



COURT OF APPEAL FOR ONTARIO

CITATION: Fuller v. Aphria Inc., 2020 ONCA
    403

DATE: 20200623

DOCKET: C67236

Tulloch, van Rensburg and
    Zarnett JJ.A.

BETWEEN

Jon-Paul Fuller and JPF Komon
    Kaisha Inc.

Applicants (Appellants)

and

Aphria Inc. and Pure Natures
    Wellness Inc. d/b/a Aphria

Respondents (Respondents)

Earl A. Cherniak, Q.C., Jason M. Squire
    and Lindsay A. Woods, for the appellants

Eric S. Block, Jacqueline Cole and
    Patrick Healy, for the respondents

Heard: February 6, 2020

On appeal from the order of Justice Laurence
    A. Pattillo of the Superior Court of Justice, dated June 21, 2019, with reasons
    reported at 2019 ONSC 3778, 147 O.R. (3d) 106.

Zarnett J.A.:


INTRODUCTION

[1]

The appellants, Jon-Paul Fuller (Fuller) and
    his personal company, JPF Komon Kaisha Inc. (JPF) sought, by application,
    damages for the failure of the respondent, Aphria Inc. (Aphria), to honour
    options to acquire Aphria common shares (the Options). The appellants claimed
    that the Options, granted to JPF in a Consulting Agreement dated June 2, 2014, and
    confirmed in a subsequently-executed Stock Option Agreement, were specified to
    have an exercise period of five yearscontinuing into 2019even though the Consulting
    Agreement itself had a two-year term that expired in June 2016. The appellants
    claimed that Aphria breached its contractual obligations when it rejected the
    appellants exercise of the Options in December 2017 as out of time.

[2]

The application was dismissed. The application
    judge agreed with Aphrias position that the Options had ceased to be
    exercisable before they were exercised. He held that the Options were subject
    to a Stock Option Plan (the Option Plan) that was incorporated by reference into
    the Consulting Agreement and the Stock Option Agreement. He gave effect to a term
    of the Option Plan that provided that any options held by a consultant cease to
    be exercisable six months after the consulting arrangement ends, rather than a
    provision, in both the Consulting Agreement and the Stock Option Agreement, that
    the Options had a five-year exercise period.

[3]

The application judge refused to grant the
    appellants alternative claim for relief from forfeiture in the event the Options
    were found to have been exercised late. He found that discretionary equitable
    relief was unavailable as Fuller had breached a Non-Competition Agreement with
    Aphria. He assessed JPFs loss from being deprived of the benefit of the Options
    at $2,820,000, but based on his primary findings, did not award any damages.

[4]

The appellants argue that the application judge
    erred in his interpretation of the relevant agreements that governed the Options.
    They also argue that, even if the Options were exercised late, relief from
    forfeiture should have been granted. If successful on either of these grounds, they
    argue that the application judge erred in not assessing and awarding damages in
    the amount of $4,480,000.

[5]

For the reasons that follow, I conclude that
    the application judge erred in his interpretation of the agreements in a manner
    that justifies appellate intervention.

[6]

When properly interpreted, the agreements
    provide that the applicable exercise period is the one that was specified when
    the Options were granted by the Consulting Agreement. By the terms of the
    Option Plan, the provision in it relied on by Aphria is inapplicable where, as
    here, it is wholly inconsistent with the exercise period set in the original
    grant of the Options. As a result, the Options had not expired before they were
    exercised, and Aphria was not justified in rejecting their exercise as late. In
    light of this conclusion, it is unnecessary to deal with the issue of whether relief
    from forfeiture should have been granted.

[7]

I would not interfere with the application
    judges assessment of damages; he made no reversible error in that determination.

[8]

Accordingly, I would allow the appeal to the
    extent of ordering that JPF recover damages from Aphria in the amount of
    $2,820,000, for Aphrias failure to honour the exercise of the Options.

FACTS

(1)

Background

[9]

The dispute between the parties arose out of the
    business relationship between Fuller and JPF, on the one hand, and Aphria on
    the other. Aphria was formerly known as Pure Natures Wellness Inc.
[1]

[10]

Aphria was formed in 2012 as a medical
    marihuana business venture. Fuller was one of Aphrias three founders. During Aphrias
    formative period, while it was seeking required licences for a medical
    marihuana business from Health Canada, Fuller held 20% of its shares. He also
    served as Aphrias Chief Executive Officer (CEO) and in other roles required
    by Health Canada.

[11]

By the spring of 2014, Aphria had obtained one of
    the licences required for its business and was expecting the imminent receipt
    of another (the Final Licence). Aphria began working toward becoming a
    publicly-traded corporation. The majority owners were of the view that a new
    CEO was necessary for that to occur. This was the impetus for a negotiated
    change to Aphrias relationship with Fuller, which both parties referred to as Fullers
    exit from Aphria. The terms of the exit were reflected in three agreements
    dated June 2, 2014: a Share Purchase Agreement, a Consulting Agreement, and a
    Non-Competition Agreement.

[12]

Under the Share Purchase Agreement, Fuller sold
    his 20% shareholding in Aphria to the other co-founders for $3 million.

[13]

Under the Non-Competition Agreement, Fuller agreed
    that he would not, for a period of two years, carry on, engage in, or have any
    financial or other interest, directly or indirectly, in any activity in North
    America in competition with the business of Aphria.

[14]

Under the Consulting Agreement, JPF and Fuller
    agreed to provide consulting services to Aphria for a term of two years. This included
    assisting Aphria in obtaining the Final License and, if requested, assisting in
    other tasks related to the process of going public. As part of the consideration
    for agreeing to do so,  JPF was granted the Options, namely, 200,000 options to
    purchase common shares in Aphria. The provisions of the Consulting Agreement relating
    to these Options are central to the disposition of this appeal.

(2)

The Consulting Agreements Grant of Options

[15]

Schedule 2.2 to the Consulting Agreement, titled
    Consulting Fees, provided that the compensation for the appellants
    consulting services included a grant to JPF of 200,000 Options to purchase
    common shares of Aphria at $0.60 per share. The Options were to issue
    immediately upon Aphrias receipt of the Final Licence. The Options had an
    expiry date that was to be five years after Aphria completed the contemplated
    transaction (known as the RTO) that would result in it becoming a public
    issuer. After describing the Options this way, Schedule 2.2 went on to state
    that the Options shall be subject to the terms and conditions of any option
    plan implemented by [Aphria].

[16]

The Consulting Agreement provided, in Section 4.1,
    that unless terminated in accordance with Section 4.2, the term of the
    Consulting Agreement would be two years, so that it would end on June 2, 2016. The
    Consulting Agreement contained no provision for the renewal or extension of its
    two-year term.

[17]

Section 4.2 of the Consulting Agreement provided
    for certain events that could result in a shortening of the term of the
    Consulting Agreement, that is, in a termination before the end of the two-year
    term. The parties could mutually agree to end the Consulting Agreement; Aphria
    could terminate it without notice for certain breaches or failures of
    performance by the appellants; and JPF could terminate it on 60 days written
    notice.

[18]

Section 4.3 of the Consulting Agreement provided
    that, in the event of an early termination of the Consulting Agreement under
    Section 4.2, all unexercised options were immediately cancelled and of no
    force and effect.

[19]

Section 4.3 of the Consulting Agreement only
    applied in the event of an early termination of the Consulting Agreement. Nothing
    in the Consulting Agreement provided for the cancellation of the Options upon,
    or tied in any way to, the expiry of the two-year term under Section 4.1 of the
    Consulting Agreement.

(3)

The RTO, The Final Licence, and the Option Plan

[20]

On December 1 and 2, 2014, three events occurred
    that were contemplated by the grant of the Options in the Consulting Agreement.
    On December 1, the RTO was completed, which started the five-year term of the Options
    described in the Consulting Agreement. Also, on December 1, Aphria implemented
    an Option Plan. On December 2, Aphria received its Final Licence, resulting in
    the issuance (which the parties and application judge treated as synonymous
    with the vesting) of the Options.

[21]

The provisions of the Option Plan are also
    central to the disposition of this appeal.

(4)

The Provisions of the Option Plan

[22]

The Option Plan described its purpose as advancing
    the interests of Aphria in a number of ways: by providing Eligible Persons
    (directors, officers, employees or consultants) with additional incentive; by encouraging
    Eligible Persons stock ownership and their interest in the success of, and
    desire to remain with, Aphria; and by attracting new directors, officers and
    employees.

[23]

The Option Plan gave Aphrias Board of Directors
    the power to administer and operate the Option Plan, as well as the power to
    grant options under it and provide for their exercise. It provided for the
    Board to be able to amend the Option Plan without shareholder approval for
    certain matters and with shareholder approval for other matters. It allowed the
    Board to delegate matters pertaining to the Option Plan to a Committee or an
    individual Board member, all of whom would be the Board for the purposes of the
    Option Plan.

[24]

The Option Plan provided that the securities
    that could be acquired under the Option Plan were common shares of Aphria. It limited
    the total number of shares that could be acquired and prescribed what would
    occur if there were a change in the number of common shares because of a stock
    dividend, split, or other corporate change. Among other things, it dealt with
    regulatory compliance, tax withholdings, and how Aphria would use the payments
    it would receive upon the exercise of options.

[25]

Of particular relevance to this appeal are the
    provisions of the Option Plan about the period of time during which options
    could be exercised, namely Section 2.3(a) and Section 2.3(g):

2.3     Exercise of Options

(a) The period during which an Option may be
    exercised (the Option Period) shall be determined by the Board at the time
    the Option is granted, subject to any vesting limitations that may be imposed
    by the Board in its sole and unfettered discretion at the time such Option is
    granted, provided that:

(i) no Option shall
    be exercisable for a period exceeding ten (10) years from the date the Option
    is granted;

(ii) the Option
    Period shall be automatically reduced in accordance with Section 2.3(f) below
    upon the occurrence of any of the events referred to therein; and

(iii) no Option in
    respect of which Shareholder approval is required under the rules of the Stock
    Exchange shall be exercisable until such time as such Option has been approved
    by the Shareholders.



(g) Subject to Section 2.3(a) and except as
    otherwise determined by the Board:

(i) if a Participant
    who is a non-executive director of the Corporation ceases to be in Eligible
    Person as a result of his or her retirement from the Board other than for
    Cause, each unvested Option held by such Participant shall automatically vest
    on the date of his or her retirement from the Board, and thereafter each vested
    Option held by such Participant will cease to be exercisable on the earlier of
    the original Expiry Date of the Option and six (6) months after the date of his
    or her retirement from the Board;

(ii) if the Board
    service, consulting relationship, or employment of a Participant with the
    Corporation or a Subsidiary Company is terminated for Cause, each vested and
    unvested Option held by the Participant will automatically terminate and become
    void on the Termination Date;

(iii) if a
    Participant dies, the legal representative of the Participant may exercise the
    Participants vested Options for a period until the earlier of the original
    Expiry Date of the Option and 12 months after the date of the Participants
    death, but only to the extent the Options were by their terms exercisable on
    the date of death. For greater certainty, all unvested Options held by a
    Participant who dies shall terminate and become void on the date of death of
    such Participant;

(iv) if a
    Participant ceases to be an Eligible Person for any reason whatsoever other
    than in (i) to (iii) above, each vested Option held by the Participant will
    cease to be exercisable on the earlier of the original Expiry Date of the
    Option and six (6) months after the Termination Date; provided that all
    unvested Options held by such Participant shall automatically terminate and
    become void on the Termination Date of such Participant. Without limitation,
    and for greater certainty only, this provision will apply regardless of whether
    the Participant received compensation in respect of dismissal or was entitled
    to a period of notice of termination which would otherwise have permitted a
    greater portion of the Option to vest with the Participant; and

(v) notwithstanding
    any provision in this Section 2.3(g) to the contrary, if a Participant who is
    an officer of the Corporation ceases to be an Eligible Person as a result of
    such officers termination without Cause or resignation for Good Reason, any
    unvested Options as of the date of termination will be accelerated and become
    immediately fully vested as of such date. Such options will be exercisable by
    the officer for a period of up to one year following the date of termination.

[26]

To summarize, Section 2.3(a) provided that the
    period during which an option could be exercised would be determined by
    Aphrias Board at the time the option was granted. This was subject to certain
    exceptions, including that no option could be exercisable for more than ten
    years, and that the exercise period was to be automatically reduced upon the
    occurrence of events listed in Section 2.3(f). Section 2.3(f) of the Option
    Plan did not, however, provide for any such events or reductions.

[27]

Section 2.3(g) of the Option Plan provided that,
    subject to Section 2.3(a) and except as otherwise determined by the Board, any
    vested option would cease to be exercisable, at the latest: (i) 6 months after
    an option holder who was a non- executive director resigned: (ii) immediately
    on the termination, for cause, of an Eligible Person from their Board service, employment
    or consulting relationship; (iii) 12 months after the death of an option holder,
    and (iv) 6 months after an option holder ceased to be an Eligible Person for
    any reason other than in (i) to (iii) above. Section 2.3(g)(iv) is the
    provision relied on by Aphria to which the application judge gave effect.

(5)

The Stock Option Agreement

[28]

The third document of central relevance to the
    appeal is a Stock Option Agreement that was executed by Aphria and Fuller. It
    was dated June 2, 2014, but the application judge, relying on Fullers evidence,
    found that it was signed on December 9, 2014, which was after the Option Plan
    had come into existence.

[29]

The Stock Option Agreement recited that 200,000 Options,
    with an exercise price of $0.60, had been granted under the Option Plan,
    subject to the terms and conditions of the Option Plan. It contained Fullers
    acknowledgment that he had read and understood the Option Plan. It described
    the Options as having been granted on June 2, 2014 and having an Expiry Date
    five years after that date, namely June 2, 2019. It provided a form of notice
    to be used by the option holder to exercise the Options in accordance with
    Section 2.3 of the Option Plan at any time and from time to time prior [to]
    the Expiry Date.

[30]

Although the Stock Option Agreement described Fuller,
    rather than JPF, as the option holder, and described an expiry date that was 5
    years after the grant of the Options in the Consulting Agreement, rather than 5
    years after the RTO, neither party ascribed any material significance to this,
    nor did the application judge. The parties, and the application judge, treated
    the document as dealing with the same grant of Options as did the Consulting
    Agreement.

(6)

The End of the Consulting Agreement

[31]

The Consulting Agreements two-year term ended
    on June 2, 2016 under Section 4.1 of that agreement. It was not the subject of
    an early termination under Section 4.2.

[32]

It is not in dispute that, as a result of the
    Consulting Agreement having come to an end on June 2, 2016, the appellants, on
    that date, each ceased to be a consultant, and therefore an Eligible Person, as
    defined in the Option Plan.

(7)

The Attempt to Exercise the Options and its
    Rejection

[33]

On December 6, 2017, JPF sought to exercise the
    200,000 Options. It provided Aphria with the form of notice attached as a
    Schedule to the Stock Option Agreement and a bankers draft payable to Aphria
    in the sum of $120,000.

[34]

Aphria rejected the exercise on the basis that
    the Options had expired on December 2, 2016, that is, six months after the
    Consulting Agreement ended and the appellants each ceased to be a consultant,
    and therefore an Eligible Person, as described in the Option Plan.

(8)

Aphrias Stock Price

[35]

On December 6, 2017, when JPF attempted to
    exercise the Options, the closing price of Aphrias shares was $13.30 per
    share. Between December 6, 2017 and January 9, 2018, Aphrias share price rose
    to as high as $24.75 per share, falling back to the $20 to $23 per share range in
    the days after. The price declined from those levels toward the end of January.
    On March 29, 2018, Aphrias shares closed at $11.49 per share. On May 7, 2018,
    the date the application was commenced, they closed at $10.30 per share.

[36]

Fuller gave evidence that if Aphria had honoured
    the exercise of the Options, he would have caused the sale of the shares
    acquired immediately after the peak in prices. An expert witness provided a
    report on behalf of the appellants that calculated, assuming disposition prices
    of between $20 and $23 per share, that JPF would have received net proceeds of
    between $3.88 million to $4.48 million from the exercise of the Options and
    subsequent resale of the acquired shares.

(9)

The Lease and the Non-Competition Allegation

[37]

Aphria rejected the exercise of the Options at
    the time it was attempted on the sole basis that the exercise was late. During
    the application, Aphria also raised the fact that a corporation of which Fuller
    was the sole director and president had, in April 2016, rented a greenhouse
    facility to a tenant who intended to use it to produce medical marihuana. Before
    this court, that fact was relied on as it pertained to whether the appellants
    alternative request for relief from forfeiture should have been granted.

THE APPLICATION JUDGES DECISION

[38]

The appellants sought damages for Aphrias
    refusal to honour the exercise of the Options, a refusal that deprived JPF of the
    opportunity to sell the shares it would have acquired. They asserted that the
    exercise of the Options on December 6, 2017 was timely, as the Options were
    granted for a five-year term and could be exercised well into 2019.

[39]

Aphria took the position that the Options
    expired before they were exercised, namely on December 2, 2016, which was six
    months after the end of the term of the Consulting Agreement.

[40]

The application judge agreed with Aphrias
    position.

[41]

The application judge approached the issue as a
    matter of contractual interpretation. He referred generally to the principles summarized
    in the Supreme Court of Canadas decision in
Sattva Capital Corp. v.
    Creston Moly Corp.
, 2014 SCC 53, [2014] 2 S.C.R. 633, and this courts
    decision in
Weyerhaeuser Company Limited v. Ontario (Attorney General)
,
    2017 ONCA 1007, 77 B.L.R. (5th) 175, at paras. 64-68, revd
Resolute FP
    Canada Inc. v. Ontario (Attorney General)
, 2019 SCC 60.
[2]
He then referred to the
    related contracts principle, citing
Salah v. Timothy's Coffees of the World
    Inc.
, 2010 ONCA 673, 268 O.A.C. 279, at para. 16, for the proposition that
    where more than one contract is entered into as part of an overall transaction,
    the contracts must be read in light of each other to achieve interpretive
    accuracy and give effect to the parties intentions. After citing that principle,
    the application judge stated that the Consulting Agreement, Option Plan, and
    Stock Option Agreement are connected, inter-related instruments to be interpreted
    in light of each other. He then stated that the interrelationship here was achieved
    through the technique of incorporation by reference, which guides the
    interpretation, citing
Invescor Restaurants Inc. v. 3574423 Canada Inc.
,
    2012 ONCA 387, 292 O.A.C. 322, at para. 19.

[42]

Noting that the Consulting Agreement said that
    the Options would be subject to the Option Plan, and that the Stock Option
    Agreement stated that the Options had been granted subject to the terms of the
    Option Plan, the application judge concluded that the grant of Options in the Consulting
    Agreement and the Stock Option Agreement incorporated by reference the terms
    and conditions of the Option Plan: at paras. 41, 44 and 47.

[43]

The application judge found that Section 2.3(g)(iv)
    of the Option Plan applied to the Options. As noted above, Section 2.3(g)(iv) provided
    that options cease to be exercisable six months after a person ceases to be an
    Eligible Person for any reason other than a reason referred to in Section
    2.3(i) to (iii) of the Option Plan, (none of which were germane here). Since the
    appellants ceased to be Eligible Persons upon the expiry of the term of the
    Consulting Agreement, the Options ceased to be exercisable on December 2, 2016:
    at paras. 48-49 and 56.

[44]

The application judge rejected the argument that
    the Consulting Agreement or the Stock Option Agreement represented an exercise
    by the Board of its power under the Option Plan to grant options exercisable at
    any time within their five-year term or to alter the period within which Section
    2.3(g)(iv) of the Option Plan said they could be exercised: at paras. 50-55. According
    to the application judge, Aphria therefore did not breach its contract with the
    appellants when it rejected the exercise of the Options: at para. 56.

[45]

The application judge also rejected the argument
    that the appellants should be granted relief from forfeiture arising from a
    late exercise of the Options. In April 2016, when the corporation of which
    Fuller was sole director and president rented a greenhouse facility to a tenant
    who intended to use it to produce medical marihuana, he was still subject to
    the Non-Competition Agreement (which ran until June 2016). Although the
    arrangements with the tenant specified that the landlord had no interest in the
    plants or products to be produced by the tenant, the application judge
    concluded that Fullers conduct was a breach of the Non-Competition Agreement.
    That meant that Fuller lacked clean hands and the appellants could not obtain
    equitable relief: at paras. 68-73.

[46]

The application judge doubted whether, even if
    he had found a breach of contract, he could award damages on an application. He
    went on, however, to assess the damages. He expressed serious concerns about Fullers
    evidence that he would have caused the shares to be sold around the peak of
    the market. The application judge observed that, contrary to what the
    appellants experts calculation of damages assumed, it would be unrealistic to
    expect that a person would have the foresight to sell at the peak of the market.
    He accepted the approach that Aphria submitted, namely, that JPFs losses should
    be assessed at $2,820,000 based on the medium share price from the purported exercise
    date to the commencement of the application of $14.70 a share, less the
    exercise price: at paras. 81-82.

ISSUES

[47]

The issues on appeal are: (1) whether the
    exercise of the Options was timely; (2) whether the appellants should obtain
    relief from forfeiture in the event that the exercise of the Options was not
    timely; and (3) how damages should be assessed.

ANALYSIS

(1)

Was the Exercise of the Options Timely?

(a)

The Standard of Review

[48]

As the application judge correctly noted, the
    issue of whether the Options had expired at the time of their exercise is a
    question of contractual interpretation. The interpretation of a non-standard
    form contract by a judge at first instance is generally subject to a deferential
    standard of review on appeal, as it involves matters of mixed fact and law:
Sattva
,
    at paras. 50-52. 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:
Sattva
, at para. 50.

[49]

However, where errors made in the course of contractual
    interpretation give rise to extricable questions of law, deference will not be
    owed. Such legal errors include the application of an incorrect principle, the
    failure to consider a required element of a legal test, or a failure to
    consider a relevant factor:
Sattva
, at para. 53. Appellate courts should
    be cautious before characterizing something as an extricable question of law in
    disputes over contractual interpretation:
Sattva
, at para. 54. Nevertheless,
    the failure to apply the appropriate principles of contractual interpretation,
    especially where it results in an interpretation inconsistent with the wording of
    the relevant provisions, can give rise to an extricable error of law and
    displace deference:
MacDonald v. Chicago Title Insurance Company of Canada
,
    2015 ONCA 842, 127 O.R. (3d) 663, leave to appeal refused, [2016] S.C.C.A. No.
    39, at paras. 64-66, 72.

[50]

In
Resolute FP
, the majority of the
    Supreme Court agreed with the  dissenting reasons in this court of Laskin J.A.
    in concluding that there were reversible errors in the motion judges
    interpretation of the scope of a contractual indemnity:
Resolute FP
,
    at para. 26. Laskin J.A. found the following errors to justify appellate
    intervention: palpable and overriding errors of fact that affect the
    interpretation; a failure to properly, accurately, and fully consider the
    context in which a contract was made, which is an error of law; and a failure
    to consider the contract as a whole, by focussing on one provision without giving
    proper consideration to other relevant provisions, which is also an error of
    law:
Weyerhaeuser
, at para. 211 (Laskin J.A. dissenting reasons);
Resolute
    FP
, at paras. 26-27, 30 and 32-34.

(b)

The Parties Positions

[51]

The parties agree that the Option Plan was
    incorporated by reference into the Consulting Agreement and the Stock Option
    Agreement, and that all three agreements must be interpreted in light of each
    other, as the application judge found. The difference between the parties is in
    relation to which of two apparently inconsistent provisions in their
    contractual arrangement governs.

[52]

The appellants rely on the provisions of the Consulting
    Agreement and Stock Option Agreement that defined the term of the Options as
    five years from their vesting or grant, and in the case of the latter
    agreement, confirmed that the Options could be exercised at any time before
    their five-year Expiry Date. These provisions, if applicable, would mean that
    the exercise of the Options in December 2017 was timely.

[53]

Aphria relies on an apparently conflicting term:
    Section 2.3(g)(iv) of the Option Plan. It provides that options are not
    exercisable more than six months after an option holder ceases to be an Eligible
    Person (a term that includes a consultant) for any reason other than resignation,
    death, or termination for cause. Aphria maintains that this provision applies when
    a consulting arrangement ends due to the expiry of its defined term. As the
    consulting arrangement here had a two-year term that ended in June 2016, this
    provision means that the December 2017 exercise, even though within five years
    from the grant and vesting of the Options, was out of time and invalid.

[54]

The appellants argue that the application
    judges selection of Section 2.3(g)(iv) of the Option Plan as the provision
    that governed was flawed for two reasons. First, they argue that, as a matter
    of law, when terms of one document (here the Option Plan) are incorporated into
    a host agreement (here the Consulting Agreement and the Stock Option
    Agreement), the terms of the host agreement prevail if they conflict with the
    terms of the incorporated document. They say that the application judge erred
    by treating a term of the incorporated document as prevailing in the event of
    an inconsistency. Second, the appellants argue that the application judge erred
    in failing to find that the Consulting Agreement and the Stock Option
    Agreement, each of which were signed by a Board member, overrode Section 2.3(g)(iv)
    of the Option Plan for the purposes of the appellants Options.

[55]

Aphria points to the language of the Consulting
    Agreement and the Stock Option Agreement which makes the Options subject to
    the terms and conditions of the Option Plan, thus justifying applying Section
    2.3(g)(iv) as the prevailing provision. Aphria also argues that there was no
    error in the application judges finding that the Board did not override the
    applicability of Section 2.3(g)(iv) of the Option Plan for the purposes of the
    appellants Options.

(c)

The Problem of Apparently Inconsistent Terms

[56]

Underlying each sides position is the argument that
    acceptance of the opposing position would render one of the terms of the
    agreements ineffective. A bedrock principle of contractual interpretation is that
    the text of a written agreement is to be read as a whole, in a manner that
    gives meaning to all of its terms and avoids an interpretation that would
    render one or more of its terms ineffective:
Ventas Inc. v. Sunrise Senior
    Living Real Estate Trust
,
2007
    ONCA 205
, 85 O.R. (3d) 254, at para. 24(a).

[57]

In some cases, however, the application of that
    principle can be especially challenging. This occurs when the parties have
    included apparently inconsistent provisions in their agreement. An inconsistent
    term is one that contradicts another or is in conflict with it to such an
    extent that effect cannot be given to both: H.G. Beale, ed.,
Chitty on
    Contracts
, 32nd ed. (London UK: Sweet & Maxwell, 2015) vol. 1, at 13-080.

[58]

Here, effect cannot be given to both a term that
    provides that the Options, granted in a two-year non-renewable Consulting
    Agreement, can be exercised for five years, and a term that provides that the Options
    cannot be exercised more than six months after the end of a consulting arrangement.
    To the same question, Can these Options be exercised more than 2.5 years after
    they were granted?, one provision would say yes while the other would say no.
    The terms are apparently inconsistent.

[59]

Where a contract contains terms that are
    actually inconsistent, in the sense that there is no proper interpretation
    which can reconcile them, a court may have to rule the repugnant term ineffective:
Chitty on Contracts
, at 13-080;
BG Checo International Ltd.
    v. British Columbia Hydro and Power Authority
, [1993] 1 S.C.R. 12, at p.
    24. But this is a rule of last resort. Where a contract contains apparently inconsistent
    terms, the court must first endeavour to reconcile them. This requires applying
    principles of contractual interpretation to discern which term the parties intended
    apply to the situation at issue, and which term ought to be read in such a way as
    to be inapplicable, thereby removing the apparent inconsistency. As the Supreme
    Court stated in
BG Checo
, Only if an interpretation giving reasonable
    consistency to the terms in question cannot be found will the court rule one
    clause or the other ineffective: at p. 24.

[60]

In reconciling apparent inconsistencies, the
    court favours terms that the parties appear to have tailored to their specific
    situation. In
BG Checo
, for example, the Supreme Court provided the
    following example of reconciling apparently conflicting terms: general terms
    of a contract will be seen to be qualified by specific termsor, to put it
    another way, where there is an apparent conflict between a general term and a
    specific term, the terms may be reconciled by taking the parties to have
    intended the scope of the general term to not extend to the subject-matter of
    the specific term: at p. 24.

[61]

Similarly, the ordinary rule for reconciling an
    apparent conflict between words parties have added to a pre-printed form of contract,
    and a provision of the pre-printed form itself, is to give the added words greater
    effect. They are the immediate language that the parties selected to apply to
    their specific situation, as opposed to the pre-printed forms general formula meant
    for use more broadly:
Chitty on Contracts
, at 13-072.

[62]

However, interpretive assumptions such as these
    may be displaced when the parties have expressly agreed which provision has
    priority in the event of a conflict: see, for example,
Chitty on Contracts
,
    at 13-072.

(d)

Apparent Inconsistency Arising from Incorporation
    by Reference

[63]

This case involves an apparent inconsistency
    between provisions in the Consulting Agreement and Stock Option Agreement about
    the period during which the options could be exercised, and a provision on the
    same topic incorporated by reference from the Option Plan. The appellants argue
    for the application of an interpretive assumption that has some similarity to
    the principles described above. They argue that, contrary to the approach of
    the application judge, the terms originally expressed, i.e. those in the
    Consulting Agreement or Stock Option Agreement, rather than those incorporated
    by reference from the Option Plan, must always be given priority. The
    appellants rely on the following passage from
Spina v. Shoppers Drug Mart
    Inc.
, 2012 ONSC 5563, at paras. 141 to 142:

Where contracting parties expressly
    incorporate terms into a contract, the court must make two interrelated
    interpretative decisions. First, because the incorporated language will be read
    into the contract, the court must determine the extent of the incorporation by
    reference. Second, the court must eliminate wording that is inconsistent or
    insensible with the pre-existing language of the contract. See: K.
    Lewiston,
The Interpretation of Contracts
, (5th ed) (London:
    Sweet & Maxwell, 2011), pp. 105, 505-506; H.G. Beale,
Chitty on
    Contracts

(30
th
ed.) (London: Sweet &
    Maxwell, 2008), para. 12-079;
Tradigrain S.A. v. King Diamond Shipping
    SA
, [2000] 2 Lloyds Rep. 319.

[
142
]

When terms would be incorporated by reference into a contract, the
    terms of the host contract prevail over any inconsistent terms incorporated by
    reference:
Sabah Flour and Feed Mills Sdn Bhd v. Comfez
, [1988] 2
    Lloyds Rep. 18 (C.A.);
Modern Building Wales Ltd. v. Limmer and
    Trinidad Co. Ltd.
, [1975] 1 W.L.R. 1281 (C.A.);
Lac La Ronge
    Indian Band v. Dallas Contracting Ltd.
, 2001 SKQB 135 at
    para. 83;
Pass Creek Enterprises Ltd. v. Kootenay Custom Log Sort
    Ltd.
2003 BCCA 580 at paras 15-17.

[64]

An interpretive approach that views the terms of
    a host contract as a better reflection of the specific parties intent than an
    apparently inconsistent term incorporated by reference, may be appropriate in
    cases where the incorporation by reference is effected by language that does
    not give the incorporated terms priority. However, I do not agree that the approach
    would necessarily apply if the incorporation by reference is effected by language
    that indicates the incorporated provisions have priority over, or at least are
    not all automatically subordinate to, those originally expressed. There can be
    good reasons why parties might choose to incorporate terms and specify that they
    wish those incorporated terms to govern in the event of a conflict with the
    host contracts provisions.

[65]

Unlike the cases cited in
Spina
, the
    host contracts in this casethe Consulting Agreement and the Stock Option
    Agreementboth used the phrase subject to when incorporating provisions of
    the Option Plan. They said the Options were subject to the Option Plan. To
    simply assert that the incorporated terms are automatically subordinate whenever
    they apparently conflict with the host contracts does not, in my view, account
    for that language. Accordingly, I do not view the appellants argument based on
Spina
as automatically resolving the issue in their favour.

(e)

Was Section 2.3(g)(iv) Applicable to the Options?

[66]

I agree, however, with the appellants second submission.
    Accepting that the Options were subject to the Option Plan does not
    automatically resolve the issue in favour of Aphria. The application judge
    erred when he rejected the argument that Section 2.3(g)(iv) of the Option Plan was
    rendered inapplicable to the Options under terms of the Option Plan that contemplated
    that very result.

[67]

In summary, the Option Plans terms not only contemplated
    that options could be granted with an exercise period different from and
    unaffected by Section 2.3(g)(iv), but it gave priority to the exercise period
    in such a grant. In other words, although the Consulting Agreements grant of Options,
    and the Stock Option Agreements confirmation of the terms of that grant, were
    both subject to the Option Plan, on the question of the exercise period, the Option
    Plan referred back to the terms of the grant and gave priority to those terms
    over any in Section 2.3(g). The terms on which the appellants Options were
    granted, as they pertained to the exercise period, are entirely inconsistent
    with the application of Section 2.3(g)(iv). The Option Plan itself requires in
    such a case that the terms on which the Options were granted be given effect in
    priority to those in Section 2.3(g)(iv).

[68]

The starting point in the analysis is Section
    2.3(a) of the Option Plan, which provides that the Board shall determine, at
    the time options are granted, the period during which an option may be
    exercised. It is not controversial that under that provision, the Board may,
    when an option is granted, set a period during which the option could be
    exercised that is different than that in Section 2.3(g), including 2.3(g)(iv). When
    that occurs, Section 2.3(g)(iv) is inapplicable. Section 2.3(g) is itself
    prefaced by the phrase: Subject to Section 2.3(a) and except as otherwise
    determined by the Board.

[69]

The application judge declined to find that
    Section 2.3(g)(iv) had been made inapplicable to the appellants Options. He
    briefly expressed, at para. 55 of his reasons, why he came to this conclusion:

The Options clearly incorporate the terms and
    conditions of the [Option] Plan. While the [Option] Plan permits the Board to
    alter the terms of the Options, including the period during which they may be
    exercised, there is nothing in the agreements to indicate that the Board did
    that in respect of the Options. Nor is there any evidence that the Board
    authorized its member who signed the Stock Option Agreement to vary the terms
    and conditions of the [Option] Plan and specifically s. 2.3(g)(iv).

[70]

With respect, the application judge made errors
    of law that tainted the conclusion he reached, resulting in an interpretation that
    is inconsistent with the wording of the relevant agreements.

[71]

Although the application judge appears to have focussed
    on whether the Board had altered the terms of the Options or the Option Plan to
    make Section 2.3(g)(iv) inapplicable, asking the question this way puts the
    cart before the horse. The correct starting point for the inquiry is not a
    search for some separate Board action altering terms, but the terms of the
    grant of the Options themselves. This is the inquiry required under Section 2.3(a)
    of the Option Plan. Only a consideration of those terms can answer the question
    before uswhether the exercise period that was specified when the Options were
    created made Section 2.3(g)(iv) inapplicable.

[72]

Aphria argues that the terms of the grant of the
    Options in the Consulting Agreement could not make Section 2.3(g)(iv) of the
    Option Plan inapplicable  because the latter did not exist when the Consulting
    Agreement was made. I do not accept that argument. The Options in this case
    must be treated as having been validly granted, as contemplated by Section
    2.3(a) of the Option Plan, even if their grant pre-dated the Option Plan. The
    parties agreement, that the Options were subject to the Option Plan, can only
    make sense if the grant of the Options is treated as having been made as contemplated
    by the Option Plan. Indeed, the Stock Option Agreement expressly described the Options
    as having been granted under the Option Plan. Under the Option Plan, it is
    the Board that grants options. The parties must be taken to have agreed that
    the Options were granted by the Board, the only body that could have granted them.
    Aphria did not take the position that the Options were not validly created, or that
    any term of the Options had been agreed to without authority.

[73]

As Section 2.3(a) of the Option Plan mandates
    that the first consideration in determining the exercise period of options is
    to look at what the exercise period was when the options were granted, a consideration
    of all of the terms of the grant is required. Interpreting a contract requires that
    it be read as a whole:
Ventas
, at para. 24(a). Here, the purpose of
    considering the terms of the appellants Options is to determine whether they
    were consistent with the operation of Section 2.3(g)(iv), or so inconsistent
    with Section 2.3(g)(iv) that giving priority to the exercise period set at the
    time of the grant necessarily requires Section 2.3(g)(iv) to be inapplicable.

[74]

In this case, as described below, the application
    judge failed to consider all of the terms of the grant of the Options and the period
    for exercising them, which was required by Section 2.3(a) of the Option Plan. Accordingly,
    his conclusion that they did not oust the operation of Section 2.3(g)(iv) was tainted
    by an error of law:
Weyerhaeuser
, at para. 211 (Laskin J.A. dissenting
    reasons);
Resolute FP
, at para. 32.

[75]

The Consulting Agreements grant of Options in Schedule
    2.2 described them as having an expiry date that was five years after a transaction
    by which Aphria would become a public company. There could be scenarios where allowing
    a provision like Section 2.3(g)(iv) to operate would not render a five-year
    term devoid of meaning (if, for example, the Consulting Agreement itself had a
    term of five years or more, or if all the circumstances under which it could
    end before five years were future uncertain events). But that is not this case.

[76]

The application judges analysis did not
    consider that the Consulting Agreement, under Section 4.1, had a two-year
    non-renewable term. That the Consulting Agreement would come to an end after
    two years, at the latest, was a certain event. The five-year expiry date of the
    Options set by the Consulting Agreement created an exercise period that would
    last more than three years after the end of the two-year non-renewable term of
    the Consulting Agreement. That exercise period is completely inconsistent with
    a provision like Section 2.3(g)(iv), which shortens the exercise period to, at
    the most, six months after the end of the Consulting Agreement. Since the end
    of the Consulting Agreement by June 2, 2016, at the latest, was certain to
    occur, the exercise period set at the time of the grant of the Options could
    never apply if Section 2.3(g)(iv) applied. That would give Section 2.3(g)(iv)
    priority over the exercise period set under Section 2.3(a), which is exactly
    the opposite of what the Option Plan provides.

[77]

Moreover, the application judge failed to properly
    consider that the Consulting Agreement contained a comprehensive code as to
    when the exercise period would be shortened from its five-year term. Section
    4.2 provided that the Consulting Agreement could be terminated before the end
    of two years: by mutual agreement, by Aphria in the event of certain breaches
    by the appellants; or by JPF on 60 days notice. Section 4.3 provided that, in
    the event of such an early termination under Section 4.2, the exercise period
    for the Options would end; the Options would be of no force or effect. However,
    neither Section 4.3, nor anything else in the Consulting Agreement provided
    that the expiry of the Consulting Agreement would have an effect on the
    exercise period of the Options in the absence of an early termination under
    Section 4.2. Although the application judge made brief  reference to these
    provisions, he did so only on the relief from forfeiture issue, not in relation
    to the proper interpretation of the exercise period of the Options.

[78]

This package of termsset at the time the Options
    were granted and taken as a wholenecessarily excludes the operation of Section
    2.3(g)(iv). The terms of the grant contain a detailed code as to the five-year length
    of the exercise period and as to when the termination of the Consulting
    Agreement would effect a shortening of that period. That code omitted the
    expiry of the two-year term from the events that would shorten the exercise
    period. In doing so, it left no room for a provision like Section 2.3(g)(iv) to
    shorten the exercise period to six months after the expiry of the two-year term
    of the Consulting Agreement, as that would contradict the terms of the grant. It
    bears repeating that under the Option Plan, specifically Section 2.3(a), the
    terms of the grant as to the length of the exercise period take priority over what
    Section 2.3(g) would otherwise provide.

[79]

The provisions of the Stock Option Agreement fortify
    this conclusion. The application judge erred in law in not considering all of
    its provisions in their entire context:
Weyerhaeuser
, at para. 211
    (Laskin J.A. dissenting reasons);
Resolute FP
, at paras. 29-30.

[80]

The Stock Option Agreement was executed after
    the Option Plan, but the application judge focussed on this fact largely to
    buttress his rejection of Fullers suggestion that he had not read the Option
    Plan. The application judge did not properly take into account that the Stock
    Option Agreement, after reciting the date of the grant as the date of the
    Consulting Agreement, and defining the Expiry Date as being in 2019, provided that
    the Options could be exercised at any time up to that Expiry Date in 2019. If
    Section 2.3(g)(iv) of the Option Plan applied, the Options could never have
    been exercised at any time up to an Expiry Date in 2019. They could never have
    been exercised more than six months after the date that the non-renewable two-year
    term of the Consulting Agreement would expire in June 2016. The application
    judge failed to give any significance to these provisions of the Stock Option
    Agreement and when they were agreed to.

[81]

The application judge noted that the Consulting
    Agreement and the Stock Option Agreement stated that the Options were subject
    to the Option Plan. But as the above analysis shows, that did not answer the
    question of whether the Options were subject to Section 2.3(g)(iv), in light of
    the exercise period that had been determined when the Options were granted. It
    therefore did not justify ignoring the actual language the parties used when
    the Options were created, or in the case of the Stock Option Agreement, after
    the Option Plan had been implemented, to define the period during which the Options
    were exercisable. That description was only consistent with excluding the
    applicability of Section 2.3(g)(iv) to the Options.

[82]

Finally, the application judge erred in law in
    treating, as a relevant consideration, the absence of evidence that the Board
    had authorized its member who signed the Stock Option Agreement to vary the
    terms of the Option Plan. As noted above, there was no suggestion that the
    grant of the Options in the Consulting Agreement had been effected without
    authority or that they were invalid. The Stock Option Agreement confirmed that
    the grant, including its five year exercise period,  was to be considered as
    having been made under the Option Plan. No variation of the Option Plan was
    required to give effect to the exercise period in the grant of the Options.

[83]

The Option Plan was of general application to options
    issued and to be issued by Aphria. Many of its terms could be applied to the Options
    in issue here. But the terms of the grant of the Options in the Consulting
    Agreement, as confirmed in the Stock Option Agreement, were specific about the
    exercise period, and about the exact and only events that would shorten it.
    They were the reflection of the parties having specifically addressed the term
    and exercise period for these Options for this option holder. Section
    2.3(g)(iv) of Option Plan did not displace the carefully-crafted specific
    provisions contained in the grant of the Options that defined the exercise
    period for them, when those specific provisions were, under Section 2.3(a) of
    the Option Plan, to be given priority.


[84]

For these reasons, the application judges
    interpretation cannot stand. Applying well-established principles of
    contractual interpretation results in the conclusion that the Options had not
    expired when the exercise occurred.

(2)

The Non-Competition Agreement and Relief from
    Forfeiture

[85]

Because of the conclusion I have reached above,
    it is not necessary to consider the  arguments about whether the application
    judge erred in finding that there was a breach of the Non-Competition Agreement
    and on that basis denying relief from forfeiture.

(3)

Damages

[86]

In oral argument, the parties agreed that the
    application judge had the power to award damages, even though the proceeding
    was brought by application.

[87]

The appellants argue that it was not open to the
    application judge, in assessing damages, to reject or doubt the credibility of Fullers
    evidence that he would have caused the shares to be sold at or around their
    peak price in January 2018. Nor, they say, was it open to the application judge
    to treat the experts calculation as a mere mathematical exercise dependent on
    that evidence. They argue that Aphria did not challenge Fullers damages evidence
    in cross-examination or lead its own expert evidence.

[88]

I would not give effect to this argument. The
    application judge was not obliged to accept Fullers evidence about when he
    would have caused the shares to be sold, which was not a matter of historical
    fact but of conjecture. The application judge was entitled to assess that
    evidence against the common sense improbability of someone being able to accurately
    determine, in real time and without hindsight, when shares were at or near their
    peak. He was entitled to view the experts evidence as dependent on an
    assumption that the application judge did not accept.

[89]

A damage assessment attracts considerable
    deference on appeal and the grounds for appellate interference are limited:
Naylor
    Group Inc. v. Ellis-Don Construction Ltd.
, 2001 SCC 58, [2001] 2 S.C.R.
    943, at para. 80;
SFC Litigation Trust v. Chan
, 2019 ONCA 525, 147
    O.R. (3d) 145, leave to appeal refused, [2019] S.C.C.A. No. 314, at para. 112.
    None of those grounds are present here.

[90]

The starting measure of damages for breach of an
    agreement that results from the exercise of an option to acquire shares in a
    public corporation is the difference between the exercise price and the share
    price at the time of exercise:
W.C. Pitfield & Co. v. Jomac Gold
    Syndicate Ltd.
, [1938] 3 D.L.R. 158 (Ont. C.A.), at pp. 164-165. The application
    judges approach assessed damages in an amount more generous to the appellants than
    that. It was generous in two respects. First, it included some amount to
    reflect Fullers stated desire to cause the shares to be held after they were
    acquired and sold later at better prices. Second, the  application judge made
    no deduction for the opportunity the appellants would have had, when the
    exercise was refused, to buy Aphria shares in the market and benefit from the rise
    in prices that subsequently occurred. There is no reversible error in the
    application judges approach about which the appellants can complain.

(4)

Conclusion

[91]

For these reasons, I would allow the appeal,
    set aside the dismissal of the application, and substitute an order that Aphria
    pay damages to JPF in the amount assessed by the application judge, namely $2,820,000.

[92]

Success on the appeal was divided, but the
    appellants have enjoyed the greater measure of success. I would therefore award
    costs of the appeal to the appellants in the sum of $12,500, inclusive of
    disbursements and applicable taxes. The parties did not address the costs of
    the application in the event the appeal were allowed. If the parties wish to do
    so they may make written submissions, not to exceed three pages each, within ten
    days of the release of these reasons.

Released: JUN 23, 2020 M.T.

B. Zarnett J.A.

I agree. M. Tulloch J.A.

I agree. K. van Rensburg J.A.





[1]
For ease of reference, these reasons refer only to Aphria.



[2]
These reasons refer to the ONCA decision as 
Weyerhaeuser
 and the SCC decision as 
Resolute FP
.


