For those who pass their business on to the next generation, particularly to family, it is undoubtedly the hope that the successors will work together to ensure that the business continues to thrive for many years to come. It’s hardly anyone’s plan to see their children in court against one another.

However, such situations regrettably do happen. Recently, the Court of Appeal affirmed the decision of the Supreme Court of Canada in the matter of 0930032 B.C. Ltd. v. 3 Oaks Dairy Farms Ltd., and the Supreme Court’s interpretation of a promissory note in respect of a shareholder loan.

Jim and Joyce ran a dairy farm. Robert, their son, lived and worked full time on the farm. James, their son-in-law, provided bookkeeping and accounting services, while also being employed elsewhere. Jim and Joyce invited Robert and James to become equity partners, under a partnership agreement which included provisions agreeing that “no partner would do anything detrimental to the best interests of the partnership or which would make it impossible to carry on the ordinary business of the partnership”. After further legal and tax advice, the farm was incorporated into a company and, in exchange for their partnership interests, shares and promissory notes were issued. However, no shareholders agreement was signed that matched the original partnership agreement.

Jim and Joyce eventually retired, and agreements were made to ensure that they could continue to live on the farm and receive a monthly management bonus as well as a lump sum payout of Jim and Joyce’s shareholder loans. So far, everything seemed like it was proceeding to plan.

However, James then suffered a heart condition and soon was unable to work either on the farm or elsewhere. James needed to be cashed out of the farm, but Robert was unable to find financing to do so. Although the shareholders agreed to a repayment of part of James’ shareholder loans, James then claimed that the promissory note allowed him to collect the entire amount.

Certainly, the promissory note states that the farm promissory to pay James “thirty (30) days after demand therefore” – and it is a rule of contractual interpretation that words cannot be implied into a written agreement that are inconsistent with the express words used by the parties. As the Court of Appeal stated, this rule is intended to provide certainty to parties in commercial dealings – what has been written down should take precedence over the recollections at trial of the subjective intentions of the parties.

Nevertheless, James was unsuccessful both at trial and on appeal. At trial, the court held that the plain and ordinary meaning of the promissory note was “excluded” by the context in which it was made – that is, the promissory note was given in exchange for obligations undertaken in the partnership agreement. While this partnership agreement itself was no longer in effect, the terms continued to apply – including the condition that the parties would not take any steps that would get in the way of the farm continuing as a dairy farm – and James was aware of this. As such, James could not collect on the entire amount of the note.

On appeal, James argued that the trial judge “implied” such a term and this was contradictory to the written terms of the promissory note. However, the Court of Appeal did not agree. The terms of the partnership agreement were intended and understood by the parties to continue in effect, notwithstanding the change from a partnership and the incorporation of the business. Certainly, the Court of Appeal had to be satisfied that the evidence, objectively considered, showed that the parties intended to bind themselves to the contractual obligations, that consideration was given and the terms were capable of performance and enforcement – but these conditions had been satisfied. As such, James could not be successful in his appeal.

On a last, rather sad note, the Court of Appeal commented on James’ continuing interest in the farm, particularly as James had not been elected a director of the farm. While that matter was not before the court, the Court of Appeal earnestly hoped that James and Robert could sort it out without further litigation – and let’s hope that is indeed the case.