Dennis R Dowling Professional Corporation v Hughes & Gibb LLP, 2016 ABQB 627

Court of Queen’s Bench of Alberta Citation: Dennis R Dowling Professional Corporation v Hughes & Gibb LLP, 2016 ABQB 627 Date: 20161109 Docket: 1303 16046 Registry: Edmonton Between: Dennis R. Dowling Professional Corporation Plaintiff - and - Hughes & Gibb LLP Defendant _______________________________________________________ Reasons for Decision of L.A.

Smart , a Master of the Court of Queen’s Bench of Alberta _______________________________________________________ Background [ 1 ] Hughes and Gibb LLP (Hughes) entered into a purchase agreement with Denis R Dowling Professional Corporation (Dowling) to acquire the assets of Dowling’s accounting practice “AS IS”. The purchase price was for $635,000 subject to adjustment as described below. Of the purchase price $400,000 had been paid by closing with the remaining balance to be paid 75 days after the “Guaranty” period by way of 24 equal payments of interest and principal with interest at the rate of 4% per annum.

Under the agreement, Dowling estimated gross revenue, which included amounts collected plus collectible accounts receivable and work in process of $635,000 +/- (the “Guaranteed Amount”) for the following year. A price adjustment was to be made in the event that the Guaranteed Amount was exceeded to a certain maximum but most relevant here reduced in amount equal to $.75 for each dollar that the gross revenue was less than the Guaranteed Amount but to not less than $525,000.

Gross revenue during the relevant period was $450,282 therefore under the terms of the agreement the $525,000 minimum applied. [ 2 ] The agreement was subject to a number of conditions in favour of the Buyer the following being the most relevant: 1. Buyer’s inspection of and satisfaction with the assets and financial and other records, client list, contracts, and losses of the business and discussions with DNTW partners; 2.

Buyer shall provide Seller with a list of all documents that Buyer wishes to review as part of the Buyers due diligence investigation within seven (7) days from the date of mutual execution of this agreement. Seller shall provide the requested documents or documents containing similar information to Buyer, Buyer’s counsel or other designated representative within seven (7) days of such request; 3.

If Buyer is not satisfied with Buyer’s due diligence investigation for whatever reason, Buyer may cancel this agreement provided that the Buyer notifies Seller of Buyer’s cancellation in writing within thirty (30) days from the date of mutual execution of this

agreement; 4. Buyer shall be deemed to be satisfied with Buyers due diligence investigation and to waive this Due Diligence Contingency unless written notice of cancellation is provided to Seller within thirty (30) days from the date of mutual execution of this agreement. Notwithstanding the above, Buyer may formally remove this Due Diligence Contingency at any time; 5.

This deadline shall be extended one day for each day that Seller is late in providing requested documents to Buyer, but in no event shall this deadline exceed forty (40) days from the date of mutual execution of this agreement. [ 3 ] Following the Guaranty period Hughes started to pay the balance of the minimum price but later stopped. Dowling has alleged that Hughes negligently operated the accounting practice resulting in poor revenue during the Guaranty period. It seeks recovery under the terms of the contract, or alternatively, damages based on unjust enrichment. This is an application for partial

summary judgment for the minimum due under the contract. Hughes argues that the financial information was misrepresented notably net work in progress and that the client list contained clients that no longer used Dowling’s services. Discussion [ 4 ] Dowling notes that Robert Hughes is an experienced accountant who has participated in the acquisition of other accounting practices by Hughes. Under the agreement Hughes as purchaser was provided the opportunity to complete due diligence and after obtaining an extension for that purpose chose to waive conditions.

It is argued that the diligence period combined with the clear description that the assets were to be purchased “As Is” ends the matter. Hughes argues that there was a misrepresentation from Dowling that collectible billings during a one year period would be at least $635,000 as set out in paragraph 4 of the agreement setting out the Guaranteed Amount. There is also considerable argument that the “collectible” work in process was overstated. When reading the documentation that is said to support this argument that terminology is not used but rather references are to gross revenue.

The agreement itself uses +/- to modify the amount of gross revenue predicted and clearly contemplates that the amount may vary by providing a price adjustment provision. [ 5 ] Hughes was concerned about the material received on the amount Dowling’s practice could generate and asked for additional information. Dowling responded he was unable to provide documentation at that point in time. It is argued that Hughes had no choice but to proceed with the transaction despite the gaps in information provided.

In my view Hughes also had the clear choice to not proceed. [ 6 ] With respect to the client list the evidence advanced by Hughes is that telephone inquiries and other investigations disclose that at least 65 of 350 clients on the printout provided were no longer clients. The list generated captured any client with outstanding work in process or an account receivable. Dowling explained that a client may well have stopped using his services despite there being outstanding work in process or accounts receivable.

On questioning when asked what he told Hughes he recalled he had said he guesstimated he had plus or minus 300 clients although he had not actually tallied the number on the list. Based on the evidence a further 101 clients from the list did not engage Hughes as their accountant. Why there was such poor uptake is unclear but is central to the allegations by Dowling that Hughes mismanaged the acquisition thereby resulting in only the minimum price being payable. [ 7 ] No steps were taken to independently investigate the client list prior to removing conditions and closing the transaction.

Robert Hughes, as a skilled accountant with experience with acquisition of accounting practices ought to have known that the list provided would contain “non-current clients” and that it was not a guarantee that all on the list would be available as clients. The verbal representation was that there were about 300 clients and the number potentially available cannot be said to be materially different. Conclusion [ 8 ] The modern test for

summary judgment requires the examination of the record to determine if a fair and just determination can be made ( Windsor v Canadian Pacific Railway Ltd , 2014 ABCA 108 , para 11-13 ). When considering the matter there must be a determination as to whether there is an issue of merit genuinely requiring a trial. It is argued that the representations made were negligent and perhaps fraudulent thereby vitiating the contract. The evidence in my view does not support such a characterization.

Following the due diligence period Hughes was well aware there were deficiencies in the material received and openly expressed concerns. Nonetheless the condition was waived with complete knowledge of the risk. [ 9 ] Based on the foregoing I am satisfied I can make a fair and just determination and that there is no issue warranting a trial. Accordingly, I grant partial judgment in favour of the Plaintiff for the remaining minimum amount payable under the contract plus interest of 4% in accordance with the contract.

Having determined that the contract is enforceable Counsel agreed that the claim for unjust enrichment necessarily falls and to that extent the claim is dismissed. The Plaintiff shall have its costs of the application on Col 2 of

Schedule C plus all reasonable disbursements. Dated at the City of Edmonton, Alberta this 9th day of November, 2016.

L.A. Smart M.C.C.Q.B.A. Appearances: Ryan F. O'Connor Nickerson Roberts Holinski & Mercer for the Plaintiff Dr. R. McKay White Robert B. White, Q.C. & Company for the Defendant