COURT OF APPEAL FOR ONTARIO
FELDMAN, MACPHERSON and CRONK, JJ.A.
B E T W E E N:
E. ROY BIRKETT
Christopher J. Cosgriffe and Geoffrey K. Ketcheson,
for the appellant
Plaintiff (Appellant)
- and -
ASTRIS ENERGI INC.
Eric Fournie and Caroline Jimdar,
for the respondent
Defendant (Respondent)
Heard: January 29, 2004
On appeal from the judgment of Justice A. Hoy of the Superior Court of Justice dated November 14, 2002.
I. INTRODUCTION
1E. Roy Birkett is a shareholder and a former officer and director of Astris Energi Inc. (“AEI”), a public holding company whose shares are traded on the over-the-counter market in the United States and on CDNX in Canada. AEI owns all the issued shares of Astris Inc. (“Astris”), a private company that is engaged in the business of developing hydrogen-based fuel energy sources.
2In November 1999, Birkett sued AEI for the sum of $315,287, which he asserted was advanced by him for reimbursable expenses incurred on behalf of AEI (the “Cash Advances”). Thereafter, in May 2001, Birkett amended his claim to also seek recovery from AEI of the additional amount of $1,627,301. He alleged that this sum was the value of those of his AEI shares that were used to retain various financial consultants to promote AEI (the “Shares Expenses”).
3Birkett alleged in his action that the officers and directors of AEI had acknow-ledged that he was to be reimbursed for the Cash Advances and the Shares Expenses, which together totalled $1,942,588. In the alternative, Birkett alleged that AEI had been unjustly enriched at his expense.
4AEI did not dispute that Birkett made the Cash Advances. However, it resisted reimbursement on the basis that Birkett failed to fulfil certain financing obligations to AEI that were a prerequisite to reimbursement. As well, AEI denied that Birkett transferred any shares to financial consultants on its behalf. In the alternative, it alleged that such share transfers were made without AEI’s prior knowledge and authorization and for Birkett’s own interests, without benefit to AEI.
5Birkett’s action was tried over five days in October 2002 before Hoy J. of the Superior Court of Justice. Birkett and Jiri Nor, the founder of Astris, were the only witnesses at trial. The trial judge found that there was an agreement between the parties that Birkett was not entitled to reimbursement for the Cash Advances until AEI had raised $10 million (U.S.) in equity financing (the “Equity Financing”). At the time of trial, the Equity Financing had not been raised. She further held that there was no agreement by AEI to compensate Birkett for most of the Shares Expenses and, to the extent that AEI had agreed to replace any of the shares used by Birkett for promotional purposes, the preconditions to the issuance of such replacement shares were unfulfilled. She also rejected Birkett’s unjust enrichment claim. Accordingly, the trial judge dismissed Birkett’s action, without prejudice to his right to seek recovery of the sum of $315,287 from AEI on account of the Cash Advances, once the Equity Financing was in place.
6Birkett appeals the trial judge’s denial of his reimbursement claim concerning the Cash Advances, and her rejection of his unjust enrichment claim regarding that part of the Shares Expenses relating to shares transferred to RMJ & Associates (“RMJ”), one of the consultants retained by Birkett. In support of his appeal, he argues that the trial judge erred: (i) in her interpretation of key documents entered into by the parties; (ii) in deciding the case on the basis of an agreement not pleaded by AEI as part of its defence to the action; and (iii) in concluding that there was a juristic reason for AEI’s enrichment and Birkett’s deprivation concerning the shares transferred to RMJ.
7For the reasons that follow, I agree with the trial judge that any entitlement by Birkett to reimbursement from AEI is limited to the amount of the Cash Advances and that, until AEI’s Equity Financing is in place, this reimbursement claim is premature. I also agree that Birkett failed to make out an unjust enrichment claim concerning that part of the Shares Expenses relating to RMJ. Accordingly, I would dismiss the appeal.
II. FACTS
8In order to address the issues raised by Birkett in this proceeding, which concern alleged errors of mixed fact and law and misapprehension of the evidence by the trial judge, it is necessary to review the background facts in some detail.
(1) AEI’s Acquisition of Astris
9Nor, a scientist experienced in research and engineering, founded Astris as a private company in 1983. Astris purchased hydrogen fuel cell technology and worked with it to develop and market an economical fuel source. By the early 1990s, Astris was interested in obtaining financing from outside investors to support the research and development of this technology.
10Birkett is a semi-retired businessman experienced in the securities industry. In early 1995, he met one of the principals of Astris, who informed him of the company’s financing needs.
11Birkett was then a shareholder of WLD Inc., an inactive public company with few assets. WLD Inc. was a ‘reporting issuer’ for the purpose of securities regulation in Alberta and its shares traded in select markets in Canada and the United States. Birkett effectively controlled WLD Inc. through his own shareholdings and those of his family, and by means of 2 million shares in WLD Inc. held by King Cade Trust, an off-shore blind trust of which Birkett was the primary beneficiary (the “Trust”). Hemery Trust and Corporate Services Limited (“Hemery”) was the sole trustee of the Trust.
12Birkett proposed a form of reverse take-over arrangement to Astris’ management to facilitate the raising of funds for Astris. Under Birkett’s proposal, WLD Inc. would dispose at no cost of its only existing asset and thereafter would acquire the outstanding shares of Astris in exchange for shares of WLD Inc.. The shareholders of Astris would receive WLD Inc. shares and options in WLD Inc. which, when exercised, would provide them with a controlling interest in WLD Inc..
13Birkett also suggested that, as part of this share exchange transaction, Hemery would sell the Trust’s shares in WLD Inc. to investors in the United States through a secondary securities offering. Hemery would then use the sale proceeds to subscribe for $10 million (U.S.) of new treasury-issued common shares in WLD Inc., thus providing WLD Inc. with funds to finance Astris’ research and development work.
14Birkett enlisted Richard Clewes and Tim Peterson (collectively with Birkett, the “WLD Group”), to assist with the acquisition of Astris and the proposed securities offering by Hemery in the United States. Each of Clewes and Peterson was compen-sated for his services by the receipt of some of the WLD Inc. shares held by Birkett, his family members, and the Trust.
(2) Letter of Intent
15On March 30, 1995, Astris entered into a letter of intent with WLD Inc. and the WLD Group (the “LOI”), which described the proposed acquisition of Astris by WLD Inc. and “other related transactions”. The LOI provided that, following the acquisition, WLD Inc. would change its name to AEI. In addition, paragraph 4 of the LOI stated:
Messrs. Birkett, Peterson and Clewes, for and on behalf of AEI, shall arrange for and facilitate the sale by the Hemery Trust (located in Jersey, The Channel Islands) of all of the 2,000,000 common shares of WLD (then called AEI pursuant to paragraph 3 above), currently held by the Trust, through a secondary securities offering carried out principally in the United States, which offering shall raise up to U.S. $10,000,000, but in any event not less than U.S. $5,000,000, from outside investors. Such offering shall be on terms and conditions satisfactory to the Board of Directors of AEI. The Hemery Trust shall invest the proceeds of the said offering in a subscription for and the allotment and issue of an additional 2,000,000 common shares of AEI from treasury through a private placement or other exempt transaction. As a result, the number of issued and outstanding common shares of AEI shall be increased accordingly and the working capital financing funds for AEI’s future operations shall have been raised and available for use by AEI [emphasis added].
16As well, paragraph 5 of the LOI provided, in part:
WLD, Messrs. Birkett, Peterson and Clewes acknowledge and agree that in order to bring the product development activities and operations of Astris forward in accordance with its business plan until the completion of all the steps described above, Astris has unfunded working capital requirements of at least $120,000 Cdn. per month of which $60,000 Cdn. would be provided to Astris on a regular monthly basis on the 25th of each and every month starting May 25, 1995, and the balance on an “as required” basis. They undertake and agree to provide such minimum working capital funding to Astris during the period of 180 days following the end of the due diligence period (or as it may be automatically extended). This shall be a binding commitment hereunder and not merely an expression of intent. Failure to provide such interim working capital in any month will terminate this letter of intent. The amounts advanced to Astris as described above shall not be repayable unless and until the securities offering provided in paragraph 4 shall close and the Hemery Trust shall have used the proceeds to subscribe for shares of AEI [emphasis added].
17It was also stipulated in paragraph 5 of the LOI that:
This letter agreement shall, in principle, constitute a letter of intent only, and shall be subject to the terms and conditions expressed herein and not otherwise binding. The proposed transactions shall only be completed upon the negotiation, finalization and execution of definitive legal documentation satisfactory to the parties and their respective counsel. …
18The LOI was signed by Birkett, Peterson and Clewes, in their personal capacities, by Birkett on behalf of WLD Inc., and by Nor on behalf of Astris.
19As contemplated by the LOI, WLD Inc. changed its name to AEI in July 1995. In addition, Peterson was replaced as a member of the WLD Group by Don Blenkarn in November 1995. On the record before this court, it is unclear whether Blenkarn formally agreed to assume Peterson’s obligations under the LOI.
20At trial, Birkett conceded that the LOI established a binding commitment by him and the other members of the WLD Group to provide Astris with interim working capital in the amount of $60,000 per month. He also testified that the Cash Advances were provided by him pursuant to the interim funding obligation in the LOI.
21Birkett and the other members of the WLD Group did not fully discharge their interim funding obligations under the LOI. Indeed, the trial judge found that they defaulted almost immediately in the performance of these obligations. In addition, the sale by the Trust of its shares in WLD Inc., as contemplated under paragraph 4 of the LOI, never took place.
22Notwithstanding his admission at trial that the Cash Advances were made pursuant to his funding obligation under the LOI, Birkett claimed at trial and before this court that his funding obligation under the LOI was binding only in respect of Astris, and not with respect to AEI. As the Cash Advances were made by him to AEI, the public company, and not to Astris, the private company that was wholly owned by AEI, Birkett asserted that the repayment condition set out under paragraph 5 of the LOI concerning interim funding advances has no application to the Cash Advances.
(3) Post-LOI Documents
23Following execution of the LOI, the parties and/or WLD Inc. and the Astris shareholders entered into a series of written agreements regarding the transactions contemplated by the LOI. Some of these agreements assumed critical importance at trial.
(i) Purchase Agreement
24The first material post-LOI document was a share exchange agreement entered into by AEI, as purchaser, and the shareholders of Astris, as vendors, on November 24, 1995 (the “Purchase Agreement”). It provided that the Astris shareholders were to receive shares and warrants (rather than shares and options) in AEI in exchange for the sale by them of their shares in Astris to AEI. Paragraph 6(g) of the Purchase Agreement stated:
- The Vendors [the Astris shareholders] severally covenant and agree with the Purchaser [AEI] that:
(g) all advances by the purchaser [AEI] shall be recorded on the books of the Corporation [Astris] as loans repayable upon the receipt by the Corporation [Astris] of additional equity financing of a minimum of Five Million ($5,000,000.00) Dollars (U.S.), or otherwise as set out in the Shareholders Agreement attached hereto as Schedule “R” [emphasis added].
25By an amending agreement dated February 23, 1996, signed by AEI and the Astris shareholders, paragraph 6(g) was deleted from the Purchase Agreement and the following paragraph was substituted in its stead:
(g) all advances by the Purchaser [AEI] to the Corporation [Astris] shall be recorded on the books of the Corporation [Astris] as loans repayable upon the receipt by the Corporation [Astris] of additional equity financing of a minimum of Ten Million ($10,000,000) Dollars (U.S.), to be repaid from the proceeds of such financing [emphasis added].
26Two important changes were effected by this amendment. First, the minimum Equity Financing contemplated by the parties was increased from $5 million (U.S.) to $10 million (U.S.). Second, as amended, the Purchase Agreement provided that the repayment of advances made by AEI to Astris was to be sourced from the funds raised by the Equity Financing.
(ii) Financing Agreement and Birkett’s
Additional Undertaking
27The share exchange transaction closed on February 27, 1996, four days after the amendment of the Purchase Agreement. On closing, the members of the WLD Group (including Birkett), the Astris shareholders and AEI entered into a written agreement (the “Financing Agreement”), which provided:
E. Roy Birkett will personally undertake to have the Hemery Trust, a trust formed under the laws of Jersey, in the Channel Islands (the “Trust”) offer 1,500,000 AEI Shares held by it (the “Trust Shares”) for sale with the Board of AEI setting the time and therefore the price(s) for these sales, with the net proceeds from the sale of all such Trust Shares to be paid directly to AEI, to be recorded on the books of AEI as contributed surplus. All such Trust Shares must be sold through the market or at the then current market price for such AEI Shares.
Additional financing required by AI and/or AEI shall be obtained from the sale of the Trust Shares as noted above together with additional equity financings to be completed with the approval of AEI’s board.
All advances made by the WLD Group to AI and AEI, whether before, on or after the Closing shall be immediately repaid once Ten Million ($10,000,000.00) Dollars (U.S.) in equity financing is raised by AEI, to be repaid from the proceeds of such financings.
28The Financing Agreement fundamentally changed the ‘deal’ originally contem-plated by the LOI. Under paragraph 1 of the Financing Agreement, Birkett personally undertook to cause the Trust to sell 1.5 million AEI shares and to provide the proceeds of sale to AEI as “contributed surplus”. In contrast to the terms of the LOI, no provision was made under the Financing Agreement for the subscription by the Trust of new replacement shares in AEI in consideration for AEI’s receipt of the proceeds from the sale of the Trust’s existing AEI shareholdings. In addition, under the Financing Agreement, the Trust’s shares were to be sold on the open market or at the then current market price, at a time controlled by AEI, rather than through a secondary securities offering by the Trust to investors. Moreover, the Financing Agreement addressed, for the first time, advances made by individual members of the WLD Group to Astris and AEI, as distinct from advances made to Astris by AEI (as contemplated by the Purchase Agreement) and by members of the WLD Group (as contemplated by the LOI). Under the Financing Agreement, past and future advances “to [Astris] and AEI” were repayable from the proceeds of the Equity Financing, once realized.
29Clewes and Birkett signed the Financing Agreement, as members of the WLD Group. Birkett also signed the Financing Agreement on behalf of AEI. Blenkarn, however, never signed the document.
30On closing, Birkett also provided a separate written undertaking in favour of AEI, the Astris shareholders, Clewes and Blenkarn concerning the sale of the Trust’s AEI shares and the Trust’s contribution of the resulting proceeds to AEI’s surplus (the “Additional Undertaking”). Like paragraph 1 of the Financing Agreement, the Additional Undertaking confirmed that AEI had a “put” in relation to 1.5 million AEI shares held by the Trust. Under this ‘put’, AEI could dictate the timing of the Trust’s dis-position of AEI shares and, hence, of its contribution of the sale proceeds to AEI’s surplus.
(4) Shares Expenses: RMJ
31The trial judge accepted that Birkett made various efforts to promote and develop a market for AEI’s stock. For this purpose, Birkett retained several stock promoters to provide various services to AEI. In particular, in July 1996, Birkett retained RMJ to act as an independent management consultant for AEI in exchange for 637,000 AEI shares, which were transferred to RMJ by Birkett from his personal AEI shareholdings.
32From time to time, Birkett sought assurances from AEI’s board of directors that the shares transferred to RMJ would be replaced. The directors initially declined to provide such assurance, claiming that it had not authorized the stock transfer and that Birkett made the transfer for his own account, without AEI’s prior knowledge or involvement. Ultimately, at a meeting held on November 5, 1996, AEI’s directors approved the issuance of AEI shares to Birkett, to replace the shares used by him to pay RMJ. However, this approval was subject to an important condition: the delivery of the replacement shares was “to be held pending delivery of the balance of $990,000 U.S.” on completion of a securities financing in the United States. This financing did not proceed.
33Before this court, Birkett’s claim for reimbursement of the Shares Expenses based on unjust enrichment concerns only the value of the shares transferred by him to RMJ, allegedly for the benefit of AEI.
(5) Exercise by AEI of its ‘Put’
34In mid-March 1996, AEI’s board of directors instructed Birkett to sell some of the Trust’s shares in AEI. Birkett testified at trial that he never received this sale instruction. Subsequently, however, at a meeting of AEI’s board of directors held on June 24, 1997, the directors called for the sale by the Trust of the entire 1.5 million share block and for the proceeds of sale to be applied to AEI’s contributed surplus account, as provided for under the Financing Agreement and Birkett’s Additional Undertaking. AEI thereby exercised its ‘put’ on the Trust’s AEI shares.
35In response, Birkett claimed that in the absence of a secondary securities offering by the Trust, as contemplated under the LOI, AEI was not entitled to invoke Birkett’s obligations under paragraph 1 of the Financing Agreement or under his Additional Undertaking. At trial, Birkett maintained that it had always been contemplated by the parties that Hemery would sell the Trust’s AEI shares as part of a secondary securities offering and that he had no obligation to effect the sale of the Trust’s shares except in the context of such an offering.
(6) Other Events
36Birkett became the treasurer and chief financial officer of AEI on September 4, 1996. The following year, in September 1997, Nor instructed Blenkarn and Clewes to investigate suspected irregularities in Birkett’s dealings with AEI’s funds. As a result of this investigation, AEI’s board of directors removed Birkett as an officer of AEI at a board meeting held on October 14, 1997. Birkett did not attend this meeting.
37At the same meeting, the directors of AEI acknowledged that the company was indebted to Birkett for $315,287 on account of the Cash Advances. Financial documents prepared for AEI by its auditors in October 1997 and AEI’s 1995 financial statements record that this debt was repayable once the Equity Financing was raised. However, the notes to AEI’s financial statements for the years 1996 to 1998 fail to record that the $315,287 debt was subject to any specific terms of repayment. At trial, Nor testified that this omission was inadvertent.
38The minutes of the October 14, 1997 meeting of AEI’s board of directors record two other significant matters. First, they indicate that an extensive discussion took place at the meeting regarding Birkett’s Shares Expenses claim, including with respect to the shares transferred by him to RMJ. The minutes contain the following entry: “It is clear that if shares were given for promotion, that the shares given did nothing for the financial status of the company and therefore, the gifts whether given or not were of no value to the Company.”
39Second, the minutes record that Blenkarn was instructed to offer Birkett shares in AEI “at 50 cents” in satisfaction of the Cash Advances, that is, 630,574 shares. Blenkarn was also instructed to make a similar offer to other AEI creditors, including Clewes and Nor. Birkett did not accept this offer.
40Finally, on January 20, 1998 Birkett was replaced as a director of AEI. This litigation was commenced approximately 2 years later.
III. ISSUES
41Birkett argues that the trial judge erred in the following ways in dismissing his action against AEI:
(i) in her interpretation of the LOI, by misconstruing the import of paragraph 5 of the LOI and by allegedly relying on parol evidence as an aid to determining the meaning of the LOI;
(ii) in basing her decision on matters not pleaded by AEI in its defence to the action;
(iii) in her interpretation of the Financing Agreement and in concluding that the Financing Agreement was bind-ing on and enforceable against Birkett; and
(iv) in rejecting Birkett’s unjust enrichment claim in relation to the RMJ Shares Expenses.
IV. ANALYSIS
(1) Trial Judge’s Interpretation of the LOI
42Birkett’s claim for reimbursement of the Cash Advances does not derive from any of the documents entered into by the parties. Rather, it is based on an alleged unqualified acknowledgement of indebtedness by the directors of AEI. Accordingly, Birkett asserts that the LOI only became relevant at trial because it was relied on and pleaded by AEI in its defence to the action.
43Birkett argues that the trial judge’s decision to reject his claim for reimbursement of the Cash Advances was grounded in the LOI. He then submits that the trial judge mis-interpreted the LOI: (i) by viewing the restriction on the repayment of interim advances to Astris contained in paragraph 5 of the LOI as applicable to the Cash Advances; (ii) by using parol evidence, that is, the Financing Agreement and other post-LOI documents, to interpret the LOI; and (iii) by misconstruing the import of some of the post-LOI documents.
44I do not agree that the trial judge’s decision to deny the Cash Advances claim turned on the LOI; nor am I persuaded that the trial judge erred in her approach to the interpretation of the LOI or in her construction of it.
45The trial judge stated concerning the Cash Advances claim (at para. 46):
The Letter of Intent, the…Purchase Agreement, the amendment to the…Purchase Agreement, the Financing Agreement, Mr. Birkett’s May 10, 1996 memo to E & Y, the audit confirmation letter dated February 13, 1996 and signed by Mr. Birkett on May 15, 1996, and the audited financial statements for the year ended December 31, 1995 subsequently issued all support the finding of an agreement that Mr. Birkett is not be entitled [sic] to be repaid cash advances made by him until AEI raises the designated amount of equity financing, initially US $5 million and then US $10 million [emphasis added].
This passage clearly indicates that the trial judge regarded the LOI as only one of several underpinnings for her conclusion that Birkett’s entitlement to reimbursement of the Cash Advances is subject to the prior receipt of the Equity Financing.
46The trial judge recognized that the LOI imposed two obligations on Birkett: (i) it obliged him to secure the Equity Financing by arranging for and facilitating the sale by the Trust of 2 million common shares of WLD Inc. (later AEI) through a secondary securities offering and, thereafter, to cause the Trust to subscribe for a like number of treasury-issued common shares in AEI (paragraph 4 of the LOI); and (ii) it required Birkett, together with the other members of the WLD Group and WLD Inc., to furnish interim working capital to AEI on a monthly basis (paragraph 5 of the LOI). The trial judge properly identified these obligations and held that each of them was breached: the securities offering was never undertaken and many of the working capital payments were never made.
47The trial judge’s reasons also reflect an appreciation of Birkett’s position concerning paragraph 5 of the LOI, namely, that it did not operate to prevent his reimbursement claim concerning the Cash Advances because they were made to AEI, rather than to Astris. She stated his position succinctly at paragraph 47 of her reasons when she observed: “[Birkett] argues that all of his advances were made to AEI and not Astris and that only the Financing Agreement, which he is not bound by because Mr. Blenkarn failed to sign it, restricts his right to repayment from AEI.”
48Significantly, as acknowledged by Birkett in his written argument before this court, nowhere in her reasons does the trial judge suggest that paragraph 5 of the LOI operated as a bar to Birkett’s claim for reimbursement of the Cash Advances made to AEI, or that it established an agreement by him that he was not entitled to repayment of the Cash Advances.
49The trial judge’s reference to the LOI in paragraph 46 of her reasons, quoted above, must be understood in context. By this reference to the LOI, in my view, the trial judge was simply suggesting that the restriction on the repayment of interim funding advances established under paragraph 5 of the LOI was consistent with the proposition that the overall dealings between the parties resulted in an agreement that Birkett was not entitled to the repayment of monies advanced by him until the Equity Financing was raised. I agree.
50It is important to recall that Birkett made two crucial concessions during his testimony at trial. First, he acknowledged that the LOI imposed binding obligations on him at the time that he signed it. Indeed, the binding nature of the interim funding obligation set out in paragraph 5 of the LOI is confirmed by the express language of that paragraph. This concession by Birkett is directly contrary to his pleaded position in the action. In his reply pleading, he stated: “Contrary to the allegations in the Statement of Defence, the Letter of Intent was never binding, was replaced by the Share Purchase Agreement, and contains no obligations as alleged in the Statement of Defence.” As well, this pleaded position is inconsistent with Birkett’s asserted position on this appeal: before this court, Birkett claims that the LOI is the only relevant and controlling document applicable to his claims against AEI.
51Second, Birkett testified at trial that the Cash Advances were designed to fulfil his interim funding obligation under the LOI. Birkett’s only interim funding obligation was created by paragraph 5 of the LOI, which obliged him to fund Astris, not AEI. Thus, Birkett sought at trial to shelter the Cash Advances under the LOI to suggest that he was fulfilling his funding obligation to Astris under that agreement, but denied the relevance of the same agreement when its application would operate to his detriment by restricting his entitlement to repayment.
52Birkett admitted, however, that he knew that the funds provided by him to AEI were flowing through AEI directly to Astris. This admission was tantamount to a concession by Birkett that he used AEI, a company that he controlled at the time that the Cash Advances were made, as a ‘mailbox’ or conduit for the delivery of the Cash Advances to Astris.
53In these circumstances, although the LOI did not address advances made to AEI rather than to Astris, I am of the view that it was open to the trial judge to regard the LOI as one indicator of the intention of the parties concerning the repayment of interim advances made to or for the benefit of Astris.
54Moreover, the trial judge’s conclusion that Birkett is not entitled to repayment of the Cash Advances until AEI raises the contemplated Equity Financing is over-whelmingly supported by the post-LOI documents introduced at trial. This evidence included:
(i) a memo dated May 10, 1996 to Ernst & Young, AEI’s auditors, in which Birkett indicated that advances “from the parent to private company” were identified as “demand loans”. In the same memo, Birkett stated: “Repayment is dependent upon the funding of the company and this was and is acceptable to the Directors/Shareholders who lent the funds [emphasis added].”
(ii) a letter dated February 13, 1996 and signed by Birkett on May 15, 1996 on behalf of WLD Inc., requested by Astris for its auditors, in which Birkett’s express confirmation was sought that no fees were repayable to WLD Inc. (subsequently AEI), “unless the securities offering in paragraph 4 in the [LOI] closes and unless US $10 million is raised. At that point the amount is repayable in full, from monies raised through the issue of new shares”;
(iii) the Purchase Agreement, entered into by AEI in November 1995 and amended in February 1996, which provided that all advances by AEI to Astris were only repayable upon Astris’ receipt of the Equity Financing. In Birkett’s reply pleading, he asserted that the Purchase Agreement, “governed the relationship between the parties and contains all of the obligations of Birkett with respect to the sale of the shares of Astris to AEI”; and
(iv) finally, and importantly, the Financing Agreement that was entered into by Birkett as well as AEI, which expressly stated that all advances made “by the WLD Group to [Astris] and AEI, whether before, on or after the Closing” were to be repaid once the Equity Financing was raised by AEI, “from the proceeds of such financings”.
These documents make it abundantly clear that the parties envisaged that cash advances are not to be repaid until AEI’s Equity Financing is in place.
55Although it is true that some of the post LOI-documents pertain to advances made by WLD Inc. or AEI to Astris – in contrast to advances made by members of the WLD Group to AEI – two of the documents specifically concern advances made by members of the WLD Group to AEI, namely the May 10, 1996 memo to Ernst & Young and the Financing Agreement. This is contrary to Birkett’s assertion on this appeal that there is no condition precedent to repayment of the Cash Advances since: “There is no separate agreement regarding advances made by Birkett to AEI. …” This claim assumes that the Financing Agreement is unenforceable.
56Birkett also submits that the trial judge misconstrued the May 10, 1996 memo to Ernst & Young as referring to advances made to AEI when, in fact, it referred to advances from AEI to Astris. I disagree. Although the May 10, 1996 memo referred to cheques from the parent company (AEI) to the private company (Astris), the next entry in the memo referenced funds lent by the “Directors/Shareholders”. In combination, therefore, these passages can only refer to funds lent to AEI, the parent company, which in turn were transmitted to Astris, the private company, by AEI. The memo clearly states that repayment “is dependent upon the funding of the company”. Again, it is important to underscore that Birkett acknowledged at trial that the Cash Advances, although paid to AEI, were retransmitted to Astris.
57It is also noteworthy that in a memo written by Birkett to the directors of AEI on May 16, 1996, six days after his memo to Ernst & Young, Birkett expressed concern that the members of the WLD Group could “end up with no or very few shares in a financed ASTRIS”. He went on to say, “Their (WLD Group) only bonus is the repayment of their loans…when ASTS [sic] is financed…[emphasis added].” This memo, therefore, also indicated that advances of funds made by WLD Group members would only be repaid once the financing funds needed by Astris were in place, regardless of the entity to which the advances were made.
58Finally, I do not accept Birkett’s submission that the trial judge improperly relied on parol evidence to interpret the LOI. I say this for two reasons.
59First, although Birkett attacks the propriety of the trial judge’s consideration of post-LOI documents in determining his Cash Advances claim, Birkett himself invited such consideration and engaged the relevance of at least one post-LOI document in his reply pleading, in which he asserted that the Purchase Agreement “governed the relationship between the parties”.
60Second, the trial judge concluded that the Financing Agreement is a complete answer to Birkett’s reimbursement claim concerning the Cash Advances. The trial judge reasoned (at para. 53):
[O]n the assumption that the Financing Agreement was not binding on him, [Birkett] argued that I could not consider extrinsic parol evidence to interpret the [LOI] as covering the terms of repayment of advances made by Mr. Birkett to AEI. I concluded that the Financing Agreement is binding on Mr. Birkett and it clearly and unambiguously sets out the terms of repayment of advances made by him to AEI. Parol evidence was ultimately not an issue [emphasis added].
61Accordingly, the trial judge made no error in her perception and application of the evidence. In the end, her decision concerning reimbursement of the Cash Advances was grounded in the terms of the Financing Agreement, rather than in the terms of the LOI. In my view, she did not use the Financing Agreement or other post-LOI documents to interpret the LOI. Instead, she concluded that Birkett’s reimbursement claim was answered by the Financing Agreement. I turn next, therefore, to Birkett’s challenge of the trial judge’s findings concerning the Financing Agreement.
(2) Financing Agreement
62The positions of the parties regarding the relevance and the significance of the Financing Agreement are sharply divided. Birkett argues that since AEI failed to plead it, the Financing Agreement was irrelevant at trial, and is irrelevant on this appeal. He also submits before this court, as he argued at trial, that the Financing Agreement is not binding on or enforceable against him because it was not signed by Blenkarn. Birkett asserts that he would not have signed the Financing Agreement, or provided his Additional Undertaking, if he had known that Blenkarn was not going to sign the Financing Agreement. Finally, Birkett maintains that, contrary to the trial judge’s interpretation, paragraph 3 of the Financing Agreement does not preclude his entitlement to be repaid the Cash Advances prior to the obtaining by AEI of the Equity Financing.
63In contrast, AEI asserts that, as the trial developed and as Birkett’s theory of his case evolved, the Financing Agreement became the key document at trial, controlling the outcome of Birkett’s claim for reimbursement of the Cash Advances. AEI also raises various arguments in response to Birkett’s assertion that it was not open to the trial judge to rely on the Financing Agreement due to AEI’s failure to plead it. It contends that the Financing Agreement is enforceable against Birkett and that the trial judge did not misinterpret its essential terms.
(i) Pleadings Argument
64Birkett pleaded in paragraph 7 of his original statement of claim that:
At all times, Birkett incurred these expenses [the Cash Advances] on behalf of AEI with the consent and knowledge of the other directors and officers of AEI, and with the acknowledgement by the other officers and directors of AEI that such expenses were to be reimbursed to Birkett by AEI.
65AEI responded to this allegation in its statement of defence and counter-claim by: (i) generally traversing the substantive allegations contained in Birkett’s pleading (paragraph 2); (ii) pleading the material terms of the LOI, including paragraph 5 thereof (paragraphs 6 to 8); (iii) acknowledging that Birkett contributed $315,287 “to Astris” (paragraph 9); and (iv) alleging that Birkett failed to fulfil his express obligations under the LOI and, thus, was not entitled to any repayment of this sum (paragraph 9).
66AEI concedes that it did not specifically plead the February 1996 Financing Agreement, or various other post-LOI documents. Although its pleading contains several references to a ‘financing agreement’, as defined in AEI’s pleading these references pertain to the LOI.
67The parties proceeded to discoveries on these pleadings, prior to any amendment by Birkett of his statement of claim. Nor was discovered on behalf of AEI. He was questioned concerning the Financing Agreement and stated that it was binding on the parties. Birkett asserted on discovery that his entitlement to reimbursement of the Cash Advances arose in October 1997 when he was removed as an officer of AEI. Thus, Birkett effectively conceded that he had no entitlement to such reimbursement prior to October 1997, unless the Equity Financing was in place. When questioned as to the basis for his claim that a reimbursement entitlement arose when he was removed as an officer of AEI, Birkett said: “Because I was kicked off the board as officer, and I’m not party to what is going on, and I contribute, and, therefore, they had changed the terms unilaterally and I want my money.” Birkett did not allege that AEI agreed to reimburse him for the Cash Advances upon his removal as an officer of the company. Rather, Birkett simply believed that he was entitled to reimbursement because he had been removed as an officer of the company.
68Following discoveries, Birkett amended his pleading to include the Shares Expenses claim. He did not amend paragraph 7 of his pleading to conform with his discovery evidence concerning his entitlement to reimbursement of the Cash Advances, or to plead that the LOI did not apply because the Cash Advances were made to AEI, rather than to Astris.
69At trial, Birkett appeared to advance a different reimbursement theory. His trial testimony on this issue was confusing and often contradictory. At various times, Birkett maintained that AEI, as the public company that received the Cash Advances, was obliged to repay them. At other times, he testified that Astris, as “the private company where the technology was” bore the repayment obligation. Birkett also repeated his assertion, made on discovery, that he became entitled to reimbursement of the Cash Advances when his position as an officer of AEI was terminated. Ultimately, however, Birkett asserted that AEI, as the recipient of the Cash Advances, was subject to a repayment obligation from the time that the Cash Advances were made; that the repayment condition imposed by paragraph 5 of the LOI applied to Astris only; and that AEI was responsible for repaying the Cash Advances even though, from the outset, it lacked the assets to do so.
70Birkett’s position at trial made the Financing Agreement highly relevant. Indeed, by the end of Birkett’s cross-examination at trial, it was clear that AEI was responding to Birkett’s revised theory of his reimbursement case on the basis of the enforceability and the content of the Financing Agreement.
71In my view, notwithstanding Birkett’s submission to the contrary, it cannot be said that Birkett was prejudiced by this turn of events. After the discovery process, Birkett was aware of AEI’s position that the Financing Agreement was binding on him. Birkett did not object at trial to the admission of the Financing Agreement; nor did he seek an adjournment of the trial to prepare different or additional evidence to respond to AEI’s reliance on that agreement. Instead, notwithstanding that he was cross-examined on the Financing Agreement, Birkett closed his case after his own testimony, without seeking to call any other witnesses. Moreover, although Nor gave evidence concerning the Financing Agreement, Birkett elected not to call any reply evidence. As well, although Birkett complains on this appeal that Blenkarn was not called as a witness at trial to explain why he did not sign the Financing Agreement, Birkett offers no explanation for his own failure to call Blenkarn, who Birkett acknowledges was available to testify, as a witness. Finally, it was not until closing arguments that Birkett objected to AEI’s reliance on the Financing Agreement on the basis that it had not been pleaded by AEI.
72In these circumstances, Birkett cannot be heard to now complain, on the basis of a deficiency in AEI’s pleading, of the trial judge’s consideration of the Financing Agreement in determining the Cash Advances claim. The Financing Agreement and other post-LOI documents were clearly ‘in play’ in this lawsuit long before trial. Birkett was aware of the terms of the Financing Agreement including, in particular, the terms of the repayment provision contained in paragraph 3 of the Financing Agreement, and of their potential significance at trial. Although AEI failed to amend its pleading before or at trial to refer specifically to the Financing Agreement, in my view, this omission is not fatal. Birkett was not prejudiced or taken by surprise by AEI’s reliance on the Financing Agreement. Indeed, that reliance was precipitated by Birkett’s own position at trial on the issue of his entitlement to reimbursement of the Cash Advances. In addition, Birkett failed to pursue available options at trial to respond to the Financing Agreement. The Financing Agreement was before the court and neither party to this action can have been under any misapprehension concerning its significance to an adjudication on the merits of Birkett’s Cash Advances claim.
(ii) Paragraph 3 of Financing Agreement
73Paragraph 3 of the Financing Agreement states that past and future advances made by the WLD Group to Astris and AEI, “shall be immediately repaid once [the Equity Financing] is raised by AEI, to be repaid from the proceeds of such financings”. Birkett asserts that this provision means that members of the WLD Group are entitled to be repaid their advances to Astris or AEI, at the latest by the time that the Equity Financing is in place.
74There are two flaws in this argument. First, the concluding language of paragraph 3 indicates that advances are to be repaid “from the proceeds of such financings”. If the repayment of advances could be compelled prior to the obtaining of the Equity Financing, this qualifying language would be unnecessary and nonsensical.
75Second, the Financing Agreement was entered into as a condition of the closing of the share exchange transaction by which AEI acquired Astris. The Cash Advances had already been made, in whole or part. The purpose of the transaction, from the outset, was to facilitate the obtaining of sorely needed funds for Astris. Prior to the closing, AEI had no assets. After the closing, its only asset was its shares in Astris. Had it been intended, as urged by Birkett, that the members of the WLD Group could claim against AEI’s assets at any time after the closing to obtain repayment of their advances to AEI, the commercial purpose of the entire transaction would be undermined. In my view, paragraph 3 of the Financing Agreement is designed precisely to avoid that result.
76Accordingly, I conclude that the trial judge properly interpreted paragraph 3 of the Financing Agreement as precluding the repayment of advances made by members of the WLD Group to AEI prior to the Equity Financing being in place. She reasoned (at para. 24): “It was obviously critical [following the closing] to clarify that the advances made to AEI were similarly not repayable until financing was raised.” I agree.
(iii) Enforceability of Financing Agreement
77Birkett’s attack on the enforceability of the Financing Agreement, and on the trial judge’s conclusion that it was binding on Birkett, may be dealt with summarily.
78The trial judge considered, and rejected, Birkett’s argument that the Financing Agreement was not binding on or enforceable against him because Blenkarn had not signed it. In my view, she was correct to do so.
79The trial judge concluded that, properly read, the Financing Agreement imposed individual, that is, several rather than joint, obligations on Birkett. I agree.
80G.H.L. Fridman, in The Law of Contract in Canada, 4th ed. (Toronto:Carswell, 1999) states at 194 in the context of issues of privity of contract:
Where there are several creditors or debtors, they may engage as parties to the contract jointly or severally. If they are joint parties, then their obligation (or benefit, as the case may be) is one and indivisible…If they are several parties, then the obligation or benefit is capable of severance or separation as between them. It is a question of construction of the contract whether their participation in the contract is joint or several [emphasis added].
See also Chitty on Contracts, 28th ed. (London: Sweet & Maxwell, 1999) at 947.
81In this case, paragraph 1 of the Financing Agreement imposed an obligation on Birkett to have the Trust offer 1.5 million AEI shares for sale, subject to terms set by the directors of AEI. This obligation applied only to Birkett and was expressed to be a personal undertaking by him. As observed by the trial judge, no other member of the WLD Group was in a position to provide this undertaking; nor were the other signatories to the Financing Agreement (AEI and the Astris shareholders) positioned to do so. Consequently, on a plain reading of paragraph 1 of the Financing Agreement, the obligation created thereunder is an individual obligation, personal to Birkett.
82Paragraph 3 of the Financing Agreement, in contrast, both conferred a benefit and imposed a restriction on each of the members of the WLD Group: they were entitled thereunder to the repayment of any advances made by them to AEI and Astris, but only after the Equity Financing was in place. There is no suggestion that if the Equity Financing was raised and the other members of the WLD Group elected not to pursue recovery of their advances, Birkett would be precluded from doing so. To the contrary, the Cash Advances claimed by Birkett were made by him personally, and his asserted reimbursement right is similarly personal to him. To the extent that other members of the WLD Group also advanced interim working capital, separate obligations were thereby created.
83Accordingly, in my view, it cannot be said that Blenkarn’s failure to sign the Financing Agreement precludes enforcement of it against, or by, Birkett. Rather, his obligations and benefits under the Financing Agreement are individual and separately enforceable. This case is therefore distinguishable from cases relied upon by Birkett in which joint property rights or obligations are created.
84Two other factors also support the trial judge’s conclusion that Birkett is bound by the Financing Agreement. First, the trial judge found as a fact that Birkett, by his conduct after the execution of the Financing Agreement, effectively acknowledged that he was bound by it. This finding is amply supported by the evidence. Second, it will be recalled that Birkett signed the Financing Agreement twice: once on behalf of AEI and once in his personal capacity. While this factor alone is not determinative of the legal character of the obligations and benefits created under the Financing Agreement, it is evidence of Birkett’s intention to be personally, and individually, bound by the Financing Agreement.
(3) Unjust Enrichment Claim: RMJ Shares Expenses
85On this appeal, Birkett’s claim for reimbursement of the value of the RMJ Shares Expenses is based on unjust enrichment and not on any of the agreements entered into between the parties. Birkett does not seek to obtain shares in AEI to replace the shares provided to RMJ. Rather, he seeks recovery of the sum of $394,940, being the asserted value of the shares in issue.
86The requisite elements of an unjust enrichment cause of action are well-established. The plaintiff must demonstrate: (i) an enrichment of the defendant; (ii) a corresponding deprivation of the plaintiff; and (iii) the absence of any juristic reason for the enrichment: see Garland v. Consumers’ Gas Co., 2004 SCC 25, [2004] S.C.J. No. 21; Pettkus v. Becker, [1980] 2 S.C.R. 834; and Campbell v. Campbell (1999), 43 O.R. (3d) 783 (C.A.).
87Birkett does not dispute that the trial judge applied the proper legal principles concerning unjust enrichment. Rather, he argues that she erred by implicitly concluding that there was a juristic reason for Birkett’s deprivation in relation to the RMJ shares. I would not give effect to this ground of appeal.
88The trial judge stated in connection with the RMJ Shares Expenses (at para. 81):
In the case of the shares transferred to RMJ, Mr. Birkett argued that the board of AEI acknowledged in the minutes of its November 5, 1996 meeting that the value of the work of RMJ had a value of $394,900. In those minutes, the board resolved to issue 637,000 shares to Mr. Birkett to replace the shares transferred by him to RMJ “at a price of 62 cents Canadian being the value placed on the shares for the work.” $394,000 is the product of 637,000 multiplied by $.62. As I have noted above, the resolution went on, however, to provide that delivery of the shares would be held pending delivery of U.S. $990,000 on the completion of [a securities financing in the United States]. This condition on delivery is to me an acknowledgment that there was no value to AEI in the work performed by RMJ unless the funding was obtained. While the share price of AEI rose for several months, presumably as a result of RMJ’s efforts, the increase was temporary. AEI did not secure the [securities] financing or any other benefit as a result. The required element of enrichment is not satisfied. Even if enrichment had been found, it would not be unfair for AEI to retain the benefit given the principle established in the Financing Agreement and the undertaking that Mr. Birkett was to cause the proceeds of sale of shares held by Hemery to be donated to AEI, the failure of Mr. Birkett to sell the Hemery shares and the fact that some of the shares transferred to RMJ appear to have come from Hemery [emphasis added].
Birkett asserts that the last sentence in the quoted passage from the trial judge’s reasons is tantamount to a finding that a juristic reason existed for the enrichment realized by AEI from RMJ’s services.
89This argument does not assist Birkett. The trial judge found that the first requisite element of an unjust enrichment – the enrichment of the defendant – had not been established by Birkett. Once that determination was made, it was unnecessary for the trial judge to consider whether the remaining elements of an unjust enrichment were satisfied: the unjust enrichment claim failed.
90Birkett does not vigorously challenge the trial judge’s finding that RMJ’s services yielded no benefit to AEI, other than a temporary and short-term increase in the value of AEI’s share price; nor does he suggest that this finding is tainted by palpable and overriding error. The trial judge’s finding, in my view, was open to her on the evidence.
91Accordingly, it is unnecessary to address Birkett’s argument that the trial judge erred by finding that the third element of unjust enrichment – a juristic reason for the enrichment of the defendant – existed. In the absence of a finding of enrichment, the juristic reason analysis does not arise.
V. DISPOSITION
92For the reasons given, I would dismiss the appeal. AEI is entitled to its costs of the appeal on a partial indemnity basis, fixed in the amount of $20,000, inclusive of disbursements and Goods and Services Tax.
RELEASED :
“KNF” “E.A. Cronk J.A.”
“JUN 15 2004” “I agree K. Feldman J.A.”
“I agree M.C. MacPherson J.A.”