Foo v. Yakimetz, 2002 CanLII 2662 (ON SC)
In1995 Yakimetz and his business partner Dubreuil owned BGI Systems Integration Ltd. They were in financial difficulty. Foo approached them with a share exchange plan whereby Foo would acquire approximately 5.4 million BGI shares. What Foo was offering was, in effect, a reverse take-over. Foo controlled what was, in effect, a publicly-traded Alberta shell company (MMC). By this reverse-engineering, BGI who have access to the public market. (para 12)
The idea was that in May 1996, Yakimetz and Dubreuil would acquire half of the publicly traded MMC in exchange for giving Foo approximately 5.4 million BGI shares. (para 17)
In May 1996 the parties prepared their share exchange agreements without using lawyers. (para 17). The May 1996 agreements gave Foo his 5.4 million BGI shares. Everyone executed the May 1996 agreements.
Then of course, the transaction failed because Alberta intermediaries pulled out. (para 18)
So what was the effect of the BGI for MCC share exchange agreement?
On its face, without parole evidence, the May 1996 share exchange agreement looked perfectly sound. Shares were being exchanged for shares. There was no conditionality clause in the share exchange agreement which said: ‘this agreement is only valid if the totality of all other related transactions close.’
The old fashioned law school rule was that we are not supposed to hear parole evidence in contract interpretation! That’s the first rule of Fight Club. The share exchange agreement of May 1996, within its four corners, was interpretable without extrinsic aid. So how was it that Yakimetz and Dubreuil succeeded in introducing testimony about the ‘real’ meaning of the May 1996 share exchange agreement?
The Court of appeal (in this case) says this:
49 [Yakimetz and Dubreuil] submission that the Share Exchange Agreement was to be conditional and to have effect only if the proposed transaction was implemented posits, in effect, an execution of the agreement in escrow pending, and conditional upon, the completion of the May transaction. It is not disputed that parol evidence is admissible for the purpose of proving an agreement between the parties to this effect: Frontier Finance Ltd. v. Hynes and Niagara Serving Machine Co. (1957), 10 D.L.R. (2d) 206 (Ont. C.A.), at page 212; Chitty on Contracts, General Principles, (27th ed., 1994), para. 12 – 094. (emphasis added)
Ultimately, after extensive oral testimony, Cullity J. decided that, although Foo wanted the May 1996 agreement to mean what it said, Yakimetz and Dubreuil were obviously of the view that the share exchange was conditional upon the totality of all other transactions closing even though that was not said in the share exchange agreement.
Cullity J. deemed the May 1996 agreement void. Foo loses.
comment #1: As Foo was in fact providing publicly traded MMC shares to BGI, Foo did in fact carry out the larger intention of the parties in the May 1996 agreement. In other words, this contract functioned perfectly well without parol evidence. Obviously getting into the granular viva voce back-and-forth of what people really intended (as opposed to what they wrote and failed to write) allows all contracts to be re-opened.
comment #2: The supreme court of Canada has had its say on parol evidence in Sattva Capital Corporation v. Creston Moly Corporation et al, 2014 SCC 53). What the supreme court says seems diametrically opposed to what Cullity J. did above.
Cullity J. re-opened the May 1996 contract to determine the subjective intentions of Yakimetz and Dubreuil to add a term to the contract, namely: ‘this agreement is only valid if the totality of all other related transactions close.’
Here’s what Rothstein J. for the unanimous SCC says:
59 It is necessary to say a word about consideration of the surrounding circumstances and the parol evidence rule. The parol evidence rule precludes admission of evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing (King, at para. 35; and Hall, at p. 53). To this end, the rule precludes, among other things, evidence of the subjective intentions of the parties (Hall, at pp. 64-65; and Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129, at paras. 54-59, per Iacobucci J.). The purpose of the parol evidence rule is primarily to achieve finality and certainty in contractual obligations, and secondarily to hamper a party’s ability to use fabricated or unreliable evidence to attack a written contract (United Brotherhood of Carpenters and Joiners of America, Local 579 v. Bradco Construction Ltd., [1993] 2 S.C.R. 316, at pp. 341-42, per Sopinka J.). (emphasis added).
Cullity j. did precisely what the parol evidence rule does not permit.
