



COURT OF APPEAL FOR ONTARIO

CITATION: Warburg-Stuart Management Corporation v. DBG
    Holdings Inc., 2016 ONCA 157

DATE: 20160226

DOCKET: C60304

Simmons, LaForme and Huscroft JJ.A.

BETWEEN

Warburg-Stuart Management Corporation

Plaintiff (Respondent)

and

DBG Holdings Inc., OHara Technologies Inc.,
    1346041 Ontario Inc.
, The Gil OHara Family Trust By Their Trustees Brian
    W. OHara and David P. OHara, Brian W. OHara and David P. OHara

Defendants (Appellants)

Douglas D. Langley, for the appellants

Peter I. Waldmann, for the respondent

Heard: December 11, 2015

On appeal from the judgment of Justice Frederick L. Myers
    of the Superior Court of Justice, dated March 10, 2015 reported at 2015 ONSC
    1594 and from the costs award dated April 7, 2015 reported at 2015 ONSC 2178.

By the
    Court:

[1]

The motion judge granted summary judgment to the
    respondent, Warburg-Stuart Management Corporation (Warburg), against the
    appellants, DBG Holdings Inc. (DBG), OHara Technologies Inc. (OTI) and
    1346041 Ontario Inc. (134), on a joint and several basis for commissions
    owing on two engagement agreements, both dated August 23, 2012. The motion
    judge also dismissed Warburgs action against the personal defendants.

[2]

In calculating the amounts owing under the
    engagement agreements, the motion judge credited the appellants with a sum paid
    as an initial retainer under one of the engagement agreements.

[3]

The appellants appeal from the finding that
    commissions were owing under the engagement agreements, and, in the
    alternative, from the quantum awarded. They also appeal from the finding of
    joint and several liability.

[4]

Warburg cross-appeals from the dismissal of the
    action against the personal defendants and from the decision to credit the
    respondents with the amount of the initial retainer.

Background

[5]

OTI is a manufacturer; 134 owns the land on
    which OTIs products are manufactured; and DBG is a guarantor of various credit
    facilities extended to OTI and 134.

[6]

In 2009, 134 and OTI obtained various loans and
    credit facilities from the Royal Bank of Canada (RBC), consisting of:

·

a $2.7 million building loan secured by a
    collateral mortgage against 134s land;

and five operating loans:

·

a $3 million revolving line of credit (Facility
    1);

·

a $1 million revolving demand facility (Facility
    2);

·

a $1.5 million revolving facility by way of term
    loans (Facility 3);

·

a $150,000 revolving lease line of credit (Facility
    4);

·

a $250,000 business VISA (Facility 5).

[7]

In 2010, Facility 4 was cancelled by mutual agreement.
    In June 2012, RBC notified OTI and 134 that they were in default under their
    financial covenants and cancelled Facility 3. Although Facility 2 remained in
    existence, all parties understood it was no longer available because Export Development
    Canada withdrew its guarantee. Around the same time, RBC recommended that the
    appellants obtain restructuring advice.

[8]

Acting on RBCs recommendation to obtain
    restructuring advice, the appellants engaged Warburg to assist them with
    restructuring their financial affairs and with finding alternate financing. Two
    engagement agreements were signed, first, the building engagement agreement,
    aimed at procuring mortgage financing for 134s building (signed by Warburg,
    OTI, 134 and DBG); and second, the operating engagement agreement, aimed at
    procuring revolving operating financing (signed by Warburg, OTI and DBG).
The
    engagement agreements would automatically terminate 90 days after the appellants
    provide specified information and documentation to Warburg.

[9]

The operating engagement agreement also provided
    that any Advisory Services to be provided by Warburg would be separately
    agreed on in writing and that Warburg would receive remuneration for these
    services as provided for in Schedule A to the operating engagement agreement.
    Schedule A stipulated an hourly rate for Advisory Services of $380 and stated
    that a $12,500 retainer is required to commence Advisory Services.

[10]

In accordance with the terms of the engagement agreements,
    Warburg approached various financial institutions with a view to obtaining
    financing proposals and ultimately, in March 2013, approached RBC. On April 15,
    2013, RBC responded with a proposal for refinancing, essentially in the same
    terms as Warburg had proposed to RBC.

[11]

Subsequently, and unbeknownst to Warburg, on
    July 2, 2013, RBC delivered a discussion paper (term sheet) to the appellants.
    The appellants eventually signed the discussion paper on August 16, 2013. RBC
    provided a formal commitment letter on October 8, 2013. After obtaining legal
    advice, the appellants signed the commitment letter on October 31, 2013,
    exactly 91 days after they purported to terminate their arrangement with
    Warburg.

The motion judges decision

[12]

The motion judge found the appellants liable to
    Warburg for commissions under para. 9 of the engagement agreements.

[13]

Paragraph 9 of each engagement agreement required
    the appellants who were parties to the particular agreement (defined as the
    Client in each engagement agreement) to pay Warburg a commission if within
    one (1) year of the termination of this Agreement, the Client executes an
    agreement to obtain financing from an investor/lender disclosed to the Client
    by [Warburg] during the term of this Agreement.

[14]

The appellants liability under para. 9 of each
    engagement agreement thus turned on the interpretation of the phrase a lender
    disclosed to the Client by [Warburg]. The appellants argued that RBC was not
    disclosed to them by Warburg because RBC was well known to the appellants and
    had been their longtime lender.

[15]

The motion judge rejected the appellants
    argument and found that they were reading the term disclosed too narrowly. He
    noted that the other banks approached by Warburg were known to the appellants
    as well and that, considered in this context, disclosed referred to the
    willingness of a financial institution to make a financing proposal to the
    appellants.

[16]

In relation to RBC, the motion judge determined
    that the appellants had not wanted to continue borrowing from RBC and that they
    were unaware that RBCs commercial lending department would be willing to make
    them a financing proposal that would induce them to change their minds. Having
    regard to these circumstances, he concluded that Warburg disclosed RBC to the
    appellants by obtaining RBCs April 2013 financing offer, which the appellants
    eventually accepted. In the particular circumstances of this case, RBC fell
    within the definition of the phrase, a lender disclosed by [Warburg].

[17]

The motion judge awarded Warburg the commissions
    it claimed, subject to a credit for the initial retainer paid to Warburg for
    Advisory Services. He held that the appellants were jointly and severally
    liable for the total amount owing and dismissed Warburgs action against the
    personal defendants.

The appeal

[18]

The appellants raise four main issues on appeal.

[19]

First, the appellants argue that the motion
    judge erred in holding that the term lender disclosed by [Warburg] in para. 9
    of the engagement agreements could include the appellants longtime lender,
    RBC. They say that the motion judges reasoning in this respect is tainted by
    palpable and overriding error in that he wrongly concluded that RBC had called
    the appellants loans and therefore began the interpretive exercise from the
    incorrect premise that RBC had excluded itself from the universe of available
    lenders. Further, they say that the motion judges determination results in a
    strained interpretation of the phrase lender disclosed by [Warburg] that does
    not fit with other provisions of the engagement agreements. Moreover, the
    motion judge improperly considered the events of March-April 2013 as part of
    the factual matrix to be considered in interpreting the engagement agreements.

[20]

We do not accept these arguments. The motion
    judge stated at para. 7 of his reasons that RBC declared defaults on the
    appellants loan facilities in June 2012. Read as a whole, his reasons indicate
    he was well aware that RBC did not call the appellants loans in June 2012, but
    merely declared them in default. The isolated reference identified by the
    appellants is a harmless misstatement.

[21]

We are not persuaded that the motion judges
    interpretation of the phrase lender disclosed by [Warburg] is either strained
    or inconsistent with the balance of the contract. As noted by the motion judge,
    many potential lenders were well known to the appellants. Warburgs role was to
    procure financing proposals and it was by revealing the willingness of a lender
    to make a financing proposal that it disclosed the lender to the appellants. In
    our view, the motion judge reasonably interpreted the restriction on
    communicating with a lender disclosed by Warburg without Warburgs consent in
    para. 9 of the engagement agreements as referring, in RBCs case, to the
    commercial lending department.

[22]

As we read his reasons, the motion judge did not
    use subsequent events to interpret the meaning of para. 9 of the engagement
    agreements. Rather, he examined those events to determine whether Warburg met
    the requirements of para. 9. He found that RBC fell within the definition of
    lender disclosed by [Warburg] because prior to Warburgs involvement, the
    appellants were unaware that RBCs commercial lending department was willing to
    make a financing proposal to them. Moreover, until Warburg obtained a proposal
    from RBC, the appellants did not want to continue borrowing from RBC.

[23]

The motion judge found as a fact that it was as
    a result of Warburgs efforts that RBC offered financing to the appellants. We
    see no error in that conclusion or in his finding that Warburg was entitled to
    the benefit of para. 9 of the engagement agreements in all the circumstances.
    RBC was not excluded as a lender under the engagement agreements. In our
    view, the motion judges interpretation of para. 9 is not inconsistent with the
    other terms of the engagement agreements.

[24]

We would not give effect to this ground of
    appeal.

[25]

Second, and in the alternative, the appellants
    argue that the motion judge erred in calculating the amount owing to Warburg.
    The first way the motion judge erred is by finding that commission was owed to
    Warburg on loans that had been fully advanced by RBC years earlier rather than
    simply on the new facilities obtained under the 2013 RBC financing commitment.

[26]

We do not accept this argument. Under the terms
    of paras. 9 and 4 of the engagement agreements, Warburg was entitled to be paid
    a commission in relation to the financing commitments into which the appellants
    entered. As noted by the motion judge, RBC made a fresh financing decision for
    all the loan facilities it provided. We see no basis on which to interfere with
    the motion judges interpretation of what was owing.

[27]

The second way in which the appellants say the
    motion judge erred in determining the quantum owing is calculating commissions
    on what Warburg described as Free Cash in its claim. According to the
    appellants, Free Cash refers to the increase from $270,000 to $500,000 of the
    portion of the $3 million operating loan (Facility 1) that was not subject to
    margins. Since the amount was part of the $3 million on which commission had
    already been calculated, the additional commission of $20,000 awarded by the
    motion judge amounted to double-counting.

[28]

We accept the appellants submission in this
    regard. The motion judge did not address this specific calculation in his
    reasons. Although Warburg claimed in oral argument on the appeal that the
    $500,000 is a separate facility unrelated to the $3 million operating loan,
    based on our review of the record, we are not persuaded that that is the case.
    We therefore reduce the amount of the commissions awarded in relation to the
    operation engagement agreement by $20,000.

[29]

The appellants third argument on the appeal is
    that the motion judge erred in ordering that the appellants are jointly and
    severally liable for all amounts owing to Warburg. We agree with this
    submission. The motion judge provided no reasons for rendering the appellants
    jointly and severally liable and we can see none. Warburgs claims against the
    appellants arise under the written engagement agreements. Liability under each
    engagement agreement should be restricted to the contracting parties under each
    agreement.

[30]

The appellants final argument is that the
    motion judge erred in awarding higher costs than Warburg sought on a partial
    indemnity basis. Warburg sought substantial indemnity costs of $73,168.88 based
    on allegations of reprehensible conduct; or, in the alternative, partial
    indemnity costs to October 31, 2014 and substantial indemnity costs thereafter,
    totaling $70,538.79 taking account of offers to settle; or, in the further
    alternative, partial indemnity costs of $59,376.26. Taking account of a number
    of factors, including the fact that Warburg recovered nearly 100% of the amount
    truly in issue, the motion judge awarded Warburg partial indemnity costs of
    $65,000, inclusive of disbursements and applicable taxes. Assuming it was open
    to the motion judge to award an amount for partial indemnity costs greater than
    the amount claimed by Warburg, taking account of the reduction we have made to
    the amount Warburg recovered, we reduce the costs awarded to Warburg to the
    amount claimed by Warburg for partial indemnity costs.

The Cross-appeal

[31]

Warburg raises two issues by way of
    cross-appeal.

[32]

First, Warburg argues that the motion judge
    erred in giving the appellants credit for $12,500 on account of the initial
    retainer for Advisory Services in relation to the operating engagement
    agreement. Warburg points to para. 3 of the engagement agreement, which it
    claims entitled it to terminate the agreement and treat as forfeit all sums
    paid under the agreement in the event the appellants failed to disclose relevant
    facts. We see no merit in this argument. Although we agree that the appellants
    breached their disclosure obligations by failing to advise Warburg about RBCs
    financing offer, Warburg did not terminate the engagement agreement. Therefore,
    it cannot rely on para. 3.

[33]

Second, Warburg argues that the motion judge
    erred in dismissing its action against the personal defendants as the claims
    against them did not form part of the summary judgment motion. The appellants
    concede that the summary judgment motion did not address the personal
    defendants. In the circumstances, the order dismissing the action against the
    personal defendants should be set aside.

Disposition

[34]

Based on the foregoing reasons:

i)

the appeal is allowed in part, the order
    imposing joint and several liability on 134 for commissions owing under the
    operating engagement agreement is set aside, the amount owing for commissions
    under the operating engagement agreement is reduced by $20,000 and the amount
    awarded for partial indemnity costs is reduced to $59,376.26, the amount
    Warburg claimed for partial indemnity costs;

ii)

the appeal is in all other respects dismissed;

iii)

the cross-appeal is allowed in part, and the
    order dismissing the action against the personal defendants is set aside; and

iv)

the cross-appeal is in all other respects
    dismissed.

[35]

Costs of the appeal and cross-appeal are to
    Warburg on a partial indemnity scale fixed in the amount of $12,000, inclusive
    of disbursements and applicable taxes.

Released: H.S.L. February 26, 2016

Janet
    Simmons J.A.

H.S.
    LaForme J.A.

Grant Huscroft J.A.


