Venture Capital USA Inc. et al. v. Yorkton Securities Inc.

[Indexed as: Venture Capital USA Inc. v. Yorkton Securities Inc.]

75 O.R. (3d) 325

[2005] O.J. No. 1885

Docket: C40750

Court of Appeal for Ontario,

MacPherson, Sharpe and Juriansz JJ.A.

May 13, 2005

• Application for leave to appeal to the Supreme Court of Canada was dismissed with costs December 8, 2005 (Major, Fish and Abella).

Agency -- Stockbrokers -- Contract between brokerage house and client containing refusal clause providing that broker had right to refuse to accept purchase or sale instructions from client whenever broker deemed it necessary for its protection or otherwise -- Clause not ambiguous -- Trial judge erring in implying term that refusal clause could only be exercised if there was illegality or other significant malfeasance on part of client and that otherwise broker was required to give reasonable notice before exercising its rights under refusal clause.

Contracts -- Implied terms -- Contract between brokerage house and client containing refusal clause providing that broker had right to refuse to accept purchase or sale instructions from client whenever broker deemed it necessary for its protection or otherwise -- Clause not ambiguous -- Trial judge erring in implying term that refusal clause could only be exercised if there was illegality or other significant malfeasance on part of client and that otherwise broker was required to give reasonable notice before exercising its rights under refusal clause.

The contract between the defendant brokerage house and the plaintiff client contained a refusal clause, which provided that the defendant had the right to refuse to accept purchase or sale instructions from the plaintiff whenever the defendant deemed it necessary for its protection or otherwise and that the plaintiff waived any and all claims against the defendant for any loss or damage arising from or relating to any refusal. The defendant was aware that the principal of the plaintiff had a serious criminal record, and became concerned that some of the plaintiff's transactions might attract regulatory disapproval. Purporting to act under the refusal clause, the defendant suspended all activity in the plaintiff's accounts. The plaintiff sued the defendant for losses allegedly sustained as a result of transactions disrupted by the suspension. The trial judge found that the refusal clause was analogous to an exemption clause and should therefore be strictly construed. She found that the clause was ambiguous as to whether it extended to all transactions and, as it was drafted by the defendant, she applied the contra proferentem principle to limit its scope. She found that a term relating to notice should be implied to give effect to the reasonable expectations of the parties, and concluded that the defendant had a contractual duty to continue to operate accounts for the plaintiff unless the transaction proposed was illegal or involved other significant malfeasance; otherwise, the defendant was obliged to give reasonable notice that the activities were being suspended. As there was no illegality or malfeasance that would justify the defendant's termination of the plaintiff's accounts under the refusal clause, the trial judge found that the defendant could only refuse to accept instructions after giving the plaintiff reasonable notice. The defendant appealed, and the plaintiff cross-appealed the award of damages.

Held, the appeal should be allowed; the cross-appeal should be dismissed.

At common law, a broker's primary duty is to follow and carry out the client's instructions. If the broker intends not to do so, the broker may be under an obligation to inform the client so that the client may make alternate arrangements. [page326] At common law, a broker-agent may renounce his agency with notice. If he fails to give timely notice, he will be liable for any loss the client may sustain by the breach of his engagement. These duties, however, may be modified by contract. In addition to the refusal clause in this case, the agreement contained a "no-waiver" clause, providing that no action taken by the defendant or its employees or agents was to be deemed to constitute a waiver or other modification of any of the defendant's rights, remedies or powers, and that the agreement could only be changed by written amendment. The cardinal rule of contract interpretation is that the court should give effect to the intention of the parties as expressed in their written agreement. The language of the agreement in this case was not ambiguous, and the trial judge erred by failing to abide by the plain expression of the parties' intention and by implying a term that the refusal clause could only be exercised if there was illegality or other significant malfeasance and that otherwise, the defendant was required to give reasonable notice before exercising its rights under the refusal clause. The common law allows a broker to refuse to accept instructions to carry out an illegal transaction. The refusal clause had to be intended to give the defendant rights beyond those provided by the common law; it would be superfluous otherwise. The notice requirement implied by the trial judge essentially rendered the refusal clause devoid of content. The word "whenever" contained in the refusal clause was sufficiently clear to do away with any common law notice requirement where the defendant decided for its own protection that it had to refuse purchase or sale instructions. The only constraint upon the defendant's right to refuse instructions under the refusal clause was that it must have deemed the refusal necessary for its protection or otherwise. Such "deeming" must have been carried out in good faith. This narrower interpretation of the refusal clause was supported by the evidence, respected the terms of the written agreement, and also accorded with commercial reality and the broker's "gatekeeper" function in the securities industry. As the term implied by the trial judge would unduly constrain the broker's gatekeeper function, it failed to accord with modern commercial reality. The agreement between the broker and the client should be interpreted in a manner that affords the broker burdened with the gatekeeper function latitude to refuse suspect transactions despite a lack of clear proof of illegality. Here, the defendant's concerns regarding the past conduct of the plaintiff's principal and the nature of the transactions he was engaged in were sufficient to support a good faith conclusion by the defendant that refusal to accept the plaintiff's sale instructions was necessary for its own protection.

The refusal clause did not give the defendant the right to reverse previously approved transactions. The duty to carry out instructions, once given and accepted, is fundamental to the broker-client relationship. However, the broker would have the right to refuse to carry out a previously approved transaction on grounds of illegality. In this case, the defendant did not reverse previously approved instructions for the purchase of shares. The defendant did have the right to refuse to carry out standing arrangements to dispose of shares bought in bulk. In applying the refusal clause, there was no principled way to distinguish between "standing instructions" and transaction-specific instructions given one at a time.

APPEAL and CROSS-APPEAL from the judgment of Himel J., reported at (2003), 2003 64232 (ON SC), 66 O.R. (3d) 760, [2003] O.J. No. 3529 (S.C.J.), from an award of damages.

Cases referred to Boulieris (Re) (2004), 27 O.S.C.B. 1597; Canadian Pacific Hotels Ltd. v. Bank of Montreal, 1987 55 (SCC), [1987] 1 S.C.R. 711, [1987] S.C.J. No. 29, 21 O.A.C. 321, 40 D.L.R. (4th) 385, 77 N.R. 161, 41 C.C.L.T. 1; Dionne (c.o.b. Dionne Construction Co.) v. Banque Canadienne Nationale, [1974] O.J. No. 829 (H.C.J.); Eli Lilly and Co. v. Novopharm Ltd., 1998 791 (SCC), [1998] 2 S.C.R. 129, [1998] S.C.J. No. 59, 161 D.L.R. (4th) 1, 227 N.R. 201, 80 C.P.R. (3d) 321, revg 1996 21793 (FCA), [1996] F.C.J. No. 576, 112 F.T.R. 239n, 1996 21940 (FCA), 197 N.R. 291, 67 C.P.R. (3d) 377 (C.A.); [page327] George v. Dominick Corp. of Canada, 1972 138 (SCC), [1973] S.C.R. 97, 28 D.L.R. (3d) 508, [1973] 3 W.W.R. 56, affg (1970) 1970 756 (BC CA), 15 D.L.R. (3d) 596, [1971] 1 W.W.R. 110 (B.C.C.A.); Gregory & Co. v. Quebec (Securities Commission), 1961 75 (SCC), [1961] S.C.R. 584, 28 D.L.R. (2d) 721; Indian Molybdenum Ltd. v. R., 1951 378 (SCC), [1951] 3 D.L.R. 497 (S.C.C.); KPMG Inc. v. Canadian Imperial Bank of Commerce, 1998 1908 (ON CA), [1998] O.J. No. 4746 (C.A.) [Leave to appeal to S.C.C. refused [1999] S.C.C.A. No. 36, [1999] 2 S.C.R. vi]; M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 677 (SCC), [1999] 1 S.C.R. 619, [1999] S.C.J. No. 17, 69 Alta. L.R. (3d) 341, 170 D.L.R. (4th) 577, 237 N.R. 334, [1999] 7 W.W.R. 681, 49 B.L.R. (2d) 1, 44 C.L.R. (2d) 163, 3 M.P.L.R. (3d) 165; Marinangeli v. Marinangeli (2003), 2003 27673 (ON CA), 66 O.R. (3d) 40, [2003] O.J. No. 2819, 228 D.L.R. (4th) 376, 174 O.A.C. 76, 38 R.F.L. (5th) 307 (C.A.); Marshall v. Bernard Place Corp. (2002), 2002 24835 (ON CA), 58 O.R. (3d) 97, [2002] O.J. No. 463, 47 R.P.R. (3d) 1, 26 B.L.R. (3d) 9 (C.A.); Martel Building Ltd. v. Canada, [2000] 2 S.C.R. 860, [2000] S.C.J. No. 60, 193 D.L.R. (4th) 1, 262 N.R. 285, 36 R.P.R. (3d) 175, 2000 SCC 60, 3 C.C.L.T. (3d) 1; Rachfall (Re), [2001] B.C.S.C.D. No. 761; Smith v. Forbes, [1882] O.J. No. 250, 32 U.C.C.P. 571; Volkers v. Midland Doherty Ltd., 1985 415 (BC CA), [1985] B.C.J. No. 2163, 62 B.C.L.R. 131, 17 D.L.R. (4th) 343 (C.A.) [Leave to appeal to S.C.C. refused (1985), 62 B.C.L.R. xli] Statutes referred to Securities Act, R.S.O. 1990, c. S.5 Securities Act of 1933, 15 U.S.C. 77a Authorities referred to Fridman, G.H.L., The Law of Agency, 7th ed. (Toronto: Butterworths, 1996) Reynolds, F., ed., Bowstead & Reynolds on Agency (London: Sweet & Maxwell, 2001)

Linda M. Plumpton and Crawford G. Smith, for defendant/appellant. Harold W. Sterling and Joseph Lin, for plaintiffs/respondents.

The judgment of the court was delivered by

1SHARPE J.A.: -- Yorkton Securities Inc., a brokerage house, became concerned that the principal of one of its clients had a serious criminal record and that some of the client's transactions might attract regulatory disapproval. A "refusal clause" in the written agreement between the broker and the client gave the broker "the right to refuse to accept purchase or sale instructions from the client whenever Yorkton shall deem it necessary for its protection or otherwise". Purporting to act under this clause, the broker suspended all activity in the client's accounts. The client sued the broker for losses allegedly sustained as a result of transactions [page328] disrupted by the suspension. The trial judge ruled that the agreement was ambiguous, invoked contra proferentem to narrow its meaning and implied a term requiring Yorkton to give reasonable notice before invoking the refusal clause in the absence of illegality or malfeasance on the part of the client. She went on to find that there was no evidence of illegality or malfeasance to justify the broker's action and, as no notice had been given, awarded the client substantial damages.

2The broker appeals to this court, arguing that the refusal clause is a complete answer to the claim and that the trial judge erred by implying a term limiting its effect. The broker also submits that the trial judge erred in her assessment of the damages. The client cross-appeals, asking that the damages be increased. For the following reasons, I would allow the appeal and dismiss the cross-appeal.

Facts

Facts

3The appellant, Yorkton, is a stockbrokerage firm registered with the appropriate securities authorities in Canada and, through an affiliate, in the United States. In February 1999, the respondents Venture Capital USA Inc., Gideon Trading Ltd., and Nisha Mehta Investments Ltd., a group of interrelated companies (collectively referred to as "Venture") controlled by Harold Arviv, opened securities trading accounts with Yorkton. The account agreements contained two provisions that bear upon the issues raised on this appeal. First is the refusal clause:

That Yorkton has the right to refuse to accept purchase or sale instructions from the Client whenever Yorkton shall deem it necessary for its protection or otherwise; and that the Client waives any and all claims against Yorkton for any loss or damage arising from or relating to any such refusal.

4Second is a "no-waiver clause":

That no action taken by Yorkton, or its employees or agents, nor any failure to take action or exercise any right, remedy or power available under this agreement or otherwise shall be deemed to constitute a waiver or other modification of any of Yorkton's rights, remedies, or powers, and that this agreement is subject to modification only by a further agreement in writing between Yorkton and the Client.

5In 1999 and 2000, Venture was in the business of financing high-tech companies requiring short-term capital infusions. Venture would buy large blocks of discounted shares from these companies and then make a profit by reselling the shares in smaller blocks over several days.

6Venture's investment advisor at Yorkton was Arthur Birstein, with whom Arviv dealt exclusively. Their usual course [page329] of dealing was that Arviv would negotiate the purchase of shares from a vendor company and send a draft of the negotiated agreement to Birstein to have the deal approved by Yorkton's compliance department. Then Yorkton would receive the stocks, transfer funds to the seller, and, under a standing arrangement, each day Birstein would sell 10 to 15 per cent of that particular company's stock, moderating the volume of trading to avoid depressing the market price.

7At issue in this appeal are two transactions that Venture embarked upon shortly before Yorkton decided to take the steps complained of in this case. The first transaction was for 275,000 shares and 275,000 warrants of USA Technologies Inc. ("USTT"). Birstein and Arviv testified that the subscription agreement for this transaction, dated November 29, 1999, received prior approval from Yorkton's compliance department. The second transaction involved 500,000 shares of USA Biomass Corp. ("USBC"). Arviv submitted a draft agreement for the USBC shares to Birstein, who in turn submitted it to Yorkton's compliance department for approval. Yorkton pre-approved the purchase of the USBC shares, and the agreement was signed January 10, 2000.

8At about this time, Yorkton had come under Ontario Securities Commission ("OSC") scrutiny for the manner in which it conducted business. The firm hired Patrick McNenly in August 1999 as Vice President and Director of Compliance with a mandate to improve compliance. In late 1999, McNenly became aware of the nature of Venture's business and the fact that Arviv controlled Venture. McNenly knew Arviv had a criminal record. Arviv had been convicted of extortion, placing an explosive substance with intent, and a violation of Florida's Racketeering, Influence and Corrupt Organizations Act in connection with a "boiler room" scheme to pass off worthless gems. He was also concerned that, given their nature and volume, Venture's transactions, which involved the purchase and subsequent disposition of large blocks of shares from American companies, might run afoul of American regulatory requirements.

9McNenly asked for but was not satisfied with information Birstein obtained from Venture about its dealings. McNenly instructed Birstein that Yorkton would accept no further transactions from Venture and would not transfer funds to third parties in the United States. McNenly retained Grant Vingoe as legal counsel to speak to Venture's counsel to ascertain the legality of the transactions. Vingoe did so and told McNenly in an e-mail message dated January 21, 2000 that "[i]f the SEC [the U.S. [page330] Securities Exchange Commission] were to review these transactions they would likely find them to be offensive" and that Yorkton's participation in Venture's trading "could certainly draw adverse regulatory attention and harm Yorkton's reputation with US regulators". Essentially, the risk was that the transactions could be questioned as Venture appeared to be acting as a broker-dealer without proper registration. McNenly told Birstein to get Venture to take its business elsewhere.

10On January 11, 2000, under orders from McNenly, Birstein told Arviv that no further transactions could take place on Venture accounts, but asked for some time to sort out the problem. Arviv agreed to wait, but shortly thereafter he was told that Yorkton would not do any further business with him and that he should find another broker. Venture managed to transfer its accounts to another broker by February 3, 2000 but claimed loss of profits resulting from the suspension of activity in its accounts.

Trial Judgment

Trial Judgment

11The trial judge found that the result of McNenly's action was to impose a "freeze" on Venture's accounts. This, she found, had the result "that the plaintiffs were unable to transact their business from January 11, 2000 until the accounts were transferred out to other brokerage houses" on February 3, 2000. While certain pre-approved transactions were processed, Venture was "unable to buy shares, wire moneys or transfer shares the way they had intended in accordance with the agreements they had negotiated and agreed upon with Yorkton previously".

12The trial judge rejected the submission that Yorkton was liable for breach of fiduciary duty. However, she also rejected Yorkton's argument that its actions could be justified under the terms of the refusal clause. She held that to accept Yorkton's argument that the refusal clause justified the freeze on Venture's accounts would be to hold that the clause gave Yorkton "the right to breach its contractual obligations whenever it wishes and face no liability for doing so" and that such an interpretation "would undermine the very nature of the brokerage bargain struck between the [parties]".

13The trial judge found that the refusal clause was analogous to an exemption clause and should therefore be strictly construed. She also found that the clause was ambiguous as to whether it extends to all transactions and, as it was drafted by Yorkton, she applied the contra proferentem principle to limit its scope. [page331]

14Giving the refusal clause a narrow construction, the trial judge found that a term relating to notice should be implied to give effect to the reasonable expectations of the parties, as she considered that they would have included a notice requirement had their attention been directed to the point. Her finding in this regard was the following [para. 68]:

I am of the view that the parties intended the power to suspend or terminate a client's account to be exercised with notice. The termination of a client's bank account with credit has been held to require reasonable notice: see Dionne v. Banque Canadienne Nationale, [1974] O.J. No. 829 (QL) (H.C.J.), at para. 117. Given the impact of suspending a client's stock account mid-transaction, I am of the opinion that it, too, must be done with reasonable notice or justification. The prior course of conduct of the parties was that Yorkton would accept the deposit of stock electronically and would wire funds to third parties from these accounts for payment. In my view, Yorkton had a contractual duty to continue to operate accounts for the plaintiffs unless the transaction proposed was illegal or involved other significant malfeasance; otherwise the defendant was obliged to give reasonable notice that the activities were being suspended. This is especially true since Yorkton had accepted standing instructions from the plaintiffs concerning the disposition of stock at the rate of ten to 15 per cent of open market volume. If Yorkton wished to change those instructions, it should have given notice to the plaintiffs so that they could make alternate arrangements.

15The trial judge found that McNenly "was motivated by the desire to disassociate the firm from the name of Harold Arviv" because of Arviv's criminal past. She also found that McNenly "did not want to attract regulatory attention". The evidence, however, did not support a finding that the USBC and USTT transactions were actually illegal. As there was no illegality or malfeasance that would justify Yorkton's termination of Venture's accounts under the refusal clause, the trial judge found that Yorkton could only refuse to accept instructions after giving its client reasonable notice.

16The trial judge found, accordingly, that Yorkton was liable for the losses Venture suffered as a result of the disruption to the USTT and USBC transactions. With respect to the USBC shares, after the freeze was implemented Venture amended the original agreement on January 19, 2000, reducing the number of shares to be purchased from 500,000 to 150,000. Despite the freeze, on January 24, 2000, Yorkton received the 150,000 USBC shares into Nisha's account and transferred out of Nisha's account approximately US$274,000, or US$1.83 per share, as payment for the shares. On January 27, 2000, Nisha transferred its USBC shares to an account at Thomson Kernaghan, another Canadian stockbrokerage firm. The shares were then sold in part from the account of Thomson Kernaghan and, after another transfer, from an account held by Venture at CIBC World Markets. The trial [page332] judge accepted the submission that by reducing the number of USBC shares to be purchased, Venture had acted to mitigate its damages. She found that, although the original agreement to purchase the shares had been approved, it could not be completed and that Venture was denied the opportunity to acquire 350,000 shares at a 35 per cent market price discount.

17With respect to the USTT shares, 40,500 shares were sold "short" before the freeze. However, Yorkton was liable for losses resulting from Venture's inability during the freeze to sell the remaining shares.

18The trial judge essentially accepted the evidence of Venture's expert as to the gains Venture would have made had it been allowed to dispose of the USBC and USTT shares at the usual rate of 10 to 15 per cent of the daily market volume. With respect to the USTT shares, the breach date was adjusted because under applicable U.S. laws the shares could not be sold until registered under the United States Securities Act of 1933, 15 U.S.C. 77a, which did not occur before January 18, 2000.

19The trial judge awarded Venture damages of US$300,000 in respect of the USBC transaction and US$150,000 in respect of the USTT transactions, then reduced that by 25 per cent for contingencies in market conditions for an actual award of CDN$494,775.00 together with CDN$88,152.64 pre-judgment interest and costs fixed at CDN$176,612.85.

Analysis

(1) Liability

Liability

20Yorkton's relationship with Venture was one of agency created by contract. Accordingly, the agreements between Yorkton and Venture are the primary source for determining Yorkton's duties and whether those duties have been breached. The agreements must, however, be interpreted against the background of the common law of agency pertinent to the relationship between brokers and their clients.

21Two sets of common law duties are important in this case. First is the broker's primary common law duty to follow and carry out the client's instructions. If the broker intends not to carry out the client's instructions, the broker may be under an obligation to inform the client so that the client may make alternate arrangements: see, e.g., Volkers v. Midland Doherty Ltd., 1985 415 (BC CA), [1985] B.C.J. No. 2163, 17 D.L.R. (4th) 343 (C.A.), leave to appeal to the S.C.C. refused (1985), 62 B.C.L.R. xli.

22Second are the duties that arise in relation to termination of the relationship. At common law, a broker-agent may renounce [page333] his or her agency with notice. As stated by Osler J. in Smith v. Forbes, [1882] O.J. No. 250, 32 U.C.C.P. 571, at p. 577 U.C.C.P."[A]lthough an agent may renounce his agency after entering upon the business, he must give his principal timely notice of his intention to do so, and, if he does not, will be liable for any loss the latter may sustain by the breach of his engagement." In Dionne (c.o.b. Dionne Construction Co.) v. Banque Canadienne Nationale, [1974] O.J. No. 829 (H.C.J.), O'Driscoll J. imposed a reasonable notice requirement on a bank closing a customer's account. Bowstead & Reynolds on Agency (London: Sweet & Maxwell, 2001) at 10-042 states that reading in a reasonable notice period in cases of an agency relationship with no fixed date of termination "will nearly always be appropriate in bilateral contract cases".

23Both sets of duties, however, may be modified by contract. As I have already mentioned, the contracts between Yorkton and Venture contained the refusal and no-waiver clauses that affect the duty to follow instructions. The refusal clause gives Yorkton the right "to refuse to accept purchase or sale instructions from the Client whenever Yorkton shall deem it necessary for its protection or otherwise". The no-waiver clause protects Yorkton from the argument that by its conduct it has altered the terms of the written agreement.

24The combined effect of these common law duties and the terms of these agreements is that (1) Yorkton was under a duty to follow instructions from Venture unless those instructions were purchase or sale instructions that Yorkton deemed necessary to refuse "for its protection or otherwise"; (2) no action taken by Yorkton or its employees or agents were to "be deemed to constitute a waiver or other modification of any of Yorkton's rights, remedies, or powers" and the agreements could only be changed by written amendment; and (3) Yorkton could only terminate the relationship upon proper notice.

25In my view, the trial judge erred by implying a term, on top of the common law and contractual duties outlined so far, that the refusal clause could only be exercised if there was illegality or other significant malfeasance and that, in the absence of such wrongdoing, Yorkton was required to give reasonable notice before exercising its rights under the refusal clause.

26The cardinal rule of contract interpretation "is that the court should give effect to the intention of the parties as expressed in their written agreement", and where the intention of the parties "is plainly expressed in the language of the agreement, the court should not stray beyond the four corners of the agreement": KPMG Inc. v. Canadian Imperial Bank of Commerce, 1998 1908 (ON CA), [1998] O.J. No. 4746 (C.A.), at para. 5, [page334] leave to appeal refused, [1999] S.C.C.A. No. 36, [1999] 2 S.C.R. vi; Indian Molybdenum Ltd. v. R., 1951 378 (SCC), [1951] 3 D.L.R. 497 (S.C.C.), at p. 502; Eli Lilly & Co. v. Novopharm Ltd., 1998 791 (SCC), [1998] 2 S.C.R. 129, [1998] S.C.J. No. 59, at pp. 166-68 S.C.R.

27I do not think that the agreement was ambiguous, and I agree with the appellant's submission that the trial judge erred by failing to abide by the plain expression of the parties' intention in their written agreement.

28The common law allows a broker to refuse to accept instructions to carry out an illegal transaction: see G.H.L. Fridman, The Law of Agency, 7th ed. (Toronto: Butterworths, 1996) at p. 156: "[T]he agent is not obliged to perform the undertaking if it is illegal. Nor is he obliged to carry out a transaction which, either by common law or statute, is null and void." In addition, the implication of the Volkers decision, supra, is that the common law also gives the broker the right to refuse to accept legal instructions upon reasonable notice to the client. The refusal clause must be intended to give Yorkton rights beyond those provided by the common law; it would be superfluous otherwise. The notice requirement implied by the trial judge essentially renders the refusal clause devoid of content.

29The word "whenever" contained in the refusal clause is sufficiently clear to do away with any common law notice requirement where Yorkton decides for its own protection that it must refuse purchase or sale instructions. In George v. Dominick Corp. of Canada, 1972 138 (SCC), [1973] S.C.R. 97, 28 D.L.R. (3d) 508, affg (1970), 1970 756 (BC CA), 15 D.L.R. (3d) 596, [1971] W.W.R. 110 (B.C.C.A.), the Supreme Court of Canada affirmed a decision of the British Columbia Court of Appeal that a clause, which allowed a broker to close out a margin account "whenever" deemed necessary for its protection, permitted the broker to close out the account without notice or demand.

30The only constraint upon Yorkton's right to refuse instructions under the refusal clause is that it must have "deemed" the refusal necessary for its protection or otherwise. Such "deeming" must have been carried out in good faith: see Marshall v. Bernard Place Corp. (2002), 2002 24835 (ON CA), 58 O.R. (3d) 97, [2002] O.J. No. 463 (C.A.), at pp. 101-04 O.R. In that case, Cronk J.A. stated"No contractual discretion is absolute, in the sense of authorizing the capricious or arbitrary exercise of the discretion." It follows, in my view, that where Yorkton has satisfied itself on a good faith basis that refusal to accept Venture's purchase or sale instructions is necessary for its own protection or otherwise, it may refuse those instructions without notice to the client under the terms of the refusal clause. [page335]

31In M.J.B Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 677 (SCC), [1999] 1 S.C.R. 619, [1999] S.C.J. No. 17, at para. 27, Iacobucci J. made clear that a contractual term may be implied "based on the presumed intention of the parties where the implied term must be necessary 'to give business efficacy to a contract or as otherwise meeting the aeofficious bystander' test as a term which the parties would say, if questioned, that they had obviously assumed'" (citing Canadian Pacific Hotels Ltd. v. Bank of Montreal, 1987 55 (SCC), [1987] 1 S.C.R. 711, [1987] S.C.J. No. 29, at p. 775 S.C.R., LeDain J.); see also Martel Building Ltd. v. Canada, 2000 SCC 60, [2000] 2 S.C.R. 860, [2000] S.C.J. No. 60, at para. 81; Marinangeli v. Marinangeli (2003), 2003 27673 (ON CA), 66 O.R. (3d) 40, [2003] O.J. No. 2819 (C.A.), at para. 55. When implying a term, however, courts must be careful to do so based on actual evidence and not mere judicial discretion. As Iacobucci J. stated in M.J.B. Enterprises at para. 29:

What is important in both formulations is a focus on the intentions of the actual parties. A court, when dealing with terms implied in fact, must be careful not to slide into determining the intentions of reasonable parties. This is why the implication of the term must have a certain degree of obviousness to it, and why, if there is evidence of a contrary intention, on the part of either party, an implied term may not be found on this basis. (Original emphasis)

32I cannot agree that this standard was met in this case. There is nothing obvious about building in a reasonable notice requirement into the refusal clause, and there is no evidence on the record to support the view that Yorkton and Venture intended that such a term be included in the agreement. The narrower interpretation of the refusal clause I have outlined is supported by the evidence, respects the terms of the written agreement, and also accords with commercial reality and the broker's "gatekeeper" function in the securities industry.

33The Investment Dealers Association (the "IDA"), the self-regulatory body with primary regulatory oversight over stockbrokers in Ontario, requires brokers to maintain a compliance department to monitor trading activity in the firm's accounts. The compliance department acts as a "gatekeeper" to the securities markets and is charged with ensuring that trading in the firm's accounts is in accordance with relevant securities laws. Compliance officers, as registrants under the Ontario Securities Act, R.S.O. 1990, c. S.5, are also subject to personal disciplinary proceedings by the IDA and the OSC if they fail to properly discharge their responsibilities. The broker's gatekeeper function has been recognized by the courts (see Gregory & Co. v. Quebec (Securities Commission), 1961 75 (SCC), [1961] S.C.R. 584, 28 D.L.R. (2d) 721, [page336] at p. 588 S.C.R.) and enforced by provincial securities commissions (see Re Rachfall, [2001] B.C.S.C.D. No. 761, at para. 23; Re Boulieris (2004), 27 O.S.C.B. 1597, at paras. 50-52, 58).

34The term implied by the trial judge would, in my view, unduly constrain the broker's gatekeeper function and, accordingly, it fails to accord with modern commercial reality. The refusal clause is to be interpreted in the context of the complex world of securities regulation. Large volume transactions involving large sums of money proceed at a rapid pace, and the risks are high. In my view, the agreement between the broker and the client should be interpreted in a manner that affords the broker burdened with the gatekeeper function latitude to refuse suspect transactions despite a lack of clear proof of illegality. Here, McNenly's concerns regarding Arviv's past conduct and the nature of the transactions he was engaged in were sufficient to support a good faith conclusion by Yorkton that refusal to accept Venture's sale instructions was necessary for its own protection.

35However, not all of Yorkton's actions can be characterized as the simple refusal to accept purchase or sale instructions and my interpretation of the refusal clause does not necessarily answer all of Venture's claims. The extent of Yorkton's liability, if any, to Venture requires consideration of four discrete issues, which I would classify under the following headings. Was Yorkton entitled: (a) To reverse previously approved transactions? (b) To refuse to carry out the clients' "standing instructions" to dispose of shares bought in bulk? (c) To freeze Venture's accounts? (d) To terminate its relationship with Venture in the manner that it did?

(a) Reversing previously approved transactions

Reversing previously approved transactions

36Yorkton had approved the transactions to purchase the USBC and the USTT shares and warrants, thereby accepting instructions to receive shares from those companies into Venture's accounts and to transfer out money to pay for the shares.

37By its terms, the refusal clause only gives Yorkton the right to "refuse to accept purchase or sale instructions". I do not see how that language can be expanded to confer upon Yorkton the right to refuse to carry out purchase or sale instructions that it has already decided to accept. The duty to carry out instructions, once given and accepted, is fundamental to the broker-client relationship. Here I agree with the trial judge's finding that the refusal clause did not give Yorkton "the right to breach its contractual obligations whenever it wishes and face no liability for doing so" as such an interpretation "would undermine the [page337] very nature of the brokerage bargain struck between the [parties]". I also agree with the trial judge that the broker would have the right to refuse to carry out a previously approved transaction on grounds of illegality: see Fridman, supra.

38However, as I have already noted, Yorkton did accept and process payment for all the USTT and USBC shares that Venture agreed to buy. Yorkton did not refuse to accept the USTT shares or to wire funds to pay for those shares. While Venture amended the USBC agreement to reduce the number of shares purchased to 150,000, Yorkton accepted those shares and made payment to the vendor. Accordingly, in the end, despite the freeze, Yorkton did not reverse previously approved instructions for the purchase of shares.

(b) Refusal to carry out standing arrangements to dispose of shares bought in bulk

Refusal to carry out standing arrangements to dispose of shares bought in bulk

39As I have noted, the pattern of dealing between Arviv and Birstein was that Birstein had a standing arrangement to liquidate between 10 to 15 per cent daily of each stock held by Venture. Despite the "standing" nature of this arrangement, it certainly was not written in stone. Both Arviv and Birstein testified that they spoke several times each day to discuss the sale of shares from the account.

40In my view, when it comes to applying the refusal clause, there is no principled way to distinguish between these so-called "standing instructions" and transaction-specific instructions given one at a time. Arviv maintained ongoing control over the sale of shares from Venture's accounts, and he instructed Birstein in that regard on a daily basis. The standing arrangement simply served as a convenient default mechanism. Absent instructions to the contrary, they were followed, but they were subject to day-to-day monitoring and could be changed at any time.

41In my view, it was therefore open to Yorkton to exercise its rights under the refusal clause and cease to carry out the standing arrangement, so long as it was acting "for its protection or otherwise".

42The no-waiver clause also bears upon this issue. To hold that Yorkton had no right to depart from the standing arrangement on the basis of past conduct would render nugatory the protection offered by the refusal clause, something that cannot be done under the no-waiver clause without written amendment.

(c) Freezing Venture's accounts

Freezing Venture's accounts

43It will facilitate the analysis to itemize the trial judge's specific findings encapsulated under the rubric of "freezing" the [page338] accounts. She found (i) that the plaintiffs were unable to transact their business from January 11, 2000 until the accounts were transferred to other brokerage houses; (ii) that there were specific entries for the receipt and disbursement of shares and moneys during this period, but without the plaintiffs' control; and (iii) that Venture was unable to buy shares, wire moneys, or transfer shares the way it had intended in accordance with the agreements it had negotiated and agreed upon with Yorkton previously.

44It follows from what I have already said that, to the extent the freeze amounted to a refusal to carry out instructions that Yorkton had already accepted, I do not think that Yorkton had the power to freeze the accounts. Nor do I see how the refusal clause could give Yorkton the right to interfere with Venture's right to deal with its own property except in relation to a transaction properly refused, but on the trial judge's findings, there is no claim except in relation to the transactions I have identified. However, as I have already indicated, there was no interference with the purchase of the USTT shares or the 150,000 USBC shares, and the refusal clause allowed Yorkton to inform Venture that it would refuse to carry out the so-called "standing instructions" to sell those shares.

(d) Terminating Venture's accounts

Terminating Venture's accounts

45I now turn to the issue of whether Yorkton breached its common law duty to provide Venture notice of its intention to terminate the accounts. In my view, the reasonable notice period must be determined according to the facts of the individual case. In this case, the best evidence on this point comes from McNenly, the head of Yorkton's compliance department, who stated that the transfer of a company's accounts could take anywhere from one to ten days. Based on this testimony, in this case I would say that a reasonable notice period would have been ten business days, or two weeks. As Yorkton decided to act on January 11, 2000, it should have given Venture until January 25, 2000 to transfer its accounts elsewhere.

46Related to the notice issue is the question of Yorkton's obligations to its client during the notice period, while the client in theory would be seeking to transfer its accounts to another brokerage house. In my view, Yorkton had a duty to act reasonably in relation to the termination of its relationship with Venture and to take reasonable steps to facilitate the transfer of Venture's accounts. Such steps should not be overly onerous, but in this case they would include: (i) ensuring that Birstein communicated [page339] clearly to Arviv that Yorkton intended to close Venture's accounts as of January 11, 2000, and (ii) informing Arviv of what steps he had to take to transfer his accounts.

47It seems clear from the record that Yorkton failed to proceed in an orderly way to accomplish its objective of terminating Venture's accounts. Birstein was left to manage the transition, but he, as he wished to retain his client, had conflicting interests. Initially, rather than facilitating that transfer, he resisted Arviv's suggestion that he move to another brokerage house. Moreover, as the account statements show, and as the trial judge found, Yorkton did in fact carry out a number of transactions after January 11, 2000. These inconsistent actions show that Yorkton had no clear plan for the termination and its execution.

48On the other hand, as found by the trial judge, Venture itself did not act as expeditiously as it could have and, to a significant extent, was the author of its own misfortune. Venture knew shortly after January 11, 2000 that its relationship with Yorkton was at an end. Arviv admitted that on January 17, 2000, several days after being advised by Birstein that Venture's accounts were under investigation, Venture decided, as a matter of urgency, to transfer its accounts to another investment dealer. However, rather than transferring its accounts to CIBC World Markets, where Venture already had an account, Arviv attempted to transfer Venture's securities and cash into an account at Thomson Kernaghan held in the name of another entity (i.e., not Venture) that he controlled. Pursuant to industry standards, Yorkton required that the securities and cash in each of Venture's accounts be transferred to an account held by the same party at another brokerage firm. For its part, Thomson Kernaghan was reluctant to open accounts associated with Arviv or Barry Herman, another of Venture's principals. These factors contributed to the delay in the transfer of Venture's cash and shares to new accounts.

(2) Damages

Damages

49I will now consider what damages, if any, flowed from these breaches. I will deal first with the claim relating to the USTT shares. As I have already noted, Yorkton did accept receipt of the USTT shares and process payment for those shares. Despite the freeze, Yorkton also accepted receipt of 150,000 USBC shares and processed payment accordingly.

50The damages awarded by the trial judge with respect to the USTT shares to compensate Venture for lost profits depended upon her finding that Yorkton was not entitled to refuse to continue with the standing arrangement to dispose of the shares. I [page340] have concluded that under the refusal clause, Yorkton was entitled to refuse to accept Venture's instructions to sell the USTT shares. Accordingly, I would set aside the trial judge's award of damages for the loss of expected profits on the sale of the USTT shares.

51I will next consider Venture's claim for damages in relation to the 350,000 USBC shares at a 35 per cent discount from market value, which Venture asserts it was unable to purchase as a result of Yorkton's reversal of its prior approval of that transaction.

52Venture entered into the agreement with USBC on January 10, 2000. Under that agreement, USBC agreed to sell Venture 500,000 shares within 30 days. Arviv knew that his relationship with Yorkton was at an end shortly after January 11, 2000. By January 17, 2000, two days before he amended the USBC agreement to take 350,000 fewer shares, Arviv was making arrangements to find another broker.

53The trial judge's finding that, by amending the agreement in relation to the USBC shares, Venture acted reasonably to mitigate its losses was premised on her conclusion regarding the nature and extent of Yorkton's breach. The trial judge essentially viewed the purchase and the gradual resale of the USBC shares under the standing arrangement as one transaction, which Yorkton had approved and was therefore obliged to complete. She awarded Venture damages based on an estimate of the expected profits from that entire transaction. As I disagree with the trial judge's conclusions as to the nature and extent of Yorkton's breach, her findings with respect to damages and mitigation are open for reconsideration on this appeal.

54Yorkton submits that no damages should be awarded in relation to the 350,000 USBC shares. It argues that the agreement for the USBC shares had a flexible delivery date, affording Venture the opportunity to process the purchase once it had made arrangements with another broker. Yorkton also submits that Venture could have immediately purchased the USBC shares through its CIBC World Markets account. Venture counters by [page341] asserting that we should not interfere with the trial judge's finding that, by amending the USBC agreement to take fewer shares, Venture acted in reasonable mitigation of its loss. Venture also submits that an apparent balance in the CIBC account was in fact otherwise committed and that it needed to use funds it had in the Yorkton account to complete the USBC transaction.

55As I have concluded that the refusal clause entitled Yorkton to refuse to sell the USBC shares, the basis for Venture's claim of lost profits disappears. Even if the agreement had not been amended, and Venture had acquired all 500,000 shares, Venture had no right to insist that Yorkton sell the shares and no right to claim damages for profits that would have been made from such sales.

56Nor do I agree that Yorkton is liable to Venture for the loss of the bargain with respect to 350,000 out of the 500,000 USBC shares that it agreed to purchase at a 35 per cent discount. By the terms of the January 10, 2000 agreement with USBC, the vendor had 30 days to deliver the USBC shares to Venture. Well before that 30-day period expired, Venture had transferred its account to another broker and was in a position to transact business unimpeded by the Yorkton freeze. Venture could have taken advantage of its agreement to purchase the USBC shares by completing the transaction through its new broker, after the effect of Yorkton's freeze of its accounts had ended, and well before the expiry of the term of the USBC agreement. Viewed in this light, Venture's loss of bargain with respect to the 350,000 USBC shares resulted from its own conduct in amending the agreement.

57In these circumstances, I fail to see why Yorkton should be held liable, either for the profits Venture would have gained from the sale of the 350,000 USBC shares or for the lost bargain of acquiring those shares at a 35 per cent discount.

58Similarly, in light of my conclusion with regard to Yorkton's right to invoke the refusal clause to refuse to continue to act on the standing arrangement, I am not satisfied that Venture suffered any loss by virtue of Yorkton's failure to give reasonable notice or to assist in the transfer of the accounts. Recovery for losses allegedly sustained as a result of being unable to sell shares in the market between January 11, 2000 and February 3, 2000 is premised on the proposition that Yorkton was bound to continue with Venture's instructions to sell a certain percentage of its holdings each day. As I have rejected that interpretation of the agreement and the refusal clause, I am of the view that Venture is not legally entitled to claim damages for these alleged losses. [page342]

(3) Cross-appeal as to damages

Cross-appeal as to damages

59As I have concluded that Venture is not entitled to damages, I would dismiss the cross-appeal asking that the damages be increased.

Conclusion

Conclusion

60For these reasons, I would allow the appeal, dismiss the cross-appeal and set aside the judgment below. The appellant is entitled to its costs of the trial, to be assessed if the parties are unable to agree, and costs of the appeal and cross-appeal fixed at $60,000 inclusive of disbursements and GST.