Archive for the ‘Contracts’ Category

Are you buying a business? Do you want to continue the business with the same employees? Success of the business may be due to the efforts of its excellent employees and you as a buyer may want to continue their employment in the hopes of attaining continued success in the business. Alternatively, you may be buying an unsuccessful business with a view to, among other things, reorganizing its workforce to make the business more financially viable or profitable. In either scenario, what obligations, if any, do you have to the employees of the seller under the Employment Standards Act (“ESA”), if you continue their employment but later terminate their employment without cause?

Section 97 of the ESA is instructive in such cases. It states:

Sale of business or assets

97 If all or part of a business or a substantial part of the entire assets of a business is disposed of, the employment of an employee of the business is deemed, for the purposes of this Act, to be continuous and uninterrupted by the disposition.

Under section 97, if a buyer continues the employment of the employees without any interruption, the buyer will assume the role of an employer and be required to assume all of the obligations and liabilities of the seller vis-à-vis the employees under the ESA including, but not limited to:

(i)                  any outstanding wages due to employees (including those that became due prior to the sale);

(ii)                statutory holiday based on the total number of days they worked for both the seller and buyer and the wages they earned with both;

(iii)               vacation and vacation pay based on the employees’ start dates with the seller;

(iv)              notice of termination or pay in lieu of notice under section 63 based on the employees’ past service with the seller;

It should be noted that one of the requirements for triggering section 97 of the ESA is a disposition of all or part of a business. While the ESA does not define the word “dispose” or any variation of it, the Interpretation Act defines it very broadly as follows:

“dispose” means to transfer by any method and includes assign, give, sell, grant, charge, convey, bequeath, devise, lease, divest, release and agree to do any of those things;

Another important requirement for triggering section 97 is that the employee must be an employee of the business on the date the business is being disposed of by the seller. If the seller has already terminated the employee’s employment in advance of the disposition of the business, even if only by a single day, then the buyer who subsequently offers employment to the employee will not be viewed as having continued the employee’s employment. Instead, the employer will be viewed as having offered the employee fresh or new employment with a new start date for the purpose of the ESA. In such case, the buyer will not be saddled with additional liability associated with the employee’s past service with the seller for calculation of, for example, termination notice, statutory holiday, vacation or vacation pay.[1]

Therefore, as a buyer of a business, if you have, for whatever reason, decided to retain employees of the seller but you do not wish to assume associated liabilities of such decision then you should make it a term of your contract of purchase that the seller will terminate the employment of all its employees at least one day before the disposition of the business to you. You should also make it a term of the contract that the seller will pay its employees all outstanding wages, termination pay and any other obligations under the ESA at the same time.

Alternatively, if you wish to continue the employment of all employees without any interruption or if the seller is requiring you to do so, you may consider negotiating with the seller some discount in the purchase price of the business to offset, some or all, liabilities you are assuming in continuing the employment of the sellers employees. In deciding what amount discount you should ask the seller, you may want to consider any outstanding wages due to the employees (earned before the date of disposition and not paid); your increased obligations to the employees for statutory holiday, vacation and vacation pay; and your increased obligation to the employees for notice of termination or pay in lieu of notice; and any other related liabilities or obligations.

It is also important to note that while the discussion here mainly focuses on the buyer’s obligation under the ESA for continuing the employment of the seller’s employees at the time of purchasing the latter’s business, there is also a potential common law obligation for severance you, as a buyer, may be assuming. For example, if you continued the employment of a long-term employee in her mid or late 50’s who had, at the time you purchased the business, been in the employ of the seller for 20 years, but subsequently (may be a few months later) you decided to terminate her employment without legal cause, you will be exposed to a significant financial liability. While under the ESA-section 63- the maximum termination pay or notice you will be required to give the employee is 2 months, the employee will likely not walk away happily with only 2 months notice or wages. She will surely consult legal counsel who will indubitably inform her that she could obtain significantly more (possibly closer to 10 times that amount depending on various factors including her age, position at work, number of years worked including the time she worked with the seller). As with the alternatives you, as a buyer, have to protect yourself from liabilities and obligations under the ESA when continuing the employment of a seller’s employees, you have the same alternatives to protect yourself from any common law severance obligations.

You may also consider negotiating with the seller, in advance, a term in your contract of purchase that holds the seller responsible for common law severance obligation for each employee you employ, if you dismiss him or her during the first year of employment after you take ownership of the business. You may also require the seller to deposit the full (or other negotiated) amount of the potential severance liability in escrow for you to draw on during the negotiated period and whatever balance is remaining at the end of the period to be returned to the seller. You may also employ the same option to protect yourself from any financial liability you assume under the ESA.

[1] See Tekmo Industrial Design Ltd. dba Budget Brake & Muffler, BC EST #D170/03

Tags: business, buying, Contracts, liability, selling, severance, vacation

The importance of careful and accurate drafting of business contracts cannot be stressed enough.  However, as careful as a party may be in drafting the contract and as clear as the contractual terms may appear to the parties at the time they are signing the contract, at some point during the operation of the contract, there may arise a dispute between the parties as to the meaning of an ambiguous term in the contract-a term that is open to more than one meaning.  What is the court to do in such case?

The British Columbia Court of Appeal, in a quartet of cases – Grace Residences Ltd. v. Whitewater Concrete Ltd.[1]; Group Eight Investments Ltd. v. Taddei[2], Chuddy v. Merchant Law Group[3], and Gilchrist v. Western Star Trucks Inc.[4]- has delineated instructive principles of contractual interpretation.  These principles may be summarized as follows:

1.     The words of the agreement are the starting point and the most significant tool for interpretation.[5]

2.     The Court must interpret the words objectively, referring to the plain and ordinary meaning, unless it would lead to an absurdity.[6]

3.     The proper “plain and ordinary” meaning must take into consideration the contract as a whole, the intention of the parties expressed within the contract, and the circumstances at the time the contract was entered into[7];

4.     The Court’s will assume that each particular word was selected for a purpose and may reject an interpretation that renders a provision ineffective[8].

5.     Only if the plain and ordinary meaning of the words still results in an ambiguity such that there remain two plausible interpretations, the Court may consider extrinsic evidence regarding the intention of the parties[9].

6.     If extrinsic evidence is relied upon, the Court should interpret the words in a manner consistent with sound commercial principles and good business sense and avoid any commercially absurd meaning[10].

Following these guidelines will assist in avoiding pitfalls when drafting and, if a dispute does arise, in understanding how a Court may decide.

[1] 2009 BCCA 144

[2] 2005 BCCA 489, 57 B.C.L.R. (4^th) 278

[3] 2008 BCCA 484, 300 D.L.R. (4^th) 56

[4] 2000 BCCA 70

[5] Gilchrist, supra, paragraph 17

[6] Grace Residences Ltd, supra, paragraph 23-25, Group of Eight Investments Ltd., supra, paragraph 20

[7] Chuddy, supra, paragraph 207, Grace Residences Ltd., supra, paragraph 23-25

[8] Grace Residences Ltd, supra, paragraph 23-25, Group of Eight Investments Ltd., supra, paragraph 20

[9] Chuddy, supra, paragraph 207

[10] Chuddy, supra, paragraph 207, Group of Eight Investments Ltd., supra, paragraph 21

Tags: contract, interpretation, Interpretation of Contracts, statutory interpretation

In the wake of the Supreme Court of Canada’s recent decision in Sharbern Holdings Ltd. v. Vancouver Airport Centre Ltd. [Sharbern], 2011 SCC 23, courts in BC are taking a sober second look at the onus placed on developers when purchasers claim that a disclosure statement contains a material misrepresentation.

In 299 Burrard Residential Limited Partnership v. Essalat, 2011 BCSC 996 [Essalat], Ms. Essalat was a purchaser of a luxurious pre-sale condominium unit in the Residences at the Fairmont Pacific Rim.  On the closing date, she refused to complete the transaction and, through counsel, demanded return of her deposit.

The developer commenced an action seeking forfeiture of her deposit.  Ms. Essalat raised a number of defences, primarily arguing that the contract should be unenforceable pursuant to section 23 of the Real Estate Development Marketing Act, S.B.C. c. 41 (“REDMA”) and that the action was, in any event, barred by section 6 of the Property Law Act.  On this basis she sought an order that her deposit be returned.

Her REDMA defence, focused on the estimated construction completion date set out in the disclosure statement.  Her unit was not tendered to her until 4 months after the estimated completion of construction date and the entire development was not completed until 7 months after the estimated completion date.  She alleged that this constituted a material misrepresentation and therefore the contract was unenforceable pursuant to section 23 of the REDMA.

In recent years, pre-sale purchasers have been successfully able rely on incorrect estimated completion dates in a developer’s disclosure statement to avoid liability under a contract and forfeiture of their deposits.

Up until now, the leading case on the topic was Chameleon Talent Inc. v. Sandcastle Holdings Ltd. [Chameleon], 2009 BCSC 1670, aff. 2010 BCCA 300.  In that case Mr. Justice Rice found that delays in the estimated commencement and completion of construction dates were material facts that required amendments to the disclosure statement.  However, the delay at issue in Chameleon was significant, extending to over a year.

The difficulty this decision caused is that it did not define in anyway how long of a delay was necessary before an amendment was required.  It appeared to suggest that any delay would be material regardless of the length.

This decision was upheld by the Court of Appeal without any further clarification on the length of delay issue.

Ms. Essalat presented no evidence to support why either a 4 or 7 month delay was in fact material.  Instead, she took the position that any delay past the estimated completion date, even if only a few days, constituted a material misrepresentation that required an amendment to the disclosure statement.  She characterized it as a “bright line pass/fail test” and she relied upon Chameleon to support that approach.

Several weeks before this trial, the Supreme Court of Canada released its decision in Sharbern. Though that case was decided under the old Real Estate Act, which is the predecessor to the REDMA, Mr. Justice Rothstein framed his decision as being applicable generally to all disclosure legislation.  He set out the following 5 part test to apply when determining just how significant a fact must be before it should be considered material:

i.  Materiality is a question of mixed law and fact, determined objectively, from the perspective of a reasonable investor;

ii.  An omitted fact is material if there is a substantial likelihood that it would have been considered important by a reasonable investor in making his or her decision, rather than if the fact merely might have been considered important. In other words, an omitted fact is material if there is a substantial likelihood that its disclosure would have been viewed by the reasonable investor as having significantly altered the total mix of information made available;

iii. The proof required is not that the material fact would have changed the decision, but that there was a substantial likelihood it would have assumed actual significance in a reasonable investor’s deliberations;

iv. Materiality involves the application of a legal standard to particular facts. It is a fact-specific inquiry, to be determined on a case-by-case basis in light of all of the relevant considerations and from the surrounding circumstances forming the total mix of information made available to investors; and

v.  The materiality of a fact, statement or omission must be proven through evidence by the party alleging materiality, except in those cases where common sense inferences are sufficient. A court must first look at the disclosed information and the omitted information. A court may also consider contextual evidence which helps to explain, interpret, or place the omitted information in a broader factual setting, provided it is viewed in the context of the disclosed information. As well, evidence of concurrent or subsequent conduct or events that would shed light on potential or actual behaviour of persons in the same or similar situations is relevant to the materiality assessment. However, the predominant focus must be on a contextual consideration of what information was disclosed, and what facts or information were omitted from the disclosure documents provided by the issuer.

In Essalat, the developer argued that this is the test that should be applied in British Columbia when considering a purchaser’s claim that a disclosure statement contains a material misrepresentation.  Mr. Justice Sewell accepted this position and rejected Ms. Essalat’s suggestion that the test is a simple question of pass/fail.

Having presented no evidence of materiality, His Lordship found that Ms. Essalat had not met her burden.

The alternative argument advanced by Ms. Essalat was that because the developer did not hold legal title to the property before the unit was tendered to her, it was in violation of section 6 of the Property Law Act, and therefore could not maintain an action to enforce the sale contract.

Section 6 states:

(1) A person who transfers land, or who makes an agreement, or assignment of an agreement, for the sale of land by which the purchase price is payable by installments or at a future time, must register his or her own title in order that a person to whom all or part of the land is transferred and a person claiming under the agreement or assignment can register their instrument under the Land Title Act.

(2) An action must not be brought on the agreement or assignment referred to in subsection (1) by a person who fails to comply with this section.

In British Columbia, Limited Partnerships (or any partnership at all) cannot be the registered owner of real property.  As is typical in the pre-sale development industry, the developer was a limited partnership and a nominee and bare trustee was set up to hold legal title to the development lands in trust and for the exclusive benefit of the developer and was required to transfer title to the land to whomever the developer directed it to.

This ownership arrangement was disclosed in the disclosure statement and the contract of purchase and sale included the following express term:

The Buyer acknowledges that the Unit is or will be registered in the name of 299 Burrard Management Ltd. (“299 Burrard”), as discussed in the Disclosure Statement, who will hold such title as agent and nominee for the Seller.  The Buyer agrees to accept the Transfer executed by 299 Burrard as transferor, but acknowledges and agrees that 299 Burrard shall have no liability or obligation to the Buyer hereunder, other than to convey legal title to the Unit to the Buyer.

Ms. Essalat argued that the Property Law Act was consumer protection legislation, and thus the protections afforded by it could not be waived even by express agreement.

The developer relied upon the decision of Mr. Justice Edwards in 410263 B.C. v. Poke (1995), 11 B.C.L.R. (3d) 368, which stood for the proposition that a purchaser cannot rely on the protections of section 6, if it has knowledge that the vendor does not hold title to the land in question and has agreed to accept title through an alternative method.  Mr. Justice Sewell agreed with this position and found that the express terms of the contract precluded Ms. Essalat from demanding compliance with section 6 of the Property Law Act.

The developer was successful in the action and Ms. Essalat was ordered to forfeit her deposit as required by the contract.

Zeubear Investments Ltd. v. Magi Seal Corporation 2010 ONCA 825 (December 7, 2010), a decision of the Ontario Court of Appeal, is a reminder to pay close attention to the potentially different interpretations in  “shotgun clauses”.

Shotgun clauses are generally inserted in shareholders’ agreements as an exit provision.  One party offers to purchase the shares of the other shareholders at the offered price per share and the others then have the option to either sell their shares or purchase the offering party’s shares at the specified price. 

These buy-sell provisions in shareholders’ agreements are often useful tools to aid in the resolution of disputes among shareholders.      

In Zeubear, the case turned on whether the purchase price was payable entirely in cash upon closing.

The “Harris Group”, owners of 60% of the shares in the subject corporations, triggered the buy-sell provisions of the shareholders’ agreements by providing notice to Geddes, the owner of 40% of the shares, offering to purchase Geddes’ shares for a certain price, payable in full on completion of the sale.

The notice also provided that if Geddes opted to purchase Harris Group’s shares instead, Geddes would have to pay the entire price for Harris Group’s shares on closing.

The shotgun clauses in question parallel the terms of a typical buy-sell offer:

Minimum Terms.  Notwithstanding any other provision hereof …  the Terms shall be deemed to provide, inter alia, that :

…(c)  payment of the Purchase Price for all of the Shares to be purchased pursuant to this section shall be made by delivering on completion:

(i)  at least 50.0% of the Purchase Price in cash or by certified cheque or bank draft; and

(ii)  a promissory note for the balance of the Purchase Price …

After receiving the notice, Geddes purported to accept the offer to purchase Harris Group’s shares but the acceptance provided that the purchase price would be payable as to 50% of the purchase price upon closing and the remainder by delivery of a promissory note.

The decision turned on whether the provisions of the shotgun clause set out minimum payment terms for the buy-sell offer, or instead set out the actual terms to form part of the offer.

The Court of Appeal, in deciding that the latter interpretation was the correct one, focused on the wording of the clauses, which stipulated that “the Terms [of any offer] shall be deemed to provide …”.  Consequently, the relevant clauses in the shareholders’ agreements provided specific terms which were required to form part of any buy-sell offers.

Geddes therefore had the option of accepting Harris Group’s offer to sell upon the payment provisions set out in the relevant clauses in the shareholders’ agreements.  Harris Group’s offers were deemed to include the payment terms set out in the relevant provision and Geddes’ acceptance was valid.

Given that the relevant clauses were titled “minimum terms” and the payment provisions required that “at least” 50% of the purchase price be paid upon closing, it may very well have been the intention of the drafter (and perhaps at least some of the parties) that the payment provisions establish a minimum cash threshold for any buy-sell offer, rather than express terms for each offer.  This was likely a very surprising outcome to Harris Group, given its notice to buy at 100% cash.

It is critical for parties to shotgun clauses in shareholders’ agreements to consider carefully the language used to reflect their intentions.  Otherwise, at the end of the day one party may be left in a very different position than it had intended.

Tags: construction of contracts, Interpretation of Contracts, Shareholders' Agreements, Shotgun clauses

In the preparation of this article, the assistance of articled student Richard Sehmer is gratefully acknowledged. 

You may recall that, on February 12, 2010, the Supreme Court of Canada released its decision in Tercon Construction Ltd. v. British Columbia (Transportation and Highways) 2010 SCC 4 in an attempt to further ensure fairness and balance the interests of owners and tenderers involved in the tendering process. Subsequently, the precedent has not only been applied to cases promoting fairness in the tendering process, as was the case in CMH Construction Ltd. v. Victoria (Town) 2010 NLTD(G) 145, but it has also been more recently applied to fairness in regard to the interpretation of commercial contracts in Strata Plan 226 v. White Rock (City) 2010 BCSC 1358. 

In Tercon the Supreme Court held that an exclusion of liability clause in a request for proposals which barred claims for compensation “as a result of participating” in the tendering process, did not, when properly interpreted, exclude Tercon’s claim for damages. It was also held that by considering a bid from a non-compliant, and thus ineligible bidder, the Province not only acted in a way that breached the express and implied terms of the contract, it did so in a manner that was an affront to the integrity and business efficacy of the tendering process.   In its reasons for judgment,  the Court confirmed its own earlier determination in The Queen (Ont.) v. Ron Engineering, [1981] 1 S.C.R. 111 that a bid submitted in the tendering process results in a contract (Contract A) between the bidder and the owner, while the awarding in the tendering process results in a separate contract (Contract B). The owner owes a duty of fairness under both contracts, and, post-Tercon, will not easily be able to exclude liability for unfairly accepting an ineligible bid under ‘Contract A’.

In two recent cases, Tercon has been applied to extend contracting parties’ implied contractual duty of fairness in different situations.   On September 22, 2010, in CMH Construction Ltd. v. Victoria (Town), a plaintiff construction company successfully relied on Tercon to argue that the defendant town, in its request for proposals in the tendering process to renovate the town’s municipal center, breached a duty of fairness it owed to the bidders. In complying with a tender call, CMH Construction submitted a bid pursuant to standard bidding techniques. Without notifying CMH, the defendant town re-issued the tender call to other contractors and suppliers in hopes that they would receive a cheaper bid. After this second round of bids, the defendant accepted a lower bid from an alternate construction company. In holding in favour of CMH, the Newfoundland court confirmed the existence of a “Contract A” in the bidding process and, as in Tercon, affirmed a duty of fairness therein.

Five days after CMH Construction was released, Tercon was applied by the British Columbia Supreme Court to a dissimilar factual scenario in Strata Plan 226 v. White Rock (City) . In this case, the court applied Tercon in an effort to promote fairness in the interpretation of a provision in a restrictive covenant on the title of strata lots in a strata plan.   In doing so, the court applied the Tercon analysis that “the key principle of contractual interpretation here is that the words of one provision must not be read in isolation but should be considered in harmony with the rest of the contract and in light of its purpose and commercial context.” In this appeal, the B.C. Supreme Court overturned a previous decision by a Board Chair who did not consider anything beyond the natural meaning of plain and obvious words as written in the relevant clause. This application of Tercon illustrates the judiciary’s willingness to apply the duty of fairness to a broader scope of commercial relationships.

The Tercon decision found a compromise between an owner’s desire to maintain flexibility during the tendering process and a tenderer’s right to a fair process after having spent considerable resources in preparation of a tender. In applying Tercon more generally, the courts will ensure fairness and transparency in not only the tendering process, but in other business transactions.

Tags: duty of fairness, tenders, Tercon Construction