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Contracts - Options. 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. . Anderson Learning Inc. (Bond International College) v. Birchmount Howden Property Holdings Inc.
In Anderson Learning Inc. (Bond International College) v. Birchmount Howden Property Holdings Inc. (Ont CA, 2022) the Court of Appeal considered the exercise of a lease renewal option:[4] On February 28, 2020, the respondent wrote to the appellant by email attaching a letter of the same date. The letter states, in the first paragraph: “This is written confirmation of [the respondent’s] intent to extend the lease at 1500 Birchmount Road”.
[5] The appellant submits that this was not a clear and unequivocal notice as required by 120 Adelaide Leaseholds Inc. v. Oxford Properties Canada Ltd., [1993] O.J. No. 2801 (C.A.). The submission is based on the rest of the February 28 letter which responds to rent and term proposals made by the appellant the previous year. The respondent indicated that it wanted the same terms and conditions of the original lease but would be prepared to extend for three years with rent fixed at $21 per square foot including utilities. The appellant submits that this demonstrates that the extension was conditional and not clear and unequivocal.
[6] We do not agree.
[7] First, the lease stipulated that to exercise the option to renew, the tenant was to provide notice of its intention to renew. The February 11 and 28 correspondences said clearly that the respondent intended to renew; the option was thus exercised. The second part of the February 28 letter responded to the appellant’s proposal and did not negate the clear exercise. Nothing in the balance of the letter suggested that the exercise was conditional upon the appellant accepting the respondent’s terms which were provided in response to the appellant’s proposal.
[8] Second, the lease provided for arbitration if the rent for the renewal term was not agreed to. The parties therefore anticipated ongoing negotiations.
[9] Third, this court owes deference to the motion judge’s conclusions: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at paras. 10, 36. She found that the fact that the respondent included a response to proposed amendments from the appellant did not detract from the clear statement of its intention to renew in the letter. She also considered the appellant’s arguments that subsequent negotiations between the parties undermined the notice and found that this was to be anticipated given the arbitration clause. In short, she rejected the arguments the appellant makes now. . Stericycle ULC v. HealthPRO Procurement
In Stericycle ULC v. HealthPRO Procurement (Ont CA, 2021) the Court of Appeal considered the law of elections as it applies to contractual options:[39] The doctrine of election was described in the following terms in Charter Building Company v. 1540957 Ontario Inc. (Mademoiselle Women’s Fitness & Day Spa), 2011 ONCA 487, 107 O.R. (3d) 133, at para. 19:
Election at common law takes place where a party is faced with a choice between two inconsistent courses of action that affect another party's rights or obligations, and knowing that the two courses of action are inconsistent and that he or she has the right to choose between them, makes an unequivocal choice and communicates that choice to the other party. The doctrine provides that the party making the election is afterwards precluded from resorting to the course of action that he has rejected. The election is effective at the point of communication on the basis that the parties to an ongoing relationship are entitled to know where they stand. [Citation omitted.] . Flintoff v. Crown William Mining Corporation
In Flintoff v. Crown William Mining Corporation (Ont CA, 2016) the Court of Appeal made the following comments on what form of new contract results from the exercise of an option contained in the original contract: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. [Citation omitted.] . Mapleview-Veterans Drive Investments Inc. v. Papa Kerollus VI Inc. (Mr. Sub)
In Mapleview-Veterans Drive Investments Inc. v. Papa Kerollus VI Inc. (Mr. Sub) (Ont CA, 2016) the Court of Appeal considered when a contractual option (here to renew a commercial land lease) might be void for uncertainty as to it's terms (here the amount of rent on the renewed term):[27] It is trite law that the courts will not enforce “an agreement to agree” and that there must be reasonable certainty as to the length of the term of a lease or of a renewal option, as well as to the amount of rent to be paid. See e.g. Re Fice and Department of Public Works of Ontario (1922), 64 D.L.R. 535 (Ont. S.C. (A.D.)), at p. 539; Gourlay v. Canadian Department Stores Ltd., 1933 CanLII 9 (SCC), [1933] S.C.R. 329, at p. 331; and Re Calford Properties Ltd. and Kelly’s Billiards Ltd. (1973), 1973 CanLII 215 (AB QB), 37 D.L.R. (3d) 300 (Alta. S.C. (T.D.)), at pp. 303-5.
[28] However, contrary to Mapleview’s submission, this case does not involve “an agreement to agree” on the renewal rate. In the cases relied upon by Mapleview, there was neither a formula or other objective standard for establishing the rate, nor any mechanism for its determination in the event of a failure to agree: see Sheppard v. Czechoslovak (Toronto) Credit Union Ltd. (1989), 1 R.P.R. (2d) 290 (Ont. D.C.), at p. 293; Young v. Van Beneen, [1953] 3 D.L.R. 702 (B.C.C.A.), at pp. 704-5; Great Atlantic & Pacific Co. of Canada v. Topostar (Aurora) Inc., 2006 CanLII 7279 (ON SC), 2006 CanLII 7279 (Ont. S.C.), at paras. 51-52; and Delphi Management Corp. v. Dawson Properties, 2014 ONSC 354 (CanLII), at paras. 10-11.
[29] Here, however, there is a formula or other objective standard for establishing the rate – namely, what is the “then current rate” at the time of renewal. Courts should not strive to set aside a commercial bargain that was intended to have legal effect where a clause in an agreement – even if not precisely expressed – has an ascertainable meaning: Hillas & Co. Ltd. v. Arcos Ltd. (1932), 147 L.T. 503 (Eng. H.L.), at p. 514; and Griffin v. Martens (1988), 1988 CanLII 2852 (BC CA), 27 B.C.L.R. (2d) 152 (C.A.), at p. 153. Adopting this approach in Empress Towers Ltd. v. Bank of Nova Scotia (1991), 1990 CanLII 2207 (BC CA), 73 D.L.R. (4th) 400, at p. 403, leave to appeal refused, [1990] S.C.C.A. No. 472, the British Columbia Court of Appeal concluded that “the courts will try, wherever possible, to give the proper legal effect to any clause that the parties understood and intended was to have legal effect.” I agree.
[30] Here, I am satisfied that the parties intended to make a binding agreement as to the renewal rate; they simply declined to specify that rate in a dollar amount because neither wished to assume the risk of error (too high or too low, depending on their interest) 15 years later. This makes commercial sense. Expressing the renewal rate as the “then current rate” is the functional equivalent of saying the “then market value” or the “then prevailing market rate” – expressions that have been found to be sufficient to overcome a void-for-uncertainty argument. See e.g. Mustard Seed (Calgary) Street Ministry Society v. Century Services Inc., 2009 ABQB 171 (CanLII), 79 R.P.R. (4th) 252, at paras. 31-39, 46 (the “then prevailing market rate”); Brown v. Gould, [1972] 1 Ch. 53, at pp. 60-62 (the “market value of the premises at the time”); Great Atlantic & Pacific Co., at para. 51 (an “objective standard such as ‘market’ rent”); and Empress Towers, at p. 404 (the expression “market rent prevailing at the commencement of [the] renewal term” would itself have sufficed, but the addition of the words “as mutually agreed between the Landlord and the Tenant” rendered the clause void for uncertainty in the circumstances).
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