DATE: 20030627

DOCKET: C37817

COURT OF APPEAL FOR ONTARIO

CARTHY, ROSENBERG AND CRONK JJ.A.

B E T W E E N:

COMPUGEN SYSTEMS LTD.

Plaintiff (Respondent, Appellant by way of cross-appeal)

R. Paul Steep and Awanish Sinha for the appellant, respondent by way of cross-appeal

• and -

MFP TECHNOLOGY SERVICES LTD.

Defendant (Appellant, Respondent by way of cross-appeal)

Laurence A. Pattillo and David Outerbridge for the respondent, appellant by way of cross-appeal

Heard: April 29, 2003

On appeal from the judgment of Justice John D. Ground of the Superior Court of Justice dated January 25, 2002, reported at [2002] O.J. No. 366.

CARTHY J.A.:

[1] The background facts in this action were neatly outlined by the trial judge as follows:

[1] The plaintiff, Compugen Systems Ltd., (“Compugen”) is a value-added reseller of information technology engaged in the business of supplying computer products and services to private and public sector customers throughout Canada. The defendant, MFP Technology Services Ltd., now MFP Financial Services Ltd., (“MFP”), was both a value-added reseller of computer products and services and a provider of lease financing for both computer products and services and other equipment to private and public sector customers throughout Canada. In 1996, MFP determined to wind down certain of its businesses including the supply of computer products and services and concentrate on its core business of lease financing. At this time and since July, 1994, MFP had had a vendor of record agreement (the “MBS Agreement”) with the Management Board Secretariat of the Government of Ontario (“MBS”) for the supply of personal computers and related services and lease financing to the government. Any ministry, agency, municipality or other provincial government entity could acquire and lease computer products and services from MFP through the MBS Agreement. MFP also had at this time separate vendor of record agreements with the Ministry of the Solicitor General and Correctional Services (“SolGen”) for the supply of services dated January 9, 1996 as amended (the “SolGen Supply Agreement”) and for lease financing dated March 1, 1993 (the “SolGen Leasing Agreement”).

[2] After having decided to get out of the computer products and services supply business in late 1995, MFP began to look for a business partner to fulfill the supply of computer products and related services to MFP’s customers. MFP determined to look for a business partner which was not involved in the leasing business and Compugen was selected. MFP approached Compugen in late February or early March, 1996 to discuss the proposed partnership. Following meetings between the parties in March, 1996, a letter of intent was executed by the parties on March 26, 1996. A formal agreement was then negotiated, drafted and executed by the parties on April 15 and 16, 1996 (the “Main Agreement”).

[3] The term of the Main Agreement was 18 months from April 15, 1996 to October 15, 1997. During the term of the Main Agreement relations between Compugen and MFP deteriorated. Compugen alleged that MFP was in breach of the Main Agreement and it was not renewed on its termination date.

[2] After an 18-day trial, Ground J. delivered extensive reasons in which he found that the Main Agreement should be interpreted as appointing Compugen as the sole and exclusive supplier of equipment and related services to all of MFP’s Ontario public sector clients (“OPS”), except where the client dealt directly with a third party supplier, or where the client specifically directed MFP to obtain supply of equipment or services from a third party. He also found that MFP had an obligation to use its best efforts to ensure that OPS clients respected this arrangement. The trial judge further found that MFP sourced substantial equipment and services elsewhere on behalf of OPS clients during the currency of the agreement, and that MFP had breached its agreement with respect to some of that business with consequent loss of profits to Compugen assessed at $4,999,180.00 plus prejudgment interest. That judgment is appealed by MFP. Compugen cross-appeals, seeking to increase the damages by $1,000,000.00.

[3] It is my conclusion that both the appeal and cross-appeal should be dismissed. The trial judge’s factual findings are all supported by the evidence and I am in agreement with each of his legal conclusions. Because his reasons are so comprehensive, it is my intention to do no more than comment by way of overview on the major arguments presented on appeal.

[4] The major thrust of the appeal was the argument that the trial judge erred in failing to find an implied term in the Main Agreement that the obligations of the parties were subject to obtaining the consent of the OPS customers to the sub-contract with Compugen for the supply of equipment and services. The trial judge found no basis in the evidence for implying such a term and I cannot identify any. To the contrary, business efficacy and common sense were best served by giving full meaning to the phrase “sole and exclusive supplier” in the agreement, and to the warranty by the appellant that the Main Agreement did not conflict with any contract binding on the appellant. It would be inconsistent to then engraft a term requiring a formal consent of a customer as a precondition of liability.

[5] The appellant then argues that, even if there is no implied term as to consent, there was no breach concerning the Community and Social Services (ComSoc) supply contract because there was evidence that the customer had rejected the respondent as a supplier. However, there was other evidence that the trial judge was entitled to, and did, accept to the effect that ComSoc was indifferent to the source of the equipment. Moreover, the trial judge found that the appellant breached the agreement by failing to use its best efforts to ensure that the respondent was the supplier to ComSoc.

[6] On the issue of damages, the appellant argues that Ground J. should not have refused to hear the evidence of Roger Hall, who was put forward by the appellant to speak to gross and net margins that may have been realized by Compugen on the lost sales. Hall was a former employee of G.E. Capital Information Technology Solutions; he intended to address G.E. Capital’s experience in those respects. The trial judge ruled the evidence inadmissible on the ground that direct evidence of Compugen’s margins was available, and that it would not be helpful to know the experience of another company of no proven similarity to the respondent.

[7] Another judge might have admitted the evidence and then assessed the weight, but this was not an exercise of discretion that could justify interference on appeal. The trial judge had before him two expert witnesses on the damages issue. It is hard to imagine that Hall’s evidence would have had any impact standing against the evidence of two professionals who analyzed the respondent’s own experience.

[8] The cross-appeal concerns the following finding of the trial judge regarding the assessment of damages:

[56] In general, I prefer the analysis done by Martin with respect to incremental expenses. The analysis is based on a detailed review of Compugen’s historic overhead costs and a per unit analysis of Compugen’s capability to manage the additional sales with existing staff and resources as opposed to Lowe’s almost straight line mathematical calculation of increased expenses based upon increased sales. It does seem to me, however, that an increase in sales of approximately $68,000,000 would have necessitated some overall increase in overhead expenses and I would add to the calculation of incremental expenses determined by Martin, an arbitrary figure of an additional $1,000,000 for overall increases in overhead expenses.

[9] MFP argues that Martin’s evidence to the effect that there would be no incremental overhead expenses should not have been discarded in favour of the trial judge’s admittedly arbitrary allowance.

[10] As I see it, the trial judge was being arbitrary only in the sense that any judge must be when a conclusion is reached that damage has occurred but the precise amount cannot be extracted from the evidence. Ground J. apparently had reservations as to one aspect of Martin’s evidence, but was not prepared to accept the opinion of Lowe on the subject of incremental costs. He obviously considered Martin to be overly optimistic and modified his opinion as to those costs by what appears to be a very reasonable amount.

[11] For these reasons, I would dismiss the appeal and cross-appeal, both with costs on a partial indemnity basis. Bills of costs have been submitted and, having regard to the relative weight of the appeal and cross-appeal and with some reduction of the amounts claimed, I would award Compugen a total amount of $30,000 inclusive of disbursements and G.S.T.

Released: June 27, 2003 “JJC”

“J.J. Carthy J.A.”

“I agree M. Rosenberg J.A.”

“I agree E.A. Cronk J.A.”