Schitthelm v Kelemen, 2017 ABQB 546

Court of Queen’s Bench of Alberta Citation: Schitthelm v Kelemen, 2017 ABQB 546 Date: 20170922 Docket: 1201 06948 Registry: Calgary Between: Gary Schitthelm Plaintiff/Defendant by Counterclaim - and - Louis J. Kelemen Defendant/Plaintiff by Counterclaim _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice D.B. Nixon _______________________________________________________ I. Introduction [ 1 ] A

summary of this decision was delivered orally. This Court reserved the right to make any editorial changes to the final form of the Judgment. [ 2 ] The Court provided its oral decision on August 31, 2017 with written reasons to follow. At the conclusion of the oral decision, counsel for Mr. Schitthelm made submissions requesting a change in remedy. Mr. Schitthelm no longer wants a decree of specific performance. Instead, he wishes to show damages. This request is addressed at the conclusion of the reasons. [ 3 ] This case concerns a commercial dispute between Mr. Gary Schitthelm and Mr. Louis Kelemen.

These two individuals were both shareholders in Simo Corporation. [ 4 ] The dispute involves a unanimous shareholders agreement that Mr. Schitthelm and Mr. Kelemen entered into with Simo Corporation (the “ USA ”). Mr. Schitthelm asserts that the dispute is fundamentally a question of contractual

interpretation concerning the

issue of whether unpaid wages were owing to Mr. Kelemen at an alleged closing associated with an agreement for sale that arose under a shotgun notice (the “ Agreement for Sale ”). [ 5 ] Amongst other claims, Mr. Schitthelm seeks an order for specific performance and a judgment for damages. Concerning the claim for specific performance, he has requested a declaration that Mr. Kelemen sold his shares to him effective May 30, 2012. Concerning the claim for damages, he is seeking damages for breach of contract, and also punitive, exemplary and aggravated damages. [ 6 ] In contrast, Mr.

Kelemen seeks by counterclaim a declaration that the Agreement for Sale concerning the transfer of his shares in Simo Corporation to Mr. Schitthelm was terminated. Mr. Kelemen also seeks an oppression remedy and alternative remedies. II. Issues [ 7 ] There are seven issues in this case, and they are as follows. a. Did Mr. Schitthelm repudiate the Agreement for Sale? b. Was a closing effected on May 30, 2012 in respect of the Agreement for Sale? c. If a closing was effected on May 30, 2012, did Simo Corporation owe Mr. Kelemen unpaid wages as at that date? d. What are the terms of the Agreement for Sale? e.

Does the Limitations Act, RSA 2000, c L-12, block any recovery by Mr. Kelemen? f. Does the oppression remedy apply in favour of Mr. Kelemen? g. How are the payments under the July 27, 2012 interim order by Justice Eidsvik (the “ Eidsvik Order ”) to be applied? h. Is Mr. Schitthelm entitled to damages? III. Facts [ 8 ] Simo Corporation is in the business of supplying furniture, including the manufacturing of certain furniture components. [ 9 ] Prior to Mr. Schitthelm joining Simo Corporation in 2008, the underlying business was operating at a net loss. While he was interested in joining Simo Corporation, Mr.

Schitthelm indicated to Mr. Kelemen that he wanted either to control the entity or to hold at least 50% of the equity. [ 10 ] Mr. Schitthelm and Mr. Kelemen had a verbal agreement in August, 2008 concerning an investment by Mr. Schitthelm into Simo Corporation. [ 11 ] Mr. Schitthelm was not able to commence his employment with Simo Corporation until November, 2008. [ 12 ] In the fall of 2008, Simo Corporation received a significant number of cancellations for the furniture orders that it had on the books. [ 13 ] The USA and other agreements were entered into amongst Mr. Schitthelm, Mr.

Kelemen and Simo Corporation on March 4, 2009. As a result of those various agreements, Mr. Schitthelm and Mr. Kelemen each held 50% of the voting shares of Simo Corporation. They were also both directors and executives of the corporation. [ 14 ] Clause 1.2 of the USA stipulates that there is no second or casting vote in the event of a tie. [ 15 ] Clause 1.3 of the USA stipulates that each of Mr. Schitthelm and Mr. Kelemen are to enter into an executive employment agreement with Simo Corporation. They did so.

On March 4, 2009, a separate executive employment agreement was entered into between Simo Corporation and each of Mr. Schitthelm and Mr. Kelemen (collectively, the “ Executive Employment Agreements”, and individually, the “ Executive Employment Agreement ”). [ 16 ] The Executive Employment Agreements set the gross annual salary to each of Mr. Schitthelm and Mr. Kelemen at $200,000 per annum. [ 17 ]

Article 2 of the USA details the compulsory buy-sell framework (the “ Shotgun Provisions ”). [ 18 ] The internal accountant for Simo Corporation was Ms. Bartley. She is the sister of Mr. Kelemen. The external accountant for Simo Corporation was Mr. Muma. [ 19 ] The Executive Employment Agreements were never provided to the internal accountant, Ms. Bartley. There was no evidence that Executive Employment Agreements were ever in the possession of, or disclosed to, the external accountant, Mr.

Muma. [ 20 ] The gross annual salary of $200,000 that is stipulated in each of the Executive Employment Agreements was never paid to Mr. Schitthelm or Mr. Kelemen. However, there was no written amendment to either of the Executive Employment Agreements to adjust the terms of that gross annual salary.

[ 21 ] After the Executive Employment Agreements were executed in March 2009, Simo Corporation started to pay the executives as follows. a. Mr. Kelemen was paid a gross annual salary amount of $144,000 by Simo Corporation, including benefits. While there was reference in the testimony to a lesser amount being paid at certain points, no details were in evidence. b. Mr. Schitthelm was paid in three different formats. i. In the first stage, Mr. Schitthelm was not paid a gross annual salary by Simo Corporation.

There was no evidence as to how long he was paid no salary (the “ Schitthelm Salary Deficiency - First Stage ”). ii. In the second stage, Mr. Schitthelm was paid a gross annual salary amount of $72,000 by Simo Corporation. There was no evidence as to how long he was paid this salary (the “ Schitthelm Salary Deficiency - Second Stage ”). iii. In the third stage, Mr. Schitthelm decided to take a salary equal to what Simo Corporation had paid Mr. Kelemen. [ 22 ] Concerning the third stage of the executive pay, Mr. Schitthelm also arranged for Simo Corporation to pay him the aggregate sum of $93,771.

The $93,771 was a catch-up amount, being the difference between the gross salary amount that the corporation had paid Mr. Kelemen and Mr. Schitthelm (the “ Payroll Catch-Up Amount ”). [ 23 ] Mr. Schitthelm arranged for Simo Corporation to pay him the Payroll Catch-Up Amount without consulting Mr. Kelemen. Mr. Schitthelm took that unilateral step on or about October 4, 2011. [ 24 ] In a document dated October 6, 2011, Mr. Kelemen issued a notice under clause 2.1 of the USA to Mr. Schitthelm. In that notice, Mr. Kelemen expressed his intention to exercise the Shotgun Provisions in the USA (the “ Shotgun Notice ”).

The Shotgun Notice reads as follows. OFFEROR’S NOTICE To: Gary Schitthelm This Offeror’s Notice (the “Notice”) is being given to you by Louis J. Kelemen (the “Undersigned”) under

Section 2.1 of that Unanimous Shareholders Agreement made between Louis J. Kelemen, Gary Schitthelm and Simo Corporation dated March 4, 2009 (the “USA”), pursuant to which the Undersigned requests the termination of the relationship created by the ownership of the issued and outstanding shares of Simo Corporation (“Simo”) by the Undersigned and Gary Schitthelm (“GS”). Pursuant to

Section 2.1 of the USA, the Undersigned hereby offers to sell all of his shares in the capital stock of Simo to you for the cash consideration of $90,000.00 (the “Purchase Price”) payable on the Closing Date. The Purchase Price does not include any monies payable to the Undersigned by Simo under

Section 2.6 and 2.9 of the USA (the “Simo Debt”) which amounts are payable on the Closing Date in addition to the Purchase Price as provided for under the terms of the USA. The Closing Date of the sale and purchase shall be determined under the provisions of

Article 2 of the USA provided that, subject to your written agreement, the Closing Date can be on such earlier date as you may select provided it is on a business day in the City of Calgary and is not less than two business days from the giving of your Offeree’s Notice under

Section 2.2 of the USA to accept this offer. The offer contained in this Notice is subject to all of the provisions of

Article 2 of the USA unless we otherwise agreed in writing. Capitalized words used in this Notice and not defined in it shall have the meaning ascribed thereto under

Article 2 of the USA. The Simo Debt as at the date hereof is, more or less, as follows (actual amounts subject to Simo confirmation): (

a) Section 2.6 of USA: Owing to Gary: $187,986 Owing to the Undersigned: $340,000 (

b) Section 2.9 of USA: *Owing to Gary: $331,761 Owing to the Undersigned: $331,761 *excludes the $93,771 paid by Simo on October 4, 2011 Dated at Calgary, Alberta this 6 th day of October 2011 “ Signature ” Louis J. Kelemen [ 25 ] Mr. Kelemen asked Mr. Muma, the external accountant, about the status of unpaid wages. However, he did not ask Mr. Muma to provide a statement in writing in respect of the unpaid wages. The details concerning the response from Mr. Muma were not in evidence.

[26] Mr. Kelemen approached the bank before he issued the Shotgun Notice. He testified that he understood the bank had given itsapproval in respect of the repayment of the shareholders loan, but he did not obtain that approval in writing. [27] Mr. Schitthelm testified that he did not need an accountant at the closing. IV. Analysis [28] The essence of this dispute concerns the

interpretation of a contract. The law requires the Court to determine a dispute of thisnature by reference to an objective assessment of the underlying documents and surrounding circumstances. The contract must be readas a whole, keeping in mind the purpose of the agreement and the nature of the relationship created by the agreement: Sattva CapitalCorp v Creston Moly Corp, 2014 SCC 53 at paras 47–48, [2014] 2 SCR 633. [29] Subject to an anticipatory breach argument, Mr. Schitthelm asserts that the only issue before the Court is the determination ofthe terms of the offer that he accepted.

At various stages of the trial, he restated the question to be whether there were unpaid wagesowing to Mr. Kelemen as of the closing date. Those two points overlap. [30] If unpaid wages are owed to Mr. Kelemen, then Mr. Schitthelm conceded that he is obligated to cause Simo Corporation topay the outstanding remuneration and the amount owed on Mr. Kelemen’s shareholder loan account. If no unpaid wages are owed toMr. Kelemen, then Mr. Schitthelm argues that Simo Corporation is only obligated to pay Mr. Kelemen the amount owed on hisshareholder loan account. Mr. Schitthelm also conceded that he owed Mr.

Kelemen $90,000 for the Simo Corporation shares that hepurchased. [31] There was a suggestion in oral argument that this may be a situation where laches applies because of a delay in making theclaim for unpaid wages. Laches was neither pled nor fully argued before the Court, and will not be considered. [32] Mr. Schitthelm and Mr. Kelemen had a verbal agreement in August, 2008. The alleged terms of that agreement were that Mr.Schitthelm would join Simo Corporation; he would purchase half the company for $375,000 and match the shareholder’s equity that Mr.Kelemen had in the business. It also was understood that Mr.

Schitthelm would not join the company until November 1, 2008. [33] Between August 2008 and November 1, 2008, Mr. Schitthelm became concerned with his business risk because of thecancellation of sales orders between Simo Corporation and its customers during the fall of 2008. These sales orders were cancelledbecause of the global financial crisis, which commenced in mid-September, 2008. That global financial turmoil occurred after thecollapse of Lehman Brothers. [34] As a result of the increased business risk that Mr.

Schitthelm perceived in the marketplace in the fall of 2008, there wereadjustments to the August 2008 verbal agreement between Mr. Schitthelm and Mr. Kelemen. That adjustment occurred during the fall of2008 and the early months of 2009. [35] While not all of the particulars concerning the adjustments to the verbal agreement are in evidence, it is apparent that Mr.Schitthelm did not match the contributions that Mr. Kelemen made to the shareholders loan for Simo Corporation. The concerns of Mr.Schitthelm in the fall of 2008 are understandable, given the economic turmoil at that time.

However, nothing turns on that point. A. Did Mr. Schitthelm Repudiate the Agreement for Sale? [36] The sequence of analysis in this case could take a number of different paths as the issues to be determined are interrelated andthere is no obvious “first issue” that must be decided. Since every journey must start somewhere, this analysis will commence with the determination of whether there was a repudiation of theAgreement for Sale. The Court commences with this issue because it was the primary focus during the trial. 1. Additional Facts [37] On November 2, 2011, Mr.

Schitthelm accepted the offer that was contained in the Shotgun Notice. 2. The Law [38] Anticipatory breach occurs when one party to an agreement makes it clear that they do not intend to be bound by thecontractual obligations that require their performance in the future. Anticipatory breach is sometimes referred to as “anticipatoryrepudiation.” This latter phrase will be used in this case because it is a better description of the circumstances.

It is a more appropriatephrase because no actual breach has yet occurred. [39] Anticipatory repudiation is distinguishable from an actual breach because performance is not yet due. However, if thethreatened non-performance would constitute a fundamental breach when performance comes due, then the doctrine of anticipatoryrepudiation gives the innocent party an option to pre-emptively terminate the contract. [40] If anticipatory repudiation applies, it releases the innocent party from further obligations.

That also entitles the innocent partyto immediately pursue all remedies against the repudiating party as though the anticipatory repudiation had been an actual breach:Kloepfer Wholesale Hardware v Roy, (SCC), [1952] 2 SCR 465, [1952] 3 DLR 705 (SCC). a. Doctrine of Anticipatory Repudiation – Two Questions

[41] An anticipatory repudiation can be express or implied, based on words or conduct. However, a finding of anticipatoryrepudiation is not to be inferred lightly. [42] The test for an anticipatory repudiation is an objective one. It raises two questions. The first question focuses on intent. Thesecond question focuses on magnitude. b. Anticipatory Repudiation – An Overview [43] Turning to the first question, did the repudiating party act in such a way that a reasonable person would conclude that he didnot intend to fulfill his end of the deal?

Turning to the second question, would the consequences of the threatened breach deprive theinnocent party of “substantially the whole benefit which it was intended that he should obtain from the contract”: Hong Kong FirShipping Co Ltd v Kawasaki Kisen Kaisha Ltd, [1962] 1 All ER 474 at 487, Diplock LJ, [1962] 2 QB 26 (CA). [44] If the answer to the first question is “yes,” the analysis must move to the second question.

Since a finding of anticipatoryrepudiation confers an option on the innocent party to terminate the contract, the breach must be of a kind that is sufficiently serious toentitle that party to treat the contract as at an end. [45] If the answer to the second question is “yes,” then an anticipatory repudiation has occurred and the innocent party mayterminate the contract. If the answer to the second question is “no,” then an anticipatory repudiation has not occurred.

In that lattercircumstance, the innocent party may not terminate the contract. [46] By approaching the analysis in this manner, the threshold test for finding an anticipatory repudiation mirrors the test for afundamental breach first articulated by Lord Diplock in the seminal case of Hong Kong Fir Shipping. This test has been endorsed by theSupreme Court of Canada: see Hunter Engineering Co v Syncrude Canada Ltd, (SCC), [1989] 1 SCR 426 at paras148–152, 57 DLR (4th) 321 (SCC). [47] The Court notes that recent case law in Canada tends to blur the boundaries between these two lines of inquiry.

At least oneappellate decision suggests that courts rely on “much the same analysis” in answering whether one party has evinced an intention not tobe bound by the terms of the contract as they do in answering whether the breach would deprive the innocent party of “substantially thewhole benefit”: see Spirent Communications of Ottawa Ltd v Quake Technologies (Canada) Inc, 2008 ONCA 92 at para 37, 88 OR(3d) 721, leave to appeal to SCC refused, [2008] SCCA No 151. [48] In the view of this Court, the blurring of those boundaries is not appropriate. To the contrary, it is prudent to maintain theanalytical distinction.

The reason for maintaining this distinction is founded on the different issues that the two questions address. Asnoted above, the first question focuses on intent by examining the certainty of the party’s words and conduct. The second questionfocuses on magnitude by examining the significance of the non-performance threatened. c. First Question – Assessing Intent [49] If a party’s intention to repudiate is uncertain or that the threatened breach is relatively insignificant, a finding of anticipatoryrepudiation would not be warranted.

Put differently, threatening a fundamental breach in a manner or in circumstances such that noreasonable person would take the threat seriously should not invariably entitle the innocent party to terminate the contract: EAD Property Holdings

(103) Corp v Greyhound Canada Transportation ULC, 2015 ABQB 239 at para 18, 22 Alta LR (6th) 24. Ultimately,whether words or conduct would effectively repudiate a contract is a question of fact. d. Second Question – Assessing Magnitude [50] A deprivation sufficient to constitute an anticipatory repudiation must be determined within the context of the specificcontract and all relevant circumstances.

There is no magic point at which anticipated non-performance can always be said to besufficiently fundamental to justify the entitlement of an innocent party to terminate a contract. [51] In many cases, the value attributable to the non-performance of non-pecuniary terms will be difficult to quantify or balanceagainst the whole. To assist the analysis, the common law considers five factors in determining whether the threatened non-performanceis serious enough to deprive the innocent party of substantially the whole benefit that he sought to obtain from the contract.

Those factorsare as follows: Spirent at paras 36–37. 1. The ratio of the party’s obligations not performed to that party’s obligations as a whole. 2. The seriousness of the breach to the innocent party. 3. The likelihood of repetition of such breach. 4. The seriousness of the consequences of the breach. 5. The relationship of the part of the obligation performed to the whole obligation. [52] The relevance and a rigour of these five factors are evident in how the courts have applied them. In Spirent, the Ontario Courtof Appeal reversed the trial judge’s decision.

It determined that the trial judge placed too much emphasis on factor 4 and not enough onfactors 1 and 5: Spirent at para 45. [53] The trial Judge in Spirent held that a possible six-week delay of a three-year lease deprived the tenant of substantially thewhole benefit under the contract: Spirent at paras 26–28. The Ontario Court of Appeal in Spirent did not agree that the delay amounted toa fundamental breach. That appellant court held that the delay was not of fundamental importance to the plaintiff. Further, the Ontario

Court of Appeal held that there was no evidence to suggest the plaintiff would have been “out on the street,” which it protested when it first learned of the delay, or that it inquired about the length of the delay: Spirent at paras 40–44. These facts greatly diminished the seriousness of the threatened breach, and did not entitle the tenant to terminate the sublease. [ 54 ] The Alberta Courts have endorsed the five factors outlined above.

In Canadian Western Bank v 702348 Alberta Ltd , 2009 ABQB 271 , 472 AR 297, the plaintiff sought a declaration that its lease agreements had been properly terminated as a result of the defendant’s anticipatory repudiation. The five Spirent factors were applied. [ 55 ] The Court in Canadian Western Bank found that although the contracts contemplated the possibility of delay in occupancy, such delay could not be indefinite: Canadian Western Bank at paras 50 – 51 .

In particular, factors 1 and 5 emphasized that the defendant had done “very little” to construct the building on time, while factors 2 and 4 were aggravated by the fact that the tenants would be unable to consolidate their staff in one location, and they were unable to find suitable premises to conduct lab work short of relocating to a different city: Canadian Western Bank at paras 65 – 67 .

Lastly, the likelihood of repeating the breach was great because there was no definitive evidence as to when construction would start again: Canadian Western Bank at para 68 . [ 56 ] Thus, despite repeated promises that construction would finish by a fixed date in the Canadian Western Bank case, the defendant’s failure to complete construction or to provide any reasonable timeline for completion deprived the plaintiff of “substantially the whole benefit” that the parties intended it should receive under the contract. Those circumstances entitled the plaintiff to terminate the leases.

The Alberta Court of Appeal affirmed the decision of the trial court concerning the application of the Spirent factors: Canadian Western Bank v 702348 Alberta Ltd , 2010 ABCA 227 at paras 17 – 20 , 487 AR 340. [ 57 ] This five factor framework provides this Court with the tools it needs to assess magnitude for the purposes of determining whether the actions of Mr. Schitthelm amount to an anticipatory repudiation of the contract. 3. Application of the Law a. Would a reasonable person conclude that Mr. Schitthelm intended to fulfill his obligations under the Shotgun Notice? [ 58 ] Mr.

Schitthelm advanced two arguments as to why he refused to pay the $331,761 amount that was listed in the Shotgun Notice as unpaid wages. First, he argued that the unpaid wages owed by Simo Corporation to Mr. Kelemen was nil. Second, he argued that the unpaid wages variable was not a term of the Agreement for Sale. [ 59 ] According to the testimony of Mr. Kelemen, the first time that Mr. Schitthelm touched on the unpaid wages issue was on November 21, 2011. An entry in Mr. Kelemen’s journal on that date indicated that Mr.

Schitthelm communicated: “Gary stated salary portion is not on the books, so not owing.” A subsequent entry on February 2, 2012 states, “Deferred salary not on books per Gary, so not a liability.” [ 60 ] Based on the evidence, this Court finds that Mr. Schitthelm did not refuse to pay the $331,761 because he no longer intended to be bound by the contract. To the contrary, he testified that Simo Corporation would pay, provided there was a liability owed to Mr. Kelemen for unpaid wages. However, he refused in the circumstances because he understood that the unpaid wages owing to Mr.

Kelemen on the closing date was nil. [ 61 ] The Court finds that a reasonable person would conclude on the basis of this evidence that Mr. Schitthelm intended to fulfill his end of the bargain. Mr. Schitthelm just needed confirmation of the amount that Simo Corporation owed in respect of unpaid wages. This finding is also supported by statements that were included in a letter dated May 30, 2012 from the Smith Mack Lamarch law firm to De Waal Law. [ 62 ] The amount that Mr. Kelemen claims for unpaid wages was not recorded in the financial statements for Simo Corporation. No one disputes that fact.

Whether the financial statements are correct is a separate matter. [ 63 ] The absence of an accrual in the financial statements for unpaid wages could reasonably lead one to conclude that no salary was payable, albeit perhaps mistakenly. Whether the absence of an accrual is correct is a separate question. Moreover, the Shotgun Notice expressly contemplated the possibility that the actual amount payable to Mr. Kelemen might diverge from the $331,761 amount that was included in that notice for information purposes. [ 64 ] In the circumstances, this Court finds that Mr.

Schitthelm disputed only the quantum of unpaid wages. He did not assert that Simo Corporation would not pay the amount, provided the unpaid wages were properly established. Accordingly, this Court also finds that Mr. Schitthelm intended to fulfil his obligations under the Shotgun Notice and the USA. [ 65 ] His additional attempts to close the deal reaffirmed the intention of Mr. Schitthelm to be bound. In this sense, the refusal of Mr. Schitthelm to pay Mr. Kelemen the $331,761 was not a rejection of his obligation.

He simply wanted confirmation that the amount was payable. [ 66 ] Whether Simo Corporation should have taken steps to ascertain that potential liability is a separate issue. The Court will touch on that issue below. b. Does a legitimate interpretative dispute weigh against anticipatory repudiation? [ 67 ] The calculation of the unpaid wages allegedly owed to Mr. Kelemen has elements of a legitimate dispute between the parties. In particular, the initial assessment of the dispute has two foundations.

First, there is a legitimate argument concerning the absence of an accrued liability for unpaid wages in the financial statements for Simo Corporation. Second, there is a legitimate argument concerning the issue of whether the payment of unpaid wages was a term of the Agreement for Sale.

i. No Corporate Accrual for Unpaid Wages [ 68 ] When examined in context, it is difficult to see how the words or conduct of Mr. Schitthelm can be construed as an intention not to be bound by the contract, the precise

interpretation of which is in dispute. Further, Mr. Kelemen’s own conduct likely contributed to the misunderstanding that developed. In particular, he failed to ensure that the alleged unpaid wages were accrued in the financial statements of Simo Corporation. Whether that obligation fell to him exclusively is another issue, which will be touched on below. [ 69 ] If a party honestly believes that he or she is acting in accordance with their contractual rights and obligations, this Court finds that such conduct weighs heavily against the application of the doctrine of anticipatory repudiation.

If it were otherwise, courts would be finding an anticipatory repudiation in circumstances where a party has voiced an unequivocal refusal to perform his or her obligations, notwithstanding that there is a legitimate dispute concerning the contractual terms. [ 70 ] The jurisprudence supports the finding of the Court on this issue.

While neither of the following cases is binding on this Court, the respective logic embedded in, Ross Smyth & Co Ltd v Bailey Son & Co , [1940] 3 All ER 60 , and White v EBF Manufacturing Ltd , 2004 NSSC 152 , 227 NSR (2d) 55 is instructive. [ 71 ] In Ross Smyth & Co , the court stated that “...a mere honest misapprehension, especially if open to correction, will not justify a charge of repudiation”: at 71. Therefore, differences in

interpretation offer Mr. Schitthelm a defence to the charge of repudiation, provided he acted reasonably and in good faith. This judicial guideline generally will preclude an anticipatory repudiation, unless the anticipated breaches are relatively large: see Jackson v Trimac Industries Ltd , 1994 ABCA 199 , 155 AR 42. [ 72 ] In EBF Manufacturing , a patent holder named Mr. White appealed a decision of the Nova Scotia Supreme Court. Mr. White argued that EBF Manufacturing Ltd. and its director, Mr. Bryson, had repudiated a patent licensing agreement when it failed to make royalty payments. In his reasons, Justice McDougall held as follows at paras 39 – 40: Although I do not accept Bryson’s

interpretation of the license agreement as it relates to the timing of payments, he never denied that royalties would eventually be paid. And, as stated earlier, I find that White’s own conduct contributed to the misunderstanding that developed. ... For the reasons previously stated I do not think the actions of Bryson as president of EBFML amounted to a repudiation of the license agreement. It is therefore still valid and enforceable. [ 73 ] The court then ordered EBF Manufacturing to pay the royalties.

The trial decision was appealed. [ 74 ] Writing for the Nova Scotia Court of Appeal in White v EBF Manufacturing Ltd , 2005 NSCA 167 , 239 NSR (2d) 270, Justice Saunders agreed with Justice McDougall’s assessment that Bryson’s failures did not amount to repudiation.

Concerning this point, Justice Saunders stated the following for the appellant court in EBF Manufacturing Ltd (NSCA) at para 80: In my opinion the cases relied upon by White are distinguishable in that there, the breaching party evinced a clear and continuing unwillingness to be bound by the terms of their agreements, whereas in this case, nothing in the factual findings of McDougall, J. suggest that EBF or Bryson ever reached that level of non-compliance. In fact the trial judge found that the areas which gave rise to the various disputes between Messrs.

White and Bryson were largely unprovided for in the agreement between them, and that there was a legitimate dispute as to

interpretation. The trial judge found as a fact that the timing and calculation of royalties were left unprovided for in the agreement, and that they were topics of legitimate dispute between the parties. To find that a contract had been repudiated, owing to a legitimate disagreement over

interpretation would, in my opinion, be a wholly erroneous conclusion . [Emphasis added.] [ 75 ] Since there is a legitimate basis to the interpretive dispute advanced by Mr. Schitthelm, this Court finds that there was no anticipatory repudiation of the Agreement for Sale. ii. Do the unpaid wages, if any, form part of the Agreement for Sale? [ 76 ] For the alleged unpaid wages to be a basis for repudiating the Agreement for Sale, the disputed amount would have to be a component of that contract.

If the alleged unpaid wages did not constitute part of the Agreement for Sale, then evincing an intention not to pay these amounts cannot be an anticipatory repudiation of the terms of the Agreement for Sale. That being the case, it would not have been open to Mr. Kelemen to terminate the Agreement for Sale. [ 77 ] For the reasons that are detailed under “C. What are the terms of the Agreement for Sale?” below, this Court finds that the alleged unpaid wages are not a component of the Agreement for Sale. That being the case, Mr. Kelemen’s acceptance of such conduct as repudiation was invalid. c.

Does the failure to deliver unpaid wages deprive Kelemen of “substantially the whole benefit” of the contract? [ 78 ] If this Court had found that Mr. Schitthelm evinced an intention not to be bound by the contract in circumstances where the unpaid wages were a term of the Agreement for Sale, that would not end the enquiry. In that circumstance, the next step would be to determine whether the words or conduct amounted to a fundamental breach of the Agreement for Sale. That would have required a review of the five Spirent factors. [ 79 ] Given the above findings, the Court does not need to take that next step.

The Agreement for Sale stands. It is a valid contract. B. Was a closing effected on May 30, 2012 in respect of the Agreement for Sale?

1. Additional Facts [80] When Mr. Schitthelm accepted the offer in the Shotgun Notice on November 2, 2011, he did not place any terms or conditionson that acceptance. [81] On January 27, 2012, Mr. Schitthelm issued a written notice to Mr. Kelemen. That document was titled “Notice of ExtendedClosing Date,” and it stated that the closing date was extended to May 30, 2012. [82] On May 30, 2012, Mr. Schitthelm had a closing meeting at 10:00 am in the law offices of Smith Mack Lamarsh. At thatclosing meeting, Mr.

Schitthelm was prepared to tender a Bank Draft for $90,000 for the payment of the shares of Simo Corporation thathe was purchasing from Mr. Kelemen and a personal cheque for $886.24 for the interest owed pursuant to clause 2.5 of the USA. Mr.Schitthelm also had a cheque from Simo Corporation for $340,000, payable to Mr. Kelemen in respect of the amount due on hisshareholder loan. [83] In a letter dated May 30, 2012, counsel for Mr. Schitthelm stated that Simo Corporation would make additional payments toMr. Kelemen for any other indebtedness owed.

That offer was subject to that other indebtedness being verified by the externalaccountant, Mr. Muma. 2. The Law a. The Contractual Provisions [84] The parties to a contract that will effect a transfer of beneficial ownership in an asset have significant control over the date onwhich that ownership shifts. The date on which beneficial ownership shifts to the purchaser is typically referred to as the closing date. [85] The mechanics of the "closing date" are detailed in clauses 2.4 and 2.5 of the USA.

The relevant components of those clausesread as follows. 2.4 ….Unless the Shareholders have otherwise agreed in writing, and subject to

Section 2.5, the closing date for any purchase and saleresulting under

Section 2.2 or 2.3 shall be on the last business day of the Corporation in the second month immediately following themonth in which the Notice Period expired (the “Closing Date”). 2.5 Where the Offeree has elected to purchase the Offeror’s Shares pursuant to this

Article 2 the Offeree may, at any time prior to theClosing Date of such purchase and sale, extend the Closing Date to a date which is no later than 120 days from the original Closing Dateby giving written notice thereof to the Offeror. In the event of an extension of the Closing Date pursuant to this

Section 2.5 the PurchasePrice shall bear interest from the original Closing Date until paid at a rate per annum equal to the Prime Rate of the Corporation’sprincipal banker (the “Bank”) in effect from time to time. b. The Jurisprudence [86] The importance of contractual provisions that deal with a closing date is recognized in the jurisprudence. Typically, the courtslook to the wording of the contract to determine the intended closing date.

The date on which beneficial ownership of the subject assetstransferred is the key date, not the date that legal title changes: De Graaf v The Queen, (FC), 85 DTC 5280 (FCTD),[1985] 1 CTC 374. [87] When courts are asked to grant specific performance of a contract that one party alleges has closed, the test of "ready, willingand able" is typically applied. In Bowlen v Digger Excavating

(1983) Ltd, 2001 ABCA 214, 286 AR 291, the Court dealt with a "time isof the essence" clause for a commercial land deal. The Court stated the following concerning the grant of specific performance in acircumstance where the closing date was at issue: Bowlen at para 28. The party which has fully performed its obligations under a contract is entitled to insist on performance by the other party.

Certainty incontracts, especially terms relating to the closing date of contracts for the sale of land is of great commercial importance, and the Courtcannot insert itself into the contracting process by extending time for performance absent evidence of relevant misconduct by theinnocent party or waiver. Recently, Hetherington. J.A. succinctly summarized the issues in 364021 Alberta Ltd. v. 361738 Alberta Ltd.,supra, at para. 3: On the closing date the purchaser did not tender the monies which he was required to pay under the agreement, nor was it ready, willingor able to do so.

In these circumstances the purchaser cannot seek specific performance or damages for any breach of the agreement bythe vendor. [88] That same principle was applied in Christensen (Estate) v Proprietary Industries Inc, 2004 ABQB 399 at para 52. Thetransaction in Christensen (Estate) was a share purchase agreement. 3. Application of the Law [89] Mr. Schitthelm accepted the offer that was contained in the Shotgun Notice. He did so without terms. That being the case,this Court finds that Mr. Schitthelm accepted the Shotgun Notice unconditionally. [90] Mr.

Schitthelm applied the provisions of the USA which allowed him to select May 30, 2012 as the closing date. In doing sohe complied with the terms of clause 2.5 of the USA, which required the notice to be in writing. The communication was effected by theNotice of Extended Closing Date. Given these particulars, this Court finds that the extended notice for the May 30, 2012 closing datewas effective.

[ 91 ] At the closing meeting on May 30, 2012, Mr. Schitthelm was prepared to table three financial instruments for Mr. Kelemen. The first financial instrument was a bank draft for $90,000. That was to fund the purchase of the Simo Corporation shares that were being acquired by Mr. Schitthelm. The second financial instrument was a personal cheque for $886.24. That was to fund interest payable on the share purchase because of the extended closing date. The third financial instrument was a cheque from Simo Corporation to Mr. Kelemen for $340,000. That was to repay the shareholder loan, which was owed to Mr.

Kelemen. [ 92 ] If there was any additional indebtedness owed by Simo Corporation to Mr. Kelemen, correspondence dated May 30, 2012 made it clear that the corporation would honour such obligations. The only caveat was that such additional indebtedness was subject to verification by the external accountant, Mr. Muma. [ 93 ] Given the above particulars, the Court finds that Mr. Schitthelm was "ready, willing, and able" to complete the transaction on May 30, 2012. The Court further finds that the closing was effective on May 30, 2012, notwithstanding that Mr. Kelemen did not attend that scheduled event.

As a consequence, the contract bound the parties as at the closing on May 30, 2012. C. What are the terms of the Agreement for Sale? [ 94 ] Given the finding that there has been no anticipatory repudiation of the Agreement for Sale, the Court turns to the next issue. That is, the determination of the terms of the contract. [ 95 ] The focus of this dispute concerns the application of the compulsory buyout provisions which are provided for in

Article 2 of the USA. The buyout terms in

Article 2 of the USA are a component of the Shotgun Provisions. 1. Additional Facts [ 96 ] Two sets of financial statements of Simo Corporation were in evidence. They were both labeled “Interim Financial Statements.” Neither of those financial statements included a report from an external accountant. Those two sets of financial statements covered the following periods. a. For the twelve months ended September 30, 2011. b. For the seven months ended April 30, 2012. [ 97 ] Both of these financial statements included an accrual for payroll liabilities. The accruals were as follows. a.

Concerning the financial statements for the twelve months ended September 30, 2011, the payroll accrual was $48,949. b. Concerning the financial statements for the seven months ended April 30, 2012, the payroll accrual was $44,471. [ 98 ] The parties both testified that the bank required that the financial statements of Simo Corporation be prepared on a Review Engagement basis. [ 99 ] The parties both testified that the external accountant, Mr. Muma, prepared the financial statements of Simo Corporation on a Review Engagement basis.

However, no such financial statements were ever entered as evidence. [ 100 ] In cross-examination, Mr. Kelemen testified that Mr. Muma’s primary purpose was to prepare financial statements for Simo Corporation on an annual basis for HSBC. [ 101 ] The alleged unpaid wages of $331,761 was calculated by Mr. Kelemen. [ 102 ] Mr. Kelemen did not report the unpaid wages as income on any income tax return. Further, Mr. Kelemen did not report any amounts that he received under the Eidsvik Order on any income tax return. 2.

The Law [ 103 ] When a party to a unanimous shareholders agreement complies with the prerequisites of a shotgun clause, the courts in Canada take a strict view of the contractual framework that applies. That framework is generally compulsory, and is dictated by the terms within the unanimous shareholders agreement. [ 104 ] The following statement from the Alberta Court of Appeal evidences this strict application: 942925 Alberta Ltd. v Thompson , 2008 ABCA 81 at paras 21 –23 . A shareholder must strictly comply with the terms of a shotgun clause in order to obtain its benefit.

Virtue J. put it this way: A shot gun buy-sell is strong medicine. One takes it strictly in accordance with the prescription or not at all. Counsel for Thompson and Chichenko conceded that the shotgun clause did not expressly provide for a joint exercise by two or more shareholders but urged that we give the clause a liberal

interpretation, or imply a term, in order to facilitate a “divorce” of the feuding shareholders. He argued that such a construction would serve the purpose of the clause. We do not agree. We cannot ignore the words of the unanimous shareholder agreement. The construction urged by counsel is both contrary to authority and to principles of

interpretation of written agreements. [ 105 ] The reason for this approach is a function of basic contract law. Specifically, the terms of the buy-sell agreement are established

between the parties as at the date they enter into the unanimous shareholders agreement. Insofar as parties have agreed to those terms, those contractual provisions must be honoured. 3. Application of the Law [ 106 ] When parties enter into a unanimous shareholders agreement, they agreed to be bound by a predetermined contractual framework. Applying that framework to this case, the parties made a contractual commitment years in advance of the date that the Shotgun Notice was accepted. [ 107 ] Given this contextual background, there are two questions which the Court must consider.

The first question is whether the particular offer was made within the context of the relevant buy-sell provisions of the USA. If it was, the buy-sell offer must be presumed to have been intended to be in compliance with the USA. The second question concerns the terms of that contract. [ 108 ] The USA is an important document. Where the USA applies, it is the governing document. [ 109 ] If the Shotgun Notice is made within the parameters outlined in the USA, then it may be that anything inconsistent with the unanimous shareholders agreement is either to be ignored or invalidates the offer.

That being the case, the only issue is: what were the terms of that contract? [ 110 ] The Shotgun Notice was issued by Mr. Kelemen to Mr. Schitthelm. By issuing that notice, Mr. Kelemen had hoped to acquire the Simo Corporation shares owned by Mr. Schitthelm. [ 111 ] In a move that likely surprised Mr. Kelemen, the Shotgun Notice was exercised by Mr. Schitthelm. That is, Mr. Schitthelm accepted the offer from Mr. Kelemen to sell his shares in Simo Corporation. As noted above, the Court found that the acceptance of the Shotgun Notice by Mr. Schitthelm was unconditional. [ 112 ] When Mr.

Schitthelm accepted the offer, a contract for sale and purchase of the Simo Corporation shares was formed. As stated above, that created the Agreement for Sale, which closed on May 30, 2012. [ 113 ] The dispute concerns the terms of the resulting Agreement for Sale. Mr. Schitthelm argues that anything in the Shotgun Notice which is inconsistent with the USA is either to be ignored or invalidates the offer. [ 114 ] To address the underlying issue, the Court will deal with three questions. First, is the Shotgun Notice in compliance with the USA?

Second, if the Shotgun Notice is not in compliance with the USA, what are the implications? Third, if a contract exists because Mr. Schitthelm accepted the terms of the Shotgun Notice unconditionally, what are the terms of the resulting Agreement for Sale? a. Is the Shotgun Notice in compliance with the USA? [ 115 ] Concerning the first question, Mr. Schitthelm argues that the Shotgun Notice is not in compliance with the USA because the document attempts to “... sneak in a little sweetener, a little bonus...” for the benefit of Mr. Kelemen. In this regard, Mr.

Schitthelm argues that the valid component of the Shotgun Notice stops at the end of the second sentence of the first paragraph of that document. [ 116 ] For clarity, the Court restates the components of the Shotgun Notice that Mr. Schitthelm accepts as being valid. This Offeror’s Notice (the “Notice”) is being given to you by Louis J. Kelemen (the “Undersigned”) under

Section 2.1 of that Unanimous Shareholders Agreement made between Louis J. Kelemen, Gary Schitthelm and Simo Corporation dated March 4, 2009 (the “USA”), pursuant to which the Undersigned requests the termination of the relationship created by the ownership of the issued and outstanding shares of Simo Corporation (“Simo”) by the Undersigned and Gary Schitthelm (“GS”). Pursuant to

Section 2.1 of the USA, the Undersigned hereby offers to sell all of his shares in the capital stock of Simo to you for the cash consideration of $90,000.00 (the “Purchase Price”) payable on the Closing Date. [ 117 ] Mr. Schitthelm says the remainder of the Shotgun Notice is invalid for the purposes of the compulsory buyout framework that was agreed to in

Article 2 of the USA. The Court agrees with that assertion insofar as no component of the remaining portion of the Shotgun Notice contains terms that are components of the Agreement for Sale. [ 118 ] More particularly, the Court finds that the portion of the Shotgun Notice which Mr. Schitthelm says is invalid is not presented in the form of an offer. It is information only. This is evident when the remaining components of the Shotgun Notice are examined. [ 119 ] The Court turns to examine the remaining components of the Shotgun Notice, but does so in two stages.

The first stage of that review concerns the last sentence of paragraph one of the Shotgun Notice and the next three paragraphs of that notice (collectively, the “ Central Component of the Shotgun Notice ”). The second stage of that review concerns the last paragraph of the Shotgun Notice (the “ Last Component of the Shotgun Notice ”). i.

Central Component of the Shotgun Notice [ 120 ] The text of the Central Component of the Shotgun Notice reads as follows: The Purchase Price does not include any monies payable to the Undersigned by Simo under Sections 2.6 and 2.9 of the USA (the “Simo Debt”) which amounts are payable on the Closing Date in addition to the Purchase Price as provided for under the terms of the USA. The Closing Date of the sale and purchase shall be determined under the provisions of

Article 2 of the USA provided that, subject to your written agreement, the Closing Date can be on such earlier date as you may select provided it is on a business day in the City of Calgary and is not less than two business days from the giving of your Offeree’s Notice under

Section 2 2 of the USA to accept this offer.

The offer contained in this Notice is subject to all of the provisions of

Article 2 of the USA unless we otherwise agreed in writing. Capitalized words used in this Notice and not defined in it shall have the meaning ascribed thereto under

Article 2 of the USA. [ 121 ] The substance of the Central Component of the Shotgun Notice is either just information or it is touching on procedural matters ( i.e. , the closing). The statement that “[t]he Purchase Price does not include any monies payable... under Sections 2.6 and 2.9 of the USA...” is an important clarifying statement.

The Court finds that if this statement had not been included in the Shotgun Notice, the legal result would be the same. [ 122 ] The Court also finds that the Central Component of the Shotgun Notice does not impact inversely on the offer that is present in the first two sentences of the full Shotgun Notice. The Court comes to this conclusion because it could ignore the Central Component of the Shotgun Notice without affecting the

interpretation of the offer that is inherent in the first two sentences of that notice. ii. Last Component of the Shotgun Notice [ 123 ] The text of the Last Component of the Shotgun Notice reads as follows: The Simo Debt as at the date hereof is, more or less, as follows (actual amounts subject to Simo confirmation): (

a) Section 2.6 of USA: Owing to Gary: $187,986 Owing to the Undersigned: $340,000 (

b) Section 2.9 of USA *Owing to Gary: $331,761 Owing to the Undersigned: $331,761 *excludes the $93,771 paid by Simo on October 4, 2011 [ 124 ] The assertion by Mr. Schitthelm to the effect that the Last Component of the Shotgun Notice is invalid is agreed to by the Court, but only insofar as no constituent of the Last Component of the Shotgun Notice contains a term that is a component of the Agreement for Sale. Further, any concern that Mr.

Schitthelm has about the Last Component of the Shotgun Notice is eliminated by the proviso which states that the actual amount of the Simo Debt is subject to confirmation by the corporation. [ 125 ] By including that “confirmation requirement” in the Last Component of the Shotgun Notice, there is an automatic adjustment clause built into the notice. That information clause is structured to make it clear that it will automatically adjust to any amount payable in respect of unpaid wages that are owed to Mr. Kelemen. Coincidentally, the same amount will be a liability of Simo Corporation. [ 126 ] In

summary, the Court finds that the Last Component of the Shotgun Notice does not invalidate the offer that is present in the first two sentences of the full Shotgun Notice. The Court comes to this conclusion for two reasons. First, the proviso within the Last Component of the Shotgun Notice operates as an economic shock absorber to, and for the benefit, of Simo Corporation. Accordingly, if no amount is payable to Mr. Kelemen for unpaid wages under clause 2.9 of the USA, then the amount attributable to the third variable is nil. Second, a person could ignore the Last Component of the Shotgun Notice without affecting the

interpretation of the offer that is inherent in the first two sentences of the notice. [ 127 ] For the reasons mentioned above, this Court finds that the Shotgun Notice is in compliance with the USA. That addresses the first question. While there is more information in the Shotgun Notice then strictly necessary, that does not adversely affect the substance of the offer which exists within the first two sentences of paragraph one of the Shotgun Notice. b.

If the Shotgun Notice is not in compliance with the USA, what are the implications? [ 128 ] Concerning the second question, the above findings that the Shotgun Notice is in compliance with the USA renders this question moot. Accordingly, the second question does not need to be considered. c. If a contract exists because Mr. Schitthelm accepted the terms of the Shotgun Notice unconditionally, what are the terms of the resulting Agreement for Sale? [ 129 ] Concerning the third question, a contract exists in the form of the Agreement for Sale. That agreement was formalized when Mr.

Schitthelm unconditionally accepted the Shotgun Notice. It now falls to the Court to determine the terms of that contract. [ 130 ] There are only three variables that need to be considered. Those three variables are as follows. (

i) The first variable concerns the amount payable for the shares of the Simo Corporation. Is this variable a valid obligation, and is it a component of the Agreement for Sale? (ii) The second variable concerns the amount of the shareholder loan. Is this variable a valid obligation, and is it a component of the Agreement for Sale? (iii) The third variable concerns the amount of unpaid wages, if any. Is this variable a valid obligation, and is it a component of the Agreement for Sale? i. First Variable – Share Purchase Price [ 131 ] Mr.

Schitthelm takes no issue with the first variable, being the purchase price for the shares of $90,000. That fact was conceded both in the conduct of Mr. Schitthelm and in argument. [ 132 ] The conduct was the tendering of the $90,000 at the time of closing. Mr. Schitthelm indicated that the $90,000 amount is still available as payment for the shares of Simo Corporation, which he was purchasing from Mr. Kelemen. [ 133 ] Given the evidence and the concessions by Mr. Schitthelm, this Court finds that the $90,000 is a component of the Agreement

for Sale. As such, this amount is owed by Mr. Schitthelm to Mr. Kelemen under the terms of that agreement. ii. Second Variable – Shareholder Loan [ 134 ] Mr. Schitthelm takes no issue with the amount of the shareholders loan that is owed to Mr. Kelemen. Again, that fact was conceded both in the conduct of Mr. Schitthelm and in argument. [ 135 ] The conduct was the tendering of the $340,000 at the time of closing. Mr. Schitthelm indicated that the $340,000 amount is still available to repay the shareholder loan amount owed to Mr.

Kelemen, subject to a reduction for any payments that should be applied against the balance. Indeed, during argument Mr. Schitthelm conceded that the $340,000 was payable pursuant to the terms of the USA, and that the said amount did not need to be mentioned in the Shotgun Notice. While it was mentioned, that did not affect the obligation of Simo Corporation. [ 136 ] Given the evidence and the concessions by Mr. Schitthelm, this Court finds that the $340,000 is not a component of the Agreement for Sale.

The reasons for this conclusion are threefold. [ 137 ] First, the Shotgun Notice states explicitly that the “...Purchase Price does not include any monies payable to the Undersigned by Simo under Sections 2.6 and 2.9 of the USA....” That phrase of the Shotgun Notice was drafted by Mr. Kelemen. Given that wording, the Court finds that Mr. Kelemen did not intend the Shareholder Loan to be a term of the Agreement for Sale. To the contrary, by his own wording, he specifically excluded the Shareholders Loan as a term of the Agreement for Sale. [ 138 ] Second, clause 2.6 of the USA states that “...the purchaser [Mr.

Schitthelm] will, as a term of purchase, cause such indebtedness to be paid or otherwise settled....” The operative term in that phrase is the word “cause.” The purchaser is obligated to cause the Shareholder Loan to be paid, nothing more. In this regard, there is a distinction between an obligation which is a term of a contract and a contractual obligation to cause an indebtedness to be paid.

In this case, the Court finds that the USA establishes a contractual obligation to cause the Shareholder Loan to be paid, but does not go on to make the Shareholder Loan obligation a term of the Agreement for Sale. [ 139 ] Third, the Agreement for Sale is between Mr. Schitthelm, as the purchaser, and Mr. Kelemen, as the vendor. Simo Corporation is a third party to the Agreement for Sale. While that body corporate has obligations to Mr. Kelemen, there is no indication that Simo Corporation was intended to be a party to the Agreement for Sale. As such, this Shareholder Loan amount is not owed by Mr.

Schitthelm to Mr. Kelemen. Instead, it is owed by Simo Corporation to Mr. Kelemen, the terms of which flow from the provisions of the USA, rather than from the Agreement for Sale. iii. Third Variable – The Unpaid Wages [ 140 ] Mr. Schitthelm does take issue with the third variable. That is, the amount which Mr. Kelemen alleges to be due to him in respect of unpaid wages. Indeed, Mr. Schitthelm asserts that the only real issue before the Court is whether there were any unpaid wages owing to Mr. Kelemen under his Executive Employment Agreement as at the closing date. [ 141 ] In making submissions, Mr.

Schitthelm referred to clause 2.9 of the USA. That clause of the USA reads as follows. 2.9 On completion of the sale of any Shares pursuant to this

Article 2 the selling Shareholder Executive shall be deemed to have resigned as a director and officer of the Corporation effective as and from the Closing Date and any Employment Agreement between the selling Shareholder Executive and the Corporation shall terminate without any monies payable to the selling Shareholder Executive thereunder except for (

i) any unpaid wages owing as of the Closing Date, and (ii) reasonable expenses for which the selling Shareholder Executive is entitled to be reimbursed under his Employment Agreement. On the termination of the selling Shareholder’s Executive Employment Agreement under this

Section 2.9 the Executive shall return to the Corporation all property of the Corporation in his possession including, without limitation, any credit cards of the Corporation issued to the Executive, keys, access cards, computers, computer software, customer lists and any motor vehicles being made available to the Executive by the Corporation. [ 142 ] This clause 2.9 makes it clear that Mr. Kelemen was only entitled to a claim for two categories. The first category was for unpaid wages that were owed as of the closing date.

The second category was for the reimbursement of reasonable expenses. [ 143 ] There is no evidence that any expenses were claimed by Mr. Kelemen. That being the case, the reimbursement of expenses is not an issue. That point was acknowledged by Mr. Schitthelm, and was not disputed by Mr. Kelemen. [ 144 ] Since Mr. Schitthelm has acknowledged that the reimbursement of expenses is not an issue in this case, any claim by Mr. Kelemen under clause 2.9 of the USA can only be in respect of unpaid wages. If unpaid wages are owed, then Mr.

Schitthelm was obliged under clause 2.6 of the USA to cause Simo Corporation to pay such wages. If there were no such unpaid wages, then nothing was owed under this third variable. [ 145 ] The Court finds that Simo Corporation would be liable for unpaid wages owed to Mr. Kelemen only up to the date of closing. As a departing shareholder, Mr. Kelemen has no claim for any amounts due after the date of closing or for severance. He contracted out of such claims. Accordingly, the only issue is whether there were any unpaid wages due to Mr. Kelemen as at the date of closing. [ 146 ] Mr.

Schitthelm testified that he did not know the character of the $331,761 claim that was being made by Mr. Kelemen. He testified that he “...wasn’t sure what it related to.” Mr. Schitthelm further testified that he did not take steps to ask Mr. Kelemen as to what the $331,761 related. He justified this lack of inquiry on the basis that he “...had no interest in speaking to the defendant.” [ 147 ] While Mr. Schitthelm did not seek details from Mr. Kelemen, he did testify that he sought clarification from “our accountant.” The testimony that Mr.

Schitthelm gave on this point lacked detail. [ 148 ] He testified that he asked the accountant “...if there was any outstanding Simo debt -- to Mr. Kelemen.” The Court notes that

Mr. Schitthelm did not provide any evidence which would satisfy the Court that either the internal accountant or external accountant had a copy of, or had ever seen, the Executive Employment Agreement which existed between Mr. Kelemen and Simo Corporation. That being the case, the Court infers that neither accountant had a copy of that document. [ 149 ] Notwithstanding his lack of inquiry, Mr. Schitthelm now argues that the $331,761 cannot be unpaid wages for five reasons. First, Mr. Kelemen consented to the claimed amount not being paid.

Second, the alleged unpaid wage amount was not accrued on the books of Simo Corporation as a liability of any kind. Indeed, Mr. Schitthelm points out that the unpaid wages claimed by Mr. Kelemen was not even disclosed in the notes to the financial statements of the corporation. Third, by not disclosing the alleged unpaid wages on the financial statements, Simo Corporation was effectively communicating to the bank that the indebtedness did not exist.

Fourth, since the financial statements for Simo Corporation were prepared on a Review Engagement basis, no Chartered Accountant would have prepared and issued those statements without accruing the unpaid wages if that liability did exist. Fifth, if unpaid wages were not accrued in the financial statements of Simo Corporation, it was a fraud on the tax department. [ 150 ] The Court disagrees with the above five arguments advanced by Mr. Schitthelm. Each of these five arguments will be addressed. However, before doing so a comment in respect of clause 9.3 of the USA is warranted.

That clause reads as follows. 9.3 If, at the time of closing of any purchase and sale of Shares hereunder, the Corporation is indebted to the selling Shareholder for amount(

s) other than Shareholders Loans, the amount of such indebtedness (as verified by the external accountants and/or auditors of the Corporation) shall be paid by certified cheque by the Corporation to the selling Shareholder at the time of closing. [ 151 ] Mr. Schitthelm argues that Mr. Kelemen failed to comply with clause 9.3 of the USA because he did not have the claim for $331,761 verified by the external accountant for Simo Corporation. In making this argument, Mr. Schitthelm places the entire obligation on Mr. Kelemen to verify the amount. The Court does not agree with Mr. Schitthelm’s

interpretation of clause 9.3. [ 152 ] In the Shotgun Notice, the $331,761 was being claimed under clause 2.9 of the USA. For reasons mentioned above, the inclusion of that amount in the Shotgun Notice was for information purposes only. Further, the Shotgun Notice also stated explicitly that the amount due under clause 2.9 of the USA was “...subject to Simo [Corporation] confirmation.” [ 153 ] That information in the Shotgun Notice alerted Mr.

Schitthelm to the fact that some amount in respect of unpaid salary might be payable by Simo Corporation, and that the corporation should review and confirm any such indebtedness. However, this Court finds that Simo Corporation did nothing to substantiate or otherwise determine whether a liability in respect of unpaid wages was owed to Mr. Kelemen. [ 154 ] Since Mr. Schitthelm acknowledged that the reimbursement of expenses is not an issue in this case, any claim by Mr. Kelemen under clause 2.9 of the USA can be only in respect of unpaid wages. Notwithstanding the attempt by Mr.

Schitthelm to assert ignorance, this Court finds that the only logical inference is that the $331,761 is a claim in respect of unpaid wages. The Court further finds that such a conclusion was obvious to Mr. Schitthelm, but he simply chose to ignore it. Indeed, he testified that he had no idea of the nature of the $331,761 claim. The Court does not accept Mr. Schitthelm’s assertion on that point. [ 155 ] The Court notes that Mr.

Schitthelm plead that “...the external accountant of Simo [Corporation] confirmed that there were no unpaid wages owing.” While the amended statement of claim may have asserted that argument, that allegation is of no assistance to the Court. The Court makes that comment for two reasons. [ 156 ] First, a pleading is not evidence : Kent v Postmedia Network Inc , 2012 ABQB 559 , 548 AR 73 at para 19 . That being the case, the pleading by Mr. Schitthelm which states that there are no unpaid wages is a neutral factor in this analysis. [ 157 ] Second, while Mr.

Schitthelm allegedly asked the external accountant whether Simo Corporation owed a debt to Mr. Kelemen, there was no evidence before the Court that constitutes an answer to that question. In particular, Mr. Muma was not called upon to provide any evidence. Indeed, Mr. Schitthelm testified that he “...didn’t need an accountant at the closing.” Since Mr. Schitthelm did not want an accountant at the closing, the Court infers that he chose to ignore the issue as to whether there were unpaid wages owing to Mr. Kelemen. [ 158 ] While Mr.

Schitthelm testified that he had no idea of the composition of $331,761, that absolves neither him nor Simo Corporation of the obligation to investigate the nature of the amount that was noted on the Shotgun Notice. Indeed, the obligation to investigate whether any unpaid wages were owed by Simo Corporation existed whether he had notice of that possibility by way of the Shotgun Notice or otherwise. In that regard, clause 9.3 of the USA automatically applied to impose that investigative obligation on Simo Corporation in its capacity as the debtor. [ 159 ] We now return to address the five reasons that Mr.

Schitthelm advanced to support his argument that the $331,761 cannot be unpaid wages owed to Mr. Kelemen. These five arguments will be addressed in the order outlined above. [ 160 ] Turning to the first argument, Mr. Schitthelm submitted that Mr. Kelemen consented to the $331,761 amount not being paid. To support his submission, Mr. Schitthelm argued that the salary for the executives can be adjusted by the board of directors of Simo Corporation, in their sole discretion.

He further argued that any such adjustment is not an amendment to the Executive Employment Agreement, and that the adjustment does not have to be in writing. [ 161 ] As the Court understands it, Mr. Schitthelm is submitting that conduct is sufficient to effect an amendment of the salary payable under the Executive Employment Agreement. He further argues this notwithstanding that clause 8.2 of the Executive Employment Agreement stipulates that any amendments or waivers must be in writing. [ 162 ] The Court disagrees with Mr. Schitthelm in respect of his first argument.

The Court finds that neither the Executive Employment Agreement nor the USA grants Mr. Schitthelm, in his sole discretion, the authority to amend the salary of Mr. Kelemen. This finding is reinforced by the fact that the board of directors would require a vote by both Mr. Schitthelm and Mr. Kelemen in their capacity as directors to effect that result. There is no evidence that such a vote occurred in this case.

[ 163 ] Absent a vote at the board level or a properly documented amendment to the Executive Employment Agreement of Mr. Kelemen, this Court finds that the legal obligation was to pay Mr. Kelemen an annual salary of $200,000 per year. The reason for this finding is embedded in the written Executive Employment Agreement between Mr. Kelemen and Simo Corporation. That agreement included an annual salary amount of $200,000. There is no evidence before the Court that the salary amount of $200,000 per annum was ever amended in accordance with the Executive Employment Agreement.

Further, there is no evidence of a board of directors meeting to effect a change to the $200,000 per year obligation owed to Mr. Kelemen. Indeed, to effect an amendment at the board level, it would have required both Mr. Schitthelm and Mr. Kelemen to vote in favour of the recommendation. There is no indication that any such vote ever occurred. [ 164 ] This finding is strongly supported by Mr. Schitthelm’s own conduct. On this point, the Court need look no further than the fact that Mr. Schitthelm did not view his salary as being foregone by his conduct.

For example, he did not take a salary during the Schitthelm Salary Deficiency – First Stage. Indeed, he subsequently calculated his shortfall (by reference to what Mr. Kelemen had been paid), and paid it to himself without raising the matter with Mr. Kelemen personally or at a board of directors meeting of Simo Corporation. Further, Mr. Schitthelm calculated his shortfall by reference to two time periods, being the Schitthelm Salary Deficiency – First Stage and the Schitthelm Salary Deficiency – Second Stage. [ 165 ] Since Mr.

Schitthelm did not view his conduct as amending the salary payable to him in respect of the Schitthelm Salary Deficiency – First Stage or in respect of the Schitthelm Salary Deficiency – Second Stage, the Court dismisses his assertion that Mr. Kelemen’s conduct equated to a consent not to be owed the difference between the $200,000 per annum in the Executive Employment Agreement and the actual amounts paid to him per annum by Simo Corporation. In

summary, Mr. Schitthelm cannot have it both ways. [ 166 ] Turning to the second argument, Mr. Schitthelm submitted that since the alleged unpaid wage amount of $331,761 was not accrued on the books of Simo Corporation, there is no liability. Mr. Schitthelm further asserted that his argument was supported by the fact that the unpaid wages claimed by Mr. Kelemen were not disclosed in the notes to the financial statements of the corporation. [ 167 ] The Court disagrees with Mr. Schitthelm in respect of his second argument.

The determination of whether Simo Corporation has a liability for unpaid wages is determined by legal relationships that exist between the body corporate, on one hand, and each of Mr. Kelemen and Mr. Schitthelm, on the other hand. Contrary to the argument of Mr. Schitthelm, the absence of an accrual for unpaid wages in the financial statements does not determine whether Simo Corporation owes Mr. Kelemen for unpaid wages.

That determination is made by reference to the legal relationships which exist at the relevant time. [ 168 ] If a proper legal analysis determines that Simo Corporation has a legal obligation to pay a determinable amount in respect of unpaid wage as at the date of closing, then that amount is payable. The fact that a corresponding liability has not been accrued in the financial statements of Simo Corporation is irrelevant to this legal determination.

The financial statements may simply be wrong. [ 169 ] The reason that there are rules within “generally accepted accounting principles” to deal with the restatement of financial statements is because errors do occur. When errors are discovered in audited financial statements of a company that is listed on a stock exchange, certain formalities are followed.

In contrast, when errors are discovered in financial statements that are not audited (such as Review Engagement and Notice to Reader financial statements) in respect of a closely held private corporation, the formalities of restating financial statements are often not followed. Notwithstanding that lack of formality, in a dispute such as we have in this case, financial questions need to be addressed. [ 170 ] Mr. Schitthelm framed the question by asking “[h]ow would [unpaid wages] be owing if Simo [Corporation] hadn’t acknowledged it as a debt?” With all due respect, that is the wrong question.

The question that should be asked is whether there is a debt owing in respect of unpaid wages. [ 171 ] In

summary on the second argument, the Court found above that there is no evidence that the annual salary of $200,000 per year in the Executive Employment Agreement between Mr. Kelemen and Simo Corporation was ever amended. If it was not amended, the resulting financial obligation that Simo Corporation had to Mr. Kelemen accrued until the termination of the Executive Employment Agreement on May 20, 2012, less the amounts that he has already received. That is the case notwithstanding that the full $200,000 per year was not paid in the year that it was owed. The only factor that might erode Mr.

Kelemen’s entitlement to unpaid wages is the application of the Limitations Act , which is addressed below in “D. Does the Limitations Act block any recovery by Mr. Kelemen?” [ 172 ] Turning to the third argument, Mr. Schitthelm submitted that by not disclosing the alleged unpaid wages on the financial statements, Simo Corporation was effectively communicating to the bank that the indebtedness did not exist. With respect, the Court has too little evidence to assess the validity of this argument. In particular, the Court has no evidence from the bank concerning its knowledge of the liability that Mr.

Kelemen alleges or how it would have treated the matter. [ 173 ] This Court takes judicial notice of the fact that it is common for banks to ask debtors and creditors to enter into forbearance agreements that are for the benefit of the financial institution. This is particularly common with owner/manager corporations where a financial institution will limit the amount of cash that is allowed to be withdrawn in respect of salary owed, dividends declared or a shareholder loan balance, unless pre-approval is granted by that institution.

Such accommodations provide flexibility for the parties, and are often a wise alternative to legal action or the formal novation of existing agreements. [ 174 ] If the alleged unpaid wages were a liability of Simo Corporation and the bank was aware of that liability, the bank might have simply asked the creditors ( i.e. , Mr. Schitthelm and Mr. Kelemen) to refrain from enforcing their respective rights. Again, the Court has no evidence from the bank on this point.

In any event, for the reasons stated in respect of the second argument above, the fact that a liability is not disclosed in the financial statements does not determine whether a liability exists or not. [ 175 ] Turning to the fourth argument, Mr. Schitthelm submitted that since the financial statements for Simo Corporation were prepared on a Review Engagement basis, no Chartered Accountant would have prepared and issued those statements without accruing the unpaid wages if that liability did exist.

This argument assumes a number of things, including the fact that the relevant accounting personnel were aware of the potential liability for unpaid wages.

[ 176 ] The Court disagrees with Mr. Schitthelm in respect of his fourth argument. A couple of brief comments evidence the weakness inherent in his argument. [ 177 ] The first comment is that while Mr. Schitthelm testified that Simo Corporation had its financial statements prepared by an external Chartered Accountant on a Review Engagement basis, there is neither direct evidence to support the assertion concerning the quality of the financial statements nor the qualifications of the external accountant.

While two sets of financial statements for Simo Corporation were entered as exhibits in this trial, neither were in the form of Review Engagement. [ 178 ] The two sets of “Interim Financial Statements” that were entered into evidence stated explicitly that they had “...been prepared by the company for internal managerial purposes only.” Those financial statements go on to state that “[t]he reader is cautioned that they may not contain all the adjustments and disclosures necessary for fair disclosure in accordance with generally accepted accounting principles, and hence the financial statements may not be suitable for the reader’s purposes.” That caution on the face of the financial statements of Simo Corporation which are in evidence focuses on the very weakness with which this Court is concerned. [ 179 ] With all due respect to Mr.

Schitthelm, the Court finds it remarkable that he would continually refer to Review Engagement financial statements, and then not enter such documents as exhibits. Given that deficiency in the evidence, this Court finds that very little weight can be given to the quality of the financial information that has been referred to by Mr. Schitthelm in evidence. [ 180 ] Concerning the credentials of the external accountant, Mr. Muma, there is nothing in evidence. The comments to the effect that he is a Chartered Accountant are simply hearsay. This deficiency could have been dealt with if Mr.

Muma had been called as a witness. Since Mr. Muma was not called as a witness, Mr. Schitthelm cannot use him as a shield. [ 181 ] The second comment is that if one or more of the accountants associated with Simo Corporation did not have the relevant information concerning the Executive Employment Agreements, they would not have had the facts necessary to even consider an accrual in respect of the alleged unpaid wages. On this point, Mr. Kelemen testified that the Executive Employment Agreement was not in possession of the internal accountant. Mr.

Schitthelm provided no testimony to suggest that the Executive Employment Agreement was in the possession of either the internal accountant or the external accountant. [ 182 ] When asked by the Court during argument whether there was any evidence that the external accountant ever had access to, or knowledge of, the Executive Employment Agreement between Mr. Kelemen and Simo Corporation, counsel for Mr. Schitthelm confirmed, first, that Mr.

Kelemen had testified that the internal accountant did not have possession of the employment agreement and, second, that there was no evidence that the external accountant had knowledge or possession of that document. Further, Mr. Schitthelm testified that he did not want the external accountant at the closing. [ 183 ] Given the evidence concerning this important document, the Court infers that the Executive Employment Agreement in respect of Mr. Kelemen was not in the possession or knowledge of Mr. Muma, the external accountant.

Since that employment agreement was neither in the possession nor knowledge of the external accountant, it was not his fault that the unpaid wages were not accrued as a liability on the financial statements for Simo Corporation. To the contrary, it is the fault of Simo Corporation for not providing that important document to Mr. Muma. [ 184 ] Turning to the fifth argument, Mr. Schitthelm submitted if there were unpaid wages that had not been accrued in the financial statements of Simo Corporation, it was a fraud on the Canada Revenue Agency. [ 185 ] The Court disagrees with Mr.

Schitthelm in respect of his fifth argument. A prerequisite to arguing fraud is that it must be pled. This requirement is explicit in

section 13.6(3)(

d) of the Alberta Rules of Court. [ 186 ] Since fraud was not pled in this case, it is not necessary to address the matter. In any event, even if fraud had properly been pled, the claim would fail because the alleged fraud is in reference to the Canada Revenue Agency, and, under the laws of general application in Canada, remuneration payable to an individual is taxed on a cash basis. That is, remuneration payable to an individual is not taxed on an accrual basis. [ 187 ] If Simo Corporation accrues a salary or wages in respect of Mr. Kelemen but does not pay that remuneration to him, he is not taxed.

While there are a couple of exceptions to this rule, they would not apply to the alleged unpaid wages. [ 188 ] To avoid an inappropriate benefit to Simo Corporation in the form of a deduction on its income statement, the accrued but unpaid wages are added back to the taxable income of that entity if that remuneration has not been paid within 180 days of the fiscal year end of the corporat

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