Amtim Capital Inc. v. Appliance Recycling Centers of America, 2022 ONSC 6877

Court File and Parties

COURT FILE NO.: C-295-11 DATE: 20221212

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Amtim Capital Inc. Plaintiff

– and –

Appliance Recycling Centers of America Defendant

COUNSEL: Joseph Figliomeni, for the Plaintiff Jonathan Rosenstein, for the Defendant

HEARD: February 16, 17, 18, 22, 23, 24, May 9 and July 8, 2022

Reasons for Judgment

Justice D.A. Broad

Background

1The defendant (referred to in these Reasons as “ARCA”) is a publicly traded US corporation having its head office, during the currency of the contractual relationship between the parties, in the City of Minneapolis in the State of Minnesota. Its current head office is in the City of Las Vegas in the State of Nevada.

2At all material times ARCA had two main businesses consisting of:

(a) appliance recycling through a number of business centres across North America, including in Canada through its Canadian subsidiary ARCA Canada Inc. (referred to in these Reasons as “ARCA Canada”); and

(b) retail sales of appliances in several cities in the US.

3Amtim Capital Inc. (referred to in these Reasons as “AMTIM”) is a personal services corporation. Joe Berta (“Berta”) is AMTIM’s sole principal. As described in more detail below, ARCA and AMTIM entered into a contractual arrangement by virtue of an “Amended and Restated Sales Representation Agreement” (the “Sales Agreement”) and “General Management Agreement” (the “Management Agreement ”) both dated September 24, 2007 (together referred to as the “Governing Agreements ” or the “Agreements”) whereby Berta, through AMTIM, assumed responsibility for all sales by, and day-to-day management of, ARCA Canada in exchange for compensation to be paid by ARCA based in large part upon the annual net profit of ARCA Canada.

4Each of the Governing Agreements had its own specific formula for calculating annual compensation to be paid by ARCA to AMTIM. However, as noted, each formula provided for AMTIM’s annual compensation to be based on the net profit on services delivered in Canada through ARCA Canada. Net profit of ARCA Canada was to be determined by subtracting total expenses from total revenue before taxes “calculated in accordance with generally accepted accounting principles of the USA, consistently applied (GAAP).”

5ARCA was responsible under the Agreements to produce an income statement for the operations of ARCA Canada in accordance with U.S. GAAP within 90 days of the end of each fiscal year and to pay AMTIM the amount to which it was owed pursuant to each Agreement in excess of the monthly amounts paid to AMTIM during the year.

6Both Governing Agreements conferred on AMTIM the right to review all ARCA records pertaining to the Canadian operations necessary to determine the accuracy of the compensation and payments payable under the Agreements.

7In August 2009 Berta wrote to ARCA to express concern that the calculation of fees owing to AMTIM pursuant to the Management Contract, and in particular the allocation of ARCA corporate overhead costs to ARCA Canada. [Note: the terms “corporate overhead costs” and “head office expenses” were used interchangeably by the witnesses and counsel during the course of the trial and are used interchangeably in these Reasons]

8In March 2010 ARCA’s U.S. attorney wrote to Berta offering to make available all accounting and relevant information for the Canadian operations at ARCA’s head office in Minnesota. AMTIM declined this offer and litigation ensued, first in the United States commenced by ARCA, and then by AMTIM by this proceeding commenced by issuance of the Statement of Claim on March 29, 2011. The Statement of Claim was subsequently amended on March 6, 2018.

9In the Amended Statement of Claim (the “Claim”) AMTIM claimed payment of the sum of $2 million, or such other sum as is deemed owed to it by ARCA pursuant to the Governing Agreements at the time of trial. The Claim alleged, among other things, that ARCA arbitrarily attributed expenses incurred in its U.S. operations to the Canadian operations in breach of the Governing Agreements, and arbitrarily attributed expenses to the Canadian operations that were not requested by AMTIM to artificially reduce the revenue earned by the Canadian operations as a result of AMTIM’s services.

10Although rectification of the Governing Agreements was not claimed by AMTIM in the prayer for relief in the Claim, AMTIM stated in the body of the Claim that, to the extent that the Governing Agreements reveal any ambiguity, it seeks rectification of them “to reflect the true intentions of the parties at the time of the making of the contracts.” The Claim did not particularize what such “true intentions of the parties” were.

11Although Mr. Figliomeni advised the court at the commencement of the trial that AMTIM’s claim for rectification was not being abandoned, he did not pursue it in his oral or written final submissions and AMTIM led no evidence at trial specifically addressing the issue.

12Although not pleaded in the Claim, AMTIM referenced two additional claims during the trial, namely:

(a) damages for improper termination of the Governing Agreements; and

(b) payment of AMTIM’s final three invoices prior to termination by ARCA, totalling $28,644 (the “invoice claim”).

13Mr. Figliomeni did not pursue the improper termination claim in his oral or written final submissions but maintained the invoice claim.

14ARCA defended the action and counterclaimed for damages in the sum of $2,000,000 and for an interim, interlocutory and permanent injunction restraining AMTIM, and its representatives including Berta, from soliciting business from any customer of ARCA or ARCA Canada, disclosing its confidential information, or entering into any contract or responding to any request for proposal or submitting any quotation to any customer of ARCA and ARCA Canada, and for the return of specified documentation relating to the business of ARCA and ARCA Canada.

15At the commencement of trial Mr. Rosenstein advised that ARCA would not be pursuing the Counterclaim.

Issues

16Apart from the invoice claim, AMTIM’s claim against ARCA is for breach of the Governing Agreements by alleged underpayment of annual compensation to it. This claim relates solely to the question of whether ARCA, in preparing the annual income statements for ARCA Canada, allocated corporate overhead costs to ARCA Canada in a manner that was not accordance with U.S. GAAP, consistently applied, thereby reducing the annual net profit of ARCA Canada and correspondingly the compensation payable to AMTIM.

17In the Claim AMTIM alleged, in part, as follows:

Para. 23… AMTIM pleads that ARCA has arbitrarily attributed expenses incurred in ARCA’s US operations to the Canadian operations in breach of the Management Contract and Sales Agreement. AMTIM pleads that ARCA has arbitrarily attributed expenses to the Canadian operation that were not requested by AMTIM in order to artificially reduce the revenue earned by the Canadian operations as a result of AMTIM’s services.

Para. 36…AMTIM pleads that the application of such allocations creates a scheme, not intended by the parties, to enable ARCA to artificially adjust the calculation of AMTIM’s compensation after delivery of AMTIM’s services.

18The fiscal years for which AMTIM claimed that ARCA improperly allocated corporate overhead costs to ARCA Canada and thereby underpaid AMTIM’s compensation were not specified in the Claim. However, at trial AMTIM indicated that the loss period covered the fiscal years ending June 30 2008 through June 30 2014 (seven fiscal years) as exemplified by the evidence of Brandon Lewis, the expert retained by AMTIM to quantify its claim for damages.

19To assist the court in addressing the issue of whether there was a misallocation of corporate overhead costs by ARCA in the relevant years, each party called a U.S. accounting expert to provide expert opinion evidence respecting the requirements, directions or guidance, if any, of U.S. GAAP concerning the allocation of corporate overhead costs by a parent corporation to its subsidiary or subsidiaries (and in particular by ARCA to ARCA Canada), namely Philip Dowad (“Dowad”) for AMTIM and Brandon Maves (“Maves”) for ARCA.

20Following a voir dire in each case Dowad was qualified by the court to give expert opinion evidence respecting accounting principles generally and in particular, U.S. GAAP and Maves was qualified by the court to give expert opinion evidence with respect to U.S. GAAP and, in particular, to U.S. GAAP rules respecting the allocation of head office expenses to subsidiaries.

21The onus of proving that ARCA breached the Governing Agreements by its allocation of head office expenses to ARCA Canada rests on AMTIM on a balance of probabilities.

22The resolution of the issues referred to above depend upon the answers to the following questions:

(a) Is it appropriate under U.S, GAAP for a parent company to allocate corporate overhead costs to a subsidiary that utilizes goods and services provided by the parent company in preparing the financial statements of each the parent and the subsidiary?

(b) if so, what if anything, does U.S. GAAP stipulate, direct or provide guidance on respecting the allocation of corporate overhead costs by a parent corporation to its subsidiary?

(c) has AMTIM proven on a balance of probabilities that ARCA breached the Governing Agreements by allocating its corporate overhead costs to ARCA Canada for one or more of the fiscal years in question in a manner that was not “in accordance with generally accepted accounting principles of the USA, consistently applied (GAAP)”?

(d) if so, did the improper allocation of corporate overhead costs to ARCA Canada have the effect of understating the net annual profit of ARCA Canada for one or more of the fiscal years in question, thereby reducing the compensation to be paid to AMTIM pursuant to the Governing Agreements for such fiscal years:

(e) if so, what is the amount by which AMTIM was under-compensated for the fiscal years at issue?

Factual Matrix Respecting the Formation of the Governing Agreements.

23Prior to his involvement with ARCA, Berta had extensive experience within the energy sector in Canada, initially with Ontario Hydro and, commencing in 1995, through his consulting company AMTIM.

24In the summer of 2004 Berta, through his research, became aware of ARCA’s involvement running programs in the United States recycling appliances for various utilities. He contacted ARCA which led to him being put in touch with Jack Cameron (“Cameron”), the then President, Chief Executive Officer and founder of ARCA. The two men met and discussed opportunities for a possible business relationship.

25ARCA established ARCA Canada as a subsidiary and retained Berta as its sales agent under a series of three Sales Representation Agreements dated September 4, 2004, January 17 2006 and May 6 2007 respectively.

26During the currency of the initial three Sales Representation Agreements Cameron personally managed the operations of ARCA Canada. In the summer of 2007 Berta and Cameron had discussions regarding a proposal for AMTIM (through Berta) to assume a general management role in ARCA Canada’s operations to relieve Cameron of that responsibility.

27The parties discussed entering into two separate agreements being a sales agreement (which led to the Amended and Restated Sales Representation Agreement defined above as the “Sales Agreement”) and a management agreement (which led to the General Management Agreement defined above as the “Management Agreement”).

28Following a meeting attended by Berta and Cameron with representatives of the Ontario Power Authority, Berta produced to Cameron a memorandum by which he set down his thoughts about what should be included in a more formal management agreement (the “Term Sheet”). The issues addressed in the Term Sheet had been previously discussed between Berta and Cameron, however Cameron had no input into the text of the document. The two men signed the Term Sheet on August 16, 2007 and agreed that it would be left to ARCA to prepare a formal document based on the Term Sheet which would constitute a formal General Management Agreement.

29Multiple drafts of the formal Sales Agreement and Management Agreement were exchanged by legal counsel acting for both parties. Each party recognized that the Sales Agreement and the Management Agreement were required to reflect the two roles which AMTIM would be assuming in relation to ARCA Canada’s operations, namely sales and general management.

30No detailed evidence was led at trial respecting the how the language requiring ARCA Canada’s net profit to be calculated in accordance with U.S. GAAP came to be included in the Governing Agreements. Berta confirmed that the existing Sales Representation Agreement dated May 6 2007 required the income statement for the Canadian operations to be prepared in accordance with generally accepted accounting principles and that Cameron requested that this be clarified in the new agreements to specify that the standards be those provided by “U.S.” GAAP. Berta agreed to this request. Berta acknowledged at trial that he had no specific knowledge of what U.S. GAAP provided respecting the calculation of net profit but was content that net profit be calculated according to whatever U.S. GAAP did provide.

31The Sales Agreement and the Management Agreement were ultimately finalized with the assistance of legal counsel for both parties and were executed on the same date. They each refer to the other and both parties acknowledge that they were intended to work together,

Provisions of the Governing Agreements Respecting AMTIM’s Annual Compensation

32The Sales Agreement provided for AMTIM to be paid a base commission of 4% of ARCA Canada’s gross sales on a monthly basis.

33The Sales Agreement went on to provide that AMTIM was entitled to the greater of the base commission of 4% of gross sales or 25% of ARCA Canada’s net profit, calculated yearly.

34As noted previously, net profit was stated to be calculated by subtracting “ARCA’s total expenses from total revenue before taxes relating to the supply of services in Canada, “calculated in accordance with generally accepted accounting principles of the USA, consistently applied (GAAP).”

35The Management Agreement provided for AMTIM to receive a “Performance Fee” based upon 50% of the annual net profit, calculated in accordance with a detailed formula.

36The actual mathematical formula set forth in the Management Agreement for calculation of AMTIM’s annual compensation may be described as complex and it is not necessary for the purpose of the resolution of the issues in this proceeding to recite it in detail. In essence, ARCA was required to annually calculate ARCA Canada’s net profit, after paying specified commission to AMTIM (to avoid double-counting), and the adjusted net profit would be split 50/50 between the parties. It is sufficient for present purposes to observe that the Management Agreement required the Performance Fee to be paid to AMTIM to be “calculated in accordance with generally accepted accounting principles of the USA, consistently applied (GAAP).”

AMTIM’s Complaints Respecting the allocation of Corporate Overhead Costs to ARCA Canada and ARCA’s Response

37In early August 2009 Berta wrote to Cameron expressing concern about the calculation of the “performance fees” pursuant to the Management Agreement and proposed that they meet to review the Management Agreement and the Financial Statements with a view to resolving the issue, or alternatively that AMTIM and ARCA retain a mutually agreeable accountant to review the agreements and related materials. Cameron responded to advise that he had spoken to ARCA’s Chief Financial Officer Peter Hausback (“Hausback”) to request that the accounting department review the contract to prepare a “true-up spreadsheet” that the parties can work with to review the matter.

38Sometime in 2009 or 2010 Hausback presented Berta with a “Transfer Pricing Study” dated July 20 2009 prepared by an accounting firm retained by ARCA. Berta reviewed the Transfer Pricing Study but did not respond directly to Cameron or Hausback regarding it as both parties had by that time retained counsel to address AMTIM’s complaint respecting the calculation of its compensation under the Agreements.

39On March 2, 2010 a U.S. Attorney representing ARCA, William J. O’Brien (“O’Brien”), wrote to Berta advising that ARCA had received confirmation from its independent auditors that the sums paid to AMTIM were in full compliance with all agreements between the parties and also that ARCA had provided Berta with a professionally prepared Price Transfer Study performed by an independent auditor, the results of which reaffirmed the corporate expense allocation that ARCA has utilized and continues to utilize for all of its operations.

40In the letter O’Brien went on to state that ARCA stood ready and willing to cooperate with AMTIM in providing any accounting information to determine if the compensation owing to AMTIM under the Governing Agreements had been calculated properly by ARCA and, to that end, would make all accounting and relevant information for the Canadian operations and the allocation of corporate overhead readily available at ARCA’s U.S. headquarters. The letter stipulated that should AMTIM avail itself of this activity it would do so at its own cost and expense, and any auditors retained by AMTIM would be required to execute an appropriate confidentiality agreement.

41Berta confirmed at trial that although ARCA’s offered to make accounting information available to AMTIM or to an auditor appointed by it at ARCA’s head office, he never availed himself of the opportunity to review the accounting information as he considered it to be “onerous.” He also acknowledged that ARCA’s offer to make its records available for inspection was never withdrawn.

42Berta proposed to ARCA that the dispute respecting AMTIM’s compensation under the Governing Agreements be submitted to adjudication by an Ontario arbitrator, however this proposal was never taken up by ARCA and no arbitration was conducted. It is noted that neither of the Governing Agreements included an arbitration provision among its terms.

43As described previously litigation between the parties ensued, first by means of an action commenced by ARCA in Minnesota followed by the current proceeding commenced by AMTIM in Ontario.

44Various motions and appeals dealing with the question of jurisdiction were litigated by the parties. It is not necessary for the determination of the current issues before the court to review the history of those steps in the proceeding.

Expert Reports Respecting the Application of U.S. GAAP to the Allocation of Corporate Overhead Costs by ARCA to ARCA Canada

45The reports of the two experts, Dowad and Maves, called by the parties to provide expert opinion evidence respecting the application of U.S. GAAP to the allocation of corporate overhead costs, are technical and dense. To afford an understanding of the opinions of the experts on the issues and the reasons advanced in support of them as well as the points of divergence between the opinions it is necessary to review the reports in some detail in these Reasons.

46It is noted at the outset that the customary sequence for the exchange of expert reports was not followed in this case.

47Although AMTIM bears the onus of proving that ARCA breached the Governing Agreements by allocating corporate overhead costs to ARCA Canada for the relevant period in a manner that was not in accordance with U.S. GAAP consistently applied, ARCA served the report of its U.S. GAAP expert first. The following was the sequence of service of the expert reports:

(1) August 19, 2019 - ARCA Expert Maves initial report;

(2) March 5, 2021 - AMTIM Expert Dowad report;

(3) April 1, 2021 - ARCA Expert Maves reply report.

48Given the complexity of the experts’ reports, on consent of the parties and with the approval of the court in the interest of promoting trial efficiency, the reports of each expert were marked as trial exhibits and constituted each expert’s evidence in chief, augmented by relatively brief viva voce testimony. Each expert was cross-examined on his respective report or reports.

Maves Initial Report dated August 19, 2019

49The following is a summary of the opinions expressed by Maves in his initial report, as augmented by his viva voce evidence.

(a) U.S. GAAP and common business practice states that it is appropriate for a parent company to allocate a portion of the common corporate overhead costs to its subsidiaries that utilize the goods and services which it provides;

(b) U.S. GAAP does not require that one particular methodology must be used in determining the quantum of the allocation of corporate overhead costs to subsidiaries. What U.S. GAAP does require is that only appropriate costs may be allocated, and that those costs must be allocated on a rational, reasonable, and consistent basis. Deciding whether a particular method satisfies that standard would typically consider the following factors;

1. the reasonableness of the cost allocation methodology

2. the consistency of the allocation methodology over time and the basis for any changes to the methodology;

3. descriptions and definitions in the company’s operating agreements, and in the case at bar those agreements with AMTIM; and

4. tax arrangements and laws in place between the parent company and the subsidiary company.

(c) Maves’ analysis considered the foregoing factors as they applied to ARCA with particular emphasis on how the allocation was applied and impacted ARCA Canada. In doing so Maves focused his efforts on:

• Understanding the existing allocation methodology used by ARCA;

• performing procedures to determine if the methodology was used consistently across the periods in question;

• assessing the appropriateness of the methodology by considering alternative methods which would otherwise appear also to be rational and reasonable;

• reviewing the position, if any, that ARCA and its subsidiaries have taken for tax purposes in its dealing with US and Canadian taxing authorities.

[Note: on cross-examination Maves acknowledged that the positions taken by ARCA and its subsidiaries for tax purposes are irrelevant to the question of the appropriateness of the allocation of corporate overhead costs under U.S. GAAP]

(d) Maves noted that ARCA has audited financial statements dating back to 2007. He stated that, in the course of the financial statement audit, the auditor gains an understanding of the allocation and the methodology utilized and assesses the reasonableness of the allocation methodology, the consistency of the allocation methodology over time and the basis for any changes to the methodology, the descriptions and definitions in the corporation’s operating agreement, and tax agreements in place depending upon the nature of the business and transactions between the parent company and the subsidiary company.

(e) In issuing its unqualified audit opinion, the auditor concludes the financial statements are presented fairly in all material respects in accordance with U.S. GAAP. In his use of ARCA’s financial statements Maves relied upon the implicit conclusion that the allocation did not result in a material misstatement of the financial statements of ARCA in accordance with U.S. GAAP.

(f) Maves observed that the ARCA cost allocation describes the specific method of allocating by department. Based upon the documents provided by ARCA the following departments have the described allocation method:

• Accounting allocation - based on total sales on all units

• Human Resources allocation - based on a charge per employee

• IT department allocation - split varies by month, based on sales

• Tech services - based on recycling sales

• Business Development - based on recycling sales

• Corporate Administration - split varies by month, based on sales

• Outside Sales - split varies by month, based on sales

• Program Coordinator - split varies by month, based on sales

(g) Maves stated that, based upon the ARCA allocation method obtained through discussions with current management and their review of ARCA’s work papers, the allocation appeared to be based on a formula or calculation conducted by ARCA. However, as result of turnover in the accounting and finance function at ARCA, Maves was unable to directly corroborate this statement with those individuals who prepared the allocation. Moreover, he had not been provided the underlying calculations used by ARCA to yield the actual allocation which it made.

(h) At section 6 of his initial report Maves advised that he made an independent review of the Transfer Pricing Study commissioned by ARCA in 2009 and concluded that it is reliable and that it is therefore a factor to consider in his own determination of whether ARCA’s allocation of head office costs was in accordance with U.S. GAAP.

(i) On cross-examination Maves acknowledged that, as the Transfer Pricing Study deals with conformity of the treatment of intercompany transactions with transfer pricing rules of both US and Canadian taxing authorities, it did not speak to U.S. GAAP. However, he elaborated that the Transfer Pricing Study id relevant to his opinion as it demonstrated that ARCA management is capable of applying methodology when doing corporate overhead allocations for U.S. GAAP purposes.

(j) At section 8 of his initial report Maves carried out a sensitivity analysis which identified alternate methodologies that would be appropriate under U.S. GAAP to utilize and considered whether the application of such alternate methodologies would have significantly changed the net profit of ARCA Canada in the relevant years and hence the amount payable to AMTIM under the Governing Agreements. He observed that this analysis is useful for two reasons, namely 1) to recognize other methodologies could have been used by ARCA under U.S. GAAP and 2) to quantify the impact on ARCA Canada’s net profit had any of these other methodologies been used by ARCA and if that impact was significant.

The first alternate allocation methodology Maves considered uses the ARCA Canada corporate expense allocation and reduces them to zero (0), 50% less than actual and 25% less than actual respectively.

The second alternate allocation methodology uses ARCA Canada recycled units as compared to ARCA total recycled units as a cost driver.

The third alternate allocation methodology utilizes ARCA consolidated revenue and ARCA Canada revenue to calculate the corporate expense allocation based on ARCA Canada’s revenue contribution.

With respect to alternate allocation methodology #1 Maves noted that a corporate allocation of zero (0) to ARCA Canada yields the greatest payment to AMTIM as representing the maximum potential payment, given no regard for corporate overhead costs allocations. He stated that this scenario would never occur in the ordinary course of business, as businesses require a certain level of general and administrative efforts and their related costs to run the business operations properly.

When reducing the corporate expense allocation by 50%, the results of the sensitivity analysis yielded an additional payment of approximately $440,000 to AMTIM over the life of its agreement with ARCA. Reducing the corporate expense allocation by 25% would have added approximately $162,000 to the payments to AMTIM over the life of its agreement with ARCA. Reducing the corporate expense allocation by approximately $2,055,000 from years 2008 through 2016 did not significantly affect the payment due to AMTIM.

As indicated, methodology number two incorporates recycled units by ARCA Canada and ARCA respectively as a cost driver. The analysis shows that approximately 26.2% of units recycled by ARCA were directly attributable to ARCA Canada operations. Maves offered the opinion that ARCA could have used the number of units recycled by subsidiary to allocate corporate expenses across ARCA subsidiaries under U.S. GAAP.

Using the 26.2% average, allocation of corporate overhead costs to ARCA Canada based on the number of recycled units would have increased by approximately $3.2 million from 2014 to 2016. Such a dramatic increase in allocation would have decreased ARCA Canada’s net profits significantly. Based on the formula in the Sales Agreement such an increase in corporate expense allocation would have resulted in AMTIM’s compensation being based on 4% of gross revenue, thus rendering the issue of corporate overhead costs moot.

The third sensitivity analysis utilizes ARCA consolidated and ARCA Canada revenue to calculate the corporate expense allocation, based on ARCA Canada’s revenue contribution. Maves stated that allocating corporate expenses based on the revenue that a subsidiary produces is an acceptable method under U.S. GAAP.

Maves noted that ARCA Canada’s revenue represented approximately 6.4% of ARCA’s consolidated revenue between the years 2008 and 2016. The average percentage of corporate overhead expenses allocated for those years were approximately 8.8%, resulting in a difference in revenue expense allocation and actual corporate expense allocation of approximately 2.4%

Maves concluded that the analysis of alternate allocation methodologies helps support the ARCA cost allocation method, as the different variations did not significantly adjust ARCA Canada’s net profits. Methodology number two, based upon the number of recycled units as a cost driver, would have been a reasonable basis on which ARCA could have allocated head office expenses to ARCA Canada at a much higher level. Methodology number three, based upon ARCA Canada’s revenue relative to that of ARCA corroborates and provides support to the allocation methodology actually used by ARCA. Maves determined that the actual corporate expense allocation was in line with ARCA Canada revenue as a percentage of ARCA consolidated revenue. He stated that, in his professional experience, this allocation methodology, namely based upon revenue, would be widely accepted in the accounting profession as a means to determine an allocation across subsidiaries.

(k) In summary, Maves offered the following opinions:

(i) corporate overhead costs reported by ARCA were reasonable and based on audited financial statements;

(ii) the methodology used to allocate corporate overhead costs amongst ARCA’s various corporate subsidiaries, including ARCA Canada, was consistently applied by ARCA both before and after ARCA entered into the governing agreements;

(iii) the ARCA allocation method met the requirements for an allocation that was permitted by U.S. GAAP;

(iv) The ARCA allocation method produced results consistent with applicable U.S. and Canadian tax regulations and was therefore a reasonable method for ARCA to allocate corporate overhead costs to its subsidiaries;

(v) ARCA’s allocation of corporate overhead costs to ARCA Canada when computing the total costs of ARCA Canada’s Canadian operations was in accordance with U.S. GAAP; and

(vi) following a survey and sensitivity analysis of other potential corporate overhead cost allocation methodologies, no other allocation methodology was more appropriate in comparison to the ARCA allocation methodology.

It is noted that during cross-examination Maves stated that, contrary to item (ii), he only focused his report on how corporate overhead costs were allocated to the Canadian subsidiary ARCA Canada. He also withdrew item (iv) stating that he was not relying upon consistency between the results of the ARCA allocation method and applicable U.S. and Canadian tax regulations.

Dowad Report dated March 5, 2021

50The following is a summary of the opinions expressed by Dowad in his March 5, 2021 report, as augmented by his viva voce evidence:

(a) Dowad was asked by ARCA counsel to review the initial Maves Report and to provide his comments to the following questions:

(i) Mandate 1: what were the accounting requirements of. U.S. GAAP for cost allocations from a parent to a subsidiary during the accounting periods for the fiscal years ending June 30, 2007 to June 30, 2018?

(ii) Mandate 2: is the cost allocation method applied by ARCA in accordance with U.S. GAAP?

(iii) Mandate 3: does the Maves report support a conclusion that the ARCA allocation method is in accordance with U.S. GAAP consistently applied?

(b) Dowad specifically noted that he was not asked to 1) calculate an alternative ARCA Canada net profit in accordance with the Governing Agreements or 2) Opine on what a reasonable allocation of costs from ARCA to ARCA Canada would be as result of the findings in his report.

(c) Dowad also stated that consideration of Maves’ comments in his summary that no other allocation methodology was more appropriate in comparison to the ARCA allocation methodology was outside the scope of his mandate.

Mandate 1 – Accounting Requirements of U.S. GAAP for Costs Allocations from Parent to Subsidiary

(d) Dowad stated that, although U.S. GAAP does not directly reference the allocation of corporate overhead costs by a parent to subsidiary, it does provide limited guidance on the appropriate allocation to the subject cost allocations from both 1) authoritative and 2) non-authoritative sources.

(e) As there is limited guidance under U.S. GAAP provided by the primary standard setter, the Financial Accounting Standards Board (“FASB”) on accounting for corporate allocations in a set of stand-alone financial statements of a subsidiary or business unit in a group, alternative sources of authoritative or non-authoritative guidance need to be considered.

(f) The guidance issued by the Securities and Exchange Commission (“SEC”), which is authoritative for SEC registrants and non-authoritative for others, provides guidance with respect to certain situations where a reasonable method of allocating common costs to a subsidiary is necessary because a specific identification of costs is not practicable. Although neither U.S. GAAP nor the SEC provides specific guidance in determining a “reasonable allocation” or “the costs that would have been incurred if the subsidiary had operated as an unaffiliated entity” there are several sources of interpretative guidance that have been published, including the “Ernst & Young (E&Y) Carve-Out Guide” and the “Deloitte Carve-Out Guide” that specifically address the SEC guidance.

(g) Dowad offered the opinion, supported by the E&Y Carve Out Guide and the Deloitte Carve Out Guide, that the allocation method should follow three steps:

(1) identification of directly attributable costs that should be 100% allocated to the reporting entity/subsidiary;

(2) identification of those remaining costs not directly attributable to the reporting entity but reasonably allocable, at least in part, as services were provided that benefit the reporting entity; and

(3) the balance of costs are not allocable to the reporting entity since they are not attributable to activities that provide benefits to the reporting entity nor do they relate to activities carried out by the reporting entity.

(h) Authoritative sources on U.S. GAAP provide only limited guidance on the measurement of costs incurred by related parties in stand-alone financial statements of the related entity, such as ARCA Canada in the case at bar.

(i) In Dowad’s experience, the most common situation where such stand-alone financial statements are prepared arises when a separate presentation of a business or group of businesses is required, often as part of a sale or purchase transaction. These statements are commonly referred to as “carve out statements”

(j) Dowad observed that various parties have provided guidance on their interpretations of the application of “carve out” cost allocation methodology to stand-alone financial statements in a U.S. GAAP context.

(k) The E&Y Carve Out Guide provides that SEC Staff expect any expenses clearly applicable to the carve-out entity (ARCA Canada in this case) to be reflected in the entity’s income statements. However, SEC staff understands that in some situations a reasonable method of allocating common expenses to the entity, for example a proportional cost allocation, is appropriate because identifying specific expenses is not practicable. SEC staff often request that management disclose that the carve-out financial statements reflect all the costs of doing business, including expenses incurred by the former parent on the carve-out entity’s behalf.

(l) The Deloitte Carve-Out Guide reiterates that compliance with SEC staff’s position requires allocation of specifically identifiable costs before allocation of remaining allocable pools of costs. Dowad quoted the following passage from the Deloitte Guide:

“Different allocation methods may be determined to be reasonable on the basis of different types of common expenses. For example, head count may be viewed as a reasonable basis of allocation for certain employee costs, while square footage may be viewed as a reasonable basis of allocation for certain occupancy costs.”

Mandate 2 - is the allocation method applied by ARCA in accordance with US GAAP?

(m) In relation to Mandate 2 Dowad stated “in my opinion the information that has been provided does not support a conclusion that the allocation method applied is in accordance with U.S. GAAP.”

(n) US GAAP requires the allocation of shared costs to be made in a manner that is reasonable both relative to the nature of the costs incurred and the benefit of incurring such costs to the entity.

(o) Dowad stated his belief that, in order to consider direct allocations to the extent relevant and in direct allocations where the pool of costs that have been incurred provided a benefit to ARCA Canada, an independent accounting expert would have required the details of the costs accounted for in each of the cost categories that were allocated to ARCA Canada. He has not been provided with details of the costs accumulations nor position papers on the basis for concluding that the methodology applied is rational and reasonable in the circumstances.

(p) ARCA’s allocation method sets out a specific method of allocation by department, the basis for which Dowad asserts are not supported in the Maves report and raise a number of significant concerns. He stated that ARCA has not provided support for:

(i) the nature of the costs incurred by department and to what extent such costs are allocable to a specific business unit, including to ARCA Canada, and of the remaining costs, are there costs that should be excluded from the allocation pool altogether as they do not relate to or were incurred for the benefit of ARCA Canada?

(ii) how does the ARCA allocation method provide a result that is representative of the services provided/benefits received by ARCA Canada?

(iii) how is the ARCA allocation method consistently applied in accordance with the Governing Agreements?

(q) Dowad went on to consider the allocation method utilized by ARCA for each of three departments - the Accounting Department, the Human Resources Department and The IT Department.

(r) In respect of the Accounting Department, for which ARCA allocated its costs based on total sales of all units, Dowad noted that the first step requires the nature of the costs incurred to be identified and assessed on whether they are directly attributable, indirectly attributable or should be excluded from the cost base that was used to allocate the department’s costs to ARCA Canada.

(s) Dowad went on to observe that a reasonable allocation methodology would reflect the effort expended for the benefiting departments. He pointed out that, by using sales, ARCA allocates a larger amount of costs on a $1000 sale, for example, than it does on a $100 sale. He observed that this “would not appear to be reasonable” and a more logical basis for allocation would reflect the number of transactions undertaken or a surrogate measure for the department’s activity. He concluded that the Maves report does not provide information to support its conclusion that the allocation methodology applied for the accounting department costs was in accordance with U.S. GAAP.

(t) With respect to the HR Department for which costs are allocated on a per employee basis, Dowad stated that, to be able to conclude on the appropriateness of HR department costs being allocable as shared costs, including to ARCA Canada, a detailed understanding of the costs incurred that are included in this group is required. He observed that the Maves report does not provide information to support his conclusion that the allocation methodology applied for the HR department costs was in accordance with U.S. GAAP.

(u) In respect of the IT Department Dowad identified certain variations and fluctuations of IT costs, including a significant increase in March 2010 without adequate support. He stated that whereas costs of been allocated based on sales, the activities that an IT department undertakes would be expected to be independent of sales levels and that therefore a sales-based allocation methodology is not appropriate in the circumstances. He stated his “belief” that an alternative method which reflects the “actual” usage of the IT department would be an appropriate basis to allocate IT department costs to ARCA’s subsidiaries and would be in accordance with US GAAP.

(v) Dowad stated that, in his report, Maves does not provide information to support his conclusion that the allocation methodology applied for the IT department costs was in accordance with U.S. GAAP.

(w) Dowad noted that he did not repeat the analysis for the remaining sales-based cost allocation components, as his analysis would be substantially consistent with that which he undertook in relation to the Accounting, HR and IT departments.

(x) In relation to Mandate 2, it is important to note that Dowad acknowledged on cross-examination that the information provided to him did not allow him to reach a conclusion on whether the allocation methods that ARCA says it used were appropriate, and whether they were actually followed.

(y) With respect to his critique concerning ARCA’s allocation of Accounting Department costs, Dowad testified that information had not been provided to him to explain why an allocation based on sales was reasonable because, on the surface, it did not appear to him to be a reasonable basis of relative effort, noting that the amount of accounting effort is not proportionate to the size of a transaction. However, he acknowledged that in an organization where transactions are typically all of the same size, the number of transactions might be a good proxy for the amount of effort. He simply did not have the information to know.

Mandate 3 – Does the Maves Report support a conclusion that the ARCA Allocation Method is in Accordance with U.S. GAAP Consistently Applied?

(z) Dowad offered the opinion that the Maves report does not support a conclusion that the allocation method applied by ARCA is either in accordance with U.S. GAAP or has been consistently applied.

(aa) Dowad noted firstly that Maves did not consider or comment on the authoritative and non-authoritative sources of U.S. GAAP to support his conclusion that the ARCA allocation method and the allocation applied are in accordance with U.S. GAAP consistently applied and reflects a reasonable allocation of costs.

(bb) He also stated that it appeared that Mave’s conclusions were based to a significant degree on his reliance on certain representations from management and that he did not have access to the underlying details of the various allocation calculations.

(cc) In reviewing the allocation pools, Dowad stated that he noted a significant increase in the allocable costs in 2010 as compared to 2008 and 2009. He stated that during 2010 the pool of costs ranged from $443,000 to $1,199,000, whereas in 2008 and 2009 the pool was approximately $400,000 per month. He observed that the Maves report does not explain this inconsistency which seems important to understand the reasons for this and whether it is appropriate and allows for a reasonable allocation of costs to ARCA Canada. He also observed that in each of November and December 2010 the allocable pool was exactly $1 million. He was not provided with the underlying data from ARCA to understand what comprises the $1 million allocable pool costs in those months and the issue was not discussed by Maves in reaching his conclusions.

(dd) Dowad expressed the view that U.S. GAAP broadly allows for an entity to change its accounting principles so long as specified criteria are made including that either (a) the changes required by newly issued accounting pronouncement or (b) the entity can justify the use of an allowable alternative accounting principle on the basis that it is preferable. He noted that there have been no newly issued accounting pronouncements relative to cost allocation methodologies and ARCA has not provided justification for the change in costs included in the allocation methodology. He offered his opinion that on this basis a change in methodology of calculating the pool would not be in accordance with U.S. GAAP and the agreements with AMTIM.

(ee) Dowad took issue with Maves’ implicit reliance on ARCA’s audited financial statements which included unqualified audit opinions, to support the reasonableness of ARCA’s allocation method on the following grounds:

(i) ARCA’s audits were of its consolidated financial statements and not of any individual subsidiary, including ARCA Canada, and therefore any intercompany transactions would have been eliminated;

(ii) an audit of consolidated financial statements does not purport to be an audit of an individual account or line item and drawing inferences that they are is inappropriate;

(iii) there is no line item entitled “corporate overhead costs” in ARCA’s consolidated financial statements filed with the SEC nor does Maves document any information gained from the audit files to support this conclusion;

(iv) to the extent that transfer pricing had been applied to determine the income taxes that require recognition in the consolidated financial statements, the procedures performed and its findings would be dependent on materiality of the balances and the extent to which they represent, in the auditors’ opinion, elements of significant risk of error or risk of fraud in the statements. The Maves report provides no such information and which would only be expected to be available in the auditors’ files; and

(v) there is no evidence in the Maves report to suggest that he had discussions with the auditor and/or reviewed the auditor’s working papers to make a claim that the auditor would have assessed the reasonableness of the ARCA allocation method

(ff) Dowad stated that Maves’ discussions respecting tax authorities in both the U.S. and Canada and his references to transfer pricing regulations is irrelevant to the allocation of ARCA costs to ARCA Canada. Transfer pricing for tax purposes is not a method to allocate costs as required by U.S. GAAP but rather determines what a third party would charge for providing such a service. In providing the service the third party would be expected to earn a profit, which is not an element of corporate costs incurred by ARCA nor basis for cost to be allocated in the case at bar.

(gg) In summary, Dowad stated that the conclusions in the Maves report are not consistent with his findings, given the nature of the costs incurred, the need under U.S. GAAP to consider direct, shared (or allocable) and non--allocable costs, and for the method of allocation applied to shared costs to be reasonable in the circumstances.

Maves Reply Report dated April 1, 2021

51Maves undertook a rebuttal of Dowad’s report and the opinions expressed therein in his Reply report. As a preliminary matter Maves noted that, in his original report of August 19, 2019 he indicated limitations to the scope of his review which included the availability of certain financial information, and that Dowad included a similar scope limitation in his report.

52Maves’ rebuttal remarks set forth in his Reply report may be summarized as follows:

Re: Mandate 1

(a) Dowad’s assertion that the allocation method used by ARCA was not in compliance with U.S. GAAP is incorrect. As both experts stated, neither U.S. GAAP nor the SEC provides explicit guidance on how to determine a “reasonable allocation” of corporate overhead costs. The term “guidance” is used by the accounting profession freely to describe both authoritative rules and discretionary guidance under U.S. GAAP, a point which is particularly relevant as the U.S. GAAP rules have transformed over time from a strict interpretation system to more of a principles-based system. Authoritative requirements promulgated by the FASB are rules or mandates whereas guidance means suggestive guidance where management is allowed discretion. Even within the rules, management is still provided with a level of discretion. Guidance is provided by many sources, including the SEC and by various accounting firms (including E & Y and Deloitte).

(b) SEC “guidance” is only that and does not constitute a mandate of a methodology. In Maves’ opinion, this allows for the exercise of discretion by management given the potential variety of appropriate practices that may be deployed by company management;

(c) the guidance provided by the SEC does not set an expectation of required compliance but offers points for financial management to consider. Consideration by management of alternative sources of authoritative and non-authoritative guidance does not result in the conclusion that the existing methodology used by ARCA is incorrect, improper or not in compliance with U.S. GAAP. Assessment of management’s particular methodology and whether it complies with U.S. GAAP will not focus on whether that particular methodology is the “right” or the “best” methodology, but rather will focus on whether the particular methodology is “rational, reasonable and consistent” and as long as it is, the assessor should defer to management’s specific choice;

(d) Maves defended his utilization of ARCA’s audited financial statements to support the reasonableness of ARCA’s methodology. ARCA’s audited SEC 10K filings include segment information, a disclosure which is required under SEC reporting requirements. While not explicitly stating that the methodology used between ARCA and ARCA Canada was appropriate, the auditor provided tacit approval of the business allocation methodologies. An auditor is required to consider and assess the accuracy and appropriateness of the allocations required to prepare the segment information within the financial statements. The accuracy of the underlying data is also supported by the unqualified opinion for all years under question. The auditor will need to perform procedures to satisfy himself or herself as to the accuracy and reasonableness of the allocation determined by management. This often requires management to thoughtfully explain and support the basis for the allocation. In Maves’ opinion any prudent and reputable audit firm would follow similar procedures when assessing a corporate expense allocation. As implied by the unqualified audit opinion, the auditors understood, tested and assessed the reasonableness of the corporate expense allocation;

Re: Mandate 2

(e) Dowad has not provided support for why the methodology chosen and implemented by ARCA management is wrong, but rather has merely provided another option which he believes would be a better methodology in the circumstances. Maves agrees that Dowad’s alternate methodology also appears to be consistent with U.S. GAAP. However, the existence of another methodology which also complies with U.S. GAAP is not relevant to the issue of whether the methodology used by ARCA is improper or not compliant with U.S. GAAP;

(f) Maves stated that Dowad’s suggestion that ARCA did not follow the three-step allocation approach referred to in the “E & Y Carve-Out Guide” and that therefore it is allocation method was not compliant with U.S. GAAP is simply wrong. In any event, he disagreed that ARCA failed to follow E & Y’s recommended approach. In answers to questions on written examination for discovery, ARCA gave evidence that (a) costs directly attributable to ARCA Canada were charged directly to it through expense reporting and were not included in the head office expense allocated using the allocation method, (b) costs unrelated to ARCA Canada were not charged to it. By inference if direct costs relating to ARCA Canada were charged to it outside the allocation method, then the direct charges for other subsidiaries must have been similarly charged to those other subsidiaries and thus were not included in the overhead costs allocated to ARCA Canada, and (c) shared costs were allocated in accordance with the allocation method. Consistent with GAAP and E & Y’s guidance, this was done using “a reasonable allocation method in all periods.”

(g) Dowad’s focus on providing an alternate approach which would also be generally accepted by both U.S. GAAP and authoritative sources, does not reduce the propriety of the allocation method used by ARCA management;

(h) All that Dowad offers is that other methods should be considered, without properly considering whether the method used by ARCA was not in compliance. The documents provided by ARCA are all consistent with the methodology having been consistently applied. It was Maves’ opinion that, it is implicit in the issued audited statements that the auditors concluded that the methodology was consistently applied;

Re: Mandate 3

(i) The results of the sensitivity analysis carried out by Maves respecting a range of different methodologies utilizing the audited financial statements demonstrated that, if ARCA utilized the different methodologies, the resulting payment due under the agreements with AMTIM would not significantly change. This confirms Maves’ opinion that the specific allocation methodology used by ARCA was both rational and reasonable and therefore in compliance with U.S. GAAP.

(j) While not explicitly stated, the auditor, in issuing his or her audit opinion on the ARCA financial statements required by the SEC, must perform a procedure or set of procedures to satisfy himself or herself as to the appropriateness of management’s allocations. The issuance of audited financial statements therefore confirms that the auditor agreed that management exercised its discretion reasonably when it selected and applied its allocation methodology.

Formation and Interpretation of the Governing Agreements

53As noted previously, ARCA and AMTIM, with the assistance of legal counsel on both sides, negotiated comprehensive commercial agreements to govern their business relationship and in particular ARCA’s retention of AMTIM as its exclusive sales representative for ARCA Canada and to facilitate and assist with management of ARCA Canada.

54The Sales Agreement and the Management Agreement were negotiated and executed contemporaneously, and the parties agreed that they intended them to operate in tandem.

55As noted previously, the Sales Agreement provided for AMTIM’s compensation to be based on a percentage of “net profit before taxes” paid to ARCA by customers under contracts that provide for services to be provided in Canada. The parties agree that “net profit” for this purpose was intended by the parties to be that of ARCA Canada because it carried on all of ARCA’s Canadian operations during the period in issue. The Sales Agreement stated that “net profit” was to be “calculated in accordance with generally accepted accounting principles of the USA, consistently applied (GAAP).”

56Under the Management Agreement the “Performance Fee” to be paid by ARCA to AMTIM was to be “calculated in accordance with generally accepted accounting principles of the USA, consistently applied (GAAP),” based upon a specific equation set forth in the agreement.

57Brown, J.A. summarized the general principles which should guide adjudicators in interpreting a commercial contract in the case of Weyerhaeuser Company Limited v. Ontario (Attorney General), 2017 ONCA 1007 (Ont. C.A.), rev'd on other grounds, at paras. 65-67 as follows:

The general principles guiding adjudicators about "how" to interpret a commercial contract were summarized in Sattva [2014 SCC 53], at para. 47, and by this court in two 2007 decisions - Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, 85 O.R. (3d) 254 (Ont. C.A.), at para. 24, and Dumbrell v. Regional Group of Cos., 2007 ONCA 59, 85 O.R. (3d) 616 (Ont. C.A.), at paras. 52-56. When interpreting a contract, an adjudicator should:

(i) determine the intention of the parties in accordance with the language they have used in the written document, based upon the "cardinal presumption" that they have intended what they have said;

(ii) read the text of the written agreement as a whole, giving the words used their ordinary and grammatical meaning, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;

(iii) read the contract in the context of the surrounding circumstances known to the parties at the time of the formation of the contract. The surrounding circumstances, or factual matrix, include facts that were known or reasonably capable of being known by the parties when they entered into the written agreement, such as facts concerning the genesis of the agreement, its purpose, and the commercial context in which the agreement was made. However, the factual matrix cannot include evidence about the subjective intention of the parties; and

(iv) read the text in a fashion that accords with sound commercial principles and good business sense, avoiding a commercially absurd result, objectively assessed.

58In the recent case of Ottawa (City) v. ClubLink Corporation ULC, 2021 ONCA 847 (Ont. C.A.) L.B. Roberts, J.A. succinctly adopted the foregoing statement of the principles governing interpretation of commercial contracts at para 52, as follows,

. . . the basic rules of contract interpretation require the determination of the intention of the parties in accordance with the ordinary and grammatical words they have used, in the context of the entire agreement and the factual matrix known to the parties at the time of the formation of the contract, and in a fashion that corresponds with sound commercial principles and good business sense: Weyerhaeuser Company Limited v. Ontario (Attorney General), 2017 ONCA 1007, 77 B.L.R. (5th) 175, at para. 65, rev'd on other grounds, Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60, 444 D.L.R. (4th) 77.

59Roberts J.A. made reference in ClubLink to the "related contracts principle" which may be engaged in the interpretive process where the contract under consideration forms part of an overall transaction involving more than one contract. In essence, this is what the plaintiffs submit in the case at bar. Roberts J.A. described the "related contracts principle" as follows at para. 54:

Under the related contracts principle, where more than one contract is entered into as part of an overall transaction, the contracts must be read in light of each other to achieve interpretive accuracy and give effect to the parties' intentions: 3869130 Canada Inc. v. I.C.B. Distribution Inc., 2008 ONCA 396, 239 O.A.C. 137, at paras. 33 — 34; Salah v. Timothy's Coffees of the World Inc., 2010 ONCA 673, 268 O.A.C. 279, at para. 16; Fuller v. Aphria Inc., 2020 ONCA 403, 4 B.L.R. (6th) 161, at para. 41, 51; Catalyst Capital Group Inc. v. Dundee Kilmer Developments Limited Partnership, 2020 ONCA 272, 150 O.R. (3d) 449, at para. 50.

60The dispute in the case at bar centres on the application of the phrase “calculated in accordance with generally accepted accounting principles of the USA, consistently applied” which appears in both Governing Agreements.

61Applying the principles in Weyerhaeuser, I find that the phrase “in accordance with” is to be interpreted to mean “in a way that agrees with or follows.” The parties could have, but chose not to, agree upon a set of detailed and prescriptive rules internal to the Agreements which would govern the calculation of “net profit” for the purpose of determining AMTIM’s compensation. Instead, the parties provided for the application of external principles which would guide the calculation of “net profit” which are recognized and shared on a societal level by many business enterprises, particularly those governed by the SEC in the United States, namely U.S. GAAP. They also chose to use the phrase “in accordance with” rather than the phrase “in compliance with” which could carry the more prescriptive meaning of “in a way that is required by.” This choice is consistent with the largely principles-based, as opposed to a rules-based, model followed by U.S. GAAP, as described the experts and discussed below.

62Both experts, as noted above, agreed, as a matter of principle, that U.S. GAAP contemplates and permits the allocation of corporate overhead costs to subsidiaries. Thus, by choosing to be guided by U.S. GAAP, the parties chose an accounting regime for the calculation of AMTIM’s compensation which would permit allocation of a portion of ARCA’s corporate overhead costs to ARCA Canada.

63In reference to the calculation of annual “net profit” the parties chose not to set out a detailed and prescriptive scheme for the allocation of corporate overhead costs by ARCA to ARCA Canada which would provide for categories of such costs to be allocated in a stipulated fashion. Instead, the Governing Agreements delegated to ARCA the task of determining ARCA Canada’s “net profit” for the purpose of calculating AMTIM’s annual compensation and provided only that the calculation be done in a way that accords with (or “agrees with or follows”) U.S. GAAP, consistently applied.

64Moreover, in applying the principles from Weyerhaeuser and, in particular, that the words used are to be given their ordinary grammatical meaning in a fashion that accords with sound commercial principles and good business sense, I find that phrase “consistently applied” refers to the application of U.S. GAAP such that it is U.S. GAAP that is to be “consistently applied,” not necessarily particular methodologies chosen by ARCA management for the allocation of corporate overhead costs to ARCA Canada. Thus, there are no provisions of the Governing Agreements which, by themselves, require allocation methodologies for corporate overhead costs to remain static over time. Any prohibition or limitation on ARCA management’s ability to change allocation methodologies would have to be based upon a determination that such change would not be “in accordance with U.S. GAAP.”

65Both of the Governing Agreements expressly provided a means for AMTIM to satisfy itself that ARCA’s calculation of its compensation was accurate. The Agreements each provided as follows:

“ARCA provides AMTIM with the right to review all records pertaining to the Canadian operations necessary to determine the accuracy of the Compensation and Payments payable hereunder as set forth above.”

66The parties chose to not provide for any external third-party verification or certification, such as by an audit, of ARCA’s calculation of AMTIM’s compensation, but rather left it to AMTIM to satisfy itself through the exercise of its right to review ARCA records that ARCA carried out the calculation correctly. AMTIM advanced no claim in the Amended Statement of Claim that a provision for external third-party certification of ARCA’s compensation calculation should be implied into the Governing Agreements. Nor did it advance an argument at trial that the implication of such a provision is necessary to give business efficacy to the Agreements or to meet the “officious bystander test” (see Energy Fundamentals Group Inc. v. Veresen Inc., 2015 ONCA 514 at paras. 30-31).

67The parties also chose not to provide for any mechanism internal to the Agreements, such as arbitration, to resolve a dispute raised by AMTIM respecting its compensation, as result of its review of ARCA’s records or otherwise, leaving it to AMTIM to advance such a claim in court proceedings, such as in the case at bar.

AMTIM’s Claim for Rectification

68As noted previously, although it did not advance a claim for rectification of the Governing Agreements in the prayer for relief in the Claim, AMTIM did include a reference to rectification in the body of the pleading as follows:

30. In the alternative, to the extent that the contracts reveal any ambiguity, AMTIM seeks rectification of the contracts to reflect the true intentions of the parties at the time of the making of the contracts.

69Although AMTIM did not abandon a claim for rectification based upon this paragraph at the commencement of the trial, it did not pursue the claim in oral or written final submissions and indeed advanced no argument that the Governing Agreements revealed any ambiguities.

70In Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC at paras. 37-41 the Supreme Court of Canada confirmed the preconditions for invoking the remedy of rectification namely (a) the existence and content of a prior oral agreement between the parties that is inconsistent with the written agreement; (b) that the written document does not correspond with the prior oral agreement and permitting the other party to take advantage of the mistake in the written document would be fraud or equivalent to fraud; (c) the precise form in which the written document can be made to express the prior intention of the parties; and (d) all of the requirements on a standard of convincing proof.

71AMTIM led no evidence which sought to satisfy these preconditions.

72I would therefore not give effect to AMTIM claim for rectification of the Governing Agreements, assumed the claim was properly advanced,

Sources of Guidance re U.S. GAAP and the allocation of corporate overhead costs to subsidiaries

73It is clear from the evidence of both experts Maves and Dowad that the allocation of corporate overhead costs by a parent corporation to a subsidiary is not governed by a strict set of rules which would provide a bright line separating allocations which would be deemed to have been made in accordance with US GAAP from allocations deemed not to have been.

74The primary standard setter for U.S. GAAP is the FASB. Maves and Dowad both agree that U.S. GAAP does not directly reference the allocation of corporate overhead costs by a parent to subsidiary. They also agree that the FASB has provided limited guidance respecting such allocations. As a result, in accounting for the allocation of corporate overhead costs in a way that is “in accordance with U.S. GAAP,” corporate management is left to look to both authoritative and non-authoritative sources for interpretive guidance.

75Guidance provided by the SEC would be considered authoritative for ARCA as an offering corporation. However, I accept Maves’ observation that the SEC’s guidance is still only guidance and does not set forth a mandatory methodology. I did not understand Dowad to disagree with this observation as he stated that “neither U.S. GAAP nor SEC guidance provide explicit guidance on how to determine a reasonable allocation.”

76Dowad pointed out that there are several publications with offer interpretive guidance including publications issued by public accounting firms such as Ernst & Young and Deloitte entitled “Carve-Out Guides.”

77I accept Maves’ comment in his Reply report that the guidance provided by the SEC and by the non-authoritative sources such as E & Y and Deloitte do not set out an expectation of required compliance, but rather offers points for financial management to consider and that a consideration is not a mandate.

78I did not understand Dowad to disagree fundamentally with Maves’ statement that, while U.S. GGAP does not require that one particular methodology must be used in determining the quantum of the allocation of corporate overhead costs to subsidiaries, what U.S. GAAP does require is that only appropriate costs may be allocated and that those costs must be allocated on a rational, reasonable and consistent basis.

79Given the foregoing, I accept that there may be a range of available allocation methodologies which may be considered rational and reasonable, and it is open to corporate financial management to exercise its own discretion in selecting the allocation methodology to be employed. An assessor or adjudicator charged with determining whether the allocation of corporate overhead costs to a subsidiary was “in accordance” with U.S. GAAP is required to be deferential to the exercise of management’s discretion, so long as it is rational, reasonable and consistent.

Has AMTIM satisfied its onus of proving a breach of contract by ARCA by its calculation of the net profit of ARCA Canada and the compensation to be paid to AMTIM for the period in question?

80As previously stated, AMTIM bears the onus of proving, on a balance of probabilities, that ARCA breached the Governing Agreements in understating ARCA Canada’s net profit by allocating corporate overhead costs to ARCA Canada in a manner that was not “in accordance with U.S. GAAP, consistently applied.” ARCA is under no obligation in this proceeding to prove that the allocations that it carried out were in accordance with U.S. GAAP.

81A finding that ARCA failed to calculate the corporate overhead cost allocations for the relevant period in accordance with U.S. GAAP, by necessity must depend upon expert evidence opinion to support it.

82I find that no expert evidence was led at trial by AMTIM upon which the court can rely to support such a finding.

83The second mandate given to Dowad was to provide his comments in response to the question “is the cost allocation method applied by ARCA in accordance with U.S. GAAP?”

84In response to this question Dowad offered only a qualified opinion that “the information that has been provided by ARCA does not support a conclusion that the allocation method applied is in accordance with U.S. GAAP.” He did not offer an unqualified opinion that the cost allocation method applied by ARCA was not in accordance with U.S. GAAP.

85As noted previously, on cross-examination Dowad expanded on the qualifications to his opinion as follows:

Q. …My note here is that you had a number of concerns and questions regarding whether… the allocation methods that ARCA says it used were appropriate, and… whether they actually were followed?

A. Yes … I think I indicated that - I believe I indicated that the information provided to me does not allow me to reach a conclusion that those two things occurred.

Q. And I take it that what you mean by that is that they may or may not - they may have been followed. They may not have been followed. You just cannot- you lack sufficient information to make any reasonable determination one way or the other?

A. Yes, that’s my conclusion

86Like Maves, Dowad included a “Scope Limitation” in his report stating “my scope of review has been limited due to certain information and documentation that I understand was requested of, but was not, or could not be provided by the Defendant.” The list included “the underlying details of or support for amounts included in ARCA Allocation Method’ and “position papers supporting the basis for the various allocations made.”

87AMTIM seeks to overcome the qualification of Dowad’s opinion by reliance upon the principle permitting adverse inferences to be drawn against ARCA in two respects, as set forth in Mr. Figliomeni’s closing written submissions, as follows:

(a) the court should draw an adverse inference against ARCA resulting from its failure to deliver on its promise to prove that the financial summaries contained at Exhibit 26 (labelled the “ARCA Binder”), which were relied on by all of the expert witnesses, are faithful to the underlying data; and

(b) the court should draw an adverse inference against ARCA for its failure to call any of the accountants or auditors that were allegedly involved in determining the nature and quantum and method of allocation of ARCA’s corporate overhead expenses to ARCA Canada.

88In support of this submission, Mr. Figliomeni cites a Court of Appeal case decided in a criminal context, R. v. Ellis, 2013 ONCA 9 at paras. 45-49.

89In the more recent case of R. v. Lo, 2020 ONCA 622 Watt J.A., referring to his earlier decision in Ellis, summarized the guiding principles succinctly, again in a criminal context, as follows at para. 156:

Sometimes, a judge may instruct the jury about its authority to draw an adverse inference from the failure of the party to call a witness or produce other evidence. This principle derives from ordinary logic and experience. Although an adverse inference may be drawn against a party for failure to call a witness reasonably assumed to be favourably disposed to that party, or one who has exclusive control over the witness, an adverse inference should only be drawn with the greatest of caution.

90In the civil context the courts have qualified the approach to the drawing of adverse inferences previously exemplified by the decision in Levesque v. Comeau 1970 CanLII 4 (SCC), 1970 CarswellNB 14 (S.C.C.) that the failure to call a witness with potentially important evidence to a party's case gave rise to a presumption that the evidence would have been adverse in nature. Courts have recognized that an adverse inference should not arise in every case where a party failed to call a witness with evidence material to its case. Advances in disclosure and exchange of documents between parties mean that both sides now have equal access to information and can call witnesses who might assist them.

91McKelvey, J. reinforced this point follows in Bishop-Gittens v. Lim, 2015 ONSC 3971 (S.C.J.):

There is, however, good reason to question the applicability of this analysis [in Levesque] in the present case. In The Law of Evidence in Canada, [4th ed. by Lederman, Bryant and Fuerst] a footnote comments that the expansive scope of examination for discovery today serves to obviate the necessity or justification for adverse inferences. In Ritchie v. Thompson (1994), 1994 CanLII 17338 (NB CA), 155 N.B.R. (2d) 35 (N.B. C.A.) the New Brunswick Court of Appeal considered the Supreme Court of Canada decision in Levesque and commented that the Levesque case involved an unusual factual situation which does not have broad application. The court further commented on how changes in disclosure obligations have further limited the applicability of the Levesque decision. The court stated,

Further weakening the overuse of the twenty-five year old case is a valid point raised by the trial judge concerning the pretrial discovery available to the appellants. When Levesque and Comeau was decided, the rules of court were much more restrictive. Now, disclosure is open, there is a freer exchange of documents and discovery of witnesses. In fact, persons other than parties can be questioned on examination for discovery before trial and parties may be required to disclose the names of witnesses they intend to call.

92In the case at bar, not only does the expansive scope of modern discovery serve to obviate the necessity or justification for adverse inferences, but importantly, the parties had established by contract a system by which AMTIM was granted access to review all records of ARCA pertaining to the Canadian operations to determine for itself the accuracy of the compensation and payments payable to it under the Agreements.

93Very soon after the dispute between the parties arose ARCA invited AMTIM to review its records pursuant to the contractual provision permitting access, with or without an auditor of AMTIM’s choosing. This invitation was never withdrawn prior to trial. Berta declined to avail himself of the right to review or audit ARCA’s records and there is no indication that he mandated or instructed either of AMTIM’s experts to do so. Dowad was not limited to reviewing the documents listed at Appendix A to his report (including the “ARCA Binder”) but had the right of access, by virtue of the Governing Agreements, to all of ARCA’s records pertaining to the Canadian operations. He was simply not mandated by AMTIM to do so.

94I am unable to accept AMTIM’s submission that ARCA had an obligation to prove that the financial summaries contained in the ARCA Binder “are faithful to the underlying data” and that, in the absence of such proof, the court should draw an adverse inference that they are not. In my view this unjustifiably reverses the onus on AMTIM to prove that the calculations were wrong.

95Given that the onus of proving that the allocations of corporate overhead costs were improper as not being in accordance with U.S. GAAP consistently applied rested with AMTIM, it is not necessary for the court to make a specific finding on whether ARCA had satisfactorily demonstrated through its evidence that the calculations carried out by ARCA accurately reflected the underlying accounting data that it maintained, as compiled in the ARCA Binder, as there is no onus on it to do so. However, it is noted in this respect that ARCA’s current controller Todd Swenson (“Swenson”) testified that in advance of trial he and his staff engaged in an extensive “tie-out” sampling process which took approximately one month to complete, which verified this.

96For the reasons set forth above, I am also unable to accept AMTIM’s submission that the court should draw an adverse inference against ARCA for its failure to call the accountants or auditors involved in determining the allocation of ARCA’s corporate overhead expenses to ARCA Canada. As indicated AMTIM had the right of access to ARCA’s relevant records but failed to avail itself of that right. Moreover AMTIM was given full discovery all of the relevant documents including the “raw data” (in electronic format) which ARCA had relied upon in carrying out the calculations contained in the brief of documents produced to Berta in July 2010, as ordered by Braid, J. on March 6, 2018. Although ARCA’s former counsel Mr. McRae was unable to locate sworn copies of the first two of the four Affidavit of Documents which ARCA served, the evidence indicated that the actual documents listed in those draft Affidavits of Documents were produced by ARCA.

97Even if ARCA’s disclosure of documentation or information might be considered to have been deficient (which I am not persuaded was the case) AMTIM’s remedy was to bring a motion to compel production (which it did, leading to the Order of Braid, J.) Since AMTIM did not bring any further motion or motions for production, it must be taken to have accepted ARCA’s position that no further production was required, and no adverse inference can be drawn. (see Bawas Gas Bars Ltd. v Kiosses, [1998] O.J. No. 5450 (Gen. Div.), para. 38 and Wade v. Baxter, 2001 ABQB 812, para. 25).

98Given that adverse inferences are only to be drawn with the greatest of caution, I am not satisfied that this case is among the rare cases where it is appropriate to do so in reference to the accountants or auditors who carried out the allocations. As previously indicated AMTIM, had the right under the Governing Agreements to carry out its own audit of the allocations and the underlying documents but chose not to do so.

99Mr. Figliomeni made reference in his closing submissions to Swenson’s evidence that the tie-out sampling process that he and his staff undertook revealed that there were some changes implemented by ARCA to the method of allocation of certain corporate overhead costs over the period from 2007 to 2017. Swenson testified that changes to such allocations are normal, especially when considering a 10-year span, and that what matters is that the allocation implemented was rational and systematic. Notwithstanding his reference to this testimony Mr. Figliomeni did not seek a finding by the court that Mr. Swenson’s evidence proved that ARCA had breached the Governing Agreements by failing to calculate ARCA Canada’s net profit “in accordance with generally accepted accounting principles of the USA, consistently applied (GAAP)” in one or more of the relevant years,

100Regardless of the foregoing, I am unable to accept the suggestion that a change in an allocation method equated to a breach by ARCA of the Governing Agreements. As observed previously, the Agreements required that U.S. GAAP be consistently applied, not any particular methods of corporate overhead costs allocation. Importantly neither expert offered the opinion that, in order to be in accordance with U.S. GAAP, the allocation methods must remain static and are not permitted to evolve over time. Moreover, AMTIM elicited no evidence particularizing the nature of the changes that were implemented and whether, and to what extent, they had any effect on the calculation of ARCA Canada’s net profit and the compensation payable to AMTIM.

101For the reasons set forth above, I find that AMTIM’s claim that ARCA breached one or both of the Governing Agreements in its determination of the annual net profit of ARCA Canada for some or all of the fiscal years in issue, thereby understating the compensation to be paid to AMTIM, must be dismissed.

Damages

102In most cases where the plaintiff’s claim is dismissed, it is considered helpful for the trial judge to nevertheless assess damages in the event that it is found on appeal that dismissal of the claim was incorrect.

103In this respect, it is appropriate for the Court to consider the evidence of Brandon Lewis (“Lewis”), the damages expert called by AMTIM.

104In his report dated March 4, 2019, which was marked as an exhibit at trial, Lewis stated that he was requested by Mr. Figliomeni to quantify the estimated loss incurred by AMTIM as result of its business arrangement with ARCA under the Governing Agreements during the fiscal years ended June 2008 through June 2014 (7 years).

105Under the heading “Qualifications and Limitations” Lewis stated that, in response to a request made by him for certain information, ARCA provided information to Mr. Figliomeni which was not suitable for his purposes. He colloquially characterized the information as a “data dump” comprising Excel spreadsheets that were incomprehensible.

106Lewis stated that, as a consequence, his calculations and conclusions contained certain assumptions and instructions received from counsel and are therefore preliminary. They may therefore require adjustment if additional information becomes available or if the assumptions are shown to be inaccurate and/or unreasonable.

107Parenthetically it is noted that there was no indication at trial that, following the production by ARCA of the “raw data” as ordered by Braid, J. on March 6, 2018, AMTIM took any steps to make enquiries of counsel for ARCA or to otherwise follow up in an effort to render the data production useful for Lewis’ purposes.

108Lewis stated that, given the scope limitation and qualification, he was instructed by AMTIM’s counsel to prepare his calculations assuming that a portion of the corporate overhead allocated to ARCA Canada is improper and should therefore be deducted from the operating expenses of ARCA Canada for purposes of calculating amounts owed to AMTIM under the Governing Agreements.

109Lewis conducted three sets of calculations of the alleged loss according to three assumed scenarios provided by AMTIM’s counsel:

Scenario One: assume that 90% of the corporate overhead allocated to AMTIM (sic) is improper and should be deducted from operating expenses of ARCA Canada

Scenario Two: assume that 75% of the corporate overhead allocated to AMTIM (sic) is improper and should be deducted from operating expenses of Arca Canada

Scenario Three: assume that 50% of the corporate overhead allocated to AMTIM (sic) is improper and should be deducted from operating expenses of ARCA Canada

110Lewis also indicated that as part of his computation of estimated loss, he was asked to include interest on the amounts owing, if any, to AMTIM and he did so based upon the annual rate of interest specified in the Governing Agreements, being the prime rate charged by the Bank of Nova Scotia plus 3%.

111In carrying out estimated lost Sales Fees and Performance Fees owed to AMTIM based on the formulae prescribed in the Governing Agreements, Lewis reviewed the calculations provided to AMTIM and adjusted the calculation of expenses to account for a 90% reduction in corporate overhead allocated to ARCA Canada in respect of Scenario One, a corresponding 75% reduction in respect of Scenario Two and a corresponding 50% reduction in respect of Scenario Three. In relation to Performance Fees under the Management Agreement, Lewis also adjusted for the fact that collection fees paid to AMTIM over the alleged loss period were less than they would have been “but for” the alleged improper corporate overhead allocations.

112Over the seven fiscal years under consideration Lewis calculated the rounded estimated loss to AMTIM, based upon each of the three scenarios as follows:

Scenario – percentage reduction of overhead allocation

Sales Fee

Performance Fee

Contract Interest

Estimated Loss

Scenario One - 90%

$1,078,000

$499,000

$796,000

$2,370,000

Scenario Two – 75%

$886,000

$227,000

$566,000

$1,678,000

Scenario Three – 50%

$564,000

$103,000

$332,000

$1,000,000

113I accept Mr. Figliomeni’s submission that it is well-established in the jurisprudence that the fact that it is difficult to calculate damages with mathematical accuracy cannot relieve the wrongdoer of the obligation to pay damages and the court is obligated to assess damages as best it can (see Radtke v. Machel, [2000] O.J. No. 3019 (S.C.J.), citing, among other cases, Wood v. Grand Valley Railway (1915), 1915 CanLII 574 (SCC), 22 D.L.R. 614).

114It is well-accepted that the measure of damages for breach of contract is the amount sufficient to place the plaintiff in the same position in which it would have been had the contract been performed.

115In the case at bar, on the assumption that ARCA was in breach, this measure of damages would be based upon the compensation to which AMTIM was entitled to under the Governing Agreements utilizing the annual net profit of ARCA Canada for each year in the loss period, calculated on the basis of the maximum amount of corporate overhead costs allocated to ARCA Canada for each year which would be in accordance with U.S. GAAP consistently applied. From this amount must be deducted the amount of compensation actually received by AMTIM during the loss period.

116The difficulty with Lewis’ calculations is that there is nothing relating any of the three assumed scenarios to the amount of corporate overhead costs which ARCA could have properly allocated to ARCA Canada and still be “in accordance with U.S. GAAP, consistently applied.” There is nothing in the evidence to suggest that it would be necessary to reduce the corporate overhead allocations by 90%, 75% or 50% to render them “in accordance” with US GAAP.

117In the recent case of Nickel v. Phoenix Construction Systems Ltd., 2021 BCCA 268, cited by AMTIM, Dickson J.A., for the panel, stated:

As Justice Griffin, then of the Supreme Court of British Columbia, explained in Encorp Pacific (Canada) v. Rocky Mountain Return Center Ltd. 2008 BCSC 779, damages are assessed by the court, not calculated, and a plaintiff is required only to prove sufficient facts upon which they can be estimated fairly and reasonably: at para. 130. That being so, in my view the judge did not err in concluding that he could find the facts necessary to decide the issue of the quantum of damages, nor did he commit a palpable and overriding error in accepting Mr. Butler's admissible opinion evidence on that question.

[underlining added]

118In my view, the selection of reductions of 90%, 75% and 50% in corporate overhead cost allocations over in the relevant fiscal years was arbitrary, as these reductions do not reflect estimated allocations which would be considered to be in accordance with U.S. GAAP. There is nothing in the evidence to suggest that a 90% reduction is any more appropriate, from the standpoint of U.S. GAAP, than a lower percentage reduction. In my view, AMTIM has not proved sufficient facts upon which the damages can be estimated fairly and reasonably.

Additional Claims

(a) Invoices

119As noted previously AMTIM advanced a claim at trial against ARCA for payment of three invoices (the “invoices”) each dated June 5 2017 as follows:

(a) Sales Representation - $23, 240.35 (inclusive of HST)

(b) General Management Fees - $3,528.72 (inclusive of HST)

(c) By-Products Commission - $1356.52 (inclusive of HST)

TOTAL - $28,644.01(inclusive of HST)

120The prayer for relief in the Amended Statement of Claim advanced no claim for payment of the invoices, and no reference was made to them in the body of the Amended Statement of Claim. The invoices were referred to in AMTIM’s Reply, in response to ARCA’s allegation at para. 19 of its Statement of Defence that ARCA terminated the Agreements for just cause and no further payments are due from ARCA to AMTIM thereunder.

121With respect to invoice (a) Berta testified that the base amount of $20,483.25 (not including HST) was calculated based on “4% sales commission for the time period of deposits into the bank… from as early as the fall of 2016 until February 2017” and “there may have been something into a bit later in 2017.”

122With respect to invoice (b) Berta testified that the base amount of $3,528.72 was derived from “the number of agreements that were picked up” and “multiplied by the .75 number against the number of units.”

123With respect to invoice (c) Berta testified that the base amount of $1,195.56 was based upon “the 4% sales commission on the …scrap that we sold. I believe this was probably for some ferrous loads.”

124Berta testified that ARCA did not pay the invoices and did not receive an explanation from ARCA for the nonpayment.

125At trial Tony Isaac, ARCA’s current CEO, denied that anything further was owing to AMTIM.

126I agree with the submission of Mr. Rosenstein that, in respect of a claim for services rendered, it is not sufficient for a plaintiff to prove that it sent an invoice and that it was not paid, but rather a plaintiff bears the onus of proving that it actually performed the services that would entitle it to payment. Berta was asked in his examination in chief how the amounts and the invoices were calculated or derived. However, he did not offer any evidence respecting the services rendered to support the invoices and in particular any evidence respecting “deposits into the bank,” “agreements picked up,” or “scrap” that ARCA Canada sold.

127For these reasons, AMTIM’s claim, if properly advanced, on the invoices must be dismissed.

(b) Termination of the Governing Agreements

128As noted above AMTIM referred at trial to a claim for the wrongful termination of the Governing Agreements by ARCA on July 26, 2017. As was the case with the invoice claim, the improper termination claim was not included in the prayer for relief nor in the body of the Amended Statement of Claim. It was referred to in ANTIM’s Reply, again in response to ARCA’s pleading that it had terminated the Agreements with just cause.

129ARCA led no evidence at trial respecting the length of notice of termination that it should have received or the measure of the damages it suffered as a result of the alleged wrongful termination. The claim for alleged wrongful termination was not pursued in final submissions and the total damages sought by AMTIM in Mr. Figliomeni’s submissions summary did not include any amount for this claim. Given this, it is not necessary to consider Mr. Rosenstein’s submission that AMTIM had either fully mitigated any damages it suffered as a result of a wrongful termination of the Agreements or had failed to take reasonable steps to do so.

130For these reasons, AMTIM’s claim, if properly advanced, alleging wrongful termination of the Governing Agreements must be dismissed.

Disposition

131For the reasons set forth above, the action is dismissed.

Costs

132The parties are strongly encouraged to agree on the costs of the action. If the parties are able to settle the issue of costs, they shall advise the court accordingly.

133If the parties cannot agree on costs, the defendant may make written submissions as to costs within 21 days of the release of these Reasons. The plaintiff has 14 days after receipt of ARCA’s submissions to respond. The defendant has a further 7 days to deliver reply submissions. All such written submissions are to be forwarded to me care of the Trial Coordinator at Brantford using the same email address as was utilized for the release of these Reasons for Judgment.

134The initial submissions of each side shall not exceed six (6) double-spaced pages, exclusive of Bills of Costs or Costs Outlines and Offers to Settle and the reply submissions, if any, shall not exceed three (3) such pages.

135If no submissions are received within this timeframe, the parties shall be deemed to have settled the issue of costs as between themselves.

136If either party does not intend to file costs submissions or reply costs submissions, that party is requested to advise the court accordingly,

D.A. Broad, J.