Executive Summary: Key Legal and Evidentiary Issues

• The scope and interpretation of article 3.56 of the Share Purchase Agreement regarding the duty to disclose material facts affecting company value.

• Whether the sellers’ failure to disclose the finite nature of a major customer’s (Wilson Fuels) orders constituted a breach of the agreement.

• The necessity for the buyer to prove actual loss or diminution in value resulting from the breach to recover compensatory damages.

• The sufficiency and reliability of expert evidence on business valuation at the time of sale.

• The appropriateness of awarding nominal damages in the absence of proven compensatory loss.

• Allocation of costs following mixed success in appeal and cross-appeal proceedings.

Facts of the case

George and Elizabeth Jeha, through The Jeha Family Trust, owned Eye Catch Signs Limited, a company specializing in commercial signage. In 2014, they sold all shares in the company to John Sullivan, through his holding company JJETS Inc., for $1.2 million. The sale was governed by a Share Purchase Agreement, which included article 3.56—a broad disclosure clause requiring the sellers to reveal any facts that could materially diminish the purchaser’s appreciation of the company’s value or profitability. Wilson Fuels, a major customer, had a finite number of gas stations requiring LED signage, and the project was nearing completion. While the Jehas disclosed Wilson Fuels as a major customer, they did not provide the spreadsheet showing the limited scope and impending end of the project before closing.

After acquiring the company, Sullivan learned from Wilson Fuels that the LED signage project was concluding and subsequently discovered the undisclosed spreadsheet. He claimed that, had he known this, he would have offered significantly less for the company. Sullivan and JJETS Inc. sued the Jehas for breach of contract and misrepresentation, seeking damages based on the alleged overpayment.

Procedural history and trial findings

At trial (2024 NSSC 280), the judge found that the Jehas breached article 3.56 by failing to disclose the finite nature of the Wilson Fuels project, which could have materially affected Sullivan’s assessment of the company’s value. However, the trial judge dismissed the claim for damages, holding that Sullivan had not provided sufficient evidence of the company’s true value at the time of sale and thus failed to prove any actual loss. The court also noted that the Jehas’ failure to disclose was not an act of deceit but a misunderstanding of their contractual obligations. Costs were awarded to the Jehas.

Appeal and cross-appeal

Sullivan appealed, arguing that the trial judge erred in requiring proof of actual loss and in denying compensatory damages. The Jehas cross-appealed, contending there was no breach and that any non-disclosure was not material. The Nova Scotia Court of Appeal considered whether the trial judge erred in finding a breach of article 3.56, whether damages should have been awarded, and whether nominal damages were appropriate.

Discussion of policy terms and clauses at issue

Article 3.56 of the Share Purchase Agreement imposed an exceptionally broad duty on the sellers to disclose any facts that could reasonably be expected to materially diminish the purchaser’s appreciation of the company’s worth or profitability. Article 5.1(f) clarified that the purchaser’s due diligence or knowledge would not limit the sellers’ disclosure obligations. The Court of Appeal affirmed the trial judge’s interpretation that these provisions allocated the risk of undisclosed material facts to the sellers, regardless of the purchaser’s own diligence.

Analysis and outcome

The Court of Appeal upheld the trial judge’s finding that the Jehas breached article 3.56 by failing to disclose the spreadsheet and the limited future of the Wilson Fuels project. However, the court agreed that Sullivan failed to prove a loss, as there was no reliable evidence of the company’s value at the time of sale. The court found that Sullivan’s expert report did not constitute a proper valuation and that the assumption the Jehas would have accepted a lower price was unsupported. The court also declined to award nominal damages, as Sullivan had not requested them.

Ruling and overall outcome

Both the appeal and cross-appeal were dismissed. The Court of Appeal confirmed that while there was a breach of the disclosure obligation, no compensatory damages were warranted due to the lack of proven loss. The court awarded costs of $15,000 to the Jehas as the successful respondents on the appeal, reflecting the complexity and mixed success of the proceedings. No monetary award was granted to the appellants, and the only quantifiable amount ordered was the costs payable by Sullivan and JJETS Inc. to the Jehas.