



COURT OF APPEAL FOR ONTARIO

CITATION:
Van Allen v. Vos, 2014 ONCA
    552

DATE: 20140721

DOCKET: C56289

Juriansz, Tulloch and Strathy JJ.A.

BETWEEN

G. Boyd Van Allen and Van Allen Health Facility
    Ltd.

Plaintiffs (Appellants)

and

Leo Vos and Vos Health Facility Ltd.

Defendants (Respondents)

Marc Munro, for the appellants

Michael R. White, for the respondents

Heard: May 2, 2014

On appeal from the judgment of Justice Joseph R.
    Henderson of the Superior Court of Justice, dated October 22, 2012, with
    reasons reported at 2012 ONSC 5989.

Tulloch J.A.:

A.

OVERVIEW

[1]

The
    appellant and respondent were partners in a dental practice for twenty years. During
    the partnership, they concluded an agreement addressing the allocation of
    annual profits and the accounting upon the partnerships termination. Later, for
    tax reasons, they sought to negotiate an agreement to terminate the partnership
    in a manner different than that set out in the original agreement. In the
    course of the negotiations, the respondents accountant discovered that, for
    several years, the partnership profits had not been distributed in conformity
    with that agreement. The parties relationship broke down soon thereafter. This
    litigation ensued.

[2]

Two
    core issues emerged at trial: whether the parties had reached a new and binding
    termination agreement outside the original agreement, and whether the
    allocation of partnership profits had been consistent with provisions of the
    original agreement. The trial judge concluded that a new agreement had not been
    finalized and that the profits had been misallocated. The appellant challenges
    both conclusions.

[3]

For
    the reasons below, I would dismiss the appeal.

B.

FACTUAL BACKGROUND

[4]

The
    appellant and respondent practiced together as dentists for approximately 28
    years. Initially, the respondent worked as an associate dentist for the
    appellant. In 1989, the respondent became a partner in the practice. He
    purchased a 49% interest in the business, and profits were allocated in accordance
    with each partners respective share.

[5]

That
    profit-sharing arrangement did not last. The appellant consistently generated
    greater income than the respondent, giving the latter a disproportionately
    large share of the profits. In 1997, the parties agreed to change the terms of
    their partnership in two respects. First, the respondents ownership share
    would be reduced to 47%. Second, a new formula would govern the distribution of
    the partnership profits. The ultimate product of the parties negotiation was
    the 2004 agreement.

(1)

The 2004 Agreement

[6]

In
    drafting a new agreement, the parties sought advice from Lloyd Wright, the
    partnerships former accountant at Deloitte & Touche LLP, and Tim Leonard,
    Wrights replacement as the partnerships accountant from 1995 onwards.

[7]

The
    parties opted for an eat what you kill arrangement. They understood that to
    mean that each partner would be allocated 100% of the income he produced, minus
    the specific expenses incurred to generate the income. The parties signed a
    one-page memorandum of agreement in June 1997 as evidence of their arrangement.
    The memorandum mentioned a new sharing formula according to Lloyd Wright and
    Tim Leonard, but provided no further details.

[8]

The
    parties concluded an agreement on January 21, 2004 (the 2004 agreement). The
    agreement was generally effective as of October 31, 1997, and effective as to
    the allocation of profits and losses as of February 1, 1999. The specific
    provisions of the 2004 agreement are described below. At the relevant times,
    Lorraine Van Allen, the appellants wife, kept the books and records for the
    partnership.

(2)

The Termination Agreement

[9]

On
    November 14, 2008, pursuant to the terms of the 2004 agreement, the appellant
    gave notice to the respondent that he wished to terminate the partnership. He
    asked the respondent to vacate the premises of the practice. The respondent
    accepted the notice and request.

[10]

The 2004 agreement
    contained specific provisions dealing with the termination of the partnership.
[1]
However, in order
    to gain a tax advantage, the parties attempted to negotiate a new and discrete
    agreement regarding termination. The parties consulted several accountants at
    Deloitte, including Lana Hillier. Hillier advised that the conclusion of a new
    termination agreement required satisfaction of three conditions: 1) agreement
    on the value and split of equipment; 2) agreement on the value of leaseholds;
    and 3) recommendation of a split of goodwill and any remaining assets. The
    parties were together responsible for the first two steps, while Deloitte was
    responsible for the third. As part of the third step, Deloitte was required to
    prepare a tax plan and make recommendations to the parties. Upon completion of
    the three steps, a final written agreement would be drafted based on the
    approved plan for termination.

[11]

After a series of
    meetings, the parties came to an agreement on several aspects of the
    termination, including the termination date, division of staff, division of
    equipment, and the value of the leasehold improvements. The trial judge found
    that at their last meeting on May 22, 2009, the parties agreed that the
    appellant would pay the respondent $24,000 for the associate goodwill.

[12]

In short, by May 2009,
    the parties had fulfilled the first and second steps of the process of reaching
    a new termination agreement. However, the third step  the provision of a tax
    plan and recommendations by Deloitte  was outstanding, and had to remain as
    such until the year-end financial statements were completed. When these statements
    were delivered in draft form in August 2009, the respondent and Wright  who
    became the respondents accountant  raised concerns about the allocation of
    partnership profits (discussed below). This dispute over profits created a rift
    between the parties. As a result, the year-end financial statements were not
    finalized, and the third step in the process of reaching a new termination
    agreement was never completed.

(3)

The Misallocation of the Partnership Profits

[13]

The parties dispute
    about profit allocation related to the treatment of the expenses of the
    practices associate dentist. The associate, who was also the appellants
    daughter, was an employee of the partnership. She did dental work for patients
    of both partners, in addition to having patients of her own. Her remuneration
    was 40% of the billings for the work that she did, regardless of whose patients
    she worked on. Wright testified that this 40%  the associates expense  was
    to be treated as a
direct
expense. In other words, the associates
    expense for each patient was to be deducted against the income generated by the
    associates work on that patient. In the partnership books, the associates
    expense would be apportioned to reflect the work that the associate did for the
    patients of each dentist. For example, the respondent would receive credit for
    the billings generated by the associate for her work on the respondents
    patients, minus the associates expense for those patients. Wrights testimony
     which the trial judge accepted  was that he directed Lorraine Van Allen to
    treat the associates expense in this fashion in the partnership books.

[14]

Contrary to Wrights
    instructions and the wording of the 2004 agreement, however, Lorraine treated
    the associates expense as a
shared
expense in allocating partner
    profit. That is, Lorraine allocated revenue from the associates work on a
    partners patients to that partner, but treated the associates expense as a
    shared expense between partners, rather than a direct expense against each
    partners production. The beneficiary of this method was the appellant, who
    referred far more patients to the associate than the respondent. The result was
    that the respondent bore a disproportionate share of the associate expense.

[15]

Lorraine treated the
    associates expense as a shared expense for each year after 1997, and forwarded
    the books and records to Leonard, the partnership accountant, to prepare the
    financial statements. The financial statements were then circulated to and
    approved by the appellant and respondent.

[16]

As noted above, Wright
    questioned the allocation of profits in August 2009. Wright made inquiries of Hillier,
    who in turn referred the matter to Lorraine. By e-mail dated October 23, 2009,
    Lorraine confirmed her application of the shared expense method in apportioning
    profits.

C.

THE TRIAL JUDGES REASONS

[17]

The trial judge
    concluded that the 2004 agreement is valid and binding. He rejected the
    appellants contention that because the 2004 agreement was intended to codify
    the manner in which Lorraine had been keeping the books, the portion of the
    2004 agreement dealing with the associates expense is incorrect. There was no
    meeting of the minds as to the allocation of partnership profits before 1997 or
    anytime until 2004. In contrast, the written agreement of 2004 was detailed,
    considered, and unambiguous on its face.

[18]

Nor did the trial
    judge accept the appellants submission that the parties made a binding
    termination agreement outside the 2004 agreement. This contract to make a
    contract did not become binding because there was no agreement on all of its
    essential provisions. The oral agreements between the parties were contingent
    on receipt of the tax plan and recommendations from Deloitte and acceptance of
    those recommendations by the parties. As these never occurred, a new
    termination agreement was never finalized.

[19]

The trial judge
    declared the partnership terminated effective May 31, 2009. On the basis that
    the 2004 agreement continues to be in force, the trial judge also ordered an
    accounting pursuant to paragraph 11 of that agreement. As a remedy for the
    improper treatment of the associates expense  which constituted a breach of
    the 2004 agreement  the trial judge ordered that the appellant pay the
    respondent $119,056.00. Finally, the trial judge rejected the appellants claim
    that the respondents action was out of time. The limitation period commences
    on the date the respondent knew or ought to have known that the profits were
    being misallocated. The respondent here did not know  or have reason to know 
    of the misallocation until his action was well within the two-year limitation
    period.

D.

THE ISSUES ON APPEAL

[20]

The appellant advances
    four grounds of appeal.

[21]

First, he says the
    trial judge erred in determining that the limitation period for the
    respondents action had not expired. The alleged breach of the agreement was
    discoverable at the outset, and the requirements of the
Limitations Act
,
    2002 S.O. 2002, c. 24, cannot be rendered inoperative by blind indifference
    to a prospective claim.

[22]

Second, the appellant
    submits that the doctrine of laches precludes the respondents claim. The
    respondent effectively acquiesced in the profit allocation formula, and it
    would be unfair to now retroactively amend the formula in his favor.

[23]

Third, there was a
    meeting of minds regarding the profit allocation formula in 1997. The conduct
    of the parties represented their shared understanding, and the respondent is estopped
    from arguing otherwise.

[24]

Fourth, the trial
    judge erred in ordering a judicial accounting, because the parties had
    negotiated several aspects of the termination between themselves.

[25]

As I explain below, I
    would reject all of the appellants submissions.

E.

ANALYSIS

[26]

I preface my analysis
    with a brief comment on the interpretation of the 2004 agreement. This issue
    was not explicitly raised as a ground of appeal. However, in both his factum
    and in argument, the appellants counsel suggested that the trial judge erred
    in his interpretation of the provision of the 2004 agreement dealing with the
    allocation of partnership profits.

[27]

Schedule A of the
    agreement says, in relevant part, the following:

A Partners Portion of the Associate Staff Expense is an
    amount equal to the ratio that the fees charged by the Partnership to the
    Partners Clients in respect of Associate Billings bears to the total of all
    fees charged by the Partnership in respect of Associate Billings to the Clients
    of all the Partners.

[28]

On my reading, this
    provision is unambiguous: each partners share of the associate expense is
    determined according to the proportion of the partners clients referred to the
    associate. In other words, the associate expense is to be treated as a direct 
    rather than shared  expense. In my view, the trial judges interpretation is plainly
    correct.

[29]

I now turn to the grounds
    of appeal.

[30]

The appellants first
    three arguments rest on a common premise, namely, that the respondent knew or ought
    to have known that Lorraine was not allocating the profits in accordance with
    the terms of the 2004 agreement. The respondents failure to raise objections
    to the profit-sharing within a reasonable time defeats his claim.

[31]

In my view, this premise
    is unfounded.

[32]

The issue of whether
    the respondent knew of the misallocation is one of fact, and the trial judges
    finding cannot be reversed absent a palpable and overriding error:
Housen
    v. Nikolaisen
, 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 10. The question
    of whether the respondent
ought to have known
of the error is one of
    mixed fact and law. Such questions lie along a law-fact spectrum. Where a
    matter is closer to the fact end of the spectrum  as it is here  appellate
    courts should be wary of interfering with a trial judges findings absent some
    extricable error in principle:
Housen
, at para. 36.

[33]

The appellant locates
    no error in the trial judges findings with regard to the respondents
    subjective and objective knowledge. The judge found, consistent with the evidence,
    that the respondent did not know that the associates expense was being treated
    as a shared expense until October 2009. The method of allocating partnership
    profits is not apparent on the face of the financial statements, as these
    statements contain only net figures for each partners allocation. Moreover,
    the respondent had no reason to believe that the profit-sharing was based on
    anything other than an eat what you kill arrangement. In these circumstances,
    the respondent was entitled to rely on the clear wording of the 2004 agreement.

[34]

That the respondent did
    not know and could not have reasonably known of the misallocation is fatal to
    the appellants first three arguments. On the issue of the limitation period, the
    appellant submits, as he did at trial, that the respondent would have
    discovered the error had he retained his accountant to review the documentation
    supporting the financial statements. The observation, even if true, is
    immaterial. It is reasonable discoverability  rather than the mere possibility
    of discovery  that triggers a limitation period:
Lawless v. Anderson
,
    2011 ONCA 102, at para. 22. To preclude the respondent from recovery because of
    his failure to review the underlying financial statements would, in the
    circumstances of this case, hold him to an unreasonably high standard.

[35]

The same is true for
    the appellants laches and estoppel arguments.  The doctrine of laches provides
    a defence to an equitable claim where the plaintiffs delay in bringing a claim
    constitutes acquiescence or results in circumstances that make prosecution of
    the action unreasonable:
M. (K.) v. M. (H.)
, [1992] 3 S.C.R. 6, at pp.
    77-78. However, a plaintiff cannot acquiesce without knowledge of the facts
    giving rise to her claim:
ibid.
, at p. 78. The respondent here lacked
    this requisite knowledge.

[36]

With regard to
    estoppel, the appellant cites this courts decision in
Shelanu Inc. v.
    Print Three Franchising Corp.
(2003), 64 O.R. (3d) 533 (C.A.), at para.
    54, for the proposition that [w]here the parties have, by their subsequent
    course of conduct, amended the written agreement so that it no longer
    represents the intention of the parties, the court will refuse to enforce the
    written agreement. That principle has no application here. In
Shelanu
,
    the intention of the parties could be inferred from their course of conduct. No
    such inference can be drawn where, as here, one party is entirely unaware of
    the relevant conduct:
Lauren International, Inc. v. Reichert
, 2008
    ONCA 382, 237 O.A.C. 94, at paras. 31-33.

[37]

Therefore, I would not
    give effect to the appellants first three submissions.

[38]

This leaves the
    appellants fourth argument, namely, that the trial judge erred in ordering a
    judicial accounting with regard to termination. The appellant suggests 
    contrary to the explicit findings of the trial judge  that the agreements
    between the parties were not contingent on a future understanding, but were
    instead discrete and enforceable agreements. In other words, the appellant contests
    the trial judges factual findings regarding the parties intentions, rather
    than his application of principles of contractual interpretation. These
    findings are owed deference, and the appellant has failed to show that they are
    tainted by a palpable and overriding error. Accordingly, I would dismiss this
    ground of appeal.

F.

CONCLUSION

[39]

The appeal is
    dismissed. Costs of $15,000 inclusive are awarded to the respondent.

Released: MT July 21, 2014

M. Tulloch J.A.

I agree. R.G.
    Juriansz J.A.

I agree. G.R.
    Strathy J.A.





[1]
Paragraph 11 of the agreement provided for matters
    related to the dissolution, including the respondents vacation of the
    premises, allocation of equipment, accounting of leasehold improvements,
    payment for the associates goodwill, and the allocation of liabilities and
    obligations between partners.


