Getting into a business arrangement with a new partner can be an exciting time, with the prospect of new opportunities and successes on the horizon. Therefore, it is essential to ensure that a new business is structured correctly to maximize success. However, from time to time, business deals may not go as planned, and disputes can quickly escalate to litigation, particularly regarding financial agreements and funding. A recent case before the Court of Appeal for Ontario involved a situation where the receiving parties to a loan made by another party attempted to invalidate the terms of the loan’s repayment. 

Pandemic presents business opportunity

In the case of Mitri v. 11054660 Canada Inc., the appellants were a small group of individuals who came up with a business idea to sell medical-grade protective gowns during the COVID-19 pandemic. The appellants determined that to start their business, they needed to raise $2 million to purchase gowns from a Chinese manufacturer known to two of the appellants.

The appellants struck an agreement to borrow $460,000 from the respondent. The parties signed a promissory note which stated that the loan would be repaid on August 29, 2020, and the respondent would be entitled to a 50% share of the gross profits from the sale of the medical gowns. 

A law firm was retained to act on behalf of all parties and was instructed to prepare a promissory note in June 2020. The note set out the parties’ agreement concerning the principal repayment and a share of profits. The contract was prepared and sent to the parties; however, only one of them actually signed the promissory note. 

Low-quality goods cause business plan’s failure

When the gowns eventually arrived in Canada at the end of June, it became apparent that they were of a lower quality than two of the appellants had represented, and they could not be re-sold in Canada. Since they could not sell the gowns, the appellants did not repay the loan by the agreed-upon deadline. Two days later, on August 31, 2020, the respondent sent a demand letter to the appellants seeking repayment of the loan. Although the respondent did not have a fully executed copy of the promissory note, the signing party assured him all of the appellants had properly executed it. 

As the months went on, the respondent made repeated attempts to contact the appellants for repayment of the loan. Eventually, the appellants made partial repayments. In October 2020, the law firm that drafted the promissory note attempted to clean up the file and obtain a copy signed by all parties. In October 2021, the respondent received a fully executed copy of the promissory note along with a reporting letter from the law firm confirming the loan and a copy of the trust ledger showing receipt of the loan principal from the respondent.

The respondent commenced an application for sought summary judgment seeking to recover the loan principal in addition to the contracted interest rate of 20%.

Motion judge rules in favour of the lender

In his decision, the motion judge determined that all of the parties had a reasonable understanding of each other’s intentions when signing the promissory note, including the law firm’s ability to apply electronic signatures to the note in accordance with instructions from the appellants, as the execution occurred during the height of pandemic restrictions.

While there were “shortcomings in the diligence exhibited in documenting the scheme,” the motion judge was satisfied that the appellants had acted as though the note was binding, specifically in the partial repayments they made following demands from the respondent. This finding outweighed some of the appellants’ arguments that they had not executed the promissory note. In addition, a fully executed version of it was later provided. However, the motion judge questioned the appellants’ commercial sense, noting that they had agreed to give up 100% of their profits through various loan agreements. 

Accordingly, the motion judge found that there was no genuine issue requiring trial and granted the respondent summary judgment. 

Did the motion judge err in granting summary judgment?

On appeal to the Court of Appeal for Ontario, the appellants argued that the motion judge conflated the two-step process known as the Hryniak framework from the Supreme Court of Canada decision in Hryniak v. Mauldin. This framework assesses whether summary judgment is appropriate (instead of a case proceeding to a full trial). The first step in this process is for the court to ask whether there is a genuine issue requiring a trial based on the evidence before it as well as the fact-finding powers of the court. The second step requires the court to consider whether a trial can be avoided by summary judgment.

The appellants argued that the motion judge skipped to the second step of the framework without first asking if there was a genuine issue for a trial. However, the Court of Appeal was satisfied that he was entitled to make the findings he did based on the record before him. Therefore, the appeal was dismissed, and the respondent was granted costs on a substantial indemnity basis of $43,000. 

Contact the Commercial Litigation Lawyers at Milosevic & Associates in Toronto for Advice on Contract Disputes

The experienced team of commercial litigation lawyers at Milosevic & Associates regularly defend the rights of business owners in contract disputes before all levels of court across the province. Whether you are involved in a shareholder dispute, require assistance with contract interpretation, or are pursuing debt collection, our lawyers will advise you of your rights and options and advocate on your behalf. Call us at 416-916-1387 or contact us online to learn how we can assist you.