COURT OF APPEAL FOR ONTARIO
CITATION: Fuller v. Aphria Inc., 2020 ONCA 403
DATE: 20200623
DOCKET: C67236
Tulloch, van Rensburg and Zarnett JJ.A.
BETWEEN
Jon-Paul Fuller and JPF Komon Kaisha Inc.
Applicants (Appellants)
and
Aphria Inc. and Pure Natures Wellness Inc. d/b/a Aphria
Respondents (Respondents)
Earl A. Cherniak, Q.C., Jason M. Squire and Lindsay A. Woods, for the appellants
Eric S. Block, Jacqueline Cole and Patrick Healy, for the respondents
Heard: February 6, 2020
On appeal from the order of Justice Laurence A. Pattillo of the Superior Court of Justice, dated June 21, 2019, with reasons reported at 2019 ONSC 3778, 147 O.R. (3d) 106.
Zarnett J.A.:
INTRODUCTION
[1] The appellants, Jon-Paul Fuller (“Fuller”) and his personal company, JPF Komon Kaisha Inc. (“JPF”) sought, by application, damages for the failure of the respondent, Aphria Inc. (“Aphria”), to honour options to acquire Aphria common shares (the “Options”). The appellants claimed that the Options, granted to JPF in a Consulting Agreement dated June 2, 2014, and confirmed in a subsequently-executed Stock Option Agreement, were specified to have an exercise period of five yearscontinuing into 2019even though the Consulting Agreement itself had a two-year term that expired in June 2016. The appellants claimed that Aphria breached its contractual obligations when it rejected the appellants’ exercise of the Options in December 2017 as out of time.
[2] The application was dismissed. The application judge agreed with Aphria’s position that the Options had ceased to be exercisable before they were exercised. He held that the Options were subject to a Stock Option Plan (the “Option Plan”) that was incorporated by reference into the Consulting Agreement and the Stock Option Agreement. He gave effect to a term of the Option Plan that provided that any options held by a consultant cease to be exercisable six months after the consulting arrangement ends, rather than a provision, in both the Consulting Agreement and the Stock Option Agreement, that the Options had a five-year exercise period.
[3] The application judge refused to grant the appellants’ alternative claim for relief from forfeiture in the event the Options were found to have been exercised late. He found that discretionary equitable relief was unavailable as Fuller had breached a Non-Competition Agreement with Aphria. He assessed JPF’s loss from being deprived of the benefit of the Options at $2,820,000, but based on his primary findings, did not award any damages.
[4] The appellants argue that the application judge erred in his interpretation of the relevant agreements that governed the Options. They also argue that, even if the Options were exercised late, relief from forfeiture should have been granted. If successful on either of these grounds, they argue that the application judge erred in not assessing and awarding damages in the amount of $4,480,000.
[5] For the reasons that follow, I conclude that the application judge erred in his interpretation of the agreements in a manner that justifies appellate intervention.
[6] When properly interpreted, the agreements provide that the applicable exercise period is the one that was specified when the Options were granted by the Consulting Agreement. By the terms of the Option Plan, the provision in it relied on by Aphria is inapplicable where, as here, it is wholly inconsistent with the exercise period set in the original grant of the Options. As a result, the Options had not expired before they were exercised, and Aphria was not justified in rejecting their exercise as late. In light of this conclusion, it is unnecessary to deal with the issue of whether relief from forfeiture should have been granted.
[7] I would not interfere with the application judge’s assessment of damages; he made no reversible error in that determination.
[8] Accordingly, I would allow the appeal to the extent of ordering that JPF recover damages from Aphria in the amount of $2,820,000, for Aphria’s failure to honour the exercise of the Options.
FACTS
(1) Background
[9] The dispute between the parties arose out of the business relationship between Fuller and JPF, on the one hand, and Aphria on the other. Aphria was formerly known as Pure Natures Wellness Inc.[1]
[10] Aphria was formed in 2012 as a medical marihuana business venture. Fuller was one of Aphria’s three founders. During Aphria’s formative period, while it was seeking required licences for a medical marihuana business from Health Canada, Fuller held 20% of its shares. He also served as Aphria’s Chief Executive Officer (“CEO”) and in other roles required by Health Canada.
[11] By the spring of 2014, Aphria had obtained one of the licences required for its business and was expecting the imminent receipt of another (the “Final Licence”). Aphria began working toward becoming a publicly-traded corporation. The majority owners were of the view that a new CEO was necessary for that to occur. This was the impetus for a negotiated change to Aphria’s relationship with Fuller, which both parties referred to as Fuller’s “exit” from Aphria. The terms of the exit were reflected in three agreements dated June 2, 2014: a Share Purchase Agreement, a Consulting Agreement, and a Non-Competition Agreement.
[12] Under the Share Purchase Agreement, Fuller sold his 20% shareholding in Aphria to the other co-founders for $3 million.
[13] Under the Non-Competition Agreement, Fuller agreed that he would not, for a period of two years, carry on, engage in, or have any financial or other interest, directly or indirectly, in any activity in North America in competition with the business of Aphria.
[14] Under the Consulting Agreement, JPF and Fuller agreed to provide consulting services to Aphria for a term of two years. This included assisting Aphria in obtaining the Final License and, if requested, assisting in other tasks related to the process of going public. As part of the consideration for agreeing to do so, JPF was granted the Options, namely, 200,000 options to purchase common shares in Aphria. The provisions of the Consulting Agreement relating to these Options are central to the disposition of this appeal.
(2) The Consulting Agreement’s Grant of Options
[15] Schedule 2.2 to the Consulting Agreement, titled “Consulting Fees”, provided that the compensation for the appellants’ consulting services included a grant to JPF of 200,000 Options to purchase common shares of Aphria at $0.60 per share. The Options were to issue immediately upon Aphria’s receipt of the Final Licence. The Options had an expiry date that was to be five years after Aphria completed the contemplated transaction (known as the “RTO”) that would result in it becoming a public issuer. After describing the Options this way, Schedule 2.2 went on to state that the Options “shall be subject to the terms and conditions of any option plan implemented by [Aphria]”.
[16] The Consulting Agreement provided, in Section 4.1, that unless terminated in accordance with Section 4.2, the term of the Consulting Agreement would be two years, so that it would end on June 2, 2016. The Consulting Agreement contained no provision for the renewal or extension of its two-year term.
[17] Section 4.2 of the Consulting Agreement provided for certain events that could result in a shortening of the term of the Consulting Agreement, that is, in a termination before the end of the two-year term. The parties could mutually agree to end the Consulting Agreement; Aphria could terminate it without notice for certain breaches or failures of performance by the appellants; and JPF could terminate it on 60 days’ written notice.
[18] Section 4.3 of the Consulting Agreement provided that, in the event of an early termination of the Consulting Agreement under Section 4.2, all unexercised options were immediately cancelled and “of no force and effect”.
[19] Section 4.3 of the Consulting Agreement only applied in the event of an early termination of the Consulting Agreement. Nothing in the Consulting Agreement provided for the cancellation of the Options upon, or tied in any way to, the expiry of the two-year term under Section 4.1 of the Consulting Agreement.
(3) The RTO, The Final Licence, and the Option Plan
[20] On December 1 and 2, 2014, three events occurred that were contemplated by the grant of the Options in the Consulting Agreement. On December 1, the RTO was completed, which started the five-year term of the Options described in the Consulting Agreement. Also, on December 1, Aphria implemented an Option Plan. On December 2, Aphria received its Final Licence, resulting in the issuance (which the parties and application judge treated as synonymous with the vesting) of the Options.
[21] The provisions of the Option Plan are also central to the disposition of this appeal.
(4) The Provisions of the Option Plan
[22] The Option Plan described its purpose as advancing the interests of Aphria in a number of ways: by providing Eligible Persons (directors, officers, employees or consultants) with additional incentive; by encouraging Eligible Persons’ stock ownership and their interest in the success of, and desire to remain with, Aphria; and by attracting new directors, officers and employees.
[23] The Option Plan gave Aphria’s Board of Directors the power to administer and operate the Option Plan, as well as the power to grant options under it and provide for their exercise. It provided for the Board to be able to amend the Option Plan without shareholder approval for certain matters and with shareholder approval for other matters. It allowed the Board to delegate matters pertaining to the Option Plan to a Committee or an individual Board member, all of whom would be the Board for the purposes of the Option Plan.
[24] The Option Plan provided that the securities that could be acquired under the Option Plan were common shares of Aphria. It limited the total number of shares that could be acquired and prescribed what would occur if there were a change in the number of common shares because of a stock dividend, split, or other corporate change. Among other things, it dealt with regulatory compliance, tax withholdings, and how Aphria would use the payments it would receive upon the exercise of options.
[25] Of particular relevance to this appeal are the provisions of the Option Plan about the period of time during which options could be exercised, namely Section 2.3(a) and Section 2.3(g):
2.3 Exercise of Options
(a) The period during which an Option may be exercised (the “Option Period”) shall be determined by the Board at the time the Option is granted, subject to any vesting limitations that may be imposed by the Board in its sole and unfettered discretion at the time such Option is granted, provided that:
(i) no Option shall be exercisable for a period exceeding ten (10) years from the date the Option is granted;
(ii) the Option Period shall be automatically reduced in accordance with Section 2.3(f) below upon the occurrence of any of the events referred to therein; and
(iii) no Option in respect of which Shareholder approval is required under the rules of the Stock Exchange shall be exercisable until such time as such Option has been approved by the Shareholders.
…
(g) Subject to Section 2.3(a) and except as otherwise determined by the Board:
(i) if a Participant who is a non-executive director of the Corporation ceases to be in Eligible Person as a result of his or her retirement from the Board other than for Cause, each unvested Option held by such Participant shall automatically vest on the date of his or her retirement from the Board, and thereafter each vested Option held by such Participant will cease to be exercisable on the earlier of the original Expiry Date of the Option and six (6) months after the date of his or her retirement from the Board;
(ii) if the Board service, consulting relationship, or employment of a Participant with the Corporation or a Subsidiary Company is terminated for Cause, each vested and unvested Option held by the Participant will automatically terminate and become void on the Termination Date;
(iii) if a Participant dies, the legal representative of the Participant may exercise the Participant’s vested Options for a period until the earlier of the original Expiry Date of the Option and 12 months after the date of the Participant’s death, but only to the extent the Options were by their terms exercisable on the date of death. For greater certainty, all unvested Options held by a Participant who dies shall terminate and become void on the date of death of such Participant;
(iv) if a Participant ceases to be an Eligible Person for any reason whatsoever other than in (i) to (iii) above, each vested Option held by the Participant will cease to be exercisable on the earlier of the original Expiry Date of the Option and six (6) months after the Termination Date; provided that all unvested Options held by such Participant shall automatically terminate and become void on the Termination Date of such Participant. Without limitation, and for greater certainty only, this provision will apply regardless of whether the Participant received compensation in respect of dismissal or was entitled to a period of notice of termination which would otherwise have permitted a greater portion of the Option to vest with the Participant; and
(v) notwithstanding any provision in this Section 2.3(g) to the contrary, if a Participant who is an officer of the Corporation ceases to be an Eligible Person as a result of such officer’s termination without Cause or resignation for Good Reason, any unvested Options as of the date of termination will be accelerated and become immediately fully vested as of such date. Such options will be exercisable by the officer for a period of up to one year following the date of termination.
[26] To summarize, Section 2.3(a) provided that the period during which an option could be exercised would be determined by Aphria’s Board at the time the option was granted. This was subject to certain exceptions, including that no option could be exercisable for more than ten years, and that the exercise period was to be automatically reduced upon the occurrence of events listed in Section 2.3(f). Section 2.3(f) of the Option Plan did not, however, provide for any such events or reductions.
[27] Section 2.3(g) of the Option Plan provided that, subject to Section 2.3(a) and except as otherwise determined by the Board, any vested option would cease to be exercisable, at the latest: (i) 6 months after an option holder who was a non- executive director resigned: (ii) immediately on the termination, for cause, of an Eligible Person from their Board service, employment or consulting relationship; (iii) 12 months after the death of an option holder, and (iv) 6 months after an option holder ceased to be an “Eligible Person” “for any reason other than in (i) to (iii) above”. Section 2.3(g)(iv) is the provision relied on by Aphria to which the application judge gave effect.
(5) The Stock Option Agreement
[28] The third document of central relevance to the appeal is a Stock Option Agreement that was executed by Aphria and Fuller. It was dated June 2, 2014, but the application judge, relying on Fuller’s evidence, found that it was signed on December 9, 2014, which was after the Option Plan had come into existence.
[29] The Stock Option Agreement recited that 200,000 Options, with an exercise price of $0.60, had been granted under the Option Plan, subject to the terms and conditions of the Option Plan. It contained Fuller’s acknowledgment that he had read and understood the Option Plan. It described the Options as having been granted on June 2, 2014 and having an “Expiry Date” five years after that date, namely June 2, 2019. It provided a form of notice to be used by the option holder to exercise the Options in accordance with Section 2.3 of the Option Plan “at any time and from time to time prior [to] the Expiry Date”.
[30] Although the Stock Option Agreement described Fuller, rather than JPF, as the option holder, and described an expiry date that was 5 years after the grant of the Options in the Consulting Agreement, rather than 5 years after the RTO, neither party ascribed any material significance to this, nor did the application judge. The parties, and the application judge, treated the document as dealing with the same grant of Options as did the Consulting Agreement.
(6) The End of the Consulting Agreement
[31] The Consulting Agreement’s two-year term ended on June 2, 2016 under Section 4.1 of that agreement. It was not the subject of an early termination under Section 4.2.
[32] It is not in dispute that, as a result of the Consulting Agreement having come to an end on June 2, 2016, the appellants, on that date, each ceased to be a consultant, and therefore an Eligible Person, as defined in the Option Plan.
(7) The Attempt to Exercise the Options and its Rejection
[33] On December 6, 2017, JPF sought to exercise the 200,000 Options. It provided Aphria with the form of notice attached as a Schedule to the Stock Option Agreement and a banker’s draft payable to Aphria in the sum of $120,000.
[34] Aphria rejected the exercise on the basis that the Options had expired on December 2, 2016, that is, six months after the Consulting Agreement ended and the appellants each ceased to be a consultant, and therefore an Eligible Person, as described in the Option Plan.
(8) Aphria’s Stock Price
[35] On December 6, 2017, when JPF attempted to exercise the Options, the closing price of Aphria’s shares was $13.30 per share. Between December 6, 2017 and January 9, 2018, Aphria’s share price rose to as high as $24.75 per share, falling back to the $20 to $23 per share range in the days after. The price declined from those levels toward the end of January. On March 29, 2018, Aphria’s shares closed at $11.49 per share. On May 7, 2018, the date the application was commenced, they closed at $10.30 per share.
[36] Fuller gave evidence that if Aphria had honoured the exercise of the Options, he would have caused the sale of the shares acquired immediately after the peak in prices. An expert witness provided a report on behalf of the appellants that calculated, assuming disposition prices of between $20 and $23 per share, that JPF would have received net proceeds of between $3.88 million to $4.48 million from the exercise of the Options and subsequent resale of the acquired shares.
(9) The Lease and the Non-Competition Allegation
[37] Aphria rejected the exercise of the Options at the time it was attempted on the sole basis that the exercise was late. During the application, Aphria also raised the fact that a corporation of which Fuller was the sole director and president had, in April 2016, rented a greenhouse facility to a tenant who intended to use it to produce medical marihuana. Before this court, that fact was relied on as it pertained to whether the appellants’ alternative request for relief from forfeiture should have been granted.
THE APPLICATION JUDGE’S DECISION
[38] The appellants sought damages for Aphria’s refusal to honour the exercise of the Options, a refusal that deprived JPF of the opportunity to sell the shares it would have acquired. They asserted that the exercise of the Options on December 6, 2017 was timely, as the Options were granted for a five-year term and could be exercised well into 2019.
[39] Aphria took the position that the Options expired before they were exercised, namely on December 2, 2016, which was six months after the end of the term of the Consulting Agreement.
[40] The application judge agreed with Aphria’s position.
[41] The application judge approached the issue as a matter of contractual interpretation. He referred generally to the principles summarized in the Supreme Court of Canada’s decision in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, and this court’s decision in Weyerhaeuser Company Limited v. Ontario (Attorney General), 2017 ONCA 1007, 77 B.L.R. (5th) 175, at paras. 64-68, rev’d Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60.[2] He then referred to the related contracts principle, citing Salah v. Timothy's Coffees of the World Inc., 2010 ONCA 673, 268 O.A.C. 279, at para. 16, for the proposition that where more than one contract is entered into as part of an overall transaction, the contracts must be read in light of each other to achieve interpretive accuracy and give effect to the parties’ intentions. After citing that principle, the application judge stated that the Consulting Agreement, Option Plan, and Stock Option Agreement are “connected, inter-related instruments” to be interpreted in light of each other. He then stated that the interrelationship here was achieved through the technique of incorporation by reference, which guides the interpretation, citing Invescor Restaurants Inc. v. 3574423 Canada Inc., 2012 ONCA 387, 292 O.A.C. 322, at para. 19.
[42] Noting that the Consulting Agreement said that the Options would be subject to the Option Plan, and that the Stock Option Agreement stated that the Options had been granted subject to the terms of the Option Plan, the application judge concluded that the grant of Options in the Consulting Agreement and the Stock Option Agreement incorporated by reference the terms and conditions of the Option Plan: at paras. 41, 44 and 47.
[43] The application judge found that Section 2.3(g)(iv) of the Option Plan applied to the Options. As noted above, Section 2.3(g)(iv) provided that options cease to be exercisable six months after a person ceases to be an Eligible Person “for any reason” other than a reason referred to in Section 2.3(i) to (iii) of the Option Plan, (none of which were germane here). Since the appellants ceased to be Eligible Persons upon the expiry of the term of the Consulting Agreement, the Options ceased to be exercisable on December 2, 2016: at paras. 48-49 and 56.
[44] The application judge rejected the argument that the Consulting Agreement or the Stock Option Agreement represented an exercise by the Board of its power under the Option Plan to grant options exercisable at any time within their five-year term or to alter the period within which Section 2.3(g)(iv) of the Option Plan said they could be exercised: at paras. 50-55. According to the application judge, Aphria therefore did not breach its contract with the appellants when it rejected the exercise of the Options: at para. 56.
[45] The application judge also rejected the argument that the appellants should be granted relief from forfeiture arising from a late exercise of the Options. In April 2016, when the corporation of which Fuller was sole director and president rented a greenhouse facility to a tenant who intended to use it to produce medical marihuana, he was still subject to the Non-Competition Agreement (which ran until June 2016). Although the arrangements with the tenant specified that the landlord had no interest in the plants or products to be produced by the tenant, the application judge concluded that Fuller’s conduct was a breach of the Non-Competition Agreement. That meant that Fuller lacked “clean hands” and the appellants could not obtain equitable relief: at paras. 68-73.
[46] The application judge doubted whether, even if he had found a breach of contract, he could award damages on an application. He went on, however, to assess the damages. He expressed “serious concerns” about Fuller’s evidence that he would have caused the shares to be sold “around the peak of the market”. The application judge observed that, contrary to what the appellants’ expert’s calculation of damages assumed, it would be unrealistic to expect that a person would have the foresight to sell at the peak of the market. He accepted the approach that Aphria submitted, namely, that JPF’s losses should be assessed at $2,820,000 “based on the medium share price from the purported exercise date to the commencement of the application of $14.70 a share, less the exercise price”: at paras. 81-82.
ISSUES
[47] The issues on appeal are: (1) whether the exercise of the Options was timely; (2) whether the appellants should obtain relief from forfeiture in the event that the exercise of the Options was not timely; and (3) how damages should be assessed.
ANALYSIS
(1) Was the Exercise of the Options Timely?
(a) The Standard of Review
[48] As the application judge correctly noted, the issue of whether the Options had expired at the time of their exercise is a question of contractual interpretation. The interpretation of a non-standard form contract by a judge at first instance is generally subject to a deferential standard of review on appeal, as it involves matters of mixed fact and law: Sattva, at paras. 50-52. It is “an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix”: Sattva, at para. 50.
[49] However, where errors made in the course of contractual interpretation give rise to extricable questions of law, deference will not be owed. Such legal errors include the application of an incorrect principle, the failure to consider a required element of a legal test, or a failure to consider a relevant factor: Sattva, at para. 53. Appellate courts should be cautious before characterizing something as an extricable question of law in disputes over contractual interpretation: Sattva, at para. 54. Nevertheless, the failure to apply the appropriate principles of contractual interpretation, especially where it results in an interpretation inconsistent with the wording of the relevant provisions, can give rise to an extricable error of law and displace deference: MacDonald v. Chicago Title Insurance Company of Canada, 2015 ONCA 842, 127 O.R. (3d) 663, leave to appeal refused, [2016] S.C.C.A. No. 39, at paras. 64-66, 72.
[50] In Resolute FP, the majority of the Supreme Court agreed with the dissenting reasons in this court of Laskin J.A. in concluding that there were reversible errors in the motion judge’s interpretation of the scope of a contractual indemnity: Resolute FP, at para. 26. Laskin J.A. found the following errors to justify appellate intervention: palpable and overriding errors of fact that affect the interpretation; a failure to properly, accurately, and fully consider the context in which a contract was made, which is an error of law; and a failure to consider the contract as a whole, by focussing on one provision without giving proper consideration to other relevant provisions, which is also an error of law: Weyerhaeuser, at para. 211 (Laskin J.A. dissenting reasons); Resolute FP, at paras. 26-27, 30 and 32-34.
(b) The Parties’ Positions
[51] The parties agree that the Option Plan was incorporated by reference into the Consulting Agreement and the Stock Option Agreement, and that all three agreements must be interpreted in light of each other, as the application judge found. The difference between the parties is in relation to which of two apparently inconsistent provisions in their contractual arrangement governs.
[52] The appellants rely on the provisions of the Consulting Agreement and Stock Option Agreement that defined the term of the Options as five years from their vesting or grant, and in the case of the latter agreement, confirmed that the Options could be exercised at any time before their five-year Expiry Date. These provisions, if applicable, would mean that the exercise of the Options in December 2017 was timely.
[53] Aphria relies on an apparently conflicting term: Section 2.3(g)(iv) of the Option Plan. It provides that options are not exercisable more than six months after an option holder ceases to be an Eligible Person (a term that includes a consultant) for any reason other than resignation, death, or termination for cause. Aphria maintains that this provision applies when a consulting arrangement ends due to the expiry of its defined term. As the consulting arrangement here had a two-year term that ended in June 2016, this provision means that the December 2017 exercise, even though within five years from the grant and vesting of the Options, was out of time and invalid.
[54] The appellants argue that the application judge’s selection of Section 2.3(g)(iv) of the Option Plan as the provision that governed was flawed for two reasons. First, they argue that, as a matter of law, when terms of one document (here the Option Plan) are incorporated into a “host” agreement (here the Consulting Agreement and the Stock Option Agreement), the terms of the host agreement prevail if they conflict with the terms of the incorporated document. They say that the application judge erred by treating a term of the incorporated document as prevailing in the event of an inconsistency. Second, the appellants argue that the application judge erred in failing to find that the Consulting Agreement and the Stock Option Agreement, each of which were signed by a Board member, overrode Section 2.3(g)(iv) of the Option Plan for the purposes of the appellants’ Options.
[55] Aphria points to the language of the Consulting Agreement and the Stock Option Agreement which makes the Options “subject to” the terms and conditions of the Option Plan, thus justifying applying Section 2.3(g)(iv) as the prevailing provision. Aphria also argues that there was no error in the application judge’s finding that the Board did not override the applicability of Section 2.3(g)(iv) of the Option Plan for the purposes of the appellants’ Options.
(c) The Problem of Apparently Inconsistent Terms
[56] Underlying each side’s position is the argument that acceptance of the opposing position would render one of the terms of the agreements ineffective. A bedrock principle of contractual interpretation is that the text of a written agreement is to be read “as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective”: Ventas Inc. v. Sunrise Senior Living Real Estate Trust, 2007 ONCA 205, 85 O.R. (3d) 254, at para. 24(a).
[57] In some cases, however, the application of that principle can be especially challenging. This occurs when the parties have included apparently inconsistent provisions in their agreement. An inconsistent term is one that contradicts another or is in conflict with it to such an extent that effect cannot be given to both: H.G. Beale, ed., Chitty on Contracts, 32nd ed. (London UK: Sweet & Maxwell, 2015) vol. 1, at 13-080.
[58] Here, effect cannot be given to both a term that provides that the Options, granted in a two-year non-renewable Consulting Agreement, can be exercised for five years, and a term that provides that the Options cannot be exercised more than six months after the end of a consulting arrangement. To the same question, Can these Options be exercised more than 2.5 years after they were granted?’, one provision would say yes’ while the other would say no’. The terms are apparently inconsistent.
[59] Where a contract contains terms that are actually inconsistent, in the sense that there is no proper interpretation which can reconcile them, a court may have to rule the “repugnant” term ineffective: Chitty on Contracts, at 13-080; BG Checo International Ltd. v. British Columbia Hydro and Power Authority, [1993] 1 S.C.R. 12, at p. 24. But this is a rule of last resort. Where a contract contains apparently inconsistent terms, the court must first endeavour to reconcile them. This requires applying principles of contractual interpretation to discern which term the parties intended apply to the situation at issue, and which term ought to be read in such a way as to be inapplicable, thereby removing the apparent inconsistency. As the Supreme Court stated in BG Checo, “Only if an interpretation giving reasonable consistency to the terms in question cannot be found will the court rule one clause or the other ineffective”: at p. 24.
[60] In reconciling apparent inconsistencies, the court favours terms that the parties appear to have tailored to their specific situation. In BG Checo, for example, the Supreme Court provided the following example of reconciling apparently conflicting terms: “…general terms of a contract will be seen to be qualified by specific termsor, to put it another way, where there is an apparent conflict between a general term and a specific term, the terms may be reconciled by taking the parties to have intended the scope of the general term to not extend to the subject-matter of the specific term”: at p. 24.
[61] Similarly, the ordinary rule for reconciling an apparent conflict between words parties have added to a pre-printed form of contract, and a provision of the pre-printed form itself, is to give the added words greater effect. They are the immediate language that the parties selected to apply to their specific situation, as opposed to the pre-printed form’s general formula meant for use more broadly: Chitty on Contracts, at 13-072.
[62] However, interpretive assumptions such as these may be displaced when the parties have expressly agreed which provision has priority in the event of a conflict: see, for example, Chitty on Contracts, at 13-072.
(d) Apparent Inconsistency Arising from Incorporation by Reference
[63] This case involves an apparent inconsistency between provisions in the Consulting Agreement and Stock Option Agreement about the period during which the options could be exercised, and a provision on the same topic incorporated by reference from the Option Plan. The appellants argue for the application of an interpretive assumption that has some similarity to the principles described above. They argue that, contrary to the approach of the application judge, the terms originally expressed, i.e. those in the Consulting Agreement or Stock Option Agreement, rather than those incorporated by reference from the Option Plan, must always be given priority. The appellants rely on the following passage from Spina v. Shoppers Drug Mart Inc., 2012 ONSC 5563, at paras. 141 to 142:
Where contracting parties expressly incorporate terms into a contract, the court must make two interrelated interpretative decisions. First, because the incorporated language will be read into the contract, the court must determine the extent of the incorporation by reference. Second, the court must eliminate wording that is inconsistent or insensible with the pre-existing language of the contract. See: K. Lewiston, The Interpretation of Contracts, (5th ed) (London: Sweet & Maxwell, 2011), pp. 105, 505-506; H.G. Beale, Chitty on Contracts (30th ed.) (London: Sweet & Maxwell, 2008), para. 12-079; Tradigrain S.A. v. King Diamond Shipping SA, [2000] 2 Lloyd’s Rep. 319.
[142] When terms would be incorporated by reference into a contract, the terms of the host contract prevail over any inconsistent terms incorporated by reference: Sabah Flour and Feed Mills Sdn Bhd v. Comfez, [1988] 2 Lloyd’s Rep. 18 (C.A.); Modern Building Wales Ltd. v. Limmer and Trinidad Co. Ltd., [1975] 1 W.L.R. 1281 (C.A.); Lac La Ronge Indian Band v. Dallas Contracting Ltd., 2001 SKQB 135 at para. 83; Pass Creek Enterprises Ltd. v. Kootenay Custom Log Sort Ltd. 2003 BCCA 580 at paras 15-17.
[64] An interpretive approach that views the terms of a “host” contract as a better reflection of the specific parties’ intent than an apparently inconsistent term incorporated by reference, may be appropriate in cases where the incorporation by reference is effected by language that does not give the incorporated terms priority. However, I do not agree that the approach would necessarily apply if the incorporation by reference is effected by language that indicates the incorporated provisions have priority over, or at least are not all automatically subordinate to, those originally expressed. There can be good reasons why parties might choose to incorporate terms and specify that they wish those incorporated terms to govern in the event of a conflict with the host contract’s provisions.
[65] Unlike the cases cited in Spina, the “host” contracts in this casethe Consulting Agreement and the Stock Option Agreementboth used the phrase “subject to” when incorporating provisions of the Option Plan. They said the Options were “subject to” the Option Plan. To simply assert that the incorporated terms are automatically subordinate whenever they apparently conflict with the host contracts does not, in my view, account for that language. Accordingly, I do not view the appellants’ argument based on Spina as automatically resolving the issue in their favour.
(e) Was Section 2.3(g)(iv) Applicable to the Options?
[66] I agree, however, with the appellants’ second submission. Accepting that the Options were “subject to” the Option Plan does not automatically resolve the issue in favour of Aphria. The application judge erred when he rejected the argument that Section 2.3(g)(iv) of the Option Plan was rendered inapplicable to the Options under terms of the Option Plan that contemplated that very result.
[67] In summary, the Option Plan’s terms not only contemplated that options could be granted with an exercise period different from and unaffected by Section 2.3(g)(iv), but it gave priority to the exercise period in such a grant. In other words, although the Consulting Agreement’s grant of Options, and the Stock Option Agreement’s confirmation of the terms of that grant, were both “subject to” the Option Plan, on the question of the exercise period, the Option Plan referred back to the terms of the grant and gave priority to those terms over any in Section 2.3(g). The terms on which the appellants’ Options were granted, as they pertained to the exercise period, are entirely inconsistent with the application of Section 2.3(g)(iv). The Option Plan itself requires in such a case that the terms on which the Options were granted be given effect in priority to those in Section 2.3(g)(iv).
[68] The starting point in the analysis is Section 2.3(a) of the Option Plan, which provides that the Board shall determine, at the time options are granted, the period during which an option may be exercised. It is not controversial that under that provision, the Board may, when an option is granted, set a period during which the option could be exercised that is different than that in Section 2.3(g), including 2.3(g)(iv). When that occurs, Section 2.3(g)(iv) is inapplicable. Section 2.3(g) is itself prefaced by the phrase: “Subject to Section 2.3(a) and except as otherwise determined by the Board”.
[69] The application judge declined to find that Section 2.3(g)(iv) had been made inapplicable to the appellants’ Options. He briefly expressed, at para. 55 of his reasons, why he came to this conclusion:
The Options clearly incorporate the terms and conditions of the [Option] Plan. While the [Option] Plan permits the Board to alter the terms of the Options, including the period during which they may be exercised, there is nothing in the agreements to indicate that the Board did that in respect of the Options. Nor is there any evidence that the Board authorized its member who signed the Stock Option Agreement to vary the terms and conditions of the [Option] Plan and specifically s. 2.3(g)(iv).
[70] With respect, the application judge made errors of law that tainted the conclusion he reached, resulting in an interpretation that is inconsistent with the wording of the relevant agreements.
[71] Although the application judge appears to have focussed on whether the Board had altered the terms of the Options or the Option Plan to make Section 2.3(g)(iv) inapplicable, asking the question this way puts the cart before the horse. The correct starting point for the inquiry is not a search for some separate Board action altering terms, but the terms of the grant of the Options themselves. This is the inquiry required under Section 2.3(a) of the Option Plan. Only a consideration of those terms can answer the question before uswhether the exercise period that was specified when the Options were created made Section 2.3(g)(iv) inapplicable.
[72] Aphria argues that the terms of the grant of the Options in the Consulting Agreement could not make Section 2.3(g)(iv) of the Option Plan inapplicable because the latter did not exist when the Consulting Agreement was made. I do not accept that argument. The Options in this case must be treated as having been validly granted, as contemplated by Section 2.3(a) of the Option Plan, even if their grant pre-dated the Option Plan. The parties’ agreement, that the Options were subject to the Option Plan, can only make sense if the grant of the Options is treated as having been made as contemplated by the Option Plan. Indeed, the Stock Option Agreement expressly described the Options as having been granted “under” the Option Plan. Under the Option Plan, it is the Board that grants options. The parties must be taken to have agreed that the Options were granted by the Board, the only body that could have granted them. Aphria did not take the position that the Options were not validly created, or that any term of the Options had been agreed to without authority.
[73] As Section 2.3(a) of the Option Plan mandates that the first consideration in determining the exercise period of options is to look at what the exercise period was when the options were granted, a consideration of all of the terms of the grant is required. Interpreting a contract requires that it be read as a whole: Ventas, at para. 24(a). Here, the purpose of considering the terms of the appellants’ Options is to determine whether they were consistent with the operation of Section 2.3(g)(iv), or so inconsistent with Section 2.3(g)(iv) that giving priority to the exercise period set at the time of the grant necessarily requires Section 2.3(g)(iv) to be inapplicable.
[74] In this case, as described below, the application judge failed to consider all of the terms of the grant of the Options and the period for exercising them, which was required by Section 2.3(a) of the Option Plan. Accordingly, his conclusion that they did not oust the operation of Section 2.3(g)(iv) was tainted by an error of law: Weyerhaeuser, at para. 211 (Laskin J.A. dissenting reasons); Resolute FP, at para. 32.
[75] The Consulting Agreement’s grant of Options in Schedule 2.2 described them as having an expiry date that was five years after a transaction by which Aphria would become a public company. There could be scenarios where allowing a provision like Section 2.3(g)(iv) to operate would not render a five-year term devoid of meaning (if, for example, the Consulting Agreement itself had a term of five years or more, or if all the circumstances under which it could end before five years were future uncertain events). But that is not this case.
[76] The application judge’s analysis did not consider that the Consulting Agreement, under Section 4.1, had a two-year non-renewable term. That the Consulting Agreement would come to an end after two years, at the latest, was a certain event. The five-year expiry date of the Options set by the Consulting Agreement created an exercise period that would last more than three years after the end of the two-year non-renewable term of the Consulting Agreement. That exercise period is completely inconsistent with a provision like Section 2.3(g)(iv), which shortens the exercise period to, at the most, six months after the end of the Consulting Agreement. Since the end of the Consulting Agreement by June 2, 2016, at the latest, was certain to occur, the exercise period set at the time of the grant of the Options could never apply if Section 2.3(g)(iv) applied. That would give Section 2.3(g)(iv) priority over the exercise period set under Section 2.3(a), which is exactly the opposite of what the Option Plan provides.
[77] Moreover, the application judge failed to properly consider that the Consulting Agreement contained a comprehensive code as to when the exercise period would be shortened from its five-year term. Section 4.2 provided that the Consulting Agreement could be terminated before the end of two years: by mutual agreement, by Aphria in the event of certain breaches by the appellants; or by JPF on 60 days’ notice. Section 4.3 provided that, in the event of such an early termination under Section 4.2, the exercise period for the Options would end; the Options would be of no force or effect. However, neither Section 4.3, nor anything else in the Consulting Agreement provided that the expiry of the Consulting Agreement would have an effect on the exercise period of the Options in the absence of an early termination under Section 4.2. Although the application judge made brief reference to these provisions, he did so only on the relief from forfeiture issue, not in relation to the proper interpretation of the exercise period of the Options.
[78] This package of termsset at the time the Options were granted and taken as a wholenecessarily excludes the operation of Section 2.3(g)(iv). The terms of the grant contain a detailed code as to the five-year length of the exercise period and as to when the termination of the Consulting Agreement would effect a shortening of that period. That code omitted the expiry of the two-year term from the events that would shorten the exercise period. In doing so, it left no room for a provision like Section 2.3(g)(iv) to shorten the exercise period to six months after the expiry of the two-year term of the Consulting Agreement, as that would contradict the terms of the grant. It bears repeating that under the Option Plan, specifically Section 2.3(a), the terms of the grant as to the length of the exercise period take priority over what Section 2.3(g) would otherwise provide.
[79] The provisions of the Stock Option Agreement fortify this conclusion. The application judge erred in law in not considering all of its provisions in their entire context: Weyerhaeuser, at para. 211 (Laskin J.A. dissenting reasons); Resolute FP, at paras. 29-30.
[80] The Stock Option Agreement was executed after the Option Plan, but the application judge focussed on this fact largely to buttress his rejection of Fuller’s suggestion that he had not read the Option Plan. The application judge did not properly take into account that the Stock Option Agreement, after reciting the date of the grant as the date of the Consulting Agreement, and defining the Expiry Date as being in 2019, provided that the Options could be exercised at any time up to that Expiry Date in 2019. If Section 2.3(g)(iv) of the Option Plan applied, the Options could never have been exercised at any time up to an Expiry Date in 2019. They could never have been exercised more than six months after the date that the non-renewable two-year term of the Consulting Agreement would expire in June 2016. The application judge failed to give any significance to these provisions of the Stock Option Agreement and when they were agreed to.
[81] The application judge noted that the Consulting Agreement and the Stock Option Agreement stated that the Options were subject to the Option Plan. But as the above analysis shows, that did not answer the question of whether the Options were subject to Section 2.3(g)(iv), in light of the exercise period that had been determined when the Options were granted. It therefore did not justify ignoring the actual language the parties used when the Options were created, or in the case of the Stock Option Agreement, after the Option Plan had been implemented, to define the period during which the Options were exercisable. That description was only consistent with excluding the applicability of Section 2.3(g)(iv) to the Options.
[82] Finally, the application judge erred in law in treating, as a relevant consideration, the absence of evidence that the Board had authorized its member who signed the Stock Option Agreement to vary the terms of the Option Plan. As noted above, there was no suggestion that the grant of the Options in the Consulting Agreement had been effected without authority or that they were invalid. The Stock Option Agreement confirmed that the grant, including its five year exercise period, was to be considered as having been made under the Option Plan. No variation of the Option Plan was required to give effect to the exercise period in the grant of the Options.
[83] The Option Plan was of general application to options issued and to be issued by Aphria. Many of its terms could be applied to the Options in issue here. But the terms of the grant of the Options in the Consulting Agreement, as confirmed in the Stock Option Agreement, were specific about the exercise period, and about the exact and only events that would shorten it. They were the reflection of the parties having specifically addressed the term and exercise period for these Options for this option holder. Section 2.3(g)(iv) of Option Plan did not displace the carefully-crafted specific provisions contained in the grant of the Options that defined the exercise period for them, when those specific provisions were, under Section 2.3(a) of the Option Plan, to be given priority.
[84] For these reasons, the application judge’s interpretation cannot stand. Applying well-established principles of contractual interpretation results in the conclusion that the Options had not expired when the exercise occurred.
(2) The Non-Competition Agreement and Relief from Forfeiture
[85] Because of the conclusion I have reached above, it is not necessary to consider the arguments about whether the application judge erred in finding that there was a breach of the Non-Competition Agreement and on that basis denying relief from forfeiture.
(3) Damages
[86] In oral argument, the parties agreed that the application judge had the power to award damages, even though the proceeding was brought by application.
[87] The appellants argue that it was not open to the application judge, in assessing damages, to reject or doubt the credibility of Fuller’s evidence that he would have caused the shares to be sold at or around their peak price in January 2018. Nor, they say, was it open to the application judge to treat the expert’s calculation as a mere mathematical exercise dependent on that evidence. They argue that Aphria did not challenge Fuller’s damages evidence in cross-examination or lead its own expert evidence.
[88] I would not give effect to this argument. The application judge was not obliged to accept Fuller’s evidence about when he would have caused the shares to be sold, which was not a matter of historical fact but of conjecture. The application judge was entitled to assess that evidence against the common sense improbability of someone being able to accurately determine, in real time and without hindsight, when shares were at or near their peak. He was entitled to view the expert’s evidence as dependent on an assumption that the application judge did not accept.
[89] A damage assessment attracts considerable deference on appeal and the grounds for appellate interference are limited: Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, [2001] 2 S.C.R. 943, at para. 80; SFC Litigation Trust v. Chan, 2019 ONCA 525, 147 O.R. (3d) 145, leave to appeal refused, [2019] S.C.C.A. No. 314, at para. 112. None of those grounds are present here.
[90] The starting measure of damages for breach of an agreement that results from the exercise of an option to acquire shares in a public corporation is the difference between the exercise price and the share price at the time of exercise: W.C. Pitfield & Co. v. Jomac Gold Syndicate Ltd., [1938] 3 D.L.R. 158 (Ont. C.A.), at pp. 164-165. The application judge’s approach assessed damages in an amount more generous to the appellants than that. It was generous in two respects. First, it included some amount to reflect Fuller’s stated desire to cause the shares to be held after they were acquired and sold later at better prices. Second, the application judge made no deduction for the opportunity the appellants would have had, when the exercise was refused, to buy Aphria shares in the market and benefit from the rise in prices that subsequently occurred. There is no reversible error in the application judge’s approach about which the appellants can complain.
(4) Conclusion
[91] For these reasons, I would allow the appeal, set aside the dismissal of the application, and substitute an order that Aphria pay damages to JPF in the amount assessed by the application judge, namely $2,820,000.
[92] Success on the appeal was divided, but the appellants have enjoyed the greater measure of success. I would therefore award costs of the appeal to the appellants in the sum of $12,500, inclusive of disbursements and applicable taxes. The parties did not address the costs of the application in the event the appeal were allowed. If the parties wish to do so they may make written submissions, not to exceed three pages each, within ten days of the release of these reasons.
Released: JUN 23, 2020 “M.T.”
“B. Zarnett J.A.”
“I agree. M. Tulloch J.A.”
“I agree. K. van Rensburg J.A.”
[1] For ease of reference, these reasons refer only to “Aphria”.
[2] These reasons refer to the ONCA decision as “Weyerhaeuser” and the SCC decision as “Resolute FP”.