Date: 19980227 Docket: S790 Registry: Powell River IN THE SUPREME COURT OF BRITISH COLUMBIA BETWEEN: KENNETH MICHAEL NORMAN RANT PLAINTIFF AND: MATTHEW ERIC WARD, and GOLDEN FIRE JUMPERS LTD. DEFENDANTS REASONS FOR JUDGMENT OF THE HONOURABLE MR. JUSTICE SIGURDSON Counsel for the Plaintiff: Robert H.J. Burgess Counsel for the Defendants: Bruce F. Fairley Place and Dates of Hearing: Vancouver, B.C. 18 & 19 December 1997 INTRODUCTION [1] The issue in this action is whether a co-obligant under a joint and several promissory note is entitled, in the circumstances, to claim contribution from the other maker. [2] The facts are uncomplicated. The plaintiff, Kenneth Rant, and the defendant, Matthew Ward, were 50% shareholders in Golden Fire Jumpers Ltd., a company incorporated to carry on their business. They were also co-obligants under a promissory note to the company's lender. Mr. Rant later sold his shares to Mr. Ward. The share purchase agreement was silent with respect to the shareholders' continuing obligation to repay the loan. The shareholders remained jointly and severally liable to the lender. The agreement did not contain an indemnity in favour of the vendor. [3] After the share purchase agreement was executed, the company's serious cash flow problems continued. Eventually the lender made demand for repayment from both the current and the former shareholder. The defendant, the share purchaser, borrowed monies personally and paid off the loan. [4] In this action, the vendor, Mr. Rant, sues for $20,000, the balance owing to him under the share purchase agreement. The defendant purchaser, Mr. Ward, claims contribution by way of set-off and counterclaims for 50 percent of the amount he paid to satisfy the parties' joint obligation to the lender. [5] The plaintiff seeks judgment for the balance owing under the share purchase contract and argues that it would be unjust and inequitable to allow the defendant to claim contribution. The defendant's expectation that the debt would be paid by the company in due course and the failure of an almost illiterate man to insist on an indemnity in a transaction where he was unrepresented, are circumstances, the plaintiff says, that make a claim for contribution unjust. [6] On the other hand, the defendant says there is a strong presumption in favour of contribution and that there is no agreement, express or implied, and no equitable reason why the usual rule should not apply. The defendant says that notwithstanding the defendant's expectation that the company would pay off the loan in due course, dire financial circumstances facing the company made that impossible. The defendant says that the share purchase transaction was fair, the defendant received substantial consideration for his shares and nothing in the transaction makes a claim for contribution inequitable. [7] The entitlement of one co-obligant to claim contribution from another appears in s. 34 of the Law and Equity Act, R.S.B.C. 1996, c. 253 and is based on the equitable doctrine of unjust enrichment. The issue in this case, as I see it, is whether the defendant is barred by agreement or by operation of some equitable principle from claiming contribution from the plaintiff, a co-maker of a promissory note. FACTS [8] In 1995, the plaintiff, Kenneth Michael Norman Rant, an energetic, but uneducated man, met the defendant, Matthew Eric Ward, a man with similar energy and some university education. They decided to establish a contracting business along the lines of Mr. Rant's existing business of providing labour crews for occasional work required by Evans Forest Products in Golden, British Columbia. Their enterprise involved slash burning and related work. [9] Prior to the incorporation of Golden Fire Jumpers Ltd., the parties began to carry on business. Mr. Ward borrowed $40,000 from his father to purchase their initial equipment. The parties then went to Community Futures Development Corporation for financing. There Mr. Rant and Mr. Ward obtained a term loan of $65,000. The loan was for working capital, to allow the purchase of a 1995 Supercab 4x4, and for equipment. [10] Community Futures received from Mr. Rant and Mr. Ward a joint and several promissory note dated May 16, 1995 and took a first charge over all the business assets including the 1995 4x4 Supercab. Allyson Edwards, Mr. Rant's girlfriend, granted a mortgage against her home as further security for the loan. [11] The company did not execute loan documents, but after the company was incorporated, the parties treated the loan as a corporate obligation and the company made the loan payments. [12] In the first year of its operations, the company was active. With a loan from the Bank of Montreal the company acquired another vehicle. The two shareholders planned to draw $5,000 a month, but took money as needed. By the work season's end, Mr. Ward had drawn $35,000 and Mr. Rant about $60,000. At the end of 1995 the company was tight for cash. In order to cover the company's ongoing obligations until the next work season, Mr. Ward proposed that they set aside $10,000 to cover expected payables. Mr. Rant, however, made withdrawals for personal expenditures which substantially depleted the company's reserves by the beginning of 1996. [13] Mr. Ward and Mr. Rant had a falling out and decided that one should buy the other's shares. Mr. Rant had no money, but told Mr. Ward that he would not take less than $30,000 and a company truck in exchange for his shares. [14] Mr. Ward agreed to purchase Mr. Rant's shares for $30,000. Mr. Rant testified that he believed the company was worth over $500,000. Mr. Ward testified that it was valueless. Although Mr. Ward spoke to the company accountant, there was no admissible evidence of the value of the shares. There is no evidence of any rationale underlying the agreed purchase price. [15] On April 29, 1996, Mr. Ward retained the law firm of Davis & Fairley to prepare a share purchase agreement. Mr. Ward sent a draft agreement and his lawyer's letter to Mr. Rant on April 30th. The letter read: We have not and will not provide any legal advice to either Rant or the Company, but act solely for our client Matthew Ward. We would advise both Rant and the Company to obtain independent legal advice if either wishes to be represented in this transaction. [16] I accept Mr. Ward's evidence that he took that letter and the draft agreement to Mr. Rant who came in the next day with Mr. Ward to see Mr. Fairley. The agreement provided: 7.4 Legal Costs and Respresentation (sic) Each of the parties to this agreement has been afforded the opportunity to seek independent legal advice. Mr. Rant understood that Mr. Fairley was not acting for him but did not seek independent advice. [17] Mr. Rant and Mr. Ward signed the agreement. The agreement provided for transfer of the shares upon payment of $30,000 plus the agreement of the company to transfer all the company's interest in a vehicle to Mr. Rant. Under the agreement, Mr. Ward was required to pay the purchase price of $30,000 by July 31, 1996. As at the date of trial, $20,000 of that purchase price remains outstanding. [18] The agreement is silent about the loan from Community Futures. The share purchase contract contains an entire agreement clause that reads: 6.2 Entire Agreement This agreement and the instruments referred to herein constitute the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements, undertakings, negotiations and discussions, whether oral or written, between the parties and there are no warranties, conditions, representations or other agreements between the parties in connection with the subject matter hereof except as specifically set forth herein. [19] I find that both parties expected that the company would carry on as it had in the past and that Mr. Ward, through the company, would in due course be able to pay out the Community Futures loan. To the extent that the evidence discloses that anything was said about the loan, it was only that Mr. Rant expressed some concern that it be taken care of so that his girlfriend, Allyson, would not be called on her mortgage. However, there was no discussion or agreement between Mr. Ward and Mr. Rant about what would happen if the loan was not satisfied by the company in the future. [20] I am unable to determine on the evidence whether there was much, if any, value to the company at the time of the transaction, but presumably Mr. Ward thought that the company had sufficient goodwill to generate future work, particularly if Mr. Rant was no longer involved. [21] After the closing of the share transaction, the company immediately faced a cash crisis. It had liabilities of about $65,000 inclusive of the Community Futures loan. The work season was late in beginning. Immediately, Mr. Ward borrowed $10,000 to keep the company's payables current. The company had little work in May and only some in June, and after late May 1996 was unable to make any further payments on its loan to Community Futures. [22] On August 8, 1996, Community Futures made demand on Mr. Ward and Mr. Rant. The loan, then in arrears for three months, exceeded $43,000. Apart from the late start, part of the company's difficulty was due to the financial problems suffered by its most important customer, Evans Forest Products, which at the time of the trial still owed the company about $59,000. [23] After Mr. Ward received the demand from Community Futures he did not contact Mr. Rant. Rather he borrowed $20,000 from his girlfriend and the balance from his father to satisfy the lender's demand of $43,356. Mr. Ward has yet to repay these further loans. [24] It is not suggested that Mr. Ward arranged his affairs in order to claim contribution and attempt to set off part of the loan against the balance owing to Mr. Rant under the share purchase agreement. It is not disputed that the financial problems facing the company made it impossible for it to satisfy the demand by Community Futures. I find as a fact that the defendant expected that he would, over the long run, pay out the loan to Community Futures from the company's future revenue, but because of financial difficulties that the company faced, including the late start to its work season and the financial difficulties facing its most significant customer, that did not occur. DISCUSSION [25] How is the entitlement of the defendant to claim contribution from the plaintiff to be determined given that the agreement was silent on this question? [26] The general entitlement of a co-surety or co-obligant to claim contribution from another co-surety or co-obligant is described in Fridman and McLeod, Restitution (1982) at p. 368: The early common law case either rejected a claim to contribution between co-sureties out of hand or allowed it to a limited degree by allowing a claim by a surety for contribution from his co-sureties limited to the total amount owed by the principal debtor divided by the number of sureties. In equity, however, the courts were more liberal in their attitude to the claim. In the leading case of Deering v. The Earl of Winchelsea (1787), 2 Bos. & P. 270, Eyre C.B. stated: In the particular case of sureties, it is admitted that one surety may compel another to contribute to the debt for which they are jointly bound. On what principle? Can it be because they are jointly bound? What if they are jointly and severally bound? What if severally bound by the same or different instruments? In every one of those cases sureties have a common interest and a common burthen. They are bound as effectively quoad contribution, as if bound in one instrument, with this difference only that the sums in each instrument ascertain their propositions whereas if they were joined in the same engagement, they must all contribute equally. In the absence of an agreement to the contrary, co-sureties are aequali jure as between themselves. Further, the comments of Eyre C.B. make clear that it is immaterial how the co-sureties come to be bound or if they are unaware of the existence of other co- sureties, so long as they are co-sureties for the same principal and the same debt. [27] The Law and Equity Act provides: 34 (1) Every person who, being surety for the debt or duty of another or being liable with another for any debt or duty, pays the debt or performs the duty is entitled to have assigned to him or her or to a trustee for him or her every judgment, specialty or other security that is held by the creditor in respect of the debt or duty, whether the judgment, specialty or other security is or is not deemed at law to have been satisfied by the payment of the debt or performance of the duty. (2) The person who has paid the debt or performed the duty is entitled to stand in the place of the creditor and to use all the remedies and, if necessary and on a proper indemnity, to use the name of the creditor in any action or other proceeding at law or in equity, in order to obtain from the principal debtor, or a co-surety, co-contractor or co-debtor indemnification for the advances made and loss sustained by the person, and the payment or performance made by the surety is not pleadable in bar of any action or other proceeding by him or her. (3) A co-surety, co-contractor or co-debtor is not entitled to recover from any other co- surety, co-contractor or co-debtor, by the means referred to in subsections (1) and (2), more than the just proportion to which, as between those parties themselves, the other co-surety, co-contractor or co- debtor is justly liable. [28] The entitlement of a co-obligant to claim contribution from another co-obligant is rooted in the law of unjust enrichment. In Fridman and McLeod, Restitution (supra) the learned authors say, at p. 365: The right of one co-obligor to seek contribution from other co-obligors when he is called upon to discharge the common obligation is similar to the right of one party to seek reimbursement from another person when he is called upon, in law, to discharge a common liability with respect to which the other is primarily liable. In both situations, the non paying "obligor" receives an unjust enrichment through the discharge of liability by the payer. In the former case (contribution) the unjust enrichment is as to a portion of the payment, whereas in the latter case (compulsory discharge of another's liability) the unjust enrichment is as to the total amount of the liability discharged. [29] In McGuinness, The Law of Guarantee (1986) the author, speaking of the right of co-obligees to seek contribution from each other, says at p. 225: The principle on which this right of contribution is founded is that of unjust enrichment: if one co- obligor pays more than his fair share of the debt, then the other co-obligor is enriched by avoiding his share of that expense. The application of this restitutionary principle is a relatively simple matter where all sureties are liable under the same instrument for the whole of the principal's debt or obligation. ... The surety's right to obtain contribution from his co-surety is based upon the equitable principle that the creditor should impose the burden upon all co- sureties on a rateable basis, and if he does not, the court will act to correct this inequity. (p. 226) ... Although the right to recover contribution is implied by law upon equitable principles of restitution, rather than based upon any principle of contract, the extent to which a surety is entitled to recover contribution from his co-sureties may be modified by the nature and terms of the agreement which each of the sureties has made. (p. 228) [30] After referring to a provision in the Mercantile Law Amendment Act similar in terms to s. 34(3) of the Law and Equity Act, the author continues: The term "just proportion" is not defined in the Act, but the amount which a surety is entitled to recover is the proportion to which the surety is entitled under the rules of equity. As noted above, the general principle is that, in the absence of an express provision or necessary inference to the contrary, two or more sureties who are equally liable as guarantors with respect to the same debt or obligation should contribute equally towards the satisfaction of the guaranteed debt or obligation, irrespective of whether the co-sureties are bound by the same agreement or separate agreements. (p. 229) [31] The author says at p. 230: There is a strong presumption of the existence of a right of contribution in any case of co- suretyship. However, this presumption is not conclusive. In all cases, the governing consideration is the apparent intention of the parties and thus, in any particular case, the courts are willing to inquire into the intention of the parties (as evidenced by the terms of their agreement and, subject to the parol evidence rule, the negotiations between them) in order to determine whether or not that right was intended to exist in the case of that contract. [32] Would the plaintiff be unjustly enriched in these circumstances if the defendant were not entitled to claim contribution for part of its payment to Community Futures? The test for unjust enrichment is set out in Peter v. Beblow, [1993] 1 S.C.R. 980. According to the judgment of Madam Justice McLachlin, an action for unjust enrichment arises when three elements are satisfied: (1) an enrichment; (2) a corresponding deprivation; and (3) the absence of a juristic reason for the enrichment. [33] The first two requirements in the Peter v. Beblow analysis have been clearly satisfied. There has been an enrichment and a corresponding deprivation by Mr. Ward paying off the loan to Community Futures for which both were responsible. [34] But what of the third element? McLachlin J. said of it in Peter v. Beblow, supra: What matters should be considered in determining whether there is an absence of juristic reason for the enrichment? The test is flexible, and the factors to be considered may vary with the situation before the court. ... In every case, the fundamental concerns is the legitimate expectation of the parties: Pettkus v. Becker, [1980] 2 S.C.R. 834. In family cases, this concern may raise the following subsidiary questions: i) Did the plaintiff confer the benefit as a valid gift or in pursuance of a valid common law, equitable or statutory obligation which he or she owed to the defendant? ii) Did the plaintiff submit to, or compromise, the defendant's honest claim? iii) Does public policy support the enrichment? (pp. 990-991) [35] In Pettkus v. Becker, Mr. Justice Dickson applied the juristic reason branch as follows: As for the third requirement, I hold that where one person in a relationship tantamount to spousal prejudices herself in the reasonable expectation of receiving an interest in property and the other person in the relationship freely accepts benefits conferred by the first person in circumstances where he knows or ought to have known of that reasonable expectation, it would be unjust to allow the recipient of the benefit to retain it. [36] In Clarkson v. McCrossen (1995), 3 B.C.L.R. (3d) 80 (C.A.), Hinds J.A., at p. 92, again dealing with a familial relationship, articulates this approach for finding a juristic reason for enrichment: (1) what is unjust; (2) the legitimate expectations of the parties; and (3) public policy concerns. I think this approach can be applied in a non-family case such as this. [37] I have concluded that the third element in the Peter v. Beblow analysis would be satisfied and that Mr. Rant would be unjustly enriched if Mr. Ward is not entitled to claim contribution in these particular circumstances. My reasons are as follows. [38] The facts of this case are somewhat unusual. Presumably, in most share purchase transactions, the entitlement of the remaining shareholder to claim contribution would be the subject of an indemnity or otherwise dealt with in the contract. But here the agreement is silent. I am unable on the evidence to find that there was either an express or implied agreement that the departing shareholder would be saved harmless from liability under the Community Futures loan under any circumstances. In appropriate circumstances, it may well be unjust for the remaining shareholder in similar circumstances to be allowed to claim contribution for payment of a debt where that debt had been taken into consideration in determining the purchase price of the shares, but there is no evidence from which I can reasonably infer that was done in this case. The reasonable expectations of the parties, of course, will largely determine what is just or those expectations may give rise, in an appropriate case, to an implied term that there would or would not be contribution in the circumstances. But here the expectation of the parties that the loan to Community Futures would be repaid from future corporate revenues was their expectation in the long run and not in the immediate future. [39] It may well be inequitable to allow a claim for contribution if the share purchaser intentionally brought about the calling of the loan in order to raise a possible set-off for monies owing under the purchase agreement. But that clearly was not the case here. [40] In summary, these are the relevant circumstances: The demand arose as a result of poor financial circumstances that came on quickly due to a number of factors including the company's late starting work season and the financial difficulties facing the company's major customer. There were no monies available in the company and the defendant had to borrow monies personally simply to meet pressing current corporate payables. To discharge the Community Futures loan, he had to borrow monies from his girlfriend and father, which he has not repaid. Based on the evidence before me, the terms of the share purchase agreement appear neither unconscionable nor unfair to Mr. Rant. I have concluded that in these particular circumstances the plaintiff would be unjustly enriched if the defendant were not entitled to claim contribution. [41] Accordingly, the defendant is entitled to claim as a set- off 50 percent of the amount of $43,356.84 and, accordingly, is therefore entitled to judgment on his counterclaim for the sum of $1,678.42. After taking into consideration the set-off, the plaintiff's claim must be dismissed. [42] My conclusion that Mr. Ward is entitled to contribution in these circumstances gives rise, in my view, to another issue; that is, whether Mr. Rant has any claim against Golden Fire Jumpers Ltd. The company is named as a defendant, but according to the answer to the interrogatories filed as part of Exhibit 1, and what I was told at trial, no claim for debt or damages is made against the company. If Mr. Rant's counsel wishes to file a written argument on that issue, he may do so within 30 days. Mr. Ward's counsel may respond in writing within 30 days. If no submission is made by Mr. Rant within 30 days, any claim against the company shall stand dismissed. [43] My present inclination is that all parties should bear their own costs. However, the parties may address that issue if they wish within the time limit for written argument set out above. "J.S. Sigurdson, J."