



COURT OF APPEAL FOR ONTARIO

CITATION: Martenfeld v. Collins Barrow Toronto LLP, 2014 ONCA
    625

DATE: 20140910

DOCKET: C57525

Doherty, Cronk and Hourigan JJ.A.

BETWEEN

Marvin Martenfeld and Jekel Enterprises Inc.

Plaintiffs (Respondents)

and

Collins
    Barrow Toronto LLP and

Collins
    Barrow Toronto Inc.

Defendants (Appellants)

Lou Brzezinski and Catherine MacInnis, for the
    appellants

Michael Tamblyn and Ryan Hauk, for the respondents

Heard: April 22, 2014

On appeal from the judgment of Justice Joan L. Lax of the
    Superior Court of Justice, dated July 24, 2013, with reasons reported at 2013
    ONSC 4792.

Cronk J.A.:

[1]

This appeal concerns the financial consequences of an equity partners withdrawal
    from an accounting partnership to join a competitor firm.  The principal issue
    is the proper interpretation of a provision in the partnership agreement that
    requires a withdrawing and competing equity partner to pay liquidated damages
    to the partnership, in an amount equal to two times the partners Permanent
    Capital.

I.        Background

(1)

The Parties

[2]

The respondent, Marvin Martenfeld (Martenfeld), is a chartered
    accountant and a former partner of the appellant, Collins Barrow Toronto LLP
    (CBT LLP or the partnership), an accounting firm.  He has practised his
    profession for almost 40 years.  Over the decades, he carried on his accounting
    practice in various large accounting firms.  In about 1992, he merged his
    practice with those of several other accountants to form Daren, Martenfeld,
    Carr and Company.

[3]

In approximately 1996, Daren, Martenfeld, Carr and Company dissolved.  The
    former partners worked under a decentralized arrangement until 2003, when Martenfeld
    and others merged their practices under the name DMCT LLP.  From 2003 to 2005,
    Martenfeld served as DMCT LLPs managing partner and a member of the Executive
    Committee.

[4]

In the mid-1990s, Martenfeld and other partners created a management
    company to provide administrative and consulting services to their partnership,
    and to permit the partners to engage in income-splitting with related persons,
    typically their spouses or other family members.

[5]

In 2008, the DMCT LLP partners joined the Collins Barrow franchise of
    accounting firms, adopting the name of CBT LLP and renaming the management
    company Collins Barrow Toronto Inc. (CBT Inc.).

[6]

The shareholders of CBT Inc. are holding companies owned or controlled,
    directly or indirectly, by each of CBT LLPs partners.  In Martenfelds case,
    the respondent, Jekel Enterprises Inc. (Jekel), a company owned by
    Martenfelds wife, was a shareholder of CBT Inc.

[1]

(2)

2004 Partnership Agreement

[7]

Sometime in 2003, the DMCT LLP partners decided to enter into a written
    partnership agreement.  The partners executed the agreement in about June 2004,
    with an effective date of January 1, 2004 (the Partnership Agreement).

[8]

In conjunction with the Partnership Agreement, the predecessor
    management company to CBT Inc.  DMCT Consultants Inc.  executed promissory
    notes in favour of each of its shareholders that were attached as Schedule D
    to the Partnership Agreement.  Jekels promissory note, dated January 1, 2004,
    was in the amount of $269,841 (the Jekel Loan).  By the terms of Jekels
    promissory note, payment of the principal owing on the Jekel Loan, without
    interest, was due on such date as may be determined by [the partnership] or
    on such earlier date as may be provided in the [Partnership Agreement].

[9]

The Partnership Agreement contains several provisions governing the financial
    rights and obligations of the parties on the withdrawal of an equity partner.

[10]

Section
    11.2.2 of the Partnership Agreement is the key provision at issue on this
    appeal.  This section creates a financial disincentive for equity partners to
    leave the partnership and enter into competition, by imposing an obligation on
    the withdrawing partner to pay liquidated damages to CBT LLP.  The amount of
    the damages payable is equal to two times the withdrawing partners Permanent
    Capital, subject to set-off against identified sums owed by the CBT Group to
    the withdrawing partner.  Section 11.2.2 reads in part:

Any Equity Partner who withdraws from the Partnership and
    competes with the Partnership
within the meaning of Section 11.2.1,
agrees
    to pay the Partnership, as a genuine pre-estimate of liquidated damages, and
    not a penalty, an amount equal to two times his or her then Permanent Capital
    (as paid-up or required to be paid-up)
and agrees that any balance in his
    or her Capital Account, if any, as well as any capital loans made as
    contemplated in Section 4.7, will constitute a down-payment that may be
    retained by (or paid by the Corporation to) the Partnership by way of set-off
    to be applied against any amounts owing in respect of this obligation. Any
    balance of the Capital Account owing to the Partner shall be paid out as
    contemplated in Section 11.5 and any balance of any capital loans made as
    contemplated in Section 4.7 shall be paid out as contemplated therein.  [Emphasis
    added.]

[11]

The
    term Permanent Capital is defined under s. 1.1 of the Partnership Agreement
    in this fashion:

Permanent Capital in respect of an Equity Partner in a Fiscal
    Year, means the lowest level of capital required of such Equity Partner at any
    time during such Fiscal Year, and which amount may not be reduced at any time
    during such Fiscal Year, as determined at the beginning of each Fiscal Year for
    each Equity Partner by Special Resolution.

[12]

Section
    1.1 of the Partnership Agreement also contains the following relevant
    definitions:

Capital Account shall mean each Partners capital account as
    maintained pursuant to Section 9.2.

.

Equity Partner means a Partner who has an interest in the
    profits and losses of the Partnership as well as an interest in the capital
    (i.e. equity) of the Partnership and whose name is set out in Schedule A
    attached hereto, together with those persons who become Equity Partners
    pursuant to the provisions of this Agreement from time to time, excluding an
    ex-Partner.

.

Related Person means a Person related to an Equity Partner
    within the meaning of the Income Tax Act and designated by the Equity Partner
    in writing.

.

Withdrawal shall mean the withdrawal of a Partner pursuant
    to Section 11.1, other than by reason of Expulsion, death, retirement or
    disability, and Withdrawing or Withdrawn shall have a similar meaning.

[13]

Article
    9 of the Partnership Agreement deals with CBT LLPs capital.  Sections 9.1 and
    9.2 state in part:

The paid-up capital of the Partnership shall consist of the
    Permanent Capital contributions made by the Equity Partners as determined by
    Special Resolution from time to time, including upon admission to the
    Partnership.  An Equity Partner will be notified of his or her required paid-up
    capital contribution and this required paid-up capital must be injected into
    the Partnership within 30 days of the date of notification of the paid-up
    capital requirement from the Partnership or as agreed by the Partnership (by
    Special Resolution, excluding the applicable Partner) [s. 9.1].

An individual Capital Account shall be established and
    maintained for each Equity Partner.  Each Equity Partners Capital Account in a
    Fiscal Year shall consist of his or her Permanent Capital for such Fiscal Year
    and (a) shall be increased by the Equity Partners allocable share of income
    allocated pursuant to this Partnership Agreement, and (b) shall be decreased by
    (i) all amounts distributed to that Equity Partner and (ii) that Equity
    Partners allocable share of losses allocated pursuant to this Partnership
    Agreement [s. 9.2].

[14]

The
    Partnership Agreement also imposes financial obligations on the CBT Group on
    the withdrawal of an equity partner from CBT LLP.  Section 4.7 states:

Upon an Equity Partner ceasing to be an Equity Partner, the
    Corporation may, subject to applicable law, distribute to the related
    Shareholder such dividends as may be determined by the Board of Directors of the
    Corporation.  After the distribution of such dividends, if any, the Corporation
    shall, subject to applicable law, redeem the related Shareholders Shares for
    the stated redemption price thereof specified in the Corporations articles.

Any capital loans due to the Equity Partner or a Related Person
    by the Corporation shall be repayable over twenty-four months following the
    redemption of the Shares on the same basis as the Equity Partners Permanent
    Capital of the Partnership as contemplated in Section 11.5, mutatis mutandis,
    for greater certainty subject to the set-off or similar rights set out in
    Sections 11.2.2 and 11.5.

[15]

Thus,
    by reason of s. 4.7, on the withdrawal of an equity partner CBT Inc. is
    authorized or obliged: 1) to distribute dividends to shareholders related to
    the withdrawing partner; 2) after the distribution of such dividends, if any, to
    redeem shares in CBT Inc. held by shareholders related to the withdrawing
    partner; and 3) following such share redemption, to repay any capital loans due
    to the withdrawing partner or a related shareholder.

[16]

Under
    s. 11.5 of the Partnership Agreement, the CBT Group is obliged to pay a
    withdrawing equity partner: 1) his or her Permanent Capital, if any, standing
    to the credit of the withdrawing partner in his or her Capital Account as at
    the end of the partnership fiscal year immediately preceding the partners
    departure date (s. 11.5(a)); 2) the amount, if any, of any declared dividends
    on his or her shares in CBT Inc. and the required amount for redemption of those
    shares (s. 11.5(b)); and 3) his or her share of net income for the year of
    withdrawal, pro-rated to the date of the partners departure (s. 11.5(c)).

(3)

Events Preceding the Partnership Agreement

[17]

Both
    before and after the creation of CBT LLP, the partners prepared three sets of
    annual financial statements: 1) financial statements concerning the business
    and financial affairs of their accounting practice (the LLP Statements); 2)
    financial statements regarding the business and financial affairs of the firms
    management company (the Inc. Statements); and 3) financial statements combining
    the LLP and the Inc. Statements (the Group Statements).

[18]

In
    April 2004, two months prior to the formal execution of the Partnership
    Agreement, Martenfeld, then the managing partner of DMCT LLP, circulated a
    memorandum to the partners (the April 2004 Memorandum), attaching the LLP,
    Inc. and Group Statements as of December 31, 2003 and a Capital Equalization
    Schedule for the 2003 year-end.  The CBT Group maintains that the Capital
    Equalization Schedule reflected the year-end capital of each partner, based on the
    Group Statements, and the amount of each equity partners Permanent Capital, as
    well as other capital requirements for the forthcoming year.

[19]

At
    annual meetings, the CBT LLP partners approved the annual LLP Statements and Capital
    Equalization Schedule.  The approved schedule as of December 31, 2003 included
    a column entitled 2004 Permanent Capital.  In 2005, this heading was replaced
    with the phrase Anchor Capital Required, a term not mentioned in the
    Partnership Agreement.

[20]

The
    CBT Group maintains that, after 2003, each partners Permanent Capital in any
    year was the amount of his or her Anchor Capital disclosed in the annual
    Capital Equalization Schedule.

[21]

As
    of December 31, 2003, the Group Statements recorded a balance of $321,301 in
    Martenfelds Capital Account, while the Capital Equalization Schedule showed
    his 2004 Permanent Capital as $230,000.  In contrast, the LLP Statements for
    the same period indicated that Martenfelds Capital Account had a negative
    balance of ($334).

(4)

Conversion of Partnership Capital to Shareholder Loans

[22]

In
    November 2004, some months after the execution of the Partnership Agreement, the
    CBT LLP partners decided to convert some of the partnership capital into
    capital loans (the Capital Conversion).  The Capital Conversion had two objectives:
    first, to limit the partners potential personal liability to creditors of the
    partnership; and, second, to equalize the amounts in each partners Capital Account
    so as to eliminate discrepancies among the amounts that individual partners had
    at risk in the partnership.  To effect the Capital Conversion, the partners
    moved amounts from their Capital Accounts in CBT LLP to shareholder loan
    accounts in CBT Inc., and each partners Capital Account was flattened to
    $10,000.

[23]

The
    Capital Conversion was reflected in the 2004 LLP Statements, which showed the
    year-end balance in the Capital Account of each partner as $10,000.  From 2004
    onwards, the partners Capital Accounts were again reconciled to the agreed
    $10,000 at the end of each fiscal year, and this amount was consistently
    recorded in the annual LLP Statements.  The Inc. Statements, in turn, recorded
    the specific amounts of each of the shareholder loans as Loans Payable to
    Shareholders or Loans Payable to Related Parties.

(5)

Proposed 2007 Amendments to the Partnership Agreement

[24]

In
    the fall of 2007, the Executive Committee of CBT LLP proposed several amendments
    to the Partnership Agreement.  These included the deletion of the s. 1.1 Permanent
    Capital definition and the introduction of the term Capital Loan, defined to
    mean shareholder loans from related corporations.  In addition, a significant revision
    of s. 11.2.2 was proposed.  If approved, the s. 11.2.2 revision would have
    required a withdrawing equity partner to pay liquidated damages equal to two
    times his or her Capital Account and Capital Loan, rather than two times his
    or her Permanent Capital.

[25]

The
    CBT LLP partners never approved the proposed 2007 amendments.
[2]

(6)

Martenfelds Withdrawal from CBT LLP

[26]

Martenfeld
    was a full equity partner in CBT LLP.  On June 30, 2009, he delivered written
    notice of his withdrawal from the partnership.  CBT LLP accepted his withdrawal
    on July 2, 2009 and the parties agreed to a departure date of August 31, 2009. 
    The following day, September 1, 2009, Martenfeld joined a competing accounting firm.

[27]

Under
    the terms of the Partnership Agreement, Martenfeld was entitled to leave CBT LLP
    and join a competing firm.  However, his decision to do so triggered serious
    personal financial consequences for him.  Upon withdrawal from CBT LLP, Martenfeld
    lost his vested retirement benefits, valued at approximately $600,000 at the
    time of his departure.  He also became obliged to pay CBT LLP liquidated
    damages under s. 11.2.2 of the Partnership Agreement.

[28]

Unfortunately,
    Martenfelds departure from CBT LLP rapidly became acrimonious and disputes
    arose regarding his rights and obligations on withdrawal, as well as his
    conduct as a partner.  The parties disagreed about the amount of his Permanent
    Capital for the purpose of his liquidated damages obligation under s. 11.2.2,
    and whether CBT Inc. was obliged to repay the Jekel Loan.  In addition, CBT LLP
    alleged that Martenfeld had breached his contractual and professional obligations
    to the partnership in numerous ways, entitling CBT LLP to substantial damages.

[29]

The
    Martenfeld Group eventually sued.  It took the position that Martenfelds Permanent
    Capital was $10,000, as reflected in his Capital Account with CBT LLP and
    recorded in the LLP Statements.  On this basis, Martenfelds indebtedness for liquidated
    damages under s. 11.2.2 totalled $20,000 (two times his Permanent Capital).

[30]

The
    Martenfeld Group also claimed that the Jekel Loan to CBT Inc. formed no part of
    the calculation of Martenfelds Permanent Capital and that it was to be paid on
    Martenfelds departure, together with Martenfelds share of CBT LLPs 2009
    income, his Permanent Capital of $10,000, and Jekels share of dividends and
    management fees from CBT Inc., under ss. 4.7 and 11.5 of the Partnership
    Agreement.

[31]

Finally,
    the Martenfeld Group sought damages against the CBT Group, including punitive,
    aggravated and exemplary damages, for alleged misconduct by CBT LLPs Executive
    Committee in relation to Martenfelds departure from the partnership and in the
    conduct of the litigation.

[32]

The
    CBT Group resisted these claims on several bases.  First, it maintained that Martenfelds
    Permanent Capital was his Anchor Capital listed in the partnerships 2009 annual
    Capital Equalization Schedule.  Since Martenfelds recorded Anchor Capital was
    $160,494 as of December 31, 2008, this would yield $320,988 in liquidated
    damages owing by Martenfeld under s. 11.2.2.

[33]

Second,
    according to the CBT Group, the shareholder loans to CBT Inc., including the
    Jekel Loan, were not intended to be genuine loans but, instead, formed part of
    CBT LLPs partnership capital.  The CBT Group argued that after set-off of the
    Jekel Loan (in the amount of $176,201 as of December 31, 2009) and the $10,000
    shown on the LLP Statements as Martenfelds Permanent Capital, Martenfeld owed
    $134,787 as liquidated damages ($320,988 - $186,201).

[34]

Further,
    and in any event, the CBT Group claimed that the Martenfeld Group was not
    entitled to payment of the Jekel Loan or other amounts under ss. 4.7 and 11.5
    because Martenfeld had breached his contractual and professional duties,
    including his fiduciary duties, to his partners prior to his departure from the
    partnership.  The CBT Group counterclaimed against the Martenfeld Group for significant
    damages and/or disgorgement of profits on account of Martenfelds alleged
    misconduct.

II.       Trial Judges Decision

[35]

The
    trial judge rejected the CBT Groups urged construction of the Partnership
    Agreement, described above.  She made the following critical findings:

(1)

only the
    LLP Statements reflected the partners     s. 9.2 Capital Accounts in the
    partnership. After 2004, the LLP Statements consistently listed the amount in
    each partners Capital Account as $10,000;

(2)

the Group
    Statements reflected the financial picture of the accounting practice as a
    whole.  However, the Group Statements had no bearing on the obligation of a
    withdrawing equity partner to pay liquidated damages;

(3)

Martenfelds
    Permanent Capital at the time of his departure from CBT LLP was $10,000  the
    amount in his Capital Account as set out in the December 31, 2009 LLP
    Statements, and did not include the Jekel Loan;

(4)

pursuant to
    ss. 11.5(a) and (c), CBT LLP owed Martenfeld $10,000 on account of his Permanent
    Capital and $33,500 on account of his share of partnership profits pro-rated to
    the date of his departure;

(5)

Martenfeld,
    in turn, owed CBT LLP $20,000 on account of liquidated damages under s. 11.2.2;

(6)

the CBT
    Group was required to repay the Jekel Loan in accordance with s. 4.7.  Pending
    any agreement to the contrary by the parties, the trial judge fixed the amount
    of the Jekel Loan at $198,450, as set out in the June 2009 Inc. Statements; and

(7)

under ss. 4.7 and
    11.5, Jekel was entitled to its share of declared dividends, and its pro-rata
    share of management fees for the month of August 2009 from CBT Inc.

[36]

The
    effect of these findings was that the CBT Group owed the Martenfeld Group the
    net aggregate amount of $260,788.25, after deduction of the $20,000 in
    liquidated damages owed by Martenfeld to CBT LLP.

[37]

The
    trial judge also dismissed the parties competing assertions of misconduct as
    against each other and their associated damages claims, including the CBT
    Groups counterclaim.

III.      Issues

[38]

The
    CBT Group advances three main issues on appeal:

1)

Did
    the trial judge err by holding that Martenfelds Permanent Capital for the
    purpose of s. 11.2.2 of the Partnership Agreement was $10,000 as of the date of
    his departure from CBT LLP?

2)

Did
    the trial judge err by holding that the CBT Group is obliged to repay the Jekel
    Loan, in the amount of $198,450?

3)

Did
    the trial judge err by holding that Jekel is entitled to its share of declared dividends,
    together with its share of management fees for the month of August 2009, and
    that Martenfeld is entitled to his pro-rata share of CBT LLPs 2009 profits?

IV.     Analysis

(1)

Approach to Contractual
    Interpretation and Standard of Review

[39]

In
    determining the legal rights and obligations of the parties under a written
    contract, the primary task of a reviewing court is to ascertain the objective
    intentions of the parties and the scope of their understanding regarding the
    rights and obligations at issue.  Recently, in
Sattva Capital Corp. v.
    Creston Moly Corp.
, 2014 SCC 53, the Supreme Court, at para. 47,
    reiterated the well-established principle that courts are to undertake this
    task with a view to the contract as a whole, giving the words used their
    ordinary and grammatical meaning, consistent with the surrounding circumstances
    known to the parties at the time of formation of the contract.

[40]

This
    interpretive approach governs the construction of the Partnership Agreement. 
    Under this approach, while the circumstances surrounding the formation of the
    disputed contract are relevant as an interpretive aid, they cannot overtake the
    written words used by the parties.  As the
Sattva
court explained, at
    para. 57, [t]he interpretation of a written contractual provision must always
    be grounded in the text and read in light of the entire contract.

[41]

The
Sattva
court also held, at para. 50, that: Contractual interpretation
    involves issues of mixed fact and law as it is an exercise in which the
    principles of contractual interpretation are applied to the words of the
    written contract, considered in light of the factual matrix.  Thus, questions
    of contractual interpretation generally attract a deferential standard of
    review:
Sattva
at para. 52.  Further, although 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, courts should be cautious
    in identifying extricable questions of law in disputes over contractual
    interpretation since, among other considerations, the goal of contractual
    interpretation, to ascertain the objective intentions of the parties, is
    inherently fact specific:
Sattva
at paras. 53-55.

[42]

On
    this appeal, the CBT Group challenges the trial judges findings regarding the
    meaning of Permanent Capital and her quantification of the amount of
    liquidated damages owed by Martenfeld under s. 11.2.2.  The CBT Group also
    attacks her findings concerning the relevance of the Capital Equalization
    Schedules, the Group Statements, and the parties discussions leading up to the
    formation of the Partnership Agreement.  These findings are either findings of
    fact or, on the authority of
Sattva
, findings of mixed fact and law. 
    In either case, they attract significant deference from this court.  Absent
    palpable and overriding error, appellate intervention with these findings is
    precluded.

(2)

Martenfelds Permanent Capital

(i)

Contractual Definition of Permanent Capital

[43]

The
    trial judge held that Martenfelds Permanent Capital was the same as the
    amount stated in his Capital Account, as reflected in the LLP Statements.  She
    also held that shareholder loans to CBT Inc., specifically, the Jekel Loan, are
    irrelevant to the quantification of a partners Permanent Capital under s.
    11.2.2.

[44]

The
    CBT Group challenges these core holdings on four main grounds.  First, it
    argues that the trial judges interpretation of the phrase Permanent Capital
    under s. 11.2.2  that a partners Permanent Capital is the same as the
    amount in his or her Capital Account  renders the s. 1.1 definition of Permanent
    Capital meaningless.

[45]

As
    I will explain, I do not accept that the trial judges interpretation of the
    phrase Permanent Capital renders the s. 1.1 definition of that term
    ineffective or devoid of meaning.

[46]

Under
    s. 1.1, Permanent Capital is defined as the lowest level of capital
    required of an equity partner in a partnership fiscal year, which amount may
    not be reduced at any time during the relevant year.  The use of the term
    lowest level allows for the possibility that the amount of capital required
    from an equity partner may fluctuate during the course of a fiscal year. 
    However, only the lowest required amount of capital in any fiscal year
    constitutes the partners Permanent Capital in that year.

[47]

Section
    1.1 also contemplates that the partnership will pass a special resolution
    fixing each partners Permanent Capital at the beginning of each fiscal year. 
    During the fiscal year, a partners Permanent Capital may only change if the
    partnership agrees to increase his or her required capital investment.

[48]

Section
    1.1 defines the term Capital Account as each partners capital account as
    maintained pursuant to s. 9.2.  Section 9.2 says that an equity partners
    Capital Account is to consist of his or her Permanent Capital for a given
    fiscal year, and increase on account of the partners allocated share of
    partnership income and decrease on account of his or her draws and allocated
    share of partnership losses.  Accordingly, under s. 9.2., the amount of a
    partners Capital Account is subject to fluctuation during the course of a
    fiscal year, to account for his or her share of partnership income and losses,
    and distributions received.

[49]

The
    combined effect of these provisions, in my view, is that a partners Capital Account
    consists of his or her Permanent Capital plus an adjustment for his or her flow
    of income, draws and losses.  In other words, a partners Capital Account is
    made up of his or her Permanent Capital, subject to change only by agreement of
    the partners, and an amount calculated with reference to the partners
    allocated share of partnership income and losses and the partners draws during
    the fiscal year.  In this fashion, the amount of a partners Capital Account
    may increase and decrease throughout a fiscal year, while the amount of his or
    her Permanent Capital remains constant.

[50]

The
    CBT LLP partners gave effect to these provisions by agreeing to equalize the
    partners Capital Accounts.  In the first LLP Statements after the Capital
    Conversion, regardless of any fluctuations in a partners Capital Account
    during the fiscal year, the partnership set each partners Capital Account at
    $10,000.  Thereafter, both at the beginning of a new fiscal year and at the end
    of the preceding fiscal year, the amount of a partners Capital Account was the
    same fixed amount of $10,000.  Each new fiscal year, the partnership approved
    this amount, thereby fixing the amount of each partners Permanent Capital for
    that year.

[51]

The
    partners confirmed this equalization on an annual basis in successive
    partnership fiscal years.  On the trial judges undisputed findings, both CBT
    LLP and CBT Inc. filed income tax returns based on this fixed amount for each
    partners Capital Account.

[52]

It
    follows, in my opinion, that while the trial judge erred when she held, without
    qualification, that a partners Capital Account and Permanent Capital are one
    and the same, this error was not overriding.  The result is the same.  The
    trial judge held that the amount in Martenfelds Capital Account at the time of
    his withdrawal was $10,000, and so his liquidated damages under s. 11.2.2 were
    $20,000.  As I read the relevant provisions of the Partnership Agreement, the
    partnerships approval of all partners $10,000 Capital Account balances for
    each new fiscal year set all partners Permanent Capital at $10,000, regardless
    of intra-year fluctuations in the amount in their individual Capital Accounts. 
    Thus, Martenfelds Permanent Capital was $10,000, both in 2008 and 2009, and
    his liquidated damages obligation was $20,000  two times the amount of his
    Permanent Capital  at the time of his withdrawal from CBT LLP.

[53]

I
    see nothing in this interpretation of the s. 1.1 definitions of Permanent
    Capital and Capital Account and s. 9.2 of the Partnership Agreement, as
    implemented under the Capital Conversion, that renders the definition of the
    term Permanent Capital ineffective.  To the contrary, it recognizes the
    partners agreement that an equity partners Capital Account was to consist of
    his or her Permanent Capital on a year-to-year basis.  It was open to the
    partners to also agree, as they did in November 2004, that the amounts of the
    partners Capital Accounts were to be fixed on an annual basis, to achieve the
    risk reduction and income-enhancing benefits afforded by the Capital Conversion. 
    This arrangement neither contradicted nor denuded the definition of Permanent
    Capital under s. 1.1 of the Partnership Agreement.

[54]

I
    also fail to see any palpable and overriding error in the trial judges ruling that
    the term Permanent Capital in s. 11.2.2 of the Partnership Agreement does not
    extend to shareholder loans, specifically, the Jekel Loan, shareholder capital,
    the management company or Related Persons. The provisions of the Partnership
    Agreement overwhelmingly support this conclusion.

[55]

Neither
    the s. 1.1 definitions of Permanent Capital and Capital Account nor s. 9.2
    refer to shareholder or capital loans, the partnerships management company or
    Related Persons.  The phrase Permanent Capital is defined under s. 1.1
    solely with reference to equity partner capital contributions  not amounts
    loaned to the management company by way of shareholder or capital loan, from either
    an equity partner or a person related to an equity partner.

[56]

Similarly,
    under both ss. 9.1 and 9.2, the focus of the partners approach to the firms capitalization
    is on Permanent Capital contributions made by the equity partners from time to
    time.  Sections 9.1 and 9.2 contain no mention of shareholder or capital loans,
    or financial contributions made to the partnerships management company by
    partners or persons related to them.  Instead, s. 9.1 states that the paid-up
    capital of the partnership shall consist of the Permanent Capital
    contributions made by the Equity Partners and that an equity partner would be
    notified of his or her required paid-up capital contribution.  Section 9.1
    also provides for the timing of payment of a partners paid-up capital requirement. 
    Thus, s. 9.1 equates Permanent Capital contributions with required paid-up
    capital contributions
by an equity partner
, to the partnership.

[57]

In
    addition, s. 4.7 of the Partnership Agreement, quoted above, differentiates
    between capital loans due to a departing equity partner or a Related Person
    by the management company, on the one hand, and the departing partners Permanent
    Capital, on the other hand.  Section 4.7 stipulates that such loans are
    repayable by CBT Inc. over 24 months on the same basis as the Equity Partners
    Permanent Capital of the Partnership.  If a partners Permanent Capital included
    shareholder or capital loans to CBT Inc., this language would be redundant.

[58]

Moreover,
    s. 11.2.2, also quoted above, expressly distinguishes between: 1) a partners Permanent
    Capital and capital loans, and 2) the balance in a departing partners Capital Account
    and capital loans.

[59]

In
    light of all these provisions, I see no error in the trial judges holding that
    a partners Permanent Capital under s. 11.2.2 of the Partnership Agreement is
    contained in the partners Capital Account recorded in the LLP Statements and
    does not include shareholder or capital loans to CBT Inc.

[60]

Consequently,
    I would reject the CBT Groups contention that a partners Permanent Capital is
    the same as his or her Anchor Capital as set out in the Capital Equalization
    Schedules.  Recall that the Capital Equalization Schedules derive from the
    Group Statements, which reflect the combined financial position of both CBT LLP
    and CBT Inc.  The financial affairs of CBT Inc. include shareholder loans.  Nothing
    in the Partnership Agreement provides that a partners Permanent Capital is to
    be quantified by reference to the financial position of the entirety of the CBT
    Group enterprise.  As I have said, Article 9 and ss. 1.1 and 11.2.2 do not
    mention the combined financial position of the partnership and the management
    company, the terms Anchor Capital or Related Persons, or shareholder or
    capital loans.

[61]

I
    therefore agree with the trial judges ruling that neither the Group
    Statements, nor the Capital Equalization Schedules that are based on them, are
    the appropriate reference to quantify liquidated damages under s. 11.2.2 of the
    Partnership Agreement.

(ii)

Commercial Absurdity Claim

[62]

The
    CBT Group also argues that the trial judges interpretation of s. 11.2.2 of the
    Partnership Agreement results in commercial absurdity.

[63]

In
    support of this argument, the CBT Group points out that under s. 11.2.2, a
    departing equity partner is afforded three years from the date of his or her departure
    within which to pay liquidated damages to CBT LLP.  Based on this and similar
    payment terms set out under the Partnership Agreement, the CBT Group submits
    that it is illogical and commercially nonsensical to calculate liquidated
    damages at two times $10,000, based on the fixed amount of a departing partners
    Permanent Capital reflected in the LLP Statements.  In other words, three years
    would not be required to pay such a nominal amount.

[64]

The
    CBT Group also emphasizes the material discrepancies that existed in the
    amounts of the partners Capital Accounts at the time the Partnership Agreement
    was entered into.  On the trial judges interpretation of s. 11.2.2, given
    these discrepancies, if two equity partners withdrew from CBT LLP after the
    date of the Partnership Agreement but before the Capital Conversion, the amount
    of their respective liquidated damages obligations would have varied
    significantly, based on the different amounts in their Capital Accounts.  This
    result, the CBT Group submits, would be inequitable and nonsensical.

[65]

Again,
    I disagree.  In my opinion, neither the three-year payment term under s. 11.2.2
    nor the fact that equity partners who left CBT LLP prior to the Capital
    Conversion might be obliged to pay disparate amounts of liquidated damages leads
    to commercial absurdity.

[66]

But
    for the Capital Conversion, s. 11.2.2 could have tied the amount a departing
    partner owed for liquidated damages to the partners stake in the partnership. 
    The loss to the partnership of a higher contributing partner, who had a larger
    stake in CBT LLP, would be more detrimental to the partnership than the loss of
    a lower contributing partner, who had a smaller stake in CBT LLP.

[67]

In
    such a case, a discrepancy between the amounts of liquidated damages payable by
    two departing partners would not lead to inequitable or nonsensical results. 
    The greater liquidated damages due from the partner with a larger stake in the
    partnership would simply reflect the greater adverse impact on the partnership of
    his or her departure and, hence, the need for a greater withdrawal
    disincentive.  In these circumstances, a three-year payment term may well have
    been required for, and benefitted, the departing partner who had a significant
    balance in his or her Capital Account.

[68]

However,
    on implementation of the Capital Conversion, the potential for such
    discrepancies was eliminated.  By equalizing the amounts in each partners Capital
    Account, the partners also quantified and equalized the amounts of each
    partners Permanent Capital.  After the date of the Capital Conversion,
    therefore, the amount of liquidated damages payable to CBT LLP by departing
    equity partners was similarly equalized, and capped at two times $10,000.

[69]

It
    is important to emphasize that the CBT LLP partners were free to introduce appropriate
    amendments to the Partnership Agreement at the time of the Capital Conversion or
    at any time thereafter to avoid the consequences of a post-Capital Conversion
    application of s. 11.2.2.  This could have been achieved in a variety of ways,
    including, for example, by amending the Partnership Agreement to state that
    Permanent Capital under s. 11.2.2 was to be quantified in accordance with the
    Capital Equalization Schedules or Group Statements.  Suitable amendments were
    not made.  Indeed, when proposed in 2007, they were not pursued or
    implemented.  The consequences that flow from this omission must be borne by CBT
    LLP.

(iii)    Consideration of
    Surrounding Circumstances

[70]

The
    CBT Group next argues that the trial judge erred in her interpretation of s.
    11.2.2 by failing to consider the context surrounding the formation of the Partnership
    Agreement.  The CBT Group complains, in particular, that the trial judge failed
    to take account of the amount of Permanent Capital listed in the April 2004 Memorandum
    and of the discussions of the CBT LLP partners about liquidated damages at the
    time of formation of the Partnership Agreement.

[71]

I accept that the trial judges reasons do not expressly
    mention the April 2004 Memorandum.  I also accept that both the April 2004
    Memorandum and the various financial documents attached to it formed part of
    the circumstances surrounding the formation of the Partnership Agreement.

[72]

That
    said, I conclude that the trial judges failure to specifically allude to the
    April 2004 Memorandum and to the partners pre-contract discussions about
    liquidated damages is of no consequence.

[73]

First,
    contrary to the CBT Groups assertion in its factum, the April 2004 Memorandum
    does not set out the partners Permanent Capital.  Rather, the Group Statements
    attached to the April 2004 Memorandum include a Statement of Partners Capital
    Accounts and the attached Capital Equalization Schedule lists each partners
    2004 Permanent Capital.  The trial judge noted the 2004 Permanent Capital
    list, as well as the post-2004 introduction in the schedules of the term
    Anchor Capital.

[74]

Second,
    the trial judge was mindful of the principles governing contractual
    interpretation.  Although the Supreme Courts decision in
Sattva
was
    released after this trial, the principle that the circumstances or factual
    matrix surrounding the making of a contract are relevant to its interpretation
    was well-established under the applicable authorities: see for example,
Dumbrell
    v. The Regional Group of Companies Inc.
, 2007 ONCA 59, 85 O.R. (3d) 616, at
    paras. 53-54;
Ventas, Inc. v. Sunrise Senior Living Real Estate Investment
    Trust
, 2007 ONCA 205, 85 O.R. (3d) 254, at para.45.

[75]

The
    trial judge referred specifically to
Dumbrell
and
Ventas
, as
    well as
Eli Lilly & Co. v. Novopharm Ltd
., [1998] 2 S.C.R. 129 and
    stated, at para. 37:

[T]he goal of interpretation of contracts is to determine the
    intention of the parties with reference to the words used in drafting the
    document, possibly read in light of the surrounding circumstances prevalent at
    the time. Evidence of one partys subjective intention is irrelevant. Extrinsic
    evidence need not be considered at all when the document is clear and
    unambiguous on its face. It should be presumed that the parties intended the
    legal consequences of their words. This makes it possible to interpret a
    plainly-worded document in accordance with the true contractual intent of the
    parties and not by the intent they ascribe to it with hindsight once
    differences have arisen.

[76]

This
    description of the controlling interpretive principles, and the trial judges
    application of those principles, reflect no error.  The trial judges statement
    that the surrounding circumstances of a contract are possibly relevant to determining
    the intention of the contracting parties derives from the language of the
    Supreme Court in
Eli Lilly
, at para. 54.
Sattva
confirms
    prior provincial appellate court decisions that evidence of the surrounding
    circumstances of a contract is relevant in the contractual interpretive
    exercise, within limits.  The
Sattva
court put it this way, at para.
    57:

The goal of examining [evidence of surrounding circumstances]
    is to deepen a decision-makers understanding of the mutual and objective
    intentions of the parties as expressed in the words of the contract.  While
    the surrounding circumstances are relied upon in the interpretive process,
    courts cannot use them to deviate from the text such that the court effectively
    creates a new agreement. [Citations omitted.]

See also
Sattva
at para. 58.

[77]

Third,
    the trial judges reasons reveal that she did take account of those
    circumstances relevant to the interpretation of the Partnership Agreement, in
    particular, the general import and significance of the Group Statements and the
    Capital Equalization Schedules and the use of the term Anchor Capital in the
    Capital Equalization Schedules after the date of the Partnership Agreement.

[78]

Having
    considered these matters, it was unnecessary for the trial judge to
    specifically mention the April 2004 Memorandum or the values ascribed to the
    partners Capital Accounts and Permanent Capital in the 2003 year-end documents
    attached to the April 2004 Memorandum.  The reasons confirm that the trial
    judge understood and came to grips with the CBT Groups argument that
    Martenfelds Anchor Capital as set out in the 2008-2009 Capital Equalization
    Schedule was the proper basis for quantifying his Permanent Capital under s.
    11.2.2.  The trial judge rejected this interpretive argument, for clear and
    cogent reasons.  I see no error in her having done so.

[79]

For
    similar reasons, I also cannot accept that the trial judge erred by failing to
    treat the CBT LLP partners discussions about liquidated damages as a relevant
    consideration when interpreting s. 11.2.2 of the Partnership Agreement.  Extrinsic
    evidence regarding the intention of contracting parties need not be considered
    when the words employed in the contract in question are unambiguous.  More
    precisely, evidence of the contracting parties subjective intentions is
    irrelevant to the interpretation of the final language employed by the parties
    in a contract:
Eli Lilly
at paras. 54 to 58;
SeaWorld Parks &
    Entertainment LLC v. Marineland of Canada Inc
., 2011 ONCA 616, 282 O.A.C.
    339, para. 16.  I do not read the
Sattva
decision as altering this
    principle.

[80]

In
    this case, the trial judge concluded, in effect, that the term Permanent
    Capital in s. 11.2.2 was unambiguous and that, on a proper reading of the
    Partnership Agreement as a whole, its meaning was clear.  For the reasons set
    out above, I agree.  It follows that the trial judge did not err by declining
    to resort to the evidence of the partners pre-contract discussions regarding
    liquidated damages to interpret s. 11.2.2.

(iv)      Trial Judges Consideration of the LLP
    Statements

and the 2007 Proposed Amendments

[81]

The CBT Group advances one further argument in aid of its contention
    that the trial judges interpretation of Permanent Capital under s. 11.2.2 is
    fatally flawed.  It submits that by taking account of the 2009 LLP Statements
    and the 2007 proposed amendments to the Partnership Agreement, the trial judge
    relied on the wrong extrinsic evidence to quantify Permanent Capital.  I
    disagree.

[82]

With
    respect to the 2009 LLP Statements, the CBT Groups argument, at heart, is that
    the trial judge should have relied on the 2009 Group Statements, rather than
    the 2009 LLP Statements, when interpreting s. 11.2.2.  I would reject this
    argument.

[83]

The
    trial judge found, correctly, that only the LLP Statements set out the balance
    in Martenfelds Capital Account in the CBT LLP partnership, as distinct from
    the entire CBT Group enterprise, at the time of his withdrawal from the
    partnership.  The trial judge relied on the 2009 LLP Statements only to
    quantify the amount of Martenfelds Permanent Capital, rather than to interpret
    the meaning of Permanent Capital under the Partnership Agreement.  She was
    right to do so.

[84]

I
    would also reject the CBT Groups complaint concerning the trial judges treatment
    of the 2007 proposed amendments to the Partnership Agreement.

[85]

As
    I read her reasons, the trial judge did not rely on the fact or nature of these
    proposed amendments to interpret s. 11.2.2 of the Partnership Agreement, or to
    quantify Martenfelds Permanent Capital.  She simply observed that the effect
    of the CBT Groups urged interpretation of s. 11.2.2 was to accord that section
    a meaning that corresponded with the unapproved 2007 proposed amendments,
    rather than with the language of s. 11.2.2 as it exists under the Partnership
    Agreement.  This was an accurate observation.

[86]

The
    conclusion that the trial judge did not rely on the 2007 proposed amendments to
    interpret s. 11.2.2 is bolstered by the placement in her reasons of her challenged
    comments regarding the amendments.  Before alluding to the amendments, the trial
    judge had already held that the meaning of Permanent Capital was clear on the
    face of the Partnership Agreement and that the Group Statements and the Anchor
    Capital values relied on by the CBT Group did not provide the basis for
    quantifying Martenfelds Permanent Capital.

(3)

Repayment of the Jekel Loan

[87]

In
    its factum, the CBT Group argued that it was not obliged to repay the Jekel
    Loan and that the amount of that loan could be set-off against the amount of
    liquidated damages owing by Martenfeld to CBT LLP.  However, during oral
    argument, the CBT Group acknowledged that if Martenfelds Permanent Capital at
    the time of his departure is properly to be quantified in the manner adopted by
    the trial judge, the Jekel Loan is repayable, presumably after deduction of the
    $20,000 in liquidated damages owed by Martenfeld.

[88]

Since
    I have concluded that the trial judge did not commit a palpable and overriding
    error in her quantification of the liquidated damages payable by Martenfeld
    under s. 11.2.2 of the Partnership Agreement, it is unnecessary to address this
    ground of appeal.  As conceded by the CBT Group and as found by the trial
    judge, the Jekel Loan is repayable by the CBT Group.

(4)

Other Amounts Awarded by the Trial Judge

[89]

It
    remains to consider the CBT Groups challenge to certain of the trial judges
    other awards to the Martenfeld Group.  The CBT Group argues that the trial
    judge erred by holding: 1) that Jekel is entitled to its share of declared
    dividends, and management fees for the month of August 2009 from CBT Inc.; and 2)
    that Martenfeld is entitled to his pro-rata share of the CBT LLP 2009
    partnership profits.  These claims may be dealt with summarily.

[90]

First,
    with respect to Jekels share of dividends declared by CBT Inc., there is no
    dispute that, in 2009, CBT Inc. declared and distributed a dividend to its
    shareholders in the total amount of $375,642, without allocating any amount of
    that dividend to Jekel.  Under ss. 4.7 and 11.5(b) of the Partnership
    Agreement, quoted above, CBT LLP was obliged on Martenfelds departure from the
    partnership to pay any declared dividends on Jekels shares in CBT Inc. prior
    to the redemption of Jekels shares.  In mid-April 2010, CBT Inc. redeemed
    Jekels shares, effective August 31, 2009.

[91]

In
    these circumstances the trial judge held, at para. 56:

While dividends are within the discretion of the Board of
    Directors [of CBT Inc.], the Board had an obligation to exercise this
    discretion fairly and with an even hand as the shares provided to the related
    corporations carried identical rights. The partnership was obliged to pay
    dividends declared up to the date of Martenfelds departure prior to [the
    redemption of] Jekels shares.

[92]

I
    agree.  While the declaration of dividends by CBT Inc. was discretionary, the
    CBT Group has been unable to point to any provision in the Partnership Agreement
    that authorizes CBT Inc. to differentiate among similarly situated shareholders
    to award dividends to some shareholders but not others.  Absent such a
    provision, the terms of ss. 4.7 and 11.5(b) apply and CBT LLP is indebted to
    Martenfeld for Jekels share of the 2009 declared dividend.  The trial judge
    fixed this amount at $35,557.  I did not understand the CBT Group to challenge
    the quantum of Jekels share of the 2009 dividend.

[93]

Next,
    the CBT Group attacks Martenfelds $33,500 award on account of his pro-rata
    share of CBT LLPs 2009 partnership profits, up to the date of his withdrawal
    from the partnership (eight months).  In support of its challenge to this
    award, the CBT Group renews some of its complaints, advanced at trial,
    concerning Martenfelds conduct prior to and at the time of his departure from
    CBT LLP, which the CBT Group says breached the Partnership Agreement.

[94]

The
    trial judge reviewed the CBT Groups complaints concerning Martenfelds conduct
    in detail.  She provided lengthy reasons for her findings that virtually all
    these complaints lacked any evidentiary support or merit.  With respect to
    those aspects of Martenfelds conduct that she viewed as problematic or
    deserving of censure, the trial judge held that the CBT Group failed to
    establish any factual or legal basis for its damages claims or that
    Martenfelds conduct had occasioned any harm.

[95]

The
    CBT Group has not demonstrated that these findings are tainted by any palpable
    and overriding error.  It simply disagrees with the trial judges findings. 
    This affords no basis for appellate interference with the trial judges award
    of a share of the 2009 partnership profits to Martenfeld.

[96]

I
    come, finally, to the question of the management fees awarded to Jekel for the month
    of August 2009.

[97]

The
    trial judges reasons provide no explanation for this award, which the trial
    judge fixed in the amount of $3,281.25.  The CBT Group argues that there was no
    evidence at trial that CBT Inc. paid management fees to its shareholders,
    separate and apart from dividends.  The Martenfeld Group has pointed to no
    evidence to the contrary.  In these circumstances, there being no apparent
    evidentiary or contractual support for this award, I would set aside the award
    of management fees made by the trial judge.

V.      Disposition

[98]

For
    the reasons given, save only for the trial judges $3,281.25 award of
    management fees in favour of Jekel, which I would set aside, I would dismiss
    the appeal.

[99]

Since
    it has succeeded on virtually all issues on appeal, I would award the
    Martenfeld Group its costs of the appeal on the partial indemnity scale, as
    agreed by the parties.  The Martenfeld Group may submit its brief written
    submissions regarding the quantum of those costs to the Registrar of this
    court, within 14 days from the date of these reasons.  The CBT Group may
    deliver its brief responding submissions on costs, within 14 days thereafter.

Released:

SEP 10 2014                                    E.A.
    Cronk J.A.

DD                                                  I agree
    Doherty J.A.

I
    agree C.W. Hourigan J.A.





[1]
I will refer in these reasons to CBT LLP and CBT Inc., collectively, as the CBT
    Group, and to Martenfeld and Jekel, collectively, as the Martenfeld Group.



[2]
Prior to trial, the CBT Group claimed that Martenfeld was bound by a new
    partnership agreement, effective July 1, 2009.  The alleged 2009 agreement
    contained substantively different partnership withdrawal terms from those in
    the 2004 Partnership Agreement.  The CBT Group abandoned this claim on the eve
    of trial.  As a result, the trial proceeded on the accepted basis that the 2004
    Partnership Agreement governed the respective rights and obligations of the
    parties.


