ASSIGNMENT # 2 BUSINESS LAW 331

by Kent Edward Baxter        3 November 1999        Instructor: Peter Miller

LAW OF CONTRACTS

PROBLEM STATEMENT

Merchant Capital Securities Corporation and Can Resources Limited of Ottawa, Ontario have filed a $4.3 million contract-related lawsuit against St. Genevieve Resources Limited. Also named in the suit are Pierre Gauthier, currently a Montreal-based promoter, formerly chairman and chief executive of St. Genevieve Resources, as well as eight present and past officials of St. Genevieve, ACT, and Strategic Exploration.

The lawsuit, filed with the Ontario Superior Court of Justice, states that St. Genevieve and its graphite firm affiliate, STREX Inc (Strategic Exploration) had allegedly made 'an intentional and/or negligent misrepresentation of value' when it sold Applied Carbon Technology (ACT) to Merchant and Can in October 1997.
 
The 1997 deal saw STREX sell a 39% equity stake in ACT, various assets and a $10 million debt to Mechant and Can. Notices and warranties for the financial situation of ACT were included in the company's purchase contract.

Around the time of the sale of ACT, once the deal had been closed, protection from creditors had been granted to St. Genevieve and its affiliate KWG once a revelation had been made of a non-authorized $22 million loan from related companies. A Russian gold mine received the proceeds of the loan.

It was soon discovered that one of the assets included in the purchase deal, a mine site located in Kearney, Ontario, had its reclamation cost of $1.6 million allegedly misrepresented by approximately $835,000.  The same mine site in Kearney was also the focus of a threatened lawsuit over reclamation by Environment Canada, which materialized five months later, in February of 1998.

A $2-million counter claim is expected to be filed by St. Genevieve Resources Ltd. against Merchant and Can, alleging that the purchasers of ACT are attempting to make up for a $10 million debt assumed upon the purchase of ACT. Mr. Gauthier remains as a consultant for St. Genevieve.

ANALYSIS

The main issues of this care are related to misrepresentation and contracts.

Utmost Good Faith p. 192, Ch. 10 - 'A duty owed when a special measure of trust is placed in one party by the other'
 
After ACT had been purchased by Merchant Capital and Can Resources, multiple difficulties that had been plaguing ACT surfaced, namely, a threatened legal action which later materialized in February 1998 when Environment Canada brought a lawsuit against ACT for the Kearney reclamation.

Regarding disclosure, the concept of misrepresentation includes 'a failure to disclose pertinent information, as the information may be privy to one party, notably the seller, but not the other, namely the buyer. (192) The party in a 'superior position of knowledge' has the duty to inform the other party of any risks assumed under the proposed contract. (192)

The allegations put forward by Merchant and Can state that the purchase contract had outlined the financial situation of ACT, but not any other problems (the $10 million debt notwithstanding) which would have been inherited by the purchasing party when the ownership was transferred.

P. 189 Re: Misrepresentation and Torts - 'A person [or in certain cases, a company] who innocently makes a misstatement and later learns that it is false is under a duty to inform the other party of the true situation as soon as possible. An innocent misrepresentation becomes fraudulent or negligent if the party fails to correct it when in a position to do so.'

St. Genevieve had sold ACT to Merchant and Can fully aware that a threatened legal action was pending; the reclamation cost was not found to be misrepresented until a later date, being discovered by the new owners of ACT, not by St. Genevieve.

Criteria for determination as to whether compensation is to be awarded will be based according to court findings -  P. 189 Re: Misrepresentation and Contracts - If [the] misrepresentation is [also] fraudulent or negligent, the court will grant damages as well as order recission.

CONCLUSION

As of publishing, a decision has not yet been made on this case.
 
If I were the judge in this case, I would take into consideration that fact that a treatened lawsuit by the federal government not being brought to the attention of the purchasers of ACT as a very serious matter.  Such a suit could harm the business reputation of ACT and their new owners, in terms of dealings,  but it is the duty of the seller to deal with any past mistakes made under their ownership, especially if the new owners are complacent to the problems.

The inability of Merchant and Can to locate the $494,000 investment in a subsidiary of ACT made by the former owners. Any such asset per se, especially one being part of a sale, should have all related information and terms set out in order for the purchaser to recieve benefits of ownership, and to deal with problems associated with the inherited risks assumed.

The countersuit by St. Genevieve against Merchant and Can, while a different manner in regards to this case, should be taken into consideration. If the $10 million debt is being paid off, then that factor has little or no credibilty. The situation of St. Genevieve and another one of its affiliates (KWG resources) being protected from creditors should have no direct relationship to the current case, as information on financial matters was given only for the ACT division, which had been sold one month before the story came out - in that matter, the issue is unrelated to facts in the current court case.

In regards to the degree of misrepresentation alleged varies, but I would concur that it was intentional in undisclosed information, such as the case of the lawsuit involving the federal government, since no disclosure was made. The alleged misrepresentation of reclamation costs, being the keystone of the case, should be verified by assessment.   Assessment details from both parties would be presented as evidence for that portion of the case, so that a decision could be made.

My decision would be, if intentional misrepresentation were proven, for St. Genevieieve to compensate Merchant Capital and Can Resources for any losses and legal fees suffered as a result of the lawsuit incolving ACT and the federal government, as well as make up the difference for the revealed undervaluation of property and enact an injuction to allow Merchant and Can to have access to the investment in ACT's high-tech subsidiary.

If, for the latter, no access can be provided, compensation in the value of the investment should be awarded to Merchant and Can. Overall, the amount awarded would be a figure similar to the $4.3 million figure being sought.

Back to Publications Page