Court File and Parties

COURT FILE NO.: CV-21-00673445-00CL DATE: 2022-05-02 SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)

RE: ELAD CANADA OPERATIONS INC., Applicant AND: RESTER ONTARIO INVESTMENTS INC., Respondent

BEFORE: Penny J.

COUNSEL: Eliot N. Kolers and Muzhgan Wahaj, for the Applicant Eric S. Block, Adam Ship and Pierre-Gabriel Grégoire, for the Respondent

HEARD: March 28, 2022

REASONS FOR DECISION

Overview

[1] This application involves the interpretation of a single provision of a dispute resolution clause contained in a purchase and sale agreement. The dispute resolution clause relates to the manner in which an independent accountant will determine a dispute about the calculation of the post-closing working capital adjustment which must be made under the agreement.

[2] The issue in dispute in this motion is whether the purchaser, Rester, is permitted to provide the independent accountant with narrative written “submissions” in response to ELAD’s notice disputing Rester’s calculation of the post-closing working capital adjustment.

Background

[3] The applicant, Elad Canada Operations Inc., is the vendor under a Share Purchase Agreement. The respondent, Rester Ontario Investments Inc., is the purchaser. The SPA relates to the purchase and sale of Elad Canada Realty Inc. and its subsidiaries. The transaction closed on May 31, 2021.

[4] The final purchase price of the transaction is subject to an adjustment based on the calculation of working capital at the date of closing. This calculation, by its nature, could only be made within a reasonable time after May 31, 2021.

[5] In order to calculate the adjustment to working capital, the SPA contemplates the sequential delivery of materials by ELAD and Rester. If, after the exchange of these materials, the parties are unable to agree on the calculation of the working capital adjustment, section 2.8(3) of the SPA provides a dispute resolution mechanism. Under this mechanism, an independent accountant, acting as an expert, not an arbitrator, must determine the correct working capital adjustment based on the terms of the SPA and the information available in the materials exchanged between the parties.

[6] Having disagreed on the working capital calculation after the initial exchange of each party’s calculations, ELAD and Rester agreed to refer the dispute to the independent accountant for final determination in accordance with the terms of section 2.8(3) of the SPA. The parties have retained PricewaterhouseCoopers LLP to act as the independent accountant but have not been able to agree on the process for submitting the dispute to PwC. In particular, the parties disagree about whether Rester is permitted, by the terms of section 2.8 of the SPA, to make any additional “written submissions” to PwC in response to the issues raised in the dispute.

The Working Capital Adjustment Process

[7] The final purchase price of the transaction was $342,000,000. This was subject to an adjustment based on the difference (if any) between: (i) the “target” closing working capital of $14,000,000 assumed for the purposes of the final purchase price pre-closing; and (ii) the working capital calculated post-closing as of the closing date.

[8] Under the SPA, working capital is a mathematical expression of the difference between the total assets of ELAD and its subsidiaries less their total liabilities as of the closing date, subject to the exclusions and methodology set out under Exhibit B of the SPA.

[9] The SPA sets out in some detail the process for managing the calculation of the working capital and the resolution of any disputes between the parties concerning its calculation. There are five steps:

(i) first, under section 2.4 of the SPA, ELAD was required (prior to closing) to prepare and deliver to Rester unaudited statements which set forth “reasonably detailed calculations” of ELAD’s good faith estimate of the working capital as at the closing date (the estimated closing working capital);

(ii) second, under section 2.8(1) of the SPA, Rester was required (within 60 days after closing) to prepare and deliver to ELAD draft unaudited statements setting forth “reasonably detailed calculations” and “reasonable supporting documentation” of the working capital at the closing date (the draft closing working capital);

(iii) third, under section 2.8(2) of the SPA, ELAD was required to review the draft closing working capital and, within 30 days, notify Rester in writing if it disputed any of Rester’s working capital calculations (the dispute notice). The dispute notice was required to “contain a statement of the basis of each of” ELAD’s objections to Rester’s draft closing working capital;

(iv) fourth, under section 2.8(3) of the SPA, the parties were required to engage in good faith attempts to resolve the objections set out in the dispute notice within 20 days following its receipt; and

(v) fifth, under section 2.8(3) of the SPA, failing bilateral resolution of the issues raised in the dispute notice, the parties were required to submit the dispute for determination to the independent accountant, who would be “acting as expert and not as arbitrator” and who would be required to make a final determination within 30 days following the submission of the dispute to PwC.

[10] Both parties spent a good deal of time in written and oral submissions criticizing the other for alleged shortcomings such as: failing to make timely disclosure of supporting documentation; failing to follow the strict terms of the dispute resolution process; and overly strict adherence to the terms of the dispute resolution process. In my view, the net result of the process followed was, with the exception of the one, narrow issue in dispute to be decided in this application, substantially in accordance with the terms of the SPA and resulted in no advantage or unfairness to either party. Nothing, therefore, turns on these allegations and cross allegations and I will say no more about them.

[11] The narrow issue in dispute turns on section 2.8(3) of the SPA. The issue is whether the use of the words “based solely on the written submissions of the parties” (emphasis added) contemplates Rester providing “narrative” submissions in response to ELAD’s criticisms, contained in the dispute notice, of the mathematical calculations Rester provided in its draft closing working capital. The full text of section 2.8(3) provides:

Failing resolution of any disputed item raised by the Vendor in the Dispute Notice, the dispute will be submitted for determination to the independent firm of chartered accountants Deloitte LLP - Toronto, or if such firm is unable to act, PricewaterhouseCoopers LLP - Toronto, or if such second firm is unable to act, to an independent firm of chartered accountants mutually agreed to by the Purchaser and the Vendor (the “Independent Accountant”). If, in such situation, the Purchaser and the Vendor are unable to mutually agree on an Independent Accountant within a further period of ten (10) Business Days, then either of them may petition a court of competent jurisdiction to appoint the Independent Accountant. Within thirty (30) Business Days following submission of the dispute to the Independent Accountant, the Independent Accountant shall make a final determination in accordance with the terms and definitions of this Agreement and, based solely on the written submissions of the Purchaser and the Vendor of the appropriate amount of each of the matters that remain in dispute. With respect to each disputed matter, such determination shall not be in excess of the higher, or less than the lower, of the amounts proposed by the Purchaser and the Vendor in the Estimated Statements and Draft Closing Statements, as applicable, with respect to such disputed matter. The determination of the Independent Accountant will be final and binding upon the Parties and will not be subject to appeal, absent manifest error. For the purposes hereof, the Independent Accountant is deemed to be acting as expert and not as arbitrator.

[12] ELAD maintains there is no scope for further written submissions beyond those described in subparagraphs 9 (i) through (v) above; Rester, by contrast, says the words “written submissions” in section 2.8(3) contemplate supplementary “narrative” submissions to explain the basis of the calculations which ELAD has now specifically put in dispute, and why ELAD’s criticisms and counterproposals described in the dispute notice are incorrect or inappropriate.

The Issues

[13] There are two issues:

(1) whether the question ELAD has asked this court to answer in this application is properly a question for the independent accountant; and,

(2) whether section 2.8(3) of the SPA permits the parties to provide any further written narrative submissions to PwC as part of the submission of this dispute to the independent accountant for final determination.

Analysis

Is this a question for PwC?

[14] Section 2.8(3) of the SPA provides that “[F]ailing resolution of any disputed item raised by the Vendor in the dispute notice, the dispute will be submitted for determination to” the independent accountant. The independent accountant “shall make a final determination in accordance with the terms and definitions of this Agreement.” Section 2.8(3) also provides that the independent accountant is “deemed to be acting as expert and not as arbitrator”. Both parties concede that it would be open to the independent accountant to ask for further information and/or submissions from the parties once the dispute has been “submitted for determination”.

[15] The powers conferred on the independent accountant have to do with the determination of the working capital adjustment, in the context of how working capital is defined and to be calculated under specific provisions of the SPA. The independent accountant’s powers do not, however, on my reading of the SPA, include determinations about the meaning of the SPA itself or, at least, performing any interpretations going beyond the determination of the required working capital adjustment itself. The independent accountant’s role is that of an expert (i.e., an expert in the calculation of working capital), not an arbitrator.

[16] For this reason, the interpretation of the provisions governing what the parties must or are entitled, prima facie, to provide to the independent accountant as part of “submitting” the dispute for determination is not a question for the independent accountant. It is a question for the Court. ELAD’s application was properly brought.

Is there any scope for further “written submissions”?

[17] There is no serious disagreement about the basic principles of contractual interpretation that apply to the interpretation of section 2.8 of the SPA. The fundamental goal of contractual interpretation is to determine the parties’ intentions, particularly with respect to disputed issues relating to their respective performance under the contract. In this regard, the Supreme Court of Canada has recognized the dual importance of express language and underlying context when interpreting commercial agreements in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 47:

… [Courts] must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract …

[A]scertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning:

‘… In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.’

[18] The Supreme Court has also made clear that contractual interpretation ought to be grounded in the words and language of the contract (Sattva, para. 57):

While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement. The goal of examining such evidence is to deepen a decisionmaker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract. While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement.

[19] In support of its position that only the materials exchanged between the parties under sections 2.4 and 2.8(1)-(2) (outlined in paras. 9(i) through (v) above) of the SPA can go to the independent accountant, ELAD points to the words of section 2.8(1). Section 2.8(1) provides, “for the avoidance of all doubt”, that Rester is not entitled to “change, amend, revise and/or supplement” its draft closing working capital:

…(A) the specific items included by the Purchaser in the Draft Closing Statements shall constitute the Purchaser’s final calculations thereof for purposes of this Section 2.8, and (B) other than arithmetic errors, the Purchaser shall not be permitted to change, amend, revise and/or supplement any of the specific items included in the Draft Closing Statements in connection with any dispute submitted for determination to the Independent Accountant pursuant to Section 2.8(3)…

[20] ELAD argues that Rester “chose not to provide adequate support for its Working Capital Calculation” and that it cannot “now, at the Dispute stage of the process, [seek] to augment its materials with written submissions”. Allowing the further submissions would “inappropriately permit Rester to circumvent the limitations of section 2.8(1) to supplement its calculations in the Draft Closing Statements with legal or accounting submissions relating to the Dispute”.

[21] I am not able to agree with ELAD’s submission for two reasons, one contextual and the other based on the ordinary and grammatical meaning of the words used.

[22] Regarding context, the closing date working capital calculation is no small or simple exercise. As one example, the real estate business sold in the transaction included dozens of active real estate projects under development. Each project was constantly changing as development progressed. Assets and liabilities associated with projects with an anticipated completion date of more than a year from closing were to be excluded. Each project, therefore, had to be assessed for its anticipated completion date and, for qualifying projects, notionally frozen in time on the date of closing and its financial and accounting records analysed to determine, on that date, the appropriate calculation of working capital associated with that project.

[23] When Rester prepared its draft closing working capital, it had no idea what might or might not be contentious or disputed. Leaving aside all the supporting documents that were ultimately provided, Rester’s draft closing working capital is a spreadsheet of 24 pages containing numbers only, with essentially no commentary.

[24] By contrast with Rester’s initiating calculations, ELAD’s dispute notice contains, including the introductory summary, 29 pages of narrative, with very few arithmetic calculations. This narrative explains ELAD’s objections to 20 issues arising out of Rester’s draft closing working capital. Many of these objections go well beyond simple disagreements about mathematical calculations per se and involve normative assessments of the supporting information and arguments about what the parties “must have” intended or why Rester’s approach is wrong and ELAD’s approach is right.

[25] The issue is not that Rester “chose” not to provide adequate support for its working capital calculation. It did provide supporting documents. The issue is that it was not possible for Rester to provide a full explanation about matters it did not know were in dispute, in response to arguments it did not know were going to be made.

[26] Turning to the ordinary and grammatical meaning, Rester seeks the opportunity to respond to the specific disputes raised by ELAD for the first time in its dispute notice. Rester acknowledges that the specific items it included in its draft closing working capital “shall constitute the Purchaser’s final calculations”. Section 2.8(1)(A) and (B) is intended to require Rester to ‘put its final numbers of the table’ so as to avoid strategic increases or other changes in position based on a subsequent dispute notice. However, Rester is not seeking to change, amend, revise and/or supplement any of its calculations of the specific items in its draft closing working capital. It is not seeking to change its numbers in any way. It seeks only the opportunity to respond, with narrative submissions, to the narrative submissions in ELAD’s dispute notice. Section 2.8(1) has no application to the issue in dispute in this application.

[27] ELAD also argues that the term “written submissions” in section 2.8(3) cannot be an express invitation to additional written submissions being made because the word “submission” also appears earlier in the same sentence of section 2.8(3) in relation to the act of putting the dispute before the independent accountant. Rester’s interpretation, ELAD submits, would accord two different meanings to the word “submission” in the same sentence, contrary to accepted rules of interpretation.

[28] While I agree that interpreting the same word to have two different meanings is to be avoided, the literal meaning of words can never be divorced from their context.

[29] Section 2.8(3) first introduces the verb “submit” in its opening phrase: “Failing resolution of any disputed item raised by the Vendor in the Dispute Notice, the dispute will be submitted for determination” to the independent accountant. Later, when setting out the time frame for the independent accountant’s determination, section 2.8(3) states that within 30 business days “following submission of the dispute”, the independent accountant must make a final determination of the appropriate amount of each of the matters that remain in dispute in accordance with the terms and definitions of the SPA and “based solely on the written submissions” of Rester and ELAD.

[30] In the world of dispute resolution, the word “submission” is often used to describe the act of putting a dispute before the decision maker and the word “submissions” is often used to describe the content of the arguments or representations made in support of each party’s position on the issues in dispute. That is precisely the sense in which those words are used in section 2.8(3). Imputing that common subtlety of meaning into the interpretation of a sophisticated document like the SPA is not at all fanciful or inconsistent with the principles of commercial contract interpretation.

[31] Finally, ELAD submits that permitting the independent accountant to receive or consider additional submissions from the parties relating to the dispute would constitute the independent accountant as a “pseudo-arbitrator”, contrary to its express role as an “expert and not as arbitrator” under the SPA.

[32] This argument stems from ELAD’s concern that Rester is trying to turn what was obviously meant to be a short, focused exercise of resolving a technical accounting question into something more like a Superior Court trial. Again, while I share that concern in general, I do not think this is an accurate or sustainable criticism of what Rester is actually seeking to do in this case.

[33] As things currently stand, Rester has provided its broad calculation of the entire working capital as of the date of closing. By necessity, that calculation does not provide specific argument or justification for each and every item which is contained within that 24 page financial spreadsheet. ELAD objects to only 20 of those myriad items underpinning Rester’s calculations and has provided, in narrative form, an explanation for and arguments in favour of its objections and why Rester’s calculation of those particular items is incorrect.

[34] At this point, therefore, Rester has not made what I would call “written submissions” on any of the disputed points. All it has done is to provide its broad calculation of the entire working capital of the business as of the date of closing, most of which is not in dispute.

[35] It seems to me inconceivable that both the parties and the independent accountant would not reasonably expect that written submissions to the independent accountant would: a) identify the points in dispute; and b) set out each side’s position on those points. This is what is encompassed by the words “based solely on the written submissions of” the parties as used in section 2.8(3). Having both sides join issue on the points in dispute is not only desirable; it is critical to any summary dispute resolution process. Permitting Rester to respond briefly to ELAD’s arguments (again, I emphasize, arguments raised for the first time in ELAD’s dispute notice) is consistent with the use of the words “written submissions” and achieves this critical objective. Allowing Rester to make such submissions, under appropriate restrictions, will not materially detract from the summary and expedited nature of the dispute resolution mechanism or turn this process into a Superior Court trial. Nor will it transform the independent accountant into an arbitrator or “pseudo-arbitrator”.

[36] For these reasons, I find that the words “written submissions” in section 2.8(3), read in the context of the other, related provisions and the agreement as a whole, contemplate some form of proportionate, narrative response by Rester to the dispute notice. This response may not change, amend, revise and/or supplement any of its calculations of the specific items in its draft closing working capital. What Rester may do, however, is explain, in narrative terms, why it says its calculations in the draft closing working capital are the right ones and, to the extent applicable, why it disagrees with ELAD’s approach to the disputed items.

[37] In order to maintain proportionality and the underlying objective in section 2.8 of a straightforward, summary and brief process for resolution of the post-closing working capital adjustment, Rester’s responding narrative “submissions” shall not exceed 25 typed, double spaced pages of 12 point font and shall be delivered within 21 days.

[38] ELAD submitted in the alternative that if Rester were to be permitted to file further submissions, ELAD should be permitted a right of reply. Rester took the position that ELAD has already delivered its narrative submission in the form of the dispute notice and should not be permitted any further submissions.

[39] Although it might be said that Rester began this process with the draft closing working capital, in fact ELAD went first with the estimated closing working capital. Of more relevance, however, is that it is ELAD which actually started the dispute resolution process by delivering a notice of dispute. For this reason, an appropriate interpretation of “written submissions” would also include a brief right of reply by ELAD, limited to no more than 5 typed, double spaced pages of 12 point font to be delivered within a further seven days.

[40] It shall be for the independent accountant to decide whether it requires any further information from the parties before making a final determination of the appropriate amount of each of the matters that remain in dispute I accordance with the SPA.

Costs

[41] The parties agreed that costs of $25,000 should be awarded to the successful party. Although Rester was unsuccessful in its request to refer this question to the independent accountant, that issue represented a very small amount of the time devoted to this matter in both written and oral argument. Rester prevailed on the main point. Accordingly, Rester is awarded partial indemnity, all inclusive costs of $25,000.

Penny J. Date: May 2, 2022