CITATION: Kapuskasing Plumbing and Heating Limited v. Fortier Beverages Limited, 2011 ONCA 558

DATE: 20110822

DOCKET: C51434

COURT OF APPEAL FOR ONTARIO

Moldaver, Sharpe and Armstrong JJ.A.

BETWEEN

Kapuskasing Plumbing and Heating Limited and Gerald Villeneuve

Plaintiffs (Appellants)

and

Fortier Beverages Limited

Defendant (Respondent)

Guy A. Wainwright, for the appellants

David Lanthier, for the respondent

Heard: February 24, 2011

On appeal from the judgment of Justice R. A. Riopelle of the Superior Court of Justice dated December 4, 2009.

Armstrong J.A.:

INTRODUCTION

[1]              The appellant, Kapuskasing Plumbing and Heating Limited (“Kapuskasing”), and the respondent, Fortier Beverages Limited (“Fortier”), were franchisees of Culligan in respect of the distribution and sale of bottled water.  In October, 2006, Fortier, located in Cochrane, purchased the business of Kapuskasing, located in Kapuskasing, for a total purchase price of $1,160,000.  The first $600,000 of the purchase price pursuant to an asset purchase agreement was payable on closing.  The balance of the purchase price was payable pursuant to a consulting agreement, which was to be paid in monthly instalments over six years.

[2]              Fortier stopped making payments under the consulting agreement when it was discovered that the former Kapuskasing business was not selling an estimated 200,000 bottles of water per year as had been represented to Fortier in pre-contract discussions.

[3]              Kapuskasing sued for the balance owing on the consulting agreement.  Fortier counter-claimed against both Kapuskasing and Gerald Villeneuve, the president of Kapuskasing, for breach of warranty and negligent misrepresentation.  The trial judge dismissed Kapuskasing’s claim.  He dismissed Fortier’s claim for breach of warranty but granted judgment for negligent misrepresentation and awarded Fortier damages in the amount of $70,258.32.

[4]              Kapuskasing appeals from the aforesaid judgment on the basis that the trial judge erred in finding that Fortier’s reliance on the misrepresentation in respect of the sale of 200,000 bottles of water was reasonable.

[5]              For the reasons that follow, I would allow the appeal, set aside the judgment below and grant judgment in favour of Kapuskasing for the amount owing under the consulting agreement.

THE FACTS

[6]              Kapuskasing started as a plumbing and heating business in Kapuskasing, Ontario.  The plumbing and heating business was sold in 1973.  At the time of the events giving rise to this action, Kapuskasing was engaged in selling water equipment, water systems, filters and drinking units.  Kapuskasing was also a franchisee of Culligan for the distribution and sale of bottled water.

[7]              Fortier operated a Coca Cola bottling business in Cochrane, Ontario, which included the sale of soft drinks, juices, soda water and confectionary.  Fortier was also a Culligan franchisee for the distribution and sale of bottled water.

[8]              Fortier was interested in expanding its bottled water business.  Raymond Fortier, the president of Fortier, approached Gerald Villeneuve to see if Villeneuve might be interested in selling Kapuskasing’s bottled water business.  Discussions between the two men took place in the spring and summer of 2006. 

[9]              In July 2006, Mr. Fortier met with Mr. Villeneuve at the Kapuskasing plant.  During that meeting, Mr. Fortier asked Mr. Villeneuve about the number of 18 litre bottles of water sold by Kapuskasing in the previous year.  After a quick mental calculation, Mr. Villeneuve advised that Kapuskasing was selling approximately 200,000 bottles per year.

[10]         Following the meeting in Kapuskasing, Mr. Villeneuve faxed a memo to Mr. Fortier, which provided information concerning the bottled water operation, including the confirmation of sales volume of “200 thousand bottles”.  The memo also suggested a total selling price of $1.2 million.

[11]         On July 25, 2006, Fortier sent a letter to Kapuskasing setting out the terms of what was described as a preliminary agreement.  The first two paragraphs of the letter said:

Further to our discussion of July 18, 2006, we have prepared a preliminary agreement in principle so that discussions may proceed with a formal offer to follow at a later date.

Fortier Beverages Limited will pay Culligan of Kapuskasing $4.00 for every 18 litre sold during the 12 month period preceding September 1st, 2006.  We recommend using the monthly report prepared for Culligan International to calculate the exact number.  We understand that this number is approximately 200,000 jugs annually as stated by you in our discussion.

[12]         A letter dated July 28, 2006 from Fortier to Kapuskasing referred to a payment of $600,000 on closing for the assets and an annual consulting fee of $100,000 for six years.

[13]         On August 3, 2006, Michael Bourgeault, solicitor for Kapuskasing, wrote to David Lanthier, Fortier’s solicitor, concerning the proposed purchase agreement and said:

The $600,000 payment for the assets is payable on closing and is not dependent on the number of bottles sold.  [Emphasis in the original.]

[14]         On August 8, 2006, Mr. Lanthier sent a letter to Kapuskasing’s lawyer concerning a number of the terms of the proposed agreement.  Paragraph 3 of the letter said:

The $600,000.00 payment would be payable at closing.  My client’s agreement to pay this amount however is dependent upon obtaining confirmation of the sales of the company.  If it is not to be a condition of closing, my client is requesting, at this time, that your client produce a Report of Sales (including, we presume, the reporting document which Culligan International no doubt requires from your client) for the periods 2004, 2005 and 2006 to the present time.  Mr. Fortier can then review the sales figures prior to signing the agreement and address any issues that he might have relative to the sales directly with Mr. Villeneuve.

[15]         Following the exchange of the above correspondence and about one and one half months prior to the signing and closing of the asset purchase agreement and the consulting agreement, Kapuskasing provided financial disclosure documentation to Fortier.  The disclosure included monthly reports to Culligan International referred to in the Fortier letter of July 25, 2006 and his lawyer’s letter of August 8, 2006.  The documentation did not expressly refer to the number of units or bottles of water sold each month. However, Fernand Gravel, the former accountant and controller of Fortier, agreed in cross-examination that it was relatively easy to get a reasonable estimate of the number of units sold by taking the average sale price per unit and dividing it into the sales figures.  If such a calculation had been done, it would have shown that the unit sales for the year prior to the sale fell far short of 200,000.  According to the trial judge, this was so even though the Culligan information did not cover bottled water sold under another brand name.

[16]         The asset purchase agreement and the consulting agreement were signed on October 5, 2006.  The closing took place on October 16, 2006.  The asset purchase agreement provided for a purchase price of $560,000 for the assets of the business including good will.  This had been reduced from $600,000.  The consulting agreement provided for a payment to Kapuskasing of $100,000 a year for six years payable in monthly instalments of $8,333.34. 

[17]         The asset purchase agreement contained no representation or warranty as to the volume of unit sales.  It contained an entire agreement clause as follows:

The Agreement constitutes the entire agreement between the parties and except as stated in it and in the instruments and documents to be executed and delivered, contains all the representations and warranties of the respective parties.  There are no oral representations or warranties or collateral agreements between the parties of any kind relating to the subject-matter herein.  This Agreement may not be amended or modified in any respect except by written instrument signed by both parties.

[18]         At issue before the trial judge and in this appeal is clause 4(1)(s) of the asset purchase agreement which provided:

No representation or warranty contained in this Section 4, and no statement contained in any Schedule, certificate, list, summary or other disclosure document provided or to be provided to the Purchaser pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact which is necessary in order to make the statements contained therein not misleading.

[19]         After closing and before it was discovered that the 200,000 estimate was in error, Culligan, the franchisor, advised that there was a mutual mistake concerning the western boundary of the sales region for Kapuskasing.  That part of the region, into which Kapuskasing and then Fortier had been selling, was actually assigned to the Thunder Bay Culligan franchisee.  As a result, on August 16, 2007, the parties entered into an amending agreement whereby Fortier was given a credit of $150,000 to adjust for the mistake.  The credit was to be applied to the balance owing on the consulting agreement.

[20]         In arriving at the amount of the credit, Mr. Fortier calculated that the territory in issue represented 17.07 per cent of the business on sales for the first eight months from November 1, 2006.  He then used the 200,000 unit estimate at $5.00 a unit to calculate a 17.07 per cent reduction in the purchase price.  This produced a figure of $177,000.  The parties then agreed to reduce that number to $150,000.  The preamble to the amending agreement made reference to the 200,000 estimate.

[21]         At the conclusion of the first full year of sales (November 2006 to October 2007), Fortier calculated that it had sold 90,512 bottles of water.  Subsequently, Fortier stopped making the monthly payments under the consulting agreement and this lawsuit was commenced by Kapuskasing.

THE TRIAL JUDGMENT

(i)        The Breach of Warranty Claim

[22]         Fortier submitted that pursuant to clause 4(1)(s) of the asset purchase agreement, the Villeneuve memo of July 20, 2006 constituted a disclosure document which contained a warranty in respect of the estimated volume of sales at 200,000 bottles per year.  In dismissing this submission, the trial judge said at para. 8 of his reasons for judgment:

I do not agree that the fax is a “disclosure document”.  That fax is simply another piece of correspondence exchanged during exploratory negotiations; it is not even a letter of intent.  It is never again referred to in any of the pre-contractual correspondence or in the contract itself.  Were it a “disclosure document” one would expect any germane information it discloses would be referred to or incorporated into the contract.

[23]         The trial judge further stated at para. 10 of his reasons:

The contract is silent on the matter of the volumes of sales or of jugs.  Notwithstanding the “entire agreement” clause such a warranty could have been deemed to form part of the contract were it not for the exchange of the letters referred to at paragraphs [5] and [6], setting out Kap’s refusal to adjust the amount due on closing to reflect the actual volume of jugs sold and the Defendant’s position that “If it is not to be a condition of closing” then Kap should provide some additional sales information.  That and Fortier’s testimony that he was unable to calculate the volume of 18 litre jugs from the information given to him prior to closing should have alerted the Defendant to the necessity of the inclusion of an express warranty as to the volume of jugs in the agreement.  No such warranty was requested.  The court will not permit pre-contractual representations, even a written one, to be introduced as a warranty when the contract is silent as to the issue and the circumstances leading to the formation of the contract make it clear that the party for whose benefit it is sought to impute a warranty should have inquired into whether the other party’s position on such a material issue was still consistent or reconcilable with its earlier position on that material issue.  It was incumbent upon the Defendant to request an express warranty in the circumstances of this case.

(ii)       The Claim for Negligent Misrepresentation

[24]         The trial judge cited Queen v. Cognos, [1993] 1 S.C.R. 87 at p. 110 for the five general requirements of a claim for negligent misrepresentation:

(1)        There must be a duty of care based on a “special relationship” between the representor and the representee;

(2)        The representation in question must be untrue, inaccurate, or misleading;

(3)        The representor must have acted negligently in making said misrepresentation;

(4)        The representee must have relied, in a reasonable manner, on said negligent misrepresentation; and

(5)        The reliance must have been detrimental to the representee in the sense that damages resulted.

The trial judge noted that the first requirement has subsequently been elaborated on in Hercules Management Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165 to require a duty based on “foreseeable reasonable reliance”. 

[25]         The parties agreed at trial that a duty of care, based on a “special relationship” between the parties, existed on the facts of this case.  Only Mr. Villeneuve possessed the information requested by Mr. Fortier.  Mr. Villeneuve acknowledged at trial that his representation of the number of bottles sold was inaccurate.

[26]         The method employed by Mr. Villeneuve to arrive at his approximate figure of 200,000 bottles sold was to do a quick calculation in his head while on the plant floor.  He noted the number of skids in the plant and multiplied that number by 20 working days a month and then did a further multiplication of that number by 12 to obtain an annual figure.

[27]         The trial judge concluded that Mr. Villeneuve was negligent in using this approach without examining the available data to see if it supported the 200,000 figure.  I should note that Mr. Villeneuve concedes for the purpose of this appeal that his misrepresentation was made negligently.

[28]         The trial judge then turned his mind to the issue of reliance: whether it was reasonable for Fortier to rely on the 200,000 bottle estimate and whether such reliance was to Fortier’s detriment.  The trial judge concluded that it was reasonable for Fortier to rely on the representation and that such reliance resulted in a loss to Fortier in the amount of $70,258.32. 

[29]         The trial judge concluded that, “[t]hese were ‘per jug’ negotiations”.  He reasoned as follows:

I accept Fortier’s evidence that he offered Kap $4.00 per jug, that Villeneuve may at one point have insisted on $6.00 per jug but that eventually the price settled at $5.00 per jug.  The one constant during those negotiations remained the representation that the volume was 200,000 18 litre jugs.  As Mr. Fortier testified, the volume of jugs “had been finalized” and he moved on from that to other issues which needed to be dealt with in order to finalize the deal.

He concluded that Fortier was induced into paying a higher purchase price based on Mr. Villeneuve’s representation.

[30]         In assessing damages, the trial judge accepted Mr. Gravel’s conclusion that in the year prior to the sale of the business, Kapuskasing sold only 109,981 bottles of water.  Using that number at $5.00 per bottle and reducing the result by 17.07 per cent (to take into account the loss of the sales territory assigned to the Thunder Bay Culligan franchise), he calculated a reduced purchase price.[1]  After taking into account the amounts already paid by Fortier, the trial judge concluded that Fortier had overpaid by

$68,965.  The trial judge added $1,293.32 for Mr. Gravel’s account to produce a damages award on Fortier’s counter-claim of $70,258.32.

THE APPEAL

[31]         The appellants raise the following grounds of appeal:

(1)        The trial judge’s findings of fact and legal conclusion in respect of the breach of warranty are inconsistent with his conclusion that Fortier reasonably relied on the misrepresentation in respect of the estimated annual sales of 200,000 bottles.

(2)        The trial judge erred in failing to recognize that the amending agreement of August 16, 2007 provided that the balance of the terms of the consulting agreement were to remain in full force and effect after allowing a credit to Fortier of $150,000.  The amending agreement was entered into at a time when Fortier had reason to believe that the 200,000 bottle estimate was incorrect.

(3)        It was contrary to public policy for the trial judge to award damages on the basis of a sale price of $1,160,000 when in fact the deal was structured so that $600,000 of the purchase price was attributable to a consulting agreement at the request of Fortier in order to minimize the tax consequences of the transaction. 

(4)        The trial judge erred in his calculation of damages for negligent misrepresentation.  Such calculation should have been done on the basis that if the representation had not been made, rather than on the basis of what the situation would have been if the representation was true.

[32]         Fortier seeks to uphold the trial judgment.  However, counsel for Fortier submits that the trial judge erred in dismissing Fortier’s claim for breach of warranty.  In this respect, he argues that the memo from Mr. Villeneuve to Mr. Fortier dated July 20, 2006 is a disclosure document pursuant to clause 4(1)(s) of the asset purchase agreement and constituted a warranty in respect of the 200,000 bottle estimate.

[33]         This latter issue raised by Fortier should properly have been the subject of a notice of cross-appeal.  However, counsel for the appellants advised that he was not taking any objection to the failure to file a notice of cross appeal.

ANALYSIS

(i)        Was there reasonable reliance by Mr. Fortier on the misrepresentation made by Mr. Villeneuve?

[34]         I start with a review of the trial judge’s reasons for judgment in respect of the claim for breach of warranty.  The trial judge began by observing that the asset purchase agreement made no reference to the volume of sales of bottled water.  He then referred to the pre-contractual correspondence.  In the letter of August 3, 2006 from Kapuskasing’s solicitor to Fortier’s solicitor, Kapuskasing made it clear that the deal “is not dependent on the number of bottles sold.”  The aforesaid letter was followed by a letter of August 8, 2006 from the solicitor for Fortier who said:

If it is not to be a condition of closing, my client is requesting at this time, that your client produce a Report of Sales (including, we presume, the reporting document which Culligan International no doubt requires from your client) for the periods 2004, 2005 and 2006 to the present time.  Mr. Fortier can then review the sales figures prior to signing the agreement and address any issues that he might have relative to the sales directly with Mr. Villeneuve.

[35]         The trial judge observed that the above correspondence and Mr. Fortier’s evidence that he was unable to calculate the number of bottles sold from the information provided by Mr. Villeneuve before closing “should have alerted the defendant [Mr. Fortier] to the necessity of the inclusion of an express warranty as to the volume of jugs in the agreement.”  The trial judge commented: “No such warranty was requested …. [i]t was incumbent on the defendant to request an express warranty in the circumstances of this case.” 

[36]         In my view, the trial judge’s subsequent conclusion that it was reasonable for Mr. Fortier to rely on the misrepresentation is inconsistent with his finding that no warranty was requested.  This is particularly so when the solicitor for Fortier asked for and received the sales reports, which Kapuskasing sent to Culligan.  Although Mr. Fortier said he was unable to calculate the volume of sales from these reports, his long time accountant and controller testified that it was relatively easy to get a reasonable estimate of bottles sold by doing some simple arithmetic.  In spite of requesting and receiving the Culligan documentation, Mr. Fortier apparently made no effort to use it or to request assistance in interpreting it.  This was somewhat surprising given that Mr. Fortier was also a Culligan franchisee in the Cochrane area.  According to the lawyer’s letter of August 8, 2006, it was contemplated that Mr. Fortier would review the sales figures prior to signing the agreement and address any issues he might have directly with Mr. Villeneuve.  No such issues were raised by Mr. Fortier.

[37]         When the trial judge finished his analysis of the breach of warranty claim and turned to the claim for negligent misrepresentation, he focused on the pre-contractual negotiations and the misrepresentation concerning the number of bottles sold. He did so without reference to the evidence that he had accepted that Kapuskasing had refused “to adjust the amount due on closing to reflect the actual volume of jugs sold” and without reference to his conclusion that Fortier should have requested an express warranty.  The trial judge also appears to have ignored his finding in respect of the letter of August 3, 2006 and the correspondence following that the 200,000 bottle figure was “never again referred to in any of the pre-contractual correspondence.”  This finding, together with Fortier’s conduct in respect of the disclosed financial information, is inconsistent with the trial judge’s conclusion that “the one constant during those negotiations remained the representation that the volume was 200,000 18 litre jugs.”

[38]         The trial judge’s finding that there was reasonable reliance by Fortier in respect of the misrepresentation is largely a finding of fact and subject to appellate review on a standard of palpable and overriding error.  See Housen v. Nikolaisen, [2002] 2 S.C.R. 235.  In my view, his finding on this issue is in direct contradiction to his finding in respect of the breach of warranty claim and constitutes a palpable and overriding error.

[39]         In summary, the case comes down to this: Kapuskasing refused to enter into a contract that was based on the number of bottles sold in the prior year.  Mr. Fortier accepted that position and asked that he be supplied with documentation from which he could review the sales figures prior to signing the agreement and address any issues with Mr. Villeneuve.  Mr. Fortier received the appropriate documentation and did nothing.  If he had an issue in respect of his ability to calculate unit sales from the information provided, he could have raised it with Mr. Villeneuve or sought the assistance of Mr. Gravel.  He did neither.

(ii)       The Amending Agreement

[40]         Contrary to the submission of Fortier’s counsel, I do not believe that the amending agreement adds anything to the result of this case.  The amending agreement did nothing more than allow a credit in respect of the original purchase price in view of the mutual mistake concerning the extent of the western boundary of Kapuskasing’s sales territory.  The fact that one of the recitals in the amending agreement referred to the 200,000 bottle estimate does not alter the analysis concerning breach of warranty or the issue of reasonable reliance.

[41]         Based on the conclusions I have reached on the first two issues, I find it unnecessary to deal with the third and fourth issues, which relate to the assessment of damages.

(iii)     Fortier’s Position on the breach of warranty issue

[42]         I turn briefly to the submission of counsel for Fortier in respect of the claim for breach of warranty.  As indicated above, Fortier seeks to set aside the trial judge’s finding that there was no breach of warranty.  Fortier’s position turns on whether the memo of July 20, 2006, containing the 200,000 bottle estimate, is a disclosure document pursuant to clause 4(1)(s) of the asset purchase agreement.  Suffice it to say, I agree with the trial judge’s analysis in paragraphs 8 and 10 of his reasons for judgment, which are referred to in paragraphs 22 and 23 above.

[43]         The memo of July 20, 2006 is not a disclosure document.  In my view, the trial judge properly characterized it as “simply another piece of correspondence exchanged during exploratory negotiations”.  Arguably, the trial judge erred in saying that, “[i]t is never again referred to in any of the pre-contractual correspondence”.  However, it is clear that the estimate was not referred to in any pre-contractual correspondence after July 28, 2006.  By the letter from Villeneuve’s lawyer of August 3, 2006, the suggestion that a sale was dependent on the number of bottles sold was taken off the table.

DISPOSITION

[44]         In the result, I would allow the appeal, set aside the judgment below and grant judgment in favour of Kapuskasing for the balance owing under the consulting agreement.

COSTS

[45]         I would award Kapuskasing and Villeneuve their costs of the appeal on a partial indemnity basis fixed in the amount of $19,500 inclusive of disbursements and applicable taxes.

[46]         In accordance with the agreement of the parties, I would refer the costs of the trial back to the trial judge for assessment.

RELEASED:

 “AUG 22 2011”                                             “Robert P. Armstrong J.A.”

“MJM”                                                            “I agree M. J. Moldaver J.A.”

                                                                        “I agree Robert Sharpe J.A.”



[1] He assumed the actual purchase price was $1 million, calculated at $5.00 a bottle for 200,000 bottles, from which he excluded the hard assets (trucks, etc.) valued at $160,000.