DATE: 20011106 DOCKET: C31177

COURT OF APPEAL FOR ONTARIO

AUSTIN, LASKIN and SIMMONS JJ.A.

B E T W E E N:

PETER HOFFMAN and ANGELIKA BERGER

William R. Gale For the Appellants

Plaintiffs/Respondents

• and -

VRP WEB TECHNOLOGY INC. ROTOFLEX INTERNATIONAL HOLDINGS LTD., REINHARD MUHS and VALENTINE RIMAS

Charles P. Criminisi For the Respondents

Defendants/Appellants

Heard: October 13, 2000

On appeal from the judgment of Justice David S. Crane dated November 16, 1998.

BY THE COURT:

1In November 1995, the respondent Peter Hoffman was hired to be the general manager of the appellant VRP Web Technology Inc., a start-up research and development company. He signed an employment contract, which by its terms, could be terminated by either party on three months’ notice. In February 1997, Hoffman was summarily dismissed.

2He sued VRP Web for damages for wrongful dismissal and for a declaration that his employment contract was unenforceable. He also sued the appellants Rotoflex International Holdings Ltd. and its two principals, Reinhard Muhs and Valentine Rimas, who together controlled VRP Web, for damages for misrepresentation. The trial judge concluded that Hoffman had been dismissed without cause, and that his employment contract was unenforceable because of misrepresentations made by all the appellants. He ordered that the appellants pay Hoffman damages equivalent to one year’s salary.

3The appellants advance two main grounds of appeal: first, the trial judge erred in failing to find that Hoffman was dismissed for cause; and second, the trial judge erred in holding that the employment contract was unenforceable. We do not agree with the appellants’ first ground of appeal, but we do agree with the second. In our view, Hoffman’s damages are limited to the equivalent of three months’ notice against VRP Web, as stipulated in his employment contract.

BACKGROUND

4Hoffman, Muhs and Rimas met at a trade show in Germany in May 1995. At the time, Rotoflex had a $10 million research contract with the Ontario government under its R2000 or SciTech program. Muhs and Rimas proposed that Hoffman join them in forming a new company – VRP Web – that would do the research for the R2000 contract and then develop into a free-standing research and development company. Hoffman would manage the company and own 35% of the shares; Muhs, Rimas and Rotoflex would own the other 65%. Hoffman was to be paid a salary of $120,000 per year plus a percentage of the revenues in the R2000 contract to a maximum of $5,000 per month.

5The parties discussed the proposal over the next few weeks. In August 1995, Hoffman and his family moved from Germany to Canada. In early November 1995, Muhs and Rimas presented Hoffman with a draft employment contract, which he signed on November 7, 1995. This contract became the focal point of the lawsuit.

6Disputes arose between the parties, principally centering on whether VRP Web was properly capitalized, on Hoffman’s desire for more authority, and ultimately on his desire to purchase the appellants’ shares in VRP Web. In early February 1997, after Hoffman refused to sign a letter of resignation, he was fired.

DISCUSSION

7The trial judge found Hoffman to be a “highly credible witness” and preferred his evidence where it differed from that of the appellants. The appellants do not challenge this finding of credibility on appeal. Therefore, we must examine the appellants' grounds of appeal in light of the trial judge’s credibility finding.

(i) Cause for Dismissal

8The trial judge concluded that the appellants had failed to prove they had cause to dismiss Hoffman. In the trial judge’s words:

On the issue of cause, I find that the Defendants failed to prove cause. I find as fact, that the Plaintiff sought only a negotiation for corporate re-structuring and a more central role for himself in VRP. I reject the Rimas evidence of an ultimatum. I find the Plaintiff was loyal to his employment. As a shareholder, he had every right to ask for a negotiation on a proposal to purchase more shares.

9The appellants have not persuaded us of any basis to interfere with this conclusion. Therefore, the trial judge’s finding that Hoffman was wrongfully dismissed stands.

(ii) The Enforceability of the Employment Contract

10The trial judge found that Hoffman’s employment contract was unenforceable for two reasons. First, he found that Muhs and Rimas misrepresented Hoffman's job description and compounded their misrepresentation by failing to include a job description in the written employment contract. Second, he found that Muhs, Rimas and Rotoflex failed to invest in VRP Web, when they represented they would do so, thereby undermining VRP Web’s viability.

11The question we must answer on appeal is whether these two findings are reasonably supported by the evidence, taking into account the trial judge’s general finding of credibility in favour of Hoffman. In our view, neither of these findings is supported by the evidence, even by Hoffman’s own testimony.

(a) Alleged Misrepresentations Concerning Hoffman’s Position

12Admittedly, the employment contract provided that it would include as an Appendix “A” Hoffman’s job description, yet no Appendix “A” was attached to the contract. However, even without an Appendix “A”, paragraph 3 of the contract specifically set out Hoffman’s duties and responsibilities. In his evidence in chief, he acknowledged that this paragraph was “an accurate statement” of those duties and responsibilities.

13The trial judge seemed concerned that the appellants misrepresented the extent to which Hoffman would control the operations of VRP Web. Even apart from the “entire agreement” clause in the employment contract, which is not mentioned by the trial judge, the contract itself set out a long list of limits on Hoffman’s authority and his obligation to seek the approval of the Board of Directors for a wide array of transactions. Hoffman was a minority shareholder in VRP Web. The appellants controlled the company and formed it initially to help Rotoflex complete the R2000 contract. Although Hoffman may have wanted more control, when he signed his employment contract the limits on his authority were made clear to him. He could not realistically think that he would be given free rein to run VRP Web. In our view, the evidence at trial, including the documentary evidence, does not support the trial judge’s finding of misrepresentations concerning Hoffman’s position in the company.

(b) Failure to Invest

14According to Hoffman, during the discussions preceding the signing of the employment contract, Muhs and Rimas represented that they would inject a minimum of $500,000 in start-up capital. In effect, the trial judge found that the appellants failed to honour this representation. Again, even Hoffman’s evidence does not support the trial judge’s finding. Rotoflex injected nearly $800,000 in VRP Web in its first year of operation. It did so by paying the invoices rendered by VRP Web. Hoffman acknowledged in his cross-examination that the appellants never specified, either orally or in writing, the form of the VRP Web financing. The business plan for the new company prepared in late September 1995 contemplated that the initial financing for the new company would come from Rotoflex’s work. The plan said, “In order to initiate the business, the Rotoflex Group will act as the first customer and will therefore supply this new venture with the necessary funds.” Therefore, the trial judge’s finding that the appellants failed to invest in VRP Web cannot stand.

15The evidence does show that while Hoffman was employed with VRP Web, the company was constantly in need of cash. Proper capitalization was an ongoing problem, a problem that is perhaps typical of most start-up research and development companies. But we are satisfied that the appellants met the financing obligation that the trial judge found to exist.

CONCLUSION

16The two bases for the trial judge’s conclusion that the employment contract was unenforceable are not reasonably supported by the evidence. Therefore, this conclusion cannot stand. Nor can his conclusion that Rotoflex, Muhs and Rimas are liable to Hoffman. Having been wrongfully dismissed, Hoffman is limited to his remedy under his employment contract: three months’ salary or $45,000 in lieu of notice to be paid by VRP Web.

17The trial judge found that Hoffman had earned $34,000 in the year following his dismissal, and deducted this amount from the award of damages. But he made no express finding on how much Hoffman earned in the first three months after he was fired. Hoffman, however, testified that he spent these first three months looking for work and only after that period did he begin doing contract work. Accepting Hoffman’s evidence, we conclude that no amount should be deducted from our $45,000 damages award.

18Accordingly, the judgment of Crane J. is varied as follows:

(i) Paragraph 3 is varied to provide that VRP Web shall pay Hoffman $45,000 plus pre-judgment interest.

(ii) Paragraph 4 is set aside.

(iii) Subject to any offers to settle, paragraph 6 is varied to provide that VRP Web shall pay the respondents their costs of the action in the amount ordered by the trial judge, $38,331.42.

(iv) The action is dismissed without costs against Rotoflex, Muhs and Rimas.

19The appellants are entitled to the costs of the appeal. Hoffman may set off these costs against the money owed to him by VRP Web.

Signed: “Austin J.A.”