Field v. Zien — [1963] SCR 632

Majority

conceded by the appellant that this sum was paid as excise THE duty on imports brought into Canada from the United States of America, and that it must be refunded.

Taschereau J

The appellant wil pay the costs in the Exchequer Court.

Judgment of the Court

J.:-I will refer to the parties to this litigation as Field, on the one hand, and Zien, on the other. Field had a business for the sale and distribution of welding supplies which he sold to Zien. One of the terms of the agreement of sale was that at the time of closing, the cash, accounts receivable and inventory would exceed the accounts payable by at least $109,865. At the closing date, the balance was less than this sum by 14,000 odd dollars. Zien, after being in possession of the business for eleven weeks, claimed the right to rescind. He secured this relief at trial and held it on appeal', Davey J.A. dissenting. Field now appeals to this Court.

The case was pleaded as one of misrepresentation on five grounds, all of which the trial judge rejected. He did, however, find another misrepresentation that was not pleaded. This, in turn, was rejected by the Court of Appeal. We are, therefore, in this position at this stage, that no misrepresentations have been proved and the argument addressed to us fails to persuade me that there was any error on this point. The Court of Appeal was asked to dismiss the action on this ground alone but all the judges held, correctly in my opinion, that it was still open to the trial judge and to them to consider the effect of clause 5.3 of the contract which I have summarized above. Clause 5.3 of the contract reads: 5.2 The contract took the form of a letter from Field to Zien giving him an option to buy. It is dated February 7, 1961, and recites the payment on that date of $1,000 for the option. Zien was to exercise the option before February 26, 1961, by written notice, together with a certified cheque for $24,000. He did this. On the exercise of the option a binding contract for sale and purchase was to come into existence. The price was $175,000, of which $25,000 had already been paid, and a further $100,000 was to be paid at the closing hour (8.30 a.m. March 1, 1961) and the balance of $50,000 four months after the closing hour. Zien paid the $100,000 on the due date and Field transferred the assets of the business. In mid May 1961 the parties discovered that the balance of current assets over current liabilities was approximately $14,000 short of the figure stated in paragraph 5.3. On May 19, 1961, Zien gave notice of rescission of the contract and tendered the business and assets back to the appellants. When the tender was rejected he issued his writ claiming rescission on the ground of misrepresentation, the return of his $125,000 and damages and indemnity and, in the alternative, damages for breach of contract. Misrepresentation has now disappeared as an issue in this litigation. All the judgments of the Court of Appeal were founded upon the effect of clause 5.3. This is a term of the contract which promises that on a certain date the working capital will be not less than a certain figure. Both the trial judge and the majority of the Court of Appeal have held that Zien is automatically entitled to rescission because the working capital did not reach that figure on that date. The trial judge said:

In my opinion the conclusion reached by the trial judge does not follow logically from the breach. In deciding whether the remedy is rescission, with all its consequences a. or damages, the emphasis should be on the seriousness of the defective performance in the particular contract. Nothing in the way of clarity is gained by attaching a label to the clause. The case for Zien, once the element of misrepresentation goes, is that clause 5.3 is a promise that during the period in question the business would show a profitable operation from September 30, 1960, the date of the last balance sheet, to the date of closing. I cannot draw this inference from the clause. Zien knew that there had been material changes in the business since September 30, 1960, such as:

(a) the occupation of larger premises;

(b) the taking on of new lines and the expansion of old lines;

(d) reduction in cartage income;

(e) the setting up of a repair shop; and

(f) an increase in inventory.

These changes involved non-recurring capital expenses of some $11,000 which were involved in the figure stated in clause 5.3, increases in regular operating expenses and nonrecurring expenses in re-organizing and moving the business. All these factors contributed to the deficiency of $14,000 and might have been foreseen by either party. Indeed, the 11earned trial judge says that the planned expansion ought to have made it apparent to the accountants of both parties that literal compliance with the clause would be impossible.

In these circumstances and with the last $50,000 of the purchase price made payable four months after closing, one cannot gather any intention that the parties contemplated that a breach such as the one in question here would give a right of rescission. A breach of this clause might be trivial or serious. I am not saying that this breach is trivial but one must weigh its commercial importance and, having regard to the amount of the shortage, the ascertainable W. probability of its occurrence at the time of the formation of the contract, the amount involved in the contract and the holdback of the final payment of $50,000 for four months, my conclusion is that the case is one for damages and not rescission, and that to follow this course is not to compel Zien to accept something which differs in an important way from that which he contracted to buy. If this $14,000 is put into the company or if Zien pays $14,000 less, he is fully compensated. If Zien had wanted rescission for any deficiency in this account he could have stipulated for it and it would have been enforced.

For these reasons I would follow the dissenting judgment of Davey J.A. and allow the appeal.

There is a balance of $50,000 owing to Field, less the sum of $14,134.07. This is the subject of a counter-claim. In view of the fact that the counter-claim contains other items and the appellant asks that the counter-claim as a whole be referred back to the trial judge, I would limit the judgment of this Court to the following points:

(a) The appeal is allowed and the contract declared valid and binding.

(b) Judgment for the balance of the purchase price, namely, $50,000, less the damages of $14,134.07. If this sum is not accepted, it must be dealt with on the reference back to the judge.

(d) The appellants should have their costs throughout. Appeal allowed with costs throughout.