Sales and Marketing Inc., 2015 ONSC 8058

COURT FILE NO.: DC-15-062-00

DATE: 2015 12 23

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

B E T W E E N:

BENEFACT CONSULTING GROUP INC.

J. Jakubiak, for the Appellant/Plaintiff

Appellant/Plaintiff

• and -

TRACTION SALES AND MARKETING INC., O/A TRACTOR SALES AND MARKETING

M. Aboud, for the Respondent/Defendant

Respondent/Defendant

HEARD: December 11, 2015

ENDORSEMENT

JUSTICE A.D.K. MACKENZIE

Overview

[1] This is an appeal from a decision of the Brampton Small Claims Court dated May 11, 2015. In that judgment, Deputy Judge Klein awarded the plaintiff (appellant) one half of its claim. The claim was for fees and service under a written contact for services rendered to or on behalf of the defendant (respondent) seeking to obtain tax credit claims in relation to scientific research and experimental development (SR & ED) under the Income Tax Act of Canada and regulations thereunder.

The Parties and the Written Contract Between Them

[2] The plaintiff carries on the business of a consultancy providing, preparing and submitting technical and financial documentation to government agencies, in particular the CRA in relation to SR & ED. The plaintiff’s function is to ensure that the submissions and applications of its clients, in this case the defendant, meet the standards of eligibility to obtain the tax credit and any financial assistance from the agencies in question.

[3] The defendant’s business provides management consulting and software development services.

[4] By an agreement dated September 5th, 2013, (the Contract) the plaintiff agreed to provide services in the preparation of the defendant’s SR & ED claims for the taxation years 2011 and 2012. In return for rendering such services, the Contract stipulated that the defendant would pay to the plaintiff a sum being the greater of $12,500 or a contingency fee of 12% of the total realized benefits obtained by the defendant, plus applicable taxes.

[5] In the course of processing the applications and submissions, the defendant received correspondence from CRA indicating it required an audit and a further review of the submissions made by the plaintiff on behalf of the defendant.

[6] There was a further audit by CRA. It is not in issue that these two audits required a significant expenditure of time on behalf of the defendant’s personnel as well as the plaintiff’s personnel in satisfying the requisitions of CRA in the audit processes. There were issues between the plaintiff’s and defendant’s personnel engaged in the applications from December 2012 through 2013 and into early 2014. In the result, the defendant on two occasions during this period informed the plaintiff that the defendant no longer considered itself bound by the Contract and temporarily ceased communication and contact with the plaintiff’s personnel.

[7] In January of 2014 the defendant revived its relationship with the plaintiff, allowing the plaintiff to continue as its agent in dealing with CRA in the course of the defendant’s SR & ED claims application.

[8] In or about May of 2014, CRA approved the defendant’s claims for SR & ED for the years 2011 and 2012. The approval resulted in the defendant receiving approximately 90% of the total tax credits that had been identified by the plaintiff.

[9] In accordance with paragraph 3 of the Contract, the defendant agreed to pay the plaintiff for services rendered:

For each fiscal year the greater of: $12,500 per fiscal year or a contingency fee of 12%, plus applicable taxes of all realized benefits for each fiscal year end that the client receives.

[10] Pursuant to paragraph 3, the plaintiff issued invoices for both the 2011 and 2012 fiscal years totalling $26,107.64 plus applicable taxes.

[11] The defendant objected to payment of the $26,107.64 plus applicable taxes. Settlement discussions with respect to the amount due and owing failed and the plaintiff commenced this action in the Brampton Small Claims Court, waiving the surplus sum over $25,000.

The Decision on Appeal

[12] At the trial, the deputy judge heard testimony from two individuals, one on behalf of the plaintiff and the second on behalf of the defendant. After reviewing the submissions of the parties, the trial judge made certain factual findings (described by him as being “left with these impressions”), in the following language:

a) The plaintiff did invest a significant amount of time in this matter. (This was alluded to by Mr. Winterfield himself, [the witness for the plaintiff at the trial)].

b) I have no doubt that the defendant has as well put in significant time in achieving the grants.

c) What I am not sure of is the “standards”. What is the standard to be expected of a service provider such as the plaintiff? As tryer of the “facts” (there is really no “law” here per se), I was given no standards to discern the quality of the work completed by the plaintiff as compared to “industry standards”. This evidence would or should have come from an expert or even another company (competitor) in the field.

d) I note that this was a first application by the defendant and I can see where being a new applicant, foreign to the CRA, they could be overly cautious – perhaps too cautious. There was no guarantee that an audit(s) [sic] cannot occur. (para. 13, Judgment).

[13] The deputy judge concludes these findings with the following statement:

Therefore, I am not convinced by the information and evidence received that either party is more “at fault” than the other. The issue of “industry standards” sticks in my mind and it would have indeed been a plus had I received that evidence. (para. 14, Judgment)

[14] In the result, the deputy judge disposed of the claim by “split[ting] the difference”; he awarded the plaintiff one half of its claim, namely $12,500 plus a nominal amount of prejudgment interest fixed at $500 inclusive of HST. (Cost issues are not engaged in this appeal)

The Positions of the Parties

Appellant

[15] Counsel for the appellant submits that the deputy judge made errors in law as follows:

a) He failed to provide any detailed analysis nor did he identify any legal or factual basis for his decision to discount the liquidated sum owing to the appellant;

b) He failed to consider the totality of the evidence by relying on hearsay evidence and facts not in evidence in support of his decision to read in an implied warranty and to discount the liquidated sum owing to the appellant; and

c) He considered evidence of the defendant’s subjective intention, namely that the defendant retained the plaintiff to lessen its burden to complete work in determining the amount owing under the Contract of September 5, 2013.

[16] Counsel reiterates the principle that a judgment by a court must set out reasons illustrating how the court has reached its legal conclusions and results, citing R. v. Sheppard, 2002 SCC 26, [2002] S.C.J. No. 30, Longo v. MacLaren Art Centre Inc., 2014 ONCA 526, [2014] O.J. No. 3242 (OCA), and Crudo Creative Inc. v. Marin et al. (2007), 90 O.R. (3d) 213 (Div. Ct.).

[17] Counsel acknowledges the standard for judicial reasons as set out in Crudo which was a case involving non-payment of invoices. The standard described in Crudo is posited by counsel for the appellant as reasons need not be perfect or lengthy nor required to refer to all the evidence that has been considered but should be sufficient to enable a reviewing court “to know whether applicable legal principles and evidence were properly considered”. Paragraphs 22 and 25 of reasons in Crudo, above.

[18] Counsel indicates that there is nothing in the judgment in appeal which sets out any finding of negligence by the deputy judge on the part of the appellant in rendering the services to the defendant. Further, the Contract, in paragraph 3, sets out the exact method of calculating the fees of the plaintiff and there was no provision in any other term of the Contract for reducing or otherwise altering those fees. In this regard, counsel submits that any reference to the subjective belief of the defendant that the plaintiff was negligent in delivering the agreed services under the Contract cannot be construed in context as a finding by the court. In essence, the appellant contends that the deputy judge failed to stipulate any legal principles to make findings in relation to the evidence in support of his decision to “split” the plaintiff’s claim.

[19] The appellant further submits that the deputy judge erred by “re-writing” the Contract, that is by reading in implied terms. Counsel contends that the decision to split the difference is based on the four findings set out above in paragraph 13 of the judgment and that none of these four factors can be related to any express terms in the contract. In particular, counsel argues that in the absence of the deputy judge making a finding of breach of the Contract by the plaintiff or negligence by the plaintiff in discharging its contractual duties, any reference by the deputy judge to equal “fault” in paragraph 13 must relate to how much time the defendant expended in the course of the applications to CRA. Counsel contends that as the Contract is silent on that particular aspect of the engagement, the deputy judge must have accepted that it was an essential term to the defendant entering into the contract and therefore incorrectly inserting a corresponding implied term in the Contact.

[20] Counsel for the appellant further submits that an alleged failure by a trial court to consider evidence in its totality by considering improper evidence or facts not in evidence constitutes an error of law and is subject to the correctness standard. Although the appellant does question the conclusion of the deputy judge that “neither” party was more “at fault” than the other, the appellant concedes this conclusion is a finding of fact. However, counsel contends that the deputy judge did not properly consider the totality of the facts in evidence and facts not in evidence, as the case may be, in making a final determination on the merits. Counsel contends that in making any final decisions, a trial judge must consider:

(a) all material facts, but must disregard;

(b) any irrelevant facts; or

(c) any facts not in evidence; or

(d) any facts otherwise excluded by legal principles or statutes, including improper hearsay.

[21] In the latter regard, counsel submits that the only substantive defences raised by the respondent at trial were:

(a) its investment of time and energy in alleged contravention of an implied term of the contract that the appellant would reduce the time in filing a claim for SR & ED; and

(b) the appellant’s negligence in respect of characterizing the investment required of the respondent to perfect its application for the SR & ED claims; and

(c) costs incurred by the respondent as a result of the time and energy required arising from items a and b, above.

[22] In essence, counsel for the appellant submits that the deputy judge improperly considered hearsay evidence of the respondent’s subjective intentions, namely, that the respondent engaged the plaintiff to lessen its burden of work in prosecuting its claims for SR and ED benefits. The appellant cites authority where courts have held that reliance by trier of facts on facts not in evidence is an error of law where it appears from review of reasons that the trier of fact did rely on information that was not part of the evidentiary record. In this regard, counsel contends that the standard of review for errors of laws set out in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, is applicable as the correct standard for errors of law in decisions arising from the Small Claims Court. In the result, the relief sought by the appellant in this court is that judgment for the full amount of its claim be granted together with prejudgment interest and costs at trial plus the costs of this appeal or, in the alternative, an order directing a new trial herein.

Position of the Respondent

[23] Counsel for the respondent submits that the deputy judge correctly found the appellant to have breached the Contract based on extensive evidence as to the breach by the appellant and a corresponding effort made by the respondent to secure the tax credits sought, these elements being the basis on which the court determined the appellant was not entitled to full payment under the Contract. In support of this contention, counsel for the respondent sets out particulars of alleged breach by the appellant of the Contract in paragraph 17 of his factum. These include allegations the appellant submitted to CRA “raw materials” without any review or edit by [the appellant]; presented documents in a manner that CRA could not understand or follow; disclosed the confidential name of one of the respondent’s clients; erroneously included a blank document in support of the 2011 claim; missed deadline; failed to substantively participate or provide any value during a site visit by CRA; and inadvertently failed to respond to particular questions: All these allegations of breach are derived from the testimony of the witness for the respondent at the trial. They do not appear in the reasons of the deputy judge as findings of fact.

[24] Counsel for the respondent contends that the reasons of the deputy judge were sufficient for the matters in dispute, having particular reference to the trial of the issues being held in the Small Claims Court. In support of this proposition, counsel cites a decision in the Ontario Court of Appeal in Mapleridge Community Management Limited v. Peel Condominium Corporation No. 231, 2015 ONCA 520. Counsel submits the Court of Appeal in Mapleridge held that the level of detailed reason would be lessened where the records discloses all that is required to permit the appellate review and that if a detailed record is available, an appellate court should not intervene simply because it thinks the trial court did a poor job of expressing itself; rather the appeal court should review the text of the reasons with regard to the trial record.

[25] In reply, the appellant argues the above dicta relied upon by the respondent here are inapplicable inasmuch as is the present case, the deputy judge did have the evidence but failed to analysis it whereas in Mapleridge, the trial judge made a thorough analysis.

[26] Counsel for the respondent submits the deputy judge did not “re-write” the Contract but correctly interpreted it based on the written terms and the evidence adduced at trial. Counsel submits the interpretation of contracts are questions of mixed fact and law and accordingly the appropriate standard to be applied by appellate courts is that of “palpable and overriding error”. In this regard, counsel contends that a decision by a trial judge to read in an implied term to a contract gives rise to a question of mixed fact and law and that implying contractual terms raises questions of mixed fact and law which attract the review standard of palpable and overriding error unless extricable errors of law appear. In this regard, counsel argues that the deputy judge’s decision on the evidence did not require him to “re-write” the Contract or read in any additional covenants or warranties and he did not in fact do so. Counsel contends that the decision of the deputy judge required him only to find that the appellant was obligated under the Contact competently assist the respondent in preparing its SR & ED filings and responses to any CRA audits and that it did not properly do so.

[27] Counsel further contends that although the deputy judge found he did not have evidence in order to determine the industry standards expected of the appellant under the Contract, he had sufficient evidence before him to find as a matter of fact that the appellant had not fully performed its obligations under the agreement and was partly at fault in its performance under the agreement. On this basis, counsel for the respondent submits that the deputy judge properly exercised judicial discretion in partially depriving the appellant of its fees under the contract.

[28] In support, counsel relies on section 25 of the Courts of Justice Act which empowers the Small Claims Court to “make such order as is considered just and agreeable to good conscience”. Accordingly, counsel argues the deputy judge was entitled as he did in law to split the difference between full payment and non-payment of the contract. In the result, the respondent seeks an order dismissing the appeal with costs on a substantial indemnity basis.

Analysis

[29] The Ontario Court of Appeal has mandated that an appellate court is required to consider the evidence in the trial record before concluding that the reasons of the trial judge were inadequate and an appeal court which restricts its analysis to a review of the text of the reasons with regard to the trial record errs in law. The difficulty presented in this case is that the factual findings of the deputy judge as they relate to the position taken by the respondent at trial as to negligence on the part of the appellant in discharging its obligations under the Contract are based on the testimony of the witness for the respondent at trial. Nowhere in the reasons of the deputy judge wherein he sets out his findings (paragraph 13, above) does he accept these allegations coming from the respondent’s trial witness as factual findings. In addition, there was no counterclaim asserted by the respondent in its defence at trial based upon the alleged breaches by the appellant of its obligations under the Contract. To give effect to the position of the respondent in this appeal relating to the alleged breaches by the appellant would, in my view, entail this appellate court essentially re-trying the case. I am not prepared to accept the submissions of counsel for the appellant that I am entitled to regard the evidence elicited at trial from the witness for the respondent as being a sufficient basis to dispose of this appeal in the manner sought by the respondent. However, I am mindful of the comments made by the deputy judge with respect to “industry standards” relating to the manner in which the appellant discharged its obligations to the respondent under the contract.

[30] In any event, the disposition by the deputy judge of “splitting the difference” on the basis of his findings set out in paragraph 13 of the judgment is “at the very least” problematic. In his oral submissions counsel for the appellant allowed as to how splitting the difference, i.e. 50/50, might have been a reasonable disposition but there was no evidentiary basis on which the deputy judge could make this decision.

[31] This observation captures the evidence and the problematic nature in this case, namely, the lack of evidence re industry standards which could reasonably have been an evidentiary foundation for the deputy judge’s splitting the difference.

[32] In the result, I allow the appeal but give effect to the alternative relief sought by the appellant in this appeal, namely, an order shall issue directing a new trial of this action.

[33] In light of the inconclusive result respecting the merits of the action the costs below and on this appeal shall be reserved.

Justice A.D.K. MacKenzie

Released: December 23, 2015

Sales and Marketing Inc., 2015 ONSC 8058

COURT FILE NO.: DC-15-062-00

DATE: 2015 12 23

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

B E T W E E N:

BENEFACT CONSULTING GROUP INC.

Appellant/Plaintiff

• and -

TRACTION SALES AND MARKETING INC., O/A TRACTOR SALES AND MARKETING

Respondents/Defendants

ENDORSEMENT

Justice A.D.K. MacKenzie

Released: December 23, 2015