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Facts of the case
ABC Technologies Inc. and ABC Technologies Holdings Inc. (“ABC”) agreed to purchase various companies owned by Project Freeway Inc. (“Project Freeway”). As part of the consideration for this multi-million-dollar purchase, ABC agreed to make “Earn-Out Payments” of up to US$26,461,000 to Project Freeway. The Share Purchase Agreement provided that Project Freeway would be entitled to payment at the end of each Earn-Out Period based on the performance of the Target Companies, using the Contribution Margin to calculate Earn-Out Payments. Section 3.10(12) of the Share Purchase Agreement set out trigger events requiring immediate payment of the entire maximum earn-out. One of these triggers, s. 3.10(12)(a), provided that accelerated payment would be required if ABC sells “a material portion of the assets of the Business of the Target Companies” to a non-affiliated purchaser, “without the prior written consent” of Project Freeway. Another trigger, s. 3.10(12)(b), accelerates payment if “the purchaser breaches any of the covenants in Section 3.10(13) in a manner that materially impairs the ability of the Vendor Shareholders to earn Earn-Out Payments.” The Share Purchase Agreement also contains an entire agreement clause in s. 14.11 stating that it and related documents “constitute the entire agreement among the Parties … and supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, of the Parties with respect to such transactions, including the Letter of Intent.”
After the purchase, ABC sold a large percentage of the assets that were owned by the Target Companies to a non-affiliated purchaser in a sale leaseback arrangement (the “Sale Leaseback”), which permitted ABC to continue to lease and operate the assets. ABC also factored the accounts receivable of the Target Companies through a discounted sale of those receivables (the “Factoring Agreement”). ABC did not secure prior written consent from Project Freeway for either transaction. Project Freeway claimed that the Sale Leaseback triggered the earn-out payments under s. 3.10(12)(a) and later alleged that the Factoring Agreement was an additional, independent trigger. ABC disagreed and maintained that it had not breached the Share Purchase Agreement.
The trial decision
Project Freeway sued ABC for breach of contract. The trial was heard by Justice Jana Steele of the Superior Court of Justice. In reasons reported as 2025 ONSC 1048, she found that ABC had not breached the Share Purchase Agreement and dismissed the action. The trial judge interpreted s. 3.10(12)(a) to require that a sale must be “material to the operation of the earn-out” in order to trigger accelerated Earn-Out Payments. She made factual findings that neither the Sale Leaseback nor the Factoring Agreement impacted the ability of the businesses acquired by ABC to hit the Contribution Margin targets used to calculate Earn-Out Payments. The trial judge also considered the Letter of Intent as part of the factual matrix. She treated the LOI as one of “all the circumstances” supporting the conclusion that the word “material” in s. 3.10(12)(a) means material to the earn-out regime, and she used it as an interpretive aid to identify what the agreement in the Share Purchase Agreement was, while applying the entire agreement clause. The LOI described two distinct triggers for acceleration of the Earn-Out Payment and referred to conduct “in a manner which materially impairs the ability of the Vendor to earn Earn-Out Payments,” although it was unclear whether that reference was intended to modify both triggers or only one of them. The trial judge noted that a consistent theme in the principles expressed in the LOI was that the purchaser would not act to impair Project Freeway’s ability to earn the Earn-Out Payouts and would maintain the working capital required to do so.
The trial judge also addressed the conduct and knowledge of individuals associated with Project Freeway. She referred to the definitions section of the Share Purchase Agreement, which defines “knowledge” to mean the “actual knowledge of” two individuals, including Mr. David Mastronardi, among others. Mr. Mastronardi was President and Chief Executive Officer of the Target Companies and a principal business contact during negotiations. The trial judge relied on his testimony that he did not view the Sale Leaseback “as a transaction of significant concern” when he facilitated site visits for prospective Sale Leaseback purchasers, and she was not obliged to ignore this testimony because of later testimony he gave “clarifying” what he meant. She used this as part of her reasoning about how Project Freeway viewed the Sale Leaseback at the time. The trial judge concluded that Project Freeway’s interpretation would be commercially absurd, reasoning that it would not make commercial sense to accelerate the Earn-Out Payments simply because the purchaser engaged in a sale that had no effect on the Contribution Margin, especially given that the agreement explicitly, and “[f]or greater certainty”, did not limit ABC’s right “to complete mergers, amalgamations or other internal reorganizations.”
Issues on appeal
Project Freeway appealed to the Court of Appeal for Ontario. It argued that the trial judge committed several legal errors that led her to misinterpret s. 3.10(12)(a) and that she committed palpable and overriding errors of fact relating to the impact of the Sale Leaseback and Factoring Agreement on its ability to earn the Earn-Out Payments. Project Freeway’s primary submission was that when s. 3.10(12)(a) is given its grammatical and ordinary meaning in the context of the contract as a whole, the phrase “material portion” necessarily refers to the size of the sale, and not to the impact of the transaction on the ability to earn. It argued that this reading was compelled by the language and that the trial judge therefore erred in law by not respecting that meaning. It also argued that the different wording of s. 3.10(12)(b) supported its position, because that provision expressly referred to conduct that “materially impairs the ability” to earn Earn-Out Payments, whereas s. 3.10(12)(a) did not. Project Freeway further argued that the trial judge erred by relying on the terms of the LOI as part of the factual matrix in light of the entire agreement clause, and by considering post-agreement conduct and knowledge of individuals associated with Project Freeway. Finally, it argued that even if the trial judge interpreted the contract without error, she erred in finding that the Sale Leaseback and the Factoring Agreement were not material to the operation of the earn-out.
The Court of Appeal’s analysis of contractual interpretation
The Court of Appeal emphasized that, absent an extricable error of law, the interpretation of a contract of this kind is a question of mixed fact and law that attracts deference to first instance decision-makers on points of contractual interpretation. The court noted that the trial judge reaffirmed the “cardinal presumption” that parties intended what they have said and expressly described her obligation to read the written agreement as a whole, giving the words their ordinary and grammatical meaning. The Court of Appeal held that it was plain that the trial judge simply disagreed that the ordinary and grammatical meaning of s. 3.10(12)(a) had the clear meaning that Project Freeway contended and that she found the provision to be ambiguous. The court accepted her conclusion that “material portion” could be understood either in terms of the size of the assets sold or in terms of the impact of the sale on the Earn-Out Payments, and that the ordinary and grammatical meaning of the term was ambiguous.
The Court of Appeal also held that the trial judge considered Project Freeway’s reliance on the use of “material” in s. 3.10(12)(b), including its argument that the absence of certain words in some areas of the contract, while present in others, is presumed to have meaning. The trial judge concluded that the difference between the language used in ss. 3.10(12)(a) and (b) did not drive the outcome, and the Court of Appeal saw no basis to interfere with this decision. It noted that the trial judge took what she described as a “practical, common-sense approach” and that she was entitled to attempt to ascertain the objective meaning of the words used by the parties in this way, rather than relying on an approach “dominated by technical rules of construction.”
Use of the Letter of Intent and commercial reasonableness
Regarding the LOI, the Court of Appeal concluded that the trial judge’s reasoning did not offend the entire agreement clause. It noted that she considered the LOI as one of “all the circumstances” leading her to conclude that the word “material” in s. 3.10(12)(a) means material to the earn-out regime and that she used the LOI as an interpretive aid to identify what the agreement in the Share Purchase Agreement was, so that she could apply the entire agreement clause. The court stated that she was entitled to do so. The Court of Appeal accepted that, although it may have been unclear whether the reference in the LOI to conduct “in a manner which materially impairs the ability of the Vendor to earn Earn-Out Payments” was intended to modify both the sale of the business and the failure to follow the operating covenants, or only the latter, the trial judge’s conclusion about the principles reflected in the LOI was an issue of fact attracting deference.
The Court of Appeal also addressed the trial judge’s reliance on commercial absurdity. Project Freeway had argued that the outcome it sought was not commercially absurd because it simply reflected the bargain struck by sophisticated parties. The Court of Appeal observed that this submission begged the question as to the bargain that was struck and noted that commercial absurdity is consulted to determine what bargain the parties intended, on the premise that commercial parties would not be likely to intend commercially absurd consequences. In the face of ambiguity, a judge will try to avoid a commercially absurd interpretation so that their decision will accurately reflect the bargain struck by the parties.
Post-agreement conduct and evidentiary issues
On the issue of post-agreement conduct, the Court of Appeal considered the trial judge’s treatment of Project Freeway’s failure to raise concern about the Sale Leaseback despite knowing that ABC was negotiating it after the sale closed. The trial judge referred to the definition of “knowledge” in the Share Purchase Agreement and relied on Mr. Mastronardi’s testimony that he did not view the Sale Leaseback as a transaction of significant concern when he facilitated site visits for prospective purchasers. The Court of Appeal held that the trial judge did not err in relying on a provision relating to representations and warranties to buttress her conclusion that the knowledge of these individuals could be ascribed to Project Freeway and that she did not err in relying on Mr. Mastronardi’s comment. The court did recognize that the factual inference drawn from the absence of objection was problematic, given that s. 3.10(12)(a) contemplates permissible sales with the vendor’s consent and that a vendor believing its consent would be sought would have no need to raise concern. However, it concluded that any error in drawing this inference or in misusing post-contract conduct to glean intention was not an overriding error or a reversible legal error, because this point was far from central to the trial judge’s conclusion, which was well supported and driven by other factors.
Findings on materiality and final outcome
On the factual question of materiality, the Court of Appeal noted that this was an appeal of factual findings made by the trial judge and that such findings are owed substantial deference. It held that Project Freeway failed to identify any palpable or overriding errors relating to these findings and that it had done little more than attempt to reargue the issues on the evidence. The Court of Appeal therefore dismissed Project Freeway’s appeal. It ordered that costs are payable by the appellant to the respondents in the amount of $40,000 inclusive of applicable taxes and disbursements, as agreed between the parties. As a result, ABC Technologies Inc. and ABC Technologies Holdings Inc. are the successful parties, and the total amount ordered in their favour in this appellate decision is $40,000 in costs.
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Appellant
Respondent
Not Specified
Court
Court of Appeal for OntarioCase Number
COA-25-CV-0345Practice Area
Corporate & commercial lawAmount
$ 40,000Winner
RespondentTrial Start Date