For those who pass their business on to the next generation,
particularly to family, it is undoubtedly the hope that the
successors will work together to ensure that the business continues
to thrive for many years to come. It's hardly anyone's plan
to see their children in court against one another.
However, such situations regrettably do happen. Recently, the
Court of Appeal affirmed the decision of the Supreme Court of
Canada in the matter of 0930032 B.C. Ltd. v. 3 Oaks Dairy
Farms Ltd., and the Supreme Court's
interpretation of a promissory note in respect of a shareholder
Jim and Joyce ran a dairy farm. Robert, their son, lived and
worked full time on the farm. James, their son-in-law, provided
bookkeeping and accounting services, while also being employed
elsewhere. Jim and Joyce invited Robert and James to become equity
partners, under a partnership agreement which included provisions
agreeing that "no partner would do anything detrimental to
the best interests of the partnership or which would make it
impossible to carry on the ordinary business of the
partnership". After further legal and tax advice, the
farm was incorporated into a company and, in exchange for their
partnership interests, shares and promissory notes were issued.
However, no shareholders agreement was signed that matched the
original partnership agreement.
Jim and Joyce eventually retired, and agreements were made to
ensure that they could continue to live on the farm and receive a
monthly management bonus as well as a lump sum payout of Jim and
Joyce's shareholder loans. So far, everything seemed like it
was proceeding to plan.
However, James then suffered a heart condition and soon was
unable to work either on the farm or elsewhere. James needed to be
cashed out of the farm, but Robert was unable to find financing to
do so. Although the shareholders agreed to a repayment of part of
James' shareholder loans, James then claimed that the
promissory note allowed him to collect the entire amount.
Certainly, the promissory note states that the farm promissory
to pay James "thirty (30) days after demand
therefore" – and it is a rule of contractual
interpretation that words cannot be implied into a written
agreement that are inconsistent with the express words used by the
parties. As the Court of Appeal stated, this rule is intended to
provide certainty to parties in commercial dealings – what
has been written down should take precedence over the recollections
at trial of the subjective intentions of the parties.
Nevertheless, James was unsuccessful both at trial and on
appeal. At trial, the court held that the plain and ordinary
meaning of the promissory note was "excluded" by the
context in which it was made – that is, the promissory note
was given in exchange for obligations undertaken in the partnership
agreement. While this partnership agreement itself was no longer in
effect, the terms continued to apply – including the
condition that the parties would not take any steps that would get
in the way of the farm continuing as a dairy farm – and James
was aware of this. As such, James could not collect on the entire
amount of the note.
On appeal, James argued that the trial judge "implied"
such a term and this was contradictory to the written terms of the
promissory note. However, the Court of Appeal did not agree. The
terms of the partnership agreement were intended and understood by
the parties to continue in effect, notwithstanding the change from
a partnership and the incorporation of the business. Certainly, the
Court of Appeal had to be satisfied that the evidence, objectively
considered, showed that the parties intended to bind themselves to
the contractual obligations, that consideration was given and the
terms were capable of performance and enforcement – but these
conditions had been satisfied. As such, James could not be
successful in his appeal.
On a last, rather sad note, the Court of Appeal commented on
James' continuing interest in the farm, particularly as James
had not been elected a director of the farm. While that matter was
not before the court, the Court of Appeal earnestly hoped that
James and Robert could sort it out without further litigation
– and let's hope that is indeed the case.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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