Before: The Honourable Mr. Justice Myers

Oral Reasons for Judgment

February 7, 2008

Counsel for the Plaintiffs:	M.T.L. Blaxland
Counsel for the Defendants:	J.B. Thompson
Place of Trial:	January 28 to February 5, 2008 Vancouver, B.C.

INTRODUCTION AND BACKGROUND

[1] In 2005 the plaintiff Mesa Luna Dine & Dance Ltd. agreed to purchase from the defendant Xen’s Taverna Inc., a restaurant and club at 1926 West Broadway, operated as Mesa Luna Dine & Dance. The asset sale agreement provided that Xen’s would retain ownership of the liquor licence but that the purchaser would be the operator under what is known as a third party operator licence.

[2] The individual plaintiffs were the shareholders of the corporate plaintiff and signed the purchase and sale agreement as guarantors. Involved with them as an investor, but not a shareholder, was Mr. Sallathurai.

[3] The defendant Mr. Schmuck was the owner of both corporate defendants. 536842 B.C. Ltd. was the owner of the building in which the restaurant was located. As part of the transaction 536842 B.C. Ltd. granted a lease to the plaintiff company. The individual plaintiffs signed the lease and purchase agreement as guarantors.

[4] At the time of the transaction, Xen’s did not own the liquor licence. Rather, it was held by a prior owner of the business, Luna Restaurant Inc.

[5] On April 25, 2006, the plaintiff Mesa Luna ceased operating the business and vacated the premises. The reason given was that no liquor licence had been issued to them.

[6] The plaintiffs claim rescission of the contract and return of the moneys they paid. (Although only the corporate plaintiff is the purchaser under the contract, the statement of claim makes no distinction between it and the individual plaintiffs.) They also claim in fraud and unjust enrichment.

[7] The defendants claim the unpaid rent and a balance owing on the purchase price for the business.

FACTS

[8] Xen’s Taverna began operating the Mesa Luna restaurant in 1999. Xen’s owned a “food primary” liquor licence for the establishment. The “food primary” designation meant that liquor had to be sold as an adjunct to the operation of a restaurant.

[9] In 2003 Xen’s sold the business to an unrelated company, Luna Restaurant Inc. The principal of that company was Richard Dedemus.

[10] The agreement provided that Xen’s would continue to hold the liquor license, but that Luna would be designated a third party operator under the license. In error – according to Mr. Schmuck – the full license was transferred to Luna.

[11] In March 2005 Xen’s Taverna bought the business back from Luna Restaurant Inc. The purchase and sale agreement stated that the sale was to include the transfer of the liquor licence but only after the final payment had been made. In the interim Xen’s was to be a third party operator of the license, which was to be held in escrow. The final payment was to be made by April 1, 2006. If not made by that time, the licence was to revert to Luna.

[12] That arrangement was probably not in compliance with the regulations which required that a licensee maintain an interest in the subject property, but Luna had disposed of its interest in the property.

[13] In June 2005 Luna applied to the Liquor Control and Licensing Branch to add Xen’s to the licence as a third party operator. As will be seen later, that approval was not granted until March 2006, well after the sale to the plaintiff Mesa Luna Dine & Dance Ltd. was completed.

[14] The negotiations leading up to the purchase by and lease to Mesa Luna Dine & Dance Ltd. took place in August 2005. I will return to those negotiations later. The plan was for the plaintiff company to operate the restaurant and to add a vocational cooking school.

[15] This is a convenient place to note that the individual parties and Mr. Sallathurai are all immigrants and English is not their first language. Mr. Sallathurai and Mr. Varatharaja are from Sri Lanka. Mr. Rivera is from Peru and Mr. Schmuck is from Austria. They all speak English with a heavy accent and this may have led to some misunderstandings.

[16] The lease and purchase and sale agreement were drafted by a friend of and business adviser to Mr. Schmuck, Mr. Evaniuk. He modelled the documents on those used for the transaction between Xen’s and Luna Restaurant Inc.

[17] The lease, dated August 15, 2005, was to commence on September 31, 2005 for a term of 36 months. The rent for the first six months was to be $12,000, increasing incrementally until it reached $17,175 for the last 12 months. The plaintiff Mesa Luna Dine & Dance Ltd. - the tenant - was to be responsible for the maintenance of the elevator, HVAC unit, and for all direct occupancy costs.

[18] The use clause read as follows:

The operation of a Restaurant and /or Dining Lounge as prescribed by the Liquor Licence held by the Landlord and assigned by the Landlord to the Tenant.

[19] The purchase and sale agreement was dated August 26, 2005. The purchase price was stated to be $150,000 but the parties had agreed verbally that there was to be an additional sum of $50,000 paid in cash on closing. That was so Mr. Schmuck could avoid paying tax on that sum.

[20] The licence was referred to in the description of assets as follows:

(c) all benefit and interest of the Vendor in the liquor license used in connection with the Business; (the “Liquor License”) which usage by the Purchaser shall be accomplished by was of a “third party operator” agreement signed by the Vendor and / or their agents and subject to the approval of the appropriate governmental bodies. The Vendor will permit the Purchaser to continue operation under the Liquor License subject to the terms herein, which will include but not be limited to payment of all taxes related to the usage of the Liquor License and subject to the Purchase not being in default of any terms of the Lease for the Premises with the Landlord …

[21] The liquor licence was also referred to as an excluded asset:

(a) the Liquor License which will remain the asset of the Vendor. The Vendor may sell, assign, transfer, etc the Liquor License as long as the sale, assignment, transfer, etc does not impede the Purchaser from operating under the “Third Party Operator” agreement …

[22] Clause 21 of the agreement provided that on the completion date Xen’s was to deliver to Mesa Luna Dine & Dance Ltd.:

(iii) the appropriate application forms, signed by the Vendor, to allow for a third party operator (i.e. the Purchaser) of the Liquor License, and the Purchaser will deliver to the Vendor …

[23] The agreement allocated the $150,000 purchase price (i.e. not including the $50,000 cash) between leasehold improvements, equipment and furniture, computer equipment and goodwill. No allocation was made with respect to the liquor licence.

[24] Of the disclosed purchase price of $150,000, $50,000 was to be paid on completion, with the $100,000 balance paid on August 31, 2006.

[25] The agreement provided that Xen’s would retain ownership of the assets until the final payment had been made. Until then it would provide Mesa Luna Dine & Dance Ltd. with the full use of the assets. Further security for the payment of the second and final instalment was provided by way of $100,000 promissory notes from Mr. Varatharaja and Mr. Rivera.

[26] The agreement did not contain a warranty or representation of Xen’s that it owned the assets being sold.

[27] The defendants had a lawyer review the documents.

[28] There is a discrepancy in the evidence as to the date that the agreement and lease were actually signed, and the closing date, but that is not material to the issues before me. All of those events and the first payment (including the $50,000 cash) were completed before the end of August.

[29] The food and liquor on the premises were not included in the purchase agreement. The plaintiffs agreed to pay Xen’s $25,000 for that over a period of undefined time.

[30] The plaintiffs began operating the restaurant on September 1, 2005.

[31] Mr. Schmuck was present every day the restaurant was operated by the plaintiffs, save for one weekend. He says that was because he knew he or Xen’s (he often did not distinguish between them) were responsible for the sale of liquor on the premises.

[32] At the time of the sale from Xen’s to Mesa Luna Dine & Dance Ltd., Xen’s had not yet paid the balance of the purchase with respect to the 2005 agreement with Luna Restaurant Inc. On September 19, 2005, Xen’s and Luna Restaurant Inc. amended their 2003 purchase and sale agreement to provide that upon Xen’s paying Luna $50,000, Luna would sign an application seeking to have Mesa Luna Dine & Dance Ltd. added as a third party operator to its licence. Mr. Schmuck paid the $50,000 and the application was signed by Mr. Dedemus.

[33] That application was never submitted to the Liquor Control and Licensing Branch. Mr. Schmuck testified that that was because he had determined to pay the full balance owing to Luna and obtain the licence back from them. He thought that submitting the third party operator application would confuse the Licensing Branch and delay his ultimate goal of getting the full licence back.

[34] Meanwhile, the June 2005 application of Luna Restaurant Inc. to have Xen’s added to its licence as a third party operator, to which I referred in paragraph 13, remained extant. On September 30, 2005, the Liquor Control and Licensing Branch wrote to Luna informing it that its application was incomplete. It required a declaration of the proposed third party operator – Xen’s – that, amongst other things, it would not “enter into an agreement to allow another person to use the licence”. Mr. Schmuck signed that declaration. The Licensing Branch received that on October 24, 2005.

[35] On October 24, 2005, Mesa Luna Dine & Dance Ltd. obtained a business licence from the City of Vancouver for the operation of a restaurant with an ancillary vocational school.

[36] On October 25, 2005, Mr. Schmuck and Mr. Rivera attended a compliance meeting with the Liquor Control and Licensing Branch. Several problems were noted, including not observing proper closing times and not checking I.D.s. The licensee’s name on the minutes recording the meeting was noted as Mesa Luna.

[37] On November 14, 2005, the plaintiffs listed the Mesa Luna business for sale. The explanations for this were inconsistent. Mr. Varatharaja stated he wanted to sell it to earn a profit. Mr. Rivera said he wanted to sell it because he was worried about being able to make the final payment on the business; he thought that Mr. Schmuck could seize his condominium if the payment was not made.

[38] Mr. Schmuck’s attention was brought to the listing by his real estate agent. He was angry that the plaintiffs would try to sell the business because, not having paid in full, they did not yet own it. He confronted Mr. Rivera and expressed his anger and concern. The end result was a written agreement – dated December 10, 2005 – which provided that Mr. Schmuck would get 15% of the selling price.

[39] Shortly before that agreement was signed, the Liquor Control and Licensing Branch wrote Luna Restaurant Inc. stating that their application to add Xen’s to their liquor licence as a third party operator met the eligibility requirements. The letter stated that either Xen’s or Luna had to make arrangements for a final inspection interview. The letter also contained the following conditions, amongst others, under the heading “Important Notice”:

1. Valid interest in the property must remain with the licencee (Luna Restaurant Inc.) for the licencee to continue to hold the liquor licence.

…

4. The proposed 3^rd party operator shall NOT operate the liquor licence prior to the corresponding application being approved by the Liquor Control and Licensing Branch.

[40] Mr. Schmuck had the required meeting with the Branch inspector on December 14, 2005.

[41] On January 12, 2006, Mr. Schmuck, Mr. Rivera, and Mr. Varatharaja attended a compliance meeting with a Branch inspector. Mr. Schmuck introduced the latter two as his future business partners. The Branch forms show that the license under discussion was that of Luna Restaurant Inc. Two items of concern were discussed. The first of these was that the inspector had noted that changes were made to the physical layout of the restaurant some time in the past. A new layout plan was requested.

[42] The second concern was that police had difficulty gaining access to the premises during the course of a prior incident. Mr. Schmuck and Mr. Rivera committed to ensuring that that would not happen again.

[43] The Branch inspector at the time, Mr. Helmes, testified that he did not recall meeting Mr. Schmuck before this meeting. He stated that assuming Branch practice was followed he would have been provided with a copy of Luna’s application to have Xen’s added as a third party operator. He therefore would have been aware that Mr. Schmuck, or Xen’s, was overseeing the business without authorisation. He said that that was in compliance with Branch policy, but by that I take him to mean that the Branch would turn a blind eye to it because of the length of time it took for the Branch to process applications.

[44] On February 12, 2006, 536842 B.C. Ltd. signed a contract to sell the Broadway property in which the restaurant was located, subject to the existing lease, with a closing date of May 15, 2006.

[45] On February 20, 2006, the plaintiffs’ solicitor, Rupert Shore, sent a letter to Mr. Schmuck. He referred to the clause from the contract which I quoted above at paragraph 20 and stated:

Our clients advise that you are not now in a position to assign them such a Liquor License. Indeed, the premises do not now have a valid Liquor License and, as such, our clients are not able to obtain a Business License. You have breached your obligations under the contract.

Further, our clients relied upon your personal representation that you were in a position to provide them with a liquor license.

…

We put you on notice that our clients will claim from you any loss suffered by them as a result of breach of contract, misrepresentation or any other cause of action at law.

[46] Mr. Evaniuk testified that, on behalf of Mr. Schmuck, he telephoned Mr. Shore to discuss this letter. Mr. Evaniuk explained to Mr. Shore the difficulties with the license and that there had been a delay in getting the license back, but that the transfer was being worked on.

[47] Mr. Shore was not called as a witness.

[48] On March 1, 2006, Xen’s was approved as a third party operator of Luna’s license.

[49] On March 24, 2006, a meeting was scheduled with the City of Vancouver to discuss concerns with respect to the status of the liquor and business license and an incident which occurred in February.

[50] In order to prepare for that meeting, in the morning of March 24, Mr. Schmuck, Mr. Evaniuk, Mr. Shore, Mr. Rivera and Mr. Varatharaja met.

[51] Mr. Evaniuk informed the attendees that Mr. Schmuck had sold a property he owned in Aldergrove, with a closing date of March 30, 2006. Mr. Schmuck would use those funds to pay Luna and get the license back from it.

[52] Mr. Schmuck, Mr. Evaniuk, Mr. Rivera and Mr. Dedemus (from Luna) attended the meeting with the City of Vancouver. The notes of the City’s License Coordinator were admitted into evidence. Once again, the situation with the license was explained. It was noted that Mr. Schmuck would be making a payment in two weeks. Then he would add Mr. Rivera to the license as a third party operator. In the interim, Mr. Schmuck would operate the premises for Mr. Rivera. (I take the reference to the individuals’ names to be to their respective companies, namely Xen’s and Mesa Luna Dine & Dance.)

[53] Things moved rapidly in the latter part of April. On April 24, 2006 Xen’s paid Luna the full amount owing on the contract of sale. On April 25, 2006, Mr. Helmes wrote to the plaintiffs’ then solicitor, Mr. Ganapathi, informing him that the liquor license for the Mesa Luna establishment was issued to Luna with Xen’s as a third party operator. He stated that Mr. Varatharaja and Mr. Rivera were not on record as owner or third party operators and as such would not be permitted to sell liquor. Although the letter does not explicitly say so, it is clear from its wording and the surrounding evidence that Mr. Ganapathi had asked Mr. Helmes to provide the letter.

[54] The same day – April 25, 2006 – Mr. Ganapathi wrote to Mr. Schmuck as follows:

Our law firm acts for Mesa Luna Dine & Dance and its owners.

We were today served with a letter of even date from a Compliance & Enforcement Officer of the Liquor Control and Licensing Branch advising that our clients would not be permitted to sell liquor from their establishment at 1926 W. Broadway, Vancouver, B.C. A copy of that letter is enclosed.

We have reviewed the Purchase Agreement, and the Lease between the parties. We also understand that you reduced the sale price in the Purchase Agreement by $50,000.00, which was demanded and received in cash in order that you might make the mortgage payments on your home, and improvements to the premises.

Clearly, you sold something you did not own, and which is fundamental to the business of our clients. You committed fraud.

We have instructed our clients to vacate the Demised Premises immediately in order to avoid prosecution.

We are also commencing an action against you. Please advise your lawyers to contact us if they wish to accept service of the proceedings on your behalf.

[55] The same day the plaintiffs vacated the premises, taking with them their own possessions and, the defendants allege, items belonging to the defendants.

[56] On April 26, 2006, Xen’s submitted an application to have the liquor license transferred from Luna.

[57] On April 27, 2006, the Liquor Control and Licensing Branch wrote Mr. Dedemus and his company, Luna Restaurant Inc. The letter stated that it had come to the Branch’s attention that Luna may no longer have a valid interest in the restaurant and was no longer carrying on the business at the establishment. The letter went on to state that:

Based on this information it is our intention to cancel the above-noted liquor license unless Luna Restaurant Inc. provides the Branch with evidence that it has valid interest in the said property and that it is the owner of the business carried on at the establishment.

[58] In response to this letter, Mr. Evaniuk telephoned the Branch and advised them that the sale from Luna to Xen’s was proceeding and that the transfer documents should already be with the Branch. On May 2, 2006, the Branch wrote Mr. Dedemus rescinding the cancellation.

[59] Mr. Schmuck did not re-open the restaurant. He says he could not do so because of the items which the plaintiffs took from the premises, in particular the reservation book, which the plaintiffs deny they took.

[60] The contracted-for sale of the Broadway Property closed on May 15, 2006.

POSITION OF THE PARTIES

[61] As I said in the introduction, the plaintiffs are claiming rescission of the contract based on misrepresentation and fraud. They also claim damages for fraud and breach of contract. As part of their damages claim, they seek $80,000 for moneys they say they expended on renovations of the premises. During the course of argument I allowed the plaintiffs to amend their statement of claim to plead that the purchase agreement was void due to illegality because the agreement contemplated the sale of liquor without a licence, thereby contravening the Liquor Control and Licensing Act, RSBC 1996, c. 267 and regulations made under it.

[62] The defendants do not deny that at the closing they were obligated to deliver the papers necessary to effectuate a third party operator license and did not do so. However, they say that both prior to the execution of the contract and after it, Mr. Schmuck and Mr. Evaniuk told the plaintiffs the difficulties with the license. Therefore, they say that the plaintiffs waived their right to demand strict compliance with the contract and that they were required to make a demand for compliance and then allow the defendants a reasonable time with which to comply with it.

[63] The defendants further say that the premises were never shut down by the Branch, and that the real reason the plaintiffs abandoned the business and the premises was because of failing sales.

[64] Xen’s counterclaims for the balance owing on the purchase price, namely $100,000. It also claims the $25,000 which it says remained unpaid on the purchase of the liquor and food inventory. The defendant 536842 B.C. Ltd. claims for unpaid rent for the months it continued to own the building, namely part of April 2006 (part of the rent had been paid) and the first 15 days of May. It also claims for unpaid hydro and gas bills.

[65] During the course of argument, I allowed the plaintiffs to amend their defence to the counterclaim to plead that the defendants failed to mitigate their damages.

[66] Before turning to the analysis of the issues, I have one further comment. There were cash transactions which complicated the proof in this case. It is clear that Mr. Schmuck wanted to be paid $50,000 in cash in order to save taxes, and that the plaintiffs were complicit in that. But there is more: after the plaintiffs took over the business there were cash sales that were “off the books”, namely undeclared revenue; and, there were cash payments by the plaintiffs to Mr. Schmuck when he was assisting in the operation of the business.

ANALYSIS

[67] A threshold factual issue is when the plaintiffs became aware that Xen’s did not have the license. Both Mr. Schmuck and Mr. Evaniuk say that in the negotiations leading up to the sale they told the plaintiffs several times that Mr. Schmuck had mistakenly assigned the license to Luna and that he would take the necessary steps to get it back. The plaintiffs and witnesses called on their behalf denied that.

[68] The plaintiffs’ testimony as to what they knew of the license and when is in conflict.

[69] Mr. Rivera’s evidence as to what he was told about the license and when was self-contradictory. In his direct evidence, he said he became aware of the difficulties with the license in January 2006. In his cross-examination he said that his evidence in chief was mistaken and that he only became aware of the licence issues in April 2006.

[70] Mr. Varatharaja testified that by the end of September the plaintiffs began to press Mr. Schmuck to take care of the license. In his discovery he said that in October or November of 2005:

He [Mr. Schmuck] told me, yes, he made a mistake on sign up paper to somebody else … I don’t know he going to be paying 200 or 300 thousand dollars to the guy to get the liquor license back.

[71] The plaintiffs and Mr. Sallathurai said that they never noticed that the liquor license hanging on the wall was in the name of Luna.

[72] One thing is clear: signed documents to accomplish the third party operator license were not presented on closing as the agreement required, yet the plaintiffs went ahead with the transaction. I think that is strong evidence to support the defendants’ version of events. As I will indicate later in these reasons, I also think that has juridical significance.

[73] The inescapable conclusion is that before the closing, the plaintiffs had been told and should have been aware of the fact that they were not getting the license they had contracted for. I do not know whether they were told the full details of the history of the license situation, but I don’t think that matters.

Fraud & Misrepresentation

[74] The foregoing conclusion is determinative of both the fraud and misrepresentation claim. Neither Mr. Schmuck nor Mr. Evaniuk intentionally, recklessly or innocently misrepresented the situation regarding the license to the plaintiffs.

Illegality

[75] As I have said above, the plaintiffs argue that the purchase agreement was void due to illegality because the agreement contemplated the sale of liquor without a licence.

[76] The agreement, however, did not contemplate that; quite the contrary. It contained an obligation on Xen’s to have the plaintiff company added as a third party operator to its license. The failure to comply with that might give rise to a claim for breach of contract, but it does not render the contract void or voidable for illegality.

Breach of Contract

[77] I begin the breach of contract analysis by asking this question: were the plaintiffs entitled to treat the contract at an end when they ceased operating the business and vacated the premises on April 25, 2006?

[78] Contractual terms have been classified into conditions and warranties. As stated in Chitty on Contracts (ed. by H.G. Beale, 29^th edition, 2007. London: Sweet and Maxwell) at para. 12-017:

Traditionally, in English law, the terms of a contract have been classified as being either conditions or warranties, the difference between them being that any breach of a condition entitles the party, if he so chooses, to treat himself as discharged from further performance under the contract, and in any event to claim damages for loss sustained by the breach. A breach of warranty, on the other hand, does not entitle him to treat himself as discharged, but to claim damages only.

[79] There are also what are called “intermediate” terms. Whether or not a party is entitled to treat himself as discharged for breach of an intermediate terms depends on the seriousness of the breach or its consequences.

[80] I think that the contractual provisions I cited above with respect to the liquor license are conditions because they were of fundamental importance to the contract and the operation of the business that was being sold.

[81] A victim of a breach of a condition does not have to treat the contract as at an end. He has the option of treating the contract as being alive and maintaining a claim for damages, but he must make an election between the two. As stated in Chitty, at para. 12-030:

“Warranty” upon election. Upon the occurrence of a breach of condition, the injured party may elect to treat the breach of condition as a breach of warranty only and not as a ground for treating the contract as repudiated; or he may be compelled to do so where he goes on with the contract and takes some benefit under it. In such a case he is sometimes said to sue on a “warranty ex post facto,” although this expression is somewhat misleading since the breach is still that of a condition of the contract.

[82] The Supreme Court of Canada recently affirmed this basic contractual principle in Jedfro Investments (U.S.A.) Ltd. v. Jacyk, 2007 SCC 55, where Chief Justice McLachlin stated, at para. 20:

A contract may be said to be repudiated when one party acts in a way that evinces an intent to no longer be bound by the contract. The other party then may, at its option, elect to terminate the contract.

[83] In the case at bar, the plaintiffs would have been entitled to refuse to complete the contract when the necessary documents to effect the third party operator status were not tendered at the closing, but they proceeded to complete. At that point they made an election to treat the contractual provisions as warranties.

[84] The plaintiffs continued to operate the premises knowing of the state of affairs. They put the business up for sale. Both of these activities amount to an affirmation of the contract.

[85] The failure to deliver the third party operator right may be seen to be a continuing breach. But for the following reasons, I do not think that assists the plaintiffs in this case.

[86] The Court of Appeal addressed the issue of election in the context of a continuing breach in Doman Forest Products Ltd. v. GMAC Commercial Credit Corp. – Canada, 2007 BCCA 88. At paras. 112 – 113 Lowry J.A. stated, for the majority:

The election to which a party is put when faced with another's repudiation of an agreement is a long-established principle of contract law. The repudiation must be accepted and the agreement put to an end promptly so that both parties are released from further performance, or it will be said to be affirmed such that both parties are required to perform. That is because the law will not permit a party to an agreement to elect between inconsistent rights – to rely upon a repudiation to avoid performing his, her, or its obligations while taking the benefit of the repudiating party's continued performance. A continuing repudiation, which permits the innocent party to make an election at any time while the repudiation continues, effectively permits the innocent party to continue to take the benefit of the agreement to the extent that the repudiating party is prepared to perform until such time as the innocent party sees fit to put the agreement to an end.

If, having affirmed an agreement in the face of it having been repudiated, and then having taken the benefit of the repudiating party's performance, the innocent party is to be heard to say at some later time there has been a continuing breach entitling that party to accept the repudiation, it can only be where there is no question that the repudiating party has in fact refused at the time of acceptance to perform. There must, at the very least, be a clear manifest refusal to perform, subsequent to an affirmation of the agreement, which is accepted with reasonable promptness. The party purporting to have accepted the repudiation bears the burden of establishing the continued or repeated refusal to perform that constitutes the repudiation. The burden will become more onerous with the passage of time between affirmation and subsequent purported acceptance. The burden is not one the appellants can meet in this case.

[87] At the time of the plaintiffs’ termination of the contract, Xen’s had not manifestly refused to perform, to use the words of Lowry J.A., nor was there such a refusal in the past. In fact, on April 24, the day before the plaintiffs vacated the premises and shut the business, Mr. Schmuck paid Luna the balance owing to it so he could effect the transfer of the license.

[88] At the least, I think that having affirmed the contract, the plaintiffs were obliged to put Xen’s on notice that if the licence was not received in a reasonable period of time, they would then treat the agreement as at an end; but, I do not have to decide that issue because there was no such notice. To the contrary, Mr. Shore’s letter evinced an intention to claim damages only, and Mr. Ganapathi’s letter came only a day before the plaintiffs ceased operating.

[89] Therefore, at the time it ceased operating the business and vacated the premises, the plaintiffs were only entitled to treat the contractual provisions dealing with the license as warranties and sue for damages. The plaintiffs were not entitled to treat the contract as having been repudiated in April. When they did so, they breached the contract.

[90] The breach of contract disentitles the plaintiffs from claiming damages. At the time they terminated the contract, the plaintiffs had not suffered any damages as a result of Xen’s breach of contract, because Mesa Luna Dine & Dance had been in full operation.

[91] The plaintiffs, of course, also breached the lease.

[92] Having reached this conclusion it is unnecessary for me to consider waiver and other equitable arguments made by the defendants.

[93] The plaintiffs’ action is therefore dismissed.

THE COUNTERCLAIM

[94] Having found that the plaintiffs breached both the agreement for purchase and sale, and the lease, I turn to address the remedies to which the defendants might be entitled, if any.

[95] The defendants claim specific performance of the agreement, namely the payment of the balance owing under the contract.

[96] But specific performance must operate in both directions and Xen’s must be able to perform its part of the bargain. Xen’s has let the liquor license lapse and the building has been sold. That precludes the remedy of specific performance.

[97] I turn to damages. The defendants must prove their damages, and the onus is on the plaintiffs to prove that the defendants failed to mitigate their loss.

[98] While Xen’s did not receive the final payment of $100,000, nor all or a portion of the 25,000[1] for the food and liquor inventory, most of the leasehold improvements, furniture and computer equipment were left behind by the plaintiffs.

[99] Therefore, I do not think the defendants’ measure of damages is the amounts left unpaid.

[100] The assets left behind were valued in the contract of purchase and sale at $150,000.

[101] Apparently, the furniture and fixtures were auctioned off. The evidence is not clear as to who got the benefit of that. It might have been either of the two defendant companies or the purchaser of the building. If it was the latter, it might be that the defendants received some moneys from the landlord.

[102] If Mr. Schmuck’s companies handled the sale of the assets improvidently, then they failed to mitigate their damages, which they were under a duty to do. That includes the numbered company as the lessor.

[103] Further, Xen’s was left with the liquor license. It could have either used that itself to operate the premises, or sold it, or sold the third party operator rights. Once again, it was under a duty to mitigate its loss. The same conclusion applies to the amount owing for the liquor and food.

[104] Mr. Schmuck said that he could not operate or re-open the business because the plaintiffs took various pieces of equipment and the reservation book. The plaintiffs may have taken some equipment, such as a dough machine, but that could have been easily replaced.

[105] I have doubts as to whether the reservation book was taken by the plaintiffs, but even if it was, it stretches credulity to think that a restaurant would have to close because its reservation book had been lost, or that the restaurant could not be opened without it.

CONCLUSION

[106] Both the claims and counterclaims are dismissed.

[107] If the parties wish, they may make arrangements to speak to costs. Otherwise, each party should bear its own costs.

“MYERS, J.”

[1] Whether part of this was re-paid (by cash payments) was disputed.

Citation:	*Mesa Luna Dine & Dance Ltd. v. 536842 B.C. Ltd.,*
	2008 BCSC 583