COURT FILE NO.: CV-18-75707
DATE: 2023/08/22
SUPERIOR COURT OF JUSTICE – ONTARIO
RE: 176519 CANADA INC., GLENN VODDEN and MICHELLE VODDEN, Plaintiffs
AND:
2429306 ONTARIO INC., C.A.C.E. CONSTRUCTION (1991) LTD., PAUL LEMIRE AND PAUL MOUSSEAU, Defendants
BEFORE: C. MacLeod RSJ
COUNSEL: J. Alden Christian, Natalie Scott & Matthew Benson, for the Plaintiffs
David Contant and Wafa Khan, student-at-law, for the Defendants
HEARD: March 20 to 24, 2023
DECISION AND REASONS
Introduction
[1] This litigation, commenced in 2018, came on for trial on March 20, 2023 at the courthouse in Ottawa. The following are my reasons for judgment.
[2] At stake is a vendor take back promissory note in the amount of $188,000, which was the balance due on the sale of C.A.C.E Construction. That sale closed in November of 2015 and resulted in a transfer of ownership of C.A.C.E Construction (1991) Ltd. (“CACE”) and a transfer of the assets used in the construction business that were previously held by 176519 Canada Inc. (“176”).
[3] The Vodden plaintiffs were the beneficial owners of the CACE through 176 and the defendants Lemire and Mousseau are the new owners through the defendant 2429306 Ontario Inc. (“242”). The purchasers allege that there are amounts owing by the vendors that more than offset the amount due under the note. That is what drove the litigation and is the issue to be tried.
[4] As discussed below, I have concluded that there are legitimate set off claims, but they do not reduce the indebtedness of the defendants to zero. There remains an amount due under the note. Both the promissory note and the guarantees are enforceable.
The trial
[5] This was one of the first civil trials to take place in person post-pandemic. Despite taking place in a physical court room, it was not a return to pre-pandemic norms. The documents and evidence remained electronic and were presented using the CaseLines platform.
[6] Prior to trial, counsel had agreed on the admissibility, authenticity and truth of almost all of the documents to be put to witnesses or entered into evidence. This simplified matters as the document books were marked as exhibits and witnesses referred to the documents in those books by electronic tab number. In the end there were four numbered exhibits and two lettered exhibits.
[7] All witnesses testified in person. The main witnesses were Mr. Vodden, Mr. Lemire, Mr. Van Dusen, the bookkeeper and Mr. Wilson, the accountant. I also heard from Mrs. Vodden.
[8] Although there were several different issues raised by the pleadings, not all of those were advanced at trial. In addition, each of the parties made concessions in closing. Consequently, the issues to be decided are narrowed to two. The first issue is how to treat intercompany debt remaining on the books. The second is whether a bookkeeping error in one of the client accounts constitutes a breach of warranty and requires the vendor to compensate the purchaser.
The Law of Contract and Admissibility of Evidence
[9] I begin by discussing the law of contract and the rules of contractual interpretation. The Supreme Court of Canada states that the primary rule of contractual interpretation is to give effect to the intention of the parties at the moment of contractual formation.[^1] In the case of a written contract, that meaning is to be found in the text itself although the factual context will also inform and deepen that analysis.[^2]
[10] Both parties acknowledge that when a contract has been reduced to writing, the written contract governs and it is the task of the court to give the document its plain and ordinary meaning. The court deciding the matter will ask itself how an objective bystander reasonably informed about the circumstances would interpret the agreement.
[11] In this case there were protracted negotiations leading up to the signing of the closing documents. If there was ever a written agreement of purchase and sale, it was not put in evidence. In reality there were a series of ongoing negotiations and agreements as the parties worked together in the business with a view to an eventual buy out.
[12] As the evidence disclosed, some of those agreements had to do with the defendants qualifying for financing and ensuring that the value they were purchasing remained in the company. Other agreements were due to the delay in closing. These prior agreements are primarily important for context. None of them are referenced in the closing documents.
[13] There was one objection when Mr. Vodden testified about his intention that the sale price would be the combined book value of the company paid out in the most tax efficient manner possible. Mr. Contant objected to the admissibility of this evidence on the basis of the Parol Evidence Rule and certain paragraphs in Sattva. In my view, this evidence is admissible and it is overly rigid to read Sattva to stand for the proposition that evidence of subjective intention can never be admitted.
[14] Evidence of Mr. Vodden’s intention would be inadmissible if led for the purpose of overriding the meaning of the written contract, but it is admissible where his purpose in proposing the agreement was made clear to the defendants. In fact, the defendants were not only aware of this, they accepted the structure of the transaction because they understood that this was a condition of the sale. The fact that Mr. Vodden wanted to structure the sale to minimize taxes is not disputed.
[15] It is the law in Canada that self serving evidence about subjective intent may not be admitted to overwhelm the clear meaning of a written contract.[^3] This is the Parol Evidence Rule but much like hearsay, whether the evidence is admissible or not depends on the purpose of the evidence. Here, Mr. Vodden was explaining why the transaction was structured as it was and his evidence on this point is entirely corroborated by the evidence of the defendants.
[16] In other words, all parties knew that there would be a complex structure designed to minimize tax. This is one of the surrounding circumstances known to both parties which may assist the court to understand the transaction and the factual matrix in which the contract must be considered and interpreted. This is very different from allowing a person to testify that they had a secret belief that the contract meant something other than what it says.
[17] With that in mind, I turn to the circumstances giving rise to the sale.
Background to the Sale
[18] Glenn Vodden founded C.A.C.E Construction with a partner in the late 1980s. CACE became a successful construction company focused primarily on heavy construction such as sewer and watermain installation. Subsequently Mr. Vodden bought out his partner or partners and became the sole owner.
[19] By the time of the events in question, CACE was held by Mr. and Mrs. Vodden through three corporations. CACE was wholly owned by 176. 176, in turn, was owned by the Voddens through their holding company, “Vodco”. Mrs. Vodden had little or nothing to do with the day-to-day operations. At all material times, it was Glenn Vodden who was the directing mind of both CACE and 176.
[20] According to the evidence, CACE was the operating company while 176 owned the heavy equipment necessary for the business. 176 also held other CACE assets such as land and owned the common shares of CACE itself. This protected the assets, but it also allowed for income to be allocated between the two corporations in the manner deemed most appropriate for each year.
[21] CACE, as the operating company, rented the equipment from 176 while 176 held the assets and paid the carrying costs. Effectively this allowed for optimized income splitting by adjusting the amount of expense incurred by CACE and income earned by 176 upward or downward.
[22] Mr. Vodden testified that while the companies were under joint control, the fees for equipment rental were typically calculated as a year end adjustment in consultation with his accountants. There was not ongoing monthly intercompany billing, but as the accounting records show, there were regular advances from CACE to 176 and then a year end adjustment. To the extent that CACE had overpaid or underpaid the agreed upon rent at the end of the year, the balance was reflected as intercompany debt.
[23] The negotiations leading up to the sale to the defendants were protracted. They began in May of 2012 and concluded in November of 2015 when the transaction finally closed. During that time, although Mr. Vodden continued to own the company, Mr. Lemire became the manager and Mr. Mousseau was the head foreman. All three worked in the business and Mr. Vodden continued to work for CACE after the closing. The key events are as follows.
[24] Paul Lemire was introduced to Mr. Vodden in 2012 at a time when Mr. Vodden was contemplating retiring and Mr. Lemire was interested in becoming the owner of a construction company. As Mr. Lemire needed to learn the business and Mr. Vodden wanted to be certain that Mr. Lemire was the right person to take over the company and manage its employees, it was agreed that Mr. Lemire would come and work for CACE. This was with the intention that Mr. Lemire would eventually buy out Mr. Vodden if both parties were satisfied with the arrangement. Mr. Lemire was also given access to the financial records upon signing a confidentiality agreement.
[25] Although Mr. Lemire indicated to Mr. Vodden in 2012, 2013 and 2014 that he wanted to go ahead with purchasing the company, there was no formal letter of intent or other documentation that would require Mr. Lemire to purchase or Mr. Vodden to sell. At some point, Mr. Lemire decided to partner with Mr. Mousseau. According to Mr. Vodden, he had always been clear that he would sell the company for the book value of the business and Mr. Lemire had been clear that he would buy the business if he was satisfied. Mr. Lemire had been exploring financing options with the Business Development Bank of Canada.
[26] CACE had a January 31 year end. This means that the performance of the company as reflected in its 2014 financial statements would largely relate to the previous year. It was eventually agreed that Mr. Lemire and Mr. Mousseau would purchase the company for the combined book value of CACE and 176 as at the 2013-2014 year end (January 31, 2014). Those are numbers based on the performance of the company during 2013 and the assets it owned at the end of the year. In addition to the financial statements, the defendants had obtained appraisals of the equipment and the land held by 176. The agreed upon combined value was $1,080,998.00.
[27] Mr. Lemire made a formal offer to purchase in early 2014, but whatever may have been the contents of that offer, Mr. Vodden did not accept it. Apparently, the proposal did not satisfy Mr. Vodden’s fundamental requirements. Mr. Vodden expected to receive the full book value of the combined companies in a manner that was tax efficient. For their part, the defendants required a structure and price they could finance through BDC.
[28] During the summer of 2014, Mr. Vodden was obtaining tax advice and putting together his own proposal. In October of 2014, Mr. Vodden shared detailed advice from his accountants on a structure for the sale. The original concept involved a sale of Vodco, the Vodden’s holding company. The precise structure outlined in the accounting proposal was not what the parties ultimately agreed upon, but the basic idea under which the purchase price would be paid through a series of dividends and intercompany transfers was acceptable. Mr. Lemire testified at trial that he was concerned about the price and what he was getting for it, but he understood Mr. Vodden required a structure that worked for him tax wise.
[29] After discussion with his lawyers and tax advisors, Mr. Vodden was eventually able to provide the purchasers with a formal offer to sell. This occurred in January of 2015 and it proposed the mechanism that eventually took place. In simplest terms, 176 would sell its equipment and other assets including the shares of CACE. So, there was to be a share purchase of CACE itself and an asset purchase of the equipment and the land.
[30] Based on this offer and the 2014 financial statements, Mr. Lemire and Mr. Mousseau negotiated financing with BDC. The purchase continued to be based on the 2014 book value, but BDC also wanted to see the financial statements for the January 2015 year end. Not surprisingly, the bank was looking to see that the revenue and profit figures were stable or improving.
[31] The purchasers secured a formal offer of financing with BDC in April of 2015 and they then agreed to purchase the shares of CACE and the assets of 176. The sale was scheduled to close in May of 2015. The purchase price had been adjusted to $1,028,000.00 (due to certain credits allowed to the vendors). Most of the purchase price was to be paid immediately, but $188,000.00 was to be by way of a “vendor take back” promissory note.
[32] Due to a last-minute issue with the financing, the transaction did not close until November 12 of 2015. It seems that BDC required Mr. Lemire and Mr. Mousseau to contribute an additional $100,000.00 to working capital. There was some discussion about Mr. Vodden lending the purchasers this amount but ultimately that was not necessary. Nevertheless, it was only in November that the parties were able to close the deal.
[33] Certain complications arose from the extended negotiations and closing date and from the fact that the parties made other side agreements. The agreement to purchase was based on the book value of the company at January 31, 2014, which was the 2013-2014 year end. By the time the agreement was finalized, another year end had passed (January 31, 2015) and by the time the purchase closed, CACE was ten months into its 2015-2016 fiscal year.
[34] The 2014 book values were the figures that the defendants took to the bank to arrange financing. It had been agreed that pending the completion of the sale, all profits would be left in CACE. Mr. Vodden undertook not to take funds out of the business other than his salary and the funds necessary for 176 to pay the carrying costs of the equipment and land. He had also agreed not to dispose of any assets without approval. These agreements were not referenced in the closing documents and if they were in writing, they were not put in evidence, but the parties agree that was the basis under which they operated the business in 2014 and 2015 pending the closing.
[35] Mr. Vodden, Mr. Lemire and Mr. Mousseau were all paid salaries by CACE, but in 2014 Mr. Vodden had proposed he also be paid $45,000 in profit because the sale had not closed and he was still the owner of the company. That is for the 2014-2015 fiscal year. The defendants apparently agreed, but by the time of the trial, none of the witnesses were sure exactly how the $45,000 was paid. Mr. Lemire believes it was worked into the purchase price. This amount is not in issue.
[36] As noted above, there were certain other adjustments to the original $1,080,998.00 book value in addition to adding the $45,000 profit share. Mr. Vodden had previously agreed to pay Mr. Mousseau a share of CACE profits and the parties agreed that would be reflected in a $57,000.00 credit to the purchase price. Mr. Vodden had also agreed to reimburse CACE for the value of his life insurance policy. Mr. Lemire testified that these amounts resulted in the adjusted sale price of $1,028,000.00.
[37] In 2015, due to the delay in closing, Mr. Vodden requested an additional $30,000 share of profits. That would have been profits from the 2015-2016 fiscal year or in reality the 2015 stub year since there would be a deemed year end with the change in control.
[38] The defendants agreed to pay the $30,000, but required it be a separate side agreement outside of the purchase of the business so as not to disrupt the financing. This resulted in personal agreements by Mr. Lemire and Mr. Mousseau to pay $15,000 each to Michelle and Glenn Vodden.
[39] Mr. Vodden testified that starting in the fall of 2014, Mr. Lemire became the manager of CACE and Mr. Vodden concerned himself primarily with the construction work. Thereafter, it was assumed the purchasers would buy out the Voddens if they could secure the financing and agree on final terms.
[40] The transaction eventually closed. The assets of 176 were transferred along with all of the shares of CACE. The end result was that ownership of CACE moved to the defendants while ownership of 176 remained with the Voddens or their holding company. Both Glenn and Michelle Vodden were given employment contracts with CACE as part of the deal and Mr. Vodden continued to work for CACE to provide his expertise and assistance after closing.
The disputes
[41] Disputes arose in the year after the closing. Firstly, in early 2016, the defendants discovered that 176 had a balance of $23,177.04 in its bank account on the day of closing and laid claim to that amount as an asset of 176 that should have been transferred.
[42] Besides the demand by Mr. Lemire for the bank balance held by 176 at the date of closing, Mr. Lemire also demanded that Mr. Vodden pay him funds received by 176 for rebates of licence plates when CACE changed the plates and for HST refunds also received by 176 post closing. On the other hand, Mr. Vodden had expected that 176 would receive an insurance rebate, but the insurance company simply transferred the insurance to CACE from 176 and did not provide a rebate.
[43] In May of 2016, the defendants advised Mr. Vodden that 176 owed more to CACE than the $240,000 intercompany debt reflected in the agreement. The purchasers proposed to set the difference off against the promissory note to reduce the amount owing under the note. They claimed other adjustments as well. This was the subject of a meeting with the company accountant in early 2016, but the issue was not resolved.
[44] In November of 2017, Mr. Vodden was advised by the defendants that they now took the position nothing was owing. The defendants claimed a number of setoffs and refused to pay the $188,000 or any amount due under the promissory note.
[45] This litigation ensued. Once that took place, both parties added additional claims so that the amounts in dispute appeared much greater than they did during the trial. Some claims were abandoned prior to trial and others were conceded in closing submissions.
[46] The dispute the court must adjudicate turns primarily on whether or not the agreement of purchase and sale should be construed as a fixed price or one that is subject to adjustment and perhaps to rectification. A related issue is the extent to which intercompany debt recorded in financial statements and the books continues to have force after closing or whether the financial statements should simply be restated to match the closing documents.
The Written Agreements
[47] The parties agree that the signed closing documents are the documents that govern them. As set out above, these were ultimately signed in November of 2015. As disclosed by the evidence, both parties were represented by sophisticated legal counsel and there were extensive proposals and counter proposals on the wording of the documents. Primarily those exchanges show the importance of the tax planning structure for the vendors and the concern of the purchasers not to have to renegotiate their financing. The agreement with BDC was subject to there being “no material change”.
[48] The challenge for the court is that nowhere in the written documents do the agreements specifically state that the numbers used to calculate the purchase price are the 2014 year end numbers. Nor do the closing documents specifically deal with changes in the numbers between February 1 of 2014 and the final closing date of November 11, 2015. The purchase price had not changed, but there had been one year and ten months of business operations between February 1, 2014 and November of 2015. During that time both the value of CACE and the value of the assets held by 176 would have changed.
[49] The primary document is the Share Purchase Agreement (SPA) between 176 as vendor and 242 as purchaser signed by Mr. Vodden and Mr. Lemire dated November 9, 2015. As between the vendor corporation and the purchaser corporation, the purchase price for the outstanding shares of CACE was set at $1.00. The agreement also contains representations and warranties, an indemnity provision and an entire agreement clause. The SPA however speaks of concurrent agreements that are set out in Schedules.
[50] The actual purchase price and mechanism of payment is found in the Schedules. Schedule B entitled “Conditions” provides that prior to closing (and after an injection of capital by the purchasers) CACE will have paid dividends to 176 in the amounts of $528,000 and $232,000, that the vendor and the purchaser will have entered into a general conveyance of the assets of 176 for a price of $508,000, and the balance owing and unpaid will be secured by a “grid promissory note” and other security.
[51] Significantly, the Schedule provides for a setoff against the purchase price of the “current indebtedness” of 176 (the Vendor) to CACE in the amount of “$240,000.00”. This is the number owing by 176 to CACE at the end of the 2013-2014 fiscal year according to the 2014 financial statements. The schedule also contains other covenants such as Glenn and Michelle Vodden signing employment agreements and noncompetition agreements.
[52] It is worth setting out the language of paragraphs 1 a) – g) of Schedule B in full. “Operating” refers to CACE. The provisions summarised above read as follows:
- Concurrent Transactions: Concurrently with the Closing, the following transactions shall have been completed:
(a) effective the Effective Date Operating shall have paid dividends to the Vendor in the amounts of $528,000 and $232,000 (these amounts may be adjusted (although the total amount of the dividends will remain the same) based on the level of safe income of Operating as determined by Collins Barrow as at November 11, 2015) and the payment secured by a grid promissory note in the form attached as Schedule "D.1" with both Operating and the Purchaser signing as prime obligors. This amount will be netted against the current indebtedness of the Vendor to Operating in the amount of $240,000 as reflected on the grid promissory note. The grid promissory note will be secured by a General Security Agreements by Operating and the Purchaser in favour of the Vendor in the form attached as Schedule "E" and guaranteed by Operating, the Purchaser, Paul Lemire and Paul Mousseau in the forms attached hereto as Schedules "F.l" and "F.2". As further security, the Purchaser shall assign to the Vendor its interest in any life insurance policies on the lives of Paul Lemire and Paul Mousseau in the form attached as Schedules "G".
(b) Paul Lemire and Paul Mousseau shall have entered into a shareholders' agreement in a form satisfactory to the Vendor for the operation of the Purchaser and Operating;
(c) each of Glenn Vodden and Michelle Vodden shall have entered into the Employment Agreements attached hereto as Schedules "H" and "I"
(d) effective the Effective Date the Vendor and the Purchaser will enter into the General Conveyance attached hereto as Schedule "J" at a purchase price of $508,000, with the purchase price secured by an addition to the grid promissory note;
(e) the Vendor and the Purchaser shall elect in accordance with section 167 (1) of the Excise Tax Act and file the necessary Form GST44 so that no HST is exigible on the transfer of the assets contemplated under the General Conveyance;
(f) Operating shall pay the Vendor $840,000 as a partial payment of the promissory note with the remainder to be paid interest only at 7% interest on November 12 of each year that any portion of the promissory note is outstanding with the remaining amount fully payable on November 12, 2020;
[53] The grid promissory note is attached as a schedule and was signed independently. It reflects the payment of the purchase price as set out above:
| GRID | ||
|---|---|---|
| Date: | Amount ($) | Balance ($) |
| November 11, 2015 | $528,000 | $528,000 |
| November 11, 2015 | $232,000 | $760,000 |
| November 11, 2015 | ($240,000) | $520,000 |
| November 12, 2015 | $508,000 | $1,028,000 |
| November 12, 2015 | ($840,000) | $188,000 |
[54] There is no dispute that the $840,000 consisting of the dividends and the purchase price for the assets was paid. The balance of $188,000 was to bear interest at seven percent per annum until paid and was to be paid in full no later than November 15, 2020.
[55] As mentioned earlier, there was a separate agreement which was not mentioned in the SPA. Under that separate agreement, Mr. Lemire and Mr. Mousseau agreed to pay $15,000 to each of Mr. and Mrs. Vodden. That was the side agreement to pay a share of the profits of CACE ($30,000) for 2015 because of the delayed closing.
[56] The Schedule dealing with the assets of 176 was expressed as a sale of “substantially all of the assets of the Vendor used in the construction (primarily excavating) business, and specifically including the Lands”. This was documented in a “General Conveyance, Assignment and Bill of Sale” attached as Schedule J to the agreement. The Conveyance sets out that the vendor is transferring “all of the vendor’s right, title and interest in the assets used in the business” (including the land) and “including without limitation” certain listed assets but excluding life insurance policies on the life of Glenn Vodden and two motor vehicles (a 2014 Subaru and a 2014 Ford F150 driven by the Voddens).
[57] Once again, it is useful to set out the language in full.
Now THEREFORE this Indenture witnesses that in consideration of the sum of $508,000 paid and satisfied by an addition to a grid promissory note in like amount made by the Purchaser in favour of the Vendor and other good and satisfactory consideration (the receipt and sufficiency of which are hereby acknowledged), the Vendor hereby sells, assigns, conveys, transfers and delivers unto the Purchaser all of the Vendor's right, title and interest in the assets used in the Business and specifically including the Lands (the "Purchased Assets"), including, without limitation, the assets listed in paragraphs (1) to (6), but excluding other assets set forth in (7) and (8) below:
(1) all equipment, furnishings, supplies and accessories used in connection with the Business including, without limitation, those described below (collectively called the "Equipment") including, but not limited to those assets listed in Schedule "A" hereto;
(2) all prepaid expenses and deposits, if applicable;
(3) the full benefit and obligation, whether known or unknown, accrued or not accrued, fixed or contingent, of all sales, unfilled purchase orders, agreements, contracts, commitments, engagements and other instruments of any kind (other than any oral agreements of the Vendor) of the Vendor pertaining to the Business and entered into in the ordinary course of the Business, (and the maintenance and support contracts associated therewith) and forward commitments for supplies or materials (whether or not contained in a contract) (collectively called the "Contracts"); and
(4) the goodwill of the Vendor pertaining to the Business, including the right to represent the Purchaser as carrying on the Business in continuation of and in succession to the Vendor;
(5) the lands legally described as [……] Ottawa, Ontario (the "Lands"); and
(6) all other property, assets and rights, real or personal, tangible or intangible owned by the Vendor or to which it is entitled in connection with the Business
[58] There is a potential ambiguity in the wording because it is a sale of the assets of 176 “used in the business” or “owned … in connection with the business”. To the extent that assets are not listed in Schedule A or specifically mentioned in paragraphs one through six (“purchased assets”) or paragraphs seven and eight (excluded assets) there is a question as to whether any assets of 176 that are not listed are assets used in the business or other assets of 176. One of the assets that is not specifically listed in either category was the balance in the 176 bank account on the date of closing. As noted earlier, that amount was $23,177.04. Obviously, the dividends that were to be paid to 176 as part of the purchase price would not be assets to be acquired by the purchaser.
[59] Neither the SPA nor any of the agreements attached as schedules contain a price adjustment clause. The SPA however does attach a set of representations and warranties and provides for a claim and indemnity process. The Representation and Warranty sections of the Agreement are found in Article 3 and in Schedule A. Articles 3.01 – 3.03 provide that both parties are relying on the representations and warranties, that they survive closing for four years (or longer for certain tax matters) and provide that each party shall indemnify and hold the other harmless for “any claim, damage, loss, cost or expense incurred as a result of any breach of any representation, warranty or covenant. Article 3.04 deals with notice and settlement of claims if any third party makes a claim against either party for which the party may seek indemnity. That is not applicable to the current dispute. Article 3.05 limits the liability of the vendor to the purchaser to aggregate claims of more than $1,000.00.
[60] Schedule A contains the Representations and Warranties. Numbers one through seven deal with corporate status and other formalities, licences and permits and legal proceedings against CACE. These are of no moment to the current dispute. Similarly paragraphs 14 to16 and 17 to 18 are not germane. Paragraphs 11 and 13 deal with “Financial Matters”. Of these, paragraph 13 deals with tax returns and assessments. The representation which may be germane to the matters before the court is paragraph 11 concerning books and records. That paragraph reads as follows:
- Books and Records: All transactions of Operating have been properly recorded in their corporate and accounting books and records which have been maintained in accordance with good business practice and generally accepted accounting principles.
Analysis and Rulings
[61] As a result of concessions made before or during the trial, the issues in dispute have been narrowed. I need not deal with the claim that the $30,000 paid to Mr. & Mrs. Vodden was extracted under duress and should be repaid, the claim by the Vodden’s that CACE owed them money for health care expenses and certain other claims for reimbursement made by the defendants against the Voddens. In addition, in closing, the plaintiffs conceded that the evidence showed the cash on hand in the 176 bank account on the date of closing should have been an asset transferred to CACE along with the equipment and land.
A) The Purchase Price
[62] The purchase price is set out in the SPA and the attached schedules. It is clear from the evidence, from the financial statements and other documents that this price was based on the values attributed to the company at the January 31, 2014 year end. There is nothing in closing documents or the written agreements that specifically addresses changes which occurred between January 31, 2014 and the date of closing.
[63] The fact that the purchase price was based on the 2014 valuation is clear from the evidence given at trial. It is also apparent from the financing agreement signed with BDC and by the numbers in the sale documents. Nowhere, however, does the SPA or any of the schedules reference the date of January 31, 2014 nor do those documents deal with developments over the intervening 22 months.
[64] What the parties did do is to make a series of interim agreements or side agreements. For example, it was agreed that Mr. Vodden would continue to collect a salary and 176 would be paid an agreed upon rental fee to cover the carrying costs but would not take profits or sell assets unless agreed upon. Subsequently there was an agreement to pay Mr. Vodden $45,000 in profits for 2014-2015 and a further $30,000 for profits up to the date of closing.
[65] It is quite clear that the purchase price was fixed based on the 2014 values. Thereafter, except as agreed upon, it was the intention that profits in CACE would accrue to the purchasers and they would receive the assets held by 176. Evidently, the equipment would continue to be depreciated and might suffer wear and tear, but there is no suggestion in the written agreement that the equipment should be revalued or the purchase price otherwise adjusted on the closing date. The book value of CACE increased up to the date of closing and that was to the benefit of the purchasers. There is no provision for price adjustment in any of the written documents.
[66] Examination of the 2014 financial statements for CACE and for 176 shows that the 2014 “retained earnings” number for CACE was almost exactly the number paid out by way of capital dividends on closing. The retained earnings amount was $780,313. The amount paid by way of dividends was $780,000. The balance of the purchase price was the amount allocated for the asset purchase. That was $508,000.
[67] The only provision in the agreement for adjustment of these numbers is the provision which provides for changes to the allocation of the dividends between the two dividend payments. That clause (reproduced above) specifies that regardless of such reallocation the total dividend was to be the same. The price for the assets was a fixed amount. The agreed upon combined price for the shares and the assets was a net figure of $1,028,000. That amount never changed despite the passage of time and changes in the books.
B) The Intercompany Debt
[68] As discussed earlier, the agreements set out in the schedules to the SPA provide for a credit against the book value equal to the debt owed to CACE by 176. The agreement states that the amount of the intercompany debt is $240,000. That is a rounded number because the actual number shown in the financial statements was $239,715, but it reflects the value on January 31, 2014. This credit was factored into the purchase price and it shows as a credit on the grid promissory note.
[69] The problem that has now arisen is because the books of both 176 and CACE showed an intercompany debt owing from 176 to CACE in the amount of $368,165 at the time of closing and after deducting the $240,000 on closing, CACE continued to show an amount owing to it. The statements for the year ending January 31, 2016 show the value of that debt as $103,601, but there were other numbers mentioned in other documents. The question is whether any amount is actually owing or if this is simply an accounting artifact that should be zeroed out.
[70] It is easy to find the source of this amount receivable. There were draft financial statements prepared for 176 and CACE for the January 31, 2015 year end. In the first draft, the rent paid by CACE to 176 was set at $164,000 which was slightly in excess of its expenses for the equipment and land inclusive of depreciation. Importantly, in that draft, the 2015 intercompany debt remained at the same level as it was on January 31, 2014.
[71] In the final set of financial statements, the rent for the equipment was reduced to $33,500. This was less than the amount required to pay the carrying costs of the equipment and land and produced an operating loss for 176 in the amount of $73,698. At the same time, this change boosted the net income of CACE and substantially increased its retained earnings. It was Mr. Vodden’s evidence that he was asked to make these changes in order to enhance the CACE financial statements to assist Mr. Lemire in obtaining his financing. This was the set of books approved by Mr. Vodden as director of both corporations and these are the statements that were taken to BDC.
[72] Since the amount actually advanced to 176 during the fiscal year was the amount shown as rent in the first draft, the reduction in the rent increased the amount shown as owing to CACE by 176 from the $240,000 shown in the 2014 financial statements.
[73] On April 20, 2015, BDC approved financing for the defendants and provided a letter of offer for the purchase of the shares of CACE at a purchase price of $1,028,000.00 including the deferred payment of $188,000.00 VTB to the vendor. That offer of financing from BDC was accepted by the defendants signed by both Mr. Lemire and Mr. Mousseau on April 20, 2015. Interestingly, Mr. Lemire & Mr. Mousseau both signed a guarantee on behalf of CACE although they were not yet its signing officers. Nothing turns on that particularly but it is consistent with the idea that everything was settled and it only remained to pay the purchase price.
[74] The parties should have been aware of the increased debt showing in the final version of the January 31, 2015 financial statements. They had the financial statements and Mr. Wilson had sketched out the changes and what impact they would have. Nevertheless, it was the January 31, 2014 amount of $240,000 that was written into the financing documents and into the closing documents. The purchase price remained based on the 2014 book values and the amount of the debt on January 31, 2014. Those were the numbers reflected in the grid promissory note secured by personal guarantees.
[75] It was only after the January 2016 year end that Mr. Lemire took the position that the receivable from 176 had not merged at the time of closing and purported to deduct the amount from the promissory note. This issue was discussed at a meeting in May of 2016 and by an exchange of letters between counsel. Stewart Wilson who was the accountant for CACE before and after closing had prepared an adjusted set of figures reflecting a reduced debt owing from CACE to 176 which he valued at $84,400.00 rather than the $188,000 set out in the agreement and in the promissory note. This position was adopted by the defendants and rejected by the plaintiffs.
[76] The sale documents as signed by both parties fix the purchase price at $1,028,000.00 “netted against the current indebtedness of the Vendor to Operating in the amount of $240,000 as reflected on the grid promissory note”. The question is whether the contract should be interpreted to freeze this number or whether it is an estimate subject to adjustment. The defendants argue that it should be read to refer to the actual debt on the date of closing and should be treated as a typographical error. Alternatively, they argue there was no meeting of the minds on this particular point and it should be subject to rectification.
[77] The plaintiffs argue that the clear intention of the contract was to permit the purchasers to purchase CACE for the January 31, 2014 book value. Any increase or decrease in the value of the company after that date was for the account of the purchasers and at their risk. It would not be reasonable and would be inconsistent to freeze the value of the company but to revalue the intercompany debt on the closing date.
[78] I agree with this submission. The reduction of the equipment rent to $33,000 for the 2015 fiscal year is entirely artificial and was done solely to enhance the CACE balance sheet. There is no evidence that there was any agreement between the parties that this increase in the book value of intercompany debt would alter the purchase price. To the contrary, they continued to use the 2014 values.
[79] The obvious reason for this is that as long as Mr. Vodden owned both companies, intercompany adjustments were somewhat artificial. He was used to making adjustments between 176 and CACE at the year end as might be most advantageous. When he owned both companies, that was the equivalent of moving funds from his left pocket to his right. The parties had already agreed on the purchase price and the amount to be credited for the debt. There is nothing to suggest that either of the parties believed this adjustment to the financial statements would change the purchase price.
[80] It should be noted that because profits were retained in CACE, the value of the retained earnings increased between January 31, 2014 and the closing date in November of 2015. This would be true even if one backs out the artificial boost to the earnings generated by the reduction in the equipment rental. Had the parties altered the purchase price by using the actual book debt amount on the date of closing, Mr. Vodden would undoubtedly have demanded an increase in the price to reflect the higher book value of the retained earnings.
[81] This intention is clear from the SPA, but it is also consistent with the side agreements. All parties agreed that after February 1 of 2014 profits were to be left in CACE (except for the amounts to be paid out to Glenn Vodden as a “share of profit”). Thus, changes in value post valuation date would have been to the account of the purchasers and not the vendors. The documents and the evidence at trial also demonstrate that the financing was based on these fixed numbers and any change to the numbers might have imperilled the agreement with BDC. It was for this reason that Mr. Lemire would not put the $30,000 profit share into the closing documents.
[82] I conclude that it is the wording of the agreement that governs and it means what is says. The purchase price was a fixed price that was not subject to adjustment and the intercompany debt as it stood on the valuation date was factored into the price. The $240,000 written into the agreement was not an error or a typographical error.
[83] As a consequence, the remaining debt shown on the CACE books as owing by 176 merged in the closing and should be written off by CACE. Mr. Vodden has already caused the books of 176 to be restated.
C) The 176 Bank Balance
[84] Although the plaintiffs now concede that the cash on hand on the day of closing should have been one of the assets transferred by 176 to CACE, it is worth briefly discussing how this came about. Mr. Vodden was acting in good faith by retaining the bank balance, but he was in error. The specific wording of the agreement captures this bank account.
[85] When this issue first came up, Mr. Vodden asked Mr. Wilson for advice. As shown in one of the emails, he was advised that the cash should stay with 176. This was on the basis that it was not a “capital asset” and is the reason it was not paid.
[86] Examination of the financial statements reveals that it is correct the cash on hand was not a “capital asset”. The assets of the corporation include capital assets and also cash on hand. The problem arises because “capital asset” is not the wording of the agreement. As noted above, the agreement calls for 176 to transfer all of the assets “used in the business”. While the major part of the assets consisted of the capital assets, this wording is broader than that and arguably included the amount in the current account.
[87] This was a live issue at trial, but it was clear from the evidence that both parties intended for all of the assets of 176 (other than the dividends to be paid as part of the purchase price) to be sold to the purchasers.
[88] In closing submissions, the plaintiffs concede that the bank balance should have been transferred on closing.
[89] On the basis of this admission, the amount of $23,177.04 is owing to CACE from 176 and should be treated as a credit to the defendants.
D) Breach of Warranty – The Fuller Invoice
[90] This issue arises due to a pre-closing, but post 2014 bookkeeping issue. This occurred while the Voddens still owned CACE through 176, but Mr. Lemire was acting as the General Manager. According to the evidence at trial, CACE had an ongoing contract with Fuller Construction under which it received a series of payments. There was a bookkeeping error which meant that on the date of closing, the accounts receivable for this client had been overstated by almost $46,000.
[91] Mr. Van Dusen was the bookkeeper. He explained what happened. Payments on construction contracts can be complicated because there are progress, draws, holdbacks, extras and chargebacks. It is rare that adjustments to a contract or to invoicing can be avoided on any substantial construction job. Mr. Vodden testified that the Fuller contract was to be billed and paid on a percentage basis. That is, CACE would expect to be paid 25 percent of the value of the contract when 25 percent of the work had been completed.
[92] Although the Statement of Defence and Counterclaim alleges that Fuller was overbilled, that is not what happened. As explained by Mr. Van Dusen, CACE received a cheque from Fuller that was for $45,765.00 more than the amount of its outstanding invoices. Because QuickBooks will not allow the bookkeeper to deposit an amount without a corresponding invoice and because he did not know where to allocate the balance, Mr. Van Dusen created a “dummy invoice” 3181 in February or March of 2015.
[93] This was an internal invoice which was never sent to Fuller, so Fuller was not overbilled and is unaffected by this issue. In due course, however, the invoices and receipts for the job caught up, but Mr. Van Dusen forgot to reverse or cancel the “dummy invoice”. This resulted in the accounts receivable for Fuller showing $45,765.00 which he ultimately corrected with an offsetting “credit memo” on April 30, 2016.
[94] Consequently, the accounts receivable for CACE were overstated on the date of closing and adjusted post closing. As discussed earlier, there is no price adjustment clause in the agreement of purchase and sale. There is the warranty about the accuracy of the books. If the vendors are obligated to compensate the purchasers for this error, there must first be a finding of breach of warranty.
[95] The Fuller contract in question ran from September of 2014 to September of 2015. This was at a time when Mr. Vodden still owned the company, but Mr. Lemire was the General Manager. The credit memo was issued in early 2016 when the Fuller account was being reconciled.
[96] Ordinarily I would not regard this error in one account as a material misstatement or as a failure to keep books and records in accordance with good business practices. In this case, however, there is a statement that no deviation of less than $1,000 will be held to be material. The defendants argue that this wording implies that anything more than $1,000 is material and hence a breach of warranty.
[97] Mr. Lemire testified that he considers $45,000 to be very significant. Construction companies operate on relatively narrow profit margins. The declared income for CACE before taxes for fiscal 2015-2016 (the year end following closing) was less than this amount and even the gross profit was only $592,814 (approximately ten percent of sales).
[98] I do not regard this as a breach of warranty when examined in the entire context of the contract and in light of all of the evidence. Mr. Lemire was managing CACE during the Fuller contract and had access to Mr. Van Dusen who was and remained the bookkeeper. I do not interpret the provision setting a de minimus level as meaning that anything over $1,000 is automatically a breach of warranty.
[99] The only relevant warranty is the one quoted above. It does not state that the books are completely free of errors, only that all transactions were entered and the books were properly maintained in accordance with sound practices.
[100] I conclude that this error by the bookkeeper is not a breach of the vendors’ warranties and does not entitle the defendants to compensation or to set off the error against the promissory note.
[101] I would add that the main purpose of a promissory note is certainty about the amount owing. While setoff may be available in certain situations where there are mutual offsetting debts, that is not always the case and the existence and wording of a note may itself be given weight in interpreting the intention of the parties.[^4]
E) Application of Prejudgement Interest
[102] In this case, the note bears interest at seven percent which is a contractual rate. Ordinary debts such as the bank balance that should have been paid would not do so and rather should bear prejudgment interest at the PJI rate set out in the Courts of Justice Act.
[103] One way to deal with this would be to calculate the debts with different rates of interest to the date of judgment and grant separate judgments to each party which could then be set off against each other.
[104] I think that would be unfair to the defendants. It is conceded that the bank balance should have formed one of the assets of 176 transferred at the date of closing. The fairest way to do that would be to credit the $23,177.04 against the grid promissory note as of that date. This would reduce the balance from $188,000 to $164,822.96. Interest at seven percent should be calculated on that amount from the date of closing (less any interest that was actually paid).
Conclusion
[105] The sum of $23,177.04 will be credited against the promissory note on the date of closing and the balance reduced to $164,822.96. Interest at seven percent will be calculated on that amount from the date of closing until the date of judgment. Credit will be allowed for any interest that was actually paid.
[106] I can be spoken to if there is any disagreement about the balance owing.
Costs
[107] There may be issues about costs. I encourage counsel to resolve that question, but of course I am not privy to any offers to settle that might have been exchanged or any other relevant factors which may give rise to enhanced or reduced costs awards.
[108] Counsel may contact my office to obtain further direction on costs submissions if that becomes necessary.
Justice C. MacLeod
Date: August 22, 2023
COURT FILE NO.: CV-18-75707
DATE: 2023/08/22
ONTARIO
SUPERIOR COURT OF JUSTICE
RE: 176519 CANADA INC., GLENN VODDEN and MICHELLE VODDEN, Plaintiffs
AND:
2429306 ONTARIO INC., C.A.C.E. CONSTRUCTION (1991) LTD., PAUL LEMIRE AND PAUL MOUSSEAU, Defendants
BEFORE: Regional Senior Justice Calum MacLeod
COUNSEL: J. Alden Christian, Natalie Scott & Matthew Benson, for the Plaintiffs
David Contant and Wafa Khan, student-at-law, for the Defendants
DECISION AND REASONS
Regional Senior Justice C. MacLeod
Released: August 22, 2023
[^1]: See Bhasin v. Hrynew, 2014 SCC 71; [2014] 3 SCR 94 @ para. 45 [^2]: See Sattva Capital Corp v. Creston Moly Corporation, 2014 SCC 53, [2014] 2 SCR 633 and see the extensive review of the law in Sluyter Capital Investments Inc. v. 1902408 Ontario Limited, 2021 ONSC 5549 [^3]: Sattva Capital Corp, supra @ paras 56 - 60 [^4]: See Sluyter Capital, supra