2017 QCCQ 12453, 2017 QCCQ 12453

2959381 Canada inc. c. 2959399 Canada inc. 2017 QCCQ 12453 COURT OF QUEBEC Small Claims Division CANADA PROVINCE OF QUEBEC DISTRICT OF MONTREAL Civil Division No: 500-32-155757-174 DATE: October 23, 2017 ______________________________________________________________________ BEFORE THE HONOURABLE ENRICO FORLINI, J.C.Q. ______________________________________________________________________ 2959381 CANADA INC. Plaintiff v. 2959399 CANADA INC.

Defendant ______________________________________________________________________ JUDGMENT ______________________________________________________________________ [ 1 ] 2959381 Canada Inc. (Markco) claims from 2959399 Canada Inc. (Gordonco) $6,245.51 [1] which it claims is due pursuant to a share and loan purchase agreement. [ 2 ] Gordonco denies all liability and argues that it was entitled to set off this amount against other amounts owed to Markco under the agreement. Questions in Issue

a) Are the civil penalties paid by Pearlmark to the U.S. Department of Commerce to settle Cases # NE110056 and # NE1103161B ‘’Tax’’ liabilities for the purposes of

section 6.2 of the Share Purchase Agreement? Context [ 3 ] Pearlmark Food Inc. (Pearlmark) is a company doing business in the importation of fish and seafood products. Up to March 2012, Markco and Gordonco each owned 50% of the issued and payed up shares in the capital of Pearlmark. [2] [ 4 ] On March 6, 2012, 2012, Gordonco and Markco entered into a Share Purchase Agreement whereby Markco sold to Gordonco all its shares in Pearlmark, and in return, Pearlmark agreed to pay to Markco, on behalf of Gordonco, $875,000.

This amount was to be paid as follows: $250,000 on closing and the balance ($625,000) to be paid by way of 36 equal, consecutive monthly payments of $17,361.11. [3] [ 5 ] On March 7, 2014, the United States Department of Commerce, National Oceanic and Atmospheric Administration, issued in case # NE110056 a Notice of Violation (Notice) against Pearlmark alleging that in November 2010, the company violated the Antarctic Marine Living Resources Convention Act of the United States of America by importing approximately 24 648 pounds of frozen Patagonian tooth fish without a valid permit (“Case # NE110056”). [4] Pearlmark was assessed an administrative monetary penalty of $5,750 US in the Notice. [ 6 ] On March 10, 2014, Pearlmark entered into a settlement agreement with the U.S.

Department of Commerce with respect to Case # NE110056 and agreed to pay a civil penalty of $5,175 US. [5] This penalty was paid on August 8, 2014. [6] [ 7 ] On December 17, 2012, the U.S. Department of Commerce, National Oceanic and Atmospheric Administration, issued in case # NE1103161B a Notice of Violation against Pearlmark in which it alleges that on or about March 24, 2011, Pearlmark violated the Antarctic Marine Living Resources Convention Act of the United States of America by re exporting 1,130 kilograms of frozen tooth fish from the U.S.A. without a valid dealer permit.

It was assessed a civil monetary penalty of $6,500 US (“Case # NE1103161B”) [7] . [ 8 ] On January 23, 2013, Pearlmark entered into a settlement with the U.S. Department of Commerce with respect to Case # NE1103161B and agreed to pay a civil penalty of $6,500 US. [8] In February 2013, Pearlmark paid the civil penalty of $6,500, which, when converted to Canadian funds, amounts to $6,663.16. [9] [ 9 ] In

summary, Gordonco paid civil penalties of $6,500 US ($6,663.16 CAN) to settle Case # NE1103161B and $5,175 US ($5,827.86

CAN) to settle Case # NE110056, for a total of $12,491.02 CAN. Relying on sections 6.7 and 6.2 of the Share Purchase Agreement,Gordonco deducted 50% of this amount, namely $6245.51, from one of the monthly payments of $17,361.11 it owed to Markco.[10] [10] Marko argues Gordonco was not entitled to set off this amount from the purchase price of the shares and hence seeks recoveryof $6,245.51. Analysis and Decision

a) Are the civil penalties paid by Pearlmark to the U.S. Department of Commerce to settle Cases # NE110056 and #NE1103161B ‘’Tax’’ liabilities for the purposes of

section 6.2 of the Share Purchase Agreement? [11] Gordonco relies on Sections 6.2 and 6.7 of the Share Purchase Agreement to withhold/set-off $6,245.51 from Markco. Theseprovisions of the Agreement state as follows: 6.2 Indemnification by Mark and Markco. Subject to

Section 6.1 hereof, Mark and Markco, hereby waiving the benefits of divisionand discussion, do hereby agree to be solitarily liable to Gordonco and Pearlmark, and Mark and Markco shall solidarily defend,indemnify and hold Gordonco and Pearlmark harmless, against any and all Losses, arising out of or related to the following: (

a) the breach of any agreement, covenant, representation or warranty of any of Mark of Markco contained in the Agreement or in anydocument required to be provided by any of Mark or Markco to Gordonco or Pearlmark hereunder; (

b) fifty percent (50%) of any and all Tax liabilities (including any interest and penalties) assessed or reassessed against Pearlmark andarising from, caused by, on account of, or attributable to any matter, cause or thing, up to and including August 4, 2011; 6.7 Set-off. The Parties agree that Pearlmark will be entitled to set-off any Losses that Mark or Markco is required to indemnify pursuantto this

Section 6, and/or any amounts due to Gordonco pursuant to

Section 6 against any amount owing by Pearlmark to Markco. Set-offmay also be applied, at the sole discretion of Pearlmark, to the upcoming monthly payments due by Pearlmark (on behalf of Gordonco)pursuant to Subsection 3.2(

b) hereof, until fully repaid. (Underlining added) [12] Gordonco argues that the civil penalties paid by Pearlmark to the U.S. Department of Commerce to settle Cases # NE110056and # NE1103161B constitute a “Tax” liability under

section 6.2(

b) of the Share Purchase Agreement and therefore, it was entitled toset-off 50% of what it paid in penalties as against the monthly purchase price payments.[11] [13] Markco argues that Gordonco was not entitled to set-off this amount as the civil penalties paid by Pearlmark do not constitutetax liabilities for the purposes of

section 6.2(

b) of the Share Purchase Agreement. [14] The term ‘’Tax’’ in

section 6.2(

b) of the Share Purchase Agreement is defined in

section 1.1 of the Agreement as follows: 1.

INTERPRETATION 1.1

Definitions.

In this Agreement, except where the context otherwise requires, the following terms shall have the following meaningsrespectively: […] (v) ‘’Tax’’ or ‘’Taxes’’ means any tax (including, without limitation, any tax on income, capital, excise, GST, goods and services,value, added), duty, stamp, deduction, deduction at source, charge, assessment, fees or costs of any nature (including without limitation,any interest, penalty or additional costs relating thereto) imposed by any competent authority. [15] To resolve the issue between the parties, this Court must first decide whether the civil penalties paid by Pearlmark to settleCases # NE110056 and # NE1103161B constitute a “Tax” as this term is defined in the Share Purchase Agreement.

If one or both does,then the Court must also decide whether the “Tax” liability arises from, was caused by, or was on account of any matter up to andincluding August 4, 2011; [16] The Share Purchase Agreement is governed by the Civil Code of Québec.[12] The principles of

interpretation of contracts areset forth in articles 1425 to 1432 of the Civil Code of Québec (C.C.Q.). [17] However, before resorting to these rules of

interpretation, the Court must first determine whether the words contained in thedefinition of ‘’Tax’’, as the term is defined in the Share Purchase Agreement, are clear or ambiguous. If the terms of the contract areclear, the Court must not resort to the principles of

interpretation that are set forth in articles 1425 to 1432 C.C.Q., but rather must simplyapply the terms of the contract to the facts of this case. It is only where the terms are unclear that the court must go on to the second stepof contractual

interpretation and apply the rules of articles 1425 to 1432 C.C.Q. [18] These rules of contractual

interpretation were recently expressed as follows by the Supreme Court of Canada in Uniprix inc. v.Gestion Gosselin et Bérubé inc.[13]: [34] The first step in interpreting a contract is to determine whether its words are clear or ambiguous (Droit de la famille — 171197,2017 QCCA 861, at para. 62 ; Samen Investments Inc. v. Monit Management Ltd., 2014 QCCA 826, at para. 46 ). Thepurpose of this step, which some authors refer to as the clear act rule (règle de l’acte clair) (Gendron, at p. 27), is to prevent judges fromdeparting, deliberately or unexpectedly, from a clearly expressed intention of the parties.

In short, a judge must defer to a clear contract.This step thus [translation] “‘serves as a bulwark’ against the risk of an

interpretation that deviates from the true intention of the partiesand subverts the scheme of their agreement” (Baudouin and Jobin, at No. 413 (citation omitted); see also Lluelles and Moore, atNo. 1570). [35] Although this step is based first and foremost on a reading of the words themselves, it is not necessarily limited to that in every case,

as there may be situations in which a contract’s language is not faithful to the parties’ common intention (Lluelles and Moore, atNo. 1574; Droit de la famille — 171197, at para. 62).

Indeed, [translation] “[w]hen considered in the context of the agreement’s otherclauses or of the circumstances in which it was concluded, the seemingly clear words of a clause may [sometimes] prove to beambiguous and to be inconsistent with the scheme of the contract, the true intention of the parties” (Baudouin and Jobin, at No. 413; seealso Lluelles and Moore, at Nos. 1572-74; Tancelin, at No. 316; Gendron, at pp. 27, 31 and 34; Éolectric inc. v. Kruger, groupe Énergie,2015 QCCA 365, at paras. 18-19 ; Rouge Resto-bar inc. v.

Zoom Média inc., 2013 QCCA 443, at paras. 78-79 ).Likewise, a clause that might be perceived to be ambiguous may be perfectly clear when considered in its context. [36] If the words of the contract are clear, the court’s role is limited to applying them to the facts before it. If, on the other hand, thecourt identifies an ambiguity, it must resolve the ambiguity by proceeding to the second step of contractual

interpretation (Baudouin andJobin, at No. 413; Lluelles and Moore, at Nos. 1584-86; Samen Investments, at paras. 46-47). The distinction between these two stepscan be difficult to see, but it is fundamental. At the first step, the judge might, for example, consider the context of the conclusion andperformance of the contract in order to confirm that its language is clear (see e.g. Habitations Gilles Stébenne inc.. v. 9166-9929 Québecinc.., 2016 QCCS 2953, at paras. 34 and 41-47 ).

In principle, however, the judge should not have recourse to the principles ofinterpretation set out in arts. 1425 to 1432 of the Code (Baudouin and Jobin, at No. 413; Lluelles and Moore, at No. 1571). In this sense,the

interpretation of the contract is more superficial at the first step than at the second (Lluelles and Moore, at No. 1572). [19] In the instant case, and relying on the principles of contractual

interpretation that are outlined in the Uniprix decision, the Courtconsiders that the terms of the definition of “Tax” as defined in the Share Purchase Agreement are clear. Hence, the Court should notresort to the second step of contractual

interpretation and need not apply rules of articles 1425 to 1432 C.C.Q. [20] Considering that the words of the contract are clear, the Court’s role is limited to applying them to the facts before it. [21] The definition of “Tax” in the Share Purchase Agreement is quite extensive. A “Tax” includes a tax, but also a duty, a stamp, adeduction, a deduction at source, a charge, an assessment, fees or costs of any nature imposed by any competent authority.

Moreover, theterm ‘’costs’’ is further defined to include any interest, penalty or additional costs. [22] In the instant case, Pearlmark was assessed a “civil monetary penalty” by the U.S. Department of Commerce[14] in Case #NE110056 and paid this penalty in an out of court settlement.[15] [23] Likewise, Pearlmark was assessed a ‘’civil monetary penalty’’ by the U.S.

Department of Commerce in Case # NE1103161Band paid this amount in an out of court settlement.[16] [24] Markco argues that the civil penalties paid by Pearlmark are not taxes and therefore do not come within the scope of s. 6.2(b).The Court disagrees with Markco. [25] The definition of the term “Tax” in the Share Purchase Agreement is very extensive and is not limited to a payment that relatesto a tax. The definition of ‘’Tax’’ is clear and includes fees or costs of any nature, including penalties. [26] The civil penalties paid by Pearlmark to the U.S.

Department of Commerce in Cases # NE110056 and # NE113161B are fees orcosts or penalties imposed by a competent authority and therefore fall within the scope of the term “Tax” as defined in the SharePurchase Agreement. [27] Do one or both of these “Tax” liabilities arise from, was caused by, or was on account of any matter that occurred up to andincluding August 4, 2011? [28] According to the Notice of Violation in Case # NE110056, the civil penalty paid to settle this case arises from an incident whichoccurred on November 16, 2010.[17] [29] According to the Notice of Violation in Case # NE1103161B, the civil penalty paid to settle this case arises from an incidentwhich occurred on March 24, 2011.[18] [30] Both civil penalties were paid on account of or arose from matters which occurred prior to August 4, 2011. [31] Therefore, the Court concludes that the civil penalties paid to settle Cases # NE110056 and # NE113161B are “Tax” liabilitieswithin the scope of the Agreement.

Pursuant to sections 6.2(

b) and 6.7 of the Share Purchase Agreement, Gordonco was entitled to set-off 50% of what it paid in penalties, namely $6,245.51, as against the purchase price. Hence, Markco’s claim is unfounded and will bedismissed. [32] FOR THESE REASONS, THE COURT: [33] DISMISSES 2959381 Canada Inc.’s application; [34] WITH COSTS of $250 in favor of 2959399 Canada Inc. __________________________________ ENRICO FORLINI, J.C.Q.

Date of hearing: September 5, 2017