Indexed as:

Kniaziew v. Suder

Between

Richard David Kniaziew, Pauline Kniaziew and Dufton Richard

Kniaziew, applicants, and

Adam Suder, respondent

[2000] O.J. No. 592

Court File Nos. 00-GD-48009 and 00-GD-48015

 Ontario Superior Court of Justice

Patterson J.

Heard: January 31, 2000.

 Judgment: February 8, 2000.

(4 paras.)

Company law -- Shareholders -- Agreements -- Shotgun clause -- Enforcement.

This was an application by the majority shareholders against the minority shareholder, Suder, to determine which party had the right to buy the other out pursuant to the shot gun provisions of their Shareholders' Agreement. The majority shareholders attempted a friendly buy-out of Suder's shares. He refused. The majority shareholders sent him notice pursuant to the shot gun clause, and gave him the option of either buying their shares or selling his. Suder mistakenly executed both the agreement to sell and to buy, but included a deposit for the purchase of the majority shares. The error was noticed two days after the documents were returned, and Suder's solicitors advised the majority shareholders that it had been his intention to buy their shares. The majority took the position that, because of the error, they could choose whether to sell or buy and they chose to buy Suder's shares. The Shareholders' Agreement was silent as to the problem that arose.

HELD: The shares of the majority were to be transferred to Suder. The two signed contracts contradicted each other. Therefore, the evidence and decision was to be made in terms of what was fair. Suder made an honest error and mistakenly signed both documents. The majority could not unilaterally create an option for themselves that did not exist in the Shareholders' Agreement. The applicants were willing to either sell their own or buy Suder's shares pursuant to the shot gun clause. The mistake did not grant an option to the majority to choose which they were to receive. The purchase offer was declared void ab initio by reason of mistake.

Counsel:

Raymond G. Colautti, for the applicants.

Robert Reynolds, for the respondent.

1 PATTERSON J.:-- The solicitors agreed that this matter would be dealt with as an application to determine which party had a right to buy the other out pursuant to the "shot gun" provisions of the Shareholders' Agreement.

2     The applicants are the majority shareholders in the company called Kapital Produce Ltd. in which they own 500 shares of the company with the other 100 common shares owned by the respondent, Adam Suder. Disagreement arose between the applicants and the respondent and on November 24, 1999 the applicants made a "friendly" offer to purchase the shares of the respondent but this offer was not accepted. At the same time on November 24 the majority shareholders requested that Mr. Adam Suder take a leave of absence. The respondent did not agree to sell his shares to the applicants. On December 2, 1999 he was given notice pursuant to the provisions of the shot gun clause contained in the Shareholders' Agreement: (a) a right to purchase the shares of the applicant; or (b) the obligation to sell his shares to the applicant. When he returned the documents he signed both the agreement to purchase and the agreement to sell which caused ambiguity as to his intention and essentially this fact gives rise to the application. The applicants claim they have a right to accept either of the proposals as both agreements to sell and to buy were returned and that they had the right to choose to buy the respondent out. Mr. Frank Ricci, the corporate solicitor, had prepared the "friendly" offer in November and the "shot gun" documents delivered on December 2. The Shareholders' Agreement set the procedure for delivery of the offers and the 10% deposit. On December 24, the respondent delivered an envelope to the applicants. The envelope contained both the agreement to sell and to buy, the return of the $10,000 deposit received from the applicants and included the $50,000 deposit which was 10% of the purchase price of the applicants' shares. The contents of the envelope were not examined at that time but it was apparent from the discussion that took place on delivery of the envelope that the respondent had agreed to purchase the applicants' shares. The mistake as to him signing both documents was not revealed until the 26th of December when Mr. Ricci carefully examined the contents of the envelope. Mr. Ricci contacted the applicants early on December 26th and later that day the applicants instructed Mr. Ricci to give notice that they were purchasing the respondent's shares on the basis that, in effect, the respondent had given them an option to select either offer. The Shareholders' Agreement makes no provision for such an event. On December 27th, when the solicitor for the respondent received notice from Mr. Ricci that the applicants were intending to purchase the respondent's shares, it became obvious to the respondent's solicitor, Mr. Spettigue, that there had been an error in that two offers had been signed by mistake. Mr. Spettigue immediately stated that it was the intention of his client to buy the applicants' shares and not to sell his shares and this was further confirmed on December 28th by a fax from the respondent to Mr. Ricci.

3     We, in effect, have two valid contracts and the agreement between the parties is silent as to this unusual happening. As a result, it is my obligation to objectively and reasonably look at all the facts to determine what is the fair result. The respondent clearly stated he was buying the applicants out on December 24th, when he handed the envelope over. There was no prejudice to the applicants, as the respondent through his solicitor on December 27, 1999 and through his fax on December 28th clearly confirmed that he was buying the applicants' shares. There is no question that the verbal statements were not adequate to satisfy the "shot gun" provisions, but it does set the scenario for what was to follow in terms of what would be fair and reasonable under the circumstances. I believe that the respondent made an honest error. It is my belief that the applicants on Christmas Eve believed that the envelope contained the respondent's purchase of their shares and by all accounts, they were not very happy. On the 26th the mistake was revealed and the applicants believed they had a right to create a new paragraph in the Shareholders' Agreement that effectively gave them an option to select either to buy or to sell. I do not believe this option may be unilaterally created. The case-law is quite clear that in the event of an obvious mistake (the signing of two offers) there is an obligation to notify the other side requesting a clarification and not to take advantage of the mistake. They did not do so. They had expressed concern that the respondent did not have adequate funds and he was just causing delay by signing both offers in order to obtain the sufficient funds. This was supposition on their part that, in my opinion, does not give them the option to select one of the two offers.

4     The fact is the two signed contracts were in contradiction to each other. The evidence must be looked at in terms of what is fair as the Shareholders' Agreement was silent as to the problem which arose. The applicants were willing to either sell their shares or buy the respondent's shares pursuant to the shot gun agreement. The danger always exists that exercising this procedure may result in the loss of the company. The respondent mistakenly signed both documents. In my view the mistake does not grant an option to the applicants to choose which they are to receive. This is not a case of parol evidence rule being used to alter a contract or, in my view, even a case in which I must examine the equitable concept of coming to court with clean hands as on the face of it we have a mistake and the issue of possible rectification. I am of the opinion that it was incumbent upon the applicants to inform the respondent of the mistake in order that there would be clarity as to what the parties were agreeing to. I therefore order that:

a) the sale offer is binding and existing;

b) the purchase offer is void ab initio by reason of a mistake;

c) the applicants take whatever steps and proceedings that are necessary to effect the transfer of the shares to the respondent in accordance with the sale offer; and,

d) in regard to the matter of costs I may be spoken to.

PATTERSON J.

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