Vindication for Persistent Pedants: Why Contractual Notice Provisions Deserve Careful Consideration?

Introduction

“Indeed those who insist on ploughing through the boilerplate in detail are often regarded as timewasters and pedants. However, when litigation on their contracts has taken place, many draftsmen have found to their cost that it was a so-called boilerplate clause (its significance overlooked by both sides at the time of drafting) which decided the issue.”[1]

In mergers and acquisitions, the devil is often in the details, and nowhere is this more evident than in the seemingly mundane "boilerplate" provisions. The recent decision by the Ontario Superior Court of Justice in the case SpaceBridge Inc. v. Baylin Technologies Inc., 2023 ONSC 4146 [SpaceBridge] – subsequently affirmed by the Court of Appeals for Ontario[2] on its salient points – underscores the critical importance of meticulous drafting of contractual notice provisions, frequently relegated to an afterthought. In this post, we explore, by reviewing SpaceBridge, how a few overlooked words can dramatically alter the resulting contractual obligations, in the context of indemnification claims.

Background and Summary of the Dispute

In January 2018, Baylin Technologies Inc. and certain of its group entities (together “Baylin”) purchased from SpaceBridge Inc. and its group entities (together “SpaceBridge”) their radio frequency, terrestrial microwave and antenna equipment and services business for $49 million (subject to post-closing adjustments) through an Asset Purchase Agreement (“APA”). The APA included adjustment and indemnification provisions and established an escrow fund. A separate Escrow Agreement dated the same date as the APA (“Escrow Agreement”) governed the escrow funds, of which, $4.9 million was set aside for indemnity claims under the APA.[3] As part of the transaction, the parties had also entered into a separate Transition Services Agreement (“TSA”).

The APA and the Escrow Agreement had distinct notice provisions. Section 10.3 of the APA provided that notices “shall be sufficiently given or sent or delivered” by personal delivery, registered mail, or email.[4] In contrast, section 7.9 of the Escrow Agreement specified that notices “shall be given in writing and delivered” by personal delivery, recognized national courier, or email, but notably omitted registered mail.[5] The TSA’s notice provisions substantially tracked those of the APA, and provided that notices would be “sufficiently given if delivered or transmitted in accordance with Section 10.3 of the APA”.[6]

After the transaction had closed, Baylin made several indemnity claims. Claim certificates for the first two claims were delivered by email. However, the third claim certificate, relating to certain supplier indemnities, was delivered by registered mail. Following the release of the indemnity claim amount to Baylin by the escrow agent, SpaceBridge commenced an application, seeking, among other remedies, a declaration from the Court that Baylin failed to comply with the notice requirements under the Escrow Agreement when it delivered the claim certificate in respect of the supplier indemnity claim, such that the supplier indemnity claim was invalid, and an ancillary order for the return of the indemnity claim amount to a new escrow agent.

Summary of the Court’s Analysis

After establishing that one of the determinative issues was whether Baylin's use of registered mail to deliver the claim certificate for the supplier indemnity claim was valid under the Escrow Agreement, the application judge proceeded with analyzing the interplay between the provisions of the APA and the Escrow Agreement.

The application judge ruled in favour of SpaceBridge, finding that the claim certificate for supplier indemnity claim was not validly delivered under the Escrow Agreement and ordered Baylin to repay the indemnity claim amount to the new escrow agent, on the following grounds:

• Citing Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673, 74 B.L.R. (4th) 161, the application judge held that where parties conclude multiple agreements pertaining to one complex transaction, the related agreements’ terms would inform the overall interpretation exercise. On this basis, the judge indicated that the Escrow Agreement and the APA, as contemporaneous and intimately related agreements, should be read together.[7]

• Citing Ross v. T. Eaton Co. (1992), 1992 CanLII 7470 (ON CA), 11 O.R. (3d) 115 (C.A.) [Ross] and Brewster v. 994620 Alberta Ltd., 2007 ABQB 264, the application judge found that the parties intended to deal with the delivery methods under the Escrow Agreement differently than the APA and TSA.[8]

• Citing Cathcart Inspection Services Ltd. v. Purolator Courier Ltd. (1982), 1982 CanLII 2056 (ON CA), 39 O.R. (2d) 656 (C.A.) [Cathcart], the application judge held that registered mail is not a commercially reasonable and objective equivalent to or an example of “recognized national courier” under the terms of the Escrow Agreement.[9]

• Citing Ross and Manchester Diocesan Council for Education v. Commercial & General Investments Ltd., [1970] 1 W.L.R. 241 (E.W. H.C.), the application judge found that even if the delivery modalities under the Escrow Agreement were not exhaustive, the absence of registered mail in the Escrow Agreement indicated an intent to exclude it as a valid delivery method, as registered mail was not an acceptable alternative since it was not “no less advantageous” than courier.[10]

• Citing Cathcart, Nova Scotia, Province of v. Weymouth Sea Products Limited (Defendants) and Commercial Credit Corporation Limited (Third Party Intervenor) (1983), 1983 CanLII 3042 (NS SC), 59 N.S.R. (2d) 181 (S.C.), and Trendsetter Developments Ltd. v. Sharpley, 1990 CarswellOnt 2189 (H.C.), the application judge noted that the courts had concluded that registered mail was considered less reliable than courier service.[11]

• The application judge then proceeded to analyse what would be objectively more reliable (or no less advantageous) in the specific case. She held that the APA provisions (which included certain caveats with respect to deemed notice rules) recognized a potential for delays, or for discontinuance or interruption in the delivery service due to labour disputes and that they were an objective manifestation of the parties’ assessment that the parties considered registered mail to be an inferior modality for delivery of notice.[12]

  Ultimately, the application judge concluded that the delivery of notice by registered mail was not permitted under the Escrow Agreement under either interpretation, whether there was a closed list (that did not provide for delivery by registered mail), or an open list (as registered mail was “ less advantageous” than the listed modalities).

Takeaways

The decision in SpaceBridge, in addition to being a story vindicating all the fellow persistent pedants out there, underscores the importance of precise and clear notice provisions in commercial agreements. It highlights that the specific methods of delivery stipulated in agreements must be strictly followed to ensure the validity of claims and notices. More generally, it serves as a stark reminder that common clauses – often glossed over during negotiations – can have a critical impact on later disputes.

Are you considering buying or selling a business? Or dealing with complex commercial agreements? Let’s connect and see how Harsa Legal can help you!

[1] Richard Chistou, Boilerplate: Practical Clauses, 8th Ed, 2020, at para 1-001.

[2] SpaceBridge Inc. v. Baylin Technologies Inc., 2024 ONCA 871, at paras 38-42.

[3] SpaceBridge, at paras 6-8.

[4] Ibid, at para 11.

[5] Ibid, at para 15.

[6] Ibid, at para 41.

[7] Ibid, at para 36.

[8] Ibid, at paras 39-42.

[9] Ibid, at para 43.

[10] Ibid, at para 44.

[11] Ibid, at para 45.

[12] Ibid, at para 46.