Court File and Parties
COURT FILE NO.: CV-22-00686619-0000 DATE: 20231127
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
9877533 CANADA CORPORATION Applicant – and – JOHN ROWINSKI and SONYA ROWINSKI Respondents
Counsel: James Quigley, for the Applicant John Rowinski, for the Respondents
HEARD: September 20, 2023
Reasons for judgment
Merritt J.
Overview
[1] The Applicant seeks a declaration that the Respondents’ right to purchase its shares pursuant to an agreement dated October 20, 2016 (the “Agreement”) is terminated and of no further force and effect.
Background Facts
[2] On October 8, 2016, John and Sonya Rowinski (“the Rowinskis”) entered into an Agreement of Purchase and Sale (the “APS”) to purchase property at 668 Lippert Lane in Faraday Township near Bancroft (the “Property”) but could not obtain financing. The Rowinskis retained a mortgage broker who suggested an arrangement whereby the Applicant would purchase the Property and lease it to the Rowinskis for a period of 12 months, and at the end of the 12-month period, the Rowinskis would purchase the Applicant’s shares (the “Shares”). The terms of the agreement were finalized on October 27, 2016 and the Rowinskis executed it on that date. The Applicant did not execute the agreement but does not dispute that it made the agreement.
[3] Section 5 of the Agreement says, “Mr. John Rowinski and Mrs. Sonya Rowinski and Mr. Jagmohan Hayer agreed to structure and the complete the transaction under the below framework…”
[4] The framework outlined can be summarized as follows:
(a) the APS would be amended to substitute the Applicant for the Rowinskis as the buyers;
(b) the Applicant would complete the transaction and purchase the Property on November 3, 2016;
(c) the Rowinskis would lease the Property from the Applicant for a period of 12 months commencing on November 3, 2016, at the rate of $4,600.00 per month, and be responsible for all maintenance and costs associated with the property;
(d) the Rowinskis would purchase 100 percent of the Shares of 9877533 Canada Inc. at the “Buyback/Principal Amount” on the “Buyback Date” in “As is Condition” as per Schedule “B” of the agreement.
(e) the Rowinskis would grant a second charge (the “Collateral Mortgage”) over their principal residence at 19 Corvinelli Drive in Whitby (“Corvinelli Drive”) in the amount of $485,325 as security for the payment of the Share Purchase Price;
(f) the Rowinskis acknowledged that they were personally liable to pay the Share Purchase Price;
(g) the Applicant would pay the $9,000.00 brokerage commission to the Broker;
(h) the interest rate on the funds advanced was 11.37%;
(i) in the event of a default, the Applicant will be free to sell either or both the Property or enforce the mortgage on Corvinelli Drive to recover the Share Purchase Price and any rental arrears or legal costs; and
(j) the Rowinskis acknowledged that the Applicant had subjected itself to risk if the value of the Property decreased, and as such their personal guarantees and the Collateral Mortgage were justified.
[5] Schedule B provides that the Buyback/Principal Amount is $485,325.00 (the “Buyback Amount”) and the “Buyback Date” is November 2, 2017 (the “Buyback Date”). The interest rate is 11.37% and the monthly payment is $4,600.00. I note that $4,600 per month is approximately 11.37% of $485,325.00.
[6] The APS was amended, the Applicant purchased the property, and the Collateral Mortgage was registered on November 2, 2016. The Rowinskis took possession of the Property and paid the monthly rent of $4,600.00.
[7] The Rowinskis were unable to obtain financing and failed to purchase the Applicant’s shares on the Buyback Date. The parties agreed to extend the terms, but no written amendment was prepared or signed. The agreement to extend the terms was:
(a) the Share Purchase Price was increased to $509,591.25;
(b) the monthly rental payments were increased from $4,600.00 to $4,700.00;
(c) the Share Purchase Date was extended to June 30, 2018; and
(d) the lease of the Property was extended (implicitly) to June 2, 2018.
[8] In the summer of 2018, the Rowinskis advised that they needed more time to obtain financing, so the Agreement was further amended by e-mail as follows:
(a) the Share Purchase Price was increased from to $514,444.00,
(b) the Share Purchase Date was extended to August 30, 2018; and
(c) the lease of the Property was extended (implicitly) to August 30, 2018.
[9] On August 27, 2018, the Rowinskis asked for a few days’ grace to arrange financing. The Rowinskis did not purchase the Applicant’s shares on August 30, 2018 and there was no agreement to further extend.
[10] John Rowinski and Jagmohan Hayer (“Hayer”) spoke intermittently but no changes to the arrangement were made and Hayer did not raise any issue concerning the expiry of the date or allege that the Rowinskis were in breach of the Agreement or that there had been a default.
[11] The Rowinskis continued to pay the monthly rent and other costs.
[12] On March 7, 2022, John Rowinski emailed Hayer to discuss the property and ownership. Hayer responded saying the agreement to buy back the property expired a few years ago. John Rowinski wrote back disputing that the right to purchase the shares could expire.
Positions of the Parties
[13] The Applicant says the Agreement is inherently flawed and it is questionable whether it was ever capable of being enforced given that the Applicant’s sole shareholder Hayer was not a party to the Agreement. The Applicant also says that the shares had to be purchased by a certain date and the Rowinskis failed to tender the purchase monies on that date.
[14] The Rowinskis’ position is that they have the right to purchase the shares at any time and that the only consequence of their failure to buy the shares within the specified time is that “3 month’s payments” are added to the price of the shares. They say the parties have abided by the terms of the agreement since 2016, the agreement remains in force and neither party ceased acting in accordance with its terms prior to this Application being commenced. It was only when they sought to exercise the Buyback that the Applicant took the position that the Buyback provision of the agreement had expired and the Rowinskis would have to pay fair market value of the Property for the Applicant’s shares.
The Issues
[15] The issues are as follows:
- Is the Agreement enforceable?
- Has the right to purchase expired?
Issue 1: Enforceability of the Agreement
The Applicant’s position
[16] The Applicant submits that a private corporation does not sell its own shares; rather, it issues them as capital stock: Taylor v. 1103919 Alberta Ltd., 2014 ABQB 167, at para. 79, aff’d 2015 ABCA 201. The Applicant is not the owner of the shares. The owner of the shares is Hayer, who is not a party to the Agreement. The privity of contract doctrine provides that parties to a contract cannot impose obligations on persons who are not parties to it: Resch v. Canadian Tire Corp., at para. 32, citing Chitty on Contracts, 29th ed., vol. 1, p. 1075; Benzie v. Hania, 2012 ONCA 766, 112 O.R. (3d) 481, at para. 28, citing London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 S.C.R. 299, at para. 200.
The Rowinskis’ position
[17] Hayer himself expressed no prior misunderstanding of his or the Applicant’s obligations to transfer the shares, and the court should not give effect to the Applicant’s attempt to create a cloud of uncertainty around this clause. While it would be preferable if Hayer himself was a party to the Agreement and it was clear that Hayer had the duty to convey the shares, the overwhelming evidence is that all parties were well aware of their obligations under the Agreement. The Rowinskis submit that the provisions for payment for the shares are clear on their face. There is only one shareholder of the corporate Applicant, who also serves as the sole officer and director. The Property is owned by the Applicant and title is unencumbered. The transaction is relatively simple in nature.
[18] For me to find that the Buyback provision is not enforceable against the Applicant, I must assume an intention on the part of Hayer, who required the involvement of the Applicant corporation, to defraud the Respondents from the outset of the relationship. There is no evidence of such a fraudulent intention here.
[19] Although the written Agreement between the parties is not well-crafted, there has been no confusion as to everyone’s obligations thereunder for nearly 7 years. The last written deadline was August 30, 2018. Since then the Rowinskis have continued to occupy and maintain the Property and to pay rent, which Hayer has accepted.
Analysis
[20] Paragraph 5 of the Agreement says that the Rowinskis and Hayer agreed to structure and complete the transaction. Hayer is the sole shareholder, sole director and directing mind and will of the Applicant. The Applicant is the instrument by which Hayer structured the Agreement. I find that the parties intended for Hayer to be a party to the Agreement, as paragraph 5 suggests. There was a meeting of the minds between the Rowinskis and Hayer, with a common intention to create an enforceable agreement, as well as sufficient certainty with respect to the essential terms of the agreement as evidenced by the written agreement: UBS Securities Canada Inc. v. Sands Brothers Canada Ltd., 2009 ONCA 328, at para. 47. Hayer says in his affidavit on this application that he “ought to have been a party to the [Agreement] in order to be bound to transfer the Shares to the Respondents. This is because, as I know (sic) understand, the Applicant does not own its shares.”
[21] Here, it is not open to Hayer to avoid his contractual obligations to the Respondents simply because he has used the Applicant as his representative in the Agreement. Hayer caused the Applicant to enter into the Agreement. I find as a fact that when he signed on behalf of the company he intended to be personally bound, based on the terms of the agreement itself. He made a promise, evidenced at paragraph 5 of the Agreement, to sell the shares of the Applicant to the Rowinskis at the agreed price. The consideration for this promise was the rent, which was in fact paid directly to Hayer and did not pass through the Applicant. It would defeat the reasonable expectations of the parties for the Agreement to be unenforceable because Hayer is not a party and the Applicant cannot transfer the shares. Hayer is a party despite not having signed the Agreement: Seip & Associates Inc. v. Emmanuel Village Management Inc., 2008 CarswellOnt 649 (S.C.J.), rev’d in part, 2009 ONCA 222.
Issue 2: Has the Right to Purchase Expired?
The Applicant’s position
[22] The Applicant argues that the Right to Purchase expired on August 30, 2018, being the final amended Share Purchase Date. No further extension of the Share Purchase Date was negotiated by the parties.
The Rowinskis’ Position
[23] The Respondents say that the only consequence of not purchasing the shares on August 30, 2018 is a penalty of three months’ rent.
Default under the Agreement
[24] Schedule “C” of the Agreement defines default as follows:
DEFAULT: Mr. John Rowinski and Mrs. Sonya Rowinski will be in default of this AGREEMENT and the full “Buyback Amount” will become payable immediately upon the occurrence of the following
- “Buyback Amount” is not paid in full along with any outstanding payments on or before the “Buyback Date”.
- First mortgage on 19 Corvinelli Drive, Whitby, ON is past due
- Sale of the property at 19 Corvinelli Drive, Whitby, ON
[25] If any of the above-described events of default occur, the Share Purchase Price (as amended) becomes immediately payable.
[26] The three listed events of default have all occurred: (i) the Rowinskis failed to pay the amended Share Purchase Price by the amended Share Purchase Date of August 30, 2018; (ii) sometime prior to March 29, 2019, the first mortgage on Corvinelli Drive did go into default and was past due; and (iii) Corvinelli Drive was sold on March 29, 2019.
[27] Under the Agreement the consequences of a default are as follows:
- Paragraph 5(f) of the Agreement states that in the event of a default in Schedule C, the Rowinskis will provide a personal guarantee for the Amended Share Price.
- Paragraph 5(h) states that an act of default in Schedule A entitles the Applicant to sell both the Property and Corvinelli Drive.
- The fourth paragraph of Schedule C, dealing with administrative fees for maintenance and security “after default and once possession has been taken” by the Applicant, implies that the Applicant is entitled to take possession of the Property.
- The second last paragraph of the first page of Schedule C says: “If the purchase of 9877533 Canada Corp is not completed within Fifteen (15) days of the “Buyback date” then Mr. John Rowinski and Mrs. Sonya Rowinski shall pay additional Three (3) payments as penalty.” The three payments must refer to rent, as there is no other reasonable interpretation of this provision.
- The last paragraph on the first page of Schedule C provides that, in the event of a default, the Applicant can sell Corvinelli Drive.
[28] The Agreement does not say that in the event of a default the Rowinskis are not entitled to exercise the buyback.
Analysis
[29] Notwithstanding the Respondents’ acts of default, the Applicant has taken none of the steps which it is entitled to take as a consequence of the default. The Applicant did not enforce the Rowinskis’ personal guarantee. The Applicant did not take possession of the Property. The applicant did not sell the Property.
[30] The law is as set out in Noseworthy v. Noseworthy, 2017 ONSC 2752, 138 O.R. (3d) 291, at para. 16, where Justice MacLeod summarized the principles of contractual interpretation enunciated by the Supreme Court of Canada in Sattva Capital Corp. v. Molycorp, 2014 SCC 53, [2014] 2 S.C.R. 633, as follows:
a. Generally speaking, interpretation of a written contract is a question of mixed fact and law in which the context and purpose of the agreement will inform the interpretation.
b. The objective of contractual interpretation is to ascertain the objective intentions of the parties having regard to the wording of the contract and the factual matrix in which it was constructed. The decision maker must read the contract as a whole giving the words used their ordinary and grammatical meaning consistent with the surrounding circumstances known to the parties at the time of the formation of the contract.
c. Evidence of surrounding circumstances will be used to deepen the decision maker’s understanding of the contract but cannot be allowed to overwhelm the words used. Courts cannot use evidence of context to deviate from the text so as to effectively create a new agreement.
d. The admissible evidence of context is objective evidence of the facts that were known or reasonably ought to have been known to both parties at the time the contract was formed. It does not include the subjective intentions each of the parties.
[31] In short, the law on contractual interpretation requires the court to read the contract as a whole, giving the words their ordinary and grammatical meaning consistent with the surrounding circumstances at the time the contract was formed. The court is not to consider the subjective intentions of the parties. The interpretive process should consist only of objective evidence of the background facts at the time of the execution of the contract: Sattva, at paras. 57-59; Lozon v. Lozon, 2023 ONCA 645, at para. 17.
[32] The objective evidence of the background facts at the time of drafting the Agreement is as follows. The Rowinskis wanted to buy the Property but were unable to obtain a mortgage. The mortgage broker and Hayer proposed an arrangement whereby Hayer’s numbered company would buy the Property, the Rowinskis would pay interest of 11.37% in the form of rent for one year and, at the end of the year, the Rowinskis would buy the shares of the numbered company and thus become the owners of the Property.
[33] The Applicant financed the purchase of the Property for the Respondents, save for the $2,500 deposit, in exchange for a pre-determined return on the investment and security (i.e., ownership of the Property and the mortgage on Corvinelli Drive). The Applicant paid taxes and property insurance. All other costs were borne by the Rowinskis. The Rowinskis were responsible for a monthly ‘rent’ of $4,600, which was later increased to $4,700. This amount reflects the 11.37% interest rate stipulated in the Agreement.
[34] In exchange for these rent and repayment terms, the Rowinskis had the right to purchase the shares of the Applicant at a fixed price, plus a penalty if they were late in doing so. The parties contemplated the possibility of the Rowinskis defaulting and agreed to various consequences that would follow if that happened. The Rowinskis giving up right to buy the shares, and thus the Property, was not one of the consequences to which the parties agreed. Rather, the contract expressly provides that if the Rowinskis fail to pay the Buyback Amount on the Buyback date, the penalty for same is 3 months of rent/interest.
[35] Under the terms of the Agreement, Hayer was not making a profit based on the appreciating value of the property. Rather, his profit was the difference between the amount the Applicant paid for the Property under the APS and the Buyback amount, plus any difference between the rent and his cost to finance the purchase of the property. The Agreement provides that in the event of a default under the Agreement, the Applicant is entitled to take possession of the Property and sell it to “… recover the ‘buyback Amount’ plus any outstanding monthly lease payments, legal and other costs and fee[s] …” This provision does not contemplate the Applicant or Hayer gaining any additional equity in the Property by way of a sale at fair market value. This provision does not contemplate the Applicant earning more profit because of an increase in the value of the property.
[36] It would be contrary to the intention of the parties to interpret the Agreement in the manner suggested by the Applicant. It would also result in a windfall to the Applicant in the form of profit on the increased value of the property that was not contemplated in the Agreement.
[37] Alternatively, if I am wrong on the interpretation of the Agreement, and the Buyback did expire, the parties by their conduct have caused the agreement to remain in force. This is not a case where both parties failed to perform the agreement when scheduled and with the passage of time it could be inferred that neither party wished to complete the transaction, and the contract should be treated as abandoned and unenforceable or repudiated by both sides and unenforceable, as discussed in Malka v. Racz, 2022 ONSC 1362, at paras. 72 to 74. Here the Rowinskis continued to occupy the Property and pay the monthly rent and the Applicant accepted same. The Agreement continued by the conduct of the parties after the Buyback date of the Agreement had expired and the Agreement remained in full force and effect: Coffee Time Donuts Incorporated v. 2197938 Ontario Inc., 2022 ONCA 435.
[38] The last written amendment to the Agreement provided that the Buyback Amount was to be paid by August 30, 2018. When that did not happen, the Applicant could have declared a default and exercised its right to possess and sell either or both of the Property and Corvinelli Drive, which the Rowinskis still owned at the time. Alternatively, the Applicant could have negotiated a new Buyback date and Buyback amount, or advised the Rowinskis that it considered the Agreement to have expired but would allow them to continue to rent the property under the same or different terms. The Applicant took no such steps. It continued to abide by the Agreement and allowed the Respondents to do the same in reliance on its terms and conditions.
[39] The parties to a contract have a duty of good faith in contractual performance. Where the failure to speak up amounts to active dishonesty directly related to the performance of the contract, the duty of good faith is breached. In such circumstances parties should correct misapprehensions and a failure to do so is contrary to the “general duty of honesty in contractual performance”. This is particularly so in the context of a long-term contract such as the one here: Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, at paras. 69 and 73 and C.M. Callow Inc. v. Zollinger, 2020 SCC 45, at para. 81.
[40] Here, the Applicant continued to allow the Respondents to meet their monthly obligations under the Agreement without disclosing the Applicant’s position that an essential term, namely the fixed Buyback Amount, had expired. It now seeks to take advantage of the increasing value of the Property where, under the Agreement, its recovery was limited to the Buyback Amount.
[41] The Applicant also says the Agreement is void for uncertainty because it is unclear which party is to convey and receive payment for the shares, and what will happen if the Buyback Amount is not paid by the Buyback Date, because the consequences of default do not adequately address the overall situation and are fundamentally unsatisfactory. For example, in the event of a default, the Applicant can sell the property but the Agreement is silent on who obtains the benefit of any increase in the value of the property.
[42] If the terms of a contract are so vague and indefinite that the intentions of the parties cannot be determined with reasonable certainty, the agreement is unenforceable. If the language used is so obscure that it is incapable of any definite meaning and the court is unable to ascertain the parties’ contractual intention, the agreement is unenforceable. The agreement must be sufficiently definite to enable the court to give the contract practical meaning: Booth v. Finch, at para. 10, citing Lord Wright in Scammell v. Ouston, [1941] 1 All E.R. 14 (H.L.).
[43] It was the intention of the parties that the Rowinskis would purchase the shares of the Applicant for the Buyback Amount and, in exchange, receive title to the Property. In the event the Rowinskis did not complete the purchase of the shares within 15 days, they were to pay an “additional Three (3) monthly payments as penalty”. The Applicant says this provision is unclear. I disagree. The only monthly payments under the Agreement are the monthly rent. This clause does not render the Buyback date meaningless as the Applicant suggests. It imposes a penalty if the Rowinskis purchase the shares after the Buyback date. The Applicant says I should in effect read in a provision that in the event of a default the Rowinskis’ right to purchase the shares is terminated. The Agreement does not say this. To read in such a provision would be to invent terms not contemplated by the parties: Ko v. Hillview Homes Ltd., 2012 ABCA 245, at paras. 6 and 8.
[44] The Respondents’ right to purchase its shares pursuant to an agreement dated October 20, 2016 (the “Agreement”) is not terminated and the Application is dismissed.
Costs
[45] The parties are encouraged to agree on costs. If they cannot do so, they may make submissions in writing of no more than 3 pages in length in addition to costs outlines, by December 15, 2023.
Merritt J.
Released: November 27, 2023