No Space for Error: Invalid Indemnity Claim in Asset Transaction Failed to Follow Notice Terms

December 18, 2024

Written By Ciara Mackey, Andrew Disipio, Douglas Fenton and Nicholas Heinrich

The latest dispute in the asset deal between Spacebridge Inc. and Baylin Technologies Inc.¹ is a stark warning to anyone delivering a notice of indemnification claim against funds held in escrow.

In SpaceBridge Inc v Baylin Technologies Inc, 2024 ONCA 871, the Court of Appeal for Ontario upheld a strict interpretation of the notice requirements under the indemnification and escrow provisions in an Asset Purchase Agreement (APA) and Escrow Agreement. Written notice of Baylin’s indemnity claim, sent to the Escrow Agent on time but by registered mail rather than courier, did not comply with the parties’ agreement and was found to be invalid. The consequence was severe. Having failed to validly deliver its indemnity claim to the Escrow Agent, Baylin was ordered to return its over $1.8 million claim in full, with interest.

In January 2018, Baylin purchased various assets from SpaceBridge under the terms of an APA. The APA set out an indemnification process, with an indemnity escrow to be established through a separate Escrow Agreement. The indemnified party could initiate a claim by delivering written notice by personal delivery, registered mail, or email. Any amounts payable by SpaceBridge were to be paid from an Escrow Fund (funded by Baylin with a portion of the APA purchase price). Under the Escrow Agreement, Baylin was required to deliver a claim certificate to the Escrow Agent by either “recognized national courier” or by email. In contrast to the APA, the Escrow Agreement did not list registered mail as a method of delivery of a claim to the Escrow Agent.

Among other issues with the transaction, SpaceBridge allegedly stopped or delayed full payment to suppliers prior to closing. Baylin sought indemnity for over $1.8 million. It sent that claim to the Escrow Agent by overnight registered mail, within the specified deadline. SpaceBridge intended to object but missed the deadline to do so. The Escrow Agent accordingly released the claimed funds to Baylin. In December 2018, SpaceBridge brought an application to reclaim the funds. Some four years later in 2022, SpaceBridge amended its application, asserting for the first time that delivery of the claim certificate to the Escrow Agent by registered mail was invalid. Baylin objected to the late amendment, contending that it was statute-barred by the Limitations Act.

The application judge sided with SpaceBridge and held that the claim delivery to the Escrow Agent was invalid. The Court concluded that the omission of registered mail as a method of delivery in the Escrow Agreement, given its inclusion in the APA, was deliberate and no funds ought to have been released from escrow. Further, since SpaceBridge’s amendment did not plead any consequential relief in addition to the requested declaration, the Court held that it was not too late for SpaceBridge to take that position.

Baylin’s appeal to the Court of Appeal was dismissed. Accepting that the Court was to defer to the application judge’s interpretation of the relevant contractual provisions, the Court saw no reason to interfere. The application judge’s focus on the textual differences between the APA and the Escrow Agreement was “detailed, comprehensive, and without error.” The judge reasonably concluded that including registered mail as a method of delivery in the APA, but not in the Escrow Agreement, was a deliberate difference which “reflected the significance of the obligation triggered by the delivery” of the claim certificate.

As to whether the late amendment was statute-barred, the Court of Appeal disagreed with the analysis of the court below but reached the same result. The new argument did not plead a new cause of action or a new remedy—SpaceBridge had always been seeking the return of the claimed escrow funds from Baylin. It was not too late to deliver the winning argument – the delivery method used by Baylin was invalid under the parties’ agreements.

Takeaways

• There is no space for error in complying with contractual terms for notice and forms for delivery of significant transactional documents, particularly in the context of indemnity claims for funds held in escrow. In this case, registered mail was no substitute for delivery by email or a “recognized national courier” as provided in the parties’ agreement. While strict, this textual interpretation of the transactional documents was upheld in SpaceBridge, resulting in return of the claimed funds in full and with interest.
• Clear and consistent drafting of notice provisions in related contracts is important. Drafting slightly different delivery requirements for different claims and processes involved in a single transaction invites confusion and mistakes. This is no place to get creative.

If you or your business have any questions, please contact a member of the Bennett Jones Commercial Litigation or Commercial Transactions group.

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