Business with Friends

On October 11, 2007, the Supreme Court of Canada is scheduled to hear the appeal in Jedfro Investments (USA) Limited, et al v Nadia Jacyk, in her capacity as Litigation Administrator for the estate of Peter Jacyk, et al, a case which deals with the question of what happens to the enforceability of a contract when all parties to that contract engage in actions which show they do not intend to comply with its terms.

The facts of the case read like a parable that provides support for the oft cited maxim: “don’t do business with friends.” Iwasykiw and Jacyk were old friends who had known each other for over 55 years. They, together with another longtime friend, Matukas, became involved in a joint venture to acquire and develop land. The three friends incorporated separate corporations which were parties to a joint venture agreement.

When the lender demanded repayment of the loan used to purchase the land, Iwasykiw and Matukas were unable to come up with their respective portions. Instead of allowing the lender to foreclose on the loan (and losing substantial investments to date) or loaning the necessary funds to Iwasykiw and Matukas, Jacyk purchased an assignment of the loan through another company which he controlled but which was not party to the joint venture agreement. The actual joint venture agreement provided a procedure through which a non-defaulting party can acquire the defaulting party’s interests in the venture by paying the defaulting party an amount calculated through a buyout formula. However, because Jacyk acquired an assignment of the loan through a different corporation, he avoided these terms by commencing foreclosure proceedings and then re-acquiring the land in a judicially supervised sale.

None of the three parties sought to rely upon the terms set out in the original joint venture agreement. Jacyk entered into negotiations with Matukas and Iwasyk to establish a new agreement for the venture which provided Jacyk with the lion’s share of future profits. While Jacyk entered into a new joint venture agreement with Matukas, Iwasykiw did not agree to the terms proposed by Jacyk and was left out of this newly formed venture. Sadly, both Jacyk and Iwasykiw, the two longtime friends, died before their dispute could be resolved and their fight has been taken up by their respective estates. Both the trial judge and the Court of Appeal were forced to rely upon evidence that Jacyk and Iwasykiw provided at discovery.

In this case, the SCC is faced with choosing between two equally unappealing possibilities. Allowing Iwasykiw’s appeal and awarding damages would reward the party that had neglected to fulfill its contractual obligations and had simply sat back and made no attempt to raise the funds to pay its portion of the loan, despite having the assets to do so. In foreclosing on the loan, Jacyk, through a corporation not party to the joint venture, had simply played the role which would have been played by the lender anyway. On the other hand, Jacyk used a separate corporate vehicle in order to circumvent the terms of the joint venture agreement and in effect acquired Iwasykiw’s share of the venture without paying for this interest under the buyout formula set out in the agreement.

Both the trial judge and the Ontario Court of Appeal chose to side with Jacyk, preferring not to interfere in the dealings of these two sophisticated businessmen. Both lower courts seemed to agree with the sentiment that Iwasykiw was the author of his own misfortune.

If the SCC agrees with the lower courts, it must be careful in how it reaches its conclusion. While the trial judge was not particularly clear as to how she concluded that the buyout provisions of the joint venture agreement were not enforceable, the Court of Appeal framed her judgment in broad terms:

Where parties act in a way that shows they do not intend to comply with or be bound by the terms of their written agreement, one party cannot later come to court and ask to have the agreement enforced for its benefit. Enforcing the written agreement in these circumstances would be contrary to the intention of the parties, as evidenced by their conduct.

It is difficult to see how Iwasykiw’s attempt to negotiate a modification of the original terms can render the original contract unenforceable when no new contract is actually reached. To uphold the Court of Appeal’s decision in such broad terms would create too much uncertainty in the law of contracts. Any time two parties unsuccessfully attempt to modify the terms of a contract, one party could then argue that the original contract is no longer enforceable. If the SCC is to uphold such a doctrine, it would be well advised to craft a sufficiently precise test where the doctrine would only apply in situations where it is equitable to do so.

Another, perhaps less bold, avenue available to the SCC in denying the appeal is simply to refuse to pierce the corporate veil. As a separate legal entity from the company which was party to the joint venture agreeement, the company which purchased the assignment of the loan had every right to bring foreclosure proceedings and did not breach the agreement by doing so. While this would ignore the practical reality that Jacyk was the person behind both corporations, there is a longstanding (and notorious) tradition within the jurisprudence for ignoring these realities. Deciding this case on such a basis may be a less radical move for the SCC with less unforeseen consequences for the development of the law.