Much to Carolyn Dare Wilfred’s chagrin, everything, as it turns out. The result in Wilfred v. Dare is a cautionary tale for the commercial litigation bar and for corporate commercial solicitors and their shareholder clients. For the litigators, do not launch your client on an expensive[1] romp through the court system claiming relief under s. 248 of the Business Corporations Act (the “OBCA”) without, you know, bona fide oppressive conduct to complain of. For corporate commercial solicitors, get a unanimous shareholder agreement up-front that provides a mechanism to compel the purchase or sale of your shareholder client’s shares so he or she does not have to seek statutory relief when (not if) he or she wants to pull the ripcord
Background in Brief
The facts of this case, as in many intra-corporate disputes, are both sordid and convoluted. You can read all the gory details in the trial decision.
For my purposes, this is what you need to know:
Dare Foods was founded in 1889 and has always been controlled by the Dare family. It manufactures cookies, crackers, fine breads, and candy. Annual sales at the time of the hearing in February 2017 were approximately $300 million and it employed 1,200 people.
Carl Dare (“Carl”), the grandson of the founder, took over the business in the early 1940s and successfully managed it for over 50 years. Carl had three children: Bryan, Graham and Carolyn. By the time of the hearing, they were 71, 69, and 65 years old, respectively.
In 1980 Carl decided to freeze his estate, which resulted in the creation of Serad Holdings Limited (“Serad”) to hold the common shares in the various operating companies then existing. The common shares in Serad were issued to the newly created Dare Family Trust, with Bryan, Graham, and Carolyn as beneficiaries. At that time, Bryan, Graham, and Carolyn signed a shareholder agreement with the Dare Family Trust that contained a restriction on the transfer of Serad’s common shares.
This restriction was in the form of a right of first offer, which provided that if Bryan, Graham, or Carolyn wanted to sell their Serad common shares, they had to first offer the shares to the other two siblings. If both siblings declined the offer, the shares could be sold to any third party, but only upon the same terms.
Prior to the 21st anniversary of the Dare Family Trust, the common shares of Serad were distributed equally to Bryan, Graham and Carolyn Dare. Each received 140 common shares. At the time of the share transfer, Bryan, Graham and Carolyn confirmed and re-executed the shareholder agreement with the benefit of legal advice and agreed that their Serad shares could be held in personal holding companies.
In 2001, Carl redeemed 25% of Carolyn’s shares (35 shares) for $5 million and it was agreed that she would receive dividends of $335,000 on her remaining shares for five years. For her part Carolyn agreed not to try to sell her remaining shares for five years. By 2009 CRA issued a $15 million Requirement to Pay against Carolyn in connection with the 2001 share redemption and her emigration to New Zealand with her new spouse later that same year. Between 2013 and 2015, Carolyn’s efforts to earn an income separate from Dare Foods in New Zealand were floundering. One business was sold for $1.4 million, but the rest were eventually placed into liquidation and became the subject of litigation.
Carl died in 2014. Carolyn made an offer to her brothers for them to buy out her remaining stake in Serad for the price of $55 million. When they refused, she made an unsuccessful effort to sell her shares to a third party. She again made an offer to her brothers to buy her out, again at the price of $55 million. When that was also rejected, she commenced her oppression application.
The Trial Decision
Carolyn was of the view that her brother’s conduct was unfairly prejudicial to or unfairly disregarded her interests as a shareholder of Serad in two respects. First, the absence of a third-party market for her shares meant her brothers could, and were in her mind, holding her shares hostage in her time of financial need, presumably in an effort to avoid paying her what she deemed to be a fair market price. Second, Carolyn complained that she had no input on Serad’s dividend policy and that while the loan back program from Serad to Dare Holdings may have made good business sense, it privileged her brothers’ interests over hers as they drew other sources of income from the business.
Her brothers defended on the basis that neither of Carolyn’s complaints amounted to conduct that was unfairly prejudicial to or unfairly disregarded her interests as a shareholder of Serad and, therefore, did not engaged the equitable relief contemplated by s. 248 of the OBCA.
The court agreed and, following what appears to be the trial of the issue, dismissed the application. In putting its decision in context, the court specifically noted that this was not a case:
- of an “incorporated partnership” where Carolyn
contributed sweat equity and was now being excluded; - where irreconcilable differences among family
members was hurting the business; or - where her financial circumstances were
attributable to her brothers’ conduct.
Instead the court reduced Carolyn’s position to its essence when it concluded: “She simply wants out”.
Relying on the seminal decision in BCE Inc., Re, the court posed a simple question: did Carolyn have a reasonable expectation of liquidity for her Serad shares?
The equally simple answer was: no.
The court found that Carolyn received her interest in Serad as a gift from the late Carl, who structured the shareholder agreement specifically to disincentivise his children from divesting their gift to third parties. Specifically, that agreement provided his children the opportunity to sell their own shares to the others, but it imposed no reciprocal obligation to buy them. Which is to say, it did not contain a shotgun or put right clause. Nor did it oblige the shareholders to have regard to each other’s personal financial circumstances in organizing the corporation’s affairs.
These facts, together with her execution of the shareholder agreement not once, but twice, and her prior efforts to market her shares to a third party when her earlier offers to sell her shares to her bothers were rebuffed, satisfied the court that her expectations would have to be tempered by the clear effect of the binding agreement.
Indeed, her reasonable expectations must include an account of her minority status. In this regard, the court noted that Carolyn’s minority interest in a closely held private corporation was, and always had been, of inherently limited liquidity. Relying on Senyi Estate v. Conakry Holdings Ltd., the court concluded that in the absence of a shareholder agreement that required the purchase of Carolyn’s shares, her reasonable expectations were limited to expecting:
- that the directors and officers will conduct the
affairs of the corporation in accordance with the statutory and common law
duties required of them in such capacities; - that the shareholder will be entitled to receive
annual financial statements of the corporation and to have access to the books
and records of the corporation to the limited extent contemplated by the Act; - that the shareholder will be entitled to attend
an annual meeting of the corporation for the limited purposes of receiving the
annual financial statements and electing the directors and auditor of the
corporation, or will participate in the approval of such matters by way of a
shareholder resolution; - that a similar approval process will be
conducted in respect of fundamental transactions involving the corporation for
which such approval is required under the Act; and - that the shareholder will receive the
shareholder’s pro rata entitlement to dividends and other distributions payable
in respect of the common shares of the corporation as and when paid to all of
the shareholders.
As was observed in Miklos v. Thomasfield Holdings Ltd., the minority shareholder’s wish to sell her shares at the highest price possible is not the same as her interest in the other shareholders not interfering in her ability to sell those shares for the highest possible price.
In short, the court held that the oppression remedy is “not designed to relieve a minority shareholder from the limited liquidity attached to his or her shares or to provide a means of exiting the corporation, in the absence of any oppressive or unfair conduct.”
On Appeal
In a unanimous decision authored by the Associate Chief Justice of the Superior Court, the Divisional Court dismissed Carolyn’s appeal.
The gist of the reasons for the dismissal is neatly summarized in the Associate Chief Justice’s observation that:
It was open to the application judge, after drawing this conclusion from the uncontradicted evidence, to conclude that the appellants had not demonstrated why it was just, fair or equitable for the court to order Bryan and Graham Dare to purchase Carolyn’s shares and to disregard what they believe to be the best interests of Serad Holdings Limited and Dare Holdings Limited and the long-term best interests of Dare Foods and its 1,200 employees.
Conclusion
The bottom line is this: the default position in Ontario is that there is no such thing as a ‘no fault’ divorce in an incorporated business. It is not good enough that you hate your business partner (I get it, holding monthly management meetings at 8:30 a.m. on Fridays is inhuman) or that you want to cash out when you see a more attractive franchise opportunity come along.
Instead, if you want to ask the court to extricate you and your capital from your bad shareholder relationship by forcing the other shareholders to buy you out, you are going to have to point to unfair or prejudicial action(s) on the part of the corporation or those other shareholders. That might be easier where you have sweat equity invested in the business and it is not being properly valued or where the corporation is akin to an incorporated partnership and there has been a relationship breakdown that harms its business operations, but all such oppression still has to be shown.
Of course, if you want a ‘no fault’ option (and who doesn’t?), then put yourself in a position to ask the court to enforce the shotgun clause, the put option, or the redemption rights that are clearly laid out in your unanimous shareholder agreement. You (and your new Starbucks franchise) will thank us.
[1] The partial indemnity costs claimed by the defendant brothers and their holding corporations after the trial was $333,872, inclusive of taxes and disbursements. The plaintiff’s own partial indemnity costs weighed in at $145,243. The trial judge ordered Wilfred to pay $270,000, inclusive. On the appeal, Wilfred and her holding corporation were stung with another $15,000 cost award.
The cost decision for the trial can be read here.
It is not uncommon to see invoices or purchase orders that provide for interest on overdue accounts at a rate of 2 per cent per month with nothing written about the rate of interest per year. The assumption being that anyone with a basic facility with arithmetic understands that this means that interest is payable on over due accounts at a rate not less than 24 per cent per year (with monthly compounding it is closer to 27 per cent).
Surprisingly, the Interest Act, an often overlooked, short piece of federal legislation, assumes otherwise. It has the effect of capping a creditor’s right to recover interest at 5 per cent per year where a non-mortgage debt recorded in writing expresses interest at a daily, weekly, monthly, or quarterly rate.
The result is that if your terms of sale (or quotation, purchase order, invoice, etc.) stipulates interest at a rate of 2 per cent per month on overdue accounts (and nothing more), the purchaser fails to pay, you sue to recover the debt owed, and you get judgment, then you will only be entitled to interest at a rate of 5 per cent per year (which is at least 19 per cent per year less than you intended).
Happily (or sadly, depend on when you are reading this), complying with the Interest Act is simple: state the rate of interest per year only or state both a monthly rate and its yearly equivalent. So, if you want to recover 2 per cent interest each month on overdue accounts, be sure to state the yearly rate of 26.824 per cent at the same time.
Can you join an unjust enrichment claim with your construction lien claim in the same action? The Court of Appeal thinks not, though the Divisional Court was not so categorical.
You expect a construction lien action, by its very name, to assert a contractor/subcontractor’s statutory right, under the Construction Lien Act, to relief against an owner’s real property, or against the security posted in lieu of a claim against the real property. It is also expected that the contractor/subcontractor will include a claim for breach of contract against the party immediately above it in the construction ‘pyramid’. What has come to be a fairly common practice is to also claim unjust enrichment against everyone, the contractor/subcontractor immediately above the lien claimant, as well as the owner with whom the lien claimant often has no direct relationship. However, just because it is common practice does not mean that it will pass legal muster.
Indeed, this was the result in Yorkwest Plumbing Supply Inc. v. Nortown Plumbing (1998) Ltd., 2016 ONCA 305 where a unanimous panel of the Ontario Court of Appeal held that any unjust enrichment claims were barred by the Construction Lien Act itself, going further than, and apparently overruling, the earlier decision of a unanimous Divisional Court in the case (2014 ONSC 5655).
The Facts
The facts are fairly straightforward. Yorkwest Plumbing Supply Inc. (“Yorkwest”) was a plumbing supply subcontractor of Nortown Plumbing (1998) Ltd. (“Nortown”) on two home development projects, one owned by Intracorp Projects (Milton on the Escarpment) Ltd. (“Intracorp”) and the other by Burl 9 Developments Limited (“Burl 9”). In the course of its subcontract Yorkwest supplies material to Nortown on credit. Before the projects are finished, Nortown is bankrupt. Yorkwest claims it is owed $39,846.69 for materials supplied on the Intracorp project and $63,535.24 for materials supplied on the Burl 9 project. Yorkwest registers a general lien against both projects in an effort to secure payment from Intracorp and Burl 9. Intracorp and Burl 9 respond with a motion for summary judgment on the basis that, among other things, Nortown’s general contract with both Intracorp and Burl 9 provided that liens would arise and expire on a lot-by-lot basis, precluding the general lien registered by Yorkwest. Intracorp and Burl 9 are successful and summary judgment is granted dismissing the action and discharging the liens. Yorkwest appeals to the Divisional Court. Its appeal is dismissed. Yorkwest appeals that dismissal to the Court of Appeal. That appeal is also dismissed.
The Decisions
The main issue at all levels of court was whether Yorkwest could sustain a general lien against the owners notwithstanding the general contract’s specific provision that liens would arise and expire on a lot-by-lot basis. In that regard, a unanimous Court of Appeal confirmed that section 20 of the Construction Lien Act permitted an owner to contract out of the default general lien provisions and that the absence of a reference in section 20 to ‘subcontract’ did not alter the analysis. Indeed, the Court indicated that a subcontractor’s right to demand information from the owner under section 39 of the Act, including whether liens expired on a lot-by-lot basis, afforded subcontractors a sufficient procedural protection to justify the refusal to permit Yorkwest to register a general lien notwithstanding that it was not privy to the contract that abrogated that right.
Intracorp and Burl 9 had also taken issue with Yorkwest’s alternative claim against them of unjust enrichment. Regardless of its claim to a lien against their real property, Yorkwest also alleged that each of Intracorp and Burl 9 has been enriched by Yorkwest’s supply of material that was incorporated into each project, that it had suffered a corresponding loss, and that there was no legal reason (such as a contract) for that transfer of value. In dismissing this aspect of the appeal, the Court of Appeal’s reasons were brief and to the point:
[53] Section 55 of the [Construction Lien Act] allows a plaintiff in a lien action to join in the action a claim for breach of contract or subcontract. In its statement of claim, the appellant pleaded that it was not paid pursuant to its agreement with Nortown, which was named as one of the defendants. However, the appellant did not plead breach of contract as against the respondent owners, Intracorp and Burl 9, as it had no contracts with them.
[54] The Divisional Court held that to allow claims not referred to in s. 55 to be joined in the action, such as claims for quantum meruit or unjust enrichment, would amount to a refusal to apply the plain wording of s. 55. I agree. The Act is intended to provide a summary procedure for dealing with lien claims. By including s. 55, the Act further defines the extent and intent of actions that can be brought to enforce it.
[emphasis is mine]
In doing so, the Court of Appeal upheld the result at the Divisional Court, insofar as the Divisional Court refused to permit Yorkwest to continue its action against Intracorp and Burl 9 on the basis of unjust enrichment alone. In doing so, however, it glossed over the nuance in the Divisional Court’s decision. On the issue of the unjust enrichment claim, Marrocco A.C.J.S.C., writing for the panel, had held:
[44] [Yorkwest] submitted that its claim should be permitted to continue its action on the basis of a breach of contract. [Yorkwest] also described its claims against [Intracorp] and [Burl 9] as claims for unjust enrichment and quantum meruit.
[45] Section 55(1) of the Construction Lien Act provides that a plaintiff in an action may join a claim for breach of contract or subcontract with a lien claim.
[46] Section 55 (1) permits the lien claimant to advance a claim based on services performed and acknowledged as received even if the contract for the provision of those services is ultimately not proven. Section 55 (1) permits the appellant to include a claim based upon a contract even if it turns out that the appellant is unable ultimately to prove the contract. Section 55 prevents personal injury or unrelated tort claims from being advanced in a lien claim because lien claims are intended to be summary in nature.
[47] [Yorkwest] did not plead a contract with either [Intracorp] or [Burl 9]. [Yorkwest] did not plead a breach of contract by those persons. The affidavit of Gabrielle Pizzardi provided in response to [Intracorp] or [Burl 9] motions for summary judgment does not suggest that [Intracorp] or [Burl 9] contracted with [Yorkwest].
[48] Yorkwest’s claims of unjust enrichment and quantum meruit in its statement of claim are not based on any pleading that there was a contract between [Yorkwest] and [Intracorp] or [Yorkwest]and [Burl 9].
[49] Allowing [Yorkwest] to join claims for unjust enrichment or quantum meruit unrelated to contracts between [Yorkwest] and those persons, amounts to a refusal to apply the plain wording of section 55 (1).
[50] Of course, it is possible to advance claims for unjust enrichment or quantum meruit in the absence of a contract. However, such claims cannot be joined with a lien claim due to the wording of section 55 (1) of the Construction Lien Act.
[51] Accordingly [Yorkwest’s] claims for unjust enrichment and quantum meruit cannot be joined with this lien claim and there will be no order permitting this action to continue as a claim for breach of contract, unjust enrichment or quantum meruit.
Conclusion
On its face, the Court of Appeal’s decision is categorical: if your claim is not contemplated by section 55 of the Act then it cannot be jointed in your lien action. The Court of Appeal’s decision may be distinguishable on its facts from a case where, as the Divisional Court discussed, a subcontractor joins an unjust enrichment claim in its lien action against the general contractor with whom it did have a contractual relationship. However, it would seem that the Divisional Court’s analysis begs the question: if there is a contract between the subcontractor and the general contractor, then there is either no unjust enrichment claim at all, insofar as the contract is the legal reason for the transfer in value, or there is no contract, in which case the freestanding unjust enrichment claim against the general contractor is no different than the impermissible freestanding unjust enrichment claim against the owner.
The Divisional Court’s analysis appears to be concerned with the use of quantum meruit to secure compensation for contractors and subcontractors who perform work that is truly outside the scope of their contract or subcontract, but without entering into a new written agreement with the owner or contractor as to the terms of compensation for that extra out of scope work. Even here, it may be better to characterize the arrangement between the owner/contractor and the contractor/subcontractor for the extra out of scope work to be an oral contract to do that extra out of scope work in exchange for fair compensation, the particulars of which compensation is to be agreed to at a later date and bypass altogether the messy question of whether your unjust enrichment claim will be permitted to proceed.
In the end, Yorkwest is a clear reminder from the Court of Appeal that construction lien actions are creatures of statute designed to advance a particular and narrow subset of claims to a quick resolution in a summary way. The practical upshot is that, as a lien claimant, you may join a breach of contract claim in your lien action, but nothing else. Of course, as the Divisional Court noted, if your claim against the owner, or anyone else, is truly in the nature of unjust enrichment, then there is no bar to commencing a separate action for that relief in the usual way and subject to the usual procedural requirements, but that is a topic for another day.