CITATION: Zabel v. Brechin, 2023 ONSC 1784

COURT FILE NO.: CV-14-497487

DATE: 20230317

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Klaus Zabel, Marlene Zabel, The Klaus Zabel Trust, and The Klaus Zabel Trust by its trustees, executor and administrator

Plaintiffs

– and –

Gregory Alan Brechin and Brechin & Huffman

Defendants

Joseph Groia and Sophie Baker, for the plaintiffs

Sean Dewart and Rebecca Glass, for the defendants

HEARD: January 9, 10, 11, 12, 13, 16, and 20, 2023

Robert CentA J.

Introduction

[1] In this action, the plaintiffs allege that the defendant lawyers provided negligent advice in connection with the sale of the plaintiffs’ business, breached their retainer agreement, and breached the fiduciary duties the defendants owed to them. The plaintiffs seek damages of over $1.4 million. For the reasons that follow, I dismiss the action in its entirety.

[2] In 1987, the plaintiff Marlene Zabel bought Life Mark Insurance Agencies (1988) Inc. She invited the plaintiff Klaus Zabel to come work for Life Mark in 1992. They married each other in 2002.

[3] Life Mark was a managing general agency. It managed a group of life insurance brokers and distributed the products of life insurance companies. Life Mark recruited, trained, and supervised life insurance brokers. It also provided back-office services to them.

[4] In 1993, Ms. Zabel combined the Life Mark business with another managing general agency under a new agency called Marketing Concepts Group Inc., which took over all active supplier and broker contracts. Life Mark continued to earn service fees, but Marketing Concepts Group managed the contracts, collected the service fees, and paid them to Life Mark. By 2010, the companies had a broker list of approximately 800 brokers across the country and annual gross revenues of about $2 million.

[5] At the relevant time, Life Mark owned all of the issued and outstanding shares in Marketing Concepts Group. Ms. Zabel, Mr. Zabel, and the plaintiff the Klaus Zabel Trust held all of the issued and outstanding shares in Life Mark.

[6] In 1999 and 2000, Marketing Concepts Group purchased two other managing general agencies in Atlantic Canada. In 2010, it purchased the annual service fees on a book of business owned by a managing general agency in Toronto.

[7] Ms. Zabel and Mr. Zabel first explored selling their business in 2010. In March 2011, after other discussions proved fruitless, Mr. Zabel met with Kevin Cott, the CEO of Qualified Financial Services Inc., which was another managing general agency. Ultimately, QFS would purchase the shares of Life Mark.

[8] The plaintiffs retained the defendant Gregory Brechin, of the defendant law firm Brechin & Huffman to represent them in the transaction with QFS. Mr. Brechin and his firm had advised the plaintiffs for over 13 years. Mr. Brechin did all of the corporate, real estate, and personal legal work for the plaintiffs, except for some tax planning. Mr. Brechin had advised the plaintiffs when they purchased the managing general agencies in Atlantic Canada and Toronto.

Plaintiffs’ position

[9] The plaintiffs allege that the defendants performed their legal services negligently, breached their contract with them, and breached the fiduciary duties owed to them. The plaintiffs make the following specific allegations.

[10] The defendants acted negligently and did not meet the standard of a reasonably competent and prudent solicitor. The defendants did not discharge their duty to provide complete advice and to warn the plaintiffs of the risks and legal consequences involved in the transaction. The defendants’ failure to follow the plaintiffs’ instructions to draft a narrow objection provision and to advise about the effect of the provisions dealing with the objection to the purchase price were negligent. Mr. Brechin considered the issues, understood their materiality, and neglected to review the changed terms and to discuss the risks with his clients. The defendants also fell below the standard of care when they failed to advise the plaintiffs regarding the discrepancy between their understanding of the pricing terms and the actual pricing terms. The plaintiffs rely on the report of their expert that Mr. Brechin fell below the standard of care in the advice he provided on the agreement.

[11] Mr. Brechin breached the retainer agreement because he did not limit the scope of his retainer and was required to protect the plaintiffs’ interests throughout the negotiations over the sale of the business. Mr. Zabel specifically instructed Mr. Brechin of “his expectations of a $5.3 million purchase price.” They also submit that Mr. Brechin “assumed control of the negotiations” with QFS on May 29, 2011, and that, regardless of any prior limitation of his retainer, from that point on, Mr. Brechin owed them the full panoply of duties a lawyer owes a client. Mr. Brechin owed the plaintiffs a duty to advise and negotiate on legal aspects of the agreement. Because he declined to advise on the provisions of the agreement dealing with objections to the purchase price, he failed to exercise reasonable competence and diligence, which was a breach of his contractual obligations to them.

[12] Finally, the defendants breached the fiduciary duty owed to the plaintiffs. Mr. Brechin did not act in their best interests, did not discharge his duty of candour, did not provide complete advice, and did not discharge his duty of loyalty by zealously representing his clients’ interests.

[13] The plaintiffs submit that they have suffered damages as a result of the breaches described above. These include:

a. $1,165,619.70, being the difference between the total expected proceeds from the sale of the companies and the amount actually received by the plaintiffs;

b. $280,437.34 in special damages, being the legal fees incurred to litigate the dispute with QFS arising from the agreement and the costs of the arbitration;

c. $50,000 plus HST, being the legal fees the plaintiffs paid to the defendants on the transaction.

Defendants’ position

[14] The defendants submit that the plaintiffs cannot succeed under any of their theories of liability. They made the following submissions.

[15] Mr. Zabel was an experienced executive in the insurance industry. He was primarily responsible for negotiating the agreement directly with Mr. Cott. Mr. Brechin denies that he took over negotiating the agreement. Mr. Zabel did not share important information with the defendants’ that would have informed their advice.

[16] Mr. Brechin met the standard of care. Mr. Brechin clearly advised Mr. Zabel on what matters he could give advice and where Mr. Zabel needed to seek the advice of his accountant. Mr. Zabel ignored Mr. Brechin’s advice that he obtain accounting advice on the definitions that eventually appeared in the agreement and led to the dispute over the calculation of the purchase price. Moreover, Mr. Zabel never told Mr. Brechin that he did not consult his external accountant.

[17] The plaintiffs only led expert evidence on the standard of care on two issues: Mr. Brechin’s advice about the changes to the definitions of Net Service Fees and Net Investment Trailers, and the objection provision. Both experts agreed that Mr. Brechin met the standard of care on the issue related to the definitions. In addition, the assumptions relied on by the plaintiffs’ expert on the objection provision were not made out in the evidence at trial. In the absence of expert evidence on any other point, no finding should be made that Mr. Brechin did not meet the standard of care.

[18] A lawyer’s contract with her client requires only that she carry out her duties in accordance with the standard of care. Proving a breach of contract requires expert evidence that the lawyer fell below the standard of care. The plaintiffs have failed to provide such evidence.

[19] The defendants deny that they breached their fiduciary duties to the plaintiffs. There is no evidence that Mr. Brechin betrayed the trust component of their relationship or that any action or inaction of Mr. Brechin implicated the fiduciary duties owed to the plaintiffs.

[20] The plaintiff has failed to prove their damages. The plaintiffs cannot rely on a spreadsheet prepared by Mr. Zabel as proof of the value of Life Mark and the court cannot assume that Mr. Cott would have agreed to calculate the value of Life Mark as Mr. Zabel wished.

[21] Finally, this action is barred by the provisions of the Limitations Act. The dispute about the purchase price surfaced in November 2011, and Mr. Zabel knew the underlying facts of his claim against Mr. Brechin in October 2011. Mr. Zabel did not issue the notice of action in this claim until January 30, 2014, which was more than two years after Mr. Zabel discovered the alleged drafting deficiency in the agreement.

The trial and the organization of these reasons

[22] The trial in this action proceeded over seven days. The plaintiffs called evidence from Mr. Zabel, Jill McCutcheon and David Di Paolo (who represented the plaintiffs in their dispute with QFS), and Robert Kinghan (who provided an expert opinion on standard of care). The defendants called Mr. Brechin and Wayne Gray (who provided an expert opinion on standard of care). The parties also filed a 5-volume joint document brief that contained approximately 270 documents, all of which were admitted into evidence (but not for the truth of their contents) by agreement of the parties.

[23] I will organize my reasons for decision as follows. I will first set out the facts underpinning the negotiations leading to the signing of the agreement. I think it is necessary to discuss these facts in some detail because it is important to understand the roles assumed by both Mr. Zabel and Mr. Brechin in the negotiations.

[24] As a preliminary legal matter, I will explain why I do not accept the defendants’ submissions that this proceeding is barred the Limitations Act, 2002.[^1]

[25] I will then set out my assessment of the reliability and credibility of the witnesses and make some findings of fact on critical matters of dispute.

[26] Next, I will consider the plaintiffs’ claim that Mr. Brechin was negligent. I will explain why I conclude that, based on the expert evidence before me, Mr. Brechin did not breach the standard of care. I will also explain why I find that the plaintiffs did not prove their damages claim and, in particular, why I find that a spreadsheet created by Mr. Zabel for use at trial is not sufficient proof of the plaintiffs’ damages. I will then explain why I find that the plaintiffs did not establish that any damages were caused by the actions of Mr. Brechin.

[27] I will explain why I find that the plaintiffs’ claim in breach of contract and breach of fiduciary duty also fail.

[28] Finally, I will explain why, in all of the circumstances of this case, I decline to draw any adverse inferences against Mr. Brechin as a result of the defendants’ failure to answer certain questions taken under advisement during his examination for discovery in 2017.

Facts

[29] Many of the facts in this case are not disputed. Much of the communication between Mr. Zabel and Mr. Brechin, and between each of them and QFS, its principals and advisors, took place via email. I will first set out the facts that are largely undisputed and then consider the facts in dispute in more detail. I will identify where I am making a finding of fact on disputed evidence, and will explain that finding later in the reasons.

[30] Given the nature of the plaintiffs’ claims, it is important to examine the negotiations leading up to the agreement in some detail. To assess the plaintiffs’ claims, it is essential to understand how and when certain clauses were amended, who conducted the negotiations, and how Mr. Zabel used and relied on Mr. Brechin during the negotiations of this agreement to assess the plaintiffs’ claims.

Initial discussions between Mr. Zabel and QFS

[31] In March 2011, Mr. Zabel first met with Mr. Cott to discuss the possibility of QFS buying the Life Mark business. At this initial meeting, Mr. Zabel proposed that the purchase price would be based on a five-times multiple of annual service fees plus a three-times multiple of annual investment trailers. Mr. Zabel indicated that he expected this would generate a purchase price of between $5 and $6 million. On March 6, 2011, Mr. Zabel sent Mr. Cott the financial statements for Life Mark and Marketing Concepts Group.

[32] Mr. Zabel testified that he called Mr. Brechin right after this meeting to let him know that discussions were underway with QFS and to report on his meeting with Mr. Cott. He recalled that he told Mr. Brechin that he intended to retire, how the deal would be priced, and that he did not want any continuing role with the company. Mr. Zabel testified that he did not want any responsibility for anything that happened after closing. He understood that Mr. Brechin considered it just advance notice of things to come because Mr. Cott had not yet provided a letter of intent or a term sheet.

[33] Mr. Brechin’s evidence was that the first time he heard of a possible sale of the business was sometime in February 2011 and he was not certain if the communication from Mr. Zabel was a telephone call or voice-mail. For reasons set out below, I find that it is more likely than not that it was a phone call.

First draft agreement – April 1, 2011

[34] On Friday, April 1, 2011, Mr. Cott emailed a draft agreement of purchase and sale to Mr. Zabel. Mr. Cott asked Mr. Zabel to review the draft agreement and to contact him as soon as possible.

[35] This draft contained two definitions that are central both to the calculation of the purchase price and to this action:

"Net Service Fees" shall mean the annualized service fees (other than first year commissions) paid or owing to the Constituent Corporations with respect to MGA contracts with insurance carriers during the 12 month period ending on the Closing Date other than service fees paid or payable to third parties in respect thereof.

"Net Investment Trailers" shall mean the annualized trailers paid or owing to the Constituent Corporations with respect to MGA contracts with insurance carriers during the 12 month period ending on the Closing Date less all trailers paid or payable to third party advisors.

[36] These definitions would be amended in the second draft of the agreement.

[37] Section 3 of the draft agreement contained provisions dealing with the calculation of the purchase price, the payment terms, the anticipated adjustment to the purchase price, and the closing transactions.

[38] Section 3.1 of the agreement set out the method of calculating the purchase price, which would be based on multiples of the two defined terms listed above: five times the Net Service Fees plus three times the Net Investment Trailers. The agreement estimated that the purchase price would be $5,300,000, but that was nothing more than an estimate and the actual purchase price would be calculated after closing. Mr. Zabel testified that he had provided the estimated purchase price to Mr. Cott. The provision provided:

3.1(a) Subject to the other terms of this Agreement, the Purchase Price payable by the Purchaser to the Shareholders for the Purchased Shares shall be an amount equal to five times the Net Service Fees plus three times the Net Investment Trailers of the Constituent Corporations for the 12 month period ending on the Closing Date. It is estimated that the Purchase Price is $5,300,000. The Purchase Price shall be calculated and confirmed in the manner set out in Section 3.2.

[39] Section 3.2 of the agreement allocated responsibility for calculating the purchase price. This version of the agreement provided that QFS (called the purchaser) would have its accountants prepare a statement setting out a detailed calculation in accordance with s. 3.1(a). The plaintiffs, referred to throughout the agreement as the shareholders, would then have the right to object to the QFS calculation. Any dispute would be submitted to an independent accountant to render a final and binding decision:

3.2(a) As promptly as practicable following the Closing Date, and in any event not later than 120 days thereafter, the Purchaser will cause a statement (the "Statement") to be prepared by the accountants of the Purchaser in accordance with the past practices of the Constituent Corporations on a consolidated basis as at the Closing Date. The Statement shall set out as at the close of business on the Closing Date a detailed calculation of the Purchase Price based on the formula contained in Section 3. 1(a), the Working Capital Amount and the book value of the Accounts Receivable.

(b) A copy of the Statement shall be delivered to the Shareholders who will have the right to review all work papers and procedures used to prepare the Statement. Unless the Shareholders, within 15 Business Days after receipt of the Statement, notify the Purchaser in writing that they object to any of the items in the Statement (an "Objection Notice") and specify the basis for such objection and the amount in dispute, the Statement will become final and binding upon the parties for purposes of this Agreement and the Shareholders shall be deemed to have waived any right to seek recourse to arbitration or the courts in respect of the Statement.

(c) If the Shareholders and the Purchaser, together with their respective advisors, are unable to resolve any objection within 20 Business Days after an Objection Notice is received by the Purchaser, the dispute will be submitted to the Independent Accountant who will be instructed to resolve the dispute in accordance with the terms of this Agreement. The Independent Accountant will make a determination as to the matter or matters in dispute which shall be final and binding on the parties.

[40] Subsequent drafts of the agreement reversed the roles of the parties so that the plaintiffs would prepare the Statement and QFS would have the right to object to that calculation.

[41] Mr. Zabel testified that he believed he spoke with Mr. Brechin about this draft. Mr. Brechin denied that this happened. As I will explain below, I find that Mr. Zabel did not provide this first draft to Mr. Brechin or call him to discuss it.

[42] On Monday, April 4, 2011, Mr. Zabel responded to Mr. Cott. He stated that he had read the agreement over the weekend but did not have enough time to “really review it.” Mr. Zabel stated that he noticed the draft agreement contained a lot of terms that were redundant or irrelevant, such as a section on hazardous waste. Mr. Zabel stated that he would get back to Mr. Cott that evening with issues related to price and payment schedule and would later send a line-by-line review of the draft agreement. Mr. Cott replied later that day and told Mr. Zabel that his lawyer had told him that there were some standard clauses that would not apply and suggested that the parties work though the bigger issues first.

[43] On April 5, 2011, Mr. Zabel emailed his comments on the financial and business issues to Mr. Cott. He indicated that he would be sending his comments on the agreement itself in a separate email. Mr. Zabel provided his thoughts on the calculation of the purchase price under the agreement:

To calculate the gross purchase price I think we should use Life Mark Insurance Agencies December 31, 2010 Financial Statements and Marketing Concepts Group Inc. May 31, 2011 statements, realizing that we will have to true up the MCG numbers once they are finalized. Life Mark is a closed book of business and the service fees do not change much from year to year, whereas MCG is increasing all the time.

The multiple of 5 times annual service fees is still good as is the multiple of 3 times segregated fund trailers.

In addition to the above items I want to add the tax value of the deductions available to the company from the Pitch Wolle purchase, The total of these, prior to any 2011 year end deductions is $442,000 so the value would be approximately 25% of that. They are a non cash deduction available over the next 32 months.

Netted against the gross purchase price will be $142,000 due to Pitch Wolle and about $500,000 due to the TD bank for a total of about $642,000 which will be repaid on closing. I will also repay a shareholder loan in the amount of $230,000. I assume that the lawyers will take care of these amounts on closing

[44] Mr. Zabel also provided his views on his preferred payment schedule, the interest rate on outstanding amounts payable under the agreement, and the allocation of transition costs.

[45] On April 7, 2011, Mr. Cott asked his external accountant, Irwin Choleva, to call Mr. Zabel.

[46] On April 13, 2011, Mr. Zabel emailed Mr. Cott an Excel spreadsheet containing his comments on the draft agreement. Mr. Zabel’s covering email indicated that he thought the draft agreement contained “many wordy sections” that could be made more specific and that some repetition could be eliminated. In his covering email, Mr. Zabel also discussed retaining certain staff persons and his desire to direct part of the purchase price into RRSPs as retiring allowances.

[47] In the attached spreadsheet, Mr. Zabel commented on many of the clauses contained in the draft agreement. Some of his comments reflected a very careful read of the agreement. For example, Mr. Zabel noted that the definition of “Business Day” was erroneously defined to mean “a Saturday, Sunday or any other day that is a statutory holiday in the Province of Ontario.” Mr. Zabel also provided comments on many of the definitions contained in the draft agreement. Importantly, Mr. Zabel commented on the definition of Net Service Fees and Net Investment Trailers. He stated:

Net Service fees has nothing to do with First Year commissions and why the time limit of 12 months?

Net Investment trailers should also [include] amounts owing from Fund Companies on Seg fund sales, not just Insurance companies

[48] Mr. Zabel testified that, subject to these two comments, he thought the definitions were fine.

[49] Mr. Zabel also commented that the section of the agreement dealing with the target working capital was unnecessary and should be removed. With respect to the objection provision and the purchase price dispute resolution provision, Mr. Zabel indicted that he wished to discuss further the identity of the independent accountant who would be determining any dispute about the purchase price. He did not otherwise comment on the objection provision.

[50] It is not necessary to describe all of Mr. Zabel’s comments. However, it is helpful to understand their breadth. Mr. Zabel offered comments on ss. 3.1(c), 3.2(c), 3.2(f), 3.3, 3.4. 4.3. 4.4, 4.5, 4.6, 4.7, 4.8, 4.10, 4.11, 4.12, 4.13, 4.20, 4.21, 4.23, 5, 7, 7.2, 7.4(c), 9.2, 9.3. He also commented on a proposed non-solicitation agreement saying, “I understand and agree that there needs to be protections but I also do not want it to limit me to not being able to work in the Insurance Industry at all.”

[51] As I will explain below, I find as a fact that Mr. Zabel provided all of his input on the first draft of the agreement to Mr. Cott without any advice from Mr. Brechin.

[52] On April 16, 2011, Mr. Cott emailed Mr. Zabel to advise that QFS was revising the agreement based on his feedback. Mr. Cott copied his lawyer and his external accountant on this message. Mr. Cott stated that he expected to have “a document for signing” by the middle of the week.

Second draft agreement – April 21, 2011

[53] On April 21, 2011, Mr. Cott emailed Mr. Zabel the second draft of the agreement. The footer of the agreement read “DRAFT: April 20, 2011.” The version of the agreement attached to this email was a clean revised copy of the agreement. There was another version of this agreement identified that appeared to have some tracked changes. Both versions introduced into evidence were produced from Mr. Zabel’s files.

[54] The email also attached an updated version of the Excel spreadsheet that contained Mr. Zabel’s comments, with responses from QFS. In my view, it is more likely than not that the responses came from QFS’s lawyer, John D. Wright, given the language of some of the comments and the fact that the file is titled Comments.KlausZabel.JDW.XLS.

[55] With respect to the definitions of Net Service Fees and Net Investment Trailers, Mr. Zabel’s comments and the responses from QFS were as follows

Net Service fees has nothing to do with First Year commissions and why the time limit of 12 months?

The definition has been amended.

Net Investment trailers should also include amounts owing from Fund Companies on Seg fund sales, not just Insurance companies.

The definition has been amended.

[56] The amendments to the definitions are set out below. Importantly, these changes limited service fees and annualized trailers to those paid to the corporations in the last 12 months. The definitions no longer included service fees and annualized trailers that were owing to the corporations. They would remain unchanged in the final agreement. For ease of comparison, I have marked the words removed by Mr. Cott using strikeout and I have underlined the words he added:

"Net Service Fees" shall mean the annualized service fees (other than first year commissions) as defined by each MGA contract paid or owing to the Constituent Corporations with respect to MGA contracts with insurance carriers during the 12 month period ending on the Closing Date other than service fees paid or payable to third parties in respect thereof excluding any service fees sold or for which notice of sale has been received during such 12 month period.

"Net Investment Trailers" shall mean the annualized trailers as defined by each MGA contract paid or owing to the Constituent Corporations with respect to MGA contracts with insurance carriers and fund companies during the 12 month period ending on the Closing Date less all trailers paid or payable to third party advisors excluding any trailers sold or for which notice of sale has been received during such 12 month period.

[57] The second draft of the agreement did not contain any changes to the provisions related to the method of calculation of the purchase price (in s. 3.1(a)) or the creation of the Statement (3.2).

[58] Four hours later, Mr. Zabel emailed Mr. Brechin. The message read, “Hi Greg, Attached is a draft Share Purchase Agreement for the sale of Lifemark Insurance Agencies and Marketing Concepts Inc. Could you please look this over and give me your comments at your earliest convenient time.” Mr. Brechin responded that he would review and respond.

[59] Mr. Zabel did not tell Mr. Brechin that this was the second draft agreement or that he had already provided comments on the financial and business issues and the language of many of the clauses in the agreement. Mr. Brechin testified that the draft agreement that Mr. Zabel sent to him was not blacklined and agreed that he did not ask Mr. Zabel if there were any earlier drafts.

[60] On April 26, 2011, Mr. Zabel updated Mr. Cott that he had sent the draft agreement to his lawyer and expected to hear from him before too long. Mr. Zabel indicated that he was interested to hear the views of Mr. Cott’s accountant on structuring the transaction as an asset sale. On April 28, 2011, Mr. Cott asked Mr. Zabel when he thought he might hear back on the draft agreement. The next day, Mr. Zabel replied that he would follow up with his lawyer to see where he was at and proposed a meeting with Mr. Cott’s accountant the next week.

Mr. Brechin’s analysis of the second draft agreement – May 5, 2011

[61] On May 5, 2011, Mr. Brechin sent a six-page letter to Mr. Zabel setting out his comments on the draft agreement. Mr. Brechin began his letter by advising Mr. Zabel to review the entire agreement carefully and emphasizing, as he would throughout the process, that it was important for Mr. Zabel to review this agreement with his accountant:

Notwithstanding my comments, you have a duty to review each and every paragraph as there are things that may trigger with you that I might not pay attention with. …

You have to review the Agreement with your accountant obviously, and notwithstanding your financial background, I think you need an accountant that is familiar with these types of transactions.

[62] During his testimony, Mr. Zabel agreed that he neither showed any draft of the agreement to his external accountants nor told Mr. Brechin that he did not follow his advice.

[63] Mr. Brechin then addressed the definitions section. He stated that he had not attempted to understand how the purchase price would be calculated and had not paid much attention to the definitions, including of the key terms Net Service Fees and Net Investment Trailers but stated that it was “exceptionally important that you and your accountant understand these definitions.” He wrote:

Paragraph 1.1 - Definitions I have not attempted to try to understand how the purchase price is calculated in the sense that that is between yourself and your accountant, so I haven't paid much attention to the definitions of Current Assets, Excluded Liabilities, Net Service Fees, Net Investment Trailers, Target Working Capital and Working Capital Amount but it is exceptionally important that you and your accountant understand these definitions.

Secondly, I always think it is a good idea in circumstances such as this to specify in the Agreement what these amounts were as of your last financial statement so that it is clear how it has been adjusted and calculated previously. I think it then makes it easier to make any adjustments and for each of the parties to know exactly what is meant when they use these definitions. …

In the definition of "net service fees" I have a couple of concerns. Would your closing date have anything to do with the 12 month period ending on the closing date which could result in an adverse situation for you? For example, you might close on June 30, but this year you might be getting a large cheque on July 1, whereas last year you received an amount on June 30. Not every 12 month period is always the same so would the closing date have any impact depending on when you receive things?

Secondly, I really don't understand in this paragraph the last three sentences and it seems to have some element of run-off so that it is unclear to me and perhaps it is insurance jargon which is understood in the industry. I have the same confusion with respect of the following paragraph "Net Investment Trailers" where it seems to have exclusions within exclusions (i.e. ... less all trailers paid or payable to third party advisors excluding any trailers sold ... )

I mentioned earlier but I think Target Working Capital and Working Capital amounts should make reference to what those amounts were as of your last financial statement for both companies.

[64] Mr. Brechin went on to provide comments on paragraphs 2.1, 3,1, 3.2, the definition of excluded assets, paragraph 4.2, 4.3, 4.6, 4.7(d), 4.8, 4.9, 4.10, 4.11, 4.13, 4.17, 4.21, 4.25, 7.4, 7.9, 7.10, 9.2, 9.3, 10.1, 11.1, 12, and 13.5. In at least seven places, Mr. Brechin emphasized the importance of Mr. Zabel consulting with his accountants or indicated that a particular issue needed input from Mr. Zabel’s accountants.

[65] Mr. Brechin indicated that he would be away between May 11 to 23, 2011, but that he would have access to his blackberry and laptop. Mr. Brechin also told Mr. Zabel that he had a “very qualified partner to see to matters in my absence.” The parties agree that Mr. Brechin did not provide the name of this partner to Mr. Zabel, and that Mr. Zabel did not attempt to contact Mr. Brechin or anyone at the defendant law firm again until May 23, 2011.

[66] Mr. Zabel agreed that he did not recall telling Mr. Brechin that he did not understand anything in Mr. Brechin’s letter and did not email any questions to Mr. Brechin about the letter. He also agreed that he did not tell Mr. Brechin that he disagreed with anything in this letter.

[67] As I will explain below, I find that Mr. Zabel did not discuss Mr. Brechin’s May 5, 2011, letter with him. Mr. Zabel sought no further input from Mr. Brechin until May 23, 2011. In the next sections, I will outline the many steps Mr. Zabel took to negotiate the terms of the agreement between May 5 and May 23, 2011. Mr. Zabel did not show Mr. Brechin any of the proposals that he provided to Mr. Cott during this period.

Mr. Zabel provides his definitive list of requested changes – May 10, 2011

[68] On May 9, 2011, Mr. Zabel met with Mr. Cott to discuss the transaction.

[69] On May 10, 2011, Mr. Zabel sent Mr. Cott an email to pass along some thoughts that had been bothering him since the meeting. Mr. Zabel stated that “we either need to do this deal soon or I need to make other arrangements.” Mr. Zabel stated that he intended to get the deal done at the agreed upon price by the end of May. Mr. Zabel stated that he received Mr. Cott’s “message” on May 9, 2011, that Mr. Cott was not inclined to make changes to the agreement beyond what he absolutely had to change, so Mr. Zabel would provide a “definitive list of changes we would like to see based on my lawyer’s comments by the end of today.” The key part of the email read as follows:

The message I got yesterday was that you are not inclined to make changes to the agreement beyond what you absolutely have to. I think it is. awkward and time consuming for two of us to be working on the same agreement and I can't see the benefit of my lawyer rewriting it. I have never seen that in the past and the process concerns me. At the same time, this proposed deal is significant to me and I need to make sure that the agreement both states what we both intend and that it is clear and unambiguous.

So what I am suggesting is this, I will develop a replacement for the 'working capital" wording we discussed yesterday in the present agreement as well as a definitive list of changes we would like to see based on my lawyers comments on the existing agreement by the end of today. I need you to specify which employees you intend to keep so we can nail down the severance piece. I am not sure you have ever said which people you want and which you do not want.

My intention to get this deal done, at the agreed upon price, by the end of this month has not changed, but I also do not want to be arguing over what the agreement meant once we have signed it.

[70] Mr. Cott replied by email stating that he also wanted to get the deal done now, was prepared to proceed with a share purchase, and asked Mr. Zabel to send his proposed changes, which he would “review and incorporate into the agreement where appropriate.”

[71] Later, on the afternoon of May 10, 2011, Mr. Zabel emailed his comments on the second version of the agreement to Mr. Cott. Mr. Zabel stated:

I have reviewed the agreement again and incorporated our lawyers [sic] comments in the attached schedule, As well I attach a page of notes. Please review this and let me know if any of it is a problem or you have questions or comments.

[72] Mr. Zabel suggested changes to the definition of Independent Accountant, Target Working Capital, and Working Capital Amount. Mr. Zabel did not suggest any changes to the definition of Net Service Fees or Net Investment Trailers.

[73] I find that Mr. Zabel incorporated some, but not all of Mr. Brechin’s comments on the agreement. I find that some of Mr. Brechin’s comments on the promissory note in s. 3.1, 4.3, 4.17, 4.25, 7.4, 9.2, and 9.3, are reflected in Mr. Zabel’s comments to Mr. Cott. Mr. Zabel’s comments did not reflect any of Mr. Brechin’s comments on or questions about the definitions of Net Service Fees or Net Investment Trailers.

[74] A call was set up for May 12, 2011, to discuss the agreement. On May 11, at 6:17 p.m., Mr. Cott wrote to Mr. Zabel and said “it is suggested that your lawyer be on the call as well. Let me know, I think we are close if not there.” Mr. Zabel responded at 8:59 p.m. and said, “It is too late to get my lawyer on the at call tomorrow morning, so we will have to do it and go from there.” There is no evidence that Mr. Zabel asked Mr. Brechin to join the call.

[75] On May 12, 2011, at 9:50 a.m., Mr. Cott emailed to Mr. Zabel a letter from his lawyer. The letter set out 17 numbered paragraphs of comments and began:

We have reviewed the notes forwarded yesterday by Klaus Zabel concerning the above matter. We believe that there is substantial agreement between the parties and that there are only a few remaining issues which require clarification. We have the following comments concerning the matters raised by Mr. Zabel and are providing a written response so that the matters can be discussed and settled during the conference call scheduled for Thursday morning at 10:00 am. Mr. Zabel's counsel should participate in the call.

[76] There is no evidence that Mr. Zabel provided this letter to Mr. Brechin.

[77] On Monday May 16, 2011, at 5:30 p.m., Mr. Zabel wrote to Mr. Cott to provide his thoughts on the working capital calculation and how the agreement could be revised to reflect his views. Later that day, Mr. Cott wrote to Mr. Zabel, his accountant, and his lawyer and said: “Klaus and I have agreed to meet this Thursday at 5:30 to sign the final agreement.” He asked his accountant to speak to Klaus to finalize the wording to implement Mr. Zabel’s thoughts on the working capital issue. Mr. Cott asked his lawyer to prepare a final blackline and signature copy of the agreement.

Third version of agreement – May 18, 2011

[78] On Wednesday May 18, 2011, at 4:55 p.m., Mr. Cott sent an email to Mr. Zabel attaching a third version of the agreement. The email attached both a clean and a black-lined copy of the third version. Mr. Cott stated “I hope this is it. If you have any questions related to accounting or legal call Irwin or John directly. Otherwise let me know if I should sign and when you will go to [Mr. Cott’s lawyer’s office] on Friday.” The agreement was dated May 18, 2011, and was marked against a version dated April 20, 2011.There are two important things to note about the third version of the agreement.

[79] First, the purchase price calculation provision in s. 3.2(a)(i) was modified in two ways: the plaintiffs would prepare the Statement, and the QFS would have the opportunity to object; and the language was amended to include a reference to GAAP, the past practices of the business, and to add an adjustment provision. The changes were as follows:

3.2 Purchase Price Calculation

(a)

(i) As promptly as practicable following the Closing Date, and in any event not later than 120 days thereafter, the Purchaser Shareholders will cause a statement (the "Statement") to be prepared by the accountants of the Purchaser in accordance with the past practices of the Constituent Corporations on a consolidated basis as at the Closing Date in accordance with GAAP in a manner consistent with past practices adjusted as provided below. The Statement shall set out as at the close of business on the Closing Date a detailed calculation of the Purchase Price based on the formula contained in Section 3.1(a), the Working Capital Amount and the book value of the Accounts Receivable.

(ii) The Statement shall be adjusted to include as Current Assets and Current Liabilities all amounts payable to the Constituent Corporations and all liabilities or debts owing by the Constituent Corporations in respect of insurance policies that have either been placed, settled and paid or have been placed and approved but not yet paid pending remaining documentation or payment from the insured. No account receivable will be included as a Current Asset if it is not paid within 45 days of settlement.

(b) A copy of the Statement shall be delivered to the Shareholders Purchasers [sic] who will have the right to review all work papers and procedures used to prepare the Statement, Unless the Shareholders Purchaser, within 15 Business Days after receipt of the Statement, notify notifies the Purchaser Shareholders in writing that they object it objects to any of the items in the Statement (an "Objection Notice") and specify [sic] the basis for such objection and the amount in dispute, the Statement will become final and binding upon the parties for purposes of this Agreement and the Shareholders Purchaser shall be deemed to have waived any right to seek recourse to arbitration or the courts in respect of the Statement.

(c) If the Shareholders and the Purchaser, together with their respective advisors, are unable to resolve any objection within 20 Business Days after an Objection Notice is received by the Purchaser Shareholders, the dispute will be submitted to the Independent Accountant who will be instructed to resolve the dispute in accordance with the terms of this Agreement. The Independent Accountant will make a determination as to the matter or matters in dispute which shall be final and binding on the parties.

[80] Later on May 18, Mr. Zabel wrote to Mr. Cott to ask a question about why the closing date had moved from May 31, 2011, to June 30, 2011. Mr. Cott replied that he made the change because the May 31 date no longer seemed feasible.

[81] On May 19, 2011, Mr. Wright wrote to Mr. Zabel and said, “I think that the purchase agreement is complete subject to any further comments that you or your lawyer may have….” He stated that he understood the parties intended to sign the agreement on May 24, 2011.

[82] On May 20, 2011, Mr. Zabel wrote to Mr. Brechin to express his concern about the unilateral change to the closing date. Mr. Zabel stated that he had expected to receive a final draft of the agreement, but then saw the closing date had been changed. He wrote:

I think we have two issues to resolve.

The first issue is that we have an agreement drafted to close on May 31, start the transition process by giving staff notices, moving etc. and then truing up the numbers in June, To that end I have done a number of things, or not done them as the case may be, anticipating that timing, including modifying my agreement with Pitch Wolle, not doing anything about renewing or extending my lease in Etobicoke and so on. Changing the closing date creates some problems for me in those areas and now I would need to revisit and resolve them.

The date itself creates some practical issues in terms of Etobicoke, staff notices and other matters that I have a hard time seeing us resolving The second issue is the lack of notice, discussion etc, concerning changing the date. I resent the fact that I received what I expected was a final draft of the agreement and the first thing I noticed was that the date had been changed. That is rather a major change to make unilaterally.

If we both work to get this done, moving it by one month and creating other issues related to that move is not conducive so achieving that end.

I know you are away and I certainly do not want to disturb your weekend, but I need in decide whether we see doing this deal or I need to go back and fix some of the things I did anticipating the sale.

[83] Mr. Zabel testified that he did not notice that this draft changed the calculation of the purchase price provisions so that the vendor would prepare the Statement and the purchaser would prepare the notice of objection. Nevertheless, since Mr. Zabel expected to receive a final version of the draft, it is noteworthy that, unlike the change to the closing date, he did not comment on any of the changes to s. 3(2) described above.

[84] Mr. Zabel took all of these steps from May 5 to May 20, 2011, without consulting with Mr. Brechin or his office.

Mr. Zabel updates Mr. Brechin – May 23, 2011

[85] On May 23, 2011, Mr. Zabel forwarded Mr. Cott’s email from May 18, 2011, to Mr. Brechin. The email attached a clean copy of the agreement dated May 18, 2011, and a blacklined copy. During his testimony, Mr. Brechin acknowledged that he received the blacklined copy. Mr. Zabel’s covering message to Mr. Brechin stated, “This is now the second to last copy of the Share Purchase Agreement with QFS.”

[86] On May 24, 2011, Mr. Cott emailed Mr. Zabel to follow up on the status of the agreement. Mr. Cott stated, “I believe you and [Mr. Wright] finally ironed out the target capital issue and we should be ready to sign tomorrow, I will sign by fax so we can get moving. I'll be on my cell over the next 3 days. Please call me.” Mr. Zabel indicated to Mr. Cott that he was trying to address several of the outstanding issues, that he had spoken to Mr. Wright a couple of times, but was still waiting to receive a revised agreement to address the target capital issue. Mr. Zabel stated, “When it is done he will send me a copy as well as our lawyer so we can review it. I assume that will be sometime tomorrow. When I get it I and have read it I will be in touch.”

Fourth version of agreement – May 25, 2011

[87] On May 25, 2011, Mr. Wright circulated the fourth version of the draft agreement to both Mr. Zabel and Mr. Brechin. He noted that this draft had not been reviewed by either party and was essentially the same as the prior draft, except that it removed the concept of target working capital. He indicated that he understood that the parties were anxious to complete and sign the agreement that day. The key parts of the message read as follows:

This agreement has not been reviewed by any of the parties and is subject to any comments that either party may have.

The agreement is essentially the same as the prior draft other than the removal of the concept of target working capital. This has been replaced with a simpler concept, namely, the constituent corporations will have no more than $85,000 of specified liabilities at closing. In addition there is the allowance of a further $40,000 of liabilities relating to termination and severance costs.

Please confirm that the agreement, as amended, is acceptable and we can then make arrangements for the schedules and signing.

If you have any questions or comments please send an email and copy the others. I understand that everyone is anxious to complete and sign the agreement today.

[88] The revised draft contained several changes: it deleted the definitions of Current Assets and Current Liabilities, Target Working Capital, Working Capital Amount, and changed the definition of Excluded Liabilities. It also revised the purchase price calculation provision. For ease of reference, I have marked the changes in the fourth draft against the third draft in this excerpt:

(i) (a) As promptly as practicable following the Closing Date, and in any event not later than 120 60 days thereafter, the Shareholders will cause a statement (the "Statement") to be prepared by the accountants of the Constituent Corporations on a consolidated basis as at the Closing Date in accordance with GAAP in a manner consistent with past practices adjusted as provided below. The Statement shall set out as at the close of business on the Closing Date a detailed calculation of the Purchase Price based on the formula contained in Section 3.1(a~~), the Working Capital Amount and the book value of the Accounts Receivable~~.

(ii) The Statement shall be adjusted to include as Current Assets and Current Liabilities all amounts payable to the Constituent Corporations and all liabilities or debts owing by the Constituent Corporations in respect of insurance policies that have either been placed, settled and paid er have been placed and approved but not yet paid pending remaining documentation or payment from the insured. No account receivable will be included as a Current Asset if it is not paid within 45 days of settlement.

[89] The fourth draft deleted the sections dealing with the Target Working Capital calculation and replaced it with a clause that provided that the liabilities, indebtedness, or obligations of Life Mark and Marketing Concepts Group would not exceed $85,000 on closing. If the liabilities exceeded $85,000, then the plaintiffs would indemnify QFS for any excess.

[90] An hour later, Mr. Brechin emailed Mr. Zabel to say that he had not yet reviewed the new draft and was not sure if it was different from the previous version sent by Mr. Zabel. He indicated that he would either review the draft agreement that night (Wednesday) or on the weekend. Mr. Zabel responded to Mr. Brechin and said he was reading the agreement now. Forty minutes later, Mr. Zabel wrote to Mr. Brechin and stated that he intended to sign the agreement the next day unless Mr. Brechin saw something that Mr. Zabel was not aware of:

I have reviewed the agreement in relation to all the business aspects, financial statement requirements etc. The issue we had related to Working Capital and Target Working Capital and they have all been removed or changed and replaced by section 3.2(e), I don't think this section gives OFS the assurance that they sought but I am alright with it. They were concerned that for the first month after closing there would be sufficient cash generated by the business to be self- supporting, Section 3.2(e) does not really address that but what the hell.

Since time is short our intention is to sign this agreement tomorrow unless you see something that I am not aware of.

Mr. Brechin’s comments on third version of the agreement – May 26, 2011

[91] On May 26, 2011, at 1:50 p.m., Mr. Brechin sent Mr. Zabel a 26-point email that set out his comments on the draft agreement. Mr. Brechin based his comments on the third version of the agreement, which was the blacklined copy of the agreement that Mr. Zabel sent to him on May 23, 2011. Mr. Brechin did not comment on the fourth version of the agreement Mr. Wright had circulated on May 25, 2011. Mr. Brechin did not provide comments on the definitions of Net Service Fees or Net Investment Trailers, or the purchase price adjustment clause. Mr. Brechin reiterated his comments about the need for Mr. Zabel to obtain accounting advice and emphasized that Mr. Zabel’s accountant needed to be “entirely familiar with this agreement.” Mr. Brechin wrote:

8. In 4.9 I would ask again that you consider whether there are any cars or computers or cell phones or blackberries that should be excluded assets. I did see elsewhere in the agreement where it talked about art being transferred out and you would have to review that carefully with your accountant and in fact your accountant should be entirely familiar with this agreement and I assume that he is and I assume that you know your tax consequences and I see that you've got the retiring allowance concept into the agreement which is good.

[92] On Friday May 27, 2011, Mr Wright wrote to Mr. Brechin and Mr. Zabel and asked for an update. Mr. Wright stated that “It is our understanding that the parties would like to sign and start the due diligence on Monday or Tuesday.” Mr. Brechin wrote to Mr. Zabel and asked “I expect you [received] my comments Thursday; how do you want to respond?”

[93] On Sunday May 29, 2011, at 9:01 p.m. Mr. Zabel responded to Mr. Brechin’s 26-point email. With respect to paragraph 8, which included Mr. Brechin’s advice about ensuring his accountant was entirely familiar with the agreement, Mr. Zabel wrote “Will do.” He then directed Mr. Brechin to speak directly with the lawyer for QFS. The meaning of these instructions is one of the significant items in dispute. Mr. Zabel wrote:

I would think the quickest way of dealing with some of the wordings etc would be for you to discuss this with their lawyer who seems anxious to get this agreement finished as well.

I am anxious to get this agreement done and this deal closed. There is considerable risk that if it became known we were selling without us being prepared for it, that it would worry our customers enough for them to wander off. So I prefer for us to tell everybody and work on getting them transitioned to QFS.

[94] On May 30, 2011, Mr. Brechin sent an email to Mr. Wright raising seven points about the draft agreement. Approximately two hours later, Mr. Wright responded favourably to many of the points raised by Mr. Brechin, but asked some follow-up questions. Mr. Wright concluded his email by emphasizing the importance of signing the agreement the next day so that QFS could obtain the necessary financing:

It is very important that the parties sign the agreement tomorrow. The purchaser is not able to complete its financing arrangements at the bank without it. As you know the agreement is not complete without the schedules. These should be prepared tomorrow. In addition would you please send copies of the minute books for the companies by courier. We will return the minute books as soon as we have completed our due diligence.

[95] On May 31, 2011, Mr. Brechin forwarded Mr. Wright’s comments to Mr. Zabel and asked him to provide some missing information and to comment on a few small issues. Mr. Brechin then wrote to Mr. Wright and advised that he would have some brief comments back to him by 10:00 a.m. and that he understood Mr. Wright’s concerns about timing. Mr. Zabel answered Mr. Brechin 15 minutes later with his answers. He concluded “I know that we have to sign this agreement as soon as possible both for their financing reasons and also because Marlene and Kevin are both away after Thursday of this week.” At this point, all parties agreed that it was essential to get the agreement signed soon so that QFS could obtain financing.

[96] At 1:41 p.m., Mr. Wright sent a revised copy of the agreement, which he indicated took into account all of Mr. Brechin’s comments from May 30, 2011. He stated that, “Subject to any further comments received on behalf of the vendors and the attachment of schedules, we believe that the agreement is in suitable form for signing.”

[97] At 3:10 p.m., Mr. Brechin asked Mr. Wright to make one further change to the agreement to ensure that Mr. Zabel would have access to the books and records of the corporations in the event that there was a post-closing claim against the corporation that Mr. Zabel would have to defend.

[98] Mr. Zabel then wrote to Mr. Brechin to advise that the agreement needed to be signed for Mr. Cott to obtain financing and to raise the issue of when the schedules to the agreement could be completed.

[99] At 9:54 p.m., Mr. Zabel emailed Mr. Wright directly and asked him to send him a clean copy of the agreement so that he could print copies for signature on June 2, 2011. He did not copy Mr. Brechin on his message.

[100] On June 1, 2011, at 11:55 a.m., Mr. Brechin emailed Mr. Zabel to advise that he had spoken with Mr. Wright and that QFS agreed to revise the agreement to confirm that Mr. Zabel would have access to the books and records of the corporation if there was a claim against the shareholders or the corporations. Mr. Brechin relayed that Mr. Cott wanted the agreement to be signed on Friday because they needed it to obtain financing. He also emphasized the importance of completing as many of the schedules to the agreement as quickly as possible.

[101] On June 2, 2011, the parties signed the agreement, which was dated as of May 18, 2011. Mr. Brechin did not met with Mr. Zabel before he signed the agreement to review it on a clause-by-clause basis.

Closing the agreement – May 18, 2011, to July 11, 2011

[102] After the agreement was signed, the parties agreed to amend it in several ways that are not material to this proceeding.

[103] The parties continued to work towards closing the agreement. One point of tension was the completion of the schedules to the agreement. Mr. Zabel expressed doubts that the transaction would close. He wrote to Mr. Brechin on July 8, 2011, and said, “I am starting to doubt that we will close this and I am having serious concerns about getting the rest of our money even if we were to close, I have other options and I am going to explore them, including seeking damages.”

[104] On Saturday, July 9, 2011, at 10:15 a.m., Mr. Zabel wrote to Mr. Cott, Mr. Wright, and Mr. Brechin. He stated that “We have decided that if we do not close this deal on Monday than we will not close at all and seek a different solution.” Mr. Cott responded shortly thereafter to reassure Mr. Zabel that he intended to close on Monday.

[105] On July 11, 2011, the parties reached an agreement with respect to the flow of funds and the calculation of liabilities owing by the corporations. The transaction closed successfully.

Post-closing discussions and the calculation of the Statement

[106] On July 19, 2011, Mr. Brechin advised Mr. Wright that Mr. Zabel was having difficulty getting access to the financial data necessary to prepare the year end financial statements. This delay would, in turn, delay the preparation of the Statement, which would be used to determine the purchase price.

[107] On August 16, 2011, Mr. Zabel wrote to Mr. Brechin to advise that he had received a copy of the draft year end financial statements dated May 31, 2011. He wrote that “these are the statements that will be used to true up the purchase price and based on these statements and Life Mark’s December 31, 2010 statements, the purchase price will go up by $307,000, 60% of which is due immediately.”

[108] Mr. Brechin responded the next day and proposed that, if the adjustments for the purposes of the agreement were negotiated between the accountants or between Mr. Zabel and Mr. Cott, Mr. Zabel should just write to Mr. Cott directly to discuss the adjustment:

With respect to the purchase price adjustment, who originally negotiated the adjustments for purposes of the Agreement of Purchase and Sale? if it was more or less between the respective accountants, or more or less between yourself and Kevin, then I suggest you write to him directly providing the statements and requesting the funds.

[109] Mr. Brechin ended up writing to Mr. Wright about these issues. On August 29, 2011, Mr. Brechin sent a letter that stated, in part,

The financial statements for Marketing Concepts Group Inc. at May 31, 2011 and June 31, 2011 are almost done as are the statements for Life Mark as at June 30, 2011. My client is a bit annoyed that it took over 40 days after closing for your client to provide the information and is now asking we have things completed.

The May 31st statements for MCG are the year-end statements and will be used to true up the price, along with the December 31, 2010 Life Mark statements. This true up should result in an increase in price by about $300,000 and my client is assuming that it will get paid on the same basis as the original price. That is 60% now and the balance will get added to the Note.

The June 30th statements for both companies will be used to measure the payables to see if they are over $85,000. Although my client is not done reviewing them yet, he estimates that the total payables will be very close to that figure, although he has found a few significant errors and double accounting since the deal has closed. This might be a result of your client not being an accountant himself and thereby not supervising the accountant close enough.

[110] On September 14, 2011, Mr. Wright wrote to Mr. Zabel and Mr. Brechin to advise that Mr. Zabel was in breach of the agreement because he had not delivered the Statement within 60 days of the closing date. Mr. Brechin responded by letter and reminded Mr. Wright that if Mr. Cott had provided the requested data in a timely way, Mr. Zabel would have already delivered the Statement.

[111] On October 4, 2011, Mr. Zabel emailed Mr. Cott and provided the final May 31, 2011, MCG financial statements, a lead sheet summary showing the breakdown of the revenue, and the Statement. According to the Statement, the total purchase price was $5,607,181, or $307,181 more than the estimated purchase price in the agreement. After discussions between them, the parties agreed to extend the time for Mr. Cott to respond to the Statement to November 3, 2011.

[112] On October 17, 2011, Mr. Brechin told Mr. Zabel that Mr. Wright had suggested that Mr. Zabel meet with Mr. Cott to discuss a few outstanding issues, including some accounting questions. Mr. Zabel indicated that he would agree to meet with Mr. Cott, but felt that Mr. Cott was just attempting to delay matters:

The recalculation of the purchase price is very straight forward. The agreement states that the Financial Statements will be prepared in the same manner as they always have and the May 31st statements are just an up to date version of the numbers used. Do not forget that we used statements for MCG that were a year old. My concern is that this is just an attempt to either delay this whole process or to, in fact try to renegotiate this deal after it is done.

My other concern with Kevin is that he says one thing and does another. So even if we meet he will do something entirely different than what he has agreed on which seems to be his pattern. If he has any "accounting question" he should submit them and get them dealt with. I doubt very much that Kevin since he knows nothing about accounting principles and practises.

[113] On October 21, 2011, Mr. Zabel and Mr. Cott agreed to meet on the afternoon of November 7, 2011. On November 2, 2011, Mr. Cott delivered a notice of objection to the Statement. He indicated that his figures showed that the adjusted purchase price should only be $4,371,000. Mr. Cott wrote:

We hope that at our meeting of Monday November 7, we will be able to address these issues with you. It is our intention to deal with all the issues in the most amicable way possible. We will do everything on our part to demonstrate our findings and it is our goal to resolve these issues when we meet. We are aware of the costs, and time, associated with arbitration, and hope that through dialogue we will be able to avoid this route.

As per the purchase and sale agreement, QFS is to pay an amount equal to five times the net service fees plus the three times the net investment trailers for the 12 month period ending on May 31/2011 for Marketing Concepts Group and Dec 31/2010 for Life Mark Insurance Agencies. Net Service Fees and net investment trailers are both clearly defined within the agreement itself.

Our findings show that the adjusted purchase price should be $4,371,000 Attached to this letter you will find a detailed account of our findings. This will be the basis for our discussion when we meet, along with the other outstanding issues. The discrepancies are significant.

This is a major concern to us (and I am certain to you) and is based on the information that was provided to us by you, your accountants and the insurance carriers.

It is vital to both of us that we meet face to face to review the numbers carefully. It is our sincerest intention to resolve this issue in the most amicable manner possible.

[114] Thirty minutes later, Mr. Zabel cancelled the November 7, 2011 meeting, saying there was “no point in meeting.” Mr. Cott responded and urged Mr. Zabel to attend the meeting so that they could work through Mr. Zabel’s concerns with the notice of objection. Mr. Brechin also recommended that Mr. Zabel go ahead with the meeting. Mr. Zabel advised Mr. Brechin that he “had no intention of meeting with this idiot” at this time and explained that he disagreed with how Mr. Cott had used the company’s financial statements, that the material Mr. Cott had sent to him was “total garbage,” and that he had not provided the supporting material that lay behind his calculations. After reviewing Mr. Cott’s letter, Mr. Brechin again recommended that Mr. Zabel meet with Mr. Cott to educate him on the problems with his calculation of the purchase price.

[115] On November 4, 2011, Mr. Zabel wrote to Mr. Brechin that he had “discovered a serious conflict” in the provisions of the agreement. This is the critical issue that prompted this lawsuit. Mr. Zabel wrote:

Further to the letter from Kevin concerning adjustments to the purchase price. I have discovered a serious conflict in the agreement between the body of the agreement and the definitions. The body of the agreement in section 3 outlines how the purchase price is to be calculated and clearly refers to Financial Statements prepared in accordance with GAAP and on a consistent basis. The definition of Net Service Fees, on the other hand, is basically a cash basis definition and does not constitute GAAP, nor is it consistent with how the statements were prepared in previous years.

If the definition is valid then the financial statements are a waste of time and if the body of the agreement is the determining factor then the stuff Kevin sent is a waste of time.

The definition is basically a cash basis and Kevin would have to reconcile every transaction booked during the year and reconcile the cash which he has not done in the material he sent.

It seems to me that the meeting of the minds was reached on a financial statement basis and the preliminary price was based on the previous financial statements and Kevin's due diligence of them. As well his outside accountant also reviewed them, so if they are not relevant why did we all bother.

Let me know your thoughts.

[116] Mr. Brechin responded to Mr. Zabel about ten minutes later. He wrote:

not that this matters, but how would a purchase price for a transaction like this normally be arrived at; maybe there is no norm

I think your approach is sound; however is there anything else you can dig up to support your position; ie in the negotiation when the original price was arrived at I assume it was based on something? that both parties were in agreement with; and if this is so, and there is now a conflict, I think the calculation consistent with how the balance due on closing was arrived at would be where a judge would look to determine which position was reasonable;

I don't know if this helps at all; but certainly there must have been a lot of exchange leading up to the agreement of purchase and sale; you both arrived at the original purchase price based on something;

[117] On November 6, 2011, Mr. Zabel wrote to Mr. Cott and set out his position on how the purchase price should be calculated. He wrote:

The purchase agreement we both signed used the May 31, 2010 Marketing Concepts Group Inc. and the December 31, 2010 Life Mark Insurance Agencies financial statements as a basis for setting the price. The estimated price in the agreement is the total of the gross service fees from those financial statements, less any service fees paid out plus the Pitch Wolle service fees because they were not yet reflected in those statements. Any and all supporting schedules, such as service fees by supplier company provided to you reconciled back to those statements. The preliminary price is a direct reflection of this numbers and we had a meeting of the minds using the numbers from those statements.

The agreement states that those preliminary numbers will be trued up based on May 31, 2011 financial statements for Marketing Concepts Group Inc. prepared " in accordance with GAAP in a manner consistent with past practices." The statements that were prepared and forwarded to you meet that criteria. That is they are prepared in accordance with GAAP in a manner consistent with past practices.

The material you sent me last week seems to be an incomplete attempt to convert these statements to a cash basis. I assume you or whoever prepared them is attempting to follow the definition of Net Service Fees contained in the definition section of our agreement.

This definition conflicts with section 3.2 in the agreement because cash basis financial statements are not "in accordance with GAAP", nor are they "prepared in a manner consistent with past practices". As you know cash basis statements are not acceptable for any purpose that attempts to report on the operations of the company, and no company that I know prepares their statements on that basis.

Since the original purchase price was set in reference to GAAP statements and our agreement specifies the price to be set in reference to a later version of GAAP statements the definition in the definitions section does not make sense. Any objections you have to the financial statements presented needs to be within the framework of GAAP statements prepared in a consistent manner with past practises. The material you sent me last week does not address any issues related to the GAAP statements.

Please let me have your comments as soon as possible.

[118] Mr. Brechin and Mr. Zabel continued to exchange emails about Mr. Cott’s position and how to resolve the dispute. Mr. Brechin continued to recommend direct negotiations. He also continued to advise that Mr. Zabel’s interpretation of the agreement would be preferred by a court. For example, on November 9, 2011, Mr. Brechin advised Mr. Zabel that “I think looking at the agreement as a whole that your interpretation would be preferred” and that “my [law] partner prefers your interpretation and he has a good business sense.” Mr. Brechin also flagged that “I don’t know what was exchanged between accountants and yourselves when the offer was originally being negotiated.”

[119] By November 14, 2011, Mr. Zabel had concluded that he and Mr. Cott were not going to be able to reach a negotiated resolution and that litigation would be necessary. Although Mr. Brechin thought that a meeting remained advisable, Mr. Zabel did not see the point in such a meeting and asked Mr. Brechin if he had any recommendations on a business litigator.

[120] On November 17, 2011, Mr. Brechin wrote to Mr. Zabel and explained the independent accountant process contained in the agreement, which would be used to resolve the dispute. He also provided his views on how an independent adjudicator might interpret the purchase price provisions. Mr. Brechin continued to urge Mr. Zabel to meet with his accountants and then with Mr. Cott, although he acknowledged that it may be necessary to retain a business litigator after Mr. Zabel met with his accountant.

[121] On November 21, 2011, Mr. Zabel wrote to Mr. Cott and suggested that they meet to see if they could resolve the interpretation issue in the agreement. He noted that because he had negotiated the language directly with Mr. Cott, the meeting should be just between the two of them. He wrote:

My suggestion is that you and I meet and go through the wording of the agreement to see if we can agree on whether we should be using the financial statements presented to you or whether the definition of Net Service fees in the definition section of the agreement should apply in training up the price. Since you and I negotiated the agreement and it is our agreement I think the meeting should be just you and I. Depending on the outcome, the next step would be to have a second meeting to discuss any proposed adjustments.

At the present time, it is difficult if not impossible to discuss potential adjustments without first agreeing on the basis of that discussion.

[122] Mr. Cott responded to Mr. Zabel on November 26, 2011. He wrote,

We believe the agreement is clear in both the formula to be used and the definition of net service fees and net trailers. As I mentioned in a previous email to you, we come up with the same purchase price by applying the necessary changes to your truing up statement or by simply using the formula of the agreement.

[123] Over the next few days, Mr. Zabel asked Mr. Cott to provide background to the calculations. Mr. Cott responded that it appeared an agreement would not be possible, so it would be necessary to invoke the dispute resolution provisions of the agreement. He repeated his offer to provide all of the back-up for the notice of objection. He stated:

Klaus. I have repeatedly offered to sit down with you to go over the information we received as the basis for our revised purchase price. I am still very very willing to do that. What I am not prepared to do at this time is to renegotiate the agreement itself. We agreed to a formula with clear definitions and we are prepared to pay the appropriate price based on that formula, higher or lower than what was estimated. If you would take the time to sit down with us I feel confident we can get this resolved. But I have asked you to do this numerous times which you have repeatedly declined. Instead you insist on wanting to discuss how the price is to be determined. We have all of the back up information for our calculations and will share all of it with you of course. If you would like to meet we are still very willing to do so.

[124] Mr. Cott and Mr. Zabel eventually agreed to meet on December 12, 2011.

[125] On November 28, 2011, Mr. Zabel and Mr. Brechin exchanged further email messages. Mr. Zabel observed that he felt that Mr. Cott was not dealing with him in good faith but that Mr. Cott “clearly wants to get a deal.” Mr. Zabel stated that he did not see the point in meeting with Mr. Cott because he just “wants me to get frustrated enough to agree to a lower price.” Mr. Zabel noted that he had been reviewing the various drafts of the agreement and noticed that the definition of Net Service Fees had changed between the first draft (which Mr. Brechin did not receive) and the second or third draft. Mr. Zabel also stated that he had “retained a lawyer who specializes in the insurance industry and she is reviewing the agreement to see what she thinks it says.” This lawyer was almost certainly Jill McCutcheon of Borden Ladner Gervais LLP.[^2]

[126] On November 30, 2011, Mr. Brechin and Mr. Zabel exchanged email messages. Mr. Brechin continued to suggest that Mr. Zabel should meet with Mr. Cott both to try and persuade Mr. Cott that his interpretation of the agreement was incorrect and that his objection to the Statement was not supported by the relevant documents, and to obtain further information. Mr. Zabel responded that “I have more information than you might think. For instance I have a detailed trial balance that lists every single transaction booked last year and ties directly to the financial statements.”

[127] On January 13, 2012, Mr. Brechin delivered his reporting letter on the transaction and his account for services rendered. Mr. Brechin charged $50,000, plus HST. Mr. Zabel paid this account.

[128] On February 2, 2012, Mr. Wright sent a statement of accounts setting out QFS’s calculation of the Net Service Fees and the Net Investment Trailers for the relevant periods. Mr. Wright explained that the purchaser sought a reduction of $254,401.55 in respect of deferred revenue arising from the sale of blocks of business between 2008 and 2011, a reduction of $192,059.40, arising from the accrual of Net Service Fees from RBC, and a further reduction of $80,477.41. Mr Wright described these three price adjustments, totalling $526,938.36, as “irrefutable.” He also listed additional substantiated adjustments of $709,296.

[129] Mr. Wright explained that even if the starting point was $5,607,181, which was the price in the Statement delivered by Mr. Zabel, the purchase price would drop to $4,370,947 once the adjustments described in his letter were applied. Mr. Wright then stated that the purchaser was prepared to resolve the dispute and fix the purchase price at $4,800,000. Mr. Wright advised that if the offer was not accepted by 5:00 p.m. on February 3, 2012, “we have advised our client to commence proceedings against the vendors for breach of contract and a reference to determine [the purchase price]”.

[130] On February 2, 2012, Mr. Brechin wrote to Mr. Wright to advise him that the purchasers were in default of their obligations under the promissory note.

[131] On February 3, 2012, Mr. Zabel wrote to Mr. Brechin and advised that he had met with another lawyer today to discuss “this whole situation.” Mr. Zabel stated, “[i]n any case I am not willing to settle for anything less than the original price and only if there are other considerations.” At trial, Mr. Zabel testified that he did not think that the lawyer he referred to in this message was either Ms. McCutcheon or Mr. DiPaolo at BLG, but he could not remember with whom he spoke.

[132] On February 8, 2012, Mr. Zabel had a conference call with Mr. DiPaolo. During his testimony, Mr. Di Paolo stated that during this call he raised with Mr. Zabel the possibility of a claim against Mr. Brechin arising out of the transaction. Subsequent to the meeting, Mr. DiPaolo left a message for Mr. Wright to advise him that he had been retained to handle the litigation arising from the transaction.

[133] On February 27, 2012, Mr. Wright wrote to the accounting firm MNP LLP, who would act as the independent accountant to determine the purchase price.

[134] As the dispute resolution process commenced, the parties continued to try and resolve the issue of the purchase price. On March 19, 2012, QFS offered to resolve the matter for a purchase price of $4,700,000. On April 4, 2012, Mr. DiPaolo sent a counter offer from Mr. Zabel to settle for $5,300,000.

[135] On September 12, 2012, Mr. Cott retained new litigation counsel. In an exchange between Mr. DiPaolo and Mr. Zabel discussing this development, Mr. Zabel indicated that he would be prepared to settle for $5,400,000. This was $100,000 more than the offer to settle that he made in April.

[136] On October 29, 2012, litigation counsel for Mr. Cott wrote a detailed letter to Mr. DiPaolo setting out Mr. Cott’s concerns with respect to the Statement delivered by Mr. Zabel. Counsel advised that QFS’s financial advisors suggest that the adjusted purchase price could be around $4.0 million, not $4.371 million, as set out in the objection. QFS raised a number of concerns, including that the Statement:

a. included deferred revenue of $50,880.31, which related to amounts actually received from 2008 to 2011, but not recognized as income during those years. This deferred revenue was then subjected to the five times multiplier, which increased the purchase price by approximately $254,406;

b. included $34,411 of accelerated accruals from RBC/Westbury, which represented the inclusion of a fifth quarter in the fiscal year;

c. included “temporary account revenue entries,” which should not be counted as trailer fees for the calculation of the purchase price;

d. overstated “Life Service Fees” because QFS obtained from the insurers the fees remitted to the corporations and Mr. Zabel has not identified any of the additional codes that may be missing from the analysis; and

e. incorrectly treated ManuLife Service fees both by including $57,408.31 in respect of amounts already accrued (which would then be subject to the five times multiple) and that the initial amount included fees already sold, which was subjected to a five-times multiple. QFS suggested that this incorrectly amounted to a 25-times multiple on certain fees.

[137] In a separate letter that day, litigation counsel for QFS offered to settle the dispute for a purchase price of $4.4 million.

[138] Throughout November 2012, the parties attempted to resolve the matter and to work out a document sharing protocol. Ultimately, the parties agreed to arbitrate a series of questions that would guide the work of the independent accountant. The parties selected Cliff Lax to act as arbitrator and appeared before him on October 22, 2013.

[139] On October 27, 2013, Mr. Zabel suggested to Mr. Cott that the parties agree to “split the difference.” Mr. Cott responded by asking Mr. Zabel to clarify what he understood the parties’ positions to be so that he could assess any possible response. There is no documentary evidence that Mr. Zabel ever responded to Mr. Cott. Mr. Zabel testified that he believed he answered Mr. Cott.

[140] Mr. Lax released his arbitral award on November 1, 2013. It is fair to say that Mr. Lax favoured QFS’s interpretation of the agreement. He found that the objection provision should be construed broadly and that the definition of Net Service Fees and Net Investment Trailers were clear and determinative. The two key questions posed in the arbitration were questions #3 and #5, which Mr. Lax answered as follows:

Q.3 Is the objection period relevant to the representations and warranties in the Share Purchase Agreement and the continuing obligation of the Vendors in accordance with the Agreement to indemnify the Purchaser in respect of breaches of representations and warranties?

The SPA (s.3.2(a) and (b)) provides not only for the Vendors' statement of the proposed purchase price but also for the possible objection by the Purchaser thereto. This is more or less what occurred in this case.

Strictly speaking, the Vendors' calculation of the purchase price ("the Statement") was to be prepared by their accountants on a consolidated basis as at the closing date in accordance with GAAP in a manner consistent with past practices. This Statement was to include a detailed calculation of the purchase price based on the formula contained in s.3.1(a) of the SPA. The Statement which the Vendors were to have prepared by their accountants was simply intended to provide a detailed calculation, with necessary back up, justifying the purchase price. The Statement in s.3.2 was not a reference to the company's financial statements, even though the Statement was to be prepared in accordance to GAAP and consistent with past practices. The financial statements might well have been accurate for other purposes but would not necessarily provide all the needed support of the proposed purchase price. The inclusion of a reference in s.3.2(a) to "GAAP and past practices" neither adds to nor detracts from the clarity of the formula for calculating the purchase price contained in s.3.1(a).

The Statement was prepared by Klaus Zabel and not by his accountants, however, the failure to involve the accountants in the preparation of this Statement, is immaterial to my award. The Purchaser objected to Mr. Zabel's calculated purchase price of approximately $5.6 million. By the Purchaser's calculation, the purchase price for the shares was allegedly about $4.3 million. The Purchaser's objection and its calculation of the purchase price was not based upon the financial statements of the Constituent Corporations nor whether such financial statements were or were not consistent with GAAP or past practices. Its objection was based simply upon a tracking of the two revenue streams, based upon the books and records of the corporation and the records of the insurance companies which paid such fees. In other words, the Purchaser attempted to isolate the components of the two income streams that it was acquiring. Such an objection is precisely what was contemplated in s.3.2(a) of the SPA. Thus it will be left to the Independent Accountant to establish the final purchase price based upon the books and records of the Constituent Corporations or from information derived from the insurance companies that paid the Service Fees or the Investment Trailers.

Q.5 In calculating the Net Service Fees and Net Investment Trailers as defined in s.1.1, is the Purchaser entitled to deduct Service Fees or Investment Trailers sold or for which Notice of Sale had been received from an insurance carrier during the twelve month period ending on the Closing Date regardless of when the funds were received?

The definition of Net Service Fees and Net Investment Trailers found in s. 1.1 of the SPA specifically excludes any service fees sold (or any trailers sold) or for which Notice of Sale has been received during the twelve month period ending on the closing date. While I sympathize with the Vendors' submission that a book of business for which Notice of Sale was received but which transaction closed after the closing date, would unfairly accrue to the benefit of the Purchaser who would receive the proceeds of sale while at the same time being entitled to deduct the fees or trailers associated with the transferred asset, from the purchase price calculation. In short, viewed in isolation the Purchaser would be recovering payment for an asset which cost it nothing.

However unfair it might seem to allow the Purchaser to keep the sale proceeds and also reduce the purchase price, the definition of both Net Service Fees and Net Investment Trailers is clear and unambiguous. The entire answer is that the result complained of is what the parties agreed to. The Vendors cannot be surprised by the result. If a contextual analysis is required, what the Vendor appears to have lost, is more than compensated for by the multipliers is the purchase price formula.

[141] On December 12, 2013, Mr. Zabel had a heart attack and was hospitalized for approximately five days.

[142] On January 20, 2014, Mr. Lax released his costs award. He awarded the purchaser approximately 70% of the costs it sought, including all of the arbitrator’s fees. The parties agree that this totalled $58,160.55.

[143] On January 30, 2014, the plaintiffs issued a notice of action in this proceeding, and they issued their statement of claim on March 3, 2014.

[144] On March 24, 2014, Mr. Cott wrote to Mr. Zabel and offered to settle the dispute on the basis of a purchase price of $4.2 million. The offer had an economic value of approximately of $4.4 million because QFS would agree to waive the arbitrator’s costs award and its own legal fees to date of approximately $200,000.

[145] On May 8, 2014, the QFS and the plaintiffs settled their dispute. The parties agreed that the purchase price would be $4.2 million, which also satisfied the arbitrators’ costs awards in favour of QFS.

Limitations Act

[146] The defendants submit that the plaintiffs’ claims were discovered or discoverable more than two years before they commenced this proceeding. The action, therefore, is barred by the provisions of the Limitations Act, 2002. Despite the very able submissions of Ms. Glass, I find that the action is not statute barred.

[147] In Ontario, most actions must be started on or before the second anniversary of the day on which the claim was discovered: Limitations Act, s. 4. The plaintiffs issued their notice of action on January 30, 2014. Working backwards, the plaintiffs missed the limitation period if they discovered their claim before January 30, 2012.

[148] Section 5 of the Limitations Act explains when a claim is discovered:

5(1) A claim is discovered on the earlier of,

(a) the day on which the person with the claim first knew,

(i) that the injury, loss or damage had occurred,

(ii) that the injury, loss or damage was caused by or contributed to by an act or omission,

(iii) that the act or omission was that of the person against whom the claim is made, and

(iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and

(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).

(2) A person with a claim shall be presumed to have known of the matters referred to in clause (1) (a) on the day the act or omission on which the claim is based took place, unless the contrary is proved.

[149] Subject to the provision of s. 5(1)(a)(iv), a claim is discovered on the earlier of the date the plaintiffs subjectively knew or ought to have known about the claim.[^3] I agree with the plaintiffs that this includes the knowledge that a proceeding is a legally appropriate means to seek a remedy.[^4]

[150] The first step is to assess when the plaintiffs subjectively knew of the facts underlying their claim against the defendants. Pursuant to s. 5(2), the plaintiffs are presumed to know of these matters on the date the act or omission on which the claim is based took place, unless they prove otherwise. In this case, I find that the date on which the act or omission took place is no later than the date the parties signed the agreement in its final form: June 2, 2011. Unless the plaintiffs are able to prove the contrary, because of the statutory presumption in s. 5(2), they are deemed to have discovered the claim on June 2, 2011, in which case they did not commence this action within the two-year limitation period.

[151] Mr. Zabel testified that he first realized that he might have a claim against Mr. Brechin after the arbitration with Mr. Lax. The arbitration took place on October 22, 2013, and Mr. Lax released his decision on November 1, 2013. He testified that he never discussed a potential claim against Mr. Brechin with Ms. McCutcheon, and that he did not discuss that possibility with Mr. Di Paolo in February 2012.

[152] Mr. Di Paolo, however, testified that he told Mr. Zabel that he might have a claim against Mr. Brechin at their initial meeting on February 8, 2012. Mr. Di Paolo testified that he had concerns about the breadth of the objection provision, asked Mr. Zabel who acted for him during the transaction, and told Mr. Zabel that, depending on how the dispute played out, he might have a claim against Mr. Brechin. Mr. Di Paolo testified that Mr. Zabel was surprised by that news, and that Mr. Zabel told him that, at least at that time, he had no desire to pursue a claim against Mr. Brechin. Mr. Di Paolo testified that Mr. Zabel agreed that Mr. Di Paolo should diarize any applicable limitation periods to preserve possible claims, but should take no further steps against Mr. Brechin. Mr. Di Paolo noted that he was not retained by Mr. Zabel to give him advice about the potential claim at that time.

[153] Mr. Di Paolo’s evidence is detailed and consistent with when he issued the notice of action on behalf of Mr. Zabel. Mr. Di Paolo was meeting with a new client about a dispute arising from an agreement for the sale of a business. The dispute described to him turned on an apparent inconsistency between the definitions section of the agreement, the pricing mechanism that incorporated those definitions, and the scope of the clause that set out the method by which any disputes over price would be resolved. I find that it is more likely than not that an experienced business litigator like Mr. Di Paolo would consider potential claims against the lawyer that assisted his client during the negotiation of the agreement.

[154] While Mr. Zabel may not have decided to proceed with a claim against Mr. Brechin until after the arbitration, I do not accept Mr. Zabel’s evidence that Mr. Di Paolo did not discuss the matter with him on February 8, 2012. Instead, I accept Mr. Di Paolo’s evidence that he told Mr. Zabel that he had a potential claim against Mr. Brechin on February 8, 2012.

[155] I also accept Mr. Di Paolo’s evidence that Mr. Zabel seemed surprised when he raised the possibility of a claim against Mr. Brechin. If Mr. Zabel knew that he had a potential claim against Mr. Brechin before that meeting, I would have expected him to raise that issue with his new litigation lawyer or, at a minimum, acknowledge to Mr. Di Paolo that he had been thinking about that issue. Mr. Zabel’s expression of surprise is good evidence that he had not subjectively discovered his claim before that day.

[156] I find that Mr. Zabel subjectively knew that he had a potential claim against Mr. Brechin on and not before February 8, 2012. On this measure, Mr. Zabel commenced his claim within two years of this date, and the action is not statute barred.

[157] The next question is when the plaintiffs ought to have known or had the means of knowing about their potential claim. The limitation period will begin to run when reasonable persons with the abilities and in the circumstances of the plaintiffs should have acquired facts to become knowledgeable about her claim.[^5]

[158] The defendants submit that in October or November 2011, Mr. Zabel discovered the underlying facts that should have permitted a reasonable person to become knowledgeable about the claim. They emphasize that on November 4, 2011, Mr. Zabel told Mr. Brechin that he had “discovered a serious conflict in the agreement between the body of the agreement and the definitions.” Moreover, the defendants point out that Mr. Zabel highlighted the precise issue underpinning the subsequent purchase price dispute. This was the very issue Mr. Zabel lost in the arbitration before Mr. Lax. The defendants submit that the applicable limitation period does not depend on knowledge of the law or on obtaining a legal opinion, it turns on when a reasonable person knew or ought to have known of the material facts underlying a cause of action.[^6] I do not accept the defendants’ submissions that the plaintiffs ought to have known about the claim in November 2011 for four reasons.

[159] First, on November 4, 2011, Mr. Zabel still believed that his interpretation of the agreement was correct and that the agreement provided him the benefits he believed that he had obtained. Relatedly, and importantly, Mr. Brechin agreed with Mr. Zabel’s interpretation and repeatedly told him so:

a. November 4, 2011, “I think your approach is sound”

b. November 5, 2011, “I think your position based on the statements makes the most sense.”

c. November 9, 2011, “If push comes to shove I think you have the better argument but you would rather not be in that situation”

d. November 9, 2011, “I think looking at the agreement as a whole that your interpretation would be preferred” and “my law partner prefers your interpretation and he has a good business sense.”

[160] Second, Mr. Brechin never suggested to Mr. Zabel that he might have a claim against Mr. Brechin for his role in the agreement or that Mr. Zabel should obtain independent legal advice on that point.

[161] Third, Mr. Brechin testified that he did not believe that he did anything wrong and never thought that there was a potential claim against him. If Mr. Brechin, a corporate lawyer who knew that his client had “discovered a serious conflict in the agreement between the body of the agreement and the definitions” did not recognize that he may have committed an error, it is difficult for me to see how a reasonable person in the circumstances of the plaintiffs should have reached that conclusion.

[162] I find that the plaintiffs continued to rely on the defendants’ professional skill and expertise throughout the fall of 2011. The plaintiffs reasonably believed that Mr. Brechin was protecting their legal interests and that if other steps were required to protect their interests, including considering a claim against the defendants, Mr. Brechin would have so advised them.

[163] Mr. Brechin repeatedly and consistently advised Mr. Zabel to try to resolve the dispute through direct negotiations with Mr. Cott. Mr. Brechin advised Mr. Zabel to collect information, to meet with Mr. Cott, and to persuade Mr. Cott that his interpretation of the agreement was incorrect and that his objection to the Statement was not supported by the relevant documents. If this approach failed, Mr. Brechin advised Mr. Zabel that he would have to resort either to the process before the independent accountant or to arbitration. In my view, Mr. Brechin advised Mr. Zabel that negotiation and possibly the independent accountant or arbitration were the methods by which Mr. Zabel could obtain the benefits that he thought he had under the agreement. I do not quarrel with this advice, but at no time did Mr. Brechin advise Mr. Zabel that the language in the agreement did not mean what Mr. Zabel thought it meant and that, therefore, he might have recourse against Mr. Brechin. Mr. Zabel was entitled to rely on Mr. Brechin’s advice without triggering the running of the limitation period.[^7]

[164] I accept that Mr. Brechin was not involved in any attempts to repair any drafting deficiency in the agreement, but I do not accept the defendants’ submission that, despite his advice, the plaintiffs should have figured out for themselves that they had a claim against the very lawyer who was advising them.[^8] As Epstein J.A. stated:

To tell the appellants that they made the mistake of relying on their own lawyers and then allow these lawyers to use this erroneous reliance to support their position that the action was commenced out of time would reward a particularly pernicious violation of solicitor-client trust.[^9]

[165] I find that a reasonable person with the abilities of the plaintiffs, in the circumstances of this case, and in light of the advice from their lawyer, would not have known that they had a potential claim against the defendants until they obtained advice from a dispassionate lawyer viewing the agreement with fresh eyes and in the context of the dispute with QFS. The limitation period only started running on February 8, 2012, after Mr. Di Paolo told Mr. Zabel that he might have a claim against Mr. Brechin. The notice of action was issued less than two years after that date.

[166] Fourth, I note that in the amended statement of defence, the defendants plead that the action was premature because the decision in the arbitration remained outstanding. Even if I treat this pleading as being made in the alternative, it is difficult to reconcile that pleading with the submission that the plaintiffs ought to have known that suing the defendants was an appropriate means to seek to remedy this loss before the arbitration was completed.[^10]

[167] I find that the plaintiffs’ action is not barred by the provisions of the Limitations Act.

Credibility and reliability

[168] There are a several significant factual disputes in this case. Resolving those disputes will require me to assess the reliability and credibility of Mr. Zabel and Mr. Brechin, the two main fact witnesses at trial.

[169] It is important to recall that reliability and credibility are different. Credibility has to do with the honesty, sincerity, or veracity of a witness. Reliability describes the other factors that can influence the accuracy of testimony, such as the witness’s ability to observe, recall, and recount events in issue.[^11]

[170] Witnesses can sincerely believe their evidence is true, but that does not mean that what they are saying is reliable. Memory is fallible and becomes increasingly frail over time. Even an apparently convincing, confident, and credible witness may not be an accurate or reliable reporter. There is significant risk in placing too much emphasis on demeanour or the confidence with which a witness speaks where there are contradictions and inconsistencies inherent in their evidence or where that testimony is inconsistent with contemporaneous records.[^12]

[171] One of the leading decisions on assessing credibility is Faryna v. Chorny, where the court explained that:

The credibility of interested witnesses, particularly in cases of conflict of evidence, cannot be gauged solely by the test of whether the personal demeanour of the particular witness carried conviction of the truth. The test must reasonably subject his story to an examination of its consistency with the probabilities that surround the currently existing conditions. In short, the real test of the truth of the story of a witness in such a case must be its harmony with the preponderance of the probabilities which a practical and informed person would readily recognize as reasonable in that place and in those conditions.[^13]

[172] Taking into account my assessment of reliability and credibility, I will assess the evidence before me according to many factors including:

a. if the evidence makes sense by being internally consistent, logical or plausible;

b. if there are inconsistencies or weaknesses in the evidence of the witness such as internal inconsistencies, prior inconsistent statements, or inconsistencies with the evidence if other witnesses;

c. if there is independent evidence to confirm or contradict the witness’s evidence, or a lack of such evidence;

d. if the witness’s demeanour, including their sincerity and use of language, although this must be considered with caution; and

e. if the witness, particularly one that is a party in a case, may have a motive to fabricate.[^14]

Mr. Brechin

[173] I found Mr. Brechin to be a careful and reliable witness.

[174] His recollection was meaningfully challenged on only one point. In his examination in chief, he stated that he believed that the first time he heard from Mr. Zabel about the possible sale of a business was in February 2011. He was not sure how he received this information. He testified as follows:

Q. When did you first hear of the possible sale of the businesses in issue in this proceeding?

A. I believe sometime in February and I'm not certain if I actually spoke to them or if he just left an email or a voicemail, rather. I'm always on voicemail, so I actually think he may have just left a voicemail saying that he was going to be selling his business. There was nothing more than that.

[175] Mr. Brechin testified that his primary mode of communication with Mr. Zabel on this file was “constant emails.” Mr. Brechin indicated that he exchanged over 400 emails with Mr. Zabel over the six weeks of this transaction, but recalled only two meetings (to sign the deal agreement and an amendment), and two phone calls towards the closing date of the transaction.

[176] On cross-examination, he confirmed that he did not recall if the initial contact with Mr. Zabel was a phone call or a voicemail. Counsel then reminded Mr. Brechin that on discovery he had said it was a very brief, very preliminary discussion by phone call. Mr. Brechin acknowledged that he could no longer recall whether it was a brief telephone call or a voicemail and that he did not mention the possibility of a voicemail during his discovery. Mr. Brechin stated only that it was a short message or conversation.

[177] Although not much turns on this discrepancy, I think it is more likely that Mr. Zabel and Mr. Brechin had a brief telephone call in February 2011. Mr. Brechin’s evidence on discovery was closer in time to the events in question. In my view, Mr. Brechin was not being evasive on this point. He candidly acknowledged the limits of his memory in 2022 about what, at the time, was a short exchange of information with Mr. Zabel.

[178] On occasion, Mr. Brechin’s training as a lawyer influenced his manner of giving evidence. It is common for lawyers to lapse into argument instead of simply answering questions put to them.[^15] To his credit, Mr. Brechin slipped into this habit far less often than many lawyer witnesses.

[179] Mr. Brechin obviously had had an interest in the outcome of the litigation. He held firm views about Mr. Zabel’s responsibility for the negotiation and structure of the agreement, but that did not undermine either his credibility or reliability. On balance, I found Mr. Brechin to be a credible and reliable witness.

Mr. Zabel

[180] I believe that Mr. Zabel was trying to provide accurate and truthful evidence. I find, however, that some of his evidence was unreliable in several key areas.

Mr. Zabel’s stated intention to retire after the sale of the business

[181] Mr. Zabel testified that after his initial meeting with Mr. Cott, he called Mr. Brechin to discuss his intention to sell the companies and that he explained his intention to retire, with no continuing role or responsibilities after closing. I find that Mr. Zabel’s recollection on this point is not reliable because it is inconsistent with the contemporaneous documents and his actions at that time.

[182] First, sections 9.2(g) and (i) of the first draft of the agreement that Mr. Cott provided to Mr. Zabel required Mr. Zabel to remain an officer of Life Mark, to sign an employment agreement, and enter into a consulting agreement with QFS. At no time did Mr. Zabel object to the inclusion of these provisions, which is inconsistent with his recollection that he had a firm intention to retire with no continuing role or responsibility and that he told this to Mr. Brechin.

[183] Second, when Mr. Zabel provided his comments to Mr. Cott on the first draft of the agreement, he noted that he would not agree to a broad non-solicitation agreement because “I do not want it to limit me to not being able to work in the insurance industry at all.” I find that Mr. Zabel’s desire to limit the scope of the non-solicitation agreement, while perfectly understandable, is not consistent with his recollection that he wanted to retire and told that to Mr. Brechin.

[184] Third, on August 17, 2011, after the deal closed, Mr. Zabel wrote to Mr. Brechin and complained that Mr. Cott was not providing him with correspondence related to his personal clients that he continued to serve. He stated:

Likewise on the issue of client correspondence. Marlene and I have a number of personal clients. On all of these clients, the companies send correspondence and other notices to us care of the MGA, MOC in this case, as they do for a number of other brokers, QFS is not passing this correspondence along and that is a big issue from an E&O point of view and also from an ownership point of view, It seems that Kevin's attitude is that all of this is his. As the broker of record for these clients Marlene and I have some serious potential liability if we do not react to issues and changes, which is impossible if we are not notified on a timely basis.

[185] Continuing to service a roster of personal clients after selling the business seems fundamentally inconsistent with an expressed intention to retire.

[186] For these reasons, I do not accept that Mr. Zabel’s recollection that he told Mr. Brechin that he intended to retire and wanted a deal with no on-going responsibility is accurate.

Mr. Zabel’s recollection that he sent Mr. Brechin the first draft agreement is unreliable

[187] In the plaintiffs’ written closing argument, they submitted that I should find that Mr. Zabel gave the first draft of the agreement to Mr. Brechin.

[188] In their statement of claim, dated March 3, 2014, the plaintiffs pleaded that “The first draft of the Agreement was prepared by QFS and its counsel and provided to the Zabels on or about April 1, 2011. The Zabels in turn provided it to Mr. Brechin for his review and comment.” The plaintiffs also pleaded that “On April 5 and 13, 2011, Klaus provided QFS with his initial comments on the First Draft Agreement…Klaus had discussed the first draft of the Agreement with Mr. Brechin, as well as Klaus' comments thereon. Mr. Brechin was aware, or should have been aware of the import of the terms ‘Net Service Fees’ and ‘Net Investment Trailers’ given their prominence in the calculation of the Formula.”

[189] On August 8, 2016, Mr. Zabel swore an affidavit for use in the arbitration with Mr. Lax. During his evidence at trial, Mr. Zabel reviewed the affidavit and confirmed that it remained accurate. In the affidavit, Mr. Zabel stated that he was certain that Mr. Brechin had a copy of the first draft of the agreement:

51. I am advised that [my lawyer] has not been able to locate a document by which I delivered the initial SPA to Mr. Brechin

52. On Monday August 1, 2016, I conducted a further search of my emails and I was not able to locate such a document.

53. That being said, I am certain that Mr. Brechin had a copy of the initial SPA. It may have been delivered by QFS’ counsel and/or by myself in person.

[190] In his evidence in chief, Mr. Zabel stated that “I can’t remember whether I gave him a copy of this agreement.” On cross-examination, he acknowledged that Mr. Brechin would testify that he did not receive a copy of the draft dated April 1, 2011, and that he did not have any evidence to the contrary. Mr. Brechin did, in fact, testify that he did not receive the first draft of the agreement.

[191] In his closing submissions, Mr. Zabel returned to his original position: he was certain that Mr. Brechin received a copy of the initial draft and he relied on the content of his affidavit in support of this submission. I do not accept that Mr. Zabel’s evidence was reliable on this point.

[192] First, contrary to the suggestion in Mr. Zabel’s affidavit, there is no reason to believe that QFS sent the first draft of the agreement directly to Mr. Brechin. The evidence strongly suggests that on April 1, 2011, QFS and Mr. Cott did not know who was representing Mr. Zabel.

[193] Second, Mr. Brechin did not produce a copy of the first agreement when he sent his entire file to BLG in August 2012 or during this litigation. That is evidence that he never received a copy of the first agreement by email or in person from anyone.

[194] Third, there is no evidence to support the suggestion in Mr. Zabel’s affidavit that he personally delivered the first draft to Mr. Brechin. Dropping the draft off in person would be entirely inconsistent with how Mr. Zabel interacted with Mr. Brechin and his office during the negotiation of this agreement. Mr. Zabel did not suggest that he delivered any of the other draft agreements in person. Absent some corroborating evidence, I would not accept this suggestion in these circumstances.

[195] Fourth, the email that Mr. Zabel sent to Mr. Brechin on April 21, 2011, attaching the second version of the agreement is consistent with it being the first time that Mr. Zabel sent a draft of the agreement to Mr. Brechin:

Hi Greg,

Attached is a draft Share Purchase Agreement for the sale of Life Mark Insurance Agencies and Marketing Concepts Group Inc. Could you please look this over and give me your comments at your earliest convenient time.

[196] Mr. Zabel makes no reference to the first draft or his comments on the first draft. There is nothing about this email that is consistent with Mr. Zabel having provided the first version to Mr. Brechin. Given the content of this contemporaneous message, I find that it is much more likely that this is the first (not the second) time Mr. Zabel send a draft of the agreement to Mr. Brechin.

[197] Mr. Zabel’s certainty that Mr. Brechin had a copy of the first version of the agreement is another example of Mr. Zabel’s memory not being reliable. I find as a fact that Mr. Brechin did not receive a copy of the draft agreement that Mr. Cott sent to Mr. Zabel on April 1, 2011.

Mr. Zabel’s recollection of Mr. Brechin’s role in the negotiations and his discussions with Mr. Cott is not reliable

[198] On August 8, 2016, Mr. Zabel swore an affidavit for use on an interlocutory motion in this proceeding. In the affidavit, he swore that Mr. Brechin “took over” negotiations after the initial draft was delivered and that Mr. Zabel had very few discussions with Mr. Cott about the first draft. The affidavit provided as follows:

10. In my view, the initial draft Agreement was a nonstarter and therefore Mr. Cott and I had little discussion in respect of the draft. Thereafter, the process by which the Agreement was negotiated was that Mr. Brechin and I would review the drafts prepared and sent by Mr. Wright and Mr. Cott and provide our comments. Any drafts I received the agreement were forwarded directly to Mr. Brechin for review comment and advice.

11. In respect of the, “the communications between the Plaintiffs and the purchaser”, it is my recollection that Mr. Cott and I did not exchange a lot of emails in relation to this topic because, as I stated above, the first draft of the agreement was not, in any way, acceptable to me. As soon as I received the first draft, Mr. Brechin took over the negotiations. Mr. Cott and I may have had some discussions on the telephone about the first draft of the agreement but these discussions were not extensive. (emphasis added)

[199] I do not believe that Mr. Zabel intended to mislead in this affidavit, but when the content of the affidavit is considered in light of the evidence at trial, it demonstrates that his recollection, even six years before trial, was not reliable about matters of fundamental importance to this litigation.

[200] As set out in the facts section above, Mr. Brechin did not “take over the negotiations” after Mr. Zabel received the first draft. Mr. Zabel received the first draft of the agreement on April 1, 2011. Mr. Brechin had no direct contact at all with Mr. Cott or his advisors until after May 29, 2011. Before that, Mr. Zabel did all of the negotiations with Mr. Cott, his lawyer, and his accountant. Mr. Zabel admitted that he and Mr. Cott were involved in continuous negotiations after April 21, 2011. To his credit, on cross-examination, Mr. Zabel admitted that this sentence in his affidavit was inaccurate.

[201] In addition, Mr. Zabel exchanged several very important emails with Mr. Cott about the first draft of the agreement. On April 5, 2011, Mr. Zabel sent his comments on the business and financial terms contained in the first draft to Mr. Cott. On April 13, 2011, Mr. Zabel sent the Excel spreadsheet containing comprehensive and detailed comments on the agreement, including on the definitions of Net Service Fees and Net Investment Trailers, to Mr. Cott.

[202] Mr. Zabel admitted that as of August 8, 2016, his recollection of events during the negotiations was unreliable “in some respects.”

[203] I accept that Mr. Zabel would have carefully considered this affidavit before he swore it, and that he would have done his best to provide his best and truthful recollection. However, it is evidence that his memory is not reliable in matters of great significance to this litigation.

Mr. Zabel recollection of the applicable interest rate on the transaction was not reliable

[204] Mr. Zabel prepared a spreadsheet setting out the plaintiffs’ damages claim, which was marked as Exhibit 19. It included approximately $250,000 in interest owing to the plaintiffs under the promissory note signed by QFS. During his examination in chief, Mr. Zabel explained that the promissory note indicated that the interest rate was to be the prime rate and he used “the TD prime,” which was 6% per year.

[205] On cross-examination, he stated that he looked up the interest rate in 2012 and that was when he learned it was 6%. He was then shown an email dated July 2012, in which he wrote to his lawyers at BLG, “I looked up the TD prime rate and it is three percent and has been three percent since September 2010.”

[206] In the result, Mr. Zabel used 6% for his interest calculations, not 3%, which resulted in a significant error. He was very confident that he had used the correct number. I do not find that Mr. Zabel attempted to mislead the court intentionally by inflating the interest rate used in his damages calculation, although that is an available inference. Instead, I conclude that when Mr. Zabel prepared the spreadsheet for trial, he did not recall accurately the interest rate from 2012. Giving Mr. Zabel the benefit of the doubt, I find that this error reflects on the reliability of Mr. Zabel’s evidence, but not his truthfulness. It is, however, another example where Mr. Zabel’s evidence is not reliable.

Mr. Zabel’s recollection that Mr. Brechin was not personally involved in closing the transaction was not reliable

[207] Mr. Zabel testified that he was concerned to receive an email from a law clerk in Mr. Brechin’s office. The import of his testimony was that he felt that Mr. Brechin delegated the transaction to his law clerk, and that he lost his line of direct communication with Mr. Brechin such that Mr. Zabel only had communications with Mr. Brechin’s law clerk as the transaction moved toward closing. He testified as follows:

Q. And would you -- did you have any reaction to the law clerk's statement that she will be handling your file from here on in.

A. Same as my previous reaction, I mean, I was surprised by it, I was somewhat concerned and I thought well, you know, maybe that's just the way that Greg's organized his office and you know, I'm sure he is in control of it, but it concerned me. I mean, I, the sort of a loss of, I don't know, direct communication there that, you know....

Q. And then, if you look at tab 81, there's an email from you to -- well an email from Gayle to you where she lists a number of items that are necessary to be resolved and you respond, "I'm attaching a spreadsheet showing various things related to the purchase price". So, do you recall dealing at all with Mr. Brechin as you moved towards closing?

A. I recall this memo and I recall sending the attached stuff but no, I think at one -- my communication was with Gayle.

[208] Mr. Zabel’s recollection is inconsistent with the evidence at trial. I find that his recollection of events is not reliable.

[209] In my view, the concerns expressed by Mr. Zabel do not flow logically from the email chain at issue. On June 28, 2011, Mr. Zabel wrote to Mr. Brechin and asked, “Could you have Donna [Wooten] send me the share structure of Life Mark and [Marketing Concepts Group] please.” Ms. Wooten was a legal assistant who worked closely with Mr. Brechin. Three minutes later, Gayle Giesler, a law clerk in Mr. Brechin’s office responded to Mr. Zabel saying, “I will be handling your file from here on in so please direct all inquiries to me.” I do not accept Mr. Zabel’s evidence that this caused him concern. He had asked that Mr. Brechin’s legal assistant send a document to him, and Mr. Brechin’s law clerk immediately responded and said that she would handling the file so to direct inquiries to her. Mr. Zabel demonstrated that he knew that within a transaction there were tasks that could be accomplished by a legal assistant and did not require a lawyer. He never raised the issue with Mr. Brechin at the time. I do not think that Ms. Giesler’s response would have caused him that concern in the moment.

[210] Perhaps more importantly, Mr. Zabel stated that he could not recall dealing with Mr. Brechin as he moved toward closing and that his dealings were with Ms. Giesler. This view was inconsistent with the evidence. Only when confronted with email evidence demonstrating that Mr. Zabel and Mr. Brechin were in frequent communication over the weekend of July 9 and 10, and early in the morning of July 11, he changed his evidence to say that he had a fear that he would have less access to Mr. Brechin as the closing progressed. In my view, that answer differed significantly from his evidence in chief.

[211] As set out above, Mr. Zabel’s recollection was unreliable on several key issues. In conclusion, where the evidence of Mr. Zabel and Mr. Brechin contradict each other, in most cases I prefer the evidence of Mr. Brechin.

Findings of fact

[212] Assessing the evidence taking into account all of the factors described above, I make the following findings of fact on the key issues in dispute.

Mr. Zabel did not send the first draft agreement to Mr. Brechin, who was never told the key definitions had changed

[213] I find as a fact that Mr. Zabel did not send to Mr. Brechin, and Mr. Brechin did not receive, the first draft agreement dated April 1, 2011, the first set of comments that Mr. Zabel provided on the draft agreement, or the blacklined copy of the second agreement marked against the first draft. I accept that Mr. Brechin did not ask Mr. Zabel if there were any prior drafts before the one that Mr. Zabel sent to him.

[214] This is important because it means that Mr. Brechin never saw the initial definitions of Net Service Fees and Net Investment Trailers, Mr. Zabel’s comments on those clauses, QFS’s responses, or the changes that were made to those definitions between the first and second drafts of the agreement. On April 5, 2011, Mr. Zabel emailed Mr. Cott and suggested that they use the financial statements to calculate the purchase price. Mr. Cott did not agree and, instead, sent the following revised definitions (with my added markups):

"Net Service Fees" shall mean the annualized service fees (other than first year commissions) as defined by each MGA contract paid or owing to the Constituent Corporations with respect to MGA contracts with insurance carriers during the 12 month period ending on the Closing Date other than service fees paid or payable to third parties in respect thereof excluding any service fees sold or for which notice of sale has been received during such 12 month period.

"Net Investment Trailers" shall mean the annualized trailers as defined by each MGA contract paid or owing to the Constituent Corporations with respect to MGA contracts with insurance carriers and fund companies during the 12 month period ending on the Closing Date less all trailers paid or payable to third party advisors excluding any trailers sold or for which notice of sale has been received during such 12 month period.

[215] Mr. Zabel testified that he did not like these changes because the definitions were moving away from accrual accounting to cash accounting. He testified that he wanted to go back to accrual accounting, but that Mr. Cott would not agree to that change and the definitions remained unchanged. Mr. Zabel testified that he wanted to use the financial statements as the basis for calculating the purchase price, but that would require the definitions to change. Mr. Zabel could have walked away from the deal at this point, but he chose not to walk away. Mr. Zabel could have insisted on the language changing so that the financial statements were used to calculate the purchase price, but he did not draw that line in the sand. Mr. Zabel could have explained the change in the definitions from the first draft to the second draft to Mr. Brechin and made this a negotiating priority, but he never told Mr. Brechin of the change. Mr. Zabel could have instructed Mr. Brechin to draft an agreement that would ensure a minimum purchase price of $5.3 million, but he never made that ask of Mr. Brechin or Mr. Cott.

[216] Moreover, Mr. Zabel did not take Mr. Brechin’s advice to ensure that he and his external accountants understood the definitions. Mr. Zabel also admitted that he did not recall telling Mr. Brechin that he did not show the agreement to any other accountants and that he had no evidence that he did. Mr. Brechin testified that he had no idea that Mr. Zabel did not follow his advice to show the agreement to another accountant. I find as a fact that Mr. Zabel did not tell Mr. Brechin that he did not show the agreement to his external accountant.

Mr. Zabel led the negotiations himself and used Mr. Brechin in a limited way

[217] Mr. Zabel’s confidence in his accounting and business acumen informed his decision to negotiate directly with Mr. Cott and his advisors without involving Mr. Brechin until the very end of the discussions when the agreement was in almost final form.

[218] I find as a fact that Mr. Zabel did not involve Mr. Brechin at all until April 21, 2011. That means that Mr. Zabel, on his own and without the benefit of any legal advice:

a. met with Mr. Cott on March 6, 2011;

b. reviewed the first draft of the agreement and provided initial comments on the financial and business issues in the agreement to Mr. Cott on April 5, 2011;

c. spoke with Mr. Cott’s external accountant about the transaction sometime on or after April 7, 2011;

d. provided detailed written comments on the agreement, including the definitions section and more than 24 different provisions, to Mr. Cott on April 13, 2011; and

e. received a second draft that Mr. Cott thought could be signed.

[219] On April 21, 2011, Mr. Zabel sent the second draft agreement to Mr. Brechin, who provided his six-page letter setting out his comments on May 5, 2011. It is undisputed that Mr. Zabel did not discuss Mr. Brechin’s letter with him or raise any questions or concerns about it. Without any further input from Mr. Brechin, Mr. Zabel took all of the following steps:

a. met with Mr. Cott on May 9, 2011;

b. sent an email to Mr. Cott on May 10, 2011, which set out some things that had been bothering him, acknowledged that Mr. Cott was not inclined to make changes beyond what the changes he absolutely had to make, indicated that he had to get the deal done soon, and committed to providing a “definitive list of changes we would like to see based on my lawyer’s comments”;

c. sent Mr. Cott the “definitive list of changes” on May 10, 2011, which included some but not all of Mr. Brechin’s comments;

d. indicated to Mr. Cott that he was prepared to meet with Mr. Cott and his lawyer on May 12, 2011, even though “it was too late to invite Mr. Brechin” to be on the call;

e. received and reviewed a 17-point letter from Mr. Cott’s lawyer on May 12, 2011, but did not forward it to Mr. Brechin;

f. provided Mr. Cott with his thoughts on the working capital calculation on May 16, 2011; and

g. advanced the discussions so far that, on May 16, 2011, Mr. Cott told Mr. Zabel and his own advisors that they would be meeting to sign the agreement on May 18, 2011;

h. received the third version of the agreement on May 18, 2021, which Mr. Zabel said in an email he “expected was a final draft of the agreement”;

i. negotiated with Mr. Cott and Mr. Wright to resolve the target working capital issue; and

j. advanced the agreement with Mr. Cott to the point where Mr. Cott stated on May 24, 2011, that he assumed the parties would be signing tomorrow.

[220] In my view, Mr. Zabel took sole responsibility for the negotiations during this period. Whether or not this was a wise decision, it was his to make. Although Mr. Brechin was away, Mr. Zabel knew that Mr. Brechin had his computer and Blackberry with him and another partner able to step in if necessary. Mr. Zabel had advanced the agreement very far down the road. He was well within his rights to do so. From a business perspective, he had identified that the longer the deal dragged on, the more damage or potential damage would be done to Life Mark and Marketing Concepts Group. He was driving the negotiations forward by himself because he needed a deal done quickly. He did so without the benefit of legal advice other than Mr. Brechin’s letter dated May 5, 2011.

[221] I place significant weight on Mr. Zabel’s email to Mr. Cott on May 10, 2011. That email follows a difficult meeting between the two of them. It was a meeting that left Mr. Zabel bothered about several issues. Mr. Zabel acknowledged that Mr. Cott was not prepared to make many concessions. Mr. Zabel received Mr. Cott’s clear message that he was “not inclined to make changes to the agreement beyond what [he] absolutely [had] to.” Mr. Zabel stated that he “can’t see the benefit of my lawyer rewriting” the agreement. Mr. Zabel then said he would be providing a “definitive list” of comments, which he did without input from Mr. Brechin.

[222] Although Mr. Zabel testified that he believed that Mr. Brechin would be ensuring that subsequent drafts of the agreement addressed Mr. Brechin’s concerns, that view is not consistent with Mr. Zabel’s actions. Mr. Zabel decided what issues would and would not be raised in the “definitive list” that he provided to Mr. Cott. He did not ask Mr. Brechin to prioritize among the issues he had raised or even to review Mr. Zabel’s list for completeness.

[223] I find that at this point, Mr. Zabel believed he faced a stark choice: accept the terms of the deal proposed by Mr. Cott with few and modest adjustments or walk away from the deal. I find that Mr. Zabel knew that Mr. Cott was not prepared to negotiate a different structure, including Mr. Zabel’s preference to rely on the financial statements to determine the purchase price.

[224] Mr. Zabel re-engaged with Mr. Brechin on May 23, 2011, when he sent the draft agreement from May 18, 2011, to Mr. Brechin. By this time, the agreement was essentially complete and in its final form. Indeed, on May 25, 2011, after Mr. Brechin said that he was not sure if he would be able to review the agreement that night or on the coming weekend, Mr. Zabel emailed Mr. Brechin and said that he had reviewed “all the business aspects [and] financial statement requirements,” that time was short, and that he intended to sign the agreement the next day unless Mr. Brechin saw something of which Mr. Zabel was not aware:

I have reviewed the agreement in relation to all the business aspects, financial statement requirements etc. The issue we had related to Working Capital and Target Working Capital and they have all been removed or changed and replaced by section 3.2(e), I don't think this section gives OFS the assurance that they sought but I am alright with it. They were concerned that for the first month after closing there would be sufficient cash generated by the business to be self- supporting, Section 3.2(e) does not really address that but what the hell.

Since time is short our intention is to sign this agreement tomorrow unless you see something that I am not aware of.

[225] In response, Mr. Brechin sent Mr. Zabel a 26-point email setting out his comments on the third version of the agreement. Mr. Cott’s lawyer followed up on Friday May 27, 2011, indicating that he understood that the parties would be signing on Monday. On Sunday, Mr. Zabel responded to Mr. Brechin’s email. None of Mr. Zabel’s comments related to the definitions of Net Service Fees or Net Investment Trailers, the pricing mechanism, or the objection provision. Mr. Zabel asked Mr. Brechin to deal directly with Mr. Wright to finalize the wording, given the urgency of the situation and the need to get the agreement signed. He wrote:

I would think the quickest way of dealing with some of the wordings etc would be for you to discuss this with their lawyer who seems anxious to get this agreement finished as well.

I am anxious to get this agreement done and this deal closed. There is considerable risk that if it Became known we were selling without us being prepared for it, that it would worry our customers enough for them to wander off. So I prefer for us to tell everybody and work on getting them transitioned to QFS.

[226] Mr. Zabel testified that when he said “the quickest way of dealing with some of the wordings etc. would be for you to discuss this with their lawyer,” he meant that he was expecting Mr. Brechin to look after the legal and other related aspects of this agreement to make sure there wasn’t anything that would “jump up and bite me.” If that was Mr. Zabel’s intention, he did not express that clearly in this email, particularly in view of his statement that he was “anxious to get the agreement done and this deal closed.”

[227] I find Mr. Zabel was not instructing Mr. Brechin to take over the negotiation of the agreement. At this stage, the agreement was no longer a blank canvass. The parties did not think there were many, if any, substantive issues that remained in dispute. Mr. Zabel was not inviting Mr. Brechin to revisit any of the key terms to which the parties had already agreed. He was instead instructing his lawyer to finalize the wording of the agreement with Mr. Cott’s lawyer because it would be the quickest way to get to a signed deal. Mr. Zabel put Mr. Brechin in charge of only that modest task. Mr. Zabel told Mr. Brechin that he was anxious to get the agreement done, that he thought Mr. Brechin would be the quickest way to achieve that goal.

[228] I do not accept that Mr. Zabel was telling Mr. Brechin to take over the negotiations. I find that this was not a change in the scope of Mr. Brechin’s retainer. Indeed, time would not have allowed for that. Mr. Zabel asked Mr. Brechin to deal with QFS’s lawyer on May 29, 2011. The parties were intending to sign on Monday May 30. In fact, the signing was pushed to June 2, 2011.

Negligence

[229] In order to prove negligence, the plaintiffs must demonstrate (1) that the defendants owed them a duty of care; (2) that the defendants’ actions or omissions breached the standard of care; (3) that the plaintiffs sustained damage; and (4) that the damage was caused, in fact and in law, by the defendants’ breach.[^16]

[230] The parties agree that the defendants owed the plaintiffs a duty of care.[^17] The duty of care is to take reasonable care to avoid causing foreseeable harm. The conduct required to satisfy the duty of care is a question of the appropriate standard of care.[^18]

Standard of Care

[231] The standard of care and skill expected of a lawyer is reasonable competence and diligence. The reasonableness of a lawyer’s conduct is to be judged in light of the surrounding circumstances that existed at the time.[^19]

[232] A lawyer is not held to a standard of perfection and her conduct is not to be judged with the benefit of hindsight. The fact that a lawyer could have done a better job does not mean that she fell below the standard of care.[^20] The question is whether a reasonably prudent solicitor in the same circumstances would have made the error.[^21] The mere fact that one solicitor can provide a valid criticism of the work of another is not evidence of a breach of the standard of care.

[233] The plaintiffs identify five attributes of a reasonably competent and prudent solicitor:

a. to be skilful and careful;

b. to advise her client on all matters relevant to her retainer, so far as may be reasonably necessary;

c. to protect the interests of her client;

d. to carry out her client’s instructions by all proper means;

e. to consult with her client on all questions of doubt which do not fall within the express or implied discretion left to her; and

f. to keep her client reasonably informed.[^22]

Circumstances relevant to the standard of care

[234] The reasonableness of a lawyer’s conduct is to be judged in light of the surrounding circumstances that existed at the time.[^23] The reasonableness of the lawyer’s conduct is to be assessed in light of the time available to complete the work, the sophistication and experience of the client; the experience and training of the solicitor; the form and nature of the client’s instructions; the specificity of those instructions; the nature of the action or legal assignment; the precautions one would expect a solicitor, acting prudently and competently to take; the course of the proceeding or assignment; and the influence of other factors beyond the control of the client and adviser.[^24]

[235] The fact that a client is a sophisticated businessperson will have a “direct effect” on the lawyer’s obligations. For example, a lawyer “is entitled to assume that his client has reviewed an agreement or undertaking before it is signed to ensure that it is in accord with the client's desires, particularly where the client is an experienced businessman.”[^25] Similarly, as the authors of Lawyers’ Professional Liability explain:

Where the nature of the client’s instructions and the terms of the retainer, both express and implied, indicate that the client himself is taking responsibility for steps that might otherwise be taken by the lawyer, a lawyer will not be responsible for not taking steps he otherwise may have had a duty to perform.[^26]

[236] The case of Hallmark Financel Insurance Brokers provides guidance on this point. The plaintiff wanted to purchase Hallmark, a general insurance brokerage firm.[^27] The plaintiff retained the defendant lawyer and sent him a letter of intent that had been drafted by the plaintiff’s accountants. The plaintiff asked the lawyer to prepare the purchase agreement. The letter of intent described the method of calculating the purchase price:

... 1.90 times the general insurance commission income earned by Financel from the said Customer List for the year ended December 31, 1985. For greater certainty, general insurance commission income excludes contingent profit rebates and other similar production bonuses and commissions earned on the placement of life and group insurance policies.

[237] The lawyer drafted the purchase agreement, including the defined term “general insurance commission income.” Both parties signed the purchase agreement and the sale closed on March 4, 1986. The plaintiff learned that, because of the definition of “general insurance commission income”, the purchase price was more than it expected to pay. The plaintiff sued the lawyer for negligence in the drafting of the purchase agreement.

[238] Justice Dunnet concluded that the lawyer’s interpretation of the meaning of the purchase price paragraph of the letter of intent was reasonable and that he was not negligent in drafting the purchase agreement. Justice Dunnet held that the lawyer:

having drafted the definition clause as he understood it and which I have held to be a reasonable interpretation, and having drafted it in clear language, did not owe any further duty to his client with respect to the definition clause which, in fact, was a business clause with wording which I find was familiar to an experienced businessman in the insurance industry.[^28]

[239] In this case, I must consider Mr. Zabel’s experience and sophistication when assessing the standard of care. There is no doubt that Mr. Zabel is a skilled and experienced businessperson. Mr. Zabel qualified as a chartered professional accountant in 1978. He then worked in a series of senior executive positions at Canadian General Life, Zurich Life, Fairfax Financial, and acted as a consultant for Metropolitan Life. He and Ms. Zabel built Life Mark and Marketing Concepts Group into a successful business.

[240] His accounting expertise and industry knowledge gave him significant confidence in his ability to protect his own interests during the negotiations with QSF. This manifested itself in two crucial ways. First, he did not take Mr. Brechin’s advice to get expert accounting advice on the definitions used in the purchase price calculation and the calculation itself. Second, Mr. Zabel’s confidence in his accounting and business acumen informed his decision to negotiate directly with Mr. Cott and his advisors without involving Mr. Brechin until very late in the process. These decisions are relevant circumstances when considering the standard of care.

Expert evidence on standard of care

[241] The Court of Appeal for Ontario has made it clear that it is inappropriate for trial judges to determine the standard of care in a professional negligence case in the absence of expert evidence unless the standard to be met is clear to an ordinary person, or the conduct is so outrageous that it is obvious the standard has not been met.[^29] All superior court judges were barristers or advocates prior to their appointment.[^30] However, as a matter of trial fairness, expert opinion evidence on the standard of care is required in all solicitor’s negligence cases unless the issue falls within the exceptions recognized by the Court of Appeal.[^31]

[242] The plaintiffs filed an expert report from Robert P. Kinghan, an experienced transaction lawyer. I had no hesitation qualifying Mr. Kinghan as an expert. His evidence was clear, measured, and helpful to me. His initial report dated August 4, 2021, and a reply report dated March 14, 2022, were both marked as exhibits.

[243] The defendants filed an expert report from Wayne Gray, also an experienced transaction lawyer. I had no hesitation qualifying Mr. Gray as an expert and his evidence was also helpful to me. His report was dated February 9, 2022.

[244] The expert reports addressed two issues:

a. Did Mr. Brechin’s advice and work with respect to the definitions of Net Service Fees and Net Investment Trailers, which in turn drove the purchase price, meet the standard of care of a reasonably prudent solicitor?

b. Did Mr. Brechin’s advice with respect to the objection provision meet the standard of care of a reasonably prudent solicitor?

Mr. Brechin met the standard of care with respect to the definitions of Net Service Fees and Net Investment Trailers

[245] One of the central issues in the trial was whether or not Mr. Brechin met the standard of care when he failed to advise the plaintiffs about the potential impact that the changes to the definitions of the Net Service Fees and Net Investment Premiums would have on the purchase price. These definitions are crucial because they drove the purchase price.

[246] Mr. Zabel confirmed on cross-examination that the definition of Net Service Fees and Net Investment Trailers with respect to managing general agency contracts were issues that are peculiar to the insurance industry. He testified that he was not expecting Mr. Brechin to understand how the purchase price was to be calculated and that Mr. Brechin told him that he had not attempted to understand how the price was calculated. Mr. Zabel agreed that Mr. Brechin told him that that it was exceptionally important that he and his accountant understand the definitions in the agreement because they would affect the purchase price.

[247] Mr. Zabel explained that he did not follow Mr. Brechin’s advice to show the draft agreement to his external accountant because “he would be hard pressed to find another accountant who understood it better than I did.” He testified as follows:

Q. Okay. And Mr. Brechin's advice to you was that was not a good idea, that notwithstanding your knowledge and expertise, you should seek external accounting advice. Yes?

A. Yes.

Q. And you declined to follow Mr. Brechin's advice on that topic?

A. Yes.

Q. And you never told him that you had declined to follow his advice on that topic.

A. I mean it, I mean, I would disagree with that. Greg had made those suggestions in a number of other circumstances, and the answer was always the same. And let me explain that. If -- if I was looking for tax or other specialist's advice, I would go find another accountant who was good at that. In terms of the insurance business, I think I understand it better than most, and I've spent my whole adult life in it. So in that narrow industry, I think I would be hard pressed to find another accountant who understood it better than I did. That's the reason behind that.

[248] Mr. Zabel admitted that Arbitrator Lax’s conclusion about the arbitration agreement turned on the same issue that Mr. Brechin flagged in his letter of May 5, 2011, and that he urged Mr. Zabel to discuss with his accountant.

[249] Both experts agreed that Mr. Brechin met the standard of care in this regard.

[250] Mr. Kinghan opined that since Mr. Brechin told Mr. Zabel that he would not be reviewing the definitions and provisions dealing with the purchase price, and urged Mr. Zabel to discuss these provisions with his accountant, he met the standard of care:

Q6 In particular, did the Defendants fall below the standard of care expected of a careful and prudent commercial lawyer by failing to advise the Zabels of the potential impact that changes to the key definitions would have on the calculation of the Purchase Price?

It appears to me that the Zabels expressed their expectations as to the amount of the Purchase Price to the Defendants. On May 5, 2011, the Defendant sent a letter to the Zabels stating that he was not reviewing the sections in the Share Purchase Agreement that pertained to the Purchase Price Sections and instructed that the Zabels seek advice from their accountant with regard to these sections and definitions.

Unless the retainer was further modified by the Zabels and the Defendant, and I did not see any documentation to this effect in the Provided Documents, then no, the Defendant did not fall below the standard of care expected of a careful and prudent commercial lawyer by failing to advise the Zabels of the potential impact that changes to the key definitions would have on the calculation of the Purchase Price.

[251] As set out above, I find that Mr. Zabel and Mr. Brechin did not modify the retainer in a way that would affect Mr. Kinghan’s conclusion

[252] Similarly, Mr. Gray opined that Mr. Brechin met the standard of care when he advised Mr. Zabel that he should obtain accounting advice on the price formula in the agreement because it was fundamentally a business, not a legal term. I agree.[^32] Even Mr. Di Paolo was reluctant to offer his opinion on the meaning of the definitions of Net Service Fees and Net Investment Trailers. He stated “I mean, I’m not an accountant. So I, I’m leery to provide my opinion on what this provision means.” This is not a criticism of Mr. Di Paolo. His comment was fair and consistent with Mr. Brechin’s advice to Mr. Zabel. The definitions were primarily business terms that required the input of expert accountants who were familiar with these type of transactions.

[253] Moreover, these definitions changed between the first draft to the second draft of the agreement in response to comments that Mr. Zabel provided to Mr. Cott. Mr. Zabel never shared the first draft or his comments on it with Mr. Brechin. That is a relevant consideration when considering if Mr. Brechin met the standard of care.

[254] The plaintiffs note that Mr. Gray stated in his written report that the definitions were not clearly drafted and testified that the definitions were “badly drafted” and that the drafting could have been improved. In his report, he wrote:

The definition of "Net Service Fees" in the SPA excluded "service fees paid or payable to third parties in respect" of the 12-month calculation period and "service fees sold or for which notice of sale has been received during such 12 month period", The definition of "Net Investment Trailers" in the SPA excludes "all trailers paid or payable to third party advisors" and "any trailers sold or for which notice of sale has been received during such 12 month period". In both cases, the exclusions are not clearly drafted. I read them as two separate exclusions rather than as an exception to an exclusion. If service fees or trailers are sold in the 12-month pre-closing period, they have zero value to the purchaser post-closing.

[255] In cross-examination, while Mr. Gray acknowledged that a reasonably prudent solicitor would have done a better job of drafting the clause, he concluded that the ambiguity in the definition favoured the plaintiffs, not QFS. He thought the drafting could have been cleaned up, but that in the end the drafting ended up being more favourable to the vendor. I agree and Mr. Brechin did not fall below the standard of care in this regard.

[256] In my view, the standard of care of a reasonable and prudent solicitor must take into account the fact that Mr. Brechin strongly recommended that Mr. Zabel obtain accounting advice, that Mr. Zabel did not follow that advice, and that Mr. Zabel did not tell Mr. Brechin that he did not follow the advice. I find that Mr. Brechin clearly advised Mr. Zabel that he needed accounting advice on the manner in which the purchase price was to be calculated, including the definitions of Net Service Fees and Net Investment Trailers. I find that Mr. Brechin met the standard of a reasonably prudent solicitor in his dealings with the definitions of Net Service Fees and Net Investment Trailers and in the language used in the purchase price calculation formula.

Mr. Brechin met the standard of care with respect to the objection provision

[257] The plaintiffs also submit that Mr. Brechin did not meet the standard of care in his handling of the objection provision.

[258] For the purposes of his report, Mr. Kinghan was asked to assume that the plaintiffs instructed Mr. Brechin to ensure that section 3.2 of the agreement, the objection provision, was narrow in scope. In his report, he stated that he relied on the following assumed facts, which the plaintiffs provided to him:

19. The Zabels instructed Mr. Brechin to ensure that the Objection Provision be narrow in scope so that an objection would only be available if (i) accounting treatment used in the preparation of the 2011 financial statements were inconsistent with past practices of Marketing Concepts Group; or (ii) financial statements were inconsistent with Canadian GAAP.

20. The final objection provision, found in s. 3.2(a), (b), and (c) was significantly broader in scope…

21. Mr. Brechin did not warn the plaintiffs about the impact of the Objection Provision and the Objection Provision was inconsistent with the instructions given to Mr. Brechin.

[259] In his report, Mr. Kinghan found that Mr. Brechin fell below the standard of care with respect to the negotiation of the objection provision. He did so, however, expressly on the basis that Mr. Zabel instructed Mr. Brechin to ensure that the objection provision was kept narrow:

On May 5, 2011, the Defendant sent a letter to the Zabels stating that he was not reviewing the sections in the agreement of purchase and sale (the "Share Purchase Agreement") that pertained to the calculation of the purchase price and any adjustments thereto (the "Purchase Price Sections") and instructed that the Zabels seek advice from their accountant with regard to these sections and definitions. Pursuant to Point # 14 of your letter of May 14th, 2021, the Zabels further modified the retainer as regards to the "Objection Provision" by instructing the Defendant further with regards to this section of the Share Purchase Agreement. For the purpose of this opinion, I am assuming that the "Objection Provision" is-section 3.2 of the Share Purchase Agreement….Unless the retainer was further modified by the Zabels and the Defendant, and I did not see any documentation to this effect in the Provided Documents, then yes, the Defendant did fall below the standard of care expected of a careful and prudent lawyer as it relates solely to changes that should have been made to the Objection Provision to align with the Zabels' instructions.

[260] In several places in his opinion, including his answers to questions 2 to 5, Mr. Kinghan repeated his opinion that Mr. Brechin fell below the standard of care because he did not implement Mr. Zabel’s instructions to keep the objection provision narrow. Mr. Kinghan acknowledged that these assumptions were central to his conclusion that Mr. Brechin fell below the standard of care. Mr. Kinghan was not asked to, and did not form an opinion on, the reasonableness of the objection provision itself. As he testified “I wasn’t asked to, other than to see whether it reflected the Zabels’ instructions.”

[261] It was entirely appropriate for Mr. Kinghan to assume that Mr. Zabel instructed Mr. Brechin to keep the objection clause narrow for the purposes of his opinion. However, before I can give any weight to Mr. Kinghan’s opinion, I must find those assumed facts to be true.[^33] The evidence at trial did not make out Mr. Kinghan’s assumptions. Instead, I find as a fact that Mr. Zabel never instructed Mr. Brechin to ensure that the objection provision was narrow in scope. I make this finding for two main reasons.

[262] First, Mr. Zabel never provided those instructions in writing to Mr. Brechin. Almost all of the communication between Mr. Zabel and Mr. Brechin about this file took place over email. Mr. Zabel testified that he recalled a few short telephone calls with Mr. Brechin, “but anything substantive was by e-mail.” I do not accept that Mr. Zabel provided these instructions to Mr. Brechin over the telephone given how infrequently they spoke about this transaction by telephone. Indeed, Mr. Zabel’s evidence is that he never discussed the objection provision with Mr. Brechin at all. Mr. Zabel may have believed that the objection provision was narrow, but there is no evidence that he provided those instructions to Mr. Brechin.

[263] Second, Mr. Brechin testified that Mr. Zabel never instructed him that the objection provision was to be narrow in scope so that QFS could only object if the accounting treatment used in the preparation of the 2011 financial statements was inconsistent with past practice or GAAP.

[264] I have found as a fact that the crucial assumption provided to Mr. Kinghan is not true. In these circumstances, I give no weight to Mr. Kinghan’s opinion that Mr. Brechin fell below the standard of care with respect to the objection provision.

[265] Setting aside the issue of instructions, I am not prepared to find that Mr. Brechin fell below the standard of care because the final agreement included a broad objection provision without expert evidence on that point. That is not an issue where the standard of care to be met is clear to an ordinary person or the conduct so outrageous that it is obvious the standard has not been met. For example, the defendants’ expert, Wayne Gray, opined that there was nothing “unusual or inappropriate” about the objection mechanism in the agreement. He stated that “in several respects, the objection mechanism in the [agreement] was at the pro-vendor end of the spectrum.” He agreed that it was unusual for Mr. Zabel to have the right to prepare the Statement because normally the purchaser would prepare that document, but that this feature inured to the benefit of Mr. Zabel. In his view, the objection provision was not one that necessarily required a discussion between Mr. Zabel and Mr. Brechin.

[266] In light of Mr. Gray’s opinion, which I accept, I do not find that Mr. Brechin breached the standard of care because the final agreement contained a broad objection provision without expert evidence on that point. This is not a case where the solicitor’s conduct is impugned on a non-technical issue understood by the ordinary person, egregious conduct that manifestly falls below the standard of care, or that Mr. Brechin was obliged to advise on this particular risk in all of the circumstances of this case.

[267] The plaintiffs have not proven that Mr. Brechin breached the standard of care with respect to the breadth of the objection provision in the agreement.

Access to books and records

[268] At trial, the plaintiffs submitted that Mr. Brechin fell below the standard of care by failing to ensure that the agreement provided the plaintiffs with post-closing access to the books and records of Life Mark and the Marketing Concepts Group. The plaintiffs submit that Mr. Brechin only obtained the right for them to have access to the books and records of the company in the event of a tax reassessment or other claims made against them in their personal capacities, and not for purposes of determining the purchase price of the business.

[269] The defendants point out that this allegation is not set out clearly in the statement of claim. They also read-in a portion of Mr. Zabel’s examination for discovery where he agreed that his complaints were limited to the changes to the definition of Net Service Fees and the “practical import” of the objection provision and in particular its breadth. I agree with the plaintiffs that the plaintiffs’ complaint about access to books and records seems to fall outside of specifics in the statement of claim. However, I will consider this issue in any event.

[270] Mr. Brechin testified that he raised with opposing counsel the issue of including an access clause specifically conferring a wide right for the plaintiffs to access the books and records of Life Mark and Market Concepts Group. This appears in an email from Mr. Brechin to Mr. Wright. The email stated, in part:

We would appreciate a clause included in the Agreement that the Purchaser will make available all records of the Constitutent [sic] Corporations subsequent to closing to the extent required by my client. If there was litigation or a tax /issue or some errors and omissions claim or accounts receivable situtation [sic] we would need access to the files or other information.

[271] Mr. Brechin agreed that the broad clause was not included in the final agreement. He acknowledged that he missed this issue and agreed with the suggestion of counsel for the plaintiffs’ that this was negligent on his part.

[272] The plaintiffs submit that Mr. Brechin fell below the standard of care on this issue and caused them harm. I disagree for five reasons.

[273] First, I am not bound by Mr. Brechin’s statement that he was “negligent.” Negligence is a legal conclusion made after a finding that (1) the defendant owed the plaintiff a duty of care; (2) that the defendant’s behaviour breached the standard of care; (3) that the plaintiff sustained damage; and (4) that the damage was caused, in fact and in law, by the defendant’s breach.[^34] Mr. Brechin was a fact witness and his answer, in my view, is better understood as an admission that the failure to ensure that the final agreement contained the provision that he envisioned was careless oversight. For the reasons that follow, I do not find that the plaintiffs have proven that Mr. Brechin fell below the standard of care.

[274] Second, there was no expert evidence on what the standard of care of a reasonably prudent solicitor would be on this issue. This is fatal to this submission as I do not believe it is the type of issue that could be decided without expert evidence.

[275] Third, I do not interpret the agreement as failing to provide the plaintiffs with necessary access to the books and records of the corporation after closing for the purposes of determining the purchase price. Section 13.11 – Instruments of Further Assurance provides as follows:

(a) Each of the parties hereto agrees, upon the request of any of the other parties hereto, from time to time to execute and deliver to such other party or parties all such instruments and documents of further assurance or otherwise as shall be reasonable under the circumstances, and to do any and all such acts and things as may reasonably be required to carry out the obligations of such requested party hereunder.

(b) The Shareholders and their representatives shall have reasonable access to the books and records of the Constituent Corporations after the Closing Date as may be reasonably required to comply with any tax assessments or other claims made against them in their personal capacities.

[276] In my view, s. 13.11(a) is broad enough to oblige QFS to provide the plaintiff with all documents necessary to complete the process to determine the purchase price. It is a standard clause in which parties agree to take any action not expressly specified in the agreement to carry out the intent of the agreement or to implement its provisions. This would include determining the purchase price as provided for in the agreement: through the independent accountant. Section 13.11(b), however, is necessary because it provides the plaintiffs with access to the books and documents not for the purposes of implementing the agreement, but rather for an independent purpose: responding to subsequent tax assessments or litigation in their personal capacities.

[277] Fourth, even if s. 13.11(a) is not as broad as I find it to be, I would imply such a term to give business efficacy to the agreement.[^35] A contractual term may be implied on the basis of the presumed intention of the parties where necessary to give business efficacy to the contract or where it meets the ‘officious bystander’ test.[^36] The court may not imply a term that contradicts the express language of the contract or is unreasonable.[^37]

[278] In my view, focussing on the actual intentions of the parties to the agreement, I would imply a term into the agreement requiring the purchase to deliver up all books and records necessary for a fair determination of the purchase price, including in an arbitration or before the independent accountant. I find that such a clause is necessary to give business efficacy to the transaction. Failing to imply such a clause would frustrate the business intention of the parties. The process the parties chose to determine the purchase price would be undermined, and its fairness eviscerated, unless a right to disclosure of information is implied.

[279] Fifth, the plaintiffs’ submission fails as a matter of fact. In November 2011, Mr. Brechin asked if Mr. Zabel was concerned about not having enough information to meet with Mr. Cott to discuss his notice of objection. Mr. Zabel responded that “I have more information than you might think. For instance, I have a detailed trial balance that lists every single transaction booked last year and ties directly to the financial statements.”

[280] If Mr. Zabel needed additional information, which seems likely, I find that all he had to do was ask QFS for that information. QFS provided Mr. Zabel with access to all books and records necessary to prepare the Statement that set out the calculation of the purchase price. I accept that this information was provided more slowly than Mr. Zabel expected or preferred, but he did receive it.

[281] After Mr. Cott delivered his notice of objection, QFS repeatedly offered to give Mr. Zabel access to all of the necessary books and records for him to understand and respond to that notice of objection. QFS never took the position, in reliance on the agreement or otherwise, that it was not obliged to provide the plaintiffs with the necessary books and records. For example, on November 29, 2011, Mr. Cott wrote:

Klaus. I have repeatedly offered to sit down with you to go over the information we received as the basis for our revised purchase price. I am still very very willing to do that. What I am not prepared to do at this time is to renegotiate the agreement itself. We agreed to a formula with clear definitions and we are prepared to pay the appropriate price based on that formula, higher or lower than what was estimated. If you would take the time to sit down with us I feel confident we can get this resolved. But I have asked you to do this numerous times which you have repeatedly declined. Instead you insist on wanting to discuss how the price is to be determined. We have all of the back up information for our calculations and will share all of it with you of course. If you would like to meet we are still very willing to do so. (emphasis added)

[282] Similar offers were made by counsel for QFS on February 2, 2012, October 29, 2012, November 16, 2012, November 22, 2012, and January 22, 2013. QFS never took the position that it would not provide the plaintiffs with the books and documents necessary to determine fairly the purchase price.

[283] Mr. Di Paolo testified that Mr. Zabel ultimately made the decision “to forego obtaining access to the documents in favour of commencing an arbitration to settle certain legal issues.” Mr. Zabel could have pursued his right to access the documents issue before the arbitrator, if he wished to do so. Indeed, counsel for the plaintiffs indicated on March 15, 2014, that if QFS declined to provide the necessary books, the plaintiffs would pursue the issue before the arbitrator. The plaintiffs did not feel it necessary to pursue that issue. The fact that the plaintiffs did not obtain access to the books and records was the result of choices they made.

[284] It was at all times open to Mr. Zabel to accept QFS’s offer to provide the relevant documents or to have the arbitrator compel QFS to turn over the necessary documents. Mr. Zabel could then have asked the Independent Accountant to resolve the purchase price in accordance with the terms of the agreement. He chose not to do so.

[285] For all of these reasons, I find that Mr. Brechin did not fall below the standard of care expected of him in these circumstances. He demonstrated reasonable competence and diligence.

Conclusion on standard of care

[286] Lawyers are not held to a standard of perfection. In this case, I agree that Mr. Brechin did not meet a standard of perfection. He could have met in person more often with the plaintiffs. He could have had more telephone calls with the plaintiffs. He could have asked Mr. Zabel if there were any prior drafts of the agreement. He could have insisted on a three-way meeting with Mr. Zabel and the external accountant to discuss the key definitions and the calculation of the purchase price. He could have explained each and every clause of the agreement to Mr. Zabel, Ms. Zabel, and the trustee in person prior to signing. Mr. Brechin could have done all of these things.

[287] However, given my findings of fact regarding Mr. Zabel’s experience and business acumen, his leadership role in the negotiations, and the absence of expert evidence that any of these omissions fell below the standard of care on these particular facts, I am not prepared to find that any of these omissions by Mr. Brechin breached the standard of care.

[288] I find that Mr. Brechin met the standard of care of a reasonably prudent solicitor in all of the circumstances of this case.

Damages

[289] The plaintiffs claim that the defendants’ breaches of the standard of care caused them damages. The plaintiffs claim several heads of damages:

a. Damages of $1,337,973.60, representing the difference between the purchase price shown on the Statement (with one downward adjustment to correct an error), plus interest, and the amount contained in the minutes of settlement between QFS and the plaintiffs;

b. Special damages equal to the arbitration costs and the legal fees paid to BLG to represent the plaintiffs in the dispute.

Purchase price damages – Exhibit 19

[290] As proof of part of their damages, the plaintiffs introduced a chart setting out the damages they claim based on the purchase price. Mr. Zabel testified that he prepared the chart for the purposes of the trial. I marked this chart as Exhibit 19, and I will refer to it that way. The plaintiffs submitted a revised version of Exhibit 19 as part of their closing submissions. I will address that issue below.

[291] Exhibit 19 was essentially a waterfall. The top of the chart set out the plaintiffs’ “expected proceeds” from the sale of the business, subject to one adjustment, which I will discuss below. Exhibit 19 then set out the payments the plaintiffs expected to receive against the purchase price over time, and a calculation of the interest accumulating on the amounts still owing from QFS. Exhibit 19 also set out the money actually received by the plaintiffs over time and tracked what the plaintiffs described as the running shortfall between the amounts they submit should have been paid, and what they actually received. There is no dispute between the parties that the plaintiffs received from QFS the amounts listed in Exhibit 19.

[292] In Exhibit 19, the plaintiffs submitted that they were entitled to receive $5,407,181.00 as proceeds of sale, plus $251,433 in interest, for a total payment of $5,658,614.92, which they should have received by the end of 2013. The plaintiffs submit that they only received $4,320,641.32, leaving a shortfall of $1,337,973, which they claim as damages against the defendants.

[293] I will reproduce below the half of Exhibit 19 that concerns the payments expected by the plaintiffs:

Estimated proceeds

$5,300,000.00

Expected proceeds

$5,607,181.00

Error adjustment

($200,000.00)

Total expected

$5,407,181.00

Yearly total

2011

$3,244,308.60

Total 2011

$3,244,308.60

2012

January

$405,538.58

Interest

$64,886.17

July

$405,538.58

Interest

$105,440.03

Total 2012

$981,403.35

2013

$1,351,795.25

Interest

$81,107.72

Total 2013

$1,432,902.97

Total

Proceeds

$5,407,181.00

Interest

$251,433.92

Grand total

$5,658,614.92

$5,658,614.92

[294] Mr. Zabel testified that for the “Expected Proceeds” of $5,607,181, he simply reproduced the figure from the Statement that he prepared and sent to Mr. Cott on October 4, 2011. He testified as follows about how he prepared the “Expected Proceeds” figure:

Q. Were you -- take us through the schedule and tell us Mr. Zabel, how you went about preparing this. …

A. Okay the, if you look at, you have to look at the financial statements as well.

Q. I don't want you to actually redo the schedule, I just want you to explain what you did to do it.

A. So, what I would I do is at the appropriate number shows up by itself on the financial statements, I would take it, and I would make sure that that number on the financial statements didn't have any other numbers mixed in with it. So, if it was service fees paid and that's all that was in that number, I would use it. If it was, I'm looking for service feeds paid but it had other components, I would withdraw those other components from there to come up with just the number that I needed. Which would be shown on this lead sheet summary, so.

Q. And the agreement called for the calculation schedule or calculation to be done by the accountants, do you recall that?

A. Yes.

Q. Why didn't you get it done by Collins Barrow or somebody else.

A. I guess because, I'm an accountant and I thought once I got the financials it would be easier for me to do it but it's using numbers that they developed.

[295] There are a number of problems with Exhibit 19 that cause me to give it no weight. Most, but not all, relate to the calculation of “Expected Proceeds,” which is essential to the plaintiffs’ proof of damages.

[296] First, for the “Expected Proceeds” of $5,607,181, Mr. Zabel simply reproduced the figure that is from the Statement that he prepared and sent to Mr. Cott on October 4, 2011. Mr. Zabel admitted that he prepared the Statement. The agreement did not contemplate that he would prepare the Statement. The agreement required that the Statement be prepared by the accountants of Life Mark and Marketing Concepts Group. The agreement itself never contemplated that the Statement would be prepared by an interested party to the transaction. Mr. Zabel testified that he showed the schedule to his accountants and that they confirmed that he did it properly. There is, however, no written or independent evidence before me that Collins Barrow approved the calculation. Moreover, given the extremely significant calculation errors that Mr. Zabel admitted to making and that were readily apparent to QFS, and which I discuss below, I do not accept Mr. Zabel’s evidence that Collins Barrow reviewed and approved the Statement.

[297] Second, the calculation of the “Expected Proceeds” is not a self-evident exercise, even from the face of the financial statements. There is nothing in the financial statements of either Life Mark or Marketing Concepts Group that is called Net Service Fees or Net Investment Trailers. As Mr. Lax stated in his arbitration award:

It is uncontested however, that the income statements which form part of the financial statements would include revenue which would not necessarily reflect only the Net Service Fees and Net Investment Trailers, as defined in the SPA. The difference would be primarily due to the fact that the Vendors chose to defer income derived from the sale of books of business such that the income was only recognized and reflected in the financial statements of later years. It is agreed by the parties that such deferred income should not be included in the calculation of the purchase price and in particular should not be subject to the multiplier set out in question 1 above. To do so, would be to overstate the purchase price.

Further, the annual revenues set out in the financial statements could include revenue items such as first year commissions and bank interest, which do not form part of the calculation of the purchase price. Therefore, the financial statements while useful to the due diligence process, could not be determinative of the purchase price calculation.

[298] Moreover, those financial statements are merely a review engagement report. The external auditor, Collins Barrow, did not express an audit opinion. While a formal audit may not have been necessary to prove the losses claimed, it would have added additional comfort. However, either as review engagement or audited financial statements, the statements alone are insufficient to support the plaintiffs’ damages claim.[^38]

[299] The calculation underlying the purchase price is complex and requires the exercise of judgment. This point is made clear in an email among Mr. Zabel’s lawyers at BLG while they were finalizing an affidavit from Richard Gargarella, the external accountant at Collins Barrow for Life Mark and Marketing Concepts Group, for use in the arbitration before Mr. Lax. Margot Finley, a lawyer at BLG reported to Mr. Di Paolo on Mr. Gargarella’s comments on the agreement:

He looked over the Agreement and says it’s a mess.

He made some comments that I found interesting – He said the definitions aren’t consistent with GAAP but the body of the agreement doesn’t otherwise define what net service fees are, so if the body governs [Mr. Zabel] could choose anything from the [financial statements] he wanted to be [Net Service Fees]. There’s nothing in the [financial statements] called “net service fees” and he doesn’t know of any standard understanding for what that might mean. It’s not terminology they use. [Mr. Zabel] also makes some deductions and adjustments in his calculation that aren’t straight from the [financial statements] so his calculation isn’t wholly consistent with GAAP or the [financial statements] either.

[300] When asked during cross-examination about Mr. Gargarella’s statement that there is nothing in the financial statements called Net Service Fees, Mr. Zabel responded that “there’s nothing in the financial statements about net assets either. But all of the numbers are in there to calculate it, right? It’s- the financial statements are a tool. They’re not, they weren’t done for a precise purpose.”

[301] Neither Ms. Finley nor Mr. Gargarella testified at trial. Ms. Finley’s hearsay statements and the double-hearsay of statements attributed to Mr. Gargarella are not admissible for the truth of their contents. Mr. Zabel’s testimony about the comments, however, is properly admissible and confirms for me that the evidence on the calculation of the expected proceeds should have been provided by an independent expert.

[302] Expert evidence presented to the court should be, and should be seen to be, the independent product of the expert, uninfluenced by the party to the litigation. Expert witnesses have a special duty to the court to provide impartial evidence in the sense that it reflects an objective assessment of the questions at hand. They also have a duty to provide independent evidence that is the product of the expert’s independent judgment, uninfluenced by who has retained them, or the outcome of the litigation. The evidence must be unbiased in the sense that it does not unfairly favour one party’s position over another.[^39]

[303] Although Mr. Zabel is himself an accountant with professional credentials, his status as a party, and corresponding lack of independence, disqualifies him from giving opinion evidence.[^40] Mr. Zabel could not fulfill the role of expert. He is an interested party to the litigation and cannot provide opinion evidence that is fair, objective, and non-partisan. He is obviously in a conflict of interest and cannot owe the duty to the court that it is expected of experts.[^41]

[304] Third, Exhibit 19 contained a significant error in the interest calculation that makes me reluctant to put any weight on its calculation of expected proceeds. I have addressed this issue above. Mr. Zabel testified that in preparing Exhibit 19, he “applied an interest calculation to the balance of the promissory note, using the TD prime in 2012.” He explained that he used 6%, which was the interest rate that he got from TD. As explained above, on cross-examination, Mr. Zabel admitted that the actual interest rate at the time was only 3%. This mistake was not apparent on the face of the document. But for the effective cross-examination of Mr. Zabel by counsel for the defendants on this point, this error would never have been apparent.

[305] In re-examination, Mr. Zabel testified that, to correct his error, the interest figures should be reduced by “about half.” He testified that the total interest number would be “about 91 or $92,000, if I do that correctly.” As part of their closing submissions, the plaintiffs delivered an amended version of their damages chart, which reduced the total interest owing from $251,433.92 to $79,080.02. This amended spreadsheet differs in significant and unexplained ways from Mr. Zabel’s evidence on re-examination:

a. Mr. Zabel testified that the $64,886.17 figure should change by “about half.” The amended Exhibit 19 did adjust that figure to $32,443.09, which is half the original interest figure.

b. Mr. Zabel testified that the $105,440.03 interest figure should change by “about half. So it should be about $52,500, say.” The amended damages chart adjusted that figure down to $26,360.01. There is nothing in the evidence to explain why the adjusted interest figure was 25% of the original figure in Exhibit 19.

c. Mr. Zabel testified that the $81,107.72 figure should be adjusted downward, “by about half, so about $40,000.” The amended Exhibit 19 adjusted that figure down to $20,276.93. Again, there is nothing in the evidence to explain why the adjusted interest figure was 25% of the original figure in Exhibit 19.

[306] The error in utilizing 6% instead of 3% is another factor in my decision that I cannot accept Exhibit 19 as proof of the plaintiffs’ damages claim of over $1 million.

[307] Fourth, Mr. Zabel made a $200,000 deduction from his expected proceeds calculation. This is apparent on the face of Exhibit 19. He explained that this related to “the RBC accrual error” that he made when he first prepared the Statement in 2011. There was no explanation of why Collins Barrow did not catch this significant error if they in fact reviewed the Statement. Mr. Zabel explained this error in the affidavit he swore on July 24, 2013, for use in the arbitration before Mr. Lax as follows:

I concede that the RBC accrual of $38,441.88 was an error in the calculation on my part and I have so advised Mr. Cott through counsel. The balance of the accruals and accrued commission payables are, however, correct. The impact of this error is a reduction in the final purchase price of $192,059.40.

[308] However, there is another apparent error of roughly the same magnitude that the plaintiffs did not recognize in Exhibit 19. In his affidavit for the arbitration, Mr. Zabel stated as follows:

I concede that, for the purposes of the purchase price calculation, there is an argument that the multiplier should not be applied to the deferred revenue of $50,880.31 as it results in unintended increases in the purchase price. As such, I agree for purposes of this arbitration that the purchase price should be reduced to account for the elimination of the multiplier on the deferred revenue amount. The impact of this adjustment is a reduction in the final purchase price of $203,521.24.

[309] During trial, Mr. Zabel confirmed that he had reviewed this affidavit and that it was accurate at the time he swore it, and that it remained accurate today. Mr. Zabel appears to have acknowledged this second calculation error on several other occasions.

[310] During cross-examination at trial, Mr. Zabel acknowledged that he knew as early as 2011 that he had made errors totalling $400,000 (not only the $200,000 RBC accrual error) in the Statement he delivered to QFS:

Q. No, but, but if - let's assume that the figure you came up with, the 5.6, let's assume that was the correct figure. As a result of these errors that you were aware of in 15 October 2011, your best day in court was now 5.2 million.

A. Correct.

[311] When Mr. Zabel then expressed some doubt about whether or not he knew of the $400,000 error as early as October 2011, counsel effectively impeached him with his evidence at his examination for discovery where he admitted that he knew as early as October 2011 that he had made errors totalling $400,000 in the Statement.

[312] In addition, no later than November 16, 2012, QFS believed that Mr. Zabel had admitted that he made two errors in the Statement. On that date, counsel for QFS wrote to Mr. Di Paolo and stated: “Given your clients’ acknowledgment with respect to items (a) and (b) above (deferred revenue and five fiscal quarters of accrued revenue), and the fact that those items alone would cause an adjustment of the purchase price of approximately $400,000, this is reasonable in the circumstances.”

[313] However, on his cross-examination at trial, Mr. Zabel stated that he did not deduct an additional $200,000 from the expected proceeds listed in Exhibit 19 because he was “resistant to calling it an error”, but agreed that it should “lead to an adjustment…based on the share purchase agreement.” Mr. Zabel acknowledged that the deferred revenue issue should lead to an adjustment in the purchase price but said “I don’t know the magnitude of it, but it should be less than what, what it is here.” Nevertheless, he made no adjustment to the purchase price in Exhibit 19. By way of comparison, QFS came to the conclusion that this issue alone should lead to the purchase price being reduced by $254,000.

[314] It is important to recall the forcefulness of QFS’s challenge to the accuracy the Statement. As Mr. DiPaolo testified, QFS took the position that “a significant chunk of the net service fee [that] is reflected in Mr. Zabel’s [S]tatement, the [S]tatement prepared in accordance with the agreement didn’t exist.” No one at QFS testified at trial and that hearsay statement is not admissible for the truth of its contents, but it is a contextual factor that supports my reluctance to accept Mr. Zabel’s calculation of the expected purchase price.

[315] Mr. Zabel’s evidence regarding the second error is unsatisfactory. At a minimum, Mr. Zabel’s admissions demonstrate the judgment and opinion that is embedded in the calculation of the expected proceeds figure. In my view, this problem cannot be solved simply by deducting another $200,000 from the expected proceeds

[316] One of Mr. Zabel’s consistent complaints about Mr. Cott’s objection notice and the position that QFS took during the dispute was that Mr. Cott did not back up his calculation or expose it to independent scrutiny. For example, on April 4, 2012, he wrote to Mr. Di Paolo that “[i]t has always bothered me that QFS keeps pushing their ‘numbers’ without having a qualified accountant certify them or review them or even prepare them. Is there some way we can get them to at least do some work to authenticate those numbers?”

[317] I find myself in a similar situation with respect to Exhibit 19. No qualified, independent accountant has prepared, reviewed, or certified Exhibit 19. It was prepared by one party to the transaction but not agreed or accepted by the other party. I do not accept that Exhibit 19, and in particular the top line “expected proceeds” figure is satisfactory proof of a damage claim in excess of $1 million.[^42] I am left with no admissible, cogent, and reliable evidence proving the damages claimed by the plaintiffs with respect to the purchase price for the agreement.

[318] Even if I found that Mr. Brechin had breached the standard of care and caused damages to the plaintiffs, or breached his contract with the plaintiffs, I would award them only nominal damages with respect to the purchase price.

Legal Expenses and costs of the arbitration

[319] The plaintiffs also tendered Exhibit 7, which was a spreadsheet that tabulated all of the BLG legal invoices and arbitration expenses the plaintiffs paid to pursue the dispute with QFS, including the arbitration. Each row of Exhibit 7 was cross-referenced to an invoice in the joint book of documents. The plaintiffs claim $280,437.34.

[320] The defendants accept these figures, but submit that $7,838.86, should be deducted from the amount claimed as it relates to this action against the defendants, not the dispute with QFS. The plaintiffs did not dispute this figure.

[321] I accept this evidence. If I had found that the defendants were negligent and caused harm to the plaintiffs, or if I had found that the defendants breached their contract with the plaintiffs or had breached their fiduciary duties, I would have awarded the plaintiffs special damages in the amount of $272,598.48. Viewed either as reasonable attempts to mitigate their losses or as reasonably foreseeable damages, the plaintiffs should have been permitted to recover them, had I found the defendants liable under any of the plaintiffs’ theories of liability.

Causation

[322] The plaintiffs submit that they have proven that their damages were caused by the defendants’ negligence and, but for that the negligence, they would not have suffered the losses. The plaintiffs frame their submissions on causation this way:

The Zabels have demonstrated on a balance of probabilities that, if properly advised, they would have proceeded in a manner that avoided the damages suffered or obtained the benefit lost as a result of the negligent advice. This "but for" causation is the generally accepted standard for causation in solicitor's negligence cases. But for Mr. Brechin's breaches, the Zabels would not have executed the Final Agreement as it was. With proper advice on the Agreement, a narrowly drafted Objection Provision, sufficient access to the Companies' books and records, and properly drafted clauses on the purchase price adjustments and dispute resolution mechanism, the Zabels would have in all likelihood been protected from the consequences of the Objection Notice.

[323] In my view, the primary cause of Mr. Zabel receiving a price other than the one he wished to obtain were the definitions of the Net Service Fees and Net Investment Trailers. Those definitions produced revenue streams that were then multiplied by five or three times to produce the purchase price. If Mr. Zabel had his external accountant review those provisions, things may have turned out very differently.

[324] I do not accept that any provisions in the dispute resolution mechanism caused any damages to Mr. Zabel. He never followed through with his right to have the purchase price dispute submitted to the independent accountant. Nothing in the wording of that provision can fairly be said to have caused any damage to the plaintiffs.

[325] For the reasons set out above, Mr. Zabel had adequate access to the books and records of the companies to prepare the Statement and I do not accept that the agreement failed to provide him with sufficient access to the books and records to permit the independent auditor to determine the purchase price. Having not pursued the process before the independent auditor, I do not believe that the delayed access to books and records caused any damage to Mr. Zabel.

[326] I do not accept that Mr. Cott would have agreed to a purchase price based on the financial statements. He refused to do so very early on in the negotiations, Mr. Zabel unsuccessfully tried to move Mr. Cott off that position and then conceded the point. For that same reason, I do not believe that Mr. Cott would have agreed to a “narrow” objection provision.

[327] The agreement contained a pricing formula and a determination of the purchase price through the production of the Statement, an objection, and a determination of price by the independent accountant. These provisions were not a post-closing price adjustment mechanism. Once the parties had agreed that the purchase price would be a multiple of a revenue stream, it does not make commercial sense that Mr. Cott would have agreed to exclude any of the price inputs from the scope of the objection provision. The objection provision was not included in the agreement to protect Mr. Zabel, it was included as part of the mechanism to set the price. As Mr. Gray put it in his evidence, the basis for the objection has to be consistent with the item being calculated and the objection provision would have to cover all of the elements of the formula that determined the price. Mr. Gray testified that he had never seen an agreement containing a “narrow” objection provision containing such restrictions.

[328] It seems extremely unlikely that Mr. Cott would agree to a pricing mechanism that would be dependent on financial parameters and then agree that he could not challenge or verify those parameters but would pay up to a five-times multiple on them.

[329] Mr. Zabel testified that he would not have signed the agreement without a narrow objection provision. I do not accept this evidence. It is inconsistent with his approach to the negotiations and, in particular, his acknowledgment on May 10, 2011, that Mr. Cott was not inclined to make changes to the draft agreement beyond what the changes that he absolutely had to make. Mr. Zabel recognized that Mr. Cott had the upper hand. If Mr. Zabel wanted to do the deal, and he did, it would be on terms acceptable to and largely set by Mr. Cott.

[330] I do not accept Mr. Zabel’s evidence that the objection provision, access to books and records, and properly drafted clauses on the purchase price adjustments and dispute resolution mechanism would have been deal-breakers for him.

[331] In conclusion, I find that any damages suffered by the plaintiffs were not caused by a negligent act of the defendants.

[332] For the reasons set out above, I dismiss the plaintiffs’ claim in negligence.

Breach of contract

[333] The plaintiffs claim that the defendants breached their contract with them.

[334] There is no longer any doubt that lawyers owe their clients concurrent duties in contract and tort for acts and omissions during a solicitor-client relationship.[^43] Where the court finds that a solicitor-client relationship exists and when there is no written retainer agreement, the court will imply the contractual duties owed by the solicitor to the client. These implied contractual duties include the duty to exercise reasonable competence and diligence in the provision of the legal services.[^44] A lawyer promises in her contract to provide legal services to her client at the standard of a reasonably competent solicitor. The retainer agreement requires that the lawyer meet the standard of care.

[335] The plaintiffs submit that Mr. Brechin had a legal duty to advise them on all legal matters and terms of the agreement, including the purchase price and objection provisions. The plaintiffs submit that Mr. Brechin never provided them with a written retainer for this mandate, but tried to limit the scope of his engagement and the standard of care he owed to his clients. I agree with the plaintiffs’ submission that the onus of proof lies on the lawyer to establish the scope of the retainer where the retainer agreement is not in writing.[^45] I also accept that if a lawyer attempts to limit a retainer to a scope less than that required of a reasonably competent and diligent solicitor, the lawyer should do so in simple, concise, and precise language reduced to writing so that it clearly defines the scope of the legal services to be provided.[^46]

[336] I do not think that Mr. Brechin’s letter from May 5, 2011, is best understood as a formal “limited scope retainer.” I understand that phrase to mean a retainer agreement in which a lawyer agrees with the client that the lawyer will provide legal services for part, but not all, of the client’s legal matter. This is sometimes referred to as the unbundling of legal services. Mr. Brechin acknowledged that he was being asked to handle all legal aspects of the sale of the business, which does not fit comfortably within the definition of a limited scope retainer.

[337] However, in my view, Mr. Brechin could not have been clearer with Mr. Zabel in his May 5, 2011, opinion letter that Mr. Zabel needed to obtain independent accounting advice with respect to the definitions of net service fees and the purchase price:

Paragraph 1.1 - Definitions I have not attempted to try to understand how the purchase price is calculated in the sense that that is between yourself and your accountant, so I haven't paid much attention to the definitions of Current Assets, Excluded Liabilities, Net Service Fees, Net Investment Trailers, Target Working Capital and Working Capital Amount but it is exceptionally important that you and your accountant understand these definitions. …

[338] In his examination in chief, when Mr. Zabel was asked if he reviewed the agreement with his accountant he answered, “Well, I am my accountant. So, yes, I guess I did.” I do not accept this explanation. The companies had external accountants at Collins Barrow. Mr. Zabel admitted that he did not do any of the accounting at Life Mark or Marketing Concepts Group. Collins Barrow did the accounting. Mr. Zabel decided not to show them the draft agreement despite Mr. Brechin’s explicit recommendation.

[339] Mr. Zabel confirmed that he read the entire letter in detail. He never told Mr. Brechin that he did not understand anything in the letter, never sent him an email asking any questions about the letter, and never told Mr. Brechin that he disagreed with anything in the letter. Mr. Zabel testified that he was not expecting Mr. Brechin to understand how the purchase price was to be calculated and did not get any advice on the purchase price or objection provisions.

[340] Mr. Kinghan, the expert retained by the plaintiffs, agreed with Mr. Gray, the expert retained by the defendants, that Mr. Brechin acted reasonably in in advising the plaintiffs to obtain accounting advice:

Rather, my agreement with Mr. Gray is solely with respect to Mr. Gray’s conclusion that the defendant acted reasonably in advising the Zabels to seek advice from their accountant….the defendant had specifically instructed the Zabels to seek their accountant’s advice on the purchase price and, to my knowledge, the retainer was not modified further such that the Zabel’s expected the defendant to advise on the price calculations.

[341] As I found above, Mr. Zabel did not alter the scope of the retainer by asking Mr. Brechin to “take over” negotiations in late May 2011. I have already found that Mr. Zabel made a much narrower ask of Mr