968703 Ontario Limited c.o.b. as Headline Industries v. Vernon et al.

Vernon et al. v. 968703 Ontario Limited et al.

[Indexed as: 968703 Ontario Ltd. v. Vernon]

58 O.R. (3d) 215

[2002] O.J. No. 580

Docket No. C36260

Court of Appeal for Ontario

Carthy, Weiler and Cronk JJ.A.

February 20, 2002

Contracts -- Breach of contract -- Remedies -- Rescission -- Repudiation -- Termination -- Punitive damages -- Contracting party's failure to perform substantial obligation entitling innocent party to end contract and sue for damages -- After- discovered breach of fiduciary duty by one contracting party, justifying innocent party's termination of contract -- Auctioneer failing to deposit proceeds from auction into joint account as required by contract -- Auctioneer breaching fiduciary duty by attempting to secretly sell assets -- Innocent party entitled to end contract -- Innocent party entitled to punitive damages.

In June 1995, V hired H, an auctioneering firm, to sell assets at an auction that took place on August 23 and 24. Under the written agreement, all proceeds were to be deposited into a joint bank account. In breach of the contract, H did not deposit over $100,000 into the joint account and, at the end of August, V refused to permit H to sell the remaining assets in accordance with the written agreement, which provided for a division of the proceeds in specified amounts. H then sued for damages for loss of profit, and V counterclaimed against H and against EW, the principal shareholder of H, for breach of contract and for breach of fiduciary duty.

After finding that EW had breached his fiduciary duty by attempting, albeit unsuccessfully, to secretly sell assets to three companies he controlled, with a view to making a profit for himself, and by further attempting to make a secret profit on the sale of scrap metal, MacKinnon J. dismissed H's claim and awarded V $5,000 on its counterclaim. MacKinnon J. also found that contrary to three interlocutory orders, H delayed paying the funds into a joint account until just before trial and it failed to reasonably account until 26 months after the auction.

The Divisional Court, however, reversed the trial judgment. It held that V was not excused from further performance, and it awarded H $50,000. The Divisional Court dismissed the counterclaim. Leave having been granted, V appealed to the Court of Appeal.

Held, the appeal should be allowed with costs.

Although there was some ambiguity in the trial judge's reasons, he was correct in holding that H's failure to pay the money into the joint bank account, excused V from further performance of its obligation under the contract. This result was not rescission, in the sense of a total abrogation of the contract with all its obligations. Rather, this was a repudiation, where the innocent party is released from its unperformed promises and can sue for damages for breach of contract. H, however, was not deprived of the commissions it had already earned. This was a correct case for excusing V because only a substantial, not a minor, breach of contract will excuse the innocent party from continued performance. In this regard, H's failure to pay into the joint account was significant in relation to the entire obligations under the contract. Further, V could rely on the after-discovered breach of fiduciary duty as a further basis to excuse it from future performance under the contract. It followed that the Divisional

Court erred by awarding H $50,000 damages, and this award should be set aside.

The Divisional Court also erred by setting aside the $5,000 awarded to V, and this award should be restored. Although the trial judge did not specifically say so, this was an award for punitive damages. The requirements for such an award are: first, the conduct in question must disregard the rights of others to such an extent that it deserves public censure; second, the person seeking punitive damages must establish that the wrongdoer committed an independent actionable wrong apart from the breach of contract; and third, the award must serve a rational purpose such as punishing the wrongdoer and deterring others. These requirements were satisfied in the immediate case. The conduct of H was at the level of attempted fraud. Its conduct was arbitrary and high-handed, and the conduct was illegal in the sense that it was contrary to three court orders. The second requirement that the conduct be independent of the breach of contract was met by H's abuse of its position and breach of fiduciary duty. As for the thi rd requirement, H's conduct was deserving of punishment and public censure.

Accordingly, the appeal should be allowed and the trial judgment should be restored.

APPEAL of an order of the Divisional Court reversing a judgment in an action and counterclaim for breach of contract and breach of fiduciary duty.

Cases referred to Bayer Aktiengesellschaft v. Apotex Inc. (1998), 113 O.A.C. 1 (C.A.); Frame v. Smith, [1987] 2 S.C.R. 99, 23 O.A.C. 84, 42 D.L.R. (4th) 81, 78 N.R. 40, 42 C.C.L.T. 1, 9 R.F.L. (3d) 225; Gerula v. Flores (1995), 83 O.A.C. 128 (C.A.); Hill v. Church of Scientology of Toronto, [1995] 2 S.C.R. 1130, 24 O.R. (3d) 865n, 126 D.L.R. (4th) 129, 184 N.R. 1, 30 C.R.R. (2d) 189, 25 C.C.L.T. (2d) 89; M. (K.) v. M. (H.), [1992] 3 S.C.R. 6, 96 D.L.R. (4th) 289, 142 N.R. 321, 14 C.C.L.T. (2d) 1; Marshall v. Watson Wyatt & Co. (2002), 57 O.R. (3d) 813, [2002] O.J. No. 84 (C.A.); Norberg v. Wynrib, [1992] 2 S.C.R. 226, 68 B.C.L.R. (2d) 29, 92 D.L.R. (4th) 449, 138 N.R. 81, [1992] 4 W.W.R. 577, 12 C.C.L.T. (2d) 1; Parker v. McKenna (1874), L.R. 10 Ch. App. 96, [1874-80] All E.R. Rep. 443, 44 L.J. Ch. 425, 31 L.T. 739, 23 W.R. 271; Raso v. Dionigi (1993), 12 O.R. (3d) 580, 100 D.L.R. (4th) 459, 31 R.P.R. (2d) 1 (C.A.); Robson v. Thorne, Ernst & Whinney (1999), 127 O.A.C. 215 (C.A.); Royal Bank of Canada v. W. Got & Associates Electric Ltd., [1999] 3 S.C.R. 408, 73 Alta. L.R. (3d) 1, 178 D.L.R. (4th) 385, 247 N.R. 1, [2000] 1 W.W.R. 1; Vorvis v. Insurance Corp. of British Columbia, [1989] 1 S.C.R. 1085, 36 B.C.L.R. (2d) 273, 58 D.L.R. (4th) 193, 94 N.R. 321, [1989] 4 W.W.R. 218, 42 B.L.R. 111, 25 C.C.E.L. 81, 90 C.L.L.C. 14,035 Authorities referred to Waddams, S.M., The Law of Contracts, 3rd ed. (Toronto: Canada Law Book, 1993)

Charles C. Mark, Q.C., for plaintiff/respondent and defendant to counterclaim/respondent 968703 Ontario Ltd., c.o.b. as Headline Industries. Itzik Basman, for defendants/appellants and plaintiffs by counterclaim/appellants.

The judgment of the court was delivered by

WEILER J.A.: --

Facts

1Spencer Vernon is an elderly gentleman in his 80s who, for several decades, operated a gravel pit and processing plant in the township of Oro, in the County of Simcoe. He is the sole director and shareholder of the appellate corporations, York Sand and Gravel Limited and Marketplace Equipment Limited, hereafter referred to as "the Vernon companies". 968703 Ontario Limited, carrying on business as Headline Industries ("Headline"), is an auctioneering firm specializing in the auctioning of heavy equipment. Ernest Wilson is the principal shareholder of Headline.

2In June 1995, the Vernon companies entered into an agreement, amended on August 1, 1995, for the sale of goods by the Vernon companies through an auction to be conducted by Headline. The parties agreed:

(i) All proceeds from the auction and any private sale thereafter were to be deposited into a joint account at a bank chosen by Vernon;

(ii) Any sale after the auction was to be at a price mutually agreed upon by the parties;

(iii) Any unsold assets as of June 7, 1996 would be taken and paid for by Headline at a mutually agreeable price, or would remain the property of York Sand and Gravel Limited; and

(iv) The sales were to be conducted on behalf of the parties to the extent of their interests with:

-- the Vernon Companies to receive the first $450,000 of sale proceeds;

-- Headline to receive the next $150,000 of sale proceeds; and

-- proceeds over $600,000 to go 70 per cent to the Vernon Companies and 30 per cent to Headline.

3The auction occurred on August 23 and 24, 1995. In breach of the contract, Headline did not deposit a substantial amount of money, over $100,000, from the auction into the joint bank account. At about the end of August 1995, the Vernon Companies refused Headline entry on their lands to sell the remaining assets. Headline sued for damages for loss of profit on account of the Vernon companies' refusal to allow it to sell the remaining assets. Vernon counterclaimed against Headline and Wilson personally.

The Issues

4The main issue on this appeal is whether Vernon, on behalf of the Vernon companies, was entitled to refuse Headline access to his remaining goods, to terminate the contract and to be released from any future obligations. A secondary issue is whether this was an appropriate case in which to make an award of punitive or exemplary damages.

Judgment at Trial

5MacKinnon J. made the following findings of fact:

(i) Headline acted as a facilitator between the Vernon Companies and third party final purchasers.

(ii) Headline breached the agreement by failing to pay all the funds into the joint account.

(iii) Ernest Wilson admitted that there was a certain level of trust in these arrangements. As auctioneer for Headline it was within Wilson's discretion to determine when "to drop the hammer" and accept a bid.

(iv) It was implicit in the dealings between Headline and the Vernon Companies that they deal fairly with each other. The auction was to be conducted in good faith and the sales proceeds were to be properly accounted for.

(v) Wilson and Headline owed the Vernon companies duties of fair dealing and fiduciary duties.

(vi) Wilson put himself in a conflict of interest with Vernon by causing Headline to sell assets to three companies controlled by Wilson with a view to making a profit for himself. He kept all of this secret from Vernon and the Vernon Companies, though in the end Headline was unable to sell the assets at a higher price than that at which they were purchased.

(vii) Wilson further attempted to make a secret profit by trying to persuade Stephen Lehmann of Francoz Metals to pay him or Headline cash for every fourth load of Vernon Companies' scrap metal in return for being given the right "to remove all scrap metals". Ernest Wilson raised the issue with Francoz, and never reported the discussions to Vernon.

(viii) The following interlocutory orders were made:

(i) Justice Eberhard, on September 5, 1995, ordered that Headline and Wilson pay all funds into a joint account;

(ii) Justice Tobias, on November 5, 1995, had to make the same order that Headline pay all proceeds into a joint account forthwith;

(iii) On August 15, 1996, Justice Eberhard again ordered Headline to pay all funds into a joint account, and to produce an accounting forthwith of the June 1995 Agreement dealings.

(ix) In the face of the interlocutory orders, Headline continued to hold significant monies for itself, and this conduct continued right to trial. Wilson's defence that "nobody's ox got gored" was grossly insufficient in the face of the parties' agreement and the orders to the contrary. Although the funds were paid into a joint account just before trial, Headline failed reasonably to account following the auction. Accounting records were not produced until October, 1997, 14 months after the orders and 26 months after the auction.

(x) Headline's post-auction conduct and attempts at self- dealing amounted to breaches of the June 1, 1995 agreement, and breaches of the fiduciary duties and duties of fair dealing owed to the Vernon companies.

6In the result, MacKinnon J. dismissed Headline's claim. He went on, however, to deal with the quantum of damages. He rejected the opinion evidence of Ernest Wilson, that the notional value of the realizable proceeds of sale of the unsold assets was $140,000, as nothing more than a rough guess and held it was substantially insufficient to prove the value of those assets on the balance of probabilities. After undertaking an accounting exercise relating to subsidiary claims, he ordered the Vernon companies to pay Headline $4,069.72 plus prejudgment interest to the date of payment. MacKinnon J. also ordered that the Vernon companies were to have judgment on their counterclaim in the amount of $5,000. This award was to "reflect the gravity of both the contractual breach and the breaches of court orders". The trial judge described Headline's conduct as "high handed, arbitrary and unlawful".

Judgment of the Divisional Court

7Headline appealed to the Divisional Court. There, as here, the findings of fact of the trial judge recounted above were not contested. That court, however, reversed the trial judge.

8The Divisional Court was of the opinion that the Vernon companies were not excused from further performance of their contract with Headline. The court also held that the trial judge erred in rejecting Wilson's evidence as to the value of the remaining goods. The court stated:

The evidence of the value of those assets given by Ernest Wilson was not challenged by cross-examination, or contradicted by other evidence. In these circumstances, although the trial judge was not obliged to accept the stochastic evidence of Wilson at face value, he was not entitled for the reasons given by him to reject it in its entirety.

In our view, the evidence clearly established that the remaining assets had some substantial value. By preventing the plaintiff from proceeding to attempt to sell those assets in accordance with the provisions of the agreement between the parties, the defendants deprived the plaintiff of an opportunity to receive the entirety of the proceeds of those assets up to approximately $100,000 and its share of the excess beyond that.

In the exercise of our discretion we consider it appropriate that the plaintiff be awarded $50,000 in damages from the defendants, York and Marketplace for the loss of that opportunity, having regard to the likely value of the assets and the contingencies, such as the likelihood of sale and agreement as to the sale price.

9It set aside the award of $5,000 stating: "There is no basis in law for this award, whether for the reasons set out by the trial judge or otherwise."

10Vernon applied for leave to appeal to this court, which was granted on April 23, 2001.

Analysis

11Headline's position is that its breach of contract and breach of fiduciary duty did not excuse the Vernon companies from further performance of the contract. All of the money owed was eventually paid to Vernon. Furthermore, Wilson made no money on the items purchased for himself when Headline breached its fiduciary duty. It is submitted, therefore, that the trial judge erred in not accepting Wilson's evidence respecting Headline's damages for loss of opportunity to sell the remaining goods. No objection was expressed to receiving the opinion evidence of Wilson at trial and his evidence was not challenged on cross-examination. Consequently, Headline submits that the Divisional Court decision awarding it $50,000 as damages for loss of opportunity should be upheld. In relation to the award of $5,000, Headline points out that there was never a contempt order made against it and submits that exemplary damages should not have been awarded.

12There is some ambiguity in the trial judge's reasons on the issue of whether the Vernon companies were excused from further performance of the contract because of Headline's failure to pay a large sum of the money from the auction into the joint bank account. Under the heading, Failure to Act in Good Faith, the trial judge stated:

This is not a case of anticipatory breach going to the root of the contract, but rather a dispute over the application and division of proceeds of the auction, failure to comply with contractual obligation for payment into the trust account, and one involving the plaintiff's flouting of court orders. These breaches entitle the Vernon companies to damages but do not in the circumstances entitle Spencer Vernon and his companies to repudiate the entire contract.

13It was at this point in his reasons that the trial judge awarded damages to the Vernon companies of $5,000. Under the next heading, "Contractual Accounting Analysis", the trial judge stated:

Having breached the agreement by failing to pay all funds into the joint account, the plaintiff is not entitled, in my view, to the value of any assets remaining.

14Before dealing with the merits of the parties' arguments, clarification of the trial judge's reasons respecting his decision will be of assistance. The trial judge's statement that the Vernon companies were not entitled to repudiate the entire contract is problematic. The term rescission, is sometimes used to indicate total abrogation of the contract with all its obligations. A repudiation means that the contract is ended in the sense that the innocent party is released from the duty of future performance. The contract is not totally abrogated because the innocent party can, however, sue for damages for the other party's breach of its obligations before the termination. See Waddams, The Law of Contracts, 3rd ed. (Toronto: Canada Law Book, 1993), at pp. 427-28. Having regard to the reasons as a whole, I am of the opinion that the trial judge meant to say that the Vernon companies were not entitled to rescind the entire contract. This conclusion is supported by t he trial judge's later holding that Headline's breach of contract by failing to pay the money into the joint bank account excused the Vernon companies from further performance of their obligations under the contract. Headline's breach, however, did not deprive it of the commissions it had already been paid from the auction sale.

15Was the trial judge correct in law to excuse Vernon from further performance of the contract and did the Divisional Court err in reversing this conclusion? Only a substantial, not a minor, breach of contract will excuse the innocent party from continued performance of a contract: Robson v. Thorne, Ernst & Whinney (1999), 127 O.A.C. 215 (C.A.); Bayer Aktiengesellschaft v. Apotex Inc. (1998), 113 O.A.C. 1 (C.A.).

16There are several factors that provide guidance in determining whether or not a breach is a substantial breach justifying future non-performance of the innocent party's obligations. They are: (a) the ratio of the party's obligation not performed to the obligation as a whole; (b) the seriousness of the breach to the innocent party; (c) the likelihood of repetition of the breach; (d) the seriousness of the consequences of the breach; and (e) the relationship of the part of the obligation performed to the whole obligation. See Waddams, supra, at pp. 401-02.

17Without getting into an exact ratio, Headline's failure to deposit in excess of $100,000 into the joint bank account was significant in relation to the entire obligation under the contract. The seriousness of the breach in this instance, however, cannot be addressed strictly in monetary terms. Headline did not cure its breach within a few days. Instead, refusing to comply with court orders, and refusing to account until over two years had passed, it repeated or continued the breach of contract. This failure was in itself sufficient to justify Vernon's refusal to perform the rest of the contract. Headline's failure to deposit the money into the joint bank account justified Vernon's refusal to go ahead and put more assets into cash that might disappear.

18During this time, Vernon discovered that Wilson had caused Headline to breach its fiduciary duty as agent. In conducting the auction, Wilson had caused Headline to sell some of the Vernon companies' goods to Wilson's companies below their appraised value. Wilson's breach of trust meant that the Vernon companies could not trust Headline to sell the remaining goods, including scrap metal, following the auction. That Vernon could not trust Wilson was confirmed by Wilson's attempt to have Stephen Lehmann of Francoz Metals pay Headline alone for every fourth load of scrap metal in order to remove it. Vernon is entitled to rely on this after-discovered breach of fiduciary duty as a further basis to excuse it from future performance under the contract. See Raso v. Dionigi (1993), 12 O.R. (3d) 580, 100 D.L.R. (4th) 459 (C.A.), and particularly Parker v. McKenna (1874), L.R. 10 Ch. App. 96, [1874-80] All E.R. Rep. 443, cited therein at pp. 587-88 O.R.

19In my opinion, the Divisional Court therefore erred in not holding that Vernon and his companies were excused from further performance under the contract.

20A further argument made by counsel for Vernon is that the agreement to sell the remaining goods at a mutually agreed price to Headline, failing which they would remain the property of Vernon, is too vague to enforce. It is an agreement to make an agreement. This argument does not appear to have been made at trial. The statement of defence simply says that the plaintiff's damages are ill-defined and remote and does not specifically plead that this portion of the contract is unenforceable as being too vague. While the submission may have merit, in the circumstances, it would not be appropriate to address it.

21It follows from my conclusion that I would set aside the award of damages made by the Divisional Court in the amount of $50,000. Were it not for my conclusion on liability, I would not interfere with the Divisional Court's assessment of the amount of damages. Wilson was an auctioneer in the business of selling the type of goods in question. He had the practical experience that enabled him to give an opinion as to the value of the remaining goods, his opinion was not challenged, and the Divisional Court applied a healthy discount for contingencies to the estimate.

22I now turn to the issue of whether the Divisional Court was correct in setting aside the $5,000 awarded by the trial judge. Although the trial judge did not specifically say so, it would appear that the award was an award of punitive damages because no general damages were proved by Vernon. Before an award of punitive damages may be made, three requirements must be met. First, the conduct in question must disregard the rights of others to such an extent that it deserves public censure. Second, the person seeking punitive damages must establish that the wrongdoer committed an independent actionable wrong apart from the breach of contract. Third, the award must serve a rational purpose such as punishing the wrongdoer and deterring others. See Vorvis v. Insurance Corp. of British Columbia, [1989] 1 S.C.R. 1085 at pp. 1104-10, 58 D.L.R. (4th) 193; Hill v. Church of Scientology of Toronto, [1995] 2 S.C.R. 1130 at pp. 1208-09, 126 D.L.R. (4th) 129; Gerula v. Flores (1995), 83 O.A.C. 128 at paras. 58-59; Marshall v. Watson Wyatt & Co. (2002), 57 O.R. (3d) 813, [2002] O.J. No. 84 (C.A.) at paras. 44 and 45. In Gerula, supra, this court commented:

The purpose of an award of punitive damages is to demonstrate to the offender that the law will not tolerate conduct that wilfully disregards the rights of others: Warner v. Arsenault (1982), 53 N.S.R. (2d) 146; 109 A.P.R. 146 (C.A.) at p. 152, cited with approval by McIntyre, J. in Vorvis, supra, at p. 1108. Punitive damages do not focus on the injury to the plaintiff but on the disregard for his or her rights. It is the outrageous conduct of the defendant that is the focus: see Vorvis, supra, at p. 1106. Punitive damages survive as a mark of public censure for egregious conduct. (footnote omitted.)

Text books and the authorities use a variety of terminology to describe the conduct that will result in an award of punitive damages. For example, in Vorvis, supra, at pp. 1107-1108, McIntyre J., in describing the type of conduct that is deserving of punishment by an award of punitive damages, referred to the "harsh, vindictive, reprehensible and malicious nature" of the conduct. In characterizing the defendant's conduct in Vorvis, supra, McIntyre J. was not suggesting that all of the adjectives he recited must be applicable to the conduct in question before punitive damages can be awarded or that the list is an all inclusive one. He stated at p. 1108:

I do not suggest that I have exhausted the adjectives which could describe the conduct capable of characterizing a punitive award, but in any case where such an award is made the conduct must be extreme in its nature and such that by any reasonable standard it is deserving of full condemnation and punishment.

23Should the conduct in this case give rise to punitive damages? In my opinion, this case bears some similarity to Royal Bank of Canada v. W. Got & Associates Electric Ltd., [1999] 3 S.C.R. 408, 178 D.L.R. (4th) 385. In that case, McLachlin and Bastarache JJ., on behalf of the court, held that the Bank had breached its contract with the borrower. The Bank failed to give the borrower reasonable notice of its intention to enforce its security, and reasonable time to pay. The Bank also moved ex parte for the appointment of a receiver. After the receiver was appointed, it was found that the affidavit of the Bank's officer, filed in support of the motion, failed to meet the duty of candour and utmost good faith required of such motions. The court held it was within the trial judge's discretion to make an award of punitive damages, although disagreement was expressed with some of the factors the trial judge gave in support of the award. The Bank's conduct was found to be an affront to the administration of justice and did not have to rise to the level of fraud, malicious prosecution, or abuse of process before an award of exemplary damages could be made. In upholding the award, the court also made reference to the cumulative effect of the conduct.

24Here, the conduct of Headline is at the level of attempted fraud. Headline took advantage of its position of auctioneer by "knocking down" the price of goods to Wilson's companies without telling Vernon. Headline's conduct was, as described by the trial judge, arbitrary and high handed. It was "illegal" in the sense that it was contrary to three court orders. This conduct, for which no explanation was offered, displays not only complete disregard for the nature of Headline's relationship with Vernon, but also for the administration of justice itself. It was within the trial judge's discretion to find that Headline's conduct deserved condemnation.

25The second requirement for an award of punitive damages, that the conduct be independent of the breach of contract, is met by Headline's abuse of its position and breach of fiduciary duty. In Norberg v. Wynrib, [1992] 2 S.C.R. 226, 92 D.L.R. (4th) 449, La Forest J., who gave the decision on behalf of the majority, held that Ms. Norberg's consent to engage in sex with Dr. Wynrib in return for drugs was not a true consent and violated the doctor-patient relationship. McLachlin J., with whom L'Heureux-Dubé J. concurred, held that the doctor-patient relationship shared the hallmarks of a fiduciary relationship as defined by Wilson J. in Frame v. Smith, [1987] 2 S.C.R. 99, 42 D.L.R. (4th) 81. The duties of loyalty, good faith, and avoidance of a conflict of duty and self-interest were all present in the doctor-patient relationship and Dr. Wynrib breached those duties. Both La Forest and McLachlin JJ. agreed that punitive damages were appropriate because the doctor had abused his posi tion. In M. (K.) v. M. (H.), [1992] 3 S.C.R. 6, 96 D.L.R. (4th) 289 at para. 106, the court built on its decision [in] Norberg, supra, and held that punitive damages were available for breach of fiduciary duty.

26The third requirement that punitive damages serve a rational purpose is also present. Society has an interest in ensuring that the power of agents and auctioneers not be used in corrupt ways and that court orders not be disregarded. The conduct of Headline is deserving of punishment and public censure. No other damages have been awarded.

Conclusion

27For the reasons given, I would allow the appeal of Vernon and his companies, set aside the decision of the Divisional Court, and restore the decision of the trial judge. I would award Vernon and his companies the costs of this action throughout, on a partial indemnity basis.

28In order to comply with the rule that now requires this court to fix costs, the respondent is requested to file a bill of costs with the court in the appropriate form. The appellants may make submissions in writing thereon within ten days after filing and the respondent may reply within ten days thereafter.