PI Financial Corp. v. Computershare Trust Company of Canada, 2011 ABQB 115

Court of Queen ’ s Bench of Alberta Citation: PI Financial Corp. v. Computershare Trust Company of Canada, 2011 ABQB 115 Date: 20110225 Docket: 0901 06047 Registry: Calgary Between: PI Financial Corp. Plaintiff - and - Computershare Trust Company of Canada and Divestco Inc. Defendants _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice S.L. Martin _______________________________________________________ I.

Introduction [ 1 ] This case raises issues that would not be out of place on a law school contracts exam: the timeliness of notice, the legal consequences of one party not being ready, willing and able to perform its part of the bargain, and the meaning of a fundamental contract term. [ 2 ] While the commercial documents have both changed and changed hands, at its most basic the case at bar involves a convertible debenture given by a borrower to a lender to evidence a loan to it of half a million dollars.

At maturity of the loan, the debenture holder could choose one of two ways to be repaid: receiving back the principal sum or converting that sum into shares. The debenture set out a presumptive position if the holder failed to say how it wanted to be repaid within the specified time. The deeming provision was in favour of the taking of shares. On maturity the plaintiff debenture holder wanted to receive back the principal sum loaned.

As a result of a series of misunderstandings, mis-communications and mishaps, the holder’s written demand for the return of the money was received on Monday morning rather than by 4:30 the previous Friday as stipulated in the debenture. [ 3 ] The borrower says it need not retire the loan by paying money because the notice requesting the cash value came too late.

[ 3 ] The borrower says it need not retire the loan by paying money because the notice requesting the cash value came too late. The borrower argues for a strict

interpretation of the notice provision but is itself in default under the agreement. The borrower was obliged to place funds into a special account the day before the maturity date to effect repayment. It did not do so, but argues nevertheless that it should be permitted to hold the debenture holder to the strict terms of the notice provision. [ 4 ] Further controversy arises because the fall back provision in favour of the taking of shares contains no express formula for how that deemed share conversion is to be calculated.

The borrower says it should be done using the “Conversion Price” defined elsewhere in the debenture for elective conversions done before maturity and at the sole discretion of the lender. The lender says that measure is not appropriate when the issue is repayment, especially considering that the “Conversion Price” advocated by the borrower yields a repayment of $21,205.33 on a $500,000 loan. This Court is called upon to interpret the various financial documents in an attempt to ascertain the intention of the parties and to find a commercially sensible reading of a key but ambiguous provision. II.

Facts [ 5 ] The facts of this case are, for the most part, agreed. [ 6 ] The Plaintiff, PI Financial (“PI”), is a corporation incorporated pursuant to the laws of British Columbia with its registered office in Vancouver. It carries on business throughout Canada as an investment dealer. The Defendant, Divestco Inc. (“Divestco”), is a corporation incorporated pursuant to the laws of Alberta with its head office in Calgary. It is a public company, the shares of which are traded on the TSX Venture Exchange (“TSX”).

The Defendant, Computershare Trust Company of Canada (“Computershare”), is a corporation incorporated pursuant to the laws of Canada with its head office in Toronto. [ 7 ] On November 21, 2005, a debenture was issued by BlueGrouse Seismic Solutions Ltd. (“BlueGrouse”), a predecessor of Divestco, to Mr. Joachim Waibel as security for a loan of $500,000.00.

This debenture (the “Debenture”) was issued pursuant to a trust indenture (the “Trust Indenture”) BlueGrouse had entered into with Computershare as the trustee. [ 8 ] On February 28, 2007, BlueGrouse and Divestco entered into an arrangement (the “Plan of Arrangement”) pursuant to which Divestco assumed all of BlueGrouse’s obligations under the Trust Indenture. On May 1, 2007, the Plan of Arrangement was approved by an order of this Court.

On May 3, 2007, as part of the Plan of Arrangement, BlueGrouse, Divestco and Computershare entered into a supplemental trust indenture (the “Supplemental Trust Indenture”), pursuant to which all issued and outstanding convertible debentures of BlueGrouse under the Trust Indenture were exchanged for convertible unsecured debentures of Divestco. [ 9 ] On May 9, 2008, Mr. Waibel transferred his securities account, including the Debenture, to PI. On June 4, 2008, PI registered the Debenture in the name of “PI Financial Corp. ITF Joachim Waibel”. Thus, PI was the legal owner of the Debenture and Mr.

Waibel was the beneficial owner. For purposes of this analysis, the distinction between legal and beneficial ownership may be neglected and, for ease of reference, I will simply treat PI as the owner of the Debenture. Mr. Waibel took no active

part in this application. [ 10 ] The first paragraph of the Debenture provides as follows: Divestco Inc. ... for value received hereby acknowledges itself indebted and, subject to the provisions of the [Trust Indenture] dated as of November 21, 2005 between [Divestco] and [Computershare] (the “Debenture Trustee”) promises to pay to: PI Financial Corp.

TR For Joachim Waibel, on November 21, 2008 (the “Maturity Date”) or on such earlier date as the principal amount hereof may become due in accordance with the provisions of the Indenture the principal sum of $500,000 in lawful money of Canada on presentation and surrender of this Initial Debenture at the main branch of the Debenture Trustee in Calgary, Alberta or Toronto, Ontario in accordance with the terms of the Indenture... [ 11 ] As noted above, the Debenture was “convertible”.

Both the Debenture and the Trust Indenture provide that, at any time prior to 4:30 p.m. (Calgary time) on the Maturity Date, the debenture holder has the right to convert the whole or any part of the principal sum into common shares of Divestco at the “Conversion Price”. The Conversion Price initially was defined in the Trust Indenture as $1.40 per common share, but was amended under the Supplemental Trust Indenture to $4.48 per common share. [ 12 ] The share price has fluctuated over time.

[ 13 ] The Debenture also provides for what was to occur at the Maturity Date (the “Maturity Provision”): Upon the Maturity Date, each holder of Initial Debentures shall have the option of either converting the Debenture into Common Shares in accordance with the terms of the Indenture or receiving the cash value of the outstanding principal amount of the [Debenture], together with the interest accrued and unpaid thereon. Such option shall be exercised by providing written notice (the “Maturity Notice”) thereof to [Computershare] on or before 4:30 p.m. (Calgary time) on the Maturity Date (the “Election Time”).

In the event that a Debentureholder’s Maturity Notice is not received by [Computershare] on or before the Election Time, such Debentureholder will be deemed to have elected to convert their [Debenture] into Common Shares and the Debentureholder will no longer have any right to receive the cash value of the outstanding principal amount of the [Debenture] and the interest accrued and unpaid thereon. [ 14 ] Prior to the Maturity Date, Divestco was required to have set aside an amount sufficient to repay the amount owing in respect of the Debenture.

Section 2.13 of the Trust Indenture provides, in part, as follows: Except as may otherwise be provided herein or in any supplemental indenture in respect of any series of Debentures, payments of amounts due upon maturity of the Debentures will be made in the following manner. The Corporation will establish and maintain with the Debenture Trustee a Maturity Account for each series of Debentures. Each such Maturity Account shall be maintained by and be subject to the control of the Debenture Trustee for the purposes of this Indenture.

On or before 11:00 a.m., Calgary time on the Business Day immediately prior to each Maturity Date for Debentures outstanding from time to time under this Indenture, the Corporation will deliver to the Debenture Trustee a certified cheque or electronic transfer of immediately available funds with receipt confirmed by the Trustee prior to such time for deposit in the applicable Maturity Account in an amount sufficient to pay the cash amount payable in respect of such Debentures (including the principal amount, together with any accrued and unpaid interest thereon, and less any tax required by law to be deducted), provided that, in the case of a certified cheque, it may be post-dated to the applicable Maturity Date. ... [ 15 ] It is common ground that Divestco failed to deposit the necessary funds in a Maturity Account in respect of the Debenture prior to the Maturity Date.

Computershare, the Debenture Trustee, issued a Notice of Event of Default to the debenture holders on December 11, 2008 stating: “[Divestco] failed to pay the maturity amount due on the Debentures on November 21, 2008. This failure constitutes an Event of Default under s. 8(1)(

b) of the Trust Indenture.” The Trustee Computershare explained that the debenture holders were not obligated to take action but they had various powers available to them, including making a request to the Trustee to declare all monies outstanding to be immediately due and payable to the Trustee. [ 16 ] PI asserts that on Friday, November 21, 2008, an employee of PI verbally advised Computershare that PI wished to surrender the Debenture for payment of the principal sum and interest. A transcript of that conversation was in evidence, but the parties dispute its import.

PI’s employee believed the Debenture had to be physically delivered to Computershare’s main branch in Toronto. It is agreed between the parties that the Debenture itself provides that it could be delivered to Computershare’s office in Calgary. [ 17 ] The Debenture was sent by courier to Computershare’s office in Toronto on Friday, November 21, 2008, along with instructions that it was to be redeemed for payment of the principal sum and interest.

The Debenture and instructions were received by Computershare in Toronto on Monday, November 24, 2008, at just after 10:00 in the morning. [ 18 ] Divestco takes the position that because Computershare did not receive a Maturity Notice from PI prior to 4:30 p.m. Calgary time on the Maturity Date, PI is deemed to have elected to convert the Debenture into Divestco shares rather than to receive cash. Further, Divestco argues that the number of shares to which PI is entitled should be determined using the Conversion Price applicable on conversion prior to the Maturity Date, being $4.48 per share.

It employs the formula for the Conversion Price set out in the Debenture and Supplemental Trust Indenture. Based on this position, on or about December 15, 2008, Divestco forwarded to PI as trustee for Mr. Waibel a certificate for 111,607 common shares plus funds in the amount of $0.64: an overall value of $21,205.33. PI refused to accept the share certificate and funds. [ 19 ] As of the Maturity Date, the closing market price of Divestco’s common shares was $0.19 per share. PI asserts that it is entitled to 2,631,579 common shares of Divestco or, in the alternative, $500,000.00 in damages.

[ 20 ] Divestco has not repaid any portion of the principal sum to PI. [ 21 ] The Debenture, the Trust Indenture and the Supplemental Trust Indenture exist together and are sometimes referred to herein as the agreement or the contract. III.

Summary Trial [ 22 ] PI brought this application by way of Notice of Motion for

Summary Trial. It seeks relief only as against Divestco. Computershare did not take an active

part in the application. [ 23 ] While there was some dispute as to the suitability of this matter for

summary trial in the written materials, the parties have agreed that the matter is appropriate for

summary trial as it will resolve all of PI’s claims against Divestco. IV. Issues [ 24 ] Three issues arise: 1. Did PI provide sufficient notice of its desire to be repaid the principal sum? 2. What impact, if any does Divestco’s failure to place repayment funds into the Maturity Account have on this determination? 3. What conversion price is to be used to calculate any deemed conversion into shares? V. Analysis 1.

Did PI provide sufficient notice of its desire to be repaid the principal sum? [ 25 ] PI argues that there has been substantial compliance with the notice requirement in the Maturity Provision and that it should be forgiven its late communication. It says it conveyed its intention to Computershare before the deadline, it was confused by the advice given by Computershare, it could have sent the debenture in time if it had known that delivery to the Calgary office would suffice and there was no evidence of prejudice from the minor delay.

The way business days were counted under the agreement, delivery on Monday instead of Friday is, it argues, of no serious consequence, being three calendar days, but only one business day late. [ 26 ] Divestco argues that PI failed to comply with the Debenture terms respecting how a Debenture holder is to exercise its option to receive the cash value. In the result, PI lost any entitlement to receive the cash value upon maturity of the Debenture. [ 27 ] The Maturity Provision uses the words “election” and “option” and the parties submitted a number of cases dealing with options.

Specifically, Divestco pressed the court’s obligation to interpret options strictly to promote commercial certainty. It argued that courts have historically tended to require that conditions precedent to the exercise of options be strictly performed to give rise to liability on the part of the optionor. Divestco likens the choice of method of repayment under the Maturity Provision to an option or unilateral contract. I do not accept these analogies or this analysis. These cases are distinguishable and are of limited utility in the case at bar. [ 28 ] Not every contractual choice is an “option”.

Black’s Law Dictionary defines “option” as follows: “Contract made for consideration to keep an offer open for prescribed period. A right, which acts as a continuing offer, given for consideration, to purchase or lease property at an agreed upon price and terms, within a specified time [:] ” B.A. Garner, ed., Black’s Law Dictionary , 9 th ed. (St.

Paul, MN: West, 2009). The options at issue in the cases referred to by the parties fall within this definition. For instance, in SailLabrador Ltd. v. Challenge One (The), (SCC), [1999] 1 S.C.R. 265, a party to a charter contract had the option topurchase the vessel at the expiration of the charter. Southland Canada Inc. v.

Zarcan Equities Ltd., 1999 ABQB 831 , 254 A.R.59 and other cases dealt with an option to acquire land or to renew a lease for a further term. [29] These cases addressed what the court said were conditions precedent to the creation of an interest that did not yet exist.Options and unilateral contracts involve offers to bring new legal relations into being. Divestco asserts that part of the requirement ofstrict observation of options stems from its nature and character as a privilege. By contrast, the Maturity Provision does not create a rightof this kind and is not an option in this sense.

Rather, the Maturity Provision contains a choice, a method and timeline for communicatingthat choice and an ex poste fall back provision for how an already existing obligation is to be performed. The Maturity Provisionaddresses repayment of the loan at Maturity, an assumed and binding contractual obligation. It provides two mechanisms of repayment -in cash or in shares. Any choice belonging to the lender was restricted to how the borrower’s legal obligation to repay would be fulfilled,not whether it existed.

In the case at bar, the obligation to repay under the Debenture not only existed, it was stated to be absolute andunconditional. Repayment was a contractual right, not a privilege. Indeed, the requirement to have a fall back position at all onlybecomes necessary because the borrower has an unconditional obligation of repayment. [30] The Maturity Provision thus serves a distinct purpose and has a different intention and effect.

It is sufficiently different fromthe legal operations of the type of clauses in the cases cited to me such that the rationale for the level of strictness associated withconditions precedent, options and unilateral contracts simply does not apply. [31] Even so, in normal circumstances, where both parties were respecting the contract, PI’s conduct would not, in my opinion,qualify as sufficient or timely notice under the Maturity Provision. The parties set out what needed to occur before the choice to receivethe principal amount would be communicated and PI failed to meet the stipulated deadline.

Even if the option cases do not apply, theSupreme Court of Canada has recognized a public interest in leaving knowledgeable parties free to order their own commercial affairs, sono legal ground permits a court to override the freedom of the parties to contract with respect to a particular term or to relieve a partyagainst the operation of a clear contract. See Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4,[2010] 1 S.C.R. 69 at paras. 85 and 86.

Further, the debenture holder has an obligation to understand the terms of the debenture held andany representations made by Computershare are not to be attributed to Divestco. Therefore, the reasons put forward by PI, standingalone, would not in my view allow this Court to extend the time and rewrite a part of the Maturity Provision which is clear and intendedto apply in the very circumstances which occurred. 2.

What impact, if any does Divestco’s failure to place repayment funds into the Maturity Account have on this determination? [32] Divestco was contractually obliged to place funds sufficient to repay the debentures outstanding in a Maturity Account theday before the debentures matured. The parties expressly provided that the money should be ready and available in this special accountfor the lender. The timing of this obligation is important. It predates the Maturity Date, the final day on which the lender may choosehow repayment is to be made.

The parties therefore contemplated that the borrower must place the funds in the Maturity Account at atime when neither party knows which election may be made by the debenture holder. [33] Divestco was thus bound to set aside the funds to repay the outstanding indebtedness the day before the Maturity Date.Divestco made no such payment and breached its obligation to pay the principal amount into the Maturity Account in accordance withthe terms of the Debenture.

Its failure to pay the funds into the Maturity Account, coupled with the Trustee issuing a Notice of Event ofDefault, support the reasonable inference that Divestco was not in a position to repay the loan at maturity. Divestco produced no contraryevidence to rebut such a common sense conclusion.

I therefore find that not only did Divestco breach this important promise, it was alsonot ready, willing and able to repay the loan according to its terms. [34] Can Divestco insist on strict compliance with the notice portion of the Maturity Provision when it was in breach of itsobligation to place amounts equivalent to the principal sum in the Maturity Account?

In my view it cannot, whether as a result of theapplication of principles of repudiatory breach, substantial non-performance, estoppel or good faith in contract performance. [35] In respect of the substantial non-performance of contractual obligations Professor Waddams states in The Law of Contracts, 6th ed. (Toronto: Canada Law Book, 2010) at para. 588:

... no simple or mechanical rule will provide answers. There is no escape from attempting an equitable balance between the severity ofthe consequences of excusing performance and the seriousness of the breach. All the surrounding circumstances of the transaction maybe relevant to this task. [36] The Maturity Provision gives the debenture holder a choice of repayment methods, sets out how that choice is to becommunicated and the fallback position of deemed conversion.

Divestco says its obligation to pay into the Maturity Account and thechoice given to the debenture holder about the method of repayment are independent and unrelated matters. With respect, they are not.They are interdependent and involve sufficient reciprocity that the actions of each have legal significance for the obligations and rights ofthe other. [37] The “Election” by the debenture holder expressly referenced in the Maturity Provision may be seen more in the nature of anelection of remedies, rather than anything like an option to create new legal relations.

The debenture holder has a choice of repaymentoptions and an obligation to communicate which option is selected by the specified date and time. If the debenture holder does not fulfillits obligation to communicate the desired mode of repayment, then the Maturity Provision sets out how the borrower may discharge theprimary obligation of repayment. Without a fall back presumption, the borrower would be left in a position of not knowing how to repay,courting a breach of contract. The requirement to provide timely notice is not an outright promise, like the covenant to repay, but it is anobligation.

It can be seen as an implied promise coupled with a presumptive remedy under which the debenture holder may claim sharesonly if it fails to communicate a timely election. Even if the “Election” is a sui generis contract term, the failure to meet its terms can beweighed on the scale of relative contractual performance.

While the doctrine of substantial non-performance usually operates to relievethe innocent party from performance of a promise assumed, there is no reason why it cannot operate in the context of a term like theMaturity Provision. [38] Divestco’s breach of its repayment obligation is serious and goes to the root of what is, at its heart, a loan agreement. Thisbreach disentitles it to rely on strict compliance with the method of communication.

Regardless of the characterization of the obligationto communicate by the specified time, PI can rightly ask Divestco: how can you insist on timely notice when you have first failed toperform a core contractual promise? In relative terms, PI’s failure to adhere to the deadline is minor, even insignificant, in comparisonwith Divestco’s failure to set aside the monies to repay the loan. Further, the fall back portion of the Maturity Provision establishingdeemed conversion was intended to apply to a situation where both of the two options remained open to the lender.

However, by theMaturity Date that was not the case. [39] It does not lie well in the mouth of a party who has breached, even repudiated, an agreement to insist on strict compliancewith time deadlines in the circumstances at bar. Divestco had the use of the borrowed funds for three years. It had actual, though late,notice of the choice to have the cash value returned; such notice was in writing and included the Debenture. There is no evidence thatDivestco suffered any prejudice from receiving the notice one business day and three calendars days late.

Deadlines are often importantand enforced because people need and rely upon the information received or not received to chart their own course of conduct. But evenbefore the day the deadline dawned, Divestco had already breached its obligations and was not in a position to react to any choice thatwas made. Divestco did not rely or change its position to its detriment based on the timing of the notice. Quite the opposite: it now seeksto take advantage of it.

It argues that a small delay in communication allows it to tender approximately $21,000.00 in shares to repay aloan of $500,000, after it had the benefit of that money for three years, and notwithstanding it was not in a position to repay it atMaturity. Commercial certainty is a venerable principle which is weakened when enlisted in an attempt to justify such behaviour. [40] Even in cases dealing with options, conduct is relevant. In Pierce v.

Empey, (SCC), [1939] S.C.R. 247, theCourt held at 252 that “a plaintiff invoking the aid of the court for the enforcement of an option for the sale of land must show that theterms of the option as to time and otherwise have been strictly observed. The owner incurs no obligation to sell unless the conditionsprecedent are fulfilled or, as a result of his conduct, the holder of the option is on some equitable ground relieved from the strictfulfilment of them.” Thus the actions of PI, while sloppy, are not of the same seriousness as the conduct of Divestco.

While such was notargued, this is the type of circumstance in which equity may intervene to grant relief against forfeiture. [41] In the case at bar, Divestco’s serious breach prevents it from requiring strict compliance with the timing requirement in theMaturity Provision. However that provision is characterized or read, Divestco’s actions prevent it from saying that actual notice onMonday falls outside the terms of their agreement. In the circumstances, PI’s notice of its request for the return of the cash value issufficient and legally binding. 3.

What conversion price is to be used to calculate any deemed conversion into shares? [42] Even if I am wrong about PI’s election of cash value being enforceable in light of Divestco’s breach, the Maturity Provisionsays that there is a deemed conversion from principal sum to common shares. The parties argue that the Maturity Provision sets out twovery different conversion prices. The Court is therefore called upon to determine how this clause should be interpreted.

[ 43 ] At issue is a convertible debenture, a commonplace method of raising capital. The Debenture and Trust Indenture in the case at bar gave the holder the right, at the holder’s option, to convert the whole or any part of the Principal Sum into Common Shares at the Conversion Price before the Maturity Date. This is the feature that makes the debenture convertible. The nature of this type of debenture is such that it typically involves a balance of risk and reward.

For example, a lender may accept a lower interest rate in exchange for the option of converting to shares of the borrower if those share increase in value. The premise is that the lender, as a rational economic actor, would exercise the option to convert to shares when the “Conversion Price” exceeded the amount of money otherwise payable. The lender thus trades lower interest for the potential upside of an increase in share price. Normally, a convertible debenture can be said to involve speculation only to that extent.

In the case at bar PI never chose to convert the whole or any part of the Principal Sum into Common Shares at the Conversion Price before the Maturity Date as the share value did not make that an economically wise course of conduct. [ 44 ] The Debenture and Trust Indenture contemplated two types of conversions: those chosen by the holder before Maturity and deemed conversions under the Maturity Provision. The Trust Indenture sets out how an elective conversion is to occur in

Article 6. There are provisions outlining the mechanics and requirements of conversion, as well as an express definition of “Conversion Price”. The Conversion Price is a defined term meaning: the “dollar amount for which each Common Share may be issued from time to time upon conversion of Debentures.” That dollar amount was changed in the Supplemental Trust Indenture.

While the “Conversion Price” is a defined term for conversions done before Maturity and at the express choice of the debenture holder, there is no such express formula for when the deadline for choice passes without the holder communicating how it wants to be repaid at maturity. [ 45 ] It is important to bear in mind the wording in the Maturity Provision: Upon the Maturity Date, each holder of Initial Debentures shall have the option of either converting the Debenture into Common Shares in accordance with the terms of the Indenture or receiving the cash value of the outstanding principal amount of the [Debenture], together with the interest accrued and unpaid thereon.

Such option shall be exercised by providing written notice (the “Maturity Notice”) thereof to [Computershare] on or before 4:30 p.m. (Calgary time) on the Maturity Date (the “Election Time”).

In the event that a Debentureholder’s Maturity Notice is not received by [Computershare] on or before the Election Time, such Debentureholder will be deemed to have elected to convert their [Debenture] into Common Shares and the Debentureholder will no longer have any right to receive the cash value of the outstanding principal amount of the [Debenture] and the interest accrued and unpaid thereon. [ 46 ] Divestco argues that the wording of the Maturity Provision in the Debenture incorporates the “Conversion Price” established for elective conversions in the Trust Indenture and makes it the measure for deemed conversions.

Divestco argues that the Debenture is not silent as to the conversion price on the deemed election and argues that this formula is sufficiently clear and that the Court need not and should not seek to imply any term contrary to this express provision. [ 47 ] Much of the argument on this provision focussed on the question of whether and in what circumstances the Court can imply a term into a contract. I am not certain that it is necessary to analyze the problem in that way. Rather, it seems to me that the problem can be characterized as giving meaning to the Maturity Provision.

Only if I determined that the current provision produces no sensible meaning would it be necessary to imply a term. Further, to the extent that a term is being implied, each side asks that I imply the one they suggest. [ 48 ] I start by acknowledging that there is some support for Divestco’s position. The deemed election in the second paragraph of the Maturity Provision appears to refer to the option in the immediately preceding paragraph.

That option was to convert “into Common Shares in accordance with the terms of the [Trust] Indenture.” The Trust Indenture is the only document that speaks to the concept of how to determine the conversion price, although the price was set at a different amount in the Supplemental Trust Indenture. At one level this reading of the documents makes some sense. Even so, in my view, it is not apparent that this is the correct

interpretation for the following reasons. [ 49 ] First, there are no express terms in the Debenture, Trust Indenture or the Supplemental Trust Indenture which stipulate the conversion price for the deemed election to convert the principal sum into common shares on Maturity. The term “Conversion Price” is not used in the Maturity Provision, even though it is defined elsewhere and even though the initial debenture provides that “Capitalized

words or expressions used in this Initial Debenture shall, unless defined herein, have the meaning ascribed to thereto in the Indenture.”The evidence is that the borrower drafted the documents thus, if it wanted to use the “Conversion Price” for deemed conversions, itcould have said so; it did not. The Maturity Provision could easily have read: “converting the Debenture into Common Shares inaccordance with the Conversion Price....” but no such express formula was used. For an explanation of the contra proferentem rule seeConsolidated Bathurst Export Ltd. v. Mutual Boiler and Machinery Ins.

Co., (SCC), [1980] 1 S.C.R. 888. [50] Second, while the Trust Indenture addresses price before Maturity, its express formula does not, on its face, apply to deemedconversion at Maturity. It addresses only a very different type and nature of transaction, being elective conversions at the sole discretionof the lender before maturity. Again, if the borrower who drafted this document had wanted to use the “Conversion Price” for thisdifferent type of situation, it could have said so and it did not.

The terms of the Indenture have priority in the case of a conflict, but herethere is silence: confusion rather than conflict. [51] Third, the “terms of the [Trust] Indenture” are numerous and point in different directions. The terms of the Trust Indenture inArticle 6 outline many matters and include the mechanics and requirements to effect conversion, as well as establishing a ConversionPrice. The clause in the Maturity Provision retains meaning if the deemed conversion is done in accordance with the procedural terms ofthe Trust Indenture.

In addition, the terms of the Trust Indenture contain other provisions which place the price of conversion in its largercontext. For example,

Article 5.4. states that nothing in

Article 5 as a whole is intended to impair Divestco’s obligation “which isabsolute and unconditional” to pay the holders the principal and interest; see also

Article 7.1 and

Article 9.5. [52] At a minimum, the Maturity Provision and the reference to the “terms of the Indenture” are ambiguous as to the applicableprice for deemed conversion and this Court must attempt to make sense of it. According to the Supreme Court of Canada in ConsolidatedBathurst, I must try to arrive at a meaning which appears to advance the true intentions of the parties at the time the Debenture wasentered into and which avoids commercial absurdity.

The words used and at issue must be read in light of the contract and commercialcircumstances in which they are found. [53] Fourth, the Maturity Provision must be interpreted by taking into account its true nature within the overall commercialarrangement agreed to by the parties. To apply the “Conversion Price”, a term not found in the Maturity Provision, to a deemedconversion would change fundamentally the nature of the contract agreed to.

A conversion at the sole discretion of the lender beforematurity and during the currency of the loan is a very different commercial transaction than a deemed conversion when the loan maturesand repayment of the amount advanced is required. [54] The

interpretation proposed by Divestco allows them to tender $21,205.33 in shares in full satisfaction of what the TrustIndenture says is an absolute and unconditional obligation to repay the principal of $500,000. The drafter of a provision seeking to justifysuch a result would require a clear form of expression. The suggestion that a lender would willingly risk the loss of most or even all of itsinvestment on the chance that a notice period might be missed cannot be supported. It changes a loan/investment with a speculativeelement into a wagering contract where repayment is not guaranteed.

Applying the Conversion Price to a deemed election at the MaturityDate is thus simply not a commercially sensible reading of this inherently ambiguous provision. [55] PI argued that a default provision in favour of shares, instead of repayment of the principal was not common. With respectthere was no evidence about the custom on this point and it is not clear such evidence would have had any bearing as the parties hereclearly expressed there would be deemed conversion if the notice deadline was not met.

However, knowing that deemed conversion wasthe fall back position only reinforces that they ought to have expressly and specifically addressed conversion price. As they did not, theirintentions must be interpreted taking into account what the parties knew about the nature of the Debenture, the fact that monies were infact advanced and that the borrower repeatedly acknowledged its obligation to repay the principal amount. [56] In such a case, a sensible

interpretation of the Maturity Provision is that both modalities of repayment, cash or shares, wereintended to result in the repayment of the outstanding loan. This is because the deeming provision, unlike elective conversion, arises inthe context of repayment of the principal at Maturity. There is still some meaning to the Maturity Provision if read this way. Havingfailed to ask for the cash value in time, the debenture holder cannot take the cash out of the company to which it had loaned funds. Theborrower can recover the funds segregated in the Maturity Account and instead may issue shares to repay the outstanding indebtedness. [57] Therefore, I conclude that the correct

interpretation of the Maturity Provision is that a lender could choose, by providing theMaturity Notice, to receive repayment of the loan in cash. Absent a timely Maturity Notice, the lender is deemed to have elected toreceive repayment in the form of common shares of Divestco, the number of which was to be computed using the market price of the

shares as of the close of business on the Maturity Date. While the Maturity Provision does not specify market price any more than it doesthe Conversion Price, this is a commercially sensible

interpretation that respects the nature of the contract, as a loan. [58] If this approach goes beyond mere

interpretation and must be characterized as implying a term into the contract, I am satisfiedthat this is a case where that may be done. In Canadian Pacific Hotels Ltd. v. Bank of Montreal, (SCC), [1987] 1 S.C.R.711, Le Dain J. held at 775 that a term could be implied in a contract based on the presumed intention of the parties where the impliedterm is necessary “to give business efficacy to a contract or as otherwise meeting the ‘officious bystander’ test as a term which the partieswould say, if questioned, that they had obviously assumed”. I am conscious of Iaccobucci J.’s caution in M.J.B.

Enterprises Ltd. v.Defence Construction (1951), (SCC), [1999] 1 S.C.R. 619 at para. 29 that I must be careful not to “slide into”determining the intentions of reasonable parties, rather than the actual parties. However, given that the Maturity Provision pertains torepayment of the loan and is separate from the conversion option applicable prior to the Maturity Date, I am satisfied that the use of themarket price has “a certain degree of obviousness to it”. Further, while Divestco certainly objects at this point to this

interpretation, thereis nothing in the Debenture or the other documentation which evidences a contrary intention. IV. Other Issues [59] There is another possible approach to the Maturity Provision: to say that the absence of a conversion price formula fordeemed conversions makes all or part of the Maturity Provision void for uncertainty. In such a case, either the lender would be requiredto communicate the desired mode of repayment before a remedy could be claimed (which it did within a reasonable time) or there wouldsimply be the singular obligation on the borrower to repay the principal sum.

This approach yields the same conclusion as finding thatDivestco’s breach disentitles it from insisting on strict compliance with the notice portion of the Maturity Provision. [60] There was a dispute between the parties as to the admissibility of an affidavit sworn by Mr. R. Thomas and pertaining to thecommunication between employees of PI and Computershare on the Maturity Date. That affidavit is admissible but it forms no part of thebasis for my decision. V. Remedy [61] There is also a dispute here as to the appropriate remedy.

The complications cited to me include the fact that the share pricehas increased since the Maturity Date. Divestco claims PI should not receive a windfall from this increase. However, if the deemingprovision applies and shares are the designated form of repayment, PI’s rights crystallized at the Maturity Date and it should receive theproperty to which it became entitled at that date.

Whether the shares subsequently gained or lost ground does not bear on entitlement(although it certainly impacts on what remedy would be requested). [62] Second, Divestco’s shares are publicly traded and it is claimed that there is no evidence that the TSX would be prepared tobackdate a share issuance. [63] These issues are avoided as I award judgment in the amount of $500,000.00, plus interest calculated in accordance with theJudgment Interest Act, R.S.A. 2000, c. J-1. VII. Costs [64] If the parties cannot resolve costs they may return before me within sixty days.

First heard on the 9th day of December, 2010, with additional argument filed January10, 2011 . Dated at the City of Calgary, Alberta this 25th day of February, 2010.

S.L. Martin J.C.Q.B.A. Appearances: Bryan Baynham, Q.C. for the Plaintiff, PI Financial Corp. Todd W. Kathol for the Defendant, Divestco Inc.