Zerr v Thermal Systems KWC Ltd, 2018 ABQB 1008

Court of Queen’s Bench of Alberta Citation: Zerr v Thermal Systems KWC Ltd, 2018 ABQB 1008 Date: 20181212 Docket: 1701 14757 Registry: Calgary Between: Howard Zerr, Ingrid Zerr, Balzac Land Holdings Inc. and 8164398 Canada Ltd. Plaintiffs - and - Thermal Systems KWC Ltd. Defendant _______________________________________________________ Memorandum of Decision of A.R. Robertson, Q.C., Master in Chambers _______________________________________________________ Introduction [ 1 ] Both plaintiffs and the defendant have brought cross partial

summary judgment applications that involve the

interpretation of a Share Purchase Agreement (“ SPA ”) and a lease agreement. The amount currently in dispute on the SPA aspect of their conflict is $84,791.58, although the outcome today might have an effect later on. The lease dispute is over a $372,000 claim advanced by the plaintiffs. [ 2 ] The plaintiffs sold the shares of three companies that operated roofing and building envelope businesses under the name “Skyline” to the defendant Thermal Systems KWC Ltd. They agreed that Thermal Systems could be a tenant in a commercial lease of the premises occupied by the “Skyline” businesses.

The landlord was a separate, but related, corporation to the Skyline corporations whose shares were sold. [ 3 ] Many of the senior employees with the purchased “Skyline” companies were kept on. [ 4 ] As it was a share sale, not an asset sale, the defendant Thermal Systems, as purchaser, wanted to have promises from the plaintiffs about what it was buying. Also, Thermal Systems was stepping into a host of agreements and potential historical liability in

respect of completed contracts as well as partially completed contracts. [ 5 ] In this environment, the parties negotiated a very complex share purchase agreement that provided various limits on the exposure that each side had. There were express indemnities given, which had varying time limits before they expired. Whether the time limits expired before Thermal Systems advanced claims is one of the main issues in the dispute over the SPA.

Another issue is whether those time limits applied at all to one category of the dispute – one of the main issues now before the Court. [ 6 ] Since Thermal Systems wanted to ensure that it had some certainty of recovering on any claim that it had arising out of the SPA and the indemnities, the parties included set-off provisions in both the lease and the SPA so that indemnity claims under the SPA could be set off as against the landlord, even though the parties were different. [ 7 ] Under the terms of the lease, Thermal Systems is the tenant.

The business that is operated in the premises is the Skyline Building Envelope business, being the business operated by the companies whose shares it bought. [ 8 ] In addition to the disputes that have arisen over the indemnities set out in the SPA, a separate dispute has arisen under the lease. The question is whether the tenant Thermal Systems had an obligation to make specified tenant improvements.

The lease payment provisions in the SPA provided for a $10,000 per month set-off to be applied towards a $1,200,000 tenant improvement allowance that was agreed to by Thermal Systems and the landlord. [ 9 ] The landlord, previously known as Skyline Land Holdings Inc., is now called Balzac Land Holdings Inc. Balzac Land argues that the lease requires that Thermal Systems perform certain tenant improvements on the two buildings that are the subject of the lease. Although various improvements were proposed, Thermal Systems chose to do only some of them.

It argues that the lease did not require it to do all of the proposed tenant improvements, and that it was allowed to prioritize its needs. The lease, if extended according to its terms, could be in place for a very long time and the existence or non-existence of certain improvements is of no particular consequence to the landlord. [ 10 ] Thermal Systems says it has spent the $1,200,000 tenant improvement allowance and that it is entitled to the full set-off. [ 11 ] The SPA is, as mentioned, complex.

Reading it is like playing a game of “Snakes and Ladders”, requiring a repeated review of provisions already covered, in order to understand what appears on subsequent pages. This is not uncommon when reading commercial agreements, but in this SPA, the extent to which references elsewhere must be reviewed to understand various passages is quite extensive. [ 12 ] For example, there are many

definitions, but not all of them appear in the “definitions” provision. As I mention below, there are 37 headings of different kinds of representations and warranties, plus many subsidiary provisions. Different expiry dates apply to different representations and warranties. [ 13 ] That complexity in the SPA seems to be the source of the disagreements about what it means.

The complexity makes it possible to read different meanings into the agreement. [ 14 ] The lease is not as complicated, but it contains some unfortunate inconsistent wording, setting the stage for the conflict that we see now. [ 15 ] Both sides to the transaction had lawyers who had their hands in the drafting of the agreements. The agreement expressly contains a passage that provides, in essence, that the

interpretation principle of contra proferentem does not apply. The Complexities in the SPA [ 16 ] The indemnity claims advanced by Thermal Systems are set out at paragraph 28 of the affidavit of Trevor Kent sworn August 31, 2018. They total $84,791.58.

Those are the claims under debate. [ 17 ] Claims number 1, 4 and 9 on that list relate to on-going projects. (The balance relate to completed projects.) In addition to the liabilities and warranty obligations to customers, Thermal Systems says that these three claims relate to the representation in the SPA that there were no deficiencies as at closing. [ 18 ] Thermal Systems used its right of set-off (as it perceived it), but in order to avoid an assertion that it has defaulted under the lease, funds were placed in trust to secure the plaintiffs’ claim and provide an appropriate argument to allow Thermal Systems to seek relief from forfeiture. [ 19 ]

Article 6 sets out the “Representations and Warranties of Vendor Parties.”

Article 7 is the general “Indemnity” provision in the SPA.

Article 8 sets out “Set-Off Rights”. [ 20 ] The essential issue in the SPA branch of the dispute is the extent to which the various deadlines for expiry of the representations and warranties as set out in the “Survival Period” (as defined in the SPA) apply to the indemnity claims now advanced by Thermal Systems, if they apply at all. The expression “Survival Period” sets out deadlines of 12 months, 24 months, 90 days, six months, and five years for various defined potential claims. With respect to certain “Fundamental Representations”, there is an indefinite period to advance a claim.

For part of the indemnity claims now advanced, Thermal Systems says that the “Survival Period” does not apply. Some Disputes over

Definitions [ 21 ] There is an argument over the term “Material Contracts”, which is defined in the SPA but the parties cannot agree on what the

definition means. As I will discuss later, it is relevant to one alternative argument advanced by Thermal Systems. The argument over the

interpretation rests on whether “and” is to be read conjunctively or disjunctively. [ 22 ] In their brief, the plaintiffs initially made an argument about this definition, but the conclusion of that argument would seem to be that there were no material contracts - despite the fact that

Schedule “E” to the SPA specifically listed certain “Material Contracts”. In oral argument, the plaintiffs partially abandoned that assertion. [ 23 ] The plaintiffs now argue that

Schedule “E” sets out certain “Material Contracts” and then there is a list of requirements, all of which must be satisfied for any other contract to be a “Material Contract”, even though (

a) none of the contracts listed on

Schedule “E” satisfy all of those requirements, and (

b) no other contract could possibly satisfy all of the listed requirements, meaning that there are no “Material Contracts” other than those set out in

Schedule “E”. [ 24 ] This, of course, causes one to wonder what the purpose was in listing a bunch of requirements, when the inevitable conclusion was that the only “Material Contracts” were those listed in the schedule. Perhaps the SPA was not complex enough. [ 25 ] There are some other defined terms that are important to consider in the analysis of the SPA. The definition of “knowledge of the Vendor” (and similar words expressing that concept) is set out in

section 1.4, as follows: References in this agreement to “ the knowledge of the Vendor ”, “ the Vendor’s knowledge ”, “ the knowledge of the Vendor Parties ” and similar expressions mean the actual knowledge, information or belief of the applicable Vendor Party (including, where applicable, its officers, directors and shareholders), and, with respect to the individuals, officers and directors of such applicable Vendor Party and its shareholders, shall include the knowledge of all matters which, after reasonable diligence, in connection with the transaction contemplated hereby, is or ought to have been known to such Person, as applicable.

The bold lettering appears in the original. Where words are capitalized, following the usual solicitor’s practice, they indicate that the word is defined in the agreement. I have added some specific emphasis for our purposes in italics. [ 26 ] In addition to these “definition” disputes, there are several important passages in the SPA that must be examined to understand the rights that are in dispute. The Representations and Warranties [ 27 ]

Section 6.2 sets out the representations and warranties of the Vendor Parties. There are 37 headings of the types of warranties and representations that are included, plus many subsidiary explanations of what was promised, or not. [ 28 ] This list includes

section 6.2(

z) which contains representations in sub-paragraph 6.2(z)(

i) about the state of affairs at closing, as follows: None of the Corporations [that were the subject of the SPA] are in default or breach of any of its obligations under any Material Contracts, and to the knowledge of the Vendor Parties , there exists no state of facts that, after notice or lapse of time or both, would constitute a material default or breach of such Material Contracts. For clarity, a material default shall include Deficient Work. (The emphasis in italics is mine.) [ 29 ] The definition in

section 1.4 and the representation in

section 6.2(

z) must be considered carefully because of the words, “and to the knowledge of the Vendor Parties”. As is apparent from

section 1.4 (above), “knowledge” includes things the Vendor Parties ought to have known with reasonable diligence. [ 30 ] The definition of “Deficient Work” tends to confirm what one would expect that expression to mean: that there might have been some defect embedded in a Material Contract before closing. The complete definition is as follows: “ Deficient Work ” means any work that does not comply with the terms and conditions of a Material Contract entered into by Skyline CGY for the performance of services in connection with the projects listed in

Schedule “S” and

Schedule “W”, and includes Skyline CGY’s failure to use the correct materials or noncompliance with any specifications provided by a project owner or its general contractor(s). [ 31 ]

Section 6.6(

a) provides that the representations and warranties would survive closing, as follows: The representations and warranties of the Vendor Parties and Purchaser contained herein shall be true and correct as of the date of this Agreement and as of the Closing Date, shall survive the completion of the transactions contemplated by this Agreement and notwithstanding such completion shall continue in full force and effect for the benefit of Vendor or Purchaser, as applicable, for the applicable Survival Period. [ 32 ] The Closing Date was July 16, 2015. Indemnity Obligations [ 33 ]

Section 7.1 sets out the general indemnity obligations of the Vendor Parties. Paragraphs (

a) and (

g) are of material interest for this analysis.

[ 34 ] The words of these particular provisions of

section 7.1 are these: Subject to

section 7.3, each of the Vendor Parties (each an “ Indemnifying Party ”), on a joint and several basis, hereby agrees to fully indemnify and hold harmless Purchaser and each of its Affiliates, Subsidiaries, employees, directors, officers and shareholders (which, for greater certainty, shall include the Corporations following the Closing Date, collectively, the “ Purchaser Indemnified Parties ”), from and against any Losses which may be made or brought against any of the foregoing or which any of the foregoing may suffer or incur as a result of, or in respect of or arising out of the following: (

a) any misrepresentation, inaccuracy, incorrectness or breach of any representation or warranty made by any Vendor Party in this Agreement or contained in any document or certificate given in order to carry out the transactions contemplated herein; ... (

g) any claim by any Person in connection with any of Skyline CGY’s liabilities and warranty obligations, including any obligation to rectify Deficient Work, incurred, accrued, or which relate to Skyline’s CGY’s actions or omission prior to Closing, whether or not pursuant to a Material Contract, for all projects listed in

Schedule “S” and

Schedule “W”; [ 35 ] Paragraph (

a) is an indemnity for misrepresentations, etc. made by the vendors in the SPA (and related documents). Paragraph (

g) is an indemnity for claims advanced by others against Skyline CGY; it does not set out an indemnity for representations or warranties that are otherwise in the SPA. [ 36 ]

Section 7.3 contains limitations on indemnity claims, and it provides that notice must be given within a specified time. Sub- paragraph (

a) says that notice of the indemnity claim must be given “on or before the date of [expiry of] the representation and warranty to which such claim relates… in accordance with

section 6.6.” (There are other restrictions that are not relevant here.) Set-Off Rights Under the Lease [ 37 ] Set-off rights under the lease are set out in

section 8.1 of the SPA, referring to the indemnities in

section 7.1. However, they are limited to those representations and warranties provided in

Section 7.1(

a) and (g), and then there are further restrictions. They are limited to (

a) Section 7.1(a), solely in respect of the representations and warranties provided in

Section 6.2(u)(

i) and

Section 6.2(z)(i); and/or (

b) Section 7.1(g). (This passage is set out in more detail, below). [ 38 ] Those set-off rights relate to setting off against the lease payments, “provided there is no duplication in recovery by the Purchaser.” I deal with this passage (also subject to dispute) below. On-Going and Completed Projects [ 39 ] Sub-paragraphs 6.2(u)(

i) and (ii) refer to on-going and completed projects that were listed in Schedules “W” and “S”: (

i) Schedule “W” sets forth a complete list of Projects that are ongoing as of the Closing Date and an accurate percentage of completion attributable to each of the Projects pursuant to which services are to be performed by the Corporations in accordance with the Material Contracts, or other contract, change order, agreement (verbal or otherwise) with the applicable Project owners or general contractors thereof and in connection therewith. (ii)

Schedule “S” sets forth a complete list of all projects undertaken by each of the Corporations that are complete as of the Closing Date and which the Corporations’ [sic] have continued warranty obligations or other liabilities that are ongoing after the Closing Date. [ 40 ]

Schedule “W” is called a “List of Ongoing Projects and Estimated Percentage Complete”.

Schedule “S” is called a “List of Completed Projects and Warranty Obligations”. [ 41 ] It is clear from

Schedule “W” and

section 8.2 that the parties intended to determine whether an on-going project was, for example, 50% complete or 70% complete as of July 16, 2015, the Closing Date. That required some after-closing work to apply these figures to the

Schedule “W” list, because of course the work for customers of the Skyline businesses continued up to and following the Closing Date. Thermal Systems had 60 days (under

section 8.2) after closing to challenge the plaintiffs’ assessment of the extent of completion. [ 42 ] The plaintiffs say that this determination also applied to identify any deficiencies that existed at that time. This is the subject of controversy. There are various reasons why Thermal Systems disagrees with the plaintiffs. [ 43 ] Firstly, in the ordinary course, construction deficiencies often do not become apparent until the end, or near the end, of construction. [ 44 ] Secondly, Thermal Systems points out that the agreement does not say what the plaintiffs argue that it means. The SPA treats the concepts of “percentage complete” and “liability and warranty obligations” differently.

Section 8.2 is the “truing-up” provision. It is headed “Indemnity Related to Representation Regarding Project Completion”.

Section 8.3 is headed “Indemnity Related to Deficiencies For Projects”. I discuss them below.

[ 45 ] Thirdly, there is a concern about the plaintiffs’

interpretation. Their approach on this point seems to assume that the personnel employed by the Skyline corporations that were sold, who stayed with the companies after closing, would be expected to identify known deficiencies to the purchaser - deficiencies that had apparently not been disclosed to the customer by that time, or they would have already been rectified. Otherwise, Thermal Systems would have to do a very careful analysis of work already done, presumably some work covered up by later installations, to find deficiencies to analyse the extent of completion.

But the plaintiffs say that this arrangement was part of the deal they made, and that it was simply a question of risk allocation. “Basket” Clause [ 46 ] Included within

section 8.3, headed “Indemnity Related to Deficiencies For Projects”, there is a “basket” clause in paragraph 8.3(

a) providing that the vendor has no liability under

section 8.3 for those projects listed in Schedules “S” and “W” until the aggregate amount of all losses incurred by the purchaser equal or exceed $50,000. [ 47 ] The first part of this “basket” clause sets out the entitlement to the indemnity: As soon as reasonably practicable after becoming aware of an Indemnity Claim with respect to Skyline CGY’s liabilities and warranty obligations , including any obligation to rectify Deficient Work, pursuant to the Material Contracts entered into by Skyline CGY for those projects listed in

Schedule “S” and “W”, Purchaser will provide the Vendor Representative with written notice of such Indemnity Claim specifying (to the extent that information is available) the factual basis for such Indemnity Claim and the amount of such Indemnity Claim (“ Deficiency Notice ”). Notwithstanding the foregoing, the Vendor Parties shall have no liability under this

Section 8.3 until the aggregate amount of all Losses incurred by the Purchaser with respect to the foregoing Indemnity Claims equals or exceeds $50,000 in the aggregate (the “ Basket ”).

The emphasis by use of italics is mine. [ 48 ] On its face, this clause applies to “Skyline CGY’s liability and warranty obligations”, as opposed to warranty obligations of the plaintiffs, and they relate to an indemnity claim that Thermal Systems has become aware of – apparently a claim by a customer. [ 49 ] One concept expressed in this provision is one that can be easily understood: the parties were agreeing on a kind of “ de minimus ” level of warranty obligation.

However, it goes on to say, in the last sentence of paragraph 8.3(a), that once the threshold of $50,000 was met, all of the Losses could be set off: Once the total of all Losses with respect to any such Indemnity Claims exceeds the Basket, Purchaser shall be entitled to set-off for the total amount of all Losses, from and including the first dollar of such Losses, against the lease payments owing by Purchaser under the Premises Lease, and upon satisfaction of any such Loss of Purchaser, Purchaser shall have no recourse owing to Purchaser in respect of such recovered Loss.

Deadline Issues: The Plaintiffs’ Position [ 50 ] The basic position of the plaintiffs is that the representations and warranties described in 7.1(

g) are included within the definition of the “Survival Period”, and no notice was given within the deadline. Deadline Issues: The Defendant’s Position [ 51 ] Thermal Systems argues that

section 7.1(

a) and (

g) deal with two different indemnities. Paragraph (

a) deals with representations and warranties given in the SPA or closing documents. It is only the indemnities identified in paragraph 7.1(

a) that are affected by the “Survival Period” restrictions. Indemnity claims under paragraph (

a) must be brought within that period, but the concept does not apply to other indemnities. [ 52 ] Paragraph (

g) deals with warranty obligations that affect either

Schedule “S” (completed) work or

Schedule “W” (on-going) work. Those obligations of the vendors do not expire within two years of the Closing Date because they were not included as things limited by the “Survival Period”. [ 53 ] The plaintiffs argue that this requires a careful analysis of the definition of “Survival Period” that is in the

definitions section,

section 1.1. The “Survival Period” varies depending on the nature of the representations and warranties. [ 54 ] And depending on the nature of the representation or warranty said to have been breached, that gives rise to indemnification by the plaintiffs, the right to set off against the rent varies. Analysis of the SPA Conflict Indemnity [ 55 ] This complex agreement must be interpreted so as to determine the intent of the parties and the scope of their understanding. Understanding the context of its creation is important, as is reading the contract as a whole: Sattva Capital Corp v Creston Moly Corp 2014 SCC 53 , 2014 CSC 53, 2014 CarswellBC 2267. [ 56 ] As mentioned,

Article 7 is the general “Indemnity” provision.

[ 57 ]

Section 7.1 is the general list of things for which indemnification is given by the Vendor Parties. I have referred to paragraph (g), but a review of all of

section 7.1 is important. [ 58 ] Paragraph 7.1(

a) is the list of representations and warranty-type promises: “any misrepresentation, inaccuracy, incorrectness or breach of any representation or warranty made by any Vendor Party in this Agreement or contained in any document or certificate given in order to carry out the transactions contemplated herein.” Set-Off [ 59 ]

Section 8.1 allows set-off for some of the indemnity claims that Thermal Systems might have against the lease payments. I quoted parts of it above when I first mentioned the set-off right. It says this: The Vendor Parties and Skyline Land [now Balzac Land Holdings Inc.] hereby acknowledge and agree that should the Purchaser Indemnified Parties be entitled to indemnification under: (

a) Section 7.1(a), solely in respect of the representations and warranties provided in

Section 6.2(u)(

i) and

Section 6.2(z)(i); and/or (

b) Section 7.1(g), the aggregate dollar amounts attributed to such applicable Losses may, at the election of Purchaser, at its sole discretion, be satisfied by the reduction and set-off against the lease payments owing by the Purchaser under the Premises Lease in accordance with this

Article 8. At the applicable time, Purchaser shall provide notice in writing [and thereafter the purchaser is given an option to use the set-off rights or proceed with an Indemnity Claim pursuant to

Article 7]. [ 60 ] This involves reflecting on paragraphs and sub-paragraphs 7.1(a), 6.2(u)(

i) and 6.2(z)(i), and 7.1(g). [ 61 ] The claims for indemnification described in paragraph 8.1(a), which may be set off against rent, are (to use the colloquial term) “reps and warranties” in the SPA or closing documents. However, the balance of paragraph 8.1(

a) limits the list even further: to those reps and warranties provided in

Section 6.2(u)(

i) and

Section 6.2(z)(i). [ 62 ] The reps and warranties in sub-paragraph 6.2(u)(

i) are the representations as to the list of Projects and their percentage completion. The representation and warranty is essentially that the lists are complete. The warranty, in essence, is that, “This is all there is, this is how far along the on-going projects are, and there are not any more.” [ 63 ] If it were not clear from the express words of paragraph 8.1(

a) that it applies only to reps and warranties in the SPA, the specific limitation makes that even clearer by looking at sub-paragraph 6.2(u)(

i) and sub-paragraph 6.2(z)(i). [ 64 ] Sub-paragraph 6.2(u)(

i) sets out the representation as to the list of on-going projects and their percentage of completion, listed in

Schedule “W”). [ 65 ] Sub-paragraph 6.2(z)(

i) states this representation: None of the Corporations are in default or breach of any of its obligations under any Material Contracts, and to the knowledge if the Vendor Parties, there exists no state of facts that, after notice or lapse of time or both, would constitute a material default or breach of such Material Contracts. [ 66 ] However, paragraph 8.1(

b) also allows rent set-off for indemnity rights under

Section 7.1(g), being: Any claim by any Person in connection with any of Skyline CGY’s liabilities and warranty obligations, including any obligation to rectify Deficient Work, incurred, accrued, or which related to Skyline CGY’s actions or omission prior to Closing, whether or not pursuant to a Material Contract, for all projects listed in

Schedule “S” and

Schedule “W”. [ 67 ] The balance of

section 7.1, apart from paragraphs (

g) and (h), refer to very specific things for which indemnity is given. [ 68 ] Paragraphs (

g) and (

h) deal with Skyline CGY’s “liability and warranty obligations” (paragraph (g)), and Skyline Building’s and Skyline USA’s “liabilities and warranty obligations” (paragraph (h)). (Claims under paragraph (

h) are not currently advanced.) Paragraphs (

g) and (

h) clearly are for claims advanced after closing by customers against the purchased Corporations for warranty obligations. [ 69 ] Paragraph 7.1(g) (set out above) is the indemnity for any claim by “any Person” (this would include any customer) in connection with Skyline CGY’s liabilities and warranty obligations including any obligation to rectify Deficient Work for work done prior to closing, “whether or not pursuant to a Material Contract, for all projects listed in

Schedule “S” and

Schedule “W”. [ 70 ] This indemnity obligation says clearly that Thermal Systems is entitled to set off Losses related to claims by customers for deficient work. However, the argument of the plaintiffs is that this indemnity is somehow for a representation or warranty in the SPA. Try as I might to understand this argument, I cannot read the agreement that way. It is an indemnity for the liabilities, if any, of Skyline CGY to others. This indemnity does not rest on any representation or warranty of the plaintiffs in the SPA. It entitles Thermal to advance an Indemnity Claim arising out of these liabilities. [ 71 ] Accordingly, my reading of

section 8.1 is very simple: if Thermal Systems is entitled to indemnity either for breach of the reps and warranties in the SPA or in respect of any claims in connection with Skyline CGY’s liabilities and warranty obligations – that is, claims that arise outside of the SPA – it is entitled to set off.

[ 72 ] Since the indemnity set out in paragraph 7.1(

g) applies to Skyline CGY’s liabilities and warranty obligations “whether or not pursuant to a Material Contract”, it is not necessary to resolve the interesting debate about what a “Material Contract” is or is not.

Since the indemnity applies to any of Skyline CGY’s liabilities, and only references Deficient Work in the inclusive words, “including any obligation to rectify Deficient Work”, it is also not necessary to determine what knowledge, if any, the Vendor Parties had about any deficiencies in Calgary CGY’s work, or whether sufficient due diligence was done by the Vendors. [ 73 ] (Because Thermal Systems advances an alternative argument, I will consider the meaning of “Material Contract” below, in the context of a separate analysis.) Time Limits and the “Survival Period” [ 74 ] The plaintiffs argue that the indemnity obligations had time limits, and that Thermal Systems advanced its claims too late.

They argue that the definition of “Survival Period” sets out how long each indemnity obligation survives closing. [ 75 ] The reference to the Survival Period is in

section 6.6, and it says that the representations and warranties “contained herein” shall be true and continue “for the applicable Survival Period”. Accordingly, the invocation of the Survival Period, set out in

section 6.6, is limited only to representations and warranties contained in the SPA. It does not apply to indemnities under paragraph 7.1(g). [ 76 ] I will explain my understanding about the “Survival Period” in more detail. [ 77 ] The definition of “Survival Period” in the SPA expressly addresses the representations and warranties in paragraphs 6.2(u)(

i) and (z)(i). In paragraph (

a) of the definition, it specifically says that the twelve-month period that is described there does not apply to those representations. They are expressly included in paragraphs (

d) and (e). [ 78 ] That means that the possibly applicable provisions of the definition of “Survival Period” are these: “ Survival Period ” means: (

d) with respect to the representations and warranties set forth in Sections 6.2(u)(i), and the liability and indemnity obligations of the Vendor Parties related thereto, the greater of (

i) six (6) months from the Closing Date, or (ii) the expiration of Purchaser’s set-off right pursuant to

Section 8.2 (including any period attributed to the resolving of disputes in connection therewith); (

e) with respect to the representations and warranties set forth in

Section 6.2(z)(i), and the liability and indemnity obligations of the Vendor Parties related thereto, five (5) years from the Closing Date. [ 79 ] But no mention is made of paragraph (g). Deficiencies vs Truing-Up the Percentage Completion [ 80 ] The plaintiffs argue that any deficiencies referenced in paragraph 7.1(

g) are caught within

section 8.2 (the “truing –up” provision). Therefore, they assert that the Survival Period ended on the later of six months following closing or upon completion of the obligations under

section 8.2. Following closing, the parties agreed to the value of the “Loss” that was described in

section 8.2. [ 81 ] That is, the plaintiffs say that if a deficiency of the purchased Corporations in an on-going project is discovered later, it is too late to set it off. The words in paragraph 8.2(

e) are these: Upon the final determination of the aggregate dollar amount attributed to the Losses suffered or incurred by Purchaser as a result of, in respect of or arising out of Vendor’s failure to provide an accurate assessment of each Project’s percentage of completion in Vendor’s Project Assessment (whether such final determination is made pursuant to Sections 8.2(

d) or (.4) such aggregate amount shall, at the discretion of Purchaser pursuant to

Section 8.1, be set-off [sic] against Purchaser’s lease payments …. [ 82 ] But that seems to jar with the “basket” provision in

section 8.3, discussed above. It begins, As soon as reasonably practicable after becoming aware of an Indemnity Claim with respect to Skyline CGY’s liabilities and warranty obligations, including any obligation to rectify Deficient Work ... [ 83 ] The

section 8.2 “truing-up” provision provides that Thermal Systems was to prepare and deliver to the vendors a report setting out the purchaser’s determination of the percentage completion of projects, including estimated final costs for each project.

The consequence was to provide for an adjustment of the difference between the percentage completion asserted by the vendors and the ultimate determination of the percentage of completion. [ 84 ] Under paragraph 8.2(e), upon the final determination of the aggregate dollar amount attributed to the losses suffered or incurred by the purchaser as a result of the vendor’s failure to provide an accurate assessment of the percentage of completion, the purchaser was entitled either to (

a) set off against the lease or (

b) advance an indemnity claim. [ 85 ] But Thermal Systems had only 60 days to do that assessment (paragraph 8.2(

a) of the SPA). The plaintiffs say that that should have included finding latent defects which, in the ordinary course often can only be determined once a project is completed. [ 86 ] The plaintiffs further point out that regardless of the words of the SPA, the actual “truing-up” in respect of the completion of the ongoing projects was not completed until March 2016. Since the closing date was in July of 2015, the time for the issues to be discussed ultimately was approximately eight months. [ 87 ] But Thermal Systems points out that paragraph 8.2 (

a) is very clear: the initial discoverability period regarding project

completion was 60 days after the closing date. That business provision would be unworkable if it was intended to apply to the discoverability of latent defects. [ 88 ] More to the point in a contract

interpretation dispute, on its face the words in

section 8.2 say nothing about latent defects or deficient work. The plaintiffs would say that should be read in. [ 89 ] I am trying to find harmony throughout the agreement. If the purchaser was supposed to give notice of such indemnity claim as soon as practicable after becoming aware, and the purchaser was also required to do that within the 60 day adjustment period after closing when settling up on the percentage complete (as required by

section 8.2), the result seems confusing. Why not say that more clearly, rather than having two separate kinds of notice obligations that cover the same thing? The plaintiffs argue that these provisions are not incompatible, because the 60 day period set out in paragraph 8.2 to challenge the Vendors’ assessment of percentage completion is not the end of the discussion.

There is then a Project Review Period of 30 days and further steps to be done to resolve the debate. [ 90 ] But that requires reading sections 8.2 (“Indemnity Related to Representation Regarding Project Completion”) and 8.3 (“Indemnity Related to Deficiencies for Projects”) as if they were one conjoined provision. However, sections 8.2 and 8.3 make no reference to each other. [ 91 ] On its face,

section 8.2 deals with a specific method for figuring out the accuracy of the percentage complete for the various ongoing projects, and to the extent that completion of existing projects has been misrepresented, the clause provides that the difference between what was represented and what is ultimately determined to be correct is to be addressed by way of set-off. [ 92 ] But

Section 8.3, provides a mechanism of how the other categories of claims in

section 8.1 may be set off. This deals with both

section 6.2(z)(

i) and

section 7.1(

g) claims, although not referenced by

section number or paragraph number. [ 93 ] I have quoted the opening part of paragraph 8.3(

a) above, but I will set out the part that leads up to the $50,000 threshold: As soon as reasonably practicable after becoming aware of an Indemnity Claim with respect to Skyline CGY’s liabilities and warranty obligations , including any obligation to rectify Deficient Work, pursuant to the Material Contracts entered into by Skyline CGY for those projects listed in

Schedule “S” and “W”, Purchaser will provide to the Vendor Representative with written notice of such Indemnity Claim specifying (to the extent that information is available) the factual basis for such Indemnity Claim in the amount of such Indemnity Claim (“ Deficiency Notice ”). Notwithstanding the foregoing, the Vendor Parties shall have no liability under this

section 8.3 ....[see above] (Again, the emphasis in italics is mine.) [ 94 ] The passage just quoted may be set out using some modest tabulation to clarify at least one possible reading, because the sentence is a run-on sentence and therefore easily misread. [ 95 ] This is how I read it, to allow an understanding of the entire SPA that is harmonious: As soon as reasonably practicable after becoming aware of an Indemnity Claim with respect to Skyline CGY’s liabilities and warranty obligations, including (

a) any obligation to rectify Deficient Work, pursuant to the Material Contracts entered into by Skyline CGY for those projects listed in

Schedule “S” and “W”, Purchaser will provide to the Vendor Representative with written notice of such Indemnity Claim specifying .... [ 96 ] Read this way – applying the reference to Deficient Work as being pursuant to Material Contracts, but not applying the indemnity only to Deficient Work and Material Contracts – the passage is in alignment with the indemnity set out in paragraph 7.1(g) (which says the indemnity applies “whether or not pursuant to a Material Contract”) and the general right to set off set out in

section 8.1. Furthermore, it is consistent with the definition of “Deficient Work”, which applies only to a Material Contract. [ 97 ] The passage that I have emphasized with italics makes it clear that it only applies to an “Indemnity Claim with respect to Skyline CGY’s liabilities and warranty obligations”. That presumes that there must first be a claim that Thermal Systems has become aware of, and must deal with as the owner of Skyline CGY, and then it may advance an Indemnity Claim. [ 98 ] The words “Indemnity Claim” are defined as having “the meaning ascribed thereto in

Section 7.3.” A review of

section 7.3 reveals that an Indemnity Claim is a claim by Thermal Systems under the SPA, as opposed to a claim by a customer of Skyline CGY. However, it is not simply any “Indemnity Claim” that

section 8.3 applies to, but “an Indemnity Claim with respect to Skyline CGY’s liability and warranty obligations”. [ 99 ] That suggests, at least, that someone – presumably a customer of Skyline CGY – has asserted that Skyline CGY has some liability and warranty obligation, because if a deficiency is discovered before an on-going project is complete, the contractor – Skyline CGY – does not yet have a liability or warranty obligation (unless there is a structural concern and possible or actual failure before completion) because the job has not, in the ordinary course of construction, yet been turned over to the owner.

Once it has become aware of the liability, Thermal Systems is to advance am Indemnity Claim. [ 100 ] Another analysis supports this reading of the SPA. In interpreting contracts, courts prefer to find meanings that are not absurd, or at least if there are two alternative

interpretations, the courts avoid choosing meanings that are very unlikely to have been intended by reasonable parties. [ 101 ] In reality, Thermal Systems could not have foreseen deficiency claims not yet advanced by customers. Finding latent defects in partially-completed jobs in the 60 days following closing, or the dispute resolution period that followed, would require clairvoyance.

Nonetheless, the plaintiffs argue that the possibility of such claims and their extent could somehow have been negotiated during the period following the closing date. [ 102 ] The plaintiffs argue in response that the question is not what might have been foreseen, but rather what was represented, and whether the indemnity for warranty claims is affected by any representations in the SPA. [ 103 ] The plaintiffs refer to

section 7.3 (“Limitations on Indemnity”), which sets out a deadline for advancing a claim for any Losses by either the Purchaser Indemnified Parties of the Vendor Indemnified Parties for indemnification pursuant to

Section 7.1 or 7.2. But the operative words are these: [N]o Indemnity Claim may be made or brought by the Purchaser Indemnified Parties pursuant to

Section 7.1(

a) unless Notice of such claim has been made ... on or before the date upon which the relevant representation and warranty to which such claim relates expires in accordance with

section 6.6 ... (My emphasis.) [ 104 ] This provision has no application to the indemnity claim we are dealing with. The indemnity claims now advanced are not ones pursuant to the general “reps and warranties” provision in paragraph 7.1(a). The “Warranty Indemnity” that is referenced here by Thermal Systems is the type of claim listed in paragraph (

g) of

section 7.1. [ 105 ] I conclude that the concept of a “Survival Period” has no application to paragraph 7.1(g).

Section 6.6 says that the Survival Period concept applies to the representations and warranties “contained herein.” [ 106 ] These claims are not in respect of the various reps and warranties set out in the SPA. [ 107 ] There are, of course, limitation periods in play, but they are the limitations that arises because of the ordinary operation of law, under the Limitations Act . Alternative Argument [ 108 ] Thermal Systems advances an alternative argument. This indemnity claim does not rely on paragraph 7.1(g). [ 109 ] Paragraph (

e) of the definition of “Survival Period” says that for “the representations and warranties in

section 6.2(z)(i) [the rep and warranty of Material Contracts being in good standing], and the liability and indemnity obligations of the Vendor Parties related thereto [is] five (5) years from the Closing Date.” [ 110 ] Thermal Systems asserts (under this alternative argument) that three of the claims set out at paragraph 28 of the affidavit of Trevor Kent (1, 4 and 9, relating to on-going projects) are claims under

section 7.1(a) – that is, they relate to the representation under subparagraph 6.2(z)(

i) of the SPA that none of the corporations are in default or breach of any of its obligations under any Material Contracts. It is also a claim under the same sub-paragraph, “to the knowledge of the Vendor Parties, there exists no state of facts that, after notice or lapse of time or both, would constitute a material default or breach of such Material Contracts.” [ 111 ] Accordingly, for this alternative argument, it is helpful to consider the definition of “Material Contracts”. This takes us to the conjunctive/disjunctive debate that I mentioned above. [ 112 ] Plaintiff’s counsel conceded that the definition of “Material Contracts” must include those contracts listed on

schedule “E”, but he argued that any other contracts, not listed on

Schedule “E”, could not be a Material Contract because of the use of the word “and” in a conjunctive, not disjunctive, sense at the end of paragraph (

g) of the definition. Of course, reading the agreement this way seems on its face illogical, because that would mean that the listed contracts on

Schedule “E” are Material Contracts, even though they could not comply with the balance of the definition (as I will explain). [ 113 ] It requires accepting that for an agreement to be a “Material Contract” as described in the list, it would have to be (for example) one that “relate[s] to any independent contractors or consultants of the Businesses” that it also “contain any material restrictive covenants binding on the Businesses or the Corporations”, and that it relates to the projects listed in

Schedule “S” (completed) or

Schedule “W” (ongoing). [ 114 ] These are completely separate concepts that simply do not belong together, and if the plaintiffs intended the definition of Material Contracts only to be those listed on

Schedule “E”, there would be absolutely no purpose in listing requirements (

a) through (h). Those provisions would be redundant and apparently designed to confuse. Plaintiffs’ counsel conceded as much. [ 115 ] More importantly, as pointed out by counsel for Thermal Systems, there is more than one critical “and” in the definition, and according to the approach taken by the plaintiffs they must both be conjunctive. A literal

interpretation of the definition this way leads to the conclusion that a Material Contract must be one listed on

Schedule “E” and must comply with all of the requirements in paragraphs (

a) through (h), which would be an absurd

interpretation and even that

interpretation is not what the plaintiffs assert. The plaintiffs’ assertion requires the reading of the first “and” as if it said “or”, but they insist that the second “and” must not be read as if it were “or” on the premise that “and” does not mean “or”. [ 116 ] I note that there is another critical “and” in the definition. In paragraph (g), which sets out the requirement that a Material Contract is one which “relate[s] to the projects listed in

Schedule “S” and

Schedule “W”. According to the approach urged by the plaintiffs, this would mean that to be a Material Contract it must relate to both on-going and completed contracts. [ 117 ] The context clearly indicates that this is not what was intended. [ 118 ] Case law on this point is clear: whether connecting words like “and” and “or” are to be read conjunctively or disjunctively

requires an understanding of the context: London Drugs Ltd v Red Deer (City), (AB KB), 1987 CarswellAlta 209,[1987] 6 W.W.R. 588 at para. 19, citing Clergue v H H Vivian & Co, (SCC), 41 S.C.R. 607 at 617 (1909). [119] In my view, the word “and” was used because, in a broad approach to the definition, it means that all of the things listed areMaterial Contracts: those listed on

Schedule “E”, and those identified in paragraph (a), and those identified in paragraph (b), and thoseidentified in paragraph (c), etc. Read this way, the word “and” is, technically, conjunctive, but the effect is disjunctive. A MaterialContract can be one listed in

Schedule “E” or one described in the list. [120] Accordingly, in my view the correct reading is, in effect, “Material Contracts are those listed on

Schedule “E” and those: [(a)through (h)].” [121] I return to the discussion of the alternative argument advanced by Thermal. It underscores the difference in the ways theplaintiffs and the defendant read subparagraph 6.2(z)(i). For convenience, I will set it out again: None of the Corporations are in default or breach of any of its obligations under any Material Contracts, and to the knowledge of theVendor Parties, there exists no state of facts that, after notice or lapse of time or both, would constitute a material default or breach ofsuch Material Contracts.

For clarity, a material default shall include Deficient Work. [122] The plaintiffs read this as if “to the knowledge of the Vendor Parties” applies to the first part of the sentence. That is not howthe defendants read this passage. I will insert tabulation, but without changing the punctuation, to clarify the defendant’s reading: (

a) None of the Corporations are in default or breach of any of its obligations under any Material Contracts, and (

b) to the knowledge of the Vendor Parties, there exists no state of facts that, after notice or lapse of time or both, wouldconstitute a material default or breach of such Material Contracts.

For clarity, a material default shall include Deficient Work. [123] The word “and” following the comma, leading into “to the knowledge” tends to suggest that Thermal System’s reading iscorrect. [124] When read this way, it is clear that the representation in 6.2(z)(i) (dealing with the state of affairs) has two components: firstly,that the Corporations are not in default of their obligations under any Material Contracts; and secondly, the vendors are not aware of anyfacts that would constitute a material default. [125] This alternative argument functionally leads to the same result in this case.

The representations are expressly stated by section6.6 to be true as at closing, but also to survive closing, and “shall continue in full force and effect for the benefit of vendor or purchaser,as applicable, for the applicable Survival Period”. [126] The definition of “Survival Period” says in paragraph (

e) that with respect to the representations and warranties set forth insection 6.2(z)(

i) the “survival Period is five years from the Closing Date. [127] Therefore, under this alternative argument, the “Survival Period” is five years, and the claims advanced now are not out of time.The claim for indemnity was made long before the expiry of five years. [128] Accordingly, the representation that none of the corporations are in default under any of its obligations under any materialcontracts was meant to survive closing for five years. “No Duplication in Recovery” [129] Counsel for Thermal Systems addressed the argument made by the plaintiffs regarding the wording in

section 8.1 aboutpreventing “no duplication in recovery by Purchaser”. The plaintiff argues that it somehow applies to “truing up” the percentage ofcompletion assessment that occurred after closing, on the premise that the purchaser should have factored in the deficiencies. Theargument is that if Thermal is allowed to agree on the Losses that result from the truing-up pf the percentage completion and also isallowed to claim for deficiencies, that is a kind of double recovery. [130] That is simply not how I read that part of the agreement.

The provision deals with the election to set off rights or to advance anindemnity claim. That is, the purchaser could recover its entitlement in one of two different ways: it is not entitled to both set off andthen advance an indemnity claim as well. That would be a “duplication in recovery”, and that is what the final words of

section 8.1 areintended to prevent. It is impossible to track that wording into

section 8.2, the provision dealing with the assessment of percentagecompletion. “No Opportunity to Review Deficiencies” [131]

Section 8.3 is the “basket” provision that deals with claims advanced “as soon as reasonably practicable after becoming aware”.The plaintiffs now assert that they lost the opportunity to review the alleged deficiencies because of the passage of time. ThermalSystems argues that this submission has no legs. [132] Thermal Systems submits that it did tell the plaintiffs about the warranty claims on the on-going work “as soon as reasonablypracticable after becoming aware” of them. The plaintiffs did nothing on a couple of them for 12 months. [133] Exhibit “K” to Mr.

Zerr’s affidavit is an email of July 7, 2016, made within 12 months of closing setting out a complaint,exhibit “L” is an email of August 22, 2016 setting out another complaint, and this one says, “We need to discuss. This is a very big issue.

Please call me”. Exhibit “J” is an email of August 28, 2016 setting out a formal list of all of the deficiencies. [ 134 ] Exhibit 5 to Mr. Kent’s affidavit sworn August 31, 2018, is an email of July 24, 2017 - almost a year after formal notice was given of the deficiencies - requiring a resolution under

section 8.4 of the SPA. [ 135 ] The plaintiffs had the opportunity to review the Deficiency Notice, pursuant to paragraph 8.3(b), within 30 days, but did not. Accordingly, the argument that the plaintiffs were denied a right to review the claims rings hollow. [ 136 ] Furthermore,

section 8.3 is a paper review only. It allowed the vendor doors to “have access to the relevant books and records” for the purpose of reviewing the deficiency notice to prepare any objections. There was no entitlement, and there could be no entitlement, to allow the vendor parties to attend at premises where work had been done (perhaps years before) on property owned by third parties. [ 137 ] If the plaintiffs wanted to review the Deficiency Notice in accordance with the SPA, they certainly could have.

The Lease [ 138 ] The issue in connection with the lease is that there are tenant’s improvements that the plaintiffs say were required to be done by Thermal Systems, and a tenant’s improvement allowance was made available to contribute to the cost of their construction. [ 139 ] The difficulty with the lease is that there is some inconsistent drafting. That has led to the dispute between the parties. [ 140 ]

Section 7.3 is the part of the lease that addresses tenant leasehold improvements. It first provides that the tenant will not construct anything in the premises in excess of $50,000 without the landlord’s consent, and then goes on to say that notwithstanding that provision, the landlord consents to “the tenant’s proposed improvements set out in

Schedule E”.

Section 7.3 goes on to describe it once again as “ proposed work”. These words do not appear in a proposal to enter into the lease – they appear in the lease. [ 141 ] This provision in the lease, standing by itself, does not contain any mandatory obligation by the tenant to do any of the things in

Schedule “E”. It is an acknowledgement by the landlord that things on

Schedule “E” are consented to in principle, provided that the tenant complies with certain requirements such as providing drawings and specifications for approval, using contractors and subcontractors that the landlord has consented to, and other standard requirements. [ 142 ] The conflict arises because

Schedule “E” contains words which appear to be mandatory. If read alone, they would be. The Plaintiffs say they should be read as meaning what they say. Thermal Systems says they must be read in light of the provisions in the text of the lease itself. It is all one agreement. [ 143 ] The answer to this debate requires the Sattva Capital Corp v Creston Moly Corp approach of reading the whole agreement and trying to place the words in context. [ 144 ]

Schedule “E” is headed, “Landlord’s and Tenant’s Work”.

Section 1 sets out the landlord’s obligations to inspect, repair, and maintain various things prior to the lease commencement date such that the premises are properly operational. [ 145 ]

Section 2 says, “Tenant shall undertake the following improvements to the premises:” and then it lists various work to be done. Thermal Systems points out that the landlord reads the word “shall” in the

Schedule as effectively overriding the word “proposed” that appears twice in the text of the lease itself. [ 146 ] Normally, commercial leases refer in the text of the lease itself to particular schedules and the provision in the lease clearly incorporates the

schedule in some way into the lease. [ 147 ] On the third page of the table of contents, there is a list of the schedules, but the only express wording saying that any

schedule is incorporated into the lease appears in

section 12.12 in the “General Provisions” part of the lease. It says, under the heading “Additional Provisions”, “Those provisions, if any, set out in

Schedule A will form part of this lease.” [ 148 ]

Schedule A is headed “Additional Provisions”, and it sets out an option to renew, it makes reference to the set-off rights in the SPA, and it contains various other provisions that could easily have been included in the text of the lease. [ 149 ] There is no other equivalent provision in the lease formally incorporating

Schedule “E” to the lease – there are only two oblique references to “incorporate” it: the reference to it in

section 7.3, which speaks of “proposed amendments”; and the list of schedules on the third page of the table of contents. [ 150 ] In the “Additional Provisions” listed on

schedule “A” – which is expressly incorporated –

section 3 addresses adjustments to rent. Sub-paragraph 3(a)(ii) deals with the tenant improvement allowance. It makes reference to

Schedule “E”. It says this: The Landlord shall make available to the Tenant an improvement allowance not to exceed the sum of $1,200,000.00 which shall apply towards the installation of office and washrooms including water and sanitary utility and service connections to the storage building on Lot 2, and towards Tenant improvements to the main building on Lot 1, or such improvements as set forth in

Schedule “E”. [ 151 ] I have emphasized the word “or” near the end. [ 152 ] The balance of the provision says how the tenant improvements allowance is to be paid – by a set-off against the basic rent payable by the tenant.

It goes on to provide that two years from the date of the commencement date the tenant is required to provide to the landlord documentation as to the total amount of the tenant improvements; and to provide a statutory declaration that the “Tenant’s Work is substantially complete and has been performed in accordance with the plans approved by the landlord”, setting out the total amount paid by the tenant to perform the “Tenant’s work”, stating that the tenant’s contractors have been paid in full, and that there are

no builders’ liens, certificates of lis pendens or other encumbrances registered in respect of the “Tenant’s work”. [ 153 ] Despite the use (although inconsistent) of capitals in referring to “Tenant’s Work”, which suggests that it might be a defined term, it is not. It is only mentioned in the heading to

Schedule “E”, which I have quoted above: “Landlord’s and Tenant’s Work”. [ 154 ] The plaintiff argued that “Tenant’s Work” is defined in the lease, because it appears in the title to

Schedule “E” to the lease, however this is problematic in light of

section 1.11 of the lease, which provides that, “Headings are for the convenience of reference only.” [ 155 ]

Schedule “A” was amended by a Lease Amending Agreement dated February 23, 2016. The passage quoted above was not changed. What was added was an entitlement by the landlord to simply pay out the tenant improvement allowance in whole or in part at any time. There was no reference to any accounting if the improvements listed on

Schedule “E” were not done. [ 156 ] Accordingly, the only words that suggest or say that the tenant is required to do all of the things listed on

Schedule “E” is the wording on

Schedule “E”. The text of the lease does not mandate the improvements and in fact it suggests otherwise.

Schedule “A”, dealing with payment by set-off, says the allowance is for office and washrooms, improvements to the main building or the improvements set out on

Schedule “E”. That alternative is a little confusing because some of the things on

Schedule “E” are “Offices”, and “Shops Washrooms” and there is a reference to under the heading “Building ... on Lot 2” under which there is a separate paragraph saying, “Add full services, plus washrooms and office space.” [ 157 ] Nonetheless, there was some kind of alternative suggested in subparagraph 3(a)(ii), and that suggests something less than a mandatory obligation to do the things described on

Schedule “E”. [ 158 ] But there is more to the analysis. [ 159 ] The provisions dealing with payment of the tenant improvement allowance by set-off, set out in

Schedule “A”, provide that the basic rent is to be reduced initially by $10,000 per month for the first two years.

After the two years, once the total cost is known, the following adjustment is to be done: The actual monthly prorated amount shall then be calculated, taking into account the Initial Tenant Improvement Set-Off, and the remaining amount of Tenant Improvement Allowance shall be amortized and deducted for the balance of the term from the basic rent payable by the tenant. (My emphasis.) [ 160 ] In essence, counsel for Thermal Systems argues that all of these provisions read together effectively say that if the tenant has not spent the $1,200,000 tenant improvements allowance within two years, then the balance of the tenant improvement allowance not yet set off is to be reduced to reflect the amount actually spent, and the balance beyond the first $240,000 will be amortized and deducted for the balance of the term. [ 161 ] Nothing in the lease says that the cost of the tenant improvements not constructed is to be valued and somehow factored into this calculation.

The fact that there is no such provision offers some illumination on the meaning of the word “shall” in

Schedule “E”, being the only provision that the plaintiffs can point to indicating that all of the listed improvements were required to be done, regardless of the cost, regardless of the need. If the tenant were actually required to do all of the proposed improvements, then one would expect that the lease would provide some way of adjusting for its failure to do that.

But all it provides for is an adjustment if the tenant does not spend $1,200,000. [ 162 ] Thermal Systems says that they are tenant’s improvements, not landlord’s improvements, and it make no difference to the landlord at this time, and it may never make any difference to the landlord because the lease is potentially such a long lease with renewals. [ 163 ] This takes us to the next level of analysis. The amendment to

Schedule “A” allows the landlord to simply pay out the tenant improvement allowance earlier, in whole or in part. The fact that it negotiated that right suggests that it did not matter to it if every improvement in

Schedule “E” was done or not. [ 164 ] I make an assumption here to understand why the landlord might want to pre-pay amounts that otherwise it would “pay” by rent deduction over a period of years. The intent must have been to allow it to sell the building with the face rate shown on the lease for rent, with no remaining deduction for the tenant improvement allowance. Commercial buildings are valued largely by their income-earning potential. The rent is capitalized to determine the value.

If this was the intent here, as it seems, complaints about the failure to add the washrooms and other items would not, in fact, change the value to the landlord, as long as the rent continued. [ 165 ] Finally, the list of things set out on

Schedule “E” are not well defined. If the intent was for the tenant to build something to comply with the terms of the lease, one would need sufficient specifications to know when the agreement had been satisfied. Words such as “Alter the second floor for useable space” and “Items such as make up air, HVAC etc. for areas outside the offices may need additional work to meet Tenant’s requirements”, being examples of the lack of specificity that we see on

Schedule “E”, are not likely to have been intended to create a contractual obligation. There is no certainty. [ 166 ] In the circumstances, I conclude that the correct reading of the lease, as a whole, in an attempt to find the most harmony, is to read the references to tenant’s improvements as being what the words suggest: an allowance to contribute to the cost of modifying the buildings as proposed, with no commitment to spend anything at all, but if the tenant did not spend at least $1,200,000, then the tenant’s improvement allowance would be reduced accordingly. The “Expert” Reports

[ 167 ] In case I am wrong about the obligations regarding the tenant’s improvements, I address the reports from Altus Group. [ 168 ] Without a provision allowing the landlord to make the adjustment that it made, it retained Altus Group Limited to provide two reports, one assessing the cost of construction of the things on

Schedule “E” that were not done and another analyzing how the rent set- off should be adjusted to reflect those costs. [ 169 ] The explanation of why the landlord did this is that there is a kind of dispute resolution clause in the lease. However, it does not provide for the appointment of an arbitrator and a hearing, as one might expect. The provision is somewhat oblique. [ 170 ] When a dispute over tenant improvements arose, Thermal Systems sent the landlord an email specifically referring to this clause,

section 1.4 of the lease, which provides as follows: Dispute Resolution Where the Landlord is obliged to refer any dispute or question to an auditor, real estate appraiser or other expert experienced in assessment appeals, surveyor, engineer, architect, insurance consultant, or other professional: (

i) the Landlord will select a person who is at arm’s length from the Landlord, except that the Landlord may use its external auditor and other arm’s-length persons with whom the landlord has dealings, (ii) that person’s decision or determination will be conclusive and binding on the Landlord and Tenant, and (iii) each of the Landlord and Tenant will pay 50% of that person’s fees and disbursements. [ 171 ] One report by Altus Group was dated October 10, 2017 prepared by a “Senior Cost Consultant”.

He concluded that the total cost of those tenant improvements that had not been done was $372,000. [ 172 ] The other report was also dated October 10, 2017, and it was prepared by an appraiser dealing with the “base rent set off” in an attempt to determine the appropriate set-off that should have been made, given the fact that not all of the tenant improvements had been constructed. [ 173 ] The second report does not deal with the way the lease was drafted.

The $10,000 monthly deduction from rent was to occur for the first two years, and thereafter an adjustment would be made if the full $1,200,000 had not been spent. If we assume that the tenant improvement allowance was to be reduced by $372,000, then the balance of the allowance not yet deducted, of $960,000 (being $1,200,00 less $240,000 deducted over two years) would be adjusted. There would be no retroactive “deduction.” [ 174 ] But as I have concluded, the lease, when read as a whole, does not make the listed tenant improvements mandatory.

The landlord was not paying for those improvement to its property for $1,200,000, regardless of what the total costs was. This is effectively what it argues now. It was making an allowance of $1,200,000 available to the tenant towards the construction of certain improvements which it had already authorized in principle, subject to the appropriate approvals of specifications, etc. [ 175 ] In my view, the email from the tenant referring to

section 1.4 of the lease when the tenant’s improvement dispute arose was an error. That dispute resolution

section was simply not in play.

Section 1.4 did not deal with contractual entitlements set out in the lease, that is, contract

interpretation. It had a very limited function. Pleadings and Application [ 176 ] Thermal Systems argues that some of the relief sought by the plaintiffs were not in the original application. The plaintiffs argue that Thermal System’s concerns should carry no weight. Reference is made to Pyrrha Design Inc v Plum and Posey Inc , 2016 ABCA 12 , where

summary judgment was granted in favour of the respondent, which had not filed a formal application.

Accordingly, when the issues have been fully fleshed out, are addressed in detail in the briefs, the absence of detail in the original application should not be the governing factor here. [ 177 ] Thermal Systems further argues some of the relief now sought was not in the statement of claim, and a proper pleading is the foundation for the action. [ 178 ] In light of my decision, the complaints are effectively moot, but in my view, Pyrrha Design and the Foundational Rules of the Alberta Rules of Court are the answer to these complaints by both sides. Both sides have been having these debates for some time.

Both provided detailed briefs. Arguments were spread over two separate days. Both sides knew what the other’s position was and they have had an ample opportunity to respond. [ 179 ] Rule 1.2(3) says this:

(3) To achieve the purpose and intention of these rules the parties must, jointly and individually during an action, (

a) identify or make an application to identify the real issues in dispute and facilitate the quickest means of resolving the claim at the least expense… [ 180 ] In a special application such as this with briefs and reply briefs served in advance, complaints about some technical defect in a pleading or in the application filed by the other side fade quickly in importance. If an amendment were necessary, it would likely be granted so that the pleadings properly reflect what the parties knew were the issues. No one has been prejudiced by an irregularity for this application.

I will leave it to the parties to determine whether an amendment to the pleadings is required to address other aspects of the case. Conclusion

[ 181 ] The applications for partial

summary judgment are allowed (by the defendant) and dismissed (by the plaintiffs) accordingly. [ 182 ] If the parties are unable to agree on costs, they may contact the masters’ chambers clerk for an appointment to discuss them with the Court. Heard on the 16 th and 25 th days of October and the 2 nd day of November, 2018. Dated at the City of Calgary, Alberta this 12 th day of December, 2018. A.R. Robertson, Q.C. M.C.C.Q.B.A. Appearances: Philip A. Carson Miller Thomson LLP for the Applicants/respondents (Plaintiffs) Alexis Teasdale and Lamont Bartlett Bennett Jones LLP for the Respondent/applicant (Defendant)