



COURT OF APPEAL FOR ONTARIO

CITATION: Brompton Corp. v. Tuckamore Holdings LP, 2017 ONCA
    594

DATE: 20170710

DOCKET: C63464

MacPherson, Cronk and Benotto JJ.A.

BETWEEN

Brompton Corp.

Plaintiff (Respondent)

and

Tuckamore
    Holdings LP,

Tuckamore
    Capital Management Inc.,

Tuckamore GP Inc. and
    Tuckamore GP Trust

Defendants (Appellants)

Jennifer Teskey and Kristine Spence, for the appellants

Christopher P. Naudie, Al-Nawaz Nanji and Lia
    Bruschetta, for the respondent

Heard: July 6, 2017

On appeal from the judgment of Justice G.A. Hainey of the
    Superior Court of Justice, Commercial List, dated February 1, 2017.

REASONS FOR DECISION

[1]

The appellants appeal from the summary judgment granted against them by
    Hainey J. of the Superior Court of Justice, Commercial List, on February 1,
    2017.

[2]

The parties accept that the threshold issue on this appeal is the motion
    judges interpretation of a written representation and warranty regarding tax
    pools given by the respondents predecessor, as purchaser (Brompton), in
    favour of the appellants or their predecessors, as vendors (Tuckamore), in an
    acquisition agreement dated February 26, 2008 (the Agreement).  Under the
    Agreement, Brompton purchased Tuckamores business in exchange for the transfer
    to Tuckamore of certain securities held by Brompton.  As a result of the
    transaction, Tuckamore became a minority shareholder of Brompton.  It held its
    equity position in Brompton until September 2011.

[3]

Tuckamore contends that the trial judges interpretation of the tax
    pools representation and warranty is tainted by palpable and overriding errors
    and extricable errors of law.  While Tuckamore advances other grounds of appeal
    from the motion judges decision, it acknowledges that those grounds fall away
    if the motion judges interpretation of the tax pools representation and
    warranty in the Agreement is sustainable.  Brompton agrees.

[4]

The clause at issue, s. 5.1(l) of the Agreement, reads:

The Purchaser represents and warrants as follows to the Vendor
    and acknowledges and confirms that the Vendor is relying on such
    representations and warranties in connection with the sale by the Vendor of the
    Purchased Securities:

.

(l)
Taxes.
Immediately prior to Closing and
    after giving effect to the transactions contemplated by this Agreement, the
    Purchaser will have tax pools as described in the Purchaser Disclosure Letter. 
    [Bold in original.]

[5]

The Purchaser Disclosure Letter cited in s. 5.1(l) sets out, in Exhibit
    A thereto, the tax losses, deductions and credits referred to as tax pools
    in s. 5.1(l) of the Agreement.  Exhibit A lists the relevant non-capital
    losses and scientific research and experimental development expenditures and
    tax credits, together with their years of expiry and associated values for
    federal and provincial income tax purposes.

[6]

In 2010, Tuckamore determined to divest its minority interest in
    Brompton.  Accordingly, it approached Brompton and its other shareholders to
    determine if there was any interest in buying out its position.  This led to a
    further agreement among the parties, dated July 5, 2011, regarding the sale of
    Tuckamores minority interest.  As a term of that agreement, Tuckamore agreed
    to indemnify Brompton for its proportionate share (40.94 percent) of any tax
    liabilities, including interest or penalties, assessed against Brompton under
    the
Income Tax Act
(Canada) in respect of the period when Tuckamore
    was a Brompton shareholder (the Tuckamore Indemnity).  Although several other
    agreements concern the commercial dealings between the parties, the focus of
    these reasons is s. 5.1(l) of the Agreement and the Tuckamore Indemnity.

[7]

The matter now in contention is whether s. 5.1(l), properly construed in
    the context of the Agreement as a whole, constitutes a representation and
    warranty as to the future tax utilization of Bromptons tax pools or, in
    contrast, whether it is directed solely to the accurate identification of the
    tax pools in existence, and their values, up to the date of closing of the
    purchase transaction contemplated under the Agreement after giving effect to
    the transactions contemplated by [the Agreement].

[8]

The question of the proper interpretation of s. 5.1(l) is important
    because, after the closing of the transaction provided for under the Agreement
    and after the date of the Tuckamore Indemnity, the Canada Revenue Agency
    (CRA) disallowed Bromptons attempted use of the tax pools to reduce its
    taxable revenues during the 2009-2013 taxation years.  On March 4, 2015, the
    CRA assessed Brompton for approximately $11.8 million in additional taxes,
    interest and penalties.  Brompton has challenged the CRA assessment in the
    courts.  That challenge is still in progress.

[9]

Following the CRA assessment, Brompton invoked the Tuckamore Indemnity
    to claim that Tuckamore was obliged to indemnify Brompton for its proportionate
    share of the assessed taxes, interest and penalties and the costs incurred by
    Brompton in challenging the CRA assessment.

[10]

Tuckamore resisted this claim, maintaining that s. 5.1(l) of the
    Agreement is a representation and warranty that the tax pools would be
    available for post-closing tax utilization.  Since the CRA has disallowed their
    use, says Tuckamore, Brompton has breached the s. 5.1(l) representation and
    warranty and cannot rely on the Tuckamore Indemnity.

[11]

The motion judge recognized that the interpretive issue before him
    regarding s. 5.1(l) was one to which the principles in
Sattva Capital Corp.
    v. Creston Moly Corp.
, 2014 SCC 53, [2014] 2 S.C.R. 633 apply.  Citing
Sattva
,
    he noted, at para. 26 of his reasons, that the principles of contractual
    interpretation are applied to the words of the written contract, considered in
    light of the factual matrix.

[12]

Having next reviewed the governing principles for the interpretation of
    commercial contracts as set out by this court in
Salah v. Timothys Coffees
    of the World Inc.
, 2010 ONCA 673, at para. 16, the motion judge held, at
    paras. 29-31:

Applying these principles to the interpretation of s. 5.1(l) of
    the Acquisition Agreement, I have concluded that Brompton did not give
    Tuckamore a representation and warranty that the tax pools would not be subject
    to a future tax assessment by the CRA.  The Purchaser Disclosure Letter does
    nothing more than list the amounts of the tax losses on a yearly basis
    specifying when each tax pool will expire.
The Purchaser
    Disclosure Letter says nothing about the future use of the tax pools and there
    is no mention of whether they could be assessed by the CRA
.

Brompton and Tuckamore are both sophisticated investors who
    carried out their own due diligence in respect of the tax pools.  Commercial
    reality dictates that they both had to know that there was a risk that their
    intended tax applications of the tax pools could be assessed and disallowed by
    the CRA in the future.  Neither could definitively predict what the CRA would
    decide if there was an assessment.

Under these circumstances it does not make commercial sense
    that Brompton would provide Tuckamore with a guarantee as to how the CRA would
    assess the use of the tax pools in the future.
Considering
    the plain meaning of s. 5.1(l) of the Acquisition Agreement and the Purchaser
    Disclosure Letter against the factual matrix and the commercial reality of the
    transaction, I have concluded that Bromptons representation and warranty was
    only as to the existence, amount and expiry dates of the tax pools and did not
    guarantee their availability for future use without the risk of a CRA
    assessment
.  If Tuckamore truly wanted a guarantee that the future use
    of the tax pools would not be subject to an assessment by the CRA, the
    Acquisition Agreement could easily have specified this in clear unequivocal
    language.  It did not do so.  [Emphasis added.]

[13]

In our view, for the reasons that follow, Tuckamore has failed to
    identify either an extricable error of law or a palpable and overriding error
    in the motion judges interpretation of s. 5.1(l) of the Agreement.  As
Sattva
instructs, the motion judges interpretation is therefore entitled to deference
    from this court.

[14]

We note, first, that the Agreement is far from a standard form
    contract.  It is the critical centrepiece of a series of associated contracts
    that implemented complex commercial transactions.  It was negotiated by
    sophisticated parties with the assistance of professional legal and tax
    advisors.

[15]

In these circumstances, the motion judge was obliged to consider the
    commercial context in which the Agreement was concluded, the surrounding
    circumstances that were known or ought to have been known to the parties at the
    time of contract formation, and the language employed by them.  As
Sattva
instructs, at para. 47, in matters of contractual interpretation, a
    decision-maker must read 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.  The overriding
    interpretive task,
Sattva
instructs, is to determine the intent of
    the parties and the scope of their understanding.

[16]

In our view, that is precisely the interpretive exercise that the motion
    judge undertook.  His reasons confirm that he was alert to the controlling
    interpretive principles, to the commercial context and factual matrix in which
    the Agreement was concluded, and the language employed in the Agreement by
    these informed and knowledgeable parties.

[17]

In particular, and contrary to Tuckamores contention, we see nothing in
    the motion judges reasons to suggest that he failed to consider and to situate
    s. 5.1

(l) in the overall
    context of the transaction between the parties, the entire Agreement, and the
    Purchaser Disclosure Letter that followed.  His reasons reveal that he was
    aware of the Tuckamore Indemnity and of an indemnity given by Brompton in
    favour of Tuckamore under s. 10.2(b) of the Agreement.  We see nothing in his
    reasons to support the assertion that he failed to consider these indemnities
    and the Agreement as a whole when interpreting the meaning of s. 5.1(l) and its
    scope.  This case, therefore, is distinguishable from
Deslaurier Custom
    Cabinets Inc. v. 1728106 Ontario Inc.
, 2016 ONCA 246, 399 D.L.R. (4th)
    575.  See also
Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc.
,
    2017 ONCA 293.

[18]

We also do not accept that the motion judge erred by conflating the
    Purchaser Disclosure Letter and the Agreement.  The former document was
    incorporated by reference in s. 5.1(l).  Regard to its contents was a proper
    and necessary consideration in interpreting the intended meaning of s. 5.1(l).

[19]

Moreover, and importantly, the motion judges interpretation of s. 5.1(l)
    gives effect to the plain language of the section, as well as that of the
    Purchaser Disclosure Letter.  Neither s. 5.1(l) of the Agreement nor the
    Purchaser Disclosure Letter refers in any way to the future use of the tax
    pools or to their viability as an effective tax reduction device.  We agree
    with Bromptons submission, as the motion judge essentially found, that the
    language of s. 5.1(l) suggests that Tuckamore was to be protected from the risk
    of misstatement of the tax pools  not from the risk of a failed future
    utilization of them  both at the time of closing and thereafter.  As the
    motion judge pointed out, if the latter protection was intended by the parties,
    it would have been a simple drafting matter to say so in explicit language. 
    This did not occur.

[20]

That this is the proper interpretation of s. 5.1(l) is bolstered by the
    only contemporaneous documentary evidence of the protections requested or
    negotiated by Tuckamore concerning the tax pools.  There is no dispute that the
    only document bearing on this issue is a Brompton email dated February 11, 2008
    to its legal counsel in which a request by Tuckamore for inclusion in the
    Agreement of a rep [representation] by Brompton as to the amount/expiry date
    of its tax losses [ and development and investment tax credits] is recorded.  That
    is precisely what s. 5.1(l) and the Purchaser Disclosure Letter provided. 
    There is no evidence that Tuckamore negotiated for a representation and
    warranty by Brompton that the tax pools could or would be effectively utilized
    in the future for tax purposes.

[21]

Finally, we reject Tuckamores submission that the motion judges
    interpretation of s. 5.1(l) of the Agreement is infected by his own subjective
    interpretation of the commercial realities surrounding the bargain between the
    parties.  As we have emphasized, the commercial context of the Agreement formed
    part of the circumstances surrounding the formation of the Agreement that the
    motion judge was obliged to consider.  Those circumstances included the obvious
    risk that a future attempt by Brompton to use the tax pools to reduce its
    taxable revenues could be rejected by the CRA.  The motion judges assessment
    of those circumstances, as known to the parties, attracts deference from this
    court.

[22]

At the end of the day, there was no evidence before the motion judge that
    Brompton offered any guarantee or assurance, or that Tuckamore sought a
    guarantee or assurance, that the tax pools could or would be successfully
    utilized by Brompton in the future, without review or adverse assessment by the
    CRA.  Indeed the evidence was to the contrary.  There was uncontradicted
    evidence before the motion judge from Bromptons then chief executive officer
    that such a guarantee or assurance  about the future conduct or reaction of
    independent third party taxation authorities  would be an extraordinary and
    unprecedented commercial event.

[23]

For these reasons, the appeal is dismissed.  Brompton is entitled to its
    costs of the appeal, fixed in the amount of $30,000, inclusive of disbursements
    and all applicable taxes.

J.C. MacPherson J.A.

E.A. Cronk J.A.

M.L. Benotto J.A.


