Lake Louise Limited Partnership v. Canad Corp. Date:, 2014 MBCA 61

Citation: Lake Louise Limited Partnership v. Canad Corp. Date: 20140613 of Manitoba Ltd. et al., 2014 MBCA 61 Docket: AI 13-30-08004 IN THE COURT OF APPEAL OF MANITOBA Coram: Chief Justice Richard J. Chartier Madam Justice Holly C. Beard Mr. Justice Christopher J. Mainella BETWEEN : LAKE LOUISE LIMITED PARTNERSHIP ) ) (Plaintiff) Appellant ) T. J. Hansell and ) D. A. Ripley - and - ) for the Appellant ) CANAD CORPORATION OF MANITOBA ) LTD. and CANAD INNS-CLUB REGENT ) D. G.

Hill CASINO HOTEL LTD. ) for the Respondents ) (Defendants) Respondents ) ) - and - ) ) BETWEEN : ) ) Appeal heard: LAKE LOUISE LIMITED PARTNERSHIP ) January 13, 2014 ) (Plaintiff) Appellant ) ) Judgment delivered: - and - ) June 13, 2014 ) CANAD CORPORATION OF MANITOBA ) LTD. and CANAD INNS-BRANDON LTD. ) ) (Defendants) Respondents ) CHARTIER C.J.M. Introduction and Issues [ 1 ] Beginning in 1999, the parties to this appeal entered into various agreements to construct, manage and share the profits of two hotels with video lottery terminals (VLTs) situated in Winnipeg and Brandon, Manitoba.

The joint venture operated without issue until a dispute arose in 2007 between the principals of the parties over another hotel project in Grand Forks, North Dakota. [ 2 ] After the 2007 dispute, the respondent, Canad Corporation of Manitoba Ltd. ( Canad) changed the calculation of their management fee pertaining to revenues from VLTs situated in the Winnipeg and Brandon hotels. As a result, the appellant, Lake Louise Limited Partnership (Lake Louise), received substantially less revenue from these two hotels than it previously had.

[ 3 ] Agreements between the parties state that the management company, Canad, is to be paid a management fee calculated as a percentage of the “Gross Revenues” of the hotels. “Gross Revenues” is a defined term and includes, in part, “all revenues and receipts of every kind” (Gross Revenues).

The agreements also state that all calculations are to be made in accordance with generally accepted accounting principles (GAAP) “on a consistent basis, except if otherwise expressly provided herein. ” [ 4 ] T he critical issue before the trial judge was whether the Gross Revenues definition, which includes “all revenues and receipts,” must be interpreted in accordance with GAAP, or whether that definition is an exception to the GAAP requirement because it is otherwise expressly excluded for herein. [ 5 ] The respondents, Canad, Canad Inns-Club Regent Casino Hotel Ltd. (Club Regent) and Canad Inns-Brandon Ltd. (Canad-Brandon) argued before the trial judge that all monies deposited into the VLTs by the players (the coin-in) are “receipts” caught by the definition of Gross Revenues and should be included in the calculation of the management fee. [ 6 ] Lake Louise submitted that only the 20 per cent commission paid to the hotels by the Manitoba Lotteries Corporation (MLC) should be used.

The 20 per cent MLC commission is 20 per cent of the “Net Win” (the 20 per cent MLC commission). “Net Win” is the coin-in less winning monies paid out to players (Net Win). [ 7 ] Prior to 2007, Canad only included the 20 per cent MLC commission in its Gross Revenues. Starting in 2007, Canad included all of the coin-in in its Gross Revenues. [ 8 ] The trial judge ruled in favour of the respondents, finding that GAAP did not apply to the definition of Gross Revenues and to the calculation of the management fee. He found that the definition of Gross Revenues included all of the c oin-in receipts.

However, he also held that the respondents were not entitled to the recalculated management fees for the fiscal years prior to and including 2006 because the contract between the parties deemed financial statements conclusive, unless objection was made within a set time period. [ 9 ] Lake Louise appeals the decision of the trial judge, raising numerous grounds.

The respondents cross appeal the decision that limited the credit for the management fee recalculation to the 2007 and subsequent fiscal years. [ 10 ] In my view, the issues with respect to Lake Louise’s appeal can be reduced to the following four questions of contractual

interpretation: 1) Did the trial judge err by taking into account extrinsic evidence (in this case, expert testimony of accountants) to determine whether the agreements were clear and unambiguous? 2) Did the trial judge err by taking into account extrinsic evidence (the accountants’ expert testimony) to determine whether GAAP were “expressly” excluded? 3) Did the trial judge err in finding that GAAP were “expressly” excluded from application to the definition of Gross Revenues and to the calculation of the management fee? 4) Did the trial judge err in finding that all of the coin-in was to be included as Gross Revenues? [ 11 ] Since I would allow the appeal for the reasons that follow, and therefore not permit Canad’s management fee recalculation, it will not be necessary for me to address the cross appeal or its background.

The Standard of Review [ 12 ] All of the issues raised relate to questions of contractual

interpretation. The new approach with respect to the standard of appellate review replaces the traditional method of simply applying the standard of correctness to all questions of contractual

interpretation. Under the new approach, the applicable standard of review will be determined by the nature of the question. In Hopkins v. Ventura Custom Homes Ltd. , 2013 MBCA 67 , 294 Man.R. (2d) 168 , after referencing a number of decisions from our court, including King v. Operating Engineers Training Institute of Manitoba Inc. , 2011 MBCA 80 , 270 Man.R. (2d) 63 , and Geoff R. Hall, Canadian Contractual

Interpretation Law , 2d ed. (Markham: LexisNexis Canada Inc., 2012) at 125-31, Beard J.A. set out a helpful

summary of the different standards that may become applicable in different situations (see para. 66). [ 13 ] What is clear is that questions regarding whether a trial judge correctly stated and correctly applied the principles of contractual

interpretation are questions of law and are to be reviewed on the correctness standard. In my view, because a pure question of law can be extricated from the facts with respect to the first issue (can a judge consider extrinsic evidence when determining whether a contract is clear and unambiguous) , it will be reviewed on the correctness standard. Further, I would find that issues two and three are also questions of law to be reviewed on the correctness standard because they can be determined on the basis of the wording of the agreements without reference to the extrinsic evidence (see Bell Mobility Inc. v.

MTS Allstream Inc. , 2009 MBCA 28 at paras. 35-41 , 236 Man.R. (2d) 167 ). With respect to issue four, since the trial judge was interpreting the language of the agreements in the context of the expert testimony about accounting terminology and concepts , it will be reviewed on the standard of palpable and overriding error.

As this court stated in King (at para. 22): A trial judge’s determination of the factual matrix or surrounding circumstances, drawing inferences from a finding of fact, findings as to credibility or good faith, consideration of extrinsic evidence and consideration of the evidence as a whole, are questions of fact and

reviewable on a standard of palpable and overriding error (Hall, at p. 109) …. …. The Facts [ 14 ] Canad and Lake Louise agreed to jointly finance the construction of two hotels: first the Club Regent Hotel and, later, the Brandon Hotel. To this end, Canad and Lake Louise incorporated what ultimately became respectively, Club Regent and Canad- Brandon. [ 15 ] Two agreements govern each hotel. The first is a co-ownership agreement (the COA), relating to the respective rights and liabilities of Canad, Lake Louise and either Club Regent or Canad-Brandon.

The second is a hotel management agreement (the HMA), which sets out the relationship between the management company, Canad, and either Club Regent or Canad-Brandon. Pursuant to the terms of the HMA, Canad is paid a management fee calculated as a percentage of the Gross Revenues of the hotels. The two HMAs are essentially the same, as are the two COAs. There are two major differences. The first relates to the sequence of the agreements. The COA involving Club Regent was signed before the HMA. For Canad-Brandon , the reverse is true: the HMA was signed before the COA.

The second difference is that the management fee for Canad-Brandon is three per cent, as opposed to two per cent for Club Regent. [ 16 ] A third agreement is relevant to this case. As both hotels have VLTs, MLC has an agreement, the VLT agreement (the VLTA), with both Club Regent and Canad-Brandon with respect to the VLTs that are placed on their respective premises. It is important to note that the management company, Canad, is not a party to the VLTA. [ 17 ] Club Regent began to operate in late 2000 or early 2001.

The COA, the HMA and VLTA were executed by the parties respectively on May 10, 1999, October 1, 2000, and July 22, 2004. Canad-Brandon began operating in early 2005. The HMA, the COA and VLTA for that hotel were executed respectively on August 5, 2003, August 12, 2003 and March 24, 2005. Again, it is to be noted that, with respect to one hotel, the HMA was signed first, whereas with the other, the COA was signed first. [ 18 ] For ease of reference, I will always refer to the agreements pertaining to Club Regent.

It is also important to remember t hat the parties agree that the HMA and COA are to be read together as to the obligations of the parties. There is no hierarchy of terms. A number of provisions in the HMA, COA and VLTA are relevant and are attached as Appendix A.

Four of those provisions are, however, more pertinent than the others and it would be useful, at this point, to set them out: From the HMA, art. 1.01 - the definition of Gross Revenues: “ Gross Revenues ” shall mean all revenues and receipts of every kind derived from operating the Hotel and parts thereof, including, but not limited to: income (from both cash and credit transactions) before commissions and discounts for prompt or cash payments, from rental of rooms, stores, offices, exhibit or sales space of every kind; lease and concession fees and rentals; income from vending machines; food and beverage sales; wholesale and retail sales of merchandise at the Hotel, service charges, and proceeds, if any, from business interruption or other loss of income insurance; provided, however, that Gross Revenues shall not include gratuities to Hotel employees other than gratuities added to any food and beverage sales by the Hotel itself for its benefit or federal, provincial or municipal excise, value added tax, GST, sales or use taxes or similar impositions collected directly from patrons or guests or included as part of the sales price of any goods or services. [emphasis added] From the HMA, art. 5.01 - Canad’s management fee: 5.01 Management Fee In consideration for the services performed under this Management Agreement during the Term, [Canad] shall retain monthly as its management fee (“Management Fee”) an amount equal to two percent (2.00%) of the Gross Revenue.

From the COA, art. 11.10 - the Governing Accounting Principles: 11.10 Accounting Principles All calculations made or referred to herein shall be made in accordance with generally accepted accounting principles and practices applied on a consistent basis, except if otherwise expressly provided herein .

[emphasis added] From the VLTA, art. 9.01 – the ownership of Net Win funds: 9.01 [Club Regent] acknowledges that the Net Win, at all times, is a trust fund owing to the MLC and that it forms no part of [Club Regent’s] property, business and undertaking. [emphasis added] [ 19 ] As can be seen from the above, pursuant to art. 5.01 of the HMA, Canad is to be paid a management fee, calculated monthly, at two per cent of Club Regent’s Gross Revenues. That term is defined in the HMA.

In addition, pursuant to art. 11.10 of the COA, all calculations made “herein” are to be made in accordance with GAAP “except if otherwise expressly provided herein.” By virtue of art. 1.1.2 of the COA (see Appendix A), the use of the word “herein” in art. 11.10 of the COA means that art. 11.10 applies to the HMA. As mentioned, the respondents conceded that the COA and the HMA are to be read together because they are constituent parts of the entire agreement between the parties.

As a result, it is uncontested that the calculation of the HMA management fee is to be made in accordance with GAAP, unless it is otherwise expressly excluded. [ 20 ] Canad’s accountants prepared monthly internal financial statements, annual budgets and annual financial statements for both hotels. The annual financial statements were reviewed by Canad’s external accountants on a review engagement basis. The fiscal year-end for the two hotel corporations was May 31.

Canad typically provided to Lake Louise, at some time during the fall of each year, the annual review engagement statements issued by Canad’s accountants. [ 21 ] For all fiscal years up to and including 2006, Canad calculated its management fee with respect to the VLTs by including only the 20 per cent MLC commission as Gross Revenues. In 2007, Canad reviewed its accounting practices and determined that the calculation of the management fee was incorrect and that it should have been including as Gross Revenues the coin-in as opposed to only the 20 per cent MLC commission.

Canad then retroactively applied its new methodology in calculating Gross Revenues to all prior years and claimed all of those increased amounts in the May 31, 2007 fiscal year. [ 22 ] This recalculation considerably increased the annual management fees paid to Canad, but reduced the yearly cash surplus to be paid to the co-owners, Lake Louise and Canad (which is to be split 51 per cent to Canad and 49 per cent to Lake Louise). Clearly, while the reduction to Canad with respect to the cash surplus was more than offset by the increase in the management fee, Lake Louise suffered significant payment reductions.

It also caused a significant one-time increase in the management fees for the May 31, 2007 fiscal year-end because of the calculation adjustments for all of the prior fiscal years (for Club Regent, a one-time increase of $1,144,598, and for Canad-Brandon, $324,918). [ 23 ] When the change in methodology for the calculation of the management fee with respect to VLT revenues occurred, Canad did not notify Lake Louise.

It was only after noticing the significant increase in management fees, reflected in the internal financial statements for the May 31, 2007 year-end, that Lake Louise requested an explanation from Canad. The first explanation it received did not mention VLT revenues.

When Lake Louise requested additional clarification, Canad advised that it had been “charging on Gross Revenues for all departments except VLT [which] was calculating [ sic ] on net amount.” [ 24 ] On June 3, 2009, Lake Louise commenced these actions, seeking, amongst other things, a declaration that Gross Revenues with respect to VLT revenues is to be calculated on the basis of the 20 per cent MLC commission, not the coin-in. Decision of the Trial Judge [ 25 ] The trial judge did not grant the declaration sought by Lake Louise. In his conclusion, he summarized his four critical findings.

First, he found that, because the material terms of the agreements were not ambiguous, there was no need to consider extrinsic evidence to interpret those terms. Second, he concluded that the calculation of the management fee is expressly excluded from having to be in accordance with GAAP. Third, he found that the coin-in was a “receipt” that fell within the definition of Gross Revenues. Fourth, he held that including the coin-in as part of Gross Revenues is neither contrary to nor in accordance with GAAP.

Position of the Parties [ 26 ] Lake Louise argues that the trial judge should not have considered the extrinsic evidence (in this case, the expert

opinion evidence) for the purposes of deciding, first, whether the agreements were ambiguous and, second, whether GAAP wereexpressly excluded from the definition of Gross Revenues and from the calculation of the management fee.

It submits that, had the trialjudge, after interpreting the agreements, found that GAAP were not expressly excluded from the definition of Gross Revenues and fromthe calculation of the management fee, then, and only then, could he have considered the expert evidence to understand how GAAPwould treat VLT revenues and receipts. [27] Lake Louise submits that, as the agreements contained no express exclusion as to the applicability of GAAP, the trialjudge erred in finding that GAAP did not apply to the definition of Gross Revenues or to the calculation of the management fee.

Finally,Lake Louise points out that the definition of Gross Revenues requires that revenues and receipts be “derived from operating the Hotel.” It points to art. 9.01 of the VLTA which states that, since the money derived from operating the VLTs is a trust fund owing to MLC, itforms no part of the business of the hotels.

Only when it is paid to the hotels as the 20 per cent MLC commission can it be considered, itsays, “revenues and receipts of every kind derived from operating the Hotel.” [28] Canad argues that, since both experts agreed that GAAP were silent on the meaning of receipts and that Lake Louise’sown expert witness admitted that GAAP did not say that “revenues” and “receipts” were synonymous terms, the trial judge was correctto interpret “receipts” as meaning something different than “revenues.” Canad points to the fact that Lake Louise’s own expertacknowledged that the key to using GAAP is to look to the agreement of the parties and, specifically, to look to the words chosen by theparties.

It submits that, on the basis of the expert testimony, the trial judge correctly concluded that the definition of Gross Revenueswas “sufficiently clear, explicit and precise” (at para. 67) to override the express intention of the parties that GAAP apply to thecalculation of the management fee. [29] Finally, Canad submits that it was proper for the trial judge to use the expert evidence to inform his determination ofwhether there was any special definition for “receipts,” as well as to provide insight on how GAAP operate and how GAAP might applyto the definition of Gross Revenues.

It contends that the trial judge properly considered the expert evidence as part of the factual matrix,and that he did so only to the extent necessary. Analysis and Decision

a) Did the trial judge err by taking into account extrinsic evidence (in this case, expert testimony of accountants) to determine whetherthe agreements were clear and unambiguous? [30] The parties agreed, as was stated in Canad’s factum, that the critical issue before the trial judge was whether the GrossRevenues definition, which includes “all revenues and receipts,” must be interpreted in accordance with GAAP, or whether thatdefinition is an exception to the GAAP requirement because it is “otherwise expressly provided herein.” They also agree that theagreements represent the exclusive record of their arrangement on how to treat the VLT revenues and receipts. [31] The parties submitted, and the trial judge agreed, that the agreements were clear and unambiguous as to the treatment ofthe coin-in.

Where the parties differed was in the

interpretation to be given to the clear and unambiguous language. As was stated byCory J.A. (as he then was), in Transcanada Pipelines Ltd. v. Northern and Central Gas Corp. Ltd. (1983), (ON CA),41 O.R. (2d) 447 (C.A.), difficulty with

interpretation is not “to be regarded as synonymous with ambiguity” (at p. 451). [32] Generally, when an agreement “is clear and unambiguous, no extrinsic evidence (i.e., no evidence outside of the fourcorners of the written document) may be considered” (King at para. 30). Steel J.A. also added in King that, typically (at para. 35): … [W]here the whole of a contract has been reduced to writing, extrinsic evidence is not admissible to add to, subtract from, vary orcontradict that written contract.

Extrinsic statements and promises cannot affect the parties’ obligations as stated in the writtenagreement. [33] However, Steel J.A. also explained that, even in the absence of ambiguity, evidence pertaining to the “surroundingcircumstances” or the “factual matrix” is admissible to aid the court in understanding and interpreting the language and meaning of anyagreement. Two points need be made.

First, “surrounding circumstances” and “factual matrix” are terms that are similar in nature (seeKing at paras. 33 and 59) so, for the rest of these reasons, I will only refer to the “factual matrix.” [34] Second, what constitutes the factual matrix must be properly understood. It is limited to objective contextual evidenceknown or reasonably capable of being known by the parties at the time of the execution of the agreements.

It includes, among otherthings, evidence of the commercial purpose and objectives of the agreements, evidence of the nature or custom of the market or industry,and evidence of the objective intention of the parties. It does not include evidence of the subjective intention of the parties, evidence ofthe negotiations, or evidence of the subsequent conduct of the parties after the execution of the agreements (see King at paras. 69-73). See also Coventree Inc. v.

Lloyds Syndicate 1221 (Millennium Syndicate), 2012 ONCA 341 at para. 18, 291 O.A.C. 178. [35] The first order of business for the trial judge was to determine whether the agreements were clear and unambiguous. Determining whether or not an agreement is ambiguous is a core judicial function and parties are not entitled to provide evidence on thatquestion. Simply put, a judge cannot use extrinsic evidence to find ambiguity. Only when a judge finds ambiguity will the parties beallowed to bring forward extrinsic evidence (see Eli Lilly & Co. v. Novopharm Ltd., (SCC), [1998] 2 S.C.R. 129 at

paras. 55 , 57, and Moore (Geoffrey L.) Realty Inc. v. Manitoba Motor League , 2003 MBCA 71 at para. 11 , 173 Man.R. (2d) 300). [ 36 ] In this case, the trial judge took into account the expert evidence to decide whether the agreements were clear and unambiguous. He stated in his reasons (at para. 34): Canad agreed in argument that the Co-Ownership Agreement and the Hotel Management Agreement are two parts of the whole contracting arrangement. Aided by expert accounting opinion evidence , and considering also the relevant provisions in the Co- Ownership Agreement and the VLT Agreement that may inform the proper

interpretation, I agree with counsel that the contracts and their material terms are not ambiguous . Thus, as counsel suggest, it follows that I need not refer to extrinsic evidence , particularly of the two men, to determine this issue. …. [emphasis added] [ 37 ] By using extrinsic evidence to determine whether the agreements were clear and unambiguous, the trial judge erred in principle. That said, his conclusion that the material terms were unambiguous is correct.

b) Did the trial judge err by taking into account extrinsic evidence (the accountants’ expert testimony) to determine whether GAAP were “expressly” excluded? [ 38 ] It is clear from his reasons that the trial judge took into account extrinsic evidence (the evidence of the accountants) to determine whether GAAP were “expressly” excluded from being applied to the Gross Revenues definition and to the calculation of the management fee (see paras. 47-50 of his reasons).

In my view, the trial judge improperly considered the accountants’ expert testimony to assist him with the determination of whether GAAP were “expressly” excluded. Again, determining whether an exclusion was “expressly” found in the agreements is a core judicial function. It was improper for him to have considered the accountants’ evidence to assist him in this determination. Either it was “expressly” excluded or it was not. Accountants’ opinions on this determination are irrelevant. Expert evidence plays a limited role in interpreting a contract.

Generally, experts cannot provide opinions on what a contract means; courts do. Expert evidence is often limited to explaining technical terms of art (see Dow Chemical Canada Inc. v. Shell Chemicals Canada Ltd. et al. , 2010 ABCA 126 at paras. 18-19 , 477 A.R. 112 ). By considering extrinsic evidence (the accountants’ expert testimony) to determine whether GAAP were “expressly” excluded, the trial judge erred in principle.

c) Did the trial judge err in finding that GAAP were “expressly” excluded from application to the definition of Gross Revenues and to the calculation of the management fee? [ 39 ] I am of the view that the trial judge also erred when he found that the art. 5.01 calculation of the management fee was expressly excluded from the art. 11.10 GAAP requirement.

He stated in his reasons (at para. 67): It would be unduly technical to require that the definition or [art.] 5.01 be qualified by specific language or phrases - along the lines of “this calculation is exempt from [art.] 11.10” or “notwithstanding the requirement for calculations to be in accordance with GAAP” - in order to find this calculation is expressly, clearly excepted from the GAAP provision of [art.] 11.10. …. [ 40 ] In arriving at his conclusion that the management fee calculation was not in accordance with GAAP, he improperly engaged in the kind of analysis that art. 11.10 was intended to avoid when it imposed the requirement that any GAAP exemption had to be “expressly provided herein.” Words are to be given their plain meaning.

As found by the trial judge, art. 11.10 is clear. Any exclusion from the GAAP requirement must be “expressly” stated in the agreements. While he correctly found that “expressly” is used “ in contra distinction to the meaning of the word ‘implied’” (at para. 66), the trial judge proceeded to imply that the parties must have intended to exclude the applicability of GAAP to Gross Revenues when they agreed to such a detailed and specific definition of Gross Revenues.

Implying that a term is “expressly” excluded leads to a result that cannot be upheld. [ 41 ] Finally, the trial judge erred when he continued to “infer” that the parties intended to “expressly” exclude the management fee calculation from the requirements of art. 11.10 because they negotiated the management fee calculation in the HMA after drawing up the COA.

Not only is this inference of a hierarchy of the terms of the HMA over the terms of the COA contrary to his earlier observation that both agreements are two parts of one agreement, it also overlooks the fact that, with respect to Canad-Brandon, the COA was signed after the HMA. As was conceded by counsel for Canad, the trial judge’s finding that the HMA had “priority” over the COA was an error as it was contrary to the terms of the agreements which provided that they were supplemental to each other.

d) Fresh Review [ 42 ] As a result of these errors, no deference is owed to the decision of the trial judge. Having reviewed the agreements afresh, as I am entitled to do, without the assistance of any extrinsic evidence, it is my view that the relevant sections are clear and

unambiguous. The agreements state that GAAP will apply to all calculations unless an express exclusion is found within the agreements themselves. There is no ambiguity there. [ 43 ] The question then becomes whether such an express exclusion exists in the agreements. As stated above, the determination of whether the GAAP exclusion is “expressly” found in the agreements rests solely with the trial judge. The accounting opinion evidence cannot be considered. Moreover, and as already stated, since the COA requires that the exclusion must be “express,” it cannot be implied or inferred.

Either such an express exclusion exists or it does not. In view of the fact that neither counsel was able to point to an express exclusion in the agreements, I can quickly conclude that the calculation of the management fee must be interpreted in accordance with GAAP.

Since the management fee is calculated as a percentage of the Gross Revenues, the Gross Revenues definition must also be interpreted in accordance with GAAP. [ 44 ] Having concluded that the agreements are clear and unambiguous and that GAAP apply, it becomes necessary to review the admissible evidence to determine which portion of the VLT monies is to be included in Gross Revenues.

The evidence that was available to the trial judge with respect to the properly understood factual matrix (see para. 34 herein) came from the testimony of each owner’s representative and, to a very limited extent, from the expert evidence.

The commercial purpose of the agreements, when stripped to its bare essence, was to divide the “cash surplus” arising from the operation of the hotels on the basis of the percentage ownership interest of the parties (Canad at 51 per cent and Lake Louise at 49 per cent). “Cash Surplus” is defined at art. 1.1.9 of the COA as meaning “Gross Cash Receipts” less regular business expenses. “Gross Cash Receipts” is defined at art. 1.1.20 of the COA as meaning “all receipts, of an income nature” and “all receipts of a capital nature.” Since Canad, unlike Lake Louise, manages and runs the day-to-day operations of both hotels, it is commercially reasonable that Lake Louise would have wanted the GAAP parameters to control how Canad would account for the business generally and what would be included in the Gross Revenues definition. [ 45 ] The only evidence with respect to the custom of the industry came from Lake Louise’s expert, Mr.

Kelly, who testified about casino revenue recognition practices. He reviewed the revenue recognition policy of the MLC as well as the two largest gaming companies in the world, Harrah’s Entertainment, Inc. and MGM Resorts International. He testified that in the industry “gaming revenue is recorded net of prizes paid.” Put another way, the gaming industry recognizes as revenue only the Net Win, not the coin-in. [ 46 ] As to the objective intentions of the parties with respect to the treatment of the VLT funds, the only agreement that expressly refers to funds from the VLTs is the VLTA.

Article 9.01 clearly states that the Net Win “is a trust fund owing to MLC and that it forms no part of the [hotels’] property, business and undertaking.” [ 47 ] Still on the matter of the objective intention of the parties, while the conduct of the parties after execution of the agreements pertaining to Club Regent cannot be part of the factual matrix, it remains an undisputed fact that, prior to and at the time of the execution of the HMA and COA for Canad-Brandon, Canad had been calculating the Club Regent management fee for the VLT revenues on the basis of the 20 per cent MLC commission, not on the basis of the coin-in. [ 48 ] In addition to the factual matrix mentioned above, and because I concluded that GAAP apply, the accounting expert evidence can be considered as an interpretive aid to better understand how GAAP would typically treat the VLT monies with respect to the determination of Gross Revenues and the calculation of the management fee. [ 49 ] Lake Louise’s expert was qualified to provide an opinion on “the application of [GAAP] to VLT revenues and receipts.” His report reviewed how GAAP would treat the VLT monies and when they should be recognized and measured as revenues and receipts.

He stated that GAAP will not view funds received in trust as either revenue or a receipt of the entity because they are never the property of the entity. He realized that art. 9.01 of the VLTA states that the VLT monies are, at all times, trust funds belonging to the MLC and not part of the property or business of the hotels. In his report, he also completed an analysis of factors specified by the Emerging Issues Committee (EIC) of the Canadian Institute of Chartered Accountants on whether revenues should be recognized as gross or net.

His analysis led him to conclude that only the 20 per cent MLC commission should be reported.

In the end, h e testified that, when the calculation of the management fee is done in accordance with GAAP, only the 20 per cent MLC commission can be included in the definition of Gross Revenues. [ 50 ] Canad’s expert was qualified to provide an opinion “on the application of the phrase ‘all revenues and receipts of every kind derived from operating the Hotel.’” In cross-examination he admitted that he was not retained to provide an opinion on whether Canad’s calculation of its management fee was in accordance with GAAP. In my view, Canad’s expert report and testimony is problematic in two ways.

First, he provides his opinion on the contractual

interpretation of the agreements and second, his opinion is based on fundamentally flawed premises. As mentioned earlier, an expert cannot provide an opinion on what a contract means. A review of his affidavit shows that he opines on matters outside his area of expertise. For example, he states that:

a) the “calculation of management fees in Clause 5.01 of the HMA supersedes Clause 11.10 of the COA”;

b) only the HMA “should be used in calculating Gross Revenues for purposes of the management fee due Canad”; c) “receipt” should be defined pursuant to the Oxford dictionary; and

d) there “is no requirement in the HMA that GAAP be used in calculating the Gross Revenues.” [ 51 ] Not only is this evidence inadmissible, it is wrong. First, the parties agree that the HMA and COA are to be read together. The parties also agree that there is no hierarchy of terms and that one does not supersede the other.

Second, he incorrectly states that only the HMA would be used to calculate Gross Revenues, when it has been established that what is to be included as revenues and receipts under the Gross Revenues definition must be consistent with the art. 11.10 requirement stipulated in the COA that GAAP apply to the calculation of the management fee. Third, his report omits the critical word “expressly” from art. 11.10.

His report misses the decisive requirement that any exclusion of GAAP must be “express.” It becomes clear from a review of his evidence that only the terms of the HMA, not those of the COA nor GAAP, guided his opinion as to which revenues and receipts should be included in Gross Revenues.

[ 52 ] These three errors also put into question the evidentiary underpinning upon which he reaches his concluding opinion: the coin-in is properly included in the definition of Gross Revenues.

His conclusion is clearly premised on the basis that the HMA superseded the COA and that, as he said in his report, there is no requirement that “GAAP be used in calculating the Gross Revenues.” In cross-examination, he reinforced his premise when he said, “It’s fundamental to my opinion that the [HMA] supersedes the GAAP requirement in 11.10 of the [COA].” [ 53 ] Moreover, and as stated above, Canad’s expert was not retained to provide an opinion on whether the calculation of the management fee was in accordance with GAAP.

That is why it is not surprising that he makes no mention of whether his opinion would be different if GAAP applied, other than in his affidavit when he stated: If the HMA had defined Gross Revenues as the revenue reported in the financial statement in accordance with GAAP, then the management fee would be calculated using the “Net Win”.

However, the HMA defined Gross Revenue as “ revenue and receipts of every kind derived from operating the hotel ”…. [ 54 ] What Canad’s expert meant was clarified in cross-examination when it became clear that he was also of the view that, when GAAP apply, only the 20 per cent MLC commission should be included as Gross Revenues, not the coin-in. (The full exchange between counsel and the expert is set out in my colleague’s dissent (see para. 164 herein).) The expert’s concession on cross- examination is also consistent with the hotels’ current accountants (Hemenway Silver in 2011 and MNP in 2012) who issued a limited audit report in 2011 and 2012, noting the inclusion of the coin-in as Gross Revenues is an irregularity not in accordance with GAAP. [ 55 ] As a result of the above, I am of the view that the conclusion of the Lake Louise expert (that only the 20 per cent MLC commission should be included in Gross Revenues) is to be preferred over the conclusion of the Canad expert (that the coin-in was to be included in Gross Revenues).

Therefore, I would conclude that the 20 per cent MLC commission, not the coin-in, should be included as revenue for the purpose of the calculation of the management fee.

This conclusion is in line first, with the fact that the Net Win was “a trust fund owing to MLC” and not part of the hotels’ business; second, with the custom of the gaming industry which never recognizes the coin-in as revenue; third, with Canad’s own accountants, who state in their Review Engagement Report that recognizing the coin-in as revenue “constitutes a departure from Canadian Accounting Standards for Private Enterprises” and is therefore not in accordance with GAAP; and, fourth, with the undisputed fact that the parties had, prior to the execution of the HMA and COA for Canad-Brandon, been calculating the Club Regent management fee for the VLT revenues on the basis of the 20 per cent MLC commission, not the coin-in.

Simply put, it was understood by the parties that, at the time of the execution of the Canad-Brandon agreements, only the 20 per cent MLC commission, not the coin-in, would be used to calculate the management fee. [ 56 ] For these reasons, I would allow the appeal with costs throughout; set aside the judgment; grant the declaratory relief sought in the notice of appeal by declaring that Gross Revenues under the HMAs for Club Regent and Canad-Brandon, as it pertains to the VLT funds, is to be calculated on the basis of the 20 per cent MLC commission for both hotels; and require Canad to account accordingly. [ 57 ] Finally, I will deal with the cross appeal, which raises an issue regarding credits resulting from the recalculation of the management fee.

As I would find that Canad’s recalculation was not done in accordance with GAAP, and was therefore wrong, the issue regarding any recalculation credit is moot. In light of the above, I would dismiss the cross appeal with costs. Had it been necessary for me to consider the issue, I would have agreed with the cross appeal reasons of my colleague. C.J.M. I agree: J.A. BEARD J.A. I. INTRODUCTION [ 58 ] Very generally, the issue in this appeal is whether the trial judge erred in his

interpretation of the contracts under consideration in this case. The facts are somewhat complex because there are a number of contracts and corporations involved. The trial judge succinctly explained the case before him as follows (at paras. 1-2): Over a decade ago, two experienced Winnipeg businessmen, Mr. Arnie Thorsteinson and Mr. Leo Ledohowski, negotiated transactions to facilitate investments respecting two new hotels, Club Regent Casino Hotel (“Club Regent”) and Canad Inns – Brandon (“Canad-Brandon”), in Winnipeg and Brandon, Manitoba respectively.

In essence, Lake Louise Limited Partnership, operated by Mr. Thorsteinson, acquired a 49% interest in each of Club Regent and Canad-Brandon while Mr. Ledohowski’s company owned 51%. Further, Mr. Ledohowski’s company, Canad Corporation of Manitoba Ltd. (“Canad”), was retained to manage the two hotels and be compensated by a fee calculated on “gross revenues” of each hotel. Materially, each hotel houses and operates a video lottery terminal (“VLT”) area. Initially everything was fine, but years later an unrelated dispute arose between the two men that ultimately led Mr.

Ledohowski to have Canad reconsider and then, as a result, recalculate all its prior years’ management fees using a different – he says, correct – method

than it had before. Canad intends to use this method in the future. This method causes a drop in the return on investment that Lake Louise would otherwise have received. These lawsuits followed in due course. [ 59 ] The Club Regent facility, which includes a hotel, casino and video lottery terminal (VLT) area, is owned by the defendant Canad-Inns – Club Regent Casino Hotel Ltd. (Club Regent).

There is a co-ownership agreement (COA) in effect dated May 10, 1999, between the two shareholders, the plaintiff, Lake Louise Limited Partnership (Lake Louise), the defendant Canad Corporation of Manitoba Ltd. (Canad), and Club Regent regarding the ownership of Club Regent. That agreement sets out certain rights and obligations of the shareholders. [ 60 ] Canad has a contract to manage the business operations carried on at the Club Regent facility.

This agreement, the hotel management agreement (HMA), is between Canad and Club Regent and is dated October 1, 2000. [ 61 ] Finally, the parties entered into a contract with Manitoba Lotteries Corporation (MLC) regarding the placement and operation of VLTs at the facility. In order to do so, Club Regent entered into a video lottery terminal siteholder agreement (VLTA) with MLC dated July 22, 2004. [ 62 ] Lake Louise and Canad entered into the same agreements regarding the construction, operation and ownership of a hotel in Brandon (Canad-Brandon), in which there is a VLT operation but not a casino.

While there are a couple of minor differences, they are not material to this dispute. There is a separate lawsuit regarding the Brandon operation, but, as the trial judge noted, “[c]ounsel did not suggest the background or factual matrix could possibly result in a different finding for each suit” (at para. 19). [ 63 ] Under art. 5.01 of the HMA, Canad is entitled to a management fee of two per cent of the gross revenues of Club Regent, “Gross Revenues” being a defined term in the HMA.

Article 11.10 of the COA requires that all calculations be made in accordance with generally accepted accounting principles (GAAP). The issue to be resolved is whether the calculation of that management fee was made in accordance with GAAP. My conclusion is set out at paras. 154-59 herein. II. THE MAJORITY DECISION [ 64 ] My colleague, Chartier C.J.M., has distilled the several grounds of appeal identified by Lake Louise down to four, which are set out at para. 10 herein.

I do not find it necessary to comment on the first two grounds of appeal because I agree with his conclusion regarding his third ground of appeal, being that the trial judge erred in finding that GAAP were “expressly” excluded from applying to the definition of “Gross Revenues,” and to the calculation of the management fee in the HMA. [ 65 ] Having made these findings, Chartier C.J.M. then concludes that “[a]s a result of these errors, no deference is owed to the decision of the trial judge” (at para. 42 herein) and he conducts his own analysis to find that GAAP do, in fact, apply to the

interpretation of both the definition of Gross Revenues and the calculation of the management fee under the HMA. (See para. 43 herein.) I am generally in agreement with that finding. [ 66 ] Where we

part company is with Chartier C.J.M.’s remaining analysis which deals with his fourth ground of appeal, being whether the trial judge erred in finding that all coin-in was to be included in Gross Revenues under the HMA. Chartier C.J.M. continues with his own analysis of this ground pursuant to his earlier statement that no deference is owed to the decision of the trial judge, without considering the balance of the trial judge’s decision. In fact, to begin, the trial judge conducted his analysis of the meaning of Gross Revenues before he determined whether that definition was excluded from the application of GAAP.

This is clear from para. 54 of his decision, in which he states: …. … I will now review the meaning of gross revenues and then return to whether it is expressly excluded from [art.] 11.10 [of the COA]. [ 67 ] As I will demonstrate later, the trial judge applied GAAP to that analysis and did, therefore, determine the meaning of Gross Revenues in accordance with GAAP. [ 68 ] As a second step, after the trial judge made his findings regarding the meaning of Gross Revenues (at paras. 55-65), he concluded that it was expressly excluded from art. 11.10 and that GAAP did not apply (at paras. 66-67).

However, he then went on to state (at paras. 68-69): Having come to this conclusion, it is unnecessary that I go further with the analysis and consider whether the definition is in accordance with GAAP regardless. However, as this was a significant factor in the case and argument, I will address it provisionally. Issue C : Is The Gross Revenues Calculation In Accordance With GAAP ? If I had concluded that the calculation of the management fee was not excluded from [art.] 11.10, I would next consider whether the calculation and hence the definition is in accordance with GAAP. If the

interpretation I ascribed to the definition of gross revenues is in accordance with GAAP, then it would not matter whether it is otherwise expressly excluded from the ambit of [art.] 11.10 or not, it would simply apply. [ 69 ] Following this, as a third step, he applied art. 11.10 and GAAP to the

interpretation of Gross Revenues, concluding that the calculation of the management fee by including coin-in as a receipt was not prohibited by GAAP, but neither was it in accordance with GAAP.

[ 70 ] It is clear from this that the trial judge conducted an alternative analysis regarding my colleague’s fourth ground of appeal on the correct basis, being that Gross Revenues and the calculation of the management fee were not excluded from art. 11.10 and were to be in accordance with GAAP. This is the correct analysis, according to the findings of my colleague.

The trial judge having applied GAAP at two separate stages of his analysis, I am of the view that my colleague is not entitled to conduct a fresh review of the agreements but, rather, should consider whether the trial judge erred at either step of his analysis. [ 71 ] Having proceeded to conduct his own analysis, my colleague effectively applied a correctness standard of review to his last ground of appeal. In fact, that last ground raises a question of mixed law and fact and should be reviewed on the more deferential standard of palpable and overriding error. III.

ANALYSIS OF THE FOURTH GROUND OF APPEAL – DID THE TRIAL JUDGE ERR IN FINDING THAT ALL OF THE COIN-IN WAS TO BE INCLUDED IN “GROSS REVENUES”? The Issues [ 72 ] The fourth ground of appeal, as defined by my colleague, does not adequately set out the remaining issues, as there are really two: (

i) Did the trial judge err in finding that all of the coin-in was to be included as a receipt within the definition of Gross Revenues under the HMA? (ii) Did the trial judge err in finding that his

interpretation of the term Gross Revenues and the calculation of the management fee was not prohibited by GAAP but neither was it in accordance with GAAP? Standard of Review [ 73 ] Both of these further grounds of appeal required the trial judge to interpret the language of the agreements in the context of the expert testimony about accounting terminology and concepts. This raises a question of mixed law and fact; I agree with my colleague that such grounds are to be reviewed on the standard of palpable and overriding error.

The Trial Judge’s Decision [ 74 ] I will outline the trial judge’s decision here and review the relevant details later in my reasons. [ 75 ] After finding the terms of the contracts to be unambiguous (which is also the conclusion of my colleague, Chartier C.J.M.), the trial judge went on to consider the meaning of Gross Revenues in the HMA.

In so doing, he dealt with what he called two threshold points, finding: - First, there was no evidence of a special meaning in the accounting vernacular to the word “derived” (see para. 42). - Second, he concluded that the hotel, in actual fact, operates the VLT area on behalf of, or at the instance of, the MLC (see paras. 43- 44). [ 76 ] The trial judge then spent a considerable amount of time analyzing the evidence of the two experts, commenting on the fact that there were weaknesses in the opinions of both.

I will review his treatment of this evidence later. [ 77 ] The trial judge then asked the question: is the definition of Gross Revenue expressly excluded from art. 11.10? Prior to answering that question, however, he reviewed the meaning of Gross Revenues and then returned to the question of whether it was expressly excluded from art. 11.10 (see para. 54). [ 78 ] The trial judge started his analysis of the meaning of Gross Revenues by stating (at para. 55): To start, I accept and recognize that VLT coin-in is not considered revenue according to GAAP.

However, for several reasons I find the meaning of the phrase “all revenues and receipts” in the definition is comprised of two distinct, not synonymous, terms. …. [ 79 ] He came to this conclusion for several reasons that involved him interpreting the definition of Gross Revenues by applying GAAP and the principles of contractual

interpretation. I will refer to the details of his reasons later. [ 80 ] Finally, the trial judge concluded (at para. 63): Having reached the determination that revenues and receipts are different and distinct terms in the definition of gross revenues, I therefore find that VLT coin-in is a receipt derived from the operation of the VLT part of the hotel. The hotel operates the area through Canad’s management, which collects the money put in the VLT’s and accounts for them both to pay out the players and the [MLC], with all of the necessarily incidental activities and risk as mandated by the [VLTA].

The collection and handling of the coin-in by the siteholder are cash receipts that must be accounted for to the [MLC]. [ 81 ] As noted earlier, it was only after interpreting the words Gross Revenues and receipts, taking into account both the expert

evidence and GAAP , that he asked whether this definition was excluded from art. 11.01. After concluding that the definition of Gross Revenues and the calculation of the management fee were excluded from the application of GAAP, the trial judge went on to consider whether, if GAAP applied, his

interpretation of Gross Revenues and the calculation of the management fee, were in accordance with GAAP. [ 82 ] The trial judge stated that, according to both experts, GAAP make no direct comment upon or reference to receipts being considered as revenue.

He also stated that there was no evidence or opinion that the balance of the definition of Gross Revenues, apart from the inclusion of coin-in as receipts, was not in accordance with GAAP, so he was not concerning himself with those other parts of the definition. (See paras. 70-71.) [ 83 ] He found that, while the financial statements prepared by the external accountants made reference to GAAP starting in 2011, he did not find those references helpful in interpreting the management fee provisions of the HMA.

I will have more to say about this later. [ 84 ] The trial judge acknowledged that the definition and calculation of the management fee in accordance with GAAP must be done by reference to the CICA Handbook, as interpreted by the parties’ experts. [ 85 ] The trial judge reviewed the positions of both experts and then stated that, while the calculation of the management fee using coin-in as a receipt was not prohibited by GAAP, that did not mean that it was in accordance with GAAP.

He accepted that, while he had found that coin-in is a receipt and, therefore, part of Gross Revenues, it would not be revenue according to GAAP and would not be treated as such by the MLC or any casino. (See paras. 77-78.) I will have more to say about this later. The Positions of the Parties [ 86 ] My colleague has set out the positions of the parties at paras. 26-29 herein. Generally Accepted Accounting Principles [ 87 ] GAAP are prepared and published by the Canadian Institute of Chartered Accountants, of which both experts were members.

As Lake Louise’s expert said in his report of May 31, 2011, “When asked to interpret accounting terminology, an accountant will refer to Generally Accepted Accounting Principles – GAAP. GAAP encompasses broad principles and conventions of general application as well as the rules and procedures laid out in the CICA Handbook .” [ 88 ] Both experts are chartered accountants, that is, members of the Canadian Institute of Chartered Accountants, and have been members since the 1970s. Both have extensive experience working as auditors in various capacities.

Given that the CICA Handbook forms the basis of their work as accountants and auditors, which both experts have done for close to 40 years, both are well- versed in the meaning,

interpretation and application of both the CICA Handbook and GAAP. They are also knowledgeable in the preparation of annual financial statements. [ 89 ] Lake Louise’s expert attached a copy of the

section of the CICA Handbook setting out the GAAP governing the concept of “revenue” to his report dated May 31,

Section 3400.01 explains the purpose and scope of that

section as follows: This

Section establishes standards for the timing of recognition of revenue in the financial statements of enterprises. It is concerned with the recognition of revenue arising in the course of the ordinary activities of an enterprise from the sale of goods, the rendering of services, and the use by others of enterprise resources yielding interest, royalties and dividends.

It does not deal with the measurement of revenue, which is usually determined by agreement between the parties involved. …. [emphasis added] [ 90 ] The trial judge found that there were significant areas on which both experts were in agreement (at para. 47): - It is not a legal requirement that GAAP apply to a given financial or accounting situation. GAAP does not apply to all financial accounting and reporting, for instance tax accounting is not necessarily consistent with GAAP; - According to GAAP, the contractual arrangement(

s) parties negotiate is important in interpreting the scope and nature of proper accounting principles that may apply to a transaction -- the words parties draft into agreements are key; -

Section 3400 of the Canadian Institute of Chartered Accountants Handbook of GAAP, establishes standards for the timing of revenue recognition in financial statements but, “does not deal with the measurement of revenue, which is usually determined by agreement between the parties involved …”; and

- GAAP addresses in various ways what revenues may be, but is silent respecting what receipts are; GAAP does not say revenues and receipts are the same or that they are synonymous terms. [ 91 ] It is these opinions, shared by Lake Louise’s expert, that form the basis of both the trial judge’s decision and my review of his decision. [ 92 ] Further, on the issue of the measurement of revenue, Lake Louise’s expert stated as follows in his report of October 13, 2010: Measurement (1000.53) is the process for determining the amount to be included in the financial statements. Once it is determined that it is appropriate to recognize some amount, the appropriate amount must be determined.

Section 3400 – Revenue – of the CICA Handbook deals only with the timing of recognition of revenue and not with measurement, other than to say that measurement is usually determined by agreement between the parties involved.

(3400.01) Hence the agreement between the parties is a key test for recording revenue. [ 93 ] In this case, the revenue (sometimes referred to as income) being measured is the management fee payable to Canad as defined in art. 5.01 of the HMA, which incorporates the definition of Gross Revenues. That definition refers to revenue which is the revenue of Club Regent. [ 94 ] While Lake Louise’s expert took the position that the words revenue and receipts within the definition of Gross Revenues were synonymous, in cross-examination he stated as follows: Q I see.

And is there anywhere in your opinion reports, or in CICA, or in EIC bulletins that says that revenue and receipt are synonymous? A No. The Agreements [ 95 ] It is clear that the two agreements, being the COA and the HMA, govern aspects of the relationship between Lake Louise and Canad as regards their joint undertaking at Club Regent. Both common sense and the wording of the agreements dictate that they are to be read together and should be interpreted in a consistent manner.

While they should be interpreted such that one is not inconsistent with the other, they have different purposes and contain different terms because they govern different aspects of that relationship. In fact, the parties are not even the same. [ 96 ] The purpose of the HMA, which is an agreement between Canad and Club Regent, is to set out the terms under which Canad will manage the operations of Club Regent. This sets out how it will be paid for its services – that is, it determines the measurement of the revenue to which Canad is entitled for those services. [ 97 ] The

preamble to the COA states that “this Agreement is entered into for the purpose of establishing detailed provisions regarding the respective holdings of the parties hereto with respect to the Property.” It is more focussed on various aspects of the relationship between the co-owners. Analysis of the Issues (

i) Did the trial judge err in finding that all of the coin-in was to be included as a receipt within the definition of Gross Revenues under the HMA? [ 98 ] The primary responsibility of a trial judge when interpreting a contract is to apply the legal principles of contractual

interpretation, which the trial judge correctly set out at paras. 21-26 of his reasons.

In this case, the terms of the contracts require him to also give effect to art. 11.10 of the COA, being that all calculations are to be made in accordance with GAAP. [ 99 ] For ease of reference, I will repeat the definition of Gross Revenues as it appears in the HMA: “Gross Revenues” shall mean all revenues and receipts of every kind derived from operating the Hotel and parts thereof, including, but not limited to : income (both from cash and credit transactions) before commissions and discounts for prompt or cash payments, from rental of rooms, stores, offices, exhibit or sales space of every kind; lease and concession fees and rentals; income from vending machines; food and beverage sales; wholesale and retail sales of merchandise at the Hotel, service charges, and proceeds, if any, from business interruption or other loss of income insurance; provided, however, that Gross Revenues shall not include gratuities to Hotel employees other than gratuities added to any food and beverage sales by the Hotel itself for its benefit or federal, provincial or municipal excise, value added tax, GST, sales or use taxes or similar impositions collected directly from patrons or guests or included as part of the

sales price of any goods or services. [emphasis added] [ 100 ] Lake Louise takes the position, firstly, that revenue and receipts are synonymous and, secondly, that coin-in is not a receipt “derived from operating the Hotel.” Revenue and Receipts [ 101 ] When his reasons are examined, it is clear that the trial judge applied both the legal principles of contractual

interpretation and GAAP in his

interpretation of the word receipts within Gross Revenues: - He applied GAAP to note that coin-in is not considered to be revenue. - He further noted that GAAP defines revenue but does not define receipts. - The experts agreed, and the trial judge found, that there is no principle in the CICA Handbook or the EIC Bulletin that says that receipts and revenues are synonymous, so the trial judge applied the principles of statutory

interpretation to the question of whether the words were synonymous. He found that “it is unnecessary that both words should have been used or drafted into the definition of Gross Revenues if they were intended to mean the same thing” and “there is no reason, on the face of the definition or the agreements as a whole, for me to consider the word ‘receipts’ to be a redundant term” (at para. 57). He then applied the principle of contractual

interpretation that “meaning is to be given to all words in the text” to find that the words were not intended to be synonymous (at para. 57). - Noting that GAAP have no meaning for receipts, he turned to the well-accepted practice of referring to a standard dictionary definition. He stated that, “No objection was taken to the Oxford dictionary meaning which defines ‘receipt’ as the act or instance of receiving or being received into one’s possession; the amount of money received” (at para. 58).

He further noted that this is distinguished from both the GAAP meaning of revenue and the meaning in the dictionary, being “total income generated by a source or business; synonyms include earnings, proceeds, profits and returns” (at para. 58). - He then applied the principle of contractual

interpretation that the words are to be considered in context and noted the very expansive wording of the definition. “It says ‘all’ revenues and receipts, ‘of every kind’, ‘including, but not limited to’ and then exempts only two very specific items ” (at para. 59). - He considered Lake Louise’s argument that the exemption of certain gratuities, taxes and “similar impositions” (at para. 60) should be read expansively to include either coin-in or Net Win. In coming to his conclusion, the trial judge applied another principle of

interpretation, “that express mention in a document of one or more members or things of a particular class may be taken as tacitly excluding others of the same class which are not mentioned,” finding that “[t]he drafting [of the exemption] is precise and narrow; it does not support such a construction” (at para. 60). - Again turning to GAAP, the trial judge noted that, according to the experts, neither gratuities nor sales or use taxes would be considered revenue pursuant to GAAP.

Therefore, if revenue and receipts were synonymous in the definition of Gross Revenues and interpreted in accordance with the GAAP definition of revenue, there was no need to add the exemption for these two types of receipts, because they would not be captured by the definition of Gross Revenues in the first place. He noted that the inclusion of the exemptions would become meaningful only if receipts are not synonymous with revenue, requiring certain types of receipts to be carved out in order to be exempted. (See para. 61.) [ 102 ] The COA is of assistance regarding the

interpretation of the term receipts in the HMA. In art. 5.2 of the COA, Club Regent is required to provide a statement of “Gross Cash Receipts,” which is defined to include “all receipts, of an income nature.” Thus, in the COA, the parties have limited the term receipts to those of an income nature. This is to be compared to the wider definition in the HMA, which defines receipts as “receipts of every kind derived from operating the Hotel and parts thereof, including, but not limited to: income.” The COA, with its more limited definition of receipts, was signed 17 months before the HMA.

Had the parties wanted to limit the meaning of receipts in the HMA to revenue or income, they could have done so as they did in the COA. Instead, they chose a wider meaning, and it must be assumed that they did so intentionally. [ 103 ] I would find that the trial judge did not err in his

interpretation of receipts as it is used in the definition of Gross Revenues. He correctly applied both GAAP and the principles of contractual

interpretation to the

interpretation of this word. He made no palpable and overriding error in arriving at his conclusion that the two words are not synonymous; in fact, I would find that his decision was correct. Derived from the Operation of the Hotel [ 104 ] Lake Louise also argues that the trial judge erred in his finding that coin-in is derived from the operation of the hotel or a part thereof. [ 105 ] The trial judge started his

interpretation by considering whether GAAP assisted with the

interpretation of the word derived and found that “there was no evidence of any special meaning in accounting vernacular to the word” (at para. 42). He next followed the principles of contractual

interpretation, determining the ordinary meaning of the word to be “get, obtain or come from a source,” and applied that to interpret the word derived. He then stated that, “Here, a VLT area is clearly a part of each hotel and revenue or receipts are derived from it” (all at para. 42). [ 106 ] Next, the trial judge considered Lake Louise’s expert’s position that, based on the

interpretation of art. 2.06 of the VLTA,

Club Regent did not operate the VLTs; therefore, no revenues or receipts were derived from operating the VLTs and, thus, coin-in should not be included in the calculation of the management fee.

That provision states: 2.06 The Siteholder acknowledges that the VLT gaming is being operated at the instance of the [MLC] and that its provision of the venue and certain ancillary services is not intended in any way to create an agency, joint venture, joint undertaking or partnership relationship. [ 107 ] The trial judge noted, correctly, that Lake Louise’s expert’s opinion was more in the vein of a legal argument and not an accounting opinion.

He further noted that art. 4 of the VLTA states that the siteholder’s commission “represents a blended payment for the use of the designated area of the Site and the ancillary services.” He then pointed out that Club Regent was expected to maintain the infrastructure and provide many ancillary services, many directly related to coin-in, including support and supervision, which were detailed in arts. 6-11 of the VLTA.

I note that these ancillary services, provided through Canad, include the provision of electricity and a dedicated telephone line for the VLT area, maintaining a float of money for the patrons, having trained security staff, collecting, counting and depositing the money from the machines into the bank (for which it hires and pays an armoured-car service) and maintaining a separate account for that purpose and providing insurance, including coverage for damage, loss or theft to the VLT equipment and theft of the VLT money. [ 108 ] The trial judge then concluded (at para. 44): ….

These many services are detailed throughout the agreement … and collectively clearly mean the hotel in actual fact operates the VLT area, albeit legally, on behalf or at the instance of the [MLC]. Read in context, [art.] 2.06 simply means that no legal relationship is created due to the hotel providing the space or services. [ 109 ] It is clear that, while MLC provided, installed and repaired the VLTs, Club Regent and its management company, Canad, were responsible both for providing and maintaining the area and also for the daily, ongoing operation of this area of the hotel and of the VLTs.

I have no difficulty in concluding that the trial judge made no palpable and overriding error, and was in fact correct, in finding that Club Regent operated the VLT area or part of the hotel and that it derived revenue and receipts from so doing. Coin-in as a Trust Fund [ 110 ] Lake Louise also argues that art. 9.01 of the VLTA states that money derived from operating the VLTs is a trust fund owing to MLC, which means that it forms no part of the business of the hotel.

Its position is that only that part paid to the hotels as the 20 per cent commission under the VLTA can be considered as revenues and receipts derived from the operation of the hotel. [ 111 ] The trial judge noted that Lake Louise’s expert was of the opinion that “pursuant to [art.] 9.01 of the [VLTA], the coin-in never became the property of the hotel siteholder and hence would not be hotel revenue according to GAAP” (at para. 74). The trial judge found that (at para. 75): …. … [The Lake Louise expert] refused to agree with the proposition that an entity receiving trust monies had receipt of those monies.

But he agreed, for example, it would be appropriate for a broker to charge a fee on monies received by him for investment if there was an agreement to do so, even though the monies were clearly not his. Ultimately, he agreed again that the agreement between parties was critical but said it could not override GAAP, if GAAP were clear. [ 112 ]

Article 9.00 of the VLTA states as follows: 9.00 ACCOUNTABILITY FOR NET WIN 9.01 [Club Regent] acknowledges that the Net Win, at all times, is a trust fund owing to MLC and that it forms no part of [Club Regent’s] property, business and undertaking. 9.02 In furtherance of clause 9.01 [Club Regent] undertakes that it will deposit the Net Win less the Commission into a single bank account designated by [Club Regent], which shall be identified to the [MLC]. This account shall be set up to facilitate the transfer sweep of the account to a bank account of the [MLC]. [ 113 ]

Article 9.01 is not literally correct that all of the Net Win is a trust fund forming no part of the property etc. of Club Regent, as Club Regent is entitled to retain 20 per cent as its commission. [ 114 ] I would agree with the proposition that, according to GAAP, coin-in is not revenue for Club Regent and that most of it is trust money for the benefit of MLC, but that does not mean that it is not received by Club Regent prior to being transferred to MLC or that it is excluded as part of the base upon which to calculate the management fee. I have come to this conclusion for the following reasons:

- Calculating a commission or fee based upon trust funds is not a novel or unconventional proposition; in fact, it occurs in many situations: - lawyers often calculate fees for real estate and mortgage work as a percentage of the value of the property or mortgage, even though it is clear that the proceeds of the sale or mortgage are trust funds to which the lawyer has no entitlement; - lawyers also charge fees for probate work based on the value of the estate, even though the estate property, to the extent that it comes into the lawyer’s possession, is trust property; - trust companies charge fees based on the value of both transactions and assets even though those assets are trust funds to which they have no entitlement; - real estate agents and investment brokers (as was acknowledged by Lake Louise’s expert) calculate fees based on the value of assets that are trust property; - commission sales people are usually paid based on the value of the goods they sell, notwithstanding that the goods would be trust property to which they would have no entitlement. - In his report of May 31, 2011, Lake Louise’s expert provided his own example of trust money forming the basis of a fee.

He described the situation where a hairdresser operates her business out of space located in a hotel. He noted that the hotel might also collect the cash earned by the hairdresser and do the accounting records for her, which he said may occur if the rent charged was a percentage of the hairdresser’s receipts . In that scenario, the hairdresser’s receipts would be trust property in the hands of the hotel to which it would have no entitlement, like the coin-in in this case. Yet, as the expert acknowledged, the hotel would charge its fee based on the amount of those trust funds. [ 115 ] Mr.

Ledohowski testified that including coin-in as part of the Gross Revenues, rather than just the management fee, was consistent with the treatment of Club Regent’s revenue from the other vending machines located on the premises. He stated that, although those machines were owned and maintained by independent operators, Club Regent included the total sales as sales in its annual financial statements and deducted the cost of the product and the income to the independent operators as cost of sales, to show a net income on the annual financial statements.

Further, he said that Club Regent calculated its revenue from these vending machines as a percentage of the sales before any deductions, which would be equivalent to calculating the management fee for the VLTs on the coin-in. [ 116 ]

Article 9.01 protects the Net Win from seizure in the event that the accounts of Club Regent or Canad are garnished or either or both fall into financial difficulty.

It does not, by designating the money as trust funds, overcome the obvious fact that Club Regent/Canad receives the money when it empties the VLTs and has possession of and responsibility for that money until MLC transfers the money from Canad’s account into its own account. [ 117 ] Much like the lawyer, real estate agent, investment broker and the sales person who charge a fee based on a percentage of trust money or property to which they are not entitled, there is no reason in the agreements or otherwise why the management fee in this case cannot be based on the coin-in.

Lake Louise’s expert’s argument to the contrary is without any merit. Including Coin-in as Revenue in Club Regent Financial Statements [ 118 ] When Canad adjusted the base for its management fee to include coin-in in 2007, it also adjusted the annual financial statements for Club Regent to show coin-in as gaming revenue and the payments to players and MLC as cost of sales. Prior to this time, it only showed the 20 per cent commission as gaming revenue.

The net effect of this change on the balance sheet was neutral. [ 119 ] There was much discussion at the trial as to whether the coin-in and Net Win, 80 per cent of which was trust money under art. 9.01 of the VLTA, could be revenue for Club Regent on its annual financial statements. Starting in 2011, the auditors noted this as an irregularity not in accordance with GAAP in their review engagement report.

As is indicated in that report, Canad was of the view that using the coin-in as the gaming revenue provided additional information as to the scale and style of VLT operations. [ 120 ] The trial judge was aware of and considered this controversy. He concluded that he did not find the comments in the review engagement report helpful and he was not relying on them for several reasons. His conclusion was (at para. 72): …. - It need be borne in mind that Canad plays concurrent roles respecting Lake Louise and the hotels.

On the one hand, it and Lake Louise are co-owners of the hotels through the trust mechanism and, on the other, Canad alone is the contractor providing management services for a fee to the hotels. In this respect, Lake Louise’s expert opined on the recognition, presentation and measurement of revenue by the hotels’ entities in their statements and how coin-in would not be GAAP consistent. He went further, saying that other casinos or indeed the [MLC]. would not use coin-in as a measure of their revenue.

I accept that using coin-in as a component of the hotel’s “sales” or “income” in the hotels’ financial statements is likely inconsistent with GAAP. However, that is different from saying that coin-in is, or would be, inappropriate as a measure to calculate a contractor’s management fee if the parties so agreed. However calculated, the management fees were an expense of the hotel and, separately, revenue of Canad (presumably on its own statements) in its own right as a management services contractor.

I cannot help but think that the presentation of the hotel’s financial statements could have been much clearer to detail the calculation of the management fee and that revenue, sales, or income of the hotel were not necessarily the same, or the same measurement, as called for in the calculation of management fees through the definition of gross revenues.

[ 121 ] I agree completely with his conclusions on this point.

To summarize: - it is very important to differentiate between the use of coin-in as part of Gross Revenues for the calculation of the management fee under the HMA and its use as revenue in the Club Regent annual financial statements; - the definition of Gross Revenues forms part of only the HMA and it is applicable only to that agreement; - it is the COA that makes provision for the preparation of Club Regent’s annual audited financial statements, and it makes no reference to Gross Revenues, as that term is used in the HMA, or coin-in. [ 122 ] I agree that the annual financial statements of Club Regent must be prepared in accordance with GAAP, and, for that purpose, revenue would be determined in accordance with GAAP, which would appear to not include either trust funds or coin-in.

It should be noted that this would apply equally to other service providers ( i.e. , lawyers, investment brokers, etc.) who calculate their fees on the basis of trust funds – those trust funds would not be revenue in the financial statements of those service providers. [ 123 ] If in fact Club Regent’s use of coin-in in the annual financial statements is not in accordance with GAAP, that does not mean that its use in the base to calculate the management fee under the HMA is not in accordance with GAAP.

While the HMA and COA are to be considered together, they are different agreements entered into for different reasons. Interpreting them together does not make them the same. [ 124 ] For these reasons, I am of the view that the irregularity in Club Regent’s annual financial statements caused by the use of coin-in as gaming revenue was irrelevant to the

interpretation of the HMA and, in the end, a red herring. Conclusion [ 125 ] The trial judge concluded (at para. 63): Having reached the determination that revenues and receipts are different and distinct terms in the definition of gross revenues, I therefore find that VLT coin-in is a receipt derived from the operation of the VLT part of the hotel. The hotel operates the area through Canad’s management, which collects the money put in the VLTs and accounts for them both to pay out the players and the [MLC], with all of the necessarily incidental activities and risk as mandated by the [VLTA].

The collection and handling of the coin-in by the siteholder are cash receipts that must be accounted for to the [MLC]. [ 126 ] I would find that this is the only logical and reasonable conclusion to draw from the trial judge’s findings and his

interpretation of the words in the definition of Gross Revenues, with which I am in agreement. Again, not only did he not commit any palpable and overriding error in his

interpretation of Gross Revenues, but I would find that he was correct in all of these matters. Further, the trial judge applied GAAP to arrive at his decisions on all of these issues, which is not acknowledged by my colleague. (ii) Did the trial judge err in finding that his

interpretation of Gross Revenues and of the calculation of the management fee was not prohibited by GAAP but neither was it in accordance with GAAP? The Trial Judge’s Decision [ 127 ] The trial judge stated (at para. 73): In this case, the only way the definition and resulting calculation of management fees can

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