





CITATION:
Kapuskasing
Plumbing and Heating
          Limited v. Fortier Beverages Limited, 2011 ONCA 558



DATE: 20110822



DOCKET: C51434



COURT OF APPEAL FOR ONTARIO



Moldaver,
          Sharpe and Armstrong JJ.A.



BETWEEN



Kapuskasing Plumbing
          and Heating Limited and Gerald
          Villeneuve



Plaintiffs (Appellants)



and



Fortier Beverages Limited



Defendant (Respondent)



Guy A. Wainwright, for the appellants



David Lanthier, for the respondent



Heard: February 24, 2011



On appeal from the judgment of
          Justice R. A. Riopelle of the Superior Court of Justice dated December 4,
          2009.



Armstrong J.A.:

INTRODUCTION

[1]

The appellant, Kapuskasing Plumbing and Heating Limited
    (Kapuskasing), and the respondent, Fortier Beverages Limited (Fortier),
    were franchisees of Culligan in respect of the distribution and sale of bottled
    water.  In October, 2006, Fortier,
    located in Cochrane, purchased the business of Kapuskasing, located in
    Kapuskasing, for a total purchase price of $1,160,000.  The first $600,000 of the purchase price
    pursuant to an asset purchase agreement was payable on closing.  The balance of the purchase price was payable
    pursuant to a consulting agreement, which was to be paid in monthly instalments
    over six years.

[2]

Fortier stopped making payments under the consulting
    agreement when it was discovered that the former Kapuskasing business was not
    selling an estimated 200,000 bottles of water per year as had been represented
    to Fortier in pre-contract discussions.

[3]

Kapuskasing sued for the balance owing on the
    consulting agreement.  Fortier
    counter-claimed against both Kapuskasing and Gerald Villeneuve, the president
    of Kapuskasing, for breach of warranty and negligent misrepresentation.  The trial judge dismissed Kapuskasings
    claim.  He dismissed Fortiers claim for
    breach of warranty but granted judgment for negligent misrepresentation and
    awarded Fortier damages in the amount of $70,258.32.

[4]

Kapuskasing appeals from the aforesaid judgment on the
    basis that the trial judge erred in finding that Fortiers reliance on the misrepresentation
    in respect of the sale of 200,000 bottles of water was reasonable.

[5]

For the reasons that follow, I would allow the appeal,
    set aside the judgment below and grant judgment in favour of Kapuskasing for
    the amount owing under the consulting agreement.

THE FACTS

[6]

Kapuskasing started as a plumbing and heating business
    in Kapuskasing, Ontario.  The plumbing
    and heating business was sold in 1973.  At
    the time of the events giving rise to this action, Kapuskasing was engaged in
    selling water equipment, water systems, filters and drinking units.  Kapuskasing was also a franchisee of Culligan
    for the distribution and sale of bottled water.

[7]

Fortier operated a Coca Cola bottling business in
    Cochrane, Ontario, which included the sale of soft drinks, juices, soda water
    and confectionary.  Fortier was also a
    Culligan franchisee for the distribution and sale of bottled water.

[8]

Fortier was interested in expanding its bottled water
    business.  Raymond Fortier, the president
    of Fortier, approached Gerald Villeneuve to see if Villeneuve might be
    interested in selling Kapuskasings bottled water business.  Discussions between the two men took place in
    the spring and summer of 2006.

[9]

In July 2006, Mr. Fortier met with Mr. Villeneuve at the
    Kapuskasing plant.  During that meeting,
    Mr. Fortier asked Mr. Villeneuve about the number of 18 litre bottles of water
    sold by Kapuskasing in the previous year.  After a quick mental calculation, Mr. Villeneuve advised that
    Kapuskasing was selling approximately 200,000 bottles per year.

[10]

Following the meeting in Kapuskasing, Mr. Villeneuve faxed
    a memo to Mr. Fortier, which provided information concerning the bottled water
    operation, including the confirmation of sales volume of 200 thousand
    bottles.  The memo also suggested a
    total selling price of $1.2 million.

[11]

On July 25, 2006, Fortier sent a letter to Kapuskasing
    setting out the terms of what was described as a preliminary agreement.  The first two paragraphs of the letter said:

Further to our discussion of July 18, 2006, we have
    prepared a preliminary agreement in principle so that discussions may proceed
    with a formal offer to follow at a later date.

Fortier Beverages Limited will pay Culligan of
    Kapuskasing $4.00 for every 18 litre sold during the 12 month period preceding
    September 1
st
, 2006.  We
    recommend using the monthly report prepared for Culligan International to
    calculate the exact number.  We
    understand that this number is approximately 200,000 jugs annually as stated by
    you in our discussion.

[12]

A letter dated July 28, 2006 from Fortier to
    Kapuskasing referred to a payment of $600,000 on closing for the assets and an
    annual consulting fee of $100,000 for six years.

[13]

On August 3, 2006, Michael Bourgeault, solicitor for
    Kapuskasing, wrote to David Lanthier, Fortiers solicitor, concerning the
    proposed purchase agreement and said:

The $600,000 payment for the assets is payable on
    closing and is
not
dependent on the number of bottles sold.  [Emphasis in the original.]

[14]

On August 8, 2006, Mr. Lanthier sent a letter to
    Kapuskasings lawyer concerning a number of the terms of the proposed
    agreement.  Paragraph 3 of the letter
    said:

The $600,000.00 payment would be payable at
    closing.  My clients agreement to pay
    this amount however is dependent upon obtaining confirmation of the sales of
    the company.  If it is not to be a
    condition of closing, my client is requesting, at this time, that your client
    produce a Report of Sales (including, we presume, the reporting document which
    Culligan International no doubt requires from your client) for the periods
    2004, 2005 and 2006 to the present time.  Mr. Fortier can then review the sales figures prior to signing the
    agreement and address any issues that he might have relative to the sales
    directly with Mr. Villeneuve.

[15]

Following the exchange of the above correspondence and
    about one and one half months prior to the signing and closing of the asset
    purchase agreement and the consulting agreement, Kapuskasing provided financial
    disclosure documentation to Fortier.  The
    disclosure included monthly reports to Culligan International referred to in
    the Fortier letter of July 25, 2006 and his lawyers letter of August 8, 2006.  The documentation did not expressly refer to
    the number of units or bottles of water sold each month. However, Fernand
    Gravel, the former accountant and controller of Fortier, agreed in
    cross-examination that it was relatively easy to get a reasonable estimate of
    the number of units sold by taking the average sale price per unit and dividing
    it into the sales figures.  If such a
    calculation had been done, it would have shown that the unit sales for the year
    prior to the sale fell far short of 200,000.  According to the trial judge, this was so even though the Culligan
    information did not cover bottled water sold under another brand name.

[16]

The asset purchase agreement and the consulting
    agreement were signed on October 5, 2006.  The closing took place on October 16, 2006.  The asset purchase agreement provided for a
    purchase price of $560,000 for the assets of the business including good
    will.  This had been reduced from
    $600,000.  The consulting agreement
    provided for a payment to Kapuskasing of $100,000 a year for six years payable
    in monthly instalments of $8,333.34.

[17]

The asset purchase agreement contained no
    representation or warranty as to the volume of unit sales.  It contained an entire agreement clause as
    follows:

The Agreement constitutes the entire agreement
    between the parties and except as stated in it and in the instruments and
    documents to be executed and delivered, contains all the representations and
    warranties of the respective parties.  There are no oral representations or warranties or collateral agreements
    between the parties of any kind relating to the subject-matter herein.  This Agreement may not be amended or modified
    in any respect except by written instrument signed by both parties.

[18]

At issue before the trial judge and in this appeal is
    clause 4(1)(s) of the asset purchase agreement which provided:

No representation or warranty contained in this
    Section 4, and no statement contained in any Schedule, certificate, list,
    summary or other disclosure document provided or to be provided to the
    Purchaser pursuant hereto, or in connection with the transactions contemplated
    hereby, contains or will contain any untrue statement of a material fact, or
    omits or will omit to state any material fact which is necessary in order to
    make the statements contained therein not misleading.

[19]

After closing and before it was discovered that the
    200,000 estimate was in error, Culligan, the franchisor, advised that there was
    a mutual mistake concerning the western boundary of the sales region for
    Kapuskasing.  That part of the region,
    into which Kapuskasing and then Fortier had been selling, was actually assigned
    to the Thunder Bay Culligan franchisee.  As a result, on August 16, 2007, the parties entered into an amending
    agreement whereby Fortier was given a credit of $150,000 to adjust for the
    mistake.  The credit was to be applied to
    the balance owing on the consulting agreement.

[20]

In arriving at the amount of the credit, Mr. Fortier
    calculated that the territory in issue represented 17.07 per cent of the
    business on sales for the first eight months from November 1, 2006.  He then used the 200,000 unit estimate at
    $5.00 a unit to calculate a 17.07 per cent reduction in the purchase
    price.  This produced a figure of
    $177,000.  The parties then agreed to
    reduce that number to $150,000.  The
    preamble to the amending agreement made reference to the 200,000 estimate.

[21]

At the conclusion of the first full year of sales
    (November 2006 to October 2007), Fortier calculated that it had sold 90,512
    bottles of water.  Subsequently, Fortier
    stopped making the monthly payments under the consulting agreement and this
    lawsuit was commenced by Kapuskasing.

THE TRIAL JUDGMENT

(i)        The Breach of Warranty Claim

[22]

Fortier submitted that pursuant to clause 4(1)(s) of
    the asset purchase agreement, the Villeneuve memo of July 20, 2006 constituted
    a disclosure document which contained a warranty in respect of the estimated
    volume of sales at 200,000 bottles per year.  In dismissing this submission, the trial judge said at para. 8 of his
    reasons for judgment:

I do not agree that the fax is a disclosure
    document.  That fax is simply another
    piece of correspondence exchanged during exploratory negotiations; it is not
    even a letter of intent.  It is never
    again referred to in any of the pre-contractual correspondence or in the
    contract itself.  Were it a disclosure
    document one would expect any germane information it discloses would be
    referred to or incorporated into the contract.

[23]

The trial judge further stated at para. 10 of his
    reasons:

The contract is silent on the matter of the volumes
    of sales or of jugs.  Notwithstanding the
    entire agreement clause such a warranty could have been deemed to form part
    of the contract were it not for the exchange of the letters referred to at
    paragraphs [5] and [6], setting out Kaps refusal to adjust the amount due on
    closing to reflect the actual volume of jugs sold and the Defendants position
    that If it is not to be a condition of closing then Kap should provide some
    additional sales information.  That and
    Fortiers testimony that he was unable to calculate the volume of 18 litre jugs
    from the information given to him prior to closing should have alerted the
    Defendant to the necessity of the inclusion of an express warranty as to the
    volume of jugs in the agreement.  No such
    warranty was requested.  The court will
    not permit pre-contractual representations, even a written one, to be
    introduced as a warranty when the contract is silent as to the issue and the
    circumstances leading to the formation of the contract make it clear that the
    party for whose benefit it is sought to impute a warranty should have inquired
    into whether the other partys position on such a material issue was still
    consistent or reconcilable with its earlier position on that material
    issue.  It was incumbent upon the
    Defendant to request an express warranty in the circumstances of this case.

(ii)       The Claim for Negligent Misrepresentation

[24]

The trial judge cited
Queen v. Cognos
, [1993] 1 S.C.R. 87 at p. 110 for the five general
    requirements of a claim for negligent misrepresentation:

(1)

There must be a duty of care based on a special relationship
    between the representor and the representee;

(2)

The representation in question must be untrue,
    inaccurate, or misleading;

(3)

The representor must have acted negligently in making
    said misrepresentation;

(4)

The representee must have relied, in a reasonable
    manner, on said negligent misrepresentation; and

(5)

The reliance must have been detrimental to the
    representee in the sense that damages resulted.

The trial judge noted that the first requirement has
    subsequently been elaborated on in
Hercules
    Management Ltd. v. Ernst & Young
, [1997] 2 S.C.R. 165 to require a duty
    based on foreseeable reasonable reliance.

[25]

The parties agreed at trial that a duty of care, based
    on a special relationship between the parties, existed on the facts of this
    case.  Only Mr. Villeneuve possessed the
    information requested by Mr. Fortier.  Mr. Villeneuve acknowledged at trial that his representation of the
    number of bottles sold was inaccurate.

[26]

The method employed by Mr. Villeneuve to arrive at his
    approximate figure of 200,000 bottles sold was to do a quick calculation in his
    head while on the plant floor.  He noted
    the number of skids in the plant and multiplied that number by 20 working days
    a month and then did a further multiplication of that number by 12 to obtain an
    annual figure.

[27]

The trial judge concluded that Mr. Villeneuve was
    negligent in using this approach without examining the available data to see if
    it supported the 200,000 figure.  I
    should note that Mr. Villeneuve concedes for the purpose of this appeal that his
    misrepresentation was made negligently.

[28]

The trial judge then turned his mind to the issue of
    reliance: whether it was reasonable for Fortier to rely on the 200,000 bottle
    estimate and whether such reliance was to Fortiers detriment.  The trial judge concluded that it was
    reasonable for Fortier to rely on the representation and that such reliance
    resulted in a loss to Fortier in the amount of $70,258.32.

[29]

The trial judge concluded that, [t]hese were per jug
    negotiations.  He reasoned as follows:

I accept Fortiers evidence that he offered Kap
    $4.00 per jug, that Villeneuve may at one point have insisted on $6.00 per jug
    but that eventually the price settled at $5.00 per jug.  The one constant during those negotiations
    remained the representation that the volume was 200,000 18 litre jugs.  As Mr. Fortier testified, the volume of jugs
    had been finalized and he moved on from that to other issues which needed to
    be dealt with in order to finalize the deal.

He concluded that Fortier was induced into paying a higher
    purchase price based on Mr. Villeneuves representation.

[30]

In assessing damages, the trial judge accepted Mr.
    Gravels conclusion that in the year prior to the sale of the business,
    Kapuskasing sold only 109,981 bottles of water.  Using that number at $5.00 per bottle and reducing the result by 17.07
    per cent (to take into account the loss of the sales territory assigned to the
    Thunder Bay Culligan franchise), he calculated a reduced purchase price.
[1]
After taking into account the amounts already
    paid by Fortier, the trial judge concluded that Fortier had overpaid by

$68,965.  The trial judge
    added $1,293.32 for Mr. Gravels account to produce a damages award on
    Fortiers counter-claim of $70,258.32.

THE APPEAL

[31]

The appellants raise the following grounds of appeal:

(1)

The trial judges findings of fact and legal conclusion
    in respect of the breach of warranty are inconsistent with his conclusion that
    Fortier reasonably relied on the misrepresentation in respect of the estimated
    annual sales of 200,000 bottles.

(2)

The trial judge erred in failing to recognize that the
    amending agreement of August 16, 2007 provided that the balance of the terms of
    the consulting agreement were to remain in full force and effect after allowing
    a credit to Fortier of $150,000.  The
    amending agreement was entered into at a time when Fortier had reason to
    believe that the 200,000 bottle estimate was incorrect.

(3)

It was contrary to public policy for the trial judge to
    award damages on the basis of a sale price of $1,160,000 when in fact the deal
    was structured so that $600,000 of the purchase price was attributable to a
    consulting agreement at the request of Fortier in order to minimize the tax
    consequences of the transaction.

(4)

The trial judge erred in his calculation of damages for
    negligent misrepresentation.  Such
    calculation should have been done on the basis that if the representation had
    not been made, rather than on the basis of what the situation would have been
    if the representation was true.

[32]

Fortier seeks to uphold the trial judgment.  However, counsel for Fortier submits that the
    trial judge erred in dismissing Fortiers claim for breach of warranty.  In this respect, he argues that the memo from
    Mr. Villeneuve to Mr. Fortier dated July 20, 2006 is a disclosure document pursuant
    to clause 4(1)(s) of the asset purchase agreement and constituted a warranty in
    respect of the 200,000 bottle estimate.

[33]

This latter issue raised by Fortier should properly
    have been the subject of a notice of cross-appeal.  However, counsel for the appellants advised
    that he was not taking any objection to the failure to file a notice of cross
    appeal.

ANALYSIS

(i)        Was there reasonable reliance by Mr. Fortier on the
    misrepresentation made by Mr. Villeneuve?

[34]

I start with a review of the trial judges reasons for
    judgment in respect of the claim for breach of warranty.  The trial judge began by observing that the
    asset purchase agreement made no reference to the volume of sales of bottled
    water.  He then referred to the
    pre-contractual correspondence.  In the
    letter of August 3, 2006 from Kapuskasings solicitor to Fortiers solicitor,
    Kapuskasing made it clear that the deal is
not
dependent on the number
    of bottles sold.  The aforesaid letter
    was followed by a letter of August 8, 2006 from the solicitor for Fortier who
    said:

If it is not to be a condition of closing, my
    client is requesting at this time, that your client produce a Report of Sales
    (including, we presume, the reporting document which Culligan International no
    doubt requires from your client) for the periods 2004, 2005 and 2006 to the
    present time.  Mr. Fortier can then
    review the sales figures prior to signing the agreement and address any issues
    that he might have relative to the sales directly with Mr. Villeneuve.

[35]

The trial judge observed that the above correspondence
    and Mr. Fortiers evidence that he was unable to calculate the number of
    bottles sold from the information provided by Mr. Villeneuve before closing
    should have alerted the defendant [Mr. Fortier] to the necessity of the inclusion
    of an express warranty as to the volume of jugs in the agreement.  The trial judge commented: No such warranty
    was requested . [i]t was incumbent on the defendant to request an express
    warranty in the circumstances of this case.

[36]

In my view, the trial judges subsequent conclusion
    that it was reasonable for Mr. Fortier to rely on the misrepresentation is
    inconsistent with his finding that no warranty was requested.  This is particularly so when the solicitor
    for Fortier asked for and received the sales reports, which Kapuskasing sent to
    Culligan.  Although Mr. Fortier said he
    was unable to calculate the volume of sales from these reports, his long time
    accountant and controller testified that it was relatively easy to get a
    reasonable estimate of bottles sold by doing some simple arithmetic.  In spite of requesting and receiving the
    Culligan documentation, Mr. Fortier apparently made no effort to use it or to
    request assistance in interpreting it.  This was somewhat surprising given that Mr. Fortier was also a Culligan
    franchisee in the Cochrane area.  According to the lawyers letter of August 8, 2006, it was contemplated
    that Mr. Fortier would review the sales figures prior to signing the agreement
    and address any issues he might have directly with Mr. Villeneuve.  No such issues were raised by Mr. Fortier.

[37]

When the trial judge finished his analysis of the
    breach of warranty claim and turned to the claim for negligent
    misrepresentation, he focused on the pre-contractual negotiations and the misrepresentation
    concerning the number of bottles sold. He did so without reference to the
    evidence that he had accepted that Kapuskasing had refused to adjust the
    amount due on closing to reflect the actual volume of jugs sold and without
    reference to his conclusion that Fortier should have requested an express
    warranty.  The trial judge also appears
    to have ignored his finding in respect of the letter of August 3, 2006 and the
    correspondence following that the 200,000 bottle figure was never again referred
    to in any of the pre-contractual correspondence.  This finding, together with Fortiers conduct
    in respect of the disclosed financial information, is inconsistent with the
    trial judges conclusion that the one constant during those negotiations
    remained the representation that the volume was 200,000 18 litre jugs.

[38]

The trial judges finding that there was reasonable
    reliance by Fortier in respect of the misrepresentation is largely a finding of
    fact and subject to appellate review on a standard of palpable and overriding
    error.  See
Housen v. Nikolaisen
, [2002] 2 S.C.R. 235.  In my view, his finding on this issue is in
    direct contradiction to his finding in respect of the breach of warranty claim and
    constitutes a palpable and overriding error.

[39]

In summary, the case comes down to this: Kapuskasing
    refused to enter into a contract that was based on the number of bottles sold
    in the prior year.  Mr. Fortier accepted
    that position and asked that he be supplied with documentation from which he
    could review the sales figures prior to signing the agreement and address any
    issues with Mr. Villeneuve.  Mr. Fortier
    received the appropriate documentation and did nothing.  If he had an issue in respect of his ability
    to calculate unit sales from the information provided, he could have raised it
    with Mr. Villeneuve or sought the assistance of Mr. Gravel.  He did neither.

(ii)       The Amending Agreement

[40]

Contrary to the submission of Fortiers counsel, I do
    not believe that the amending agreement adds anything to the result of this
    case.  The amending agreement did nothing
    more than allow a credit in respect of the original purchase price in view of
    the mutual mistake concerning the extent of the western boundary of
    Kapuskasings sales territory.  The fact
    that one of the recitals in the amending agreement referred to the 200,000
    bottle estimate does not alter the analysis concerning breach of warranty or
    the issue of reasonable reliance.

[41]

Based on the conclusions I have reached on the first
    two issues, I find it unnecessary to deal with the third and fourth issues,
    which relate to the assessment of damages.

(iii)     Fortiers
    Position on the breach of warranty issue

[42]

I turn briefly to the submission of counsel for Fortier
    in respect of the claim for breach of warranty.  As indicated above, Fortier seeks to set aside the trial judges finding
    that there was no breach of warranty.  Fortiers
    position turns on whether the memo of July 20, 2006, containing the 200,000
    bottle estimate, is a disclosure document pursuant to clause 4(1)(s) of the
    asset purchase agreement.  Suffice it to
    say, I agree with the trial judges analysis in paragraphs 8 and 10 of his
    reasons for judgment, which are referred to in paragraphs 22 and 23 above.

[43]

The memo of July 20, 2006 is not a disclosure document.  In my view, the trial judge properly
    characterized it as simply another piece of correspondence exchanged during
    exploratory negotiations.  Arguably, the
    trial judge erred in saying that, [i]t is never again referred to in any of
    the pre-contractual correspondence.  However, it is clear that the estimate was not referred to in any
    pre-contractual correspondence after July 28, 2006.  By the letter from Villeneuves lawyer of
    August 3, 2006, the suggestion that a sale was dependent on the number of bottles
    sold was taken off the table.

DISPOSITION

[44]

In the result, I would allow the appeal, set aside the
    judgment below and grant judgment in favour of Kapuskasing for the balance
    owing under the consulting agreement.

COSTS

[45]

I would award Kapuskasing and Villeneuve their costs of
    the appeal on a partial indemnity basis fixed in the amount of $19,500
    inclusive of disbursements and applicable taxes.

[46]

In accordance with the agreement of the parties, I
    would refer the costs of the trial back to the trial judge for assessment.

RELEASED:

AUG 22 2011                                             Robert
    P. Armstrong J.A.

MJM                                                            I
    agree M. J.
Moldaver
J.A.

I
    agree Robert Sharpe J.A.





[1]
He
    assumed the actual purchase price was $1 million, calculated at $5.00 a bottle
    for 200,000 bottles, from which he excluded the hard assets (trucks, etc.)
    valued at $160,000.


