Court File and Parties

Court File No.: CV-18-26442 Date: 2025-08-29 Ontario Superior Court of Justice

Between:

Dr. Michael Emon Dentistry Professional Corporation, Plaintiff

– and –

Alexander Sevo Dentistry Professional Corporation, Dr. Alexander Sevo, Dr. Tim McManus and Dental Specialists of Windsor, Defendants

Counsel:

• R. Colautti and A. Elkeeb, for the Plaintiff
• C. Bondy and R. Godard, for the Defendants

Heard: December 3, 4 and 5, 2024

Reasons for Judgment

HORVAT J.:

Overview

[1] This case involves the sale of an endodontics practice from one dentist to another. The parties entered into a letter of intent that set out a series of steps and conditions precedent that were required to be completed and met prior to the purchase of the practice. At issue is whether there was a breach of good faith and honest performance by the proposed purchaser in his performance of discretionary sections included in the letter of intent or in his discretionary termination of the letter of intent.

[2] For the reasons that follow, I find that there was no breach of good faith or honest performance by the proposed purchaser, and the action is dismissed.

Background Facts

[3] The parties reached consensus on an Agreed Statement of Facts (ASF) and a Joint Document Book (JDB) prior to trial. The facts that follow are not in dispute. All dates occurred in 2017 unless otherwise stated.

[4] The plaintiff, Dr. Michael Emon Dentistry Professional Corporation (Emon) is a professional corporation which operated as an endodontic clinic in Windsor, Ontario.

[5] Alexander Sevo Dentistry Professional Corporation is a professional corporation which provides endodontic services in Windsor with the defendant, Alexander Sevo, being its sole officer, director, and shareholder (collectively "Sevo").

[6] In late 2016, Emon and Sevo commenced discussions regarding Sevo purchasing Emon's endodontic practice ("The Practice"). The Practice had three employees: Mary, the receptionist and office manager; Christine, a dental hygienist; and Hoda, a dental hygienist. The Practice also employed Danielle who completed bookkeeping functions.

[7] At the time, Sevo was practicing endodontics as an associate at an endodontic clinic in Thunder Bay, Ontario and had a desire to return to the Windsor area. The intention of both parties was for Sevo to purchase the Practice and continue servicing Emon's patients as Emon transitioned into retirement.

The Letter of Intent

[8] On April 11, Emon and Sevo executed a Letter of Intent (LOI). The LOI states:

This letter is not contractual in nature or binding (except as specifically set out herein), notwithstanding the signature of each party hereto, and reflects only the intention to proceed toward the negotiation of the Purchase Agreement. It is intended that the Purchase Agreement shall be signed no later than April 31, 2017.

[9] The LOI includes non-binding provisions, binding non-surviving provisions which ended on the termination of the LOI, and binding provisions which survived the termination of the LOI. It states that the closing date is May 1, or such other date as the parties may agree in writing. The closing of the transaction, under the LOI, is subject to the usual conditions of closing in favour of Sevo as the purchaser. All these conditions were to be included in the Purchase Agreement, including, but not limited to, the following:

(a) There shall have been no material adverse change in the Practice and the Practice shall have been carried on in the ordinary course since the date of the most recent financial statement.

(b) Sevo shall enter into a lease agreement with the endodontist who shared the leased space with Emon, the Gossack Dentistry Professional Corporation (Gossack), and the landlord, Windsor Poirier Inc. (Landlord), on terms which were satisfactory to Sevo.

(c) Sevo, in his sole and absolute discretion, shall be satisfied with his due diligence investigations into the Practice and Emon's Business.

(d) Sevo shall have obtained financing on terms and conditions satisfactory to Sevo in his sole discretion.

[10] The LOI states that Sevo and his representatives were entitled to make investigations into the financial position of Emon's Practice, patient charts, assets of the Practice, or any other such matters relating to the transactions contemplated in the LOI as Sevo deemed advisable. These investigations were to satisfy Sevo as to the financial position, future profitability, assets of, and other matters affecting the Practice.

[11] Under s. 7 of Part II of the LOI, Sevo can terminate the LOI by written notice if he "is not satisfied with [his] due diligence investigation for any reason." The termination of the LOI is stated to not affect the liability of a party for breach of any of the "Binding Provisions," which includes due diligence and access for due diligence. It also states that Emon shall "conduct the operation of the Practice only in the ordinary and usual course." Provisions concerning confidentiality, public announcements, and each party's bearing of expenses incurred in connection with the transactions contemplated in the LOI, survive any termination of the LOI as the "Surviving Binding Provisions."

[12] The LOI states that no party is deemed to have waived the exercise of any right under the LOI unless it is made in writing.

Drafting of Transaction Documents Including the Lease

[13] Following the execution of the LOI, Emon's lawyers and Sevo's lawyers began working together to finalize the transaction documents. Further, the Landlord's lawyer and Gossack's lawyers began working with Emon's and Sevo's lawyers on the Lease and other documents needed from the Landlord and Gossack to finalize the transaction (i.e. cost sharing agreement, surrender of previous lease, and consent).

[14] On April 27, Emon's lawyer advised Sevo's lawyer of the current lease Emon had with Gossack and the Landlord but was unable to find a signed copy of the lease agreement. Instead, Emon's lawyer provided Sevo's lawyer with the Landlord's name and contact information.

[15] On May 5, Sevo's lawyer emailed the Landlord advising of the need for a new lease agreement for Sevo and Gossack.

[16] On May 17, the Landlord's lawyer emailed Sevo's lawyer advising him that she acts for the Landlord and would be preparing the new lease agreement.

[17] On May 25, Emon and Sevo agreed to re-schedule the closing date for the transaction to June 30. A Closing Agenda was created for the June 30 closing date.

[18] On June 6, Emon sent a text message to Sevo that stated, in part: "I contacted [the Landlord] re the holdup re your lease. I hope things will start moving."

[19] On June 8, Sevo sent a text message to Emon that stated: "I just spoke with my lawyer, just to be clear we have been waiting on Miller Canfield for the draft lease, asset purchase and cost sharing agreement." Both the Landlord's and Emon's lawyers were at Miller Canfield.

[20] On June 15, Sevo advised Emon that he did not want to retain Hoda as an employee.

[21] On June 27, Sevo's lawyer received the initial draft of the lease agreement from the Landlord's lawyer. That same day, Sevo's lawyer advised the Landlord's lawyer that he received the draft lease agreement and indicated that the closing date may be extended to July 14.

[22] On June 30, Sevo's lawyer advised Emon's lawyer that confirmation of Hoda's termination was required prior to closing. Emon fired Hoda and provided Sevo with her termination letter.

[23] On July 5, Sevo's lawyer provided Emon's lawyer with revised Offers of Employment for Mary, the receptionist and office manager for the Practice, and Christine, a dental hygienist with the Practice.

[24] On July 10, Sevo's lawyer provided comments to the Landlord's initial draft lease agreement. On or around this date, Sevo and Emon settled the terms of the Purchase Agreement and the Services Agreement. The lease was to be attached at Schedule "L" to the Purchase Agreement. Emon's lawyer also provided Sevo's lawyer with Hoda's termination letter.

[25] In mid-July, Sevo hired Aliya, a dental assistant. He paid her an hourly wage to work in Emon's office.

[26] On July 11, the Landlord's lawyer notified Gossack's lawyers that her clients were away and would return on July 14.

[27] On July 12, Emon's lawyer emailed Sevo's lawyer stating that Gossack's lawyer had some minor proposed changes and narrow comments for the lease being negotiated with the Landlord. Emon's lawyer believed the July 14 closing date was still doable.

[28] On July 13, Gossack's lawyer emailed Sevo's lawyer regarding her proposed changes to the draft lease being negotiated with the Landlord.

[29] On July 14, Sevo hired the Cirrus Consulting Group. Sevo provided Cirrus Consulting with the draft lease agreement.

[30] On July 23, Cirrus Consulting provided Sevo with a red-lined version of the draft lease agreement for his review and approval.

[31] On July 25, Sevo approved Cirrus Consulting's red-lined version of the draft lease agreement. Cirrus Consulting then provided the Landlord's lawyer with its red-lined version of the draft lease agreement for review and approval. Also, on July 25, Aliya began work at the Practice. Sevo paid her.

[32] On July 26, the Landlord's lawyer responded to Cirrus Consulting with her comments regarding Cirrus Consulting's red-lined version of the draft lease agreement. Cirrus Consulting then provided the Landlord's lawyer with its comments on the lease agreement being negotiated. On this date, Emon's lawyer emailed Sevo's lawyer and Gossack's lawyer requesting an update regarding the status of the lease and advised that he understood that Sevo had hired a leasing consultant. Gossack's lawyer responded that same day stating the lease that included comments from Cirrus Consulting had been provided to the Landlord. Sevo's lawyer stated that he will do what he can to "move things along" but is not directly involved with the lease negotiations anymore.

[33] In early August, Sevo had Point-of-Sale terminals delivered to the Practice.

[34] On August 2, Emon sent Sevo a text message that stated, in part: "Mary gave me a letter of resignation today. Her last day will be August 31. She has a letter addressed to you too. I think [sic] should would consider part time." Sevo responded by text: "That's not good."

[35] On August 3, Sevo's lawyer emailed Emon's lawyer stating that the Gossack Cost Sharing Agreement is settled and that the "Assignment Agreement" needs confirmation from Sevo.

[36] On August 8, Sevo texted Emon to ask if he could call him "and ask what Danielle's duties are and when she plans to stay on until." Emon responded by text on August 9: "Danielle pays the bills, does payroll, banking and makes sure the accountant has everything he needs. She also pays the bills for the joint account" and "She will retire when the deal closes."

[37] On August 9, Emon's lawyer emailed the Landlord's lawyer requesting an update regarding the status of the lease. Also on August 9, Emon's lawyer provided the Landlord's lawyer with an updated Surrender of Lease Agreement. The Landlord's lawyer responded that she would review it and get back to him.

[38] On August 10, Sevo met with Dr. Tim McManus, a dentist and owner of a dental practice in Windsor, Ontario.

[39] On Friday, August 11, Emon's lawyer emailed the Landlord's lawyer requesting an update regarding the status of the lease. She responded that she had instructions from the Landlord on the first two rounds of comments but was figuring out what additional comments the leasing specialist was requesting and needed instructions on those points. She advised that she may not get to it that day but would on the weekend and then wait for comments from her client, the Landlord. Emon's lawyer responded that the Landlord is not responsible for delay.

Termination of the LOI

[40] On Monday, August 14, Sevo advised his lawyers and Cirrus Consulting that he was terminating the purchase transaction. He wrote an email to Cirrus Consulting that stated: "I just called my lawyer and told him that I am calling off the deal to purchase Dr. Emon's practice. A lot of red flags and I just have to go with my gut on this one."

[41] Sevo also attempted to speak with Emon over the telephone on August 14, however, Emon was away and Sevo wanted to have the conversation in person.

[42] On August 15, Sevo briefly met with Emon and advised him that he was terminating the purchase transaction. On this date, Emon's lawyer called and emailed Sevo's lawyer regarding Sevo's decision to terminate the transaction. Sevo's lawyer responded that Sevo had opted to not pursue the deal "for a number of reasons" and gave written notice of the termination of negotiations.

[43] On August 16, Emon texted Sevo: "Alex I'm still in shock over yesterday's short conversation. We've been discussing our transaction for over a year. I didn't see this coming. Can we meet to discuss what went wrong?" The following day, Sevo responded, in part: "There are many issues and concerns that developed during the course of negotiations and unfortunately there is no hope in resolving them at this point."

Analysis

[44] The issue for determination is whether Sevo's conduct amounted to a breach of the duty of good faith or honest performance, and thus a breach of the LOI.

Principles of Contract Interpretation

[45] The LOI sets out several conditions precedent to the closing of the transaction, including the negotiation of a new lease with the Landlord by Gossack and Sevo, on terms satisfactory to Sevo. In my view, while the parties agreed that both of their intentions were for Sevo to purchase the Practice and continue servicing Emon's patients, the LOI did not bind Sevo to completing the transaction unless the conditions precedent were met.

[46] The goal of contract interpretation is to determine the objective intentions of the parties. The principles of contractual interpretation established by the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, include the following:

(a) The courts approach to contract interpretation "has evolved towards a practical, common-sense approach not dominated by technical rules of construction": Sattva, at para. 47.

(b) The context and purpose of the agreement will inform its interpretation: Sattva, at para. 50.

(c) The court 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: Sattva, at para. 47; Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20, 492 D.L.R. (4th) 389, at paras. 2, 61-65; Spina v. Shoppers Drug Mart Inc., 2024 ONCA 642, at para. 69.

(d) The objective evidence of the facts that were known – or reasonably ought to have been known – by both parties at the time the agreement was formed is admissible, while evidence of the subjective intentions of the parties is not admissible: Sattva, at paras. 58 and 60; Spina, at para. 70.

(e) Evidence of the surrounding circumstances should not be used to deviate from the words of the agreement to effectively create a new agreement. Evidence outside the words of the written agreement that would add to, subtract from, vary, or contradict a contract is not admissible. While surrounding circumstances may influence the interpretation of the contract, "they must never be allowed to overwhelm the words of the agreement": Sattva, at para. 57; Spina, at para. 70.

[47] As the principles of contract interpretation stipulate, a practical, common-sense approach is necessary. The words must be used in their ordinary and grammatical meanings consistent with the surrounding circumstances known to the parties at the time. The words must be interpreted in the context of the LOI as a whole, considering the objective intentions of the parties and the factual matrix.

[48] The LOI refers to the purchase of the Practice by Sevo as "the proposed purchase" and contemplates the preparation of a "definitive purchase and sale agreement (the "Purchase Agreement")" that is "anticipated to be subsequently negotiated between the parties." The LOI explicitly states that it "is not contractual in nature or binding (except as specifically set out herein)" and is stated to reflect "only the intention to proceed toward the negotiation of the Purchase Agreement."

[49] Paragraph 10.1(f) of the LOI makes it a condition of closing that Sevo, in his "sole and absolute discretion," shall be satisfied with his due diligence investigation respecting the Practice and the Business. Section 7(b) of Part II(b) of the LOI gives Sevo the right to terminate the LOI if he was not satisfied with his due diligence investigation "for any reason."

[50] The plain language of the LOI clearly, in my view, supports a finding that it did not bind Sevo to completing the transaction unless the conditions precedent were met, on terms satisfactory to him.

[51] Emon argues that (i) Sevo's failure to finalize and sign the lease agreement with the Landlord, (ii) the manner in which Sevo exercised his contractual discretion under the LOI, and (iii) his ultimate termination of the LOI and transaction, each amount to a breach of the duty of good faith and honest performance.

[52] For the reasons that follow, I disagree.

[53] In my view, Sevo acted in good faith and honestly throughout the performance and the termination of the LOI. I find that at no point did Sevo exercise his discretion in an unreasonable manner.

Good Faith, Honest Performance and Discretion

[54] The law in Canada imposes a duty on parties to perform their contractual obligations honestly and in good faith: Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, at paras. 1, 33, 62-63, 66, 70, 73 and 92-93; C.M. Callow Inc. v. Zollinger, 2020 SCC 45, [2020] 3 S.C.R. 908, at paras. 1-3, and 91; and Spina, at para. 166. This includes the exercise of contractual discretion: Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, [2021] 1 S.C.R. 32, at para. 62; Spina, at para. 167.

[55] The Wastech court stated, at para. 88:

In sum, then, the duty to exercise discretion in good faith will be breached where the exercise of discretion is unreasonable, in the sense that it is unconnected to the purposes for which the discretion was granted. This will notably be the case where the exercise of discretion is capricious or arbitrary in light of those purposes because that exercise has fallen outside the range of behaviour contemplated by the parties. The fact that the exercise substantially nullifies or eviscerates the fundamental contractual benefit may be relevant but is not a necessary pre-requisite to establishing a breach.

[56] It is a question of contract interpretation to determine whether a party exercises its discretion in a manner connected to the underlying purposes for which the discretion was granted. If the contract is not explicit about the intention of the parties, then the purposes can be understood only in the context of the contract as a whole: Wastech, at paras. 72, 76, and 88; Spina, at para. 169.

[57] The principle of good faith, however, should not be applied in a manner that ignores the freedom of contracting parties to pursue their individual economic self-interest, and should not "veer into a form of ad hoc judicial moralism or 'palm tree' justice": Bhasin, at para. 70; Bram Enterprises Ltd. v. A.I. Enterprises Ltd., 2014 SCC 12, [2014] 1 S.C.R. 177, at para. 31. While a contracting party should have regard for the legitimate contractual interests of the other contracting party in carrying out the performance of the contract, including exercising discretionary provisions, good faith performance does not require a party to put the interests of the other party first: Bhasin, at paras. 65, 70, 73, and 86; Callow, at paras. 39-40, 47, and 81-82; Wastech, at paras. 52, and 69-71; and Spina, at para. 168.

[58] The general duty of honesty in contractual performance means that "parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one's contractual performance": Bhasin, at para. 73; Callow, at para. 91; and Spina, at para. 166.

[59] The duty of honest performance does not include a positive obligation of disclosure related to the exercise of termination clauses. However, there does exist an obligation to refrain from misleading the other party in the exercise of that clause. "In circumstances where a party lies to or knowingly misleads another, a lack of a positive obligation of disclosure does not preclude an obligation to correct the false impression created through its own actions": Callow, at para. 38. The Supreme Court of Canada in Callow, at para. 9, stated:

At the end of the day, whether or not a party has "knowingly misled" its counterparty is a highly fact-specific determination, and can include lies, half-truths, omissions, and even silence, depending on the circumstances. I stress that this list is not closed; it merely exemplifies that dishonesty or misleading conduct is not confined to direct lies.

[60] If the duty of good faith or honest contractual performance is breached, then damages are assessed according to the ordinary contractual measure. This would result in putting Emon in the position that he would have been in had the duty been performed: Bhasin, at para. 88; Callow, at paras. 53, 106-116; Wastech, at paras. 54 and 62; and Spina, at para. 171.

Failure to Enter into a Lease Agreement on Terms Satisfactory to Sevo

[61] Although most of the required closing documents for the transaction were settled by July 14, all the documents were not. The Closing Agenda identifies numerous items either still in draft or outstanding. The Lease Agreement was one such document and was a condition precedent to closing under paragraphs 9 and 10.1(e) of Part I of the LOI.

[62] Emon argues that Sevo's refusal to enter into a lease agreement with the Landlord was inconsistent with the expectations of the parties and a deliberate effort by Sevo to delay and avoid his contractual obligations under the LOI. Emon argues this was a breach of contractual discretion and good faith performance. Emon submitted that the terms of the lease agreement in place between him, Gossack, and the Landlord should have been good enough for Sevo. Emon's arguments ignore the plain language of the LOI.

[63] Section 9 of the LOI states: "The transactions contemplated here and in the Purchase Agreement are conditional upon the negotiation of a new lease by [Sevo] and Dr. Gossack on terms satisfactory to [Sevo]." The LOI explicitly granted Sevo the right to enter into a lease agreement on terms satisfactory to him. It is not, in my view, a breach of the duty of good faith performance for Sevo to enter into a lease agreement on his own terms, and not adopt the one negotiated by prior tenants.

[64] Emon also argued that by hiring a leasing consultant, Sevo was in breach of the duty of good faith performance and acted in bad faith. Again, I disagree. In my view, the fact that Sevo hired a leasing consultant shows that as of at least July, and arguably until he directed the leasing consultant to stop work, Sevo had every intention of closing the transaction. The hiring of the leasing consultant at his own expense supports the conclusion that Sevo was acting in good faith under the terms of the LOI and was committed to completing the transaction. It does not support an argument, in my view, that the hiring of the leasing consultant was a deliberate effort to delay or avoid his contractual obligations. There is nothing unreasonable about Sevo retaining the services of a leasing consultant.

[65] The terms of the LOI did not prevent Sevo from obtaining the best deal he could on the lease agreement and ensure that his interests were protected. He was not required, under the terms of the LOI to agree to any lease arrangement or agree to the terms of the lease currently in place. The LOI says the opposite. It is not bad faith, in my view, for Sevo to protect his own interests.

[66] The timing of Sevo's termination of the LOI before the Landlord responded to the last draft of the leasing agreement from the leasing consultant, was also raised as an act of bad faith by Emon. With respect, the Landlord and the Landlord's lawyer received the draft lease agreement from the leasing consultant on or about July 26. In my view, it was not unreasonable, and not an act of bad faith, for Sevo to terminate the LOI and the lease agreement negotiations in these circumstances on August 15. On the date that Sevo terminated the transaction, neither the Landlord nor its lawyer had accepted nor responded to the draft lease agreement substantively. Further, a review of the correspondence and the negotiation timeline reveal that Sevo was working on getting a lease from May 4 until August 9 when he again asked for an update and received none. Four months with relatively no movement from the Landlord is not promising for a new commercial leasing relationship and, in my view, it was reasonable for Sevo to end the negotiations by terminating the LOI.

[67] Reviewing and taking into consideration all the correspondence in the JDB, particularly the correspondence between Sevo and his lease consultant, and that between Emon and Sevo, between July 20 and August 14, Sevo worked diligently with his consultant to finalize a lease agreement. There is no evidence to support the argument that there was a deliberate effort by Sevo to avoid his obligations under the LOI. For example, Sevo provided all the information requested by his leasing consultant and communicated promptly with Emon seeking that information. From the communications, it is Emon who appeared less than enthusiastic about assisting in obtaining the information sought by the leasing consultant.

[68] It is also clear from the correspondence during this period that Gossack's lawyer was also involved in revising the lease terms that were proposed to the Landlord, including requesting the option to terminate the lease in three years. The red-line version of the lease agreement sent to the Landlord sets out the terms satisfactory not only to Sevo but also to Gossack.

[69] The only communication that was made by the Landlord or its lawyer to the leasing consultant regarding the terms of the draft lease agreement was made through Emon's lawyer to Sevo's lawyer. On August 11, Emon's lawyer wrote to Sevo's lawyer stating, in part:

I just wanted to check in with respect to the Emon/Sevo deal. I checked in with Landlord lawyer (Danielle) today and comments are with her and she is hoping to get them back out to the leasing specialist this weekend if possible, subject to obtaining her client's instructions on the certain additional comments provided by the leasing specialist - which she says appear to be less favorable then the first round comments (so we will have to see what Landlord is agreeable to). I will keep you posted as I hear anything and please do the same.

[70] Based on this communication, it appears that the Landlord would not respond with an acceptance of the terms proposed by Sevo's leasing consultant, which would lead to another round of draft agreements. It was anticipated, and communicated to counsel for Emon and Sevo, that the Landlord would have issues with the draft lease.

[71] Further, Sevo argued that the evidence of the Landlord's principle, Mr. Poirier, was clear that the Landlord could not and would not agree to the red-line terms of the draft lease proposed by Sevo's leasing consultant in at least two key respects: (i) the Landlord's mortgagee would not provide a non-disturbance agreement; and (ii) the mortgagee would regard a three year lease as a monthly tenancy and would insist on at least a five year or potentially even a ten year lease term. It was Gossack who requested an option to terminate the lease in three years, effectively creating a three-year lease term.

[72] In my view, the evidence supports a finding that Sevo used all reasonable efforts to finalize a lease agreement, including bearing the expense of hiring a lease consultant. There was nothing unreasonable in his attempts to negotiate and finalize a lease agreement. The evidence does not support a finding that Sevo breached his duty of good faith performance or was unreasonable in his exercise of discretion under s. 9 of the LOI. In my view, the evidence also does not support a finding that Sevo breached his duty of honest performance. There is no evidence that Sevo lied or otherwise knowingly misled Emon with respect to the lease negotiations. The ball was in the Landlord's court at the time of termination, and based on the evidence, no acceptance of the draft lease agreement was forthcoming.

Sevo's Exercise of Due Diligence Discretion

[73] Emon argues that Sevo abused his contractual discretionary powers by relying on the discretionary clauses in the LOI to justify its termination. Under s. 10(f) of the LOI, a further condition of closing the transaction is that Sevo, in his "sole and absolute discretion," is satisfied with his due diligence investigation of the Practice and the Business. In my view, the resignation of an employee key to the operation of the Practice is a material disruption and adverse change in the Practice.

[74] The Asset Purchase Agreement contemplated Emon's employees continuing as full time employees. Section 10.1(d) of the LOI provides that before closing there must be no "material adverse change in the Practice and the Practice must be carried on in the ordinary course."

[75] In May, Emon had learned that Mary, the Practice's office manager, intended to resign to pursue a career in real estate. He did not advise Sevo of this until August 2, by text message. Emon also advised Sevo on August 9, by text message that a second employee, Danielle, whose responsibilities included bookkeeping related tasks, was retiring when the deal closed. The departure of these two employees, Sevo argues, is a material adverse change in the Practice as contemplated in paragraph 10.1(d) of the LOI given that he contemplated purchasing a "turnkey" practice. I agree.

[76] In these circumstances, Sevo acted reasonably in exercising his discretion. His decision to terminate the LOI was connected to the purposes for which the discretion was granted: as a condition precedent to the closing of the transaction. Further, Sevo's exercise of his discretion was not capricious or arbitrary and did not fall outside the range of behaviour contemplated by the parties: Wastech, at para. 88.

[77] The LOI is explicit about the intentions of the parties. It states that it "is not contractual in nature or binding (except as specifically set out herein)" and is stated to reflect "only the intention to proceed toward the negotiation of the Purchase Agreement." The parties agreed that a condition of closing would be that Sevo, in his "sole and absolute discretion", is satisfied with his due diligence investigation in respect of the Practice and the Business. Further, s. 7(b) of Part II(b) of the LOI gives Sevo the right to terminate the LOI if he was not satisfied with his due diligence investigation "for any reason."

[78] In reading the LOI as a whole, the purpose of the discretion granted to Sevo is clear: to permit him an opportunity to determine whether he wants to proceed to the next step, being the completion of the transaction, once the conditions precedent were met. Sevo determined that the conditions precedent were not met and therefore he did not wish to proceed. As he was entitled to do. In my view, Sevo did not act unreasonably in the exercise of his discretion. When drafting the LOI, the parties foresaw the risk of the LOI being terminated and not following through with the completion of the transaction.

Termination of the LOI

[79] Section 7 of Part II(b) of the LOI permits Sevo to terminate the LOI if he "is not satisfied with [his] due diligence investigation for any reason." Sevo's right to terminate the transaction and the LOI must be exercised in keeping with the duty to act honestly. In other words, Sevo could not "lie or otherwise knowingly mislead" Emon "about matters directly linked to the performance of the contract": Bhasin, at para. 73; Callow, at para. 37.

[80] The inability to negotiate a new lease between Sevo, Gossack, and the Landlord on terms satisfactory to Sevo is fatal to the transaction and Sevo had the right to terminate on that basis alone. The additional concern that Sevo had with respect to the departures of key employees also justified termination in accordance with section 7(b) of Part II(b) of the LOI.

[81] Emon relies on Callow to argue that Sevo failed to correct the false impression that the Transaction would close, which he created by his own actions, and thus the duty of honest performance was breached: Callow, at para. 99. In Callow, the party who decided to terminate withheld the decision so that the other party would continue to perform work as an incentive for a potential contract renewal. The SCC found that while there was no freestanding obligation to disclose that it would be terminating the contract, an obligation to refrain from misleading the other party did exist: Callow, at para. 38. Unlike the facts in Callow, there was no active deception or intentional misleading by Sevo.

[82] In the present case, the evidence is not clear about precisely when Sevo decided to terminate the LOI and not proceed with the Transaction. Sevo could have only failed to correct a false impression or actively deceived or knowingly misled Emon after he made the decision to terminate the LOI and not proceed with the Transaction.

[83] It is my view after considering the evidence, the ASF, and the JBD, the earliest that Sevo formed the intention to terminate the LOI and not proceed with the Transaction was on August 2, when he learned that the Practice's office manager was resigning. Following this revelation, the only step that Sevo took based on the evidence was inquiring about the responsibilities of another employee, Danielle, who he learned on August 9, completed bookkeeping functions. On this same date, Sevo learned that Danielle would retire once the deal closed.

[84] At this point, the red-lined version of the Lease Agreement prepared by Sevo's consultant was in the hands of the Landlord's lawyer, and Sevo was waiting for a response. The record shows that no other steps were taken between August 2 and August 15, the date that Sevo terminated the LOI. There is no evidence that Sevo actively deceived or knowingly misled Emon during this period. Unlike the facts in Callow, Sevo did not deceive Emon through a series of active communications in anticipation of exercising his termination right. There is no evidence that Emon took any steps following August 2 in reliance on communications or omissions made by Sevo.

[85] In my view, Sevo properly terminated the LOI under s. 7(b) of Part II(b) of the LOI and he did so while acting in good faith, including while using his discretion through the due diligence process and while negotiating the lease. I cannot point to anything in the evidence that would suggest otherwise. Sevo took all reasonable steps to complete the transaction and finalize a lease agreement. In my view, he did not act in a capricious or arbitrary manner. There is no evidence to support the argument that Sevo lied or misled Emon with respect to his due diligence investigation or the lease agreement. Once Sevo determined that he was no longer interested in finalizing the transaction, he advised Emon and told his lawyer and leasing consultant to stop work on the deal in a prompt manner and in accordance with the LOI.

[86] Accordingly, I find that Sevo did not breach the LOI and the action should be dismissed.

Conclusion

[87] For these reasons, I dismiss the plaintiff's action.

[88] I encourage the parties to settle the issue of costs. If they cannot, then Sevo may deliver brief written submissions of no more than five (5) double spaced pages (exclusive of any costs outlines, bill of costs, dockets, offers to settle, or authorities) within 30 days. Emon may then deliver responding written submissions of no more than five (5) double spaced pages (exclusive of any costs outlines, bill of costs, dockets, offers to settle, or authorities) within 20 days.

Jacqueline A. Horvat Justice

Released: August 29, 2025