The Supreme Court in British Columbia just considered a case involving attempts to secure financing Drover v. Steer (15 October 2018).
Clifford Drover worked for the Canadian Military. He was set to retire and would receive to funds when he left. He wanted to use those funds to buy a business. Mr. and Mrs. Steer were planning to retire and sell their butcher shop.
A friendly accountant put together a “letter of intent”. Neither party had lawyers. That was probably a mistake as you might imagine!
The letter of intent anticipated that there would be a share purchase agreement to follow, but some of the provisions were intended to be binding. Frequently, there are letters of intent which specifically state that they are “not binding”. This wasn’t one of them.
The sum of $75,000.00 was paid as a deposit to Mrs. Steer. Drover consent to permit her to use the funds to pay off or pay down a debt in favour of the Business Development Bank.
Financing Facts
The court set out the following:
[26] Ms. Steer swears that she spoke to Mr. Drover on October 28, and Mr. Drover told her he was considering applying for a government grant.She swears that she suggested he approach the Business Development Bank of Canada, and that he responded that he felt a bank loan was not an option because of his bad credit, and he did not want monthly payments.
[27] Mr. Drover swears that on or about October 30, 2016, he informed Ms. Steer that he would not be completing the share purchase. He swears that he was having difficulty raising the funds necessary to complete the share purchase – $74,000 – and that he asked a friend to lend him the required money, but was refused. [28] Mr. Drover swears:As a result of not being able to secure the balance of funds required to complete the Purchase, I was incapable of waiving my financing condition and as a result of Craig Partridge’s [the friend Mr. Drover had approached for a loan] advice that the Business was not profitable, even if I was able to complete the Purchase, it would not have been in my best interest to do so.
[29] Mr. Partridge’s advice is not admissible for its truth, nor is his opinion admissible, but the bare statement is admissible to show that Mr. Drover had the advice of his friend.Determination of the Facts
The Court stated:
[36] I find the following facts:1. The terms to which the parties agreed are as set out in the Agreement, dated for reference October 15, 2016. Ms. Steer has sworn that its terms reflected the agreement reached at a meeting on August 28, 2016, and Mr. Drover has sworn that the parties celebrated coming to an agreement with respect to the Agreement of Purchase and Sale of shares. Mr. Drover has pleaded that Agreement, and asserted its validity in his Notice of Application.
2, Mr. Drover paid just over half the agreed $149,000 purchase price for the shares by way of a $75,000 “down payment/deposit” as reflected in the Letter of Intent.
3. Mr. and Ms. Steer agreed in that same document to hold the $75,000 in trust until the anticipated August 30, 2016 completion of the share sale.
4. The parties agreed in the Letter of Intent that if the share sale did not complete by August 30, 2016, Mr. Drover would forfeit $10,000 to the Steers as compensation for their costs and lost opportunity.
5. In the period between signing the Letter of Intent and the end of October 2016, Mr. Drover held himself out as the intended purchaser or new owner of the meat shop operated by Steers Meat Shop Limited. I accept the sworn evidence of Ms. King, Mr. Tate, Mr. Massina, Ms. Hansen and Mr. Kelly in that regard.
6. In March 2016, Ms. Steer asked Mr. Drover for permission to use the $75,000 deposit, or some portion of it, to pay down business debt, and Mr. Drover readily agreed with these words:
“Please please get rid of that debt you have my word and I’m sure it will cease some stress.”
7. Both parties understood the debt referred to be debt of the Company, the shares in which Mr. Drover was to buy and the Steers to sell.
8. Ms. Steer did not volunteer, nor did Mr. Drover inquire about, the nature of the debt in question, to whom it was owed, or in what amounts.
9. All parties understood that Mr. Drover proposed to pay the balance owing on the share purchase from money he expected to receive on his discharge from the Canadian Armed Forces.
10. On August 28, 2016, the parties met in the offices of the accountant for the Company and agreed to the terms set out in the Agreement.
11. The Agreement was intended by all parties to supplant and to replace the Letter of Intent signed earlier in 2016.
12. When it appeared to Mr. Drover that his military discharge, and the payment he expected to accompany it, would not occur by the completion date of October 15, 2016, he informed Ms. Steer and the parties agreed to extend the completion date to October 28.
13. When it appeared likely to Mr. Drover that he would not receive his military payout by October 28, 2016, he sought financing from his friend.
14. Mr. Drover’s friend refused to lend him the money to complete the purchase of the shares.
15. Mr. Drover was unable to complete the purchase of the shares by October 28, 2016, and stated his intention to not complete on October 30, 2016.
16. Ms. Steer told Mr. Drover she would re-list the business, meaning the shares in the Company, and would pay something to Mr. Drover – without being specific – when she sold.
17. Ms. Steer was unable to sell the business and eventually sold off the Company’s assets and paid the outstanding liabilities of the Company, with nothing for Mr. Drover.
And, also:
[37] All parties agree that two agreements were reached, the first being the Letter of Intent in February 2016, the second being the Agreement of August 28, 2016. The Letter of Intent was signed, the Agreement was not, but the parties agree that the Agreement sets out the terms agreed to in a meeting at the accountant’s office on August 28, 2016 and that it supplants the Letter of Intent.The parties agree that the date set in the Agreement for completion of the sale purchase – October 15, 2016 – was extended to October 28, 2016 and that Mr. Drover refused to complete the share purchase on that day or shortly afterward.
Commenting on Gordon Nelson v. Cameron
The Court quoted with approval the decision of the British Columbia Court of Appeal in Gordon Nelson Inc. v. Cameron (2018):
[56] The Court of Appeal dismissed the appeal, and in the process held that not every contract in which a condition regarding “satisfactory” or “suitable” financing requires that the party in whose favour the condition lies is obliged to make “best efforts” to find the financing.
It depends on the nature of the bargain between the parties. At para. 16, the court says:
It follows that the judge was correct to treat the contractual obligation as defined by the express language of the contract. This is not a case about implying a contractual term in the absence of a term being expressly stipulated in the contract. To imply a term in these circumstances would be impermissibly to construct an agreement for the parties, contrary to the agreement they objectively made. Equally, the judge was correct to conclude that, in any event, implying a term was not necessary to give the contract business efficacy.
Making an honest effort to find suitable financing and honestly concluding, having tested the market, that suitable financing was not available is an efficacious business arrangement. The judge found the purchaser honestly concluded that the market would not provide suitable financing and that further searching for financing would be pointless. She did not find that the purchaser availed itself of the financing condition to avoid a purchase it no longer wanted for other reasons.
Decision of the Court
The Court concluded as follows:
[57] Applying the lower standard of “honest effort” to Mr. Drover’s evidence of his search for “financing on terms satisfactory to the Purchaser,”I conclude that Mr. Drover fell short of putting an honest effort into his search.
It is simply not enough that he ask one friend for a loan, and, when refused, to assert an inability to complete a purchase based on an inability to find financing on satisfactory terms.
[58] In his first affidavit Mr. Drover has sworn that he decided to not proceed with the share purchase because of his impression of the viability of the meat shop business.In his second affidavit, he has sworn that “I was having difficulty obtaining the funds to complete the purchase contemplated in the Agreement (the “Purchase”) in the fall of 2016 and as such looked to borrowing funds to complete the Purchase.”
[59] While his motive for not completing does not significantly impact on whether he acted honestly in his search for financing (see Gordon Nelson Inc. v. Cameron, 2017 BCSC 1269 (CanLII), aff’d 2018 BCCA 304 (CanLII)),Mr. Drover has failed to produce any evidence of any attempt on his part to find financing from some source other than his friend.
[60] This is not a claim for restitution, in unjust enrichment or otherwise. [61] In his claim for return of his deposit, Mr. Drover does not allege any breach of contract by the defendants. [62] In the circumstances, and on the evidence led, Mr. Drover’s claim for the return of his deposit is dismissed.COMMENT
One simple request for financing from a friend is not enough. That’s not an “honest effort” that would fall under Bhasin v. Hrynew (2014 SCC). There is also the issue of changing one’s mind. The profits didn’t seem to be as high as he might have liked.
At the very least, have this issue raised by mortgage lenders, not one but several.
So, here we have a Letter of Intent, partially binding, partially not, signed but the actual Agreement for the Purchase of Shares was reduced to writing, but never, ever signed.
If this were a real estate transaction in Ontario, then the Statute of Frauds would come into play. Share purchases need not be in writing. They should be, but it’s not a requirement.
Also, have lawyers involved from the outset, not at the very end when you are going to Court. That’s foolhardy.
Brian Madigan LL.B., Broker