Badesha v. Aujla

2016 BCCA 294 Badesha v. Aujla COURT OF APPEAL FOR BRITISH COLUMBIA Citation: Badesha v. Aujla, 2016 BCCA 294 Date: 20160706 Docket: CA42980 Between: Kuldip Badesha and 0909043 B.C. Ltd. Respondents (Plaintiffs) And Snowland Sporting Goods Ltd. Respondent (Defendant) And Jasjit Singh Aujla Appellant (Defendant) Before: The Honourable Madam Justice Saunders The Honourable Mr. Justice Groberman The Honourable Mr. Justice Fitch On appeal from: An order of the Supreme Court of British Columbia, dated July 16, 2015 (Badesha v. Snowland Sporting Goods Ltd., 2015 BCSC 1229, Vancouver Docket No. S127004). Counsel for the Appellant: N.T. Mitha R. Sieg C. Edstrom Counsel for the Respondents, K. Badesha and 0909043 B.C. Ltd.: G.E. Sourisseau A. Rawal No one Appearing on behalf of Snowland Sporting Goods Ltd. Place and Date of Hearing: Vancouver, British Columbia February 9, 2016 Place and Date of Judgment: Vancouver, British Columbia July 6, 2016 Written Reasons by: The Honourable Madam Justice Saunders Concurred in by: The Honourable Mr. Justice Groberman The Honourable Mr. Justice Fitch Summary: Two contracts intended to swap a hotel in Williams Lake with property in Chilliwack failed to complete. The parties were misnamed in the contracts. The transactions provided for the sale of shares in companies that owned the properties, but those companies were not the sellers in the written contract. In the order appealed a shareholder of a company that in turn owned the company that owned the hotel, and who was named as a buyer in the Chilliwack property, was found liable under two penalty clauses in the amount of $1,000,000 for the failure of the transaction. Held: appeal allowed. Nemo dat quod non habet - one cannot give more than one has. As to rectification, one could not determine with sufficient exactitude what company's shares were intended to be sold or who the seller in the hotel transaction was. This meant both contracts failed because they were interdependent. Further, it was an error to pierce the corporate veil to impose liability on a shareholder for corporate default. Reasons for Judgment of the Honourable Madam Justice Saunders: [1] On August 3, 2012 two transactions intended to swap a hotel property in Williams Lake and a commercial property in Chilliwack failed to complete. In the order appealed the judge found Mr. Aujla, associated with the Williams Lake hotel property, liable to pay $1,000,000 to parties associated with the Chilliwack property, being $500,000 in damages related to the hotel contract and $500,000 in damages related to the Chilliwack property contract, under the contracts' mirror penalty clauses for default in performance. The judge dismissed Mr. Aujla's counterclaim for damages as the wronged party. [2] This appeal challenges the enforceability of the contracts, the personal liability of Mr. Aujla, and, independent of the enforceability of the contracts, the enforceability of the penalty clauses. The appellant also challenges many of the findings of fact. I conclude there was legal error in the analysis of the situation by the judge on the first two issues, and accordingly I need not address the enforceability of the penalty clause, or the alleged factual errors. I would allow the appeal, set aside the order appealed and dismiss the action. The Contracts [3] The confused documentation for the contemplated transaction is at the heart of this appeal. [4] The hotel in Williams Lake is owned by Snowland Sporting Goods Ltd. Snowland, in turn, is owned by 0912494 B.C. Ltd., which I will refer to as 494 BC. 494 BC is owned 25% by Mr. Aujla, 25% by Mr. Aujla's son, and 50% by Parminder Kaler in trust for her husband. What I will call the "hotel contract" described the property being sold as the Howard Johnson Hotel in Williams Lake. It named Snowland and Mr. Aujla as the seller and Mr. Badesha as the buyer. While on its face the contract described the property that is the subject of the contract as the hotel, the contract did not concern itself with the sale of land or the sale of assets. Rather it anticipated that Mr. Badesha would purchase shares of Snowland. The key clause was in an addendum that provides: The seller [i.e., Snowland and Mr. Aujla] agree to sell and the buyer agree to buy 100% shares of the company "Snowland Sporting Goods LTD." [5] The Chilliwack property is owned by the respondent 0909043 B.C. Ltd., which I will refer to as 043 BC. The shares of 043 BC are held equally by the respondent Mr. Badesha, Mr. Rai and Mr. Pannu. The "Chilliwack contract" described the property being sold by its street address and legal description. It named 043 BC as the seller and Mr. Aujla as the buyer. However, it too, described a share purchase to effect the change of control over the Chilliwack property. The key clause was in an addendum that provides: This is the fundamental condition of this contract that the seller [i.e., 043 BC] agree to sell and the buyer agree to buy 100% shares of the company 0909043 B.C. LTD. The Litigation [6] When the transactions failed to complete, Mr. Badesha and 043 BC commenced legal proceedings against Snowland and Mr. Aujla, claiming specific performance of the contracts or in the alternative damages in lieu, or in the further alternative damages according to the penalty clauses. Mr. Badesha and 043 BC later abandoned the claim for specific performance. [7] In the amended response to civil claim Snowland and Mr. Aujla allege, inter alia, that the contracts are unenforceable because the sellers do not own the assets, that is, nemo dat quod non habet. With respect to the hotel contract they pleaded that Snowland's commitment to sell its shares runs against two hurdles - that its shares are owned by 494 BC and that in law it could not sell its own shares. With respect to the Chilliwack property they pleaded that in law 043 BC could not sell its own shares. In addition to these issues, which in my view were sufficient to dispose of the action, they contested many of the details set out in the notice of civil claim. Further, Mr. Aujla (and perhaps Snowland, depending on one's view of the pleading) counterclaimed for certain business expenses and, alleging fault on the part of Mr. Badesha for the failure of the swap transaction, also invoked the penalty clauses. [8] With respect to the hotel property, the reply of Mr. Badesha and 043 BC alleges that it was intended that the "seller would be the owner of the shares of Snowland, that is, Mr. Aujla's company 0912494 B.C. Ltd." and the "buyers would be Mr. Badesha, Mr. Pannu and Mr. Rai." With respect to the Chilliwack property, the reply alleges the "sellers would be Mr. Badesha and his two partners, Sarbjit Pannu and Harinder Rai," and the buyers would be "Mr. Aujla and his partner Harchet Kaler or their nominee". In their reply Mr. Badesha and 043 BC sought rectification of the contracts to correctly name the owners of the shares being sold in each case if the two agreements are found not to be "enforceable in their current form". The response to the counterclaim, on the other hand, describes the hotel contract as one in which Mr. Aujla and Snowland are the sellers. It also alleges it was a term of the hotel contract that Snowland and Mr. Aujla would sell or facilitate the sale of 100% of the shares of Snowland to Mr. Badesha, and that it was a term of the Chilliwack property contract that Mr. Badesha and 043 BC would sell, or cause to be sold, 100% of the shares of 043 BC to Mr. Aujla. [9] Notwithstanding these pleadings, 494 BC was never made a party to the litigation, nor were Mrs. Kaler (or Mr. Kaler), Mr. Pannu, Mr. Aujla's son, or Mr. Rai. Discussion [10] This is a case in contract. Usually such a case will involve construction of the contract as a question of mixed fact and law, as to which we must apply the deferential standard to the conclusions of the judge: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at paras. 50-52. The appellant complains of some of the findings of fact and the judge's view of the positions of the parties which he says is inconsistent with the pleadings. These complaints, however, are peripheral to the heart of the case, which involves basic principles of contract and company law that are extricable from the facts. On such issues, the judge was required to be correct: Sattva; British Columbia (Ministry of Forests) v. Teal Cedar Products Ltd., 2015 BCCA 263. For the purposes of these reasons I have set aside the issues of fact raised by the appellant and address only the issues of legal principle raised as to the enforceability of the contracts, and the liability of Mr. Aujla. 1. Enforceability of the contracts [11] I will start with the contracts as presented to the court. The question is not their interpretation but rather their formation as enforceable contracts. It seems clear that all concerned, including the judge, recognized that the documents did not describe transactions that are intelligible in law. This is patently correct, and the reasons for this bear upon the issue of rectification. [12] It is axiomatic that the vendor in a contract for sale must be able to convey the asset sold. If not, the contract collapses for failure of consideration or, to look at it another way, collapses because the true owner of the asset has not agreed to sell. The hotel contract has suffered this collapse. It is fatally undermined by the requirement that Snowland, the owner of the hotel, and Mr. Aujla (together defined as the seller), sell 100% of the shares of Snowland to Mr. Badesha. Snowland does not and cannot own 100% of the shares of itself. If it is Snowland that is required to sell shares, the clause confuses the corporate entity with its owners. If it is Mr. Aujla who must sell 100% of the shares of Snowland, or indeed any shares of Snowland, he cannot because 494 BC owns the shares. The principle that a corporation and its owners are distinct is strong. This contract is incapable of performance as drafted. [13] The Chilliwack contract, as is, is likewise fatally undermined by the commitment of 043 BC to sell 100% of its shares. 043 BC, like Snowland, cannot sell its shares; the shares are owned by Mr. Badesha, Mr. Pannu and Mr. Rai, and the latter two men are not party to the contract at all. [14] I conclude that both contracts, as written, are not enforceable because the seller in each case does not own the shares proposed to be sold. Accordingly, any damages claim against Mr. Aujla for non-performance based on the contracts cannot succeed on the current language. [15] The judge appears to have recognized that the contracts did not name the correct parties. She found that Mrs. Kaler (who holds shares in trust for Mr. Kaler) and Mr. Aujla's son gave verbal authority to Mr. Aujla to act on their behalf. In this way the judge found the contracts did not fail by naming the wrong parties or making impossible commitments for the parties. While the judge did not discuss the concept of rectification, she must have reached these conclusions on a rectification basis. [16] The judge said, concerning the hotel contract: [126] In my view, there is little merit to Mr. Aujla's argument that the swap agreement is unenforceable as it fails to name the proper parties who are also not before this Court. The shareholders of 494 Ltd. are Mr. Aujla, Tajinder, and Mrs. Kaler. Mr. Banwait testified that Mr. Aujla told him that he had the consent of both Tajinder and Mrs. Kaler to sell their respective shares and Mr. Aujla testified that he had the consent of Tajinder and Mrs. Kaler to sell their respective shares. [128] When Mr. Banwait was asked in cross-examination why he did not note Mrs. Kaler as the seller of the Snowland shares, he testified that in the presence of Mr. Kaler, Mr. Aujla told him that he had signing authority for Snowland, Mr. Kaler never disputed that fact, and Mr. Kaler was present at the Tim Hortons when Mr. Aujla signed the two contracts. [129] Mr. Badesha and Mr. Aujla clearly understood that the swap agreement was a share purchase agreement, or what was essentially two property transactions, and that they both had the consents of the necessary parties to transfer their respective shares. Mr. Aujla, by his response to civil claim, admitted that Snowland was owned and controlled by him, and that to facilitate the swap agreement, he would purchase all of the shares in [043 BC] Ltd., and Mr. Badesha would purchase all of the shares of Snowland. By his third party notice, Mr. Aujla also alleged that the Kalers knew of the material terms of the swap agreement, approved the swap transaction, Mr. Kaler instructed Mrs. Kaler to sell her shares in Snowland as part of the swap transaction, and Mr. Kaler was present when the contracts were signed. [131] All of the parties had legal representation prior to and at the time of closing. There was never any suggestion that other persons or corporations needed to be made a party to either of the contracts. The intention of the parties and their business partners is not contested, and it is not contested that at all times Mr. Badesha and Mr. Aujla had the authority to act for their respective business partners. [17] While paragraph 129 is not an accurate reflection of the pleadings, I will pass over that problem and move directly to the issue of rectification as a possible cure for the error in the contracts' provisions for sale of shares. [18] The law of rectification is discussed by Mr. Justice Lowry in Fraser v. Houston et al., 2006 BCCA 66, 51 B.C.L.R. (4th) 82: [26] The intervention of equity to rectify a document that by virtue of the parties' mutual mistake does not evidence their true agreement is a remedy that requires adherence to principles that have been developed in recognition of the importance of preserving confidence in commercial paper. It is a remedy to be employed with caution. This is seen to be as true today as when the Supreme Court considered the remedy in what are the two cornerstone cases of Canadian law on the subject: Hart v. Boutilier (1916), 56 D.L.R. 620 (S.C.C.) [Hart], and Ship "M.F. Whalen" v. Pointe Anne Quarries Ltd. (1921), 63 S.C.R. 109, 63 D.L.R 545 [M.F. Whalen] [28] In Bank of Montreal v. Vancouver Professional Soccer Ltd. (1987), 15 B.C.L.R. (2d) 34 (C.A.) at 36-37, after stating that rectification is not concerned with the making of a contract but with defects in recording it, McLachlin J.A. (as she then was) said that before the remedy can be obtained, the applicant must establish first that the instrument does not reflect the agreement of the parties, and then that the parties shared a continuing common intention, up to the time of signing, that the provision at issue stand as agreed and not as reflected in the document [29] This statement is not, however, to be taken as excluding the requirement that the parties' common intention must have been outwardly expressed. Writing for a unanimous court in Joscelyne v. Nissen, Russell L.J. emphasized the requirement at p. 1221, after quoting in particular Buckley L.J. from Lovell and Christmas Ltd. v. Wall, [1911] 104 L.T. 85 at 93, at p. 1217 as follows: 'In ordering rectification the court does not rectify contracts, but what it rectifies is the erroneous expression of contracts in documents. For rectification it is not enough to set about to find out what one or even both of the parties to the contract intended. What you have got to find out is what intention was communicated by one side to the other, and with what common intention and common agreement they made their bargain.' [30] In keeping with rectification being a form of relief that is to be granted with caution, the party seeking to have the instrument that was executed altered has always borne a heavy onus to prove that what was executed was not the agreement, as well as what the outwardly expressed continuing common intention actually was [19] Applying this standard, I cannot discern from the pleadings and the judge's findings of fact how the two contracts should be rectified in respect to the parties and their obligations. In their reply Mr. Badesha and 043 BC say that the seller in the hotel contract was intended to be 494 BC, and that the sellers in the Chilliwack property contract were intended to be Mr. Badesha, Mr. Pannu, and Mr. Rai. In the response to the counterclaim they say in respect to the hotel contract that Mr. Aujla and Snowland were to be the sellers. [20] The court's findings of fact as to common intention would support rectification of the Chilliwack property contract to change the seller from 043 BC to the three shareholders of 043 BC. [21] The court's findings of fact, however, do not support rectification of the hotel contract to change the seller to 494 BC. At most the judge's findings support two alternative agreements whereby Mr. Badesha would obtain control of the hotel. One is that Mr. Badesha would directly acquire the shares of Snowland from 494 BC. This version is consistent with the reply but would require rectification of the contract to join 494 BC as a party to the contract. It would also require the corporate resolutions authorizing the transaction. The other alternative is that Mr. Badesha would acquire the shares of 494 BC, thereby indirectly acquiring Snowland. This version would require rectification of the contract to join Mr. Aujla's son and Mrs. Kaler as parties to the contract, and additional language providing for transfer of the shares of 494 BC. While this is not the agreement sought in the reply, it is consistent with the judge's reference to Mr. Aujla's son and Mrs. Kaler selling shares, which could only be shares in 494 BC. I conclude from these two entirely different, but plausible, alternatives that the generalized statements that Mr. Aujla had authority to transfer Snowland to Mr. Badesha does not provide sufficient clarity on the structure of the intended transaction to allow the court to say that the parties shared a continuing common intention of what would be sold to Mr. Badesha. In my view, rectification of the hotel contract addendum is not possible. [22] A third possibility also arises on the findings of the judge - that she considered the contract for sale of the hotel required Mr. Aujla to acquire 100% of the shares and transfer them to Mr. Badesha. This, however, is not a contract that was pleaded, and in any case would require other transactions to occur first to solve the nemo dat issue - none of which appears to have been considered. [23] The presence of these widely divergent alternatives demonstrates that the hotel contract is not suitable for rectification. While one can see that some transaction was intended, one cannot discern with any degree of clarity how the parties intended to effect the change in control of the hotel. It fails the test in Fraser v. Houston et al. The transaction disintegrates into fault gouge of incohesive legal intentions. [24] I conclude that the judge erred in law in her rectification analysis of the hotel contract. It was an error to rectify this contract without knowing how the identity of the seller will be modified. This error is fatal to the enforceability of the hotel contract. It is conversely fatal to the Chilliwack property contract because it is agreed the two contracts are a matched pair - if one falls, the other does as well. [25] There were, then, no enforceable contracts to support claims for damages for non-performance. 2. Enforceability of a contract against Mr. Aujla [26] Even if one could determine which company's shares were to be transferred in the hotel contract, unless Mr. Aujla was bound to be the seller (which I conclude cannot be the result for the reasons above) I consider Mr. Aujla, in law, could not be liable for either corporation's non-performance of the contract. In effect, to find Mr. Aujla liable for the failure to transfer shares by which the hotel property was controlled is to pierce the corporate veil of either 494 BC or Snowland. [27] The distinction in law between each company and Mr. Aujla is significant. In Edgington v. Mulek Estate, 2008 BCCA 505, Mr. Justice Lowry commented on the importance of legal vehicles and the reluctance of courts to pierce the corporate veil: [20] I consider the position taken by the purchasers largely ignores the longstanding principle that a corporation is in law an entity distinct and separate from its shareholders: Salomon v. Salomon & Co., [1897] A.C. 22 (H.L.). Parties to transactions employ the use of corporate vehicles for a reason, as they are entitled to do. Shareholders, despite being in a position of control, do not, as a rule, incur liability for the breach of their corporation's contractual obligations. It is not a matter of control; the shareholders of a closely held company like Westpark invariably have control of the company. [21] The separate legal personality of the corporation will not be lightly disregarded. As recognized in Big Bend Hotel Ltd. v. Security Mutual Casualty Co. (1980), 19 B.C.L.R. 102 at 108 (B.C.S.C.), respect for the corporate form is strict: On the whole, Canadian and English courts rigidly adhere to the concept set out in Salomon, supra, that a corporation is an independent legal entity not to be identified with its shareholders. [22] There are certain circumstances in which what the authorities state to be the "corporate veil" will be "pierced" or "lifted", or where the separate legal personality of the corporation will be disregarded. Such circumstances generally arise where the corporate form has been abused - that is, it has been used for fraudulent or illegitimate purposes (see Big Bend Hotel). [23] In Kosmopoulos v. Constitution Insurance Co., [1987] 1 S.C.R. 2 at 10, 34 D.L.R. (4th) 208, Wilson J. recognized that in certain circumstances a court will pierce the veil where failing to do so would result in unfairness, which would appear to be the suggestion that underlies the purchasers' contention on this appeal: As a general rule a corporation is a legal entity distinct from its shareholders: Salomon v. Salomon & Co., [1897] A.C. 22 (H.L.). The law on when a court may disregard this principle by "lifting the corporate veil" and regarding the company as a mere "agent" or "puppet" of its controlling shareholder or parent corporation follows no consistent principle. The best that can be said is that the "separate entities" principle is not enforced when it would yield a result "too flagrantly opposed to justice, convenience, or the interests of the Revenue": L.C.B. Gower, Modern Company Law (4th ed. 1979), at p. 112. [24] This Court has, however, been clear that lifting the corporate veil does not extend to circumstances where declining to do so would simply be unfair. [28] Mr. Justice Lowry went to this passage from B.G. Preeco I (Pacific Coast) Ltd. v. Bon Street Holdings Ltd. (1989), 60 D.L.R. (4th) 30, 37 B.C.L.R. (2d) 258 (C.A.): The concluding words in the chapter in L.C.B. Gower, Modern Company Law, 4th ed. (London: Stevens & Sons, 1979), from which Wilson J. quoted are these (at p. 138): The most that can be said is that the courts' policy is to lift the veil if they think that justice demands it and they are not constrained by contrary binding authority. The results in individual cases may be commendable, but it smacks of palm-tree justice rather than the application of legal rules. He concluded: [26] It follows that any argument to the effect this Court must disregard the separate legal personality of Westpark because a failure to do so will result in "unfairness" cannot stand. The strict recognition of Westpark as an entity distinct from its owners does not yield a result that comes anywhere near being flagrantly opposed to justice. A corporation and its shareholders are separate legal entities. While a narrowly held corporation or a corporation with a sole shareholder may appear to be the "alter ego" of its shareholders, the two entities remain legally distinct and must be treated as such. [29] The case of Mr. Badesha and 043 BC carries the general theme of unfairness or injustice to Mr. Badesha and his business associates. I would note, however, that legal advice could have detected this basic flaw in the structure of the transaction, and the parties were free to demand some evidence that the sellers were capable of selling what they purported to sell. This was not done. Further, at the end of the day, Mr. Badesha and his associates retained control over the Chilliwack property and Mr. Aujla and his associates retained control over the hotel property. This is not a circumstance crying for redress in law or equity. Conclusion [30] I conclude that the appeal should be allowed, the order awarding damages should be set aside, and the claim of Mr. Badesha and 043 BC should be dismissed with costs of the trial to the appellant, absent submissions as to why that should not be. "The Honourable Madam Justice Saunders" I AGREE: "The Honourable Mr. Justice Groberman" I AGREE: "The Honourable Mr. Justice Fitch"