is the requirement of s. 2.2.2 that UTS provide the Groves Group with detailed back up documentation to support the calculations reflected in the Earn Out Report. According to Wayne Groves, this back up documentation is required so that they can scrutinize the underlying basis of the calculations and know whether they have grounds to object.

[35] UTS maintains that it disclosed the various documents, but only by way of a supplementary affidavit of documents delivered after this litigation was commenced. In any event, UTS states that Wayne Groves had the requisite knowledge from his past position as president. Furthermore, it maintains that it is only obliged to disclose and produce for inspection only these documents. This is a dispute that will likely require a motion to resolve. However, the lack of production of these documents in this motion underpins the inadequacy of the evidentiary record.

[36] The Groves Group take the position that given the lack of documentary disclosure, the default position is that the Vendors are automatically entitled to the full two million dollars divided by 2/3rds (reflecting their 2/3rds interest, Mr. Uyede and his company having sold the other 1/3 rd interest) for the amount of $1,333,333.33. They offer no case law in support of their interpretation of this clause and UTS disputes this interpretation. It is not clear to me, based on the wording of the agreement, that a consequence of non-compliance with s. 2.2.2 is that the earn-out calculation is deemed to be the full two million dollars. To the contrary, s. 2.2.2(8) provides a dispute resolution mechanism to deal with any concerns regarding the earn-out report and calculation. To counter this argument, UTS states that the Groves Group failed to file a notice of objection. Furthermore, it has raised the defence of waiver, bad faith and a limitation period defence and adduced evidence which could reasonably support these defences. In any event, the issue of non-compliance, waiver, bad faith, and the consequences raise genuine issues requiring a trial on a more complete evidentiary record.

[37] The Groves Group have failed to discharge the initial onus and burden of proof. They do not reach the evidentiary threshold of demonstrating that there is no genuine issue requiring a trial.

[38] There are many contentious issues that will require a trier of fact to assess credibility on both sides of the ledger. For example, UTS’s contention that Wayne Groves was well aware of the poor financial performance of the Bell Canada Contracts from his time as president of UTS, such that it was unnecessary to provide the detail of financial disclosure underpinning its earn out calculation that the SPA arguably calls for, is a fact that is disputed by Wayne Groves in his affidavit and will have to be assessed on the evidence, including a credibility assessment of Wayne Groves on this issue.

[39] Richardson offers four possible calculations of the earn out provision and then concludes that at least $491,010.83 is owing. However, he admits that it is “impossible” to verify the accuracy of the documentation produced by UTS or its claim that no amount is owing by way of the earn out calculation or the authenticity or accuracy of the expenses attributed by UTS to the Bell Contracts without having the underlying records. He does not have the complete documentary record upon which to make an informed judgment as to how much is actually likely owing under the earn out clause. Wilson counters that there is nothing owing under the earn out clause under her calculations based on her review of the financial records. However, she, like Richardson, is not an independent expert witness and her calculation and underlying assumptions and sources will have to be scrutinized by the trier of fact.

[40] The determination of the earn out issue will likely require expert evidence, together with an assessment of the credibility of Mr. Richardson and Ms. Wilson, on the issue of the propriety of expenditures attributed by UTS to the Bell Contracts, and the resulting calculation. For example, do the expenditures and resulting calculations meet the GAAP (generally accepted accounting principles). It is not possible on the existing evidentiary record to even attempt this exercise. The “thousands” of pages of back up documentation disclosed by UTS in support of its earn out calculation, as revealed its supplementary affidavit of documents, has not been produced in the motion.

[41] In addition, the majority of the caselaw advanced by the Groves Group related to the test for summary judgment, and not the appropriate approach the court should take in interpreting the SPA and its various requirements under the earn out provision. Accordingly, the summary judgment motion advanced by them falls short on the law as well.

[42] In addition, even if I had found that the Groves Group met the evidentiary threshold, the defences pleaded by UTS raise triable issues requiring a trial and will benefit from a trier of fact’s assessment based on a more fulsome record than that provided by UTS on this motion; especially the allegations relating to waiver and bad faith. The limitation period defence pleaded by UTS also raises a genuine issue for trial regarding the application of the statutory discoverability analysis under s. 5(1) of the Limitations Act, 2002. The evidentiary record put forward by the Groves Group and UTS raises genuine issues requiring a trial.

[43] While it is open to a motions judge on a motion for summary judgment to dismiss the moving party’s motion and grant summary judgment in favour of the responding party (called a “boomerang summary judgment”), this is not an appropriate case in which to exercise my discretion for the reasons above stated. UTS did not seriously advance this position at the motion.

[44] The summary judgment process does not enable me to make the requisite finding of facts or apply the law to the facts, and is not the most proportionate, timely and cost-effective approach to resolution. The fact finding powers under r. 20.04(2.1) and (2.2) in the circumstances of this matter should only be exercised at trial in the interests of justice given not only the credibility assessments on key issues that must be made, but the inadequacy of the evidentiary record. This is not a straightforward question of contractual interpretation, based on largely uncontested material facts involving the earn out provisions of the SPA. The court will have to wrestle with the process and underlying substance of UTS’ calculations to come to a determination of the question of how much, if anything, is owed to the Groves Group arising from the earn-out provisions of the SPA, taking into account the defences asserted by UTS.

[45] Similarly, this is not an appropriate case to grant partial summary judgment. As candidly admitted by counsel for the Groves Group, if I were to grant partial summary judgment, it would not substantially shorten the trial. The same issue would have to be resolved (how much is owing), and the same evidence would have to be adduced. Also, in my view, there is a risk of inconsistent findings. In the event I were to find that at least $491,010.83 was owing (and I do not make that finding of fact) and the trier of fact with a more fulsome evidentiary record was to conclude that, as advanced by UTS, nothing was owing, this would lead to an inconsistent result. Examinations for discovery have been completed, and at this point the most efficient way to proceed is to advance this matter to trial. Furthermore, the Groves Group did not seek partial summary judgment in their Notice of Motion.

[46] It did not escape my notice that the Groves Group failed to place any jurisprudence before the court to support its alternative position requesting partial summary judgment, such as the leading case of Malik v Attia, 2020 ONCA 787.

[47] Accordingly, the motion for summary judgment is dismissed.

[48] If the parties cannot agree on costs, then UTS will deliver its cost outline and written submissions within 15 days from the release of these reasons. The Grove Group will then have 10 days to provide its cost outline and written submissions. These submissions shall not exceed 3 pages each. Any reply submissions shall be delivered within 5 days thereafter and shall be no longer than 1 page.

[49] I assume that the parties exchanged cost outlines in advance of receiving my reasons as they have not been uploaded to CaseLines. If not, I am to be advised. Parties are reminded that they are to always exchange cost outlines in advance of a motion and should upload them on CaseLines providing rule 49 offers are not potentially engaged.

Justice S. Vella Date: April 13, 2022