2013 QCCQ 4279, 2013 QCCQ 4279

Advantech Wireless Inc. c. Century Services Inc. 2013 QCCQ 4279 COURT OF QUEBEC CANADA PROVINCE OF QUEBEC DISTRICT OF MONTRÉAL TOWN OF MONTRÉAL Civil Division No: 500-22-182868-110 DATE: April 26, 2013 ______________________________________________________________________ BY THE HONOURABLE SUZANNE HANDMAN, J.C.Q. ______________________________________________________________________ ADVANTECH WIRELESS INC. Plaintiff v. CENTURY SERVICES INC.

Defendant ______________________________________________________________________ JUDGMENT ______________________________________________________________________ [ 1 ] Advantech Wireless inc. (“Advantech”), which sought financing from Century Services inc. (“CSI”), is claiming the cancellation of the contract (the Terms Letter) it concluded with CSI and the reimbursement of $25,000 it paid as a processing fee. It submits CSI added a requirement, knowing Plaintiff would never have agreed to the Terms Letter if such a condition was required. CSI submits the fee is non refundable. QUESTIONS IN LITIGATION: 1 .

Was Advantech’s consent vitiated as it contends, such that the contract should be annulled and the processing fee be refunded? 2 . Did CSI violate the terms of the agreement concluded by the parties? THE EVIDENCE: [ 2 ] Advantech is involved in the design, manufacturing, marketing and sales of network technology for satellite and terrestrial wireless communication, with offices across North America and Europe and clients throughout the world. [ 3 ] Following the global financial crisis in 2007, and a decline in business, RBC asked Advantech to repay a five million dollar loan.

Advantech’s assets were subjected to an inventory appraisal for RBC, after which Advantech sought a replacement lender from non traditional lenders to provide a demand facility in the maximum amount of five million US dollars. [ 4 ] CSI, which provides asset appraisals and specialized financial services, specializing in (asset based) distress lending, was shortlisted as a potential lender. [ 5 ] Discussions began between the parties in April 2009. Advantech, assisted by legal counsel, considered certain conditions unacceptable.

Its president and CEO David Gelerman refused to provide an unlimited personal guarantee. This condition was modified as well as other conditions, including the amount of the processing fee, which was reduced to $25,000. [ 6 ] Mr. Gelerman also refused any assignment of Advantech’s receivables to CSI and any notice to its clients. He explained to CSI the importance of the non notification condition. Customers are very sensitive to its vendors’ financial stability, particularly in the electronics’ field.

If Advantech projected an image of financial distress, it would result in the loss of business since clients want to deal with a manufacturer that will finish a project, offer emergency services and honour its warranties. Mr. Gelerman explained that notification would be “the kiss of death”.

[ 7 ] For Advantech, the absence of notification was an essential, non negotiable, condition for any deal and if the engagement contained any notification requirement, there would be no question of concluding a contract. [ 8 ] Mr. Gelerman testified that CSI understood Advantech’s position. Mr. De Braga, CSI’s V.P., agreed the demand facility would be conducted through a swept lock box [1] , without notification to Advantech’s clients. [ 9 ] According to Mr. Gelerman, Mr. De Braga advised him that the Credit Committee had provided pre-approval for the lock box concept, with no notification, a fact Mr.

De Braga, in his testimony, denied. [ 10 ] Mr. De Braga was not a member of the Credit Committee, which approved loans. At the outset, he wanted traditional notification as a condition, since it allows for confirmation that account receivables are valid and will be paid. CSI occasionally concludes contracts involving a lock box. It is used when companies have a better financial situation with fewer clients but it is not the norm when dealing with companies in financial distress. [ 11 ] According to Mr. De Braga, he told Mr.

Gelerman it would be difficult to have a non notification condition approved but he would bring it to his superior and he would recommend that the loan be granted on that basis. Mr. De Braga did submit this condition to his boss, who approved it. [ 12 ] Several drafts of the agreement (the Terms Letter) were written, which ultimately included several negotiated changes, before it was signed. [ 13 ] The granting of the loan was subject to due diligence and to the Credit Committee’s approval. Mr. Gelerman claims Mr.

De Braga advised him that if there was no discrepancy between the information provided to CSI before signing the agreement and the due diligence results, the financing would be provided. [ 14 ] Mr. De Braga denied having said it was a done deal . Due diligence is an integral part of the process and not a mere formality. He had a sense of what makes a deal and thought Advantech’s request for financing would be approved. However, he maintained that he pointed out that the request was subject to the Credit Committee’s approval and that he (Mr. De Braga) had no vote.

He also pointed out that the processing fee was non refundable. [ 15 ] Mr. Gelerman reiterated the importance of the lack of notification and claimed Mr. De Braga assured him he understood the importance of this condition. Advantech signed the agreement on May 6, 2009 and paid the processing fee. [ 16 ] Due diligence was then carried out by three people over two and a half days at Advantech’s offices and continued at CSI for another week or two. The report that was prepared listed Advantech’s positive and negative aspects.

The latter included the absence of factoring, the specialized nature of its business, rendering realization difficult, the loss of money, the existence of customers all over the world and the potential that recovery on EDC would be time consuming. [ 17 ] After due diligence was completed, the report that was prepared formed part of Mr. De Braga’s submission to the four member Credit Committee. This was followed by a conference call during which Mr.

De Braga presented his report, seeking approval for this new account. [ 18 ] Some of the members raised concerns: Advantech’s sales had dropped from 100 million dollars to 69 million, with no imminent turn around. It had lost 5.9 million in 2007, 6.8 million in 2008, and projected a loss of 4.2 million in 2009. Its balance sheet was decimated. Other concerns centered on Mr. Gelerman not providing a personal guarantee, the relinquishment of CSI’s control over accounts receivable by instituting a lock box, the funds excluded from the borrowing base, etc.. [ 19 ] The Committee refused the loan.

There were too many issues raised and it considered the risk too high. Mr. De Braga was surprised the loan was denied. [ 20 ] According to Mr. Gelerman, Mr. De Braga advised him that the loan had been approved but one of the conditions could not be met. One of the Committee members was not comfortable in providing the requested financing without notification and the decision had to be unanimous. Mr. Gelerman was furious, called Mr. De Braga a shyster and told him to get out of his offices. [ 21 ] According to Mr. De Braga, he met with Mr. Gelerman and his finance V.P., Mr.

Bugatto, and advised them the Committee had turned down the financing. Mr. Bugatto contacted him and the three met again and discussed the possibility of obtaining financing if notification was included as a condition. However, Mr. De Braga’s superior rejected the proposal, with only this condition included. [ 22 ] Mr. De Braga maintained that, while the no notification clause was not included in the Terms Letter, his intention was to deliver the request for a lock box with no notification.

While this condition was problematic, he did not consider it to be a deal breaker. [ 23 ] Although Advantech desperately required funds in 2009, it continued without any relationship with a lending company. It paid RBC and its other creditors and has been profitable for the past several years. ***** [ 24 ] During trial, Defendant objected to the evidence regarding the discussions leading to the signing the agreement P-2, invoking that a contract cannot be contradicted by testimony. The evidence was allowed “under reserve ” of the objection.

The Court considers this evidence admissible; it does not contradict the terms of the Terms Letter (the written agreement). [ 25 ] Plaintiff objected to the evidence Defendant presented as to the reasons Defendant refused to provide the loan, alleging it was hearsay evidence since Mr. De Braga was not a member of the credit committee. The Court considers this evidence admissible. Mr. De Braga took

part in the discussions with the members. His evidence does not establish the veracity of the reasons advanced but simply that the motives raised by the committee led to the refusal of the loan.

ANALYSIS: [ 26 ] Advantech seeks the cancellation of the Terms Letter and reimbursement of the $25,000 fee it paid to CSI, alleging its consent was vitiated as a result of an error with respect to an essential element of the agreement [2] . Advantech submits the no notification was an essential condition [3] for it to accept financing. It signed the agreement since it was led to believe this condition, which was a deal breaker, did not pose a problem.

Had it known the condition would be refused, it would not have signed the agreement. [ 27 ] CSI submits the decision whether to grant financing is subject to the approval of the Credit Committee, whose decision is discretionary.

The processing fee, charged to cover costs involved, is non refundable. [ 28 ] The following provisions of the Terms Letter are pertinent to determine the conditions governing the granting of the loan: Based on your representations and the information provided to us, Century Services Inc. (“CSI”) subject to the successful completion of due diligence and credit committee approval is pleased to outline the terms of a Demand Operating Facility (the “Demand Facility” ) that CSI would be willing to extend to Advantech Advances Microwave Technologies Inc. and related Companies (collectively, the “Assignors” ). (…) 7.

CONDITIONS: The obligation of CSI to make the Facility available is subject to and conditional upon each of the following: approval of CSI’s Credit Committee ; (…) d)…CSI will retain the right to enter into a factoring agreement covering accounts and to notify customers. (…)

h) The Borrowers will set up a bank account to deposit all proceeds of collections and this account shall be swept daily to CSI’s account. (…) (the underlining is ours) [ 29 ] The execution of the Terms Letter does not automatically ensure that Advantech will obtain the financing it sought. The agreement clearly indicates the Demand Facility that CSI was willing to extend to Advantech was subject to both due diligence and to the Credit Committee’s approval. [ 30 ] The offer to loan is first dependant upon the results of the lender’s due diligence.

This aspect is not a mere formality but an integral part of the process that allows for a detailed evaluation of the potential borrower’s financial profile and permits CSI to determine whether or not it will provide the financing sought. [ 31 ] The importance of due diligence is pointed out in 2757800 Canada Inc . v.

Merrill Lynch Capital Canada Inc ., [4] where the Court concluded that changes could be made to the conditions set out in the parties’ agreement by the Finance Committee, based on the findings of due diligence: In final reflection on this first argument, if Revco’s position that there can be no subsequent changes to the conditions of the Commitment were accurate, what would be the purpose of due diligence? Would it not become a purely academic exercise to assess just how badly the lender had been fooled?

Business cannot be done under such circumstances. [ 32 ] In addition, as indicated twice in the Terms Letter, the Credit Committee’s approval must be obtained. This Committee has the option of approving or declining the loan.

It has sole discretion, which is not restricted in any way. [ 33 ] Accordingly, until the Credit Committee renders its decision and accepts to provide the loan described in the Terms Letter, Advantech has only a conditional commitment from CSI. [ 34 ] Advantech submits that CSI was aware of the importance that its clients not be notified that it was obtaining asset based financing and that the absence of notification was an essential condition for it to accept financing. Advantech also contends that it obtained pre-approval of this condition. [ 35 ] Mr. De Braga denied having told Mr.

Gelerman he had pre-approval of the no notification condition from the Credit Committee. He admitted he had consulted his superior with respect to this condition and had obtained his approval. [ 36 ] However, his superior was not the ultimate person deciding. While Mr. De Braga’s boss was a member of the Credit Committee, there were other members who took

part in the decision. Mr. Gelerman may have mistaken the nature of the approval given by Mr. De Braga’s superior. However, the Terms Letter is clear: the Credit Committee’s approval was required, following due diligence. [ 37 ] Advantech considers that CSI should have advised it at the outset that the loan would not be granted if there was a no notification condition. In such a case, given the importance of this condition for Advantech, it would not have signed the Terms Letter and paid the $25,000 fee. [ 38 ] Firstly, while the absence of notification was an essential condition for Advantech, it is not stipulated in the agreement. Mr. De

Braga admitted he understood the lock box would involve no notification and made his recommendations in this manner. However, his role was to recommend; he had no decision making authority, a fact he had explained to Mr. Gelerman. [ 39 ] Secondly, it was not possible to confirm whether any condition would be accepted prior to due process being carried out.

The information obtained from this process showed Advantech suffering considerable financial losses for three consecutive years, in addition to other negative financial issues raised. [ 40 ] As well, the evidence indicates that CSI does provide lock boxes without notification, when the borrower’s financial situation is better than that of Advantech and where a company has fewer clients.

Therefore, the Court cannot conclude that the absence of notification was a decision made by CSI at the outset when the agreement was signed and before due process was done. [ 41 ] Finally, Advantech claims that the sole reason for CSI’s refusal of the loan was the existence of a lock box, without notification. It points to Mr. De Braga’s suggestion that the no notification condition be removed in order to re-submit the request for financing. [ 42 ] The evidence shows there were a number of issues that concerned the Committee, and in particular Advantech’s financial profile.

The lack of notification was only one of a number of the Committee’s concerns. [ 43 ] Mr. De Braga did suggest that Advantech consider the possibility of notification but could not guarantee the Credit Committee would approve the loan even if such a condition was changed. In fact, he brought this possibility to his superior, who said the change in this aspect alone was not sufficient. [ 44 ] Advantech, which contends its consent was vitiated, has the burden of proof, which, in the view of the undersigned, has not been met.

As the Court stated in Dion vs Bachar [5] : …le Tribunal est d’avis que la défenderesse et le défendeur n’ont pas offert de preuve prépondérante utile à retenir qu’ils n’ont pas bien compris ou qu’on ne leur a pas bien expliqué le contenu des documents signés le 8 septembre 2011 et le 8 octobre 2011, leurs consentements n’ayant pas été viciés au sens du Code civil du Québec . [ 45 ] Even if Advantech’s consent was vitiated, (contrary to the undersigned’s conclusions), because of an error on a determinant aspect of the agreement, such an error is inexcusable. [ 46 ] Its president and CEO, Mr.

Gelerman, an educated and savvy, businessman, negotiated the loan agreement with assistance from legal counsel. He was aware of the agreement’s contents and it had been reviewed by Advantech’s legal department. [ 47 ] Advantech accepted to sign the Terms Letter in which the terms clearly provide that the Credit Committee has the final say on the loan. The absence of any express provision in the agreement [6] excluding notification, and the fact the Committee’s decision is discretionary and final, prevents Advantech from invoking that Mr.

De Braga’s representations incited it to believe that notification of its clients would not be required, even if such a condition constituted a principal consideration for Advantech. [ 48 ] Finally, the agreement provides that the processing fee is not refundable [7] : 11 PROCESSING FEE: Borrowers shall pay to CSI a Processing Fee upon acceptance of this terms letter by the Assignors.

CSI shall be entitled to payment from the Borrowers of a fully earned and non-refundable processing fee in the amount of CDN $25,000 plus all out of pocket expenses. (the underlining is ours) [ 49 ] Accordingly, even if the financing did not materialize, Advantech undertook to pay a non refundable processing fee [8] , charged by CSI to cover the costs of the evaluation, whether or not the loan was granted. [ 50 ] While the Court is fully cognizant of Mr.

Gelerman’s frustration and anger with the outcome of Advantech’s attempt to obtain financing from CSI, for the reasons outlined above, the Court is unable to grant Advantech the remedy it is seeking. FOR THESE REASONS, THE COURT: DISMISSES Plaintiff’s action; THE WHOLE , with costs.

__________________________________ SUZANNE HANDMAN, J.C.Q. Me Marie-Claude Martel Arnault Thibault Cléroux Attorney for Plaintiff Me Jean-François Carpentier Kugler Kandestin L.L.P. Attorney for Defendant Date of hearing: March 28, 2013