2017 MBCA 110, 2017 MBCA 110

Citation: Elias et al v Western Financial Group Inc, Date: 20171115 2017 MBCA 110 Docket: AI16-30-08716 IN THE COURT OF APPEAL OF MANITOBA Coram: Mr. Justice Michel A. Monnin Madam Justice Holly C. Beard Madam Justice Jennifer A. Pfuetzner BETWEEN : ARTHUR ELIAS, JACK ELIAS and ) DOUGLAS SIGURDSON as Trustees ) L. W. Bowles and of The Elias Family Trust, and ROSSANO ) K. L. Dixon D’ASCANIO, PATRIZIA D’ASCANIO ) for the Appellant and ALESSANDRA RESCINITI as ) Trustees of The D’Ascanio Family Trust ) S. F. Vincent and ) J. A.

Baigrie (Plaintiffs) Respondents ) for the Respondents ) - and - ) Appeal heard: ) June 12 and 13, 2017 WESTERN FINANCIAL GROUP INC. ) ) Judgment delivered: (Defendant) Appellant ) November 15, 2017 On appeal from 2016 MBQB 75 PFUETZNER JA [ 1 ] This appeal raises issues involving contractual

interpretation and the application of the doctrine of rectification in the context of a commercial transaction between sophisticated parties with equal bargaining power, both represented by experienced counsel. Introduction [ 2 ] The plaintiffs were owners of a successful insurance brokerage, Hayhurst Elias Dudek Inc. (HED). In 2006, the defendant began a process of buying out the plaintiffs by purchasing shares in HED in multiple tranches.

After the initial share purchase was completed in 2006, the parties entered into a unanimous shareholders agreement (the USA) to govern their future relationship as shareholders. The USA outlined “put” and “call” rights, among other things. By 2009, the defendant owned all the shares in HED. A series of contracts memorialized the agreements reached by the parties in respect of the sale of each tranche of shares to the defendant. The contracts each contained a valuation formula for the tranche of shares that were the subject of that contract.

In each of the contracts, the initial purchase price of the shares was calculated using a set formula. The contracts further provided for the shares to be re-valued as of set dates in the future, with any increase in value being paid to the plaintiffs. These purchase price adjustments were referred to by the parties as “bumps”. [ 3 ] In 2010, after the plaintiffs had sold all their shares to the defendant, a dispute arose between the parties as to the calculation of the final bumps.

The plaintiffs claimed that they had mistakenly agreed to an incorrect valuation formula in the share purchase agreements that dealt with the sale of shares in 2008 and 2009, as a result of which they were underpaid for their shares. The trial judge agreed with the plaintiffs. He ordered rectification of the 2008 share purchase agreement (the 2008 SPA); found that the defendant had breached both the 2008 SPA and the 2009 share purchase agreement (the 2009 SPA); and awarded damages of $10,704,227 and pre-judgment and post-judgment interest at the pre-judgment rate.

[ 4 ] The defendant appeals the award of damages. The plaintiffs cross appeal the trial judge’s finding that there was no agreement between the parties that the defendant would pay interest at 12 per cent per annum on the award of damages. [ 5 ] For the reasons that follow, I would allow the appeal because the trial judge made two reversible errors. The first was in ordering rectification of the 2008 SPA based on too expansive an approach to the doctrine of rectification which was not available on the facts. The other error was in his construction of the 2008 SPA and the 2009 SPA.

As a result, the cross appeal is moot and I would dismiss it. Background [ 6 ] Prior to the defendant acquiring shares in HED, HED was co-owned by VenGrowth Investment Fund Inc., VenGrowth II Investment Fund Inc. (together, VenGrowth) and the plaintiffs. VenGrowth owned 10% of the issued and outstanding common shares in HED (the shares). The plaintiffs, Arthur Elias (Elias), Jack Elias and Douglas Sigurdson (Sigurdson), as trustees of the Elias Family Trust (the Elias Trust), owned 70.6% of the shares.

The plaintiffs, Rossano D’Ascanio (D’Ascanio), Patrizia D’Ascanio and Alessandra Resciniti, as trustees of the D’Ascanio Family Trust (the D’Ascanio Trust), owned 19.4% of the shares. [ 7 ] In 2006, the defendant agreed to acquire 11% of the shares by purchasing all of VenGrowth’s 10% interest and purchasing a further 1% interest from the D’Ascanio Trust. This transaction was effected by way of a share purchase agreement (the 2006 SPA). At the same time, HED issued 1,783.705 new shares from treasury to the defendant pursuant to a subscription agreement (the 2006 SA).

The defendant paid the sum of $3,376,294, being the subscription price for those shares, to HED which HED used to pay down debt. [ 8 ] In 2008, the Elias Trust and the D’Ascanio Trust served the defendant with notice that they intended to exercise their put rights and wished to sell to the defendant shares representing 24% of the issued and outstanding shares in HED. The plaintiffs had Roger Ranieri (Ranieri), the COO of HED, prepare an initial calculation of the purchase price for the shares on their behalf that they sent to the defendant.

The calculation was later incorporated, along with other terms, into the 2008 SPA. [ 9 ] In 2009, the defendant advised the plaintiffs that it was in a financial position to purchase the balance of the plaintiffs’ shares. Accordingly, the Elias Trust and the D’Ascanio Trust served the defendant with notices that they intended to exercise their put rights and wished to sell to the defendant their remaining shares representing 51% of the issued and outstanding shares in HED.

Again, Ranieri prepared an initial purchase price calculation on behalf of the plaintiffs which was incorporated, with other terms, into the 2009 SPA. [ 10 ] Each of the 2006 SPA, the 2008 SPA and the 2009 SPA sets out as a specific dollar amount the purchase price for the shares subject to each respective agreement. Each agreement also incorporated a

schedule setting out the valuation formula and calculation upon which the purchase price was based. The

schedule included both a written valuation formula and a numerical calculation, the latter of which had been prepared by the plaintiffs. The written valuation formula included in each agreement was, in all essential terms, identical. It also accorded to the formula incorporated into the USA as

Schedule C which the parties intended to apply to the valuation of shares on a future transaction. In fact, the 2009 SPA incorporates, by reference, the formula contained in

Schedule C to the USA rather than setting out a written valuation formula. Simplified, the valuation formula is 6.5 times EBITDA (earnings before interest, income taxes, depreciation and amortization), minus debt, plus (or minus) working capital. [ 11 ] Even though the 2006 SPA, the 2008 SPA and the 2009 SPA specified the exact purchase price to be paid on closing for the shares, the valuation formula and calculations are central to this appeal.

This is because the same valuation formula and calculations were used to calculate the value of the shares at various times after closing in order to determine the purchase price adjustments (bumps). [ 12 ] Each of the 2006 SA, the 2006 SPA, the 2008 SPA and the 2009 SPA provides the manner by which the bumps would be calculated and, if applicable, paid by the defendant to the plaintiffs. The general concept was that the shares would be re-valued at the bump date using the same formula as was used to determine the initial purchase price.

The defendant would pay an amount to the plaintiffs equal to any increase in the value of the shares. Essentially, the parties agreed that the plaintiffs would, over a fixed period of time, benefit from any increase in value of HED due to its earnings increasing, to the exclusion of the defendant. [ 13 ] Since the bumps were meant to reflect increases in the value of HED due to an increase in its earnings, the agreements also incorporated a concept of deducting from the valuation formula any increases in the value of HED derived from equity contributed to HED by a shareholder or other person.

This could occur, for example, if new shares were issued from treasury. The provisions in the agreements that set out the manner in which adjustments to the valuation formula were to be made in respect of equity injections varied slightly. The construction and effect of these provisions was a central issue at trial. The terms of these provisions will be reviewed in detail later on. [ 14 ] The defendant’s position is that the equity that was injected into HED in 2006 when it paid $3,376,294 (the 2006 equity) for treasury shares under the 2006 SA was to be deducted from all future valuations of HED.

In fact, this is what occurred. When the plaintiffs exercised their put rights in 2008 and 2009 and provided the defendant with Ranieri’s purchase price calculations, those calculations deducted the 2006 equity. The 2008 calculation shows the deduction of the sum of $3,376,294 as a separate-line item referred to as “Less: Nov 2006 WFG equity injection”. The 2009 calculation deducts the 2006 equity as adjusted by the payment of a bump calculated in 2007.

Accordingly, the 2009 calculation shows the deduction of the sum of $6,994,706 as a separate-line item with the notations “Less: WFG equity injections -6,994,706 (2006 Sale and 2007 Bump)”. The calculations were ultimately incorporated into the 2008 SPA and the 2009 SPA respectively. The valuation calculations for the subsequent bumps also deducted the 2006 equity. This had the effect of ultimately reducing the amounts received by the plaintiffs under the 2008 SPA and the 2009 SPA. [ 15 ] The plaintiffs’ position is that the 2006 equity was deducted by mistake in all of these calculations.

The plaintiffs say that the 2006 equity was only to be deducted in calculating the bumps payable to VenGrowth and the D’Ascanio Trust on the shares they

sold to the defendant under the 2006 SPA. The plaintiffs say that the rationale for this is that these shareholders sold their shares on the same day that the defendant injected the 2006 equity. Accordingly, they have no interest in the 2006 equity and the bumps payable to these shareholders should be calculated without reference to the 2006 equity. In order to incorporate this concept,

section 2.7 of the 2006 SPA reads, in part: 2.7 Adjustments in respect of equity injections . Notwithstanding anything else in this

Article 2, it is agreed that in calculating the . . . Bump Calculations : (

a) there shall be excluded from the appropriate part(

s) of each Bump Calculation (EBITDA formula, working capital, debt and/or book value components of such calculation, as applicable), any equity contribution or injection made by any shareholder or any other person on or subsequent to the Closing Date including, without limitation (and for greater certainty) the Subscription Price of the Shares subscribed for by the Purchaser pursuant to the Subscription Agreement (which amount is acknowledged to be $3,376,294, paid to the Corporation), plus any price adjustments to such Subscription Price paid to the Corporation. [ 16 ] The plaintiffs argue that the same rationale does not apply to the 2008 SPA and the 2009 SPA which were entered into subsequent to the 2006 transactions.

After the 2006 transactions, the plaintiffs owned 75% of the shares and, thus, effectively had an interest in 75% of HED’s net assets which, at this point, included the 2006 equity initially funded by the defendant which had been put to use in the business. As a result, the plaintiffs say there was no rationale to deduct the 2006 equity from any calculations involving the plaintiffs’ 75% shareholding.

To do so unfairly resulted in them being deprived of their 75% interest in the 2006 equity and the earnings on that 2006 equity. [ 17 ] Another way of stating the plaintiffs’ concern is that, each time they sold shares in 2008 and 2009, the shares were undervalued. This occurred when the initial purchase prices were calculated and when the subsequent revaluations were done to determine the bump payments on those shares. As previously noted, the valuation formula for HED set out in the 2008 SPA and the 2009 SPA is 6.5 times EBITDA, minus debt, plus (or minus) working capital.

Each time they prepared the HED valuation calculations, the plaintiffs deducted the 2006 equity. [ 18 ] The formula also contained a method of determining the purchase price payable to each of the vendors in respect of their shares. The price per share for each vendor was calculated by dividing the HED valuation by the total number of issued and outstanding shares.

The unfairness alleged by the plaintiffs arises because the 2006 equity of $3,376,294 (as adjusted) was deducted from the HED valuation, yet in determining the value or price for each of the vendors’ shares, the HED valuation was divided by the total number of issued and outstanding shares, including the 1,783.705 shares issued to the defendant under the 2006 SA in exchange for its payment of the 2006 equity. [ 19 ] In support of their position, the plaintiffs point to a provision in

Article 9 of the USA dealing with the valuation of HED shares on a future purchase and sale.

Section 9.06(

b) makes no mention of deducting the 2006 equity and states (in part): 9.06 Adjustments for Equity Injections . Notwithstanding anything else in this

Article 9, it is agreed that in calculating the . . . Bump Calculations : (

b) there shall be excluded from the appropriate part(

s) of each Bump Calculation (EBITDA formula, working capital, debt and/or book value components of such calculation, as applicable), any equity contribution or injection made by any shareholder or any other person on or subsequent to the Closing Date of the purchase and sale of the . . . Shares in respect of which the adjustment is to be made. [ 20 ] However, in contrast to the plaintiffs’ assertion that the 2006 equity was not to be deducted in valuations relating to any later share sales, the 2008 SPA contained a provision which specifically directed that the 2006 equity be deducted in calculating the bumps on the tranche of shares sold under the 2008 SPA. The relevant

section of the 2008 SPA states (in part): 2.6 Adjustments in respect of equity injections . Notwithstanding anything else in this

Article 2, it is agreed that in calculating the [bumps]: (

a) there shall be excluded from the appropriate part(

s) of each [bump] Calculation (EBITDA formula, working capital, debt and/or book value components of such calculation, as applicable), any equity contribution or injection made by any shareholder or any other person on or subsequent to the Closing Date including, without limitation (and for greater certainty) the Subscription Price of the Shares subscribed for by the Purchaser pursuant to the Share Subscription Agreement (which amount is acknowledged to be $3,376,294, paid to the Corporation), plus any price adjustments to such Subscription Price paid to the Corporation. [ 21 ] The 2009 SPA dealt with the deduction of equity injections in more general terms in

section 2.9 as follows (in part): 2.9 Adjustments in respect of equity injections. Notwithstanding anything else in this

Article 2, it is agreed that in calculating the [bumps]:

(

a) there shall be excluded from the appropriate part(

s) of each [bump] Calculation (EBITDA formula, working capital, debt and/or book value components of such calculation, as applicable), any equity contribution or injection made by any shareholder or any other person on or subsequent to the Closing Date. [ 22 ] In

summary, the 2006 SPA and the 2008 SPA specifically refer to the deduction of the 2006 equity in calculating bumps payable on the shares dealt with under those contracts. In addition, those contracts provide for the deduction of any other equity injected into HED between the closing date of the sale of that tranche of shares (in the 2008 SPA, the term “Closing Date” is defined as May 30, 2008) and the payment of the bump.

The 2009 SPA does not refer to the 2006 equity but only refers to the deduction of equity injected into HED between the closing date of the sale of that tranche of shares (defined as October 1, 2009) and the payment of the bump on those shares. [ 23 ] The 2008 SPA, the 2009 SPA, the valuation formula, the valuation calculations and the bump calculations were reviewed by numerous people, including the parties and their advisors, accountants and lawyers. Moreover, the valuation calculations were prepared on behalf of the plaintiffs and presented by them to the defendant.

During the negotiation of the 2009 SPA, the plaintiffs harboured concerns about the deduction of the 2006 equity but remained silent. The plaintiffs did not voice any concerns regarding their valuation calculations to the defendants until 2010, when the final bump payments were calculated. It was only then, months after the plaintiffs had sold their final tranche of shares, that they emerged from the weeds, claiming that there had been a mistake. [ 24 ] However, the question of whether the arrangements made by the parties were, on a macro level, fair to the plaintiffs is not the issue on this appeal.

The issue is whether the defendant should bear legal responsibility for the plaintiffs having repeatedly agreed to a formula that the plaintiffs themselves proposed but which they now say undervalued their shares. The Trial Judge’s Decision [ 25 ] In lengthy reasons, the trial judge made several important findings of fact. [ 26 ] Sigurdson, the lawyer who advised the plaintiffs throughout these transactions, said he made a mistake when he copied the equity injection clause at

section 2.7 of the 2006 SPA directly into the 2008 SPA as

section 2.6(a). Sigurdson felt that he should have used an equity injection clause in the 2008 SPA based instead on

section 9.06(

b) of the USA which makes no reference at all to the 2006 equity. Sigurdson also admitted to having given incorrect advice to his clients. In 2008, the plaintiffs believed that

section 2.6(

a) of the 2008 SPA followed the wording of

section 9.06(

b) of the USA based on Sigurdson’s advice to them. [ 27 ] Both Elias and D’Ascanio reviewed the 2008 SPA before signing it and assumed that the equity injection clause (section 2.6(a)) was appropriate based on Sigurdson’s advice. Elias reviewed the calculations attached to the 2008 SPA, was aware of the deduction of the 2006 equity and assumed it to be correct. [ 28 ] The trial judge accepted the evidence of Elias, Sigurdson and D’Ascanio.

The trial judge put little weight on the evidence of Ranieri or that of the defendant’s witnesses, Scott Tannas (Tannas) and Thomas Dutton (Dutton), who testified that they always intended for the 2006 equity to be deducted under the 2008 SPA and the 2009 SPA. [ 29 ] In August of 2009, Elias exchanged emails with Ranieri, D’Ascanio and Sigurdson in which he raised the issue of whether it was correct for the 2006 equity to be deducted from the valuations of HED that were being calculated by Ranieri for the purposes of the purchase price under the 2009 SPA and the 2009 bumps under the other agreements.

Ranieri replied, “I believe it is provided for otherwise we wouldn’t be doing it. Don’t think this is a door to be opened at this time.” Sigurdson confirmed this and added: [E]ssentially [the defendant] does not want to pay on the Bump payments based upon money they have injected as equity (they will pay on earnings increase, but not on cash increase where they were the source of the cash). Specifically,

section 9.06 of the USA is below (and similar clauses are found in each subscription and purchase agreement) (and the reference to equity injection by a shareholder is really just a reference to [the defendant]). [ 30 ] The plaintiffs proceeded to negotiate and finalize the 2009 SPA fully knowing that the 2006 equity was being deducted from the valuations of HED, as had been done with all prior valuations. Indeed, one of the schedules to the 2009 SPA was a calculation of the estimated bump payable under that agreement as of December 31, 2009.

The calculation showed the deduction of the 2006 equity as adjusted by the 2007 and 2008 bumps on the subscription shares. [ 31 ] The trial judge analyzed the plaintiffs’ claim by focussing first on the USA. In construing

section 9.06(

b) of the USA (adjustments for equity injections), the trial judge considered the terms of the 2006 SPA and the 2006 SA which had been signed a few days prior to the USA. The trial judge compared the wording of

section 2.7(

a) of the 2006 SPA,

section 3.2(

a) of the 2006 SA and

section 9.06(

b) of the USA and concluded (at para 188): While I find there to be a significant distinction in the [equity injection adjustment] clause of the USA as compared to the [equity injection adjustment] clauses in the [2006] SPA and [2006] SA, I cannot say that the meaning of each of those three [equity injection adjustment] clauses is clear and unambiguous. I therefore find that consideration of the circumstances surrounding the preparation and execution of the USA is warranted.

[ 32 ] The trial judge, quoting from Sattva Capital Corp v Creston Moly Corp , 2014 SCC 53 , instructed himself “to consider only the ‘objective evidence of the background facts at the time of the execution of the contract,’ which consists of ‘knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting’” (at para 189). [ 33 ] The trial judge proceeded to consider, in detail, a series of emails between the parties’ lawyers (Sigurdson on behalf of the plaintiffs and Jody Langhan for the defendant) and the defendant’s financial advisor (Craig Eckart) in the days leading up to the execution of the USA in which they exchanged and discussed drafts of the USA.

In particular, the trial judge considered email discussions regarding prior versions of what became

section 9.06(

b) in the USA.

The trial judge concluded (at para 198): [B]oth Eckart and Langhan clearly demonstrate in their emails that the wording of the [equity injection adjustment] clause in the USA was to be different from the [equity injection adjustment] clauses in the [2006] SPA and the [2006] SA in that the deduction would apply only to new equity injected between the time of future share purchases and the time of the associated bumps on those purchases. [ 34 ] The trial judge then considered the testimony of people involved in the transactions (including Tannas, Dutton, Ranieri, Elias and D’Ascanio) as to their subjective understanding of the meaning of equity injection adjustment clauses in the 2006 SPA, the 2006 SA and the USA.

He rejected the evidence of Tannas, Dutton and Ranieri and accepted that of Elias and D’Ascanio. He concluded (at para 207): I accept the plaintiffs’

interpretation of s. 9.06(

b) of the USA in finding that the deduction of the adjusted subscription price was to apply only to new equity injected between the time of future share purchases and the time of the associated bumps on those purchases. [ 35 ] As will become clear, the trial judge’s construction of

section 9.06(

b) of the USA had two aspects. First, as noted in his comments above, he found that

section 9.06(

b) provides that equity injected into HED between the date of a future share sale and the calculation of a bump on those shares will be deducted in calculating the bump. Second, the trial judge found that the

section included a corollary of sorts: it prohibits the deduction of any other equity injected into HED on the calculation of future share sales or bumps (in particular, the 2006 equity) and, in effect, it prohibits the parties from agreeing to new terms for any future sale of shares by way of separately negotiated share purchase agreements. [ 36 ] In analyzing whether the plaintiffs had made out a case for rectification of the 2008 SPA on the basis of mistake, the trial judge considered the defendant’s argument that the 2008 SPA and 2009 SPA (both of which, to the knowledge of the plaintiffs, provided for deduction of the 2006 equity) were new, stand-alone agreements that had been extensively negotiated. [ 37 ] The trial judge concluded (at paras 223-24): [T]he plaintiffs offered their shares for sale pursuant to the provisions of the USA, and I find that the parties intended those provisions to apply.

In fact, for whatever reason, the [equity injection adjustment] clause in the 2009 SPA conformed with the [equity injection adjustment] clause in the USA. However, the valuation calculations did not follow those provisions and deducted the adjusted subscription price, as had been done pursuant to the 2008 SPA. I find that the deduction constituted a breach of the [equity injection adjustment] clause in the 2009 SPA .

As with the 2008 SPA, I find that the 2009 SPA was not intended to be a “stand-alone” agreement and that the relevant provisions of the USA were applicable . [emphasis added] [ 38 ] The USA contains an “entire agreement” clause in

section 12.04; the 2008 SPA contains one in

section 1.4; and the 2009 SPA contains one in

section 1.4. These clauses essentially state the parties’ intention that the written document executed by them will constitute the entire agreement between the parties and that extrinsic, parol evidence outside of the written document is irrelevant.

Although the 2008 SPA made specific reference to the continuing existence of the USA, the USA was not carved out of the “entire agreement” clause in the 2009 SPA. [ 39 ] The trial judge reviewed the law on the equitable doctrine of rectification, including Performance Industries Ltd v Sylvan Lake Golf & Tennis Club Ltd , 2002 SCC 19 ; Shafron v KRG Insurance Brokers (Western) Inc , 2009 SCC 6 ; and McLean v McLean , 2013 ONCA 788 .

The trial judge did not have the benefit of Canada (Attorney General) v Fairmont Hotels Inc , 2016 SCC 56 ( Fairmont ) , which was released after he had rendered his decision. [ 40 ] He stated the law with reference to McLean (at para 231 ): In McLean , the court described rectification as being an equitable remedy dependent on the trial judge’s exercise of discretion.

It set out the following three conditions that must be established for the equitable remedy of rectification to be granted (at para. 45): . . . . . . (1) that the parties had a common continuing intention prior to the making of the document alleged to be deficient; (2) that that intention remained unchanged or existed at the time when the document sought to be rectified was signed; and (3) by mistake, the parties signed a document that did not accurately reflect their common intention . . . . . .

[ 41 ] The trial judge recited the direction in McLean that, in determining if a common continuing intention exists, the Court must consider the totality of the evidence, including “the testimony of a party as to what he or she understood the terms to be. The weight of this testimonial evidence will vary depending on the documentary and other evidence available” (at para 233). [ 42 ] The trial judge found that, prior to making the USA, the parties had a common continuing intention to deduct the 2006 equity only with respect to the 2006 SA and the 2006 SPA.

He also found that the common intention remained unchanged leading up to, and at the time of, the signing of the 2008 SPA. [ 43 ] In coming to his conclusion, the trial judge considered and weighed the following evidence (see para 235): the evidence of Tannas, Dutton and the plaintiffs’ witnesses regarding their subjective understanding of the issue of the deduction of the 2006 equity in the 2008 SPA and the 2009 SPA (the trial judge gave little weight to the evidence of Tannas and Dutton); the exchange of emails immediately preceding the completion of the final draft of the USA in 2006; the put notices in 2008 and 2009 referred to the USA; and the evidence of Sigurdson that the “incorrect” equity injection adjustment clause was inserted into the 2008 SPA by “mistake”. [ 44 ] Accordingly, the trial judge concluded that the plaintiffs had met their case on a balance of probabilities that “rectification of the 2008 SPA is justified” (at para 236) and he ordered that the equity injection adjustment clause,

section 2.6(

a) of the 2008 SPA, be rectified by deleting the specific reference to the 2006 equity. [ 45 ] As previously noted, the trial judge found that the deduction of the 2006 equity in the valuation calculations performed under the 2009 SPA was a breach of the 2009 SPA. Similarly, he concluded that the valuation calculations performed under the 2008 SPA were in breach of the rectified 2008 SPA (see para 240). [ 46 ] The trial judge ordered damages to the plaintiffs of $10,704,227 based on the opinion of the plaintiffs’ expert as to their losses (see para 252).

The plaintiffs had claimed losses of $10,704,221, being $6 less than awarded by the trial judge. There are two components to this sum. The plaintiffs’ expert had assessed the damages arising from the deduction of the 2006 equity under the 2008 SPA and the 2009 SPA as $5,804,644. The balance of the damages ($4,899,577) assessed by the plaintiffs’ expert related to the timing of the inclusion in HED’s working capital of the bumps paid to HED on the treasury shares issued to the defendant in 2006.

This claim will be explained further later in these reasons. [ 47 ] The trial judge dismissed the plaintiffs’ claim that there was an agreement with the defendant that the defendant would pay interest at 12 per cent per annum on any amount found to be owing (at para 254). The Issues and the Positions of the Parties [ 48 ] There are four primary issues raised by the appeal and one issue raised by the cross appeal. These issues and the positions of the parties are set out below: 1. Did the trial judge err in his

interpretation of the USA? [ 49 ] The defendant submits that the trial judge made errors of law in his approach to interpreting the USA. The defendant argues that the trial judge made the following errors: he erred in finding that

section 9.06(

b) of the USA was ambiguous as he failed to consider the entire agreement or the surrounding circumstances in making this determination; and he erred in considering parol evidence of negotiations as part of the surrounding circumstances. [ 50 ] According to the defendant, these errors led the trial judge to an

interpretation of

section 9.06(

b) of the USA that is contrary to the plain meaning of the words of that section. The defendant says that

section 9.06(

b) of the USA does not address whether the 2006 equity should be deducted on future share sales or bumps. All that

section 9.06(

b) deals with is to direct that future equity injections that occur between the date of a future share sale and a subsequent bump on those shares must be deducted in calculating the bump. It does not say that other deductions are impermissible. [ 51 ] The plaintiffs argue that the trial judge did not make an error in law; his

interpretation of the USA is a question of mixed fact and law and the applicable standard of review is palpable and overriding error. The plaintiffs say that the trial judge properly stated and applied the law regarding surrounding circumstances in contractual

interpretation. After finding

section 9.06(

b) of the USA to be ambiguous, the trial judge properly considered the evidence of the exchanges between the parties and counsel leading up to the execution of the USA. The plaintiffs’ position is that the trial judge made no reversible error in his

interpretation of the USA. 2. Did the trial judge err in rectifying the 2008 SPA? [ 52 ] The defendant argues that the trial judge erred in law in applying the law of rectification. The Supreme Court, in Fairmont (released after the trial judge’s decision), has clarified that the doctrine of rectification is only available to correct an error in recording the terms of an agreement.

However, rectification is not available where the “mistake” alleged in a contract is actually a mistaken assumption regarding background facts or where unexpected consequences arise out of the agreement including, but not limited to, income tax consequences. [ 53 ] The defendant points out that, since the plaintiffs candidly admitted that they understood when they signed the 2008 SPA and the 2009 SPA that the 2006 equity was to be deducted from all valuations of HED, there was no mistake in the written recording of the agreement. Everyone understood and agreed to the terms of the written contracts.

The defendant says that rectification is not available on these facts. [ 54 ] The plaintiffs argue that the trial judge made no reversible error in rectifying the 2008 SPA and finding that there was a

common continuing intention that the 2006 equity would not be excluded from valuations of HED for share purchases after 2006 and related bumps. They say that deference is owed to the trial judge’s credibility findings and his weighing of the evidence. 3.

Did the trial judge err in finding a breach of the 2009 SPA? [ 55 ] The defendant submits that the trial judge erred in finding that the 2009 SPA required the 2006 equity not to be deducted in the face of the following facts: the 2009 SPA sets out a specific purchase price agreed to by the parties and calculated by deducting the 2006 equity; the 2009 SPA includes the calculations (prepared by the plaintiffs) showing how the purchase price was arrived at and the calculations specifically deduct the 2006 equity; the plaintiffs admit they knew when they signed the 2009 SPA that it provided for the 2006 equity to be deducted; the calculations were incorporated into the 2009 SPA to ensure that the bumps were calculated in the same manner; and the 2009 SPA incorporates a calculation (deducting the 2006 equity) of the estimated final bump using projected year-end numbers. [ 56 ] The defendant argues that the trial judge erred by construing the equity injection adjustment clause (section 2.9) in the 2009 SPA in a manner that was directly in conflict with the other provisions of the 2009 SPA which specifically called for the deduction of the 2006 equity. [ 57 ] The plaintiffs’ position is that the trial judge did not make any reviewable error in construing the 2009 SPA and in finding that the defendant had breached it.

The trial judge was alive to all of the issues raised by the defendant, including its main argument that the 2008 SPA and 2009 SPA were stand-alone agreements, separate from the USA, and rejected them. They say he made no error in doing so. 4. Did the trial judge err in assessing the plaintiffs’ damages? [ 58 ] The defendant claims that the trial judge erred in ordering damages in excess of what the plaintiffs’ expert had assessed as arising from the deduction of the 2006 equity under the 2008 SPA and the 2009 SPA. The damages sought for this claim were $5,804,644.

The balance of the damages ($4,899,577) resulted from a new claim (the New Claim) that the plaintiffs included in their final amendment to the statement of claim. The New Claim related solely to the timing of when the bumps paid to HED on the treasury shares that the defendant subscribed for in 2006 would be added to working capital of HED for accounting purposes—i.e., in the fiscal year in which the bump was actually calculated and paid or in the prior fiscal year in respect of which the bump was calculated.

For example, would a bump paid in April of 2009 in respect of the 2008 fiscal year be added to working capital for the 2009 year or the 2008 year? The defendant points out that nowhere in the trial judge’s lengthy reasons does he address the New Claim, yet he awards at least $4,899,577 in damages in respect of it.

The defendant submits that the trial judge likely forgot to consider the New Claim and inadvertently awarded damages in the amount of the global figure put forward by the plaintiffs’ expert. [ 59 ] The plaintiffs argue that the trial judge made no error in his award of damages and states that the plaintiffs’ expert and the defendant’s expert agreed on the calculations. The plaintiffs concede that, if the defendant is successful in its appeal and this Court were to reverse the trial judge’s decision that the 2008 SPA and the 2009 SPA prohibited the deduction of the 2006 equity, the New Claim fails.

In other words, the New Claim can only succeed if the plaintiffs are successful on their main claim. 5.

Did the trial judge err in failing to order interest at 12 per cent per annum to the plaintiffs? [ 60 ] The plaintiffs, in their cross appeal, argue that the trial judge erred in law when he dismissed the plaintiffs’ claim for interest by relying on the subjective intent of the defendant, rather than applying an objective reasonable bystander test, to determine if an agreement had been reached. [ 61 ] The defendant argues that the record shows that the trial judge was well aware of the legal issues regarding subjective intent and that the evidence supports his finding that there was no agreement to pay interest at 12 per cent per annum on damages awarded by the court.

Standard of Review [ 62 ] The standard of review applicable in this case depends upon the nature of the question under review. [ 63 ] The standard of review in respect of factual findings and inferences of fact is that of palpable and overriding error ( see Housen v Nikolaisen , 2002 SCC 33 at paras 22 , 24-25). [ 64 ] The application of a legal standard to facts is a question of mixed fact and law and, in a civil matter, will only be interfered with if the judge has made a palpable and overriding error ( see Housen at para 37 ). [ 65 ] On the other hand, an error relating to an extricable question of law or the mischaracterization of a legal standard will be reviewed on a standard of correctness.

In Sattva , Rothstein J stated (at para 53): Nonetheless, it may be possible to identify an extricable question of law from within what was initially characterized as a question of mixed fact and law ( Housen , at paras. 31 and 34-35 ). Legal errors made in the course of contractual

interpretation include “the

application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor”(King [v Operating Engineers Training Institute of Manitoba Inc, 2011 MBCA 80], at para 21). Moreover, there is no question thatmany other issues in contract law do engage substantive rules of law: the requirements for the formation of the contract, the capacity ofthe parties, the requirement that certain contracts be evidenced in writing, and so on.

See also Heritage Capital Corp v Equitable Trust Co, 2016 SCC 19 at paras 21-22. [66] I will identify the applicable standard of review when I discuss the issues raised on the appeal. First, however, I willreview the relevant law. The Law—Contractual

Interpretation [67] This appeal raises issues of contractual

interpretation relating not only to the USA, but to the 2008 SPA and the 2009SPA. [68] It is well settled in Canada that the goal of contractual

interpretation is to give effect “to the intention of the parties, tobe gathered from the words they have used” (Consolidated-Bathurst v Mutual Boiler, (SCC), [1980] 1 SCR 888 at 899). In Sattva, Rothstein J described the process of determining the intention of the parties when he wrote (at paras 47-48): To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistentwith the surrounding circumstances known to the parties at the time of formation of the contract.

Consideration of the surroundingcircumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because wordsalone do not have an immutable or absolute meaning.

The meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of therelationship created by the agreement. [69] Courts are required to consider the surrounding circumstances in interpreting a contract regardless of whether thecontract may be ambiguous (see King at paras 69-70; Sattva at para 46; Fontaine et al v Canada (Attorney General) et al, 2014 MBCA93 at para 43; Directcash Management Inc v Seven Oaks Inn Partnership, 2014 SKCA 106 at para 13; Shewchuk v Blackmont CapitalInc, 2016 ONCA 912 at para 39; and IFP Technologies (Canada) Inc v EnCana Midstream and Marketing, 2017 ABCA 157 at para 82). [70] The type of evidence that can be considered as part of the surrounding circumstances was described in Sattva (at para58): The nature of the evidence that can be relied upon under the rubric of “surrounding circumstances” will necessarily vary from case tocase.

It does, however, have its limits. It should consist only of objective evidence of the background facts at the time of the executionof the contract (King, at paras. 66 and 70), that is, knowledge that was or reasonably ought to have been within the knowledge of bothparties at or before the date of contracting. [emphasis added] [71] However, the surrounding circumstances cannot be used to overwhelm the words of the contract. In Sattva, Rothstein Jwrote (at para 57): The

interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract ([GeoffR] Hall, [Canadian Contractual

Interpretation Law, 3rd ed (Toronto: LexisNexis, 2016)] at pp. 15 and 30-32). While the surroundingcircumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectivelycreates a new agreement (Glaswegian Enterprises Inc. v B.C. Tel Mobility Cellular Inc. (1997), (BC CA), 101B.C.A.C. 62). [72] It is also clear that the requirement that surrounding circumstances be considered in the

interpretation of contracts doesnot conflict with the parol evidence rule. [73] The parol evidence rule has been stated as follows in Ahone v Holloway, 1988 CarswellBC 336 (CA), quoting fromProfessor Corbin’s text, Corbin on Contracts (1952) at 534, (at para 16): When the terms of a contract have been embodied in a writing to which both parties have assented as the definite and completestatements thereof, parol evidence of antecedent agreements, negotiations and understandings is not admissible for the purpose ofvarying or contradicting the contract so embodied. [emphasis added]

[74] Where a contract contains an “entire agreement” clause, the case for the exclusion of extrinsic evidence is strengthened(see SM Waddams, The Law of Contracts, 7th ed (Toronto: Thomson Reuters, 2017) at para 326).

This is because the parties havespecifically turned their minds to whether prior agreements or negotiations should have any effect and have intentionally excluded them. [75] The parol evidence rule does not exclude evidence that would be included as part of the surrounding circumstances, asexplained in Sattva (at para 60): The parol evidence rule does not apply to preclude evidence of the surrounding circumstances.

Such evidence is consistent with theobjectives of finality and certainty because it is used as an interpretive aid for determining the meaning of the written words chosen bythe parties, not to change or overrule the meaning of those words. The surrounding circumstances are facts known or facts thatreasonably ought to have been known to both parties at or before the date of contracting; therefore, the concern of unreliability does notarise. [76] Contracts should not be construed in a manner so as to defeat the reasonable expectations of the parties.

In my view,this principle is particularly important in the context of commercial contracts, such as the ones at issue in this appeal, which were thesubject of extensive negotiations between sophisticated parties. Parties to such a contract have legitimate expectations that the contractwill be enforced and construed in accordance with their reasonable expectations. Indeed, the parties often will have entered into otherarrangements with third parties based on an assumption that their reasonable expectations will be fulfilled.

As noted in IFP Technologies(at para 192): Whether expectations are reasonable can be informed by the commercial context of a contract: Mesa [Operating Ltd Partnership vAmoco Canada Resources Ltd, 1994 ABCA 94 , 1994 CarswellAlta 89 (CA)], supra at para 20.

Reasonable expectations ofcontracting parties are to be found in the contract itself rather that the court’s abstract perception of what is “fair”. [T]he reasonableexpectations of the parties operate so as to imply a term limiting one party’s ability to perform a contract in a manner which underminesthe interests of the other party. [emphasis added] [77] Some commentators consider the protection of reasonable expectations to be the fundamental purpose of contract law.

As stated in Waddams (at para 337): “[T]he law of contracts exists to protect reasonable expectations.” [78] Another issue that is raised by this appeal is the law respecting ambiguity of contractual provisions. It must beemphasized that a contractual provision can be difficult to construe without being ambiguous (see Moore Realty Inc v Manitoba MotorLeague, 2003 MBCA 71 at para 25). [79] True legal ambiguity occurs where a phrase is “reasonably susceptible of more than one meaning” (Hi-Tech Group Incv Sears Canada Inc, (ON CA), 2001 CarswellOnt 9 at para 18 (CA)).

Ambiguous wording has also been describedas one with a “double or devious meaning, that is to say, one word or one expression or a series of expressions capable on its face or in itsapplication of two or more meanings” (Moore Realty at para 25). [80] A significant consequence of a finding of ambiguity is that parol evidence is admissible to dispel the ambiguity. Aspreviously explained, parol evidence is normally inadmissible for the purposes of contractual

interpretation. As stated by Hall (at ch3.1.5): “One of the exceptions to the parol evidence rule has always been that where there is ambiguity in the written contract itself, extrinsicevidence may be admitted to clarify the meaning of the ambiguous term.” Ambiguity means something more than the mere existence ofcompeting

interpretations, otherwise parol evidence would be admitted in virtually every case. Thus the question of whether there isambiguity is to be determined by an objective evaluation of whether there are two or more reasonable

interpretations. Put another way,where a written contract is ambiguous in the sense of being reasonably susceptible of having more than one meaning, extrinsic evidenceis admissible to determine which meaning is preferable. [81] The principles of contractual

interpretation reviewed above are relevant to the issues raised by the defendant in respectof the trial judge’s

interpretation of the USA, as well as the 2008 SPA and the 2009 SPA. The Law—Rectification [82] The defendant argues that the trial judge erred in his application of the doctrine of rectification. [83] Traditionally, the equitable remedy of rectification was only available in relatively narrow situations—where theagreement reached by the parties was inaccurately recorded in the written document meant to reflect that agreement. As a result, onlydocuments can be rectified, not the terms of the contract or agreement itself.

The traditional doctrine was stated by Denning LJ in F ERose Ltd v Wm H Pim Ltd, [1953] 2 All ER 739 (CA) at 747: Rectification is concerned with contracts and documents, not with intentions. In order to get rectification, it is necessary to show that theparties were in complete agreement on the terms of their contract, but by an error wrote them down wrongly. And in this regard, in orderto ascertain the terms of their contract, you do not look into the inner minds of the parties—into their intentions—any more than you doin the formation of any other contract.

You look at their outward acts, i.e., at what they said or wrote to one another in coming to their

agreement, and then compare it with the document which they have signed. If you can predicate with certainty what their contract was,and that it is, by a common mistake, wrongly expressed in the document, then you rectify the document. But nothing less will suffice. [emphasis added] [84] A more liberal approach to the application of the doctrine of rectification developed, in particular, in jurisprudence ofthe Ontario Court of Appeal (see Juliar v Canada (Attorney General), (ON CA), 2000 CarswellOnt 3518 (CA); andFairmont Hotels Inc v Canada (Attorney General), 2015 ONCA 441).

In Juliar, family members had entered into a corporatereorganization that they intended to be neutral from an income tax perspective. As part of the transaction, the Juliars took backpromissory notes from a new corporation. This placed the transaction outside of rollover provisions in the Income Tax Act, RSC 1985, c1 (5th Supp), and resulted in taxation on capital gains. The Juliars sought rectification of the transactions so that they could take backshares instead of promissory notes. The Ontario Court of Appeal granted rectification on the basis of a continuing common intention toavoid taxation.

This was done despite the fact that the parties, at the time they entered into the transaction, clearly intended to take backpromissory notes instead of shares. [85] However, the liberal approach to rectification is no longer the law in Canada. In Fairmont, the Supreme Court rejectedthe approach to the doctrine illustrated in Juliar and confirmed the traditional application of the doctrine of rectification. [86] There are several aspects of Brown J’s reasons in Fairmont that are of particular relevance to the issues raised on thisappeal.

First, he confirms that “a ‘relaxed approach to rectification as a substitute for due diligence at the time a document is signedwould undermine the confidence of the commercial world in written contracts’: Performance Industries, at para. 31” (at para 13). [87] Second, Brown J confirms that rectification is not available to amend the agreement itself, stating (at para 13): In short, rectification is unavailable where the basis for seeking it is that one or both of the parties wish to amend not the instrumentrecording their agreement, but the agreement itself.

More to the point of this appeal, and as this Court said in Performance Industries (atpara. 31), “[t]he court’s task in a rectification case is . . . to restore the parties to their original bargain, not to rectify a belatedlyrecognized error of judgment by one party or the other”. [88] And again, in concluding that Juliar was wrongly decided (at para 19): As I have stressed, rectification is available not to cure a party’s error in judgment in entering into a particular agreement, but an error inthe recording of that agreement in a legal instrument.

Alternatively put, rectification aligns the instrument with what the parties agreed todo, and not what, with the benefit of hindsight, they should have agreed to. [89] Brown J characterized the Court of Appeal’s decision in Juliar as rectifying not the instrument recording the parties’antecedent agreement but the agreement itself, where it was entered into as a result of an error in judgment (see para 19). [90] The characterization of the error that the plaintiffs sought to rectify is a central issue in this case. [91] Rectification proceedings are not subject to the parol evidence rule.

The Court, by necessity, must look to evidenceoutside of the written document and the surrounding circumstances to determine whether the document does not accurately record theagreement reached between the parties. As previously noted, parol evidence is not permitted to be used to aid in the construction of acontract.

The distinction would seem to arise because the accuracy of the written document is put into question on a rectificationapplication (see GHL Fridman, The Law of Contract in Canada, 6th ed (Toronto: Carswell, 2011) at 775-76. [92] Accordingly, evidence of prior negotiations and declarations of the subjective intent of the parties are relevant andadmissible evidence on a rectification application (see Investors Compensation Scheme Ltd v West Bromwich Building Society, [1998] 1All ER 98 at 114 (HL)). [93] The standard of proof applicable to a rectification application is the standard generally applicable to all civil cases—thebalance of probabilities (see Fairmont at para 36). [94] However, one must also consider the quality of evidence by which that standard is discharged.

In Fairmont, Brown Jstated (at para 36): A party seeking rectification faces a difficult task in meeting this standard, because the evidence must satisfy a court that the truesubstance of its unilateral intention or agreement with another party was not accurately recorded in the instrument to which it nonethelesssubscribed.

A court will typically require evidence exhibiting a high degree of clarity, persuasiveness and cogency before substitutingthe terms of a written instrument with those said to form the party’s true, if only orally expressed, intended course of action. [95] All of the relevant evidence must be considered in determining if the burden has been discharged—including whetherthe written agreement was the result of negotiations between sophisticated parties who benefitted from professional advice. [96] The party seeking relief must be ignorant of the discrepancy between the terms agreed to and those stated in thedocument (see Waddams at para 341; and Distillery, Etc, Int’l Union v Can Park & Tilford Ltd (1973), (BC SC), 36DLR (3d) 632 (BCSC)).

As in the case of other equitable remedies, affirmation of the contract with knowledge of the mistake has been

held to be a bar to rectification (see Waddams at para 339 (specifically n 91); and Pepper v Prudential Trust Co (1963), (SK CA), 41 DLR (2d) 583 (Sask CA), aff’d (SCC), [1965] SCR 417. In other words, the party seeking equitable reliefin the form of rectification must come to the court with clean hands. [97] In

summary, the law of rectification in Canada has returned to its traditional roots. It is not available to assist a partywho regrets entering into an ill-advised contract or a contract with unanticipated consequences. Nor should it be utilized in situationsthat would undermine the reasonable expectations of a party to a contract. Application to this Case 1. Did the trial judge err in his

interpretation of the USA? [98] The first issue raised by the defendant is the trial judge’s approach to interpreting the USA. The defendant argues thatthe trial judge made errors of law in how he dealt with surrounding circumstances and parol evidence, as well as in his finding ofambiguity. [99] For the reasons that follow, in my view, the trial judge erred in his

interpretation of

section 9.06(

b) of the USA. As Iwill explain, the

interpretation of

section 9.06(

b) should be of minimal relevance in this case, as both the 2008 SPA and the 2009 SPAare separate stand-alone agreements. However, the trial judge applied his construction of the equity injection adjustment clause in theUSA to construe the equity injection adjustment clauses in the 2008 SPA and the 2009 SPA. [100] The fundamental error of the trial judge was in finding that

section 9.06(

b) is ambiguous. He failed to apply the correcttest to determine legal ambiguity. This is an extricable question of law and is reviewed on the basis of correctness. After finding thesection to be ambiguous, he relied on parol evidence of contractual negotiations and statements of the parties’ subjective intention to givea meaning to the

section that extends well beyond the plain meaning of the words used, considered in light of the surroundingcircumstances. [101] The trial judge began the exercise of construction of

section 9.06(

b) of the USA correctly. He noted that the “USAcannot be considered in isolation” and properly took into account the 2006 SPA and 2006 SA as surrounding circumstances. He alsoproperly took note of the aim and genesis of the USA which “related to the anticipated future purchase of the remaining shares in HEDby the defendant” (at para 181). [102] However, he fell into error when he stated, “I cannot say that the meaning of each of those three [equity injectionadjustment] clauses is clear and unambiguous” (at para 188).

The trial judge gave no explanation of how the provision is capable of “adouble or devious meaning” (Moore Realty at para 25). Difficulty in construction, without more, does not give rise to an ambiguity. [103] In my view, the meaning of

section 9.06(

b) of the USA is not ambiguous. Rather, its plain meaning is clear. It providesthat future equity injections made on or subsequent to the date of closing of a future share sale will be deducted from a subsequent bumpon those shares. There is no devious or double meaning. There is no corollary dealing with the 2006 equity.

Section 9.06(

b) does notaddress the 2006 equity.

Indeed, this was correctly noted by the trial judge when he said, “In the USA, the [equity injection adjustment]clause, which is s. 9.06(b), makes no reference to the deduction of the subscription price paid to the corporation [i.e., the 2006 equity]”(at para 186). [104] Similarly, he stated (at para 198): [T]he wording of the [equity injection adjustment] clause in the USA was to be different from the [equity injection adjustment] clauses inthe [2006] SPA and the [2006] SA in that the deduction would apply only to new equity injected between the time of future sharepurchases and the time of the associated bumps on those purchases. [105] I completely agree with the trial judge’s conclusions on this point. [106] However, after finding

section 9.06(

b) ambiguous, the trial judge extensively reviewed the evidence of pre-contractualnegotiations and statements of the parties’ subjective intentions that they did not intend to deduct the 2006 equity in future share sales. The trial judge then found that

section 9.06(

b) had an additional meaning (at para 207): On a balance of probabilities, I accept the plaintiffs’

interpretation of s. 9.06(

b) of the USA in finding that the deduction of the adjustedsubscription price was to apply only to new equity injected between the time of future share purchases and the time of the associatedbumps on those purchases. [emphasis added] [107] In other words, the trial judge interpreted

section 9.06(

b) of the USA to mean that the deduction of the 2006 equity inany future purchase price calculations or bumps was prohibited.

Section 9.06(

b) cannot be given that meaning on any reasonableinterpretation. Logically, it is an improper leap to conclude that, because the USA expressly provides for deduction of contingent futureequity injections in certain circumstances, it must prohibit the deduction of past equity injections in all circumstances. [108] This is clear when one considers the plain meaning of the words used in

section 9.06(

b) in light of the USA as a whole. First,

section 9.06(

b) deals only with the calculation of bumps in the event there is a future equity injection. It says nothing aboutcalculating the purchase price of shares. Second, there are other provisions in

Article 9 of the USA dealing with valuation of shares inthe event of a future share transaction.

Section 9.02(

a) of the USA provides in part that:

Whenever a valuation [of shares] is required to be made for the purposes of a purchase and sale between the parties . . . the value . . . and hence the purchase price payable therefor (the “Valuation Price”) . . . shall be determined in accordance with the valuation formula set out on

Schedule C hereof . [ 109 ]

Schedule C sets out the same formula that was used for all the transactions: essentially 6.5 times EBITDA, minus debt, plus (or minus) working capital. [ 110 ]

Section 9.03 provides that the parties will try to reach agreement on each element of the valuation formula and states (in part) that: Upon the . . . occurrence of an event . . . giving rise to a need to determine the Valuation Price of [shares], the parties to the transaction of purchase and sale . . . shall make a bona fide attempt to agree . . . as to the values of each component of the above-referenced formula (e.g.

EBITDA, Working Capital, Book Value, etc.) . . . using the same method of calculation and subject to the same normalization adjustments as were used for the purposes of the [2006 SPA]. [ 111 ] The parties intended that valuations of shares for the purposes of future agreements of purchase and sale were to be done using the same formula as was used under the 2006 SPA with the parties agreeing to the values of each element of the formula. This is precisely what occurred in 2008 and 2009 when the plaintiffs offered to sell their shares based on a purchase price calculated in accordance with the formula in

Schedule C and with an agreed-upon deduction of the 2006 equity. [ 112 ] It is simply not a sustainable construction, in light of the USA as a whole, to interpret

section 9.06(

b) to prohibit the deduction of the 2006 equity for the purposes of the valuation of shares and the calculation of bumps on a future sale. [ 113 ] In conclusion, in my view, the trial judge erred in his construction of the USA. The trial judge’s initial legal error in misapplying the test for legal ambiguity led him to consider parol evidence of contractual negotiations and subjective intention that was simply not relevant and should not have been considered. The trial judge’s construction of

section 9.06(

b) of the USA is not sustainable in light of the USA as a whole and the admissible surrounding circumstances. 2. Did the trial judge err in ordering rectification of the 2008 SPA? [ 114 ] In ordering rectification of the 2008 SPA, the trial judge found that the parties had a common continuing intention that the 2006 equity was not to be deducted in any subsequent share purchases. He based this upon his construction of the USA and the evidence of the plaintiffs’ witnesses. As just explained, the trial judge’s construction of the USA cannot be sustained.

Accordingly, his finding that rectification of the 2008 SPA was justified on the basis that the parties had a common continuing intention that the 2006 equity was not to be deducted was also in error. [ 115 ] However, even if I am wrong in finding that the trial judge misconstrued the USA, his application of the doctrine of rectification is nonetheless not sustainable on the evidence of the witnesses that he accepted. Without the benefit of Fairmont , the trial judge applied an incorrect legal test to determine if rectification was available on the facts.

Moreover, he made a palpable and overriding error in finding that the parties had a common continuing intention in 2008 not to deduct the 2006 equity. [ 116 ] As explained, on a rectification application, parol evidence of negotiations and subjective intention is relevant and therefore admissible. The trial judge examined parol evidence of the negotiations and subjective intentions of the parties leading up to the execution of the USA. He found that, in 2006, the parties did not intend to deduct the 2006 equity in future share sales.

This finding was open to him on the record. [ 117 ] The trial judge also properly found that both Elias and D’Ascanio knowingly agreed to a valuation formula in the 2008 SPA that deducted the 2006 equity.

Moreover, it was the plaintiffs who offered to sell their shares in 2008 to the defendant at a price that was calculated by specifically deducting the 2006 equity. [ 118 ] After making these findings, the trial judge was faced with two facts: in 2006, the parties did not intend to deduct the 2006 equity on future transactions; and, in 2008, the parties agreed to deduct the 2006 equity on the sale of the plaintiffs’ 24% interest in HED.

In my respectful view, the trial judge made a palpable and overriding error in finding that the parties’ intention in 2006, which he found was expressed in the USA, continued unabated in 2008. This finding is incompatible with his finding that the plaintiffs knowingly offered to sell their 24 per cent interest in 2008 using a valuation formula that deducted the 2006 equity. Both intentions could not logically co-exist in 2008.

The only reasonable conclusion is that, by 2008, the intentions of the parties, as expressed by them in the 2008 SPA, had changed. [ 119 ] The trial judge erred when he stated that there was an “absence of any evidence excluding the USA” (at para 235). The existence and terms of the 2008 SPA were overwhelming evidence that the parties had struck a new deal.

There is nothing in the USA that prevented the parties from agreeing to an arrangement that was not in strict compliance with the USA. [ 120 ] The plaintiffs say that they were improperly advised by Sigurdson as to the terms of the USA and that is why they agreed to deduction of the 2006 equity in 2008.

Even so, Sigurdson’s involvement in the preparation of the 2008 SPA only began after the plaintiffs had offered to sell their shares using a valuation formula that deducted the 2006 equity and the defendant had accepted that offer. [ 121 ] There was absolutely no mistake in the recorded terms of the 2008 SPA as required by Fairmont . It perfectly reflected

the agreement of the parties.

What the plaintiffs characterize as a “mistake” is, in reality, their error in judgment in offering to sell their remaining shares on terms that they subsequently regretted. [ 122 ] The application of the principles of rectification, confirmed in Fairmont , to the facts found by the trial judge leads only to one conclusion: rectification of the 2008 SPA is not available to the plaintiffs. [ 123 ] The policy reasons for not allowing rectification in these circumstances are clear: rectification cannot be used as a substitute for due diligence by the plaintiffs; the relaxed application of the doctrine undermines the importance of certainty and finality in commercial relations; rectification would undermine the reasonable expectations of the defendant; and the plaintiffs are seeking to rectify the agreement itself, not an error in the recording of the agreement. [ 124 ] In conclusion, the trial judge erred in his application of the doctrine of rectification.

There was no evidence to support a conclusion that the parties had agreed not to deduct the 2006 equity but made a mistake in recording the agreement. In fact, all the evidence pointed to the opposite conclusion: that, in 2008, they clearly did agree to deduct the 2006 equity. 3. Did the trial judge err in finding a breach of the 2009 SPA? [ 125 ] The third issue raised by the defendant is whether the trial judge erred in finding a breach of the 2009 SPA. This issue raises the question of the proper construction of the 2009 SPA.

I will also briefly address the proper construction of the 2008 SPA. [ 126 ] In his reasons, the trial judge construed the 2009 SPA and the rectified 2008 SPA together. The result of his application of the doctrine of rectification was to make the equity injection adjustment clause of the 2008 SPA (section 2.6(a)) virtually the same as the equity injection adjustment clause of the 2009 SPA (section 2.9(a)). The trial judge stated that “[t] he rectified s. 2.6(

a) of the 2008 SPA does not deduct the [2006 equity] from the 2008 and 2009 bump calculations in the 2008 SPA . However, that is precisely what was done. The 2009 bump calculations in the 2009 SPA were also deducted” (at para 238). He then found that the bump calculations were made in breach of the agreements and should not have deducted the 2006 equity (see para 240). [ 127 ] Unfortunately, the trial judge’s reasons do not set out in any detail the analysis leading to his construction of the 2009 SPA. However, reading his reasons as a whole, I conclude that he based his decision on his construction of the wording of

section 9.06(

b) of the USA (the equity adjustment clause). The equity injection clause in the 2009 SPA contains language nearly identical to that in

section 9.06(

b) of the USA. [ 128 ] As I have explained, the trial judge erred in concluding that

section 9.06(

b) of the USA prohibited the deduction of the 2006 equity on future share sales. That

section does not address the 2006 equity at all. It only addresses equity injected into HED at a subsequent date at the time or after the shares have been sold but prior to the calculation of any bump on those shares. [ 129 ] Accordingly, in my view, the trial judge similarly erred in concluding that the 2009 SPA was to be construed so as to prohibit deduction of the 2006 equity. [ 130 ] As previously noted, the goal of contractual

interpretation is to give effect to the intention of the parties, to be gathered from the words they have used, reading the contract as a whole and taking into account the surrounding circumstances. [ 131 ] It is clear to me that the trial judge erred in not considering the 2009 SPA as a whole. If he had done so, he would have had to address the following provisions of the 2009 SPA that specifically provide for the deduction of the 2006 equity: •

Section 2.1 sets out an initial purchase price of $23,155,758.

Schedule 2.7, which is incorporated into the 2009 SPA, contains a calculation showing how the purchase price was determined. The 2006 equity is deducted as a separate, identified line item. •

Section 2.2 provides for payment to the plaintiffs on closing of one half of the estimated bumps that would eventually become payable on the shares. Specific dollar amounts are set out for these payments.

Schedule 2.7 contains a bump calculation using estimated year-end numbers to show how the estimated bumps were determined. The 2006 equity is deducted as a separate, identified line item. [ 132 ] When one considers the 2009 SPA as a whole, in light of the surrounding circumstances, the only conclusion that can be reached is that the parties intended for the 2006 equity to be deducted on all valuations of HED for the purposes of both the initial purchase price of the shares and subsequent bumps on those shares.

The surrounding circumstances include: the aim and genesis of the 2009 SPA; the extensive negotiations which resulted in a comprehensive share purchase agreement; the sophistication of the parties; and the involvement of professional advisors. [ 133 ] The specificity of the calculations included in the 2009 SPA overwhelmingly points to this conclusion. Arguably, one of the most important provisions of a share purchase agreement is the price.

Here, the parties not only fixed the initial purchase price but explicitly showed that it had been calculated by deducting the 2006 equity so that purchase price adjustments (bumps) could be calculated the same way. [ 134 ] Moreover, the other provisions of the 2009 SPA are consistent with this construction. The plaintiffs argue that the contractual language of the valuation calculations (incorporated by reference to

Schedule C of the USA) take paramountcy over the mathematical calculations included in

Schedule 2.7 to the 2009 SPA. As previously noted, the valuation formula in

Schedule C boils down to 6.5 times EBITDA, minus debt, plus (or minus) working capital. [ 135 ] The contractual language in

Schedule C, although lengthy, does not specifically address the deduction of the 2006 equity. However,

section 2.8 of the 2009 SPA indicates the parties’ intention that bump calculations would be “determined by agreement of all of the [plaintiffs] and the [defendant]” and that they would use “the same methodology as set out in

Schedule C to the USA”. The parties specifically contemplated the possibility that they may not be able to reach agreement and provided that HED’s auditor would resolve any disputes “[i]n the event the [defendant] and the [plaintiffs] are unable to agree as to one or more of the components comprising any of the adjustment calculations”.

[ 136 ] Accordingly, the parties contemplated that they would use the same valuation methodology as set out in

Schedule C to the USA but that they would agree on any specific adjustments to the formula. This is precisely what they did in 2009 when the plaintiffs proposed the deduction of the 2006 equity and the defendant agreed. [ 137 ] The trial judge’s construction of the 2009 SPA yields a result that is commercially unreasonable. The parties went to the effort of negotiating a specific initial purchase price in the 2009 SPA that explicitly deducted the 2006 equity.

The effect of the trial judge’s construction would be, in essence, to automatically add the 2006 equity to the purchase price on the first bump calculation under the 2009 SPA regardless of whether HED’s earnings had increased. There is no dispute that the purpose of the bump calculations was to compensate the plaintiffs for any increase in HED’s earnings by comparing EBITDA on the bump calculation date to EBITDA on a previous date.

However, the trial judge’s construction of the 2009 SPA would require the 2006 equity to be added back into the valuation, resulting in an additional bump payment to the plaintiffs on the first bump calculation date in excess of $3.3 million regardless of whether EBITDA had changed.

It is highly unlikely that the parties would have structured the transaction in such a way. [ 138 ] In conclusion, the trial judge erred when he found that the defendant breached the 2009 SPA by deducting the 2006 equity in calculating the bump payments under the 2009 SPA. [ 139 ] As for the 2008 SPA, in my view, the trial judge erred when he found that the defendant breached the 2008 SPA by deducting the 2006 equity in calculating the bump payments under the 2008 SPA. I come to this conclusion for much the same reasons as my conclusion in respect of the 2009 SPA.

In addition, once the trial judge’s rectification decision is set aside, the equity injection clause of the 2008 SPA specifically states that the 2006 equity was to be deducted in calculating bumps. 4. Did the trial judge err in assessing the plaintiffs’ damages? [ 140 ] Due to my conclusions regarding the trial judge’s construction of the 2008 SPA and the 2009 SPA, there is no need to deal with the alleged error in the calculation of damages resulting from the New Claim as it is now moot.

However, I will say that the lack of any reference to, or analysis of, the New Claim in the trial judge’s reasons is concerning. If I had upheld the trial judge’s finding of liability, the issue of his assessment of damages would likely have required intervention by this Court. 5. Did the trial judge err in failing to order interest at 12 per cent per annum? [ 141 ] As I have concluded that the trial judge erred in awarding any damages to the plaintiffs, the plaintiffs’ cross appeal on interest is moot. Conclusion [ 142 ] In closing, I will make one final comment.

The importance of certainty in commercial relations and the protection of the reasonable expectations of parties to commercial contracts cannot be overemphasized. The approach taken by the trial judge to the admission of parol evidence, the

interpretation of commercial contracts and the application of the doctrine of rectification had the potential to send the practice of commercial law sideways. It is difficult to imagine what more the defendant in this case could have done to ensure that it knew what its rights and obligations were under the documents it signed. [ 143 ] For the foregoing reasons, I would allow the appeal and dismiss the cross appeal with costs to the defendant throughout. JA I agree: JA I agree: JA