In Elad Canada Operations Inc. v Rester Ontario Investments Inc., 2022 ONSC 2327, Justice Penny considered the role of an Independent Accountant retained by parties to a Share Purchase Agreement (“SPA”) to determine disputes relating to the calculation of post-closing purchase price adjustments. The Independent Accountant was to make a final determination, “acting as an expert and not an arbitrator”. In addition, the parties disputed the process for determination of the dispute after they had followed the information exchange protocol provided for in the SPA. The Vendor’s dispute notice disagreed with the Purchaser’s calculation of the adjustment and provided a narrative explanation. It argued that the Independent Accountant’s jurisdiction to make a final determination “based solely on the written submissions of the parties” referred to the information exchanged pursuant to the protocol and did not allow the Purchaser to provide “narrative” submissions in response to the Vendor’s dispute notice. Justice Penny disagreed and found that this was the first opportunity the Purchaser had to respond to the issues in dispute and that it was, “inconceivable that both the parties and the independent accountant would not reasonably expect that written submissions to the independent accountant would: a) identify the points in dispute; and b) set out each side’s position on those points” (para. 35). Once Justice Penny had interpreted the SPA, the issue of the correct calculation of the post-closing adjustment was to be decided by the Independent Accountant.
Applicant Elad Canada Operations Inc. (“the Vendor”) sold its shares and those of its subsidiaries to Respondent Rester Ontario Investments Inc, (“the Purchaser”) pursuant to the terms of a Share Purchase Agreement (“SPA”). The transaction closed on May 31, 2021.
The final purchase price of the transaction was subject to a post-closing adjustment based on the difference (if any) between the pre-closing estimated working capital and the actual post-closing working capital calculation as at the date of closing. In order to calculate that number, the parties were required to exchange information. Justice Penny described the five-step information exchange protocol as follows and dispute resolution mechanism as follows (para. 9):
(i) first, under section 2.4 of the SPA, Vendor was required (before closing) to prepare and deliver to the Purchaser unaudited statements which set forth “reasonably detailed calculations” of the Vendor’s good faith estimate of the working capital as at the closing date (the estimated closing working capital);
(ii) second, under section 2.8(1) of the SPA, Purchaser was required (within 60 days after closing) to prepare and deliver to the Vendor draft unaudited statements setting forth “reasonably detailed calculations” and “reasonable supporting documentation” of the working capital at the closing date (the draft closing working capital);
(iii) third, under section 2.8(2) of the SPA, the Vendor was required to review the draft closing working capital and, within 30 days, notify Purchaser in writing if it disputed any of the Purchaser’s working capital calculations (the dispute notice). The dispute notice was required to “contain a statement of the basis of each of” the Vendor’s objections to the Purchaser’s draft closing working capital;
(iv) fourth, under section 2.8(3) of the SPA, the parties were required to engage in good faith attempts to resolve the objections set out in the dispute notice within 20 days following its receipt; and
(v) fifth, under section 2.8(3) of the SPA, failing bilateral resolution of the issues raised in the dispute notice, the parties were required to submit the dispute for determination to the independent accountant, who would be “acting as expert and not as arbitrator” and who would be required to make a final determination within 30 days following the submission of the dispute.
The Vendor sent a dispute notice with respect to 20 items in the Purchaser’s calculation and the parties appointed an Independent Accountant, which was an accounting firm explicitly to be “acting as expert and not as arbitrator”. However, the parties could not agree on the procedure before the Independent Accountant. The issue was whether the Purchaser was permitted to make any additional narrative “written submissions” in response to the issues raised in the Vendor’s dispute notice. The issue turned on the interpretation of the dispute resolution clause, s. 2.8(3), which provided that:
“…Failing resolution of any disputed item raised by the Vendor in the Dispute Notice, the dispute will be submitted for determination to the “Independent Accountant”… Within thirty (30) Business Days following submission of the dispute to the Independent Accountant, the Independent Accountant shall make a final determination in accordance with the terms and definitions of this Agreement and, based solely on the written submissions of the Purchaser and the Vendor of the appropriate amount of each of the matters that remain in dispute… The determination of the Independent Accountant will be final and binding upon the Parties and will not be subject to appeal, absent manifest error. For the purposes hereof, the Independent Accountant is deemed to be acting as expert and not as arbitrator.”
It was the Vendor’s position that there was no scope for further written submissions beyond those described in the information exchange protocol.
The Purchaser’s position was that the language in the dispute resolution clause that the, “Independent Accountant shall make a final determination in accordance with the terms and definitions of this Agreement and, based solely on the written submissions of the Purchaser and the Vendor of the appropriate amount of each of the matters that remain in dispute, contemplated supplementary “narrative” submissions to explain the basis of the calculation which the Vendor had put in dispute and why the Vendor’s criticisms and counterproposals contained in the dispute notice were not correct or appropriate.
Both parties agreed that it would be open to the Independent Accountant to ask for further information/submissions once the dispute had been submitted for determination.
Justice Penny found that the application before him raised two questions: (1) whether this was a proper issue to be decided by the Independent Accountant, rather than the court; and (2) whether s. 2.8(3) allowed the parties to make any further narrative written submissions as part of the submission of the dispute to the Independent Accountant for determination.
The jurisdiction question – Justice Penny found that the role of the Independent Accountant was limited to determining the post-closing working capital adjustment, “in the context of how working capital is defined and to be calculated under the specific provisions of the SPA” (para. 15). However, the Independent Accountant did not have the power to interpret or make determinations on the meaning of the SPA. The Independent Accountant’s role was that of an expert (i.e. an expert in the calculation of working capital), not an arbitrator.
The substantive question – Both parties agreed that the applicable principles of contract interpretation were to be found in Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 53 at paras 47 and 57.
Justice Penny set out the Vendor’s position that no additional written submissions were permitted as follows:
“ In support of its position that only the materials exchanged between the parties under sections 2.4 and 2.8(1)-(2) (outlined in paras. 9(i) through (v) above) of the SPA can go to the independent accountant, [the Vendor] points to the words of section 2.8(1). Section 2.8(1) provides, “for the avoidance of all doubt”, that [the Purchaser] is not entitled to “change, amend, revise and/or supplement” its draft closing working capital:
…(A) the specific items included by the Purchaser in the Draft Closing Statements shall constitute the Purchaser’s final calculations thereof for purposes of this Section 2.8, and (B) other than arithmetic errors, the Purchaser shall not be permitted to change, amend, revise and/or supplement any of the specific items included in the Draft Closing Statements in connection with any dispute submitted for determination to the Independent Accountant pursuant to Section 2.8(3)…
 [The Vendor] argues that [the Purchaser] “chose not to provide adequate support for its Working Capital Calculation” and that it cannot “now, at the Dispute stage of the process, [seek] to augment its materials with written submissions”. Allowing the further submissions would “inappropriately permit [the Purchaser] to circumvent the limitations of section 2.8(1) to supplement its calculations in the Draft Closing Statements with legal or accounting submissions relating to the Dispute”.
Justice Penny disagreed with the Vendor for the following reasons.
First, he looked at the context of the agreement. The Purchaser’s draft closing date working capital calculation was extremely complicated and involved the review of financial and accounting records of dozens of active real estate projects under various stages, constantly evolving, of development. Further, when the Purchaser was preparing its draft working capital, it had no idea what might or might not be contentious or disputed so could not provide a full explanation. Its draft working capital calculation was on a 24-page spreadsheet with numbers only, and little commentary. In comparison, the Vendor’s dispute notice contained an introductory summary and 29 pages of narrative, with very few calculations. Much of the narrative focussed not on simple disagreements about mathematical calculations, but “normative assessments of the supporting information and arguments about what the parties ‘must have intended’ or why [the Purchaser’s] approach is wrong and [the Vendor’s] approach is right.”
Second, Justice Penny looked at the ordinary and grammatical meaning of the SPA. He found that the Purchaser was seeking an opportunity to respond to the issues raised for the first time in the Vendor’s dispute notice. While the SPA referred to the Purchaser’s draft closing working calculation as its “final calculations”, the Purchaser was not seeking to “change, amend and/or supplement” any of its calculations. Rather, it wanted an opportunity to respond, with narrative submissions, to the narrative submissions in the Vendor’s dispute notice. The Vendor argued that this outcome would have the effect of interpreting the same word (“submission”) in more than one way in the parties’ agreement, which is contrary to the rules of contract interpretation. Justice Penny disagreed and found that he was “imputing that common subtlety of meaning into the interpretation of a sophisticated document like the SPA is not at all fanciful or inconsistent with the principles of contractual arbitration” (para. 30). He distinguished between a “submission” of a dispute to the Independent Accountant (a verb) and the Independent Accountant’s jurisdiction to make a final determination “based solely on the written submissions” of the parties (a noun), both of which were found in the dispute resolution clause. Finally, Justice Penny did not accept the Vendor’s argument that allowing the Purchaser to make narrative submissions would turn the process into an arbitration. The parties clearly intended a short, focussed exercise of deciding a technical accounting question, not a trial, which the Purchaser was not seeking to do.
Therefore, Justice Penny concluded that the SPA permitted the Purchaser to respond briefly to the Vendor’s arguments and allowed both parties to join issue on the matters in dispute. However, to maintain proportionality and to achieve the underlying objective of a straightforward, summary, and brief process, he limited the Purchaser’s responding narrative submissions to a fixed number of pages. He also allowed the Vendor a brief reply briefly.
First, compare the language in this dispute resolution clause with that in a recent case note: Ontario – Arbitration or expert determination? Stay granted, referral to “Independent Accountant” – #620. Here, the dispute resolution clause stated expressly that the Independent Accountant was “acting as an expert and not an arbitrator”. Justice Penny interpreted this to mean that the Independent was considered “an expert in the calculation of working capital” (para. 15). This language assisted him in divining the parties’ intentions as expressed in their contract with respect to procedure and to determine that the contract interpretation issue was not within the jurisdiction of the Independent Accountant. He did not accept the Vendor’s argument that allowing the Purchaser to deliver “narrative” responding submissions would make the Independent Accountant a “pseudo- arbitrator”.
Second, it is interesting that the dispute resolution clause provided its own standard of review: “The determination of the Independent Accountant will be final and binding upon the Parties and will not be subject to appeal, absent manifest error.” The language “manifest error” is common in dispute resolution clauses providing for expert determination of post-closing purchase price adjustment disputes, rather than arbitration. See previous Case Notes for a discussion of the language: Ontario – court enforces post-dispute submission agreement to override earlier arbitration agreement and quash appeal attempt – #012 and Alberta – expert determination allows expert to decide questions of mixed fact and law – #121.
Third, for a good list of other terms that may be included in an expert determination dispute resolution clause, see J. Brian Casey, “Arbitration Law of Canada: Practice and Procedure” (3rd ed. 2017), s. 3.17.2.