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Appeal Court Dicta

Contracts - Interpretation - Multiple Related Contracts

. Leeder Automotive Inc. v. Warwick

In Leeder Automotive Inc. v. Warwick (Ont CA, 2023) the Court of Appeal considered an issue of repudiation (and 'partial' repudiation) of an optional share-sale provision of a unanimous shareholder's agreement (USA) - here being a breach of condition that a fresh evaluation conducted by an agreed upon "independent business valuator" be conducted upon an option-invoked share sale.

In these quotes the court considered whether the share-sale aspect of the USA constituted a 'standalone' contract, here for purposes of determining whether full contractual repudiation occurs and it's implications:
(2) The share-purchase transaction was a standalone contract capable of being repudiated

[41] Leeder submits that this ground of appeal involves a matter of contractual interpretation and gives rise to a question of mixed fact and law that is entitled to deference on appeal. It relies on Flintoff, in which Pardu J.A. said the following about the standard of review, at para. 7:
Determining whether an option contained within a contract amounts to a separate unilateral agreement is an exercise driven by the context and the contractual language. In Sail Labrador Ltd. v. Challenge One (The), 1999 CanLII 708 (SCC), [1999] 1 S.C.R. 265, at para. 41, Bastarache J. stated that:
Whether a contract which contains an option clause establishes a single, bilateral contract or two separate contracts, one bilateral and the other unilateral, is a matter of construction. Courts must examine the text of the contract and the context surrounding it in order to determine the intention of the parties, keeping in mind that this Court has previously approved of the tendency by courts to treat offers as calling for bilateral rather than unilateral performance whenever a contract can fairly be so construed. [Citations omitted.]
[42] In my respectful view, the application judge erred in her conclusion that the buy-sell agreement did not form a separate contract. As laid out in Flintoff, this is a matter of contractual interpretation, something that would ordinarily attract deference on appeal. However, the application judge’s ultimate conclusion in this case – that the agreement had been repudiated – appears to rest on the assumption that it did not matter whether there was a standalone contract or not (see para. 27, above).

[43] The parties agree that the law does not recognize the concept of partial repudiation of a contract. Repudiation occurs when the entire foundation of a contract has been undermined; where the very thing bargained for has not been provided. It allows the non-repudiating party to elect to treat the contract as at an end, and relieves the parties from further performance of the contract: see Remedy Drug Store Co. Inc. v. Farnham, 2015 ONCA 576, 389 D.L.R. (4th) 671; Spirent, at para. 35; Place Concorde at para. 51; Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd., [1962] 1 All E.R. 474 (C.A.), at 485; and Angela Swan, Jakub Adamski & Annie Na, Canadian Contract Law, 4th ed. (Toronto: LexisNexis Canada, 2018), at §7.89.

[44] Partial repudiation of a contract would be antithetical to a finding that the entire foundation of a contract has been undermined. Accordingly, the application judge could not have found, on the one hand, that the share-purchase transaction was merely an implementation of the USA, but on the other hand, that the transaction agreement alone had been repudiated. Thus, in the circumstances of this case, the application judge’s analysis on this issue is not entitled to deference; it is predicated on an incorrect legal assumption.

[45] Returning to the question of whether there was in fact a standalone agreement, both parties urged her to make that finding. It would appear that Leeder’s counsel provided Blackmore to the application judge in order to draw an analogy between the treatment of the shotgun provision in that case, and the buy-sell mechanism in this case. However, Blackmore does not assist with the interpretive issue in this case.

[46] In Blackmore, the shareholder agreement entitled “each shareholder to force a share sale at a price and on the terms stipulated in [the shareholder’s] offer”, at which point “the recipient of the offer decides whether to buy or sell”: at para. 34. The agreement identified the shareholder who triggered the shotgun provision as the “Instigator”, and the target as the “Recipient”. As MacKenzie J.A. wrote, at para. 36: “The ordinary meaning of these provisions is that once the clause is invoked, the process cannot be stopped – the shareholder relationship will be severed” (emphasis added). The court found that, based on the agreement as whole, once the process was triggered, it was irrevocable during the relevant notice period. The offering parties were not permitted to back out even if market conditions changed during that period.

[47] Whether the shotgun provisions gave rise to a standalone agreement would appear to have played a minor role in the Blackmore decision. MacKenzie J.A. characterized the invocation of the shotgun provision as the exercise of a contractual term rather than as an offer to form a new contract. This characterization influenced her analytical approach to the central question of revocability. As MacKenzie J.A. said, at para. 31:
I am not persuaded that the invocation of a shotgun clause is either an exercise of a contractual option or an offer to form a new contract. Rather, to invoke a shotgun clause is to rely on a term of an existing contract by which the parties have agreed to a compulsory buyout procedure. As a result, whether the respondents were entitled to revoke the shotgun offer depends on the proper interpretation of the shareholders' agreement as a whole. [Emphasis added.]
[48] Interestingly, although the application judge in this case relied on Blackmore to find the buy-sell mechanism did not create a standalone contract, she declined to characterize the mechanism as a shotgun provision. Relying on the discussion of shotgun provisions in Western Larch Limited v. Di Poce Management Limited, 2013 ONCA 722, 117 O.R. (3d) 561, leave to appeal dismissed, [2014] S.C.C.A. No. 32, at paras. 41 and 42, the application judge said, at para. 54:
In my view, Article 12 is not a true shotgun buy-out provision because it cannot be used to initiate a sale of shares against an unwilling vendor. However, once the offer is accepted, this provision does operate in a similar manner insofar as the offeror vendor cannot withdraw from the transaction unilaterally.
[49] As outlined above, Article 8.2 requires that, before a shareholder enters into any discussions with a third party about the purchase and sale of any shares, it must provide notice to all other shareholders of its intention to sell. There is no corresponding obligation on the Corporation to buy those shares. The Corporation may choose not to buy those shares, and the shares may be sold to other shareholders, who may also decline the offer. In this eventuality, the shareholder may sell the shares to a third party: Articles 8.2-8.4.

[50] As can be seen, there is little that is compulsory about this procedure, not at least until the Corporation or other shareholders elect to purchase the offered shares. Built into the buy-sell mechanism are a number of exit ramps, including where the Corporation declines to purchase the shares, and where other shareholders do the same. At this juncture, the offering shareholder may decide to sell to a third party, or they may have a change of heart and retain their shares.

[51] In my view, Article 8.2 creates a mechanism akin to a right of first refusal, giving rise to a new contractual arrangement built on an offer to sell (by Mr. Warwick) and the acceptance of that offer (by the Corporation or other shareholders). The application judge said that Leeder “effectively had a right of first refusal under Article 8.2 of the Shareholders’ Agreement”: para. 46. Indeed, Article 8 is entitled “Rights of First Consideration”, a relevant factor in the interpretation of these contractual provisions.

[52] The essential aspect of a right of first refusal is “a commitment by the grantor to give the grantee the first chance to purchase should the grantor decide to sell. This commitment may be structured in a variety of ways”: Paul M. Perell, “Options, Rights of Repurchase and Rights of First Refusal as Contracts and as Interests in Land” (1991) 70 Can. Bar Rev. 1, at p. 8 (emphasis added); Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada, 1995 CanLII 87 (SCC), [1995] 2 S.C.R. 187 at p. 200.

[53] The authors of Canadian Contract Law identify a right of first refusal as a type of option contract. They state, at §4.120:
An option contract is a contract like any other. The typical arrangement is that the optionor, i.e., the person giving the option, agrees with the optionee, i.e., the person who may want to exercise that option, to sell property, often real property or shares, to the optionee in return for a payment by the optionee. Options may take other forms; a right of first refusal, for example, is an option to buy property at the price and on the conditions fixed by the offer the optionor has received from a third party. [Footnotes omitted.]
[54] In this case, the triggering of the buy-sell mechanism by the selling shareholders did not force a sale, as the shotgun clause did in Blackmore. Instead, the buy-sell mechanism required an acceptance of the seller’s offer by the Corporation (or by other shareholders), and in this way the mechanism differed fundamentally from the shotgun clause in Blackmore. It was the fact that the buy-sell mechanism required both offer and acceptance that caused it to give rise to a standalone contract. In my respectful view, it was therefore an error to characterize the buy-sell mechanism in this case by relying on the analysis of the shotgun clause in Blackmore.

[55] That the buy-sell mechanism must give rise to a standalone contract is also illustrated by the scenario involving a potential sale to a third party. By definition, a third party purchaser is not a party to the USA. Any such sale would undoubtedly involve a separate contract. In oral argument, the appellants submit that this situation is just “different” and inconsequential. They relied on Sail Labrador to illustrate the following distinction. On the one hand, a third party sale would require an offer and an acceptance, thus giving rise to a contract. By contrast, a sale from one shareholder to another would simply follow the process laid out within the existing USA. I would not accept this submission.

[56] The process in the USA required shareholders wishing to sell their shares to make an offer that the Corporation could accept or reject, and subsequently, another shareholder could either accept or reject. The offer, if accepted, created an agreement that the transaction would be completed through compliance with Article 12. The presence of the opportunity for the Corporation or another shareholder to accept - or reject - the offer, and, subsequent to rejection by both, for the offeror to retain their shares, meant that the buy-sell mechanism would give rise to a contract in the same way that sale to a third party would inevitably require the creation of a contract.

[57] In this case, reading the relevant provisions in the context of the USA as a whole, there is no basis on which to characterize a sale between shareholders and a sale between a shareholder and a third party in such fundamentally different ways. This approach would mean that some share-purchases (i.e., to the Corporation or other shareholders) would not constitute standalone transactions, and would not be capable of repudiation, whereas others (to third parties) would. I would reject this interpretation.

[58] In conclusion, the agreement to sell Mr. Warwick’s shares was a standalone agreement that arose from and incorporated terms of the USA – specifically, those laying out the valuation procedure under Article 12. As a standalone agreement, it was capable of being repudiated.
. Ferraro v. Neilas

In Ferraro v. Neilas (Ont CA, 2023) the Court of Appeal notes that contracts may be contained in more than one document:
[34] On their plain language, the Trust Agreement was expressly linked to the LPA which, in turn, was expressly linked to the terms and conditions of the Loan Commitment, incorporating them by reference: Chitty on Contracts, 34th ed., vol. 1 (London: Sweet & Maxwell, 2021), at p. 1114:15-016.[2] [Chitty on Contracts states, at §15-016: “Incorporation by express reference. The terms of a contract may be contained in more than one document. In such a case, the terms set out in one document may incorporate into the contract terms to be found in another document.”] And, of course, running through all three documents was the ubiquitous signature of Jim Neilas, who acted on behalf of the trustee, lender, borrower, and guarantors.
. Ottawa (City) v. ClubLink Corporation ULC

In Ottawa (City) v. ClubLink Corporation ULC (Ont CA, 2021) the Court of Appeal considered contractual interpretation where several contracts were meant to work together:
[54] As a result, the related contracts principle is also engaged in the interpretative process here. Under the related contracts principle, where more than one contract is entered into as part of an overall transaction, the contracts must be read in light of each other to achieve interpretive accuracy and give effect to the parties’ intentions: 3869130 Canada Inc. v. I.C.B. Distribution Inc., 2008 ONCA 396, 239 O.A.C. 137, at paras. 33-34; Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673, 268 O.A.C. 279, at para. 16; Fuller v. Aphria Inc., 2020 ONCA 403, 4 B.L.R. (6th) 161, at para. 41, 51; Catalyst Capital Group Inc. v. Dundee Kilmer Developments Limited Partnership, 2020 ONCA 272, 150 O.R. (3d) 449, at para. 50.


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