Forum Selection Clause Not Enforceable

A “drag-along” clause in a unanimous shareholder agreement covering a joint venture company will be enforced by an Ontario court despite the existence of a forum selection clause in a prior memorandum of understanding which would give New Zealand courts jurisdiction. 

The case of 2072270 Ontario Inc. v. Dish Family Trust, 98 O.R. (3d) 198, explains why. 

In the Dish case, four Canadian and four New Zealand individuals entered into a memorandum of understanding (“MOU”) covering the formation and operation of a joint venture company to carry on the business of manufacturing and distributing mobile and static shredding systems for the shredding and recycling industries in the Americas. The Canadian group was to own 50 per cent of the issued shares of the company, and the New Zealand group was to own the other 50 per cent. The Canadian group transferred its shares to a separate holding corporation which then paid a loan owed by the company to the New Zealand shareholders and which then became the holder of 95 per cent of the shares, with the New Zealanders holding the remaining 5 per cent.

The parties entered into a unanimous shareholder agreement (“USA”) containing a “drag-along” clause which required the New Zealand shareholders to sell their 5 per cent to any third party buying the shares of the holding corporation if requested to do so by the holding corporation. When the holding corporation agreed to sell its shares to a third party and requested the New Zealand shareholders to do so as well, the New Zealand shareholders refused. The holding corporation sought an order authorizing the sale to the third party. While the MOU contained a “choice of forum” clause selecting the courts of the jurisdiction of the defendant in any action brought under the MOU, the USA contained no such clause although it confirmed and incorporated the terms of the MOU.

In authorizing the sale to take place, the Superior Court declined to comply with the forum selection clause in the MOU, holding (at page 209) as follows:

I agree with the position of the applicant that the forum selection clause does not apply. The MOU was signed when [the company] AXO was owned equally by the Canadian principals and the New Zealand principals. The purpose of s. 28 of the MOU was to settle disputes over governance of the company among the two groups of principals – first by mediation, and if that was unsuccessful, by a lawsuit in the jurisdiction of the defendant. This is a reasonable clause, when the company is owned equally by parties in Canada and in New Zealand. It is not reasonable when 95 per cent of the owners are in Canada and only 5 per cent are in New Zealand. The unanimous shareholders’ agreement which contains the drag along provisions in s. 4 also states in s. 1 that where there are differences between the USA and the MOU, the USA shall prevail. Further, if the forum selection clause of the MOU is still in effect, in my view, the plaintiff has shown “strong cause” why it should not apply.       

The Dish case is another reminder that courts will assume jurisdiction in a dispute if the circumstances warrant, despite a forum selection clause to the contrary.  

Limitation Period for Enforcing a Personal Guarantee

The limitation period applicable to the enforcement of a demand personal guarantee does not commence until demand is made.

The case of Bank of Nova Scotia v. Williamson, 97 O.R. (3d) 561 (C.A.), provides clarification. 

In the Williamson case, an officer, director and shareholder gave his personal guarantee of a company’s debts to the bank up to a maximum of $350,000. The company defaulted on its loans and the bank wrote a demand letter to the company, with a copy to the guarantor, advising of the demand and stating that it would take steps to recover from the guarantor if the company failed to pay. The company was deemed bankrupt, and the bank was still owed over a million dollars by the company.

The bank then wrote to the guarantor a letter, which was two and half years after the date of the first letter, demanding payment under the guarantee. When the guarantor did not pay, the bank moved for summary judgment on the guarantee and was successful against the guarantor. The guarantor appealed, arguing that the two-year limitation period under the Limitations Act had expired.  

The Court of Appeal dismissed the guarantor’s appeal, holding that the applicable limitation period did not commence until demand was made under the guarantee, and rejected the guarantor’s argument that it should commence when the bank knew or ought to have known that the company was not going to pay as principal debtor. While the bank’s second letter to the guarantor constituted a demand under the guarantee, the first letter did not and was sent merely to advise the guarantor that the bank would look to the guarantor for payment if the company, as principal debtor, failed to pay.

Letter of Credit Enforced Against Issuing Bank

A bank may not be able to rely upon the defence of non-compliance with a letter of credit in refusing to pay if it knowingly contributed to the circumstances which prevented compliance. 

The case of Nareerux Import Co. Ltd. v. Canadian Imperial Bank of Commerce, 97 O.R. (3d) 481 (C.A.), addresses this issue. 

A letter of credit was issued by the bank to a vendor selling shrimp to a customer of the bank for resale to an ultimate purchaser which required presentation to the bank of receipts from the ultimate purchaser before payment could be made to the vendor under the letter of credit. The customer failed to provide the bank with the receipts and the bank used the proceeds of sale to pay down the customer’s line of credit with the bank instead of paying the vendor under the letter of credit. The court did not allow the defence of non-compliance with the letter of credit because the bank knowingly contributed to the circumstances preventing such compliance. 

In the Nareerux case, a Thai based vendor sold shrimp to a US based customer of the bank for resale to a large US retail chain in reliance upon a letter of credit issued by the bank. Payment under the letter of credit was to be made to the vendor upon presentation to the bank by the customer of purchase orders and receipts showing the shrimp had been taken by the retail chain. The vendor was not paid under the letter of credit for all of the shrimp supplied because the customer failed to present all of the receipts even though the bank knew shrimp had been taken by the retail chain, and the bank applied the sale proceeds it received from the customer to the balance owing under the customer’s line of credit with the bank instead of paying the vendor. The bank also allowed the customer’s inventory which included the shrimp to be sold to buyers other than the retail chain and used the proceeds from those sales to further reduce the customer’s line of credit balance. The vendor successfully sued the bank to recover its damages in the amount remaining unpaid under the letter of credit, and the bank appealed.

The Court of Appeal dismissed the appeal and held that the bank was not entitled to rely upon the defence of non-compliance with the requirement for presentation of receipts under the letter of credit because it knowingly contributed to the circumstances that undermined the prospect of strict compliance. The court held that the bank had collaborated with the customer to ensure that the proceeds from the sale of shrimp covered by the letter of credit were used to reduce the bank’s exposure under the customer’s line of credit instead of being paid by the bank to the vendor under the letter of credit. The court upheld the findings made at trial that the bank’s conduct was a direct breach of the principle of autonomy underpinning a letter of credit transaction, as well as a breach of the implied duty of good faith not to act to defeat or eviscerate the purpose of the letter of credit.

In holding that the bank could not rely upon the doctrine of strict performance to avoid paying under the letter of credit, the court stated (at pages 497 and 498, with footnotes omitted) as follows:

The central issue on this appeal, however, is whether [the bank] CIBC had become disentitled by its conduct to rely upon the doctrine of strict compliance in the circumstances. Courts have held that the equitable doctrines of waiver and estoppel apply in letter of credit cases. … Examples of circumstances in which an issuer of a letter of credit has disentitled itself to do so include those in which the issuer (i) has waived strict compliance, either expressly or by its conduct; (ii) has delegated its duty to evaluate a beneficiary’s documentary presentation independently; (iii) has been unjustly enriched by the credit transaction; (iv) has engaged in improper consultations with its customer concerning whether to accept or refuse the documents tendered; (v) has induced the beneficiary to believe the credit would be honoured until after its expiry date, when it was too late for the beneficiary to correct the situation; and (vi) has failed to provide prompt notice of dishonour to the beneficiary.  

In confirming that Canadian jurisprudence supports an implied duty of good faith in the performance of letters of credit, the court held (at page 503) that the bank breached such a duty, as follows:

It gave the Bank the opportunity to exert what was tantamount to a discretionary control over the documentary compliance and the timing of payment to [its customer] Thai Fisheries. Contracts in which performance is dependent upon the exercise of discretion on the part of one of the parties are contracts that are particularly characterized by the implied duty of good faith performance. In such circumstances, the discretion must be exercised reasonably and in good faith.   

In short, the bank placed its interest as lender ahead of its duty as contracting party under the letter of credit, thereby interfering with the guiding principle of autonomy and independence as well as the contractual duty of good faith.

 

Payment Provisions in a Shotgun Clause

When enforcing the “shotgun” clause in a shareholder agreement which indicates how the purchase price is to be paid, the payment provisions may be mandatory.

The case of Zeubear Investments Ltd. v. Magi Seal Corporation, 103 O.R. (3d) 578 (C.A.), is instructive.

In the Zeubear case, the 60 per cent shareholder of a company delivered a “shotgun” offer to the 40 per cent shareholder providing for the offeror’s purchase of the offeree’s 40 per cent interest, or a sale of the offeror’s 60 per cent interest to the offeree, each on an all cash basis. The offeree decided to purchase the offeror’s shares, and delivered an acceptance notice containing the payment terms prescribed in the company’s shareholder agreement which allowed for “at least” 50 per cent of the purchase price to be paid in cash, with a promissory note for the balance payable one year after closing.

When the offeror rejected the offeree’s acceptance, the offeree applied to the Superior Court of Justice for a declaration that its acceptance was valid. When the application judge held that the acceptance was not valid, the offeree appealed.

In allowing the appeal and deciding that the payment provisions in the shareholder agreement were not the minimum payment terms but the actual payment terms, the Court of Appeal held that those provisions were deemed to be included in an offer made under the agreement and that their language was mandatory.

In holding that its interpretation gives rise to a commercially reasonable result, the Court of Appeal stated (at page 586) as follows:

That interpretation avoids the very situation that arose in this case whereby the [offeror] Harris group would be able to purchase the [offeree] Geddes group’s shares without paying any money unless the Geddes group was able to pay close to $3 million within 90 days in order to purchase the Harris group’s shares and pay the amounts owing under the [previously issued] promissory notes. In my view, it is not commercially unreasonable to interpret [the payment provisions in] s. 4.12(2)(c) in a manner that, at least to some extent, levels the buy-sell playing field between the parties.

The Zeubear case is a useful reminder to any party contemplating the exercise of a shotgun contained in a shareholder agreement that the terms of the shotgun clause should be strictly followed. 

 

Enforcing the Sale of Real Property

Specific performance rather than damages may be awarded by a court for the breach of an agreement to sell real property if there is no readily available substitute property.

The case of Erie Sand and Gravel Ltd. v. Seres’ Farms Ltd.., 97 O.R. (3d) 241 (C.A.), provides some insight into remedies for the breach of agreements for the purchase and sale of real property.     

The plaintiff orally agreed to purchase certain land from the defendant which was subject to a right of first refusal in favour of a third party. The plaintiff submitted a written purchase offer to the defendant which was not matched by the third party but the defendant nonetheless sold the land to the third party. Since the land was unique to the plaintiff’s needs and the defendant breached their agreement, specific performance of the agreement was awarded.

The plaintiff in Erie Sand carried on the business of mining sand and stone aggregate and wished to purchase land owned by the defendant which held 50 per cent of the aggregate available in the local county. The plaintiff was aware that the land was subject to a right of first refusal in favour of a third party but orally agreed with the defendant to purchase the land for a set price and submitted a written purchase offer to the defendant which reflected their agreement. Even though a purchase offer subsequently submitted by the third party did not match the plaintiff’s offer, the defendant nonetheless sold the land to the third party. The plaintiff then sued for specific performance of its purchase agreement with the defendant. The trial judge ordered the third party (which had been added as a defendant) to transfer the land to the plaintiff. The third party defendant appealed.

In dismissing the appeal, the Court of Appeal held that the plaintiff and defendant owner had agreed upon all the essential terms and intended their agreement to be binding. The provisions of section 4 of the Statute of Frauds which require a contract for the sale of land to be in writing and signed by the owner do not apply to a contract which is partly performed, which was the case here. The plaintiff had delivered a certified cheque for the full purchase price, together with its offer, and the defendant owner had delivered that offer to the defendant third party in recognition of the right of first refusal. Since the offer submitted by the third party defendant contained a lower deposit and later closing date than the plaintiff ‘s offer provided, the defendant owner had breached its agreement with the plaintiff to sell the land unless the third party defendant matched the plaintiff’s offer.

In holding that an agreement had been reached, the Court of Appeal referred (at page 251) to its previous decision in Bawitko Investments Ltd. v. Kernels Popcorn Ltd., 79 D.L.R. (4^th) 97 (C.A.) as follows:

In Bawitko, this court held that where parties have agreed on all the essential provisions to be incorporated into a formal document and they intend the agreement to be binding, a valid and binding agreement exists – the existence of the agreement does not depend on the formal written document. The fact that a formal written document is to be prepared and signed does not alter the binding validity of the original contract.

In applying the doctrine of part performance to get around the effect of section 4 of the Statue of Frauds, the Court of Appeal stated (at page 259) as follows:

That is, in order to bring itself within the doctrine, the party attempting to rely on an alleged oral agreement must prove its acts of performance of the alleged agreement and it must prove that the other party “stood by”. It is the performance by one party, coupled with the standing by of the other party, which would make it inequitable for the other party to rely on the Statute of Frauds to be relieved of the obligation to perform.

And, further (at 265):

I accept that delivery of an offer to purchase land, with a deposit, will not normally amount to part performance. It happens every day and is not suggestive of a pre-existing agreement in respect of the land. In fact, it suggests the opposite – namely, that the offeror is hoping to be able to enter into an agreement to purchase the property. But that is not this case. In this case, to the knowledge of all, there was a right of first refusal over the property. The right of first refusal is critical because it dictated that acts be performed in a particular sequence. Further, the Offer was not in standard form and the “deposit” was not a deposit in the ordinary sense of the word as it was for the full purchase price. In these circumstances, judged by the standards on which reasonable people act, was the trial judge entitled to conclude that the conduct reflected that there had been “some dealing” in the land? In my view, it was open to the trial judge to find that the acts were referable to “some dealing with the land”, such that evidence of the oral agreement was admissible for the purposes of explaining those acts.  

In upholding the trial judge’s finding that that land was unique to the plaintiff’s needs and in granting specific performance of the agreement, the Court of Appeal (at page 269) held as follows:

In summary, therefore, absent evidence that the land which is the subject matter of the agreement is unique, damages will be adequate and the plaintiff will not have a fair, real and substantial claim to specific performance. However, the converse is also true. Where a plaintiff establishes that the land in question is unique, damages will often be inadequate and the plaintiff has a fair, real and substantial claim to specific performance. Land is unique if there is no readily available substitute property. One method of proving that there is no readily available substitute is to show that the land has a quality that cannot be readily duplicated and that the quality relates to its proposed use, making the land particularly suitable for the purpose for which it was intended.

The case of Erie Sand is a useful reminder that a seller can be forced to transfer land it has agreed to sell to a buyer if that land has qualities which are uniquely suited to the buyer’s needs.

 

Enforcing the Sale of Private Company Shares

Specific performance rather than damages may be awarded by a court for the breach of an oral agreement to sell the shares of a private company because such shares may not be readily available on the market and valuation can be difficult.

The case of UBS Securities Canada, Inc. v. Sands Brothers Canada, Ltd., 95 O.R. (3d) 93, provides some insight into agreements for the purchase and sale of private company shares.   

In the UBS case, the plaintiff securities dealer wished to buy the shares of the private company then operating the Montreal Stock Exchange which were held by the defendant, a shell company with no assets other than the shares which were held in New York City. The plaintiff claimed that it had a binding oral purchase and sale agreement with the defendant which had been made between one of the plaintiff’s securities traders and a director, officer and principal of the defendant. In reliance upon that agreement, the plaintiff agreed to sell some of the purchased shares to a third party. Before the closing date of the agreement, the private company announced that it was listing its shares, and the defendant then asserted that no binding agreement had been reached and the defendant refused to deliver the shares.

The plaintiff brought an application for a declaration that the defendant had agreed to sell the shares, and for specific performance of the agreement. The trial judge found that an oral agreement had been reached and ordered that the agreement be specifically performed. The defendant’s appeal of the trial decision was dismissed by the Ontario Court of Appeal.

The Court of Appeal upheld the trial judge’s findings that an agreement had been reached and that the essential terms were the price, quantity of shares and closing date. A written share purchase agreement was held not to be a condition of the transaction but merely an indication of the manner in which the agreement already made was to be implemented. In approving the order for specific performance, the Court of Appeal upheld the trial judge’s finding that the shares were unique, and prior to their public listing, there was no readily available substitute for them. The Court of Appeal also held that it was appropriate for the trial judge to consider the defendant’s financial position since the defendant’s ability to pay damages is relevant as to whether an award of damages would be an adequate remedy in the circumstances. 

In upholding the finding of an enforceable agreement, the Court of Appeal summarized the principles of contract formation (at pages 102 and 103) as follows: 

For a contract to exist, there must be a meeting of minds, commonly referred to as consensus ad idem. The test as to whether there has been a meeting of the minds is an objective one – would an objective, reasonable bystander conclude that, in all circumstances, the parties intended to contract? As intention alone is insufficient to create an enforceable agreement, it is necessary that the essential terms of the agreement are also sufficiently certain. However, an agreement is not incomplete simply because it calls for the execution of further documents. 

In reviewing the trial judge’s order of specific performance of the agreement, the Court of Appeal summarized (at page 114) the legal principles applicable to remedies for breach of contract as follows:

When fashioning a remedy for a breach of contract, the object is to place the injured party in the position that he or she would have been had the contract been performed. Typically, damages are ordered. However, where damages are inadequate to compensate an injured party for its losses, specific performance may be ordered. Accordingly, specific performance may be ordered where the subject matter of a bargain is unique or irreplaceable because, in those circumstances, damages may be inadequate.

In its discussion of specific performance in the context of share purchase agreements, the Court of Appeal (at page 115) stated as follows:

Specific performance may be ordered in connection with the shares of a private company because, as in the present case, such shares may not be readily available on the market and valuation can be difficult. Contracts for the sale of publicly traded shares are also candidates for specific performance in circumstances such as those of the present case where the vendor is subject to an injunction restraining it from selling the shares, the purchaser has diligently pursued its claim for specific performance from the outset, and the plaintiff has entered into additional contracts for the resale of some of the shares … The uniqueness of the property that is the subject of the contract is one, non-determinative factor in deciding the appropriateness of specific performance. The underlying principle is that if the property is unique, it should be delivered up because damages would have not put the party in the position they would have been in but for the breach.

In other words, in light of the UBS case, if a seller fails to close on a purchase and sale transaction involving the shares of a private company, the seller may be forced to transfer and deliver the actual shares to the buyer rather than paying monetary compensation instead.