Reasons for Decision
Introduction
1Gray Jay Estates Inc. ("Gray Jay") seeks an order varying the “Payment Amount” as defined in the assignment of indebtedness and security agreement dated April 24, 2024, between, among others, Gray Jay as assignor, NE SPC II LP ("Blacksail") as assignee, and 9869247 Canada Limited d.b.a Safari Flower ("Safari Flower") as borrower (the "Blacksail Assignment Agreement").
2The variation sought by Gray Jay would have the effect of increasing the Payment Amount as defined in the Blacksail Assignment Agreement, such that the amount to be paid by Blacksail to Gray Jay would be increased by approximately $1 million.
3Blacksail opposes the relief sought by Gray Jay.
Background
4Safari Flower and GN Ventures Ltd., the Applicants in this proceeding, carried on business as a licensed cultivator and processor of cannabis.
5Blacksail and Gray Jay were senior secured lenders of the Applicants.
6An initial order under the Companies’ Creditors Arrangement Act, RSC 1985, c C-36 (the "CCAA") was made in respect of the Applicants on January 12, 2024, and Ernst & Young Inc. was appointed as monitor (the "Monitor").
7Blacksail was the DIP lender in the CCAA proceedings of the Applicants. It is not disputed that the sum of $2,898,130.00 was owing under the DIP facility (the "DIP Facility") as of August 16, 2024.
8A sale process was run in the CCAA proceedings and did not result in any offer that was acceptable. As a result, Gray Jay and Blacksail entered in a number of agreements which at a high-level provided that Gray Jay had the option to take an assignment of Blacksail’s debt and security. If Gray Jay closed on that assignment, Gray Jay would also become the purchaser under a share purchase agreement in respect of the shares of the Applicants. If Gray Jay did not close on that assignment, then Blacksail would take an assignment of Gray Jay’s debt and security and would proceed to close as purchaser under the share purchase agreement between the Applicants and Blacksail dated as of April 29, 2024 (the “Share Purchase Agreement”).
9To this end, on April 25, 2024, Blacksail and Gray Jay entered into an assignment agreement which provided for the purchase by Gray Jay of Blacksail's loan to the Applicants (the "Gray Jay Assignment Agreement"). Under the Gray Jay Assignment Agreement, if Gray Jay failed to purchase the Blacksail debt and security by May 17, 2024, then Blacksail would purchase the Gray Jay debt and security pursuant to the Blacksail Assignment Agreement.
10Gray Jay failed to complete the assignment contemplated by the Gray Jay Assignment Agreement and, therefore, the Blacksail Assignment Agreement became operative.
11The Share Purchase Agreement was approved by the Court on May 7, 2024, pursuant to a reverse vesting order.
12The Blacksail Assignment Agreement was originally scheduled to close on June 17, 2024. There were delays and closing was eventually rescheduled for August 9, 2024, however the parties could not agree on the Payment Amount.
13The Payment Amount was defined in section 2.01 of the Blacksail Assignment Agreement as follows:
The Base Amount [$7,300,000] shall be adjusted as follows as at the Closing Date:
(a) Decreased dollar-for-dollar by all amounts outstanding under a debtor-in-possession financing term sheet between the Borrower, GN Ventures and the Assignor [Blacksail] dated as of January 19, 2024 as amended and restated pursuant to an amended term sheet dated February 23, 2024 as may be further amended from time to time accrued since February 1, 2024 or which may accrue on or after the date hereof;
(b) Decreased dollar-for-dollar by all amounts paid by the Assignee [Gray Jay] to Hyde Advisory & Investments Inc. on behalf of the Borrower pursuant to the Settlement and Release Agreement between Hyde Advisory & Investments Inc., the Assignor, the Assignee, the Borrower and GN Ventures, but only to the extent such amounts are not included in the amounts set out in Section 2.01(a); and
(c) Increased by the amount of $50,000 as a closing extension fee. [emphasis added]
14On August 19, 2024, the Court granted an order (the “August 19 Order”) compelling Gray Jay to complete the Blacksail Assignment Agreement based on a Payment Amount of $4,451,870.32, provided that Gray Jay had the right to bring a motion for an order varying the Payment Amount.
15The transaction contemplated by the Blacksail Assignment Agreement closed on August 22, 2024. Shortly thereafter, the transaction contemplated by the Share Purchase Agreement also closed.
16Gray Jay then, as contemplated by the August 19 Order, brought a motion seeking an increase in the Payment Amount to reflect that (i) cash on hand should have been used by the Applicants to repay a portion of amounts outstanding under the DIP Facility prior to closing under Blacksail Assignment Agreement (the “Assignment Closing”); and (ii) cash on hand for purposes of (i) should be increased to reflect the amount of certain pre-paid expenses.
Issues
17There are two issues to be decided:
(a) first, should the cash on hand of the Applicants have been used to repay amounts under the DIP Facility prior to the Assignment Closing; and
(b) second, should the Court imply a term into the Blacksail Assignment Agreement requiring that the DIP Facility be repaid from cash on hand prior to the calculation of the Payment Amount?
18In their written material, Gray Jay also claimed that the cash on hand of the Applicants, at the time of the Assignment Closing (being $1,155,285) should also be adjusted by certain amounts, including an increase of $805,365.56 representing ‘prepaid expenses’ of the Applicants. However, during the course of oral argument, Gray Jay abandoned that claim.
Analysis
Issue One: Should the cash on hand of the Applicants have been used to repay amounts under the DIP Facility prior to the Assignment Closing?
19Gray Jay argues that the DIP Facility matured, pursuant to its terms on June 30, 2024. Further, Gray Jay says that the Monitor projected that the Applicants would only have cash on hand of $188,736 at the time of the Assignment Closing (the “Projected Closing Cash”). Accordingly, Gray Jay takes the position that it would only be reasonable and proper to assume that the Applicants’ cash on hand, in excess of the Projected Closing Cash, would have been used to repay the DIP Facility.
20Gray Jay submits that applying the cash on hand, less the Projected Closing Cash, to reduce the DIP Facility would have resulted in a corresponding increase of almost $1 million in the payment that Blacksail was required to make to Gray Jay under the Blacksail Assignment Agreement. Because Blacksail was also the purchaser under the Share Purchase Agreement, immediately following the closing of that transaction, Blacksail retained the benefit of the cash on hand in the Applicants (as the new shareholder of the Applicants). As such, Gray Jay says, Blacksail has obtained a ‘windfall’ of approximately $1 million because the Applicants did not use their ‘excess’ cash to repay the DIP Facility – the Payment Amount was reduced by the amount of the excess cash while, at the same time, Blacksail retained the benefit of that cash.
21There is no question that had the Applicants used a portion of the cash on hand to reduce the DIP Facility prior to Assignment Closing, that Payment Amount owing by Blacksail to Gray Jay would have increased and there would have been less cash in the Applicants following closing. However, the DIP Facility was not in fact repaid.
22Blacksail did not control the Applicants prior to closing of the Share Purchase Agreement transaction. As the Assignment Closing preceded the closing of the share purchase transaction, it was not Blacksail’s decision to repay the DIP Facility prior to the Assignment Closing.
23Blacksail also takes issue with Gray Jay’s reliance on the Projected Closing Cash. First, it says that the cash flow forecast relied on by Gray Jay was attached to the Monitor’s Seventh Report dated July 24, 2024. The Monitor’s Seventh Report was compiled approximately three months after the Blacksail Assignment Agreement had been entered into and, therefore, cannot be relevant to an interpretation of that agreement.
24Second, Blacksail says that the closing was originally scheduled for June 17, 2024, and was then delayed through July and into August, including in part because of the dispute with Gray Jay. The cash on hand in the various cash flow forecasts filed by the Monitor varied depending upon the week. For example, the cash flow forecast attached to the Monitor’s Seventh Report shows an opening cash balance of almost $1 million for the week of July 22, 2024. However, it does not forecast any DIP Facility repayment (even though, as argued by Gray Jay, the DIP Facility had matured at that point).
25I agree with Blacksail that reliance on the Projected Closing Cash is not appropriate.
26Blacksail also says the documents at the time indicated no intention to repay the DIP Facility. The DIP Facility was an assumed obligation under the Share Purchase Agreement. That agreement, at section 3.3 provides:
On the Closing Date, the Company shall retain the Blacksail Debt as set out in Schedule “F”. For greater certainty, the Blacksail Debt shall be retained by the Company and paid on the date when the Blacksail Debt becomes due and owing in accordance with such terms and conditions as shall be agreed between the Purchaser, the Vendor and the Company prior to the Closing. [emphasis added]
27Gray Jay was not a party to the Share Purchase Agreement, however, as noted above, the Share Purchase Agreement formed part of the package of documents entered into around the time of the Blacksail Assignment Agreement. The Share Purchase Agreement was also publicly filed and was approved by the Court by Order dated May 7, 2024.
28There was nothing in the Blacksail Assignment Agreement or the Share Purchase Agreement which spoke to repayment of the DIP Facility prior to closing of those transactions.
29It is agreed that the DIP Facility had matured. However, Gray Jay was not a party to the DIP Facility. The parties to the DIP Facility had also entered into the Share Purchase Agreement and as noted above, the Share Purchase Agreement spoke to a retention of the DIP Facility along with amended terms and conditions – not a repayment prior to closing.
30Accordingly, based on the record before me, I am not persuaded that an order should be made deeming that cash on hand of the Applicants be used to repay amounts under the DIP Facility prior to the Assignment Closing.
Issue Two: Should the Court imply a term into the Blacksail Assignment Agreement requiring that the DIP Facility be repaid from cash on hand prior to the calculation of the Payment Amount?
31Gray Jay submits that the phrase “all amounts outstanding under [the DIP Facility]” in section 2.01(a) of the Blacksail Assignment Agreement should be read to mean all amounts properly outstanding under the DIP Facility.
32As noted above, Gray Jay submits that the amount properly outstanding should be calculated by applying the cash on hand of the Applicants, less the Projected Closing Cash to reduce the DIP Facility.
33As set out by the Supreme Court of Canada in Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20 ("Earthco"), the overriding concern of contractual interpretation is to determine the parties’ intention and the scope of their understanding: see Earthco at para 62. The actual words chosen are central to the analysis, but to determine true intent, “decision makers must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract” (see Earthco at para 63 quoting Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 ("Sattva"), at para 47). Although the facts surrounding the contract formation are relevant, those facts must not be allowed to overwhelm the words of the contract (see Earthco at para 63).
34As stated in paragraph 65 of Earthco, “Sattva allows courts to interpret contractual terms in light of the contract as a whole and with reference to objective evidence that illustrates what was within the parties’ knowledge at or before the time of their contract’s formation (see para. 58). Ultimately, ascertaining the objective intent of the parties involves not only a consideration of the actual words used in a contract but also a consideration of the factual matrix surrounding the contract.”
35The record before does not demonstrate that the parties to Blacksail Assignment Agreement, being Gray Jay and Blacksail, had a mutual understanding at the time the Blacksail Assignment Agreement was entered into that any cash on hand of the Applicants (or any ‘excess’ cash on hand) would be used to repay the DIP Facility prior the Assignment Closing. The target closing was prior to the DIP Facility maturity, and Gray Jay admits that there is no evidence that the parties had turned their mind to repayment of the DIP Facility if cash was available.
36Gray Jay also submitted that while it did not allege any bad faith on the part of Blacksail, relying on Bhasin v. Hrynew, 2014 SCC 71 at para 45, consideration of good faith should be assumed so as to intend minimum standards of conduct on the part of Blacksail. In this regard, Gray Jay submits that the minimum standard of conduct should be assumed to be that any ‘excess’ cash on hand would have been used to repay the matured DIP Facility. Gray Jay takes the position that not doing so leads to an unreasonable result and, therefore, cannot be what the parties intended. As set out below, I do not agree.
37Blacksail takes the position that Gray Jay, with the benefit of hindsight, deciding it had made a bad bargain, asks the court to re-write the agreement. Blacksail relies on the Ontario Court of Appeal’s recent decision in ID Inc. v. Toronto Wholesale Produce Association, 2025 ONCA 22 which quoted with approval the decision of Arnold v. Britton, [2015] UKSC 36, [2015] A.C. 1619, at para. 19: "[t]he mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language.”
38In considering the words used in the Blacksail Assignment Agreement, the phrase “all amounts outstanding under the [DIP Facility]” is clear. The parties agree that the amount outstanding at the relevant time was $2,898,130.00. There is nothing in the text of the agreement or in the surrounding circumstances that leads me to conclude that anything different than the plain reading of the phrase ‘all amounts outstanding’ was intended.
39Gray Jay asks that the court imply the term ‘properly’ into section 2.01 of the Blacksail Assignment Agreement. Gray Jay and Blacksail agree that the law regarding implied terms in contracts is as set out in Moulton Contracting Ltd. v. British Columbia, 2015 BCCA 89 ("Moulton") where it was held:
[53] In M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., [1999] 1 S.C.R. 619 at para. 27, cited by the trial judge in support of the implied terms, Justice Iacobucci for the Supreme Court summarized the three circumstances (identified in Canadian Pacific Hotels Ltd. v. Bank of Montreal, [1987] 1 S.C.R. 711 at 774-776) where terms may be implied in a contract:
(1) based on custom or usage; (2) as the legal incidents of a particular class or kind of contract; or (3) based on the presumed intention of the parties where the implied term must be necessary “to give business efficacy to a contract or as otherwise meeting the ‘officious bystander’ test as a term which the parties would say, if questioned, that they had obviously assumed” [citation omitted].
[54] Justice Iacobucci noted that while it was not clear from Canadian Pacific Hotels Ltd. whether the “business efficacy” and “officious bystander” tests were two separate tests, what was “important in both formulations is a focus on the intentions of the actual parties”, and not “the intentions of reasonable parties” (at para. 29 [emphasis in original]):
This is why the implication of the term must have a certain degree of obviousness to it, and why, if there is evidence of a contrary intention, on the part of either party, an implied term may not be found on this basis.
[55] The key element is that the implied term is more than just reasonable; it is necessary to make the contract as the parties intended. That is, without the term, the contract, as intended by the parties, would not be effective. [emphasis added]
40In the present case, implying the term ‘properly’ in reference to the outstanding amount under the DIP Facility is not necessary to make the contract as the parties intended. There is, as admitted by Gray Jay, no evidence as to what the parties intended. I recognize that as held by the Ontario Court of Appeal in Energy Fundamentals Group Inc. v. Veresen Inc., 2015 ONCA 514 ("Energy Fundamentals"), the implication of a contractual term does not require a finding that the parties actually thought about it – often implied terms fill gaps in agreement to which the parties did not turn their mind: see para 35. However, the court will not imply a term which contradicts the express language of the contract or is unreasonable: see para 36 of Energy Fundamentals.
41The Blacksail Assignment Agreement is effective as it was drafted. Adding the word “properly” as requested by Gray Jay would only lead to ambiguity and potential litigation about the word’s meaning.
42The crux of the matter appears to be Gray Jay’s belief that Blacksail is receiving a windfall. However, the record before me does not support that position. If the parties had intended the Payment Amount was to increase based on the amount of cash (or prepaid expenses) of the Applicants at the time of the Assignment Closing, the parties could have negotiated language, similar to a working capital adjustment of some kind, to address that business risk. They did not do so. Gray Jay may regret that no other adjustments to the Payment Amount were negotiated, however, the language of 2.01 of the Blacksail Assignment Agreement is clear. There is no need to imply a term as requested by Gray Jay to make the contract effective and doing so would not be appropriate.
43Accordingly, I would dismiss Gray Jay’s motion.
Disposition
44For the reasons above, the motion by Gray Jay is dismissed.
45The parties had advised me during oral argument that an agreement had been reached between them that costs of the motion would be payable of $20,000 by the unsuccessful party. Accordingly, Gray Jay is ordered to pay Blacksail the amount of $20,000 inclusive of HST within 30 days hereof.
Jane Dietrich
Date: February 28, 2025