ENDORSEMENT

REQUEST FOR RELIEF

[1] The Plaintiff/Appellant, 6157734 Canada Inc., appeals the Judgment of Deputy Judge Prattas of the Ontario Small Claims Court dated January 28, 2015. Deputy Judge Prattas dismissed the Appellant’s claim for unpaid fees and expenses.

[2] The Appellant and Respondent signed an Agreement whereby the Appellant would perform services for a third party. The third party agreed to pay the Respondent and the Respondent agreed to pay the Appellant as and when the third party paid the Respondent.

[3] The two clauses in the Agreement between the Appellant and the Respondent that are at issue, are as follows:

Clause 4: Invoices: Payment

…Primary Supplier will pay Secondary Supplier invoices on a net 15 basis: provided, however, that in no event shall Primary Supplier be obligated to pay Secondary Supplier for any invoiced amount unless and until Primary Supplier receives payment from Customer for amounts relating to such invoice.

Clause 12: Good Faith

It is understood that all parties will operate in good faith. It is further understood by Secondary Supplier that Primary Supplier will serve, in effect, as the “Customer” and that all correspondence, communication transmittal and communique’s both verbal and non-verbal, will take place between Secondary Supplier and Primary Supplier, and that Secondary Supplier is in no way permitted or allowed to contact Primary Supplier’s Customer, including marketing activity, without the prior knowledge and consent of Primary Supplier.

[4] In March 2012, the third party advised the Respondent that it no longer wished to use the services of the Appellant upon discovering that U.S. and Ontario Securities Commissions had found him liable for insider trading and issued penalties that were not paid. The Respondent immediately terminated the services of the Appellant.

[5] The Appellant was not paid for work he did and expenses he incurred for two months prior to termination.

[6] The issue on this Appeal is whether the trial judge erred in law by articulating the wrong test for good faith and /or made a palpable and overriding error of fact and law in finding that the Respondent made good faith efforts to recover money owing to the Appellant by a third party.

THE ISSUES

[7] During oral submissions, it was agreed that the issues on this Appeal are as follows:

a) Did the Trial Judge correctly interpret the legal obligation of a payor to a “pay when paid” provision?

b) Did the trial judge make an error of fact or mixed fact and law in determining that the Respondent had made good faith efforts to recover money owing to the Appellant?

JURISDICTION AND STANDARD OF REVIEW

[8] Ontario Regulation 626/00 enacted pursuant to the Courts of Justice Act, R.S.O. 1990, c. C.43, provides that a single judge of the Divisional Court has jurisdiction to hear appeals from a decision of the Small Claims Court for the payment of money in excess of $2,500.

[9] A decision of a Deputy Judge of the Small Claims Court will be interfered with only if the Court made an error of law, applied the wrong principles of law, or misapprehended the evidence. (Zeitoun v. Economical Insurance Group 2008 20996 (ON SCDC), [2008] CarswellOnt 2576 (Ont. Div. Ct), aff’d (2009) 2009 ONCA 415, 96 O.R. (3d) 639).

[10] On matters of law, the standard of review is one of correctness. On matters of fact, the standard of review is “palpable and overriding error” which affects the conclusion, as findings of fact are entitled to deference. (Housen v. Nikolaisen 2002 SCC 33, paras. 9 and 10.)

[11] Questions of mixed fact and law involve the application of a legal standard to a set of facts. Where the error concerns an application of an incorrect standard, a failure to consider a legal test can be considered as one approaching an error of law and the standard of correctness will apply. Where the legal question is intertwined with the factual question or is not readily extricable from the factual question, the matter is subject to the more stringent standard of palpable and overriding error calling for more deference to be given to the trial judge’s conclusions. (Housen at para. 8.)

THE EVIDENCE IN THIS CASE

The Parties

[12] The Appellant, 6157734 Canada Inc., is a company owned by Shane Suman that provides information technology services.

[13] The Respondent, Bluelime Enterprises Inc., is a human resources placement agency that provides personnel to its customers on a temporary basis.

[14] The third party, CGI is an international consulting firm and customer of the Respondent. The Agreement between CGI and the Respondent provides that disputes may be submitted to arbitration.

The Agreement

[15] CGI was asked by Alberta Justice to find someone to work in their IT department. CGI contacted the Respondent who in turn, contacted the Appellant.

[16] On August 3, 2011 a CGI representative sent an email to the Appellant advising that, “the client is the Department of Justice”.

[17] Before the Appellant’s services were engaged, the third party conducted significant due diligence including a criminal record check and a Background Check in which the Appellant was asked: “Were you ever convicted of a work-related penal or criminal offence for which you have not been pardoned?”

[18] The Appellant responded “no”. The Appellant said he did so truthfully as he has never been involved in criminal proceedings.

[19] Thereafter, on August 5, 2011, the Respondent sent the Appellant a four-page Agreement to sign. The Respondent advised the Appellant that:

This document lays out the terms and conditions of the engagement between the Respondent and your company. No surprises here. It addresses confidentiality, notice period, insurance/WSIB, invoicing etc. Don’t hesitate to contact me with any kinds of questions or concerns with the document.

[20] An hour later, the Appellant sent the Respondent his signed copy of the Agreement.

[21] The Appellant began work for Alberta Justice on August 7, 2012. In accordance with the terms of the Agreement between the Appellant and Respondent, the Respondent paid the Appellant for IT services the Appellant provided to Alberta Justice. Alberta Justice was pleased with the Appellant’s work and the Respondent was instructed to renew the Appellant’s Agreement for another six months in February, 2012.

CGI Discovery Regarding the Securities Commission Decisions

[22] On February 11, 2010, the United States District Court granted a summary judgment motion brought by the U.S. Securities and Exchange Commission. The Appellant was found to have engaged in insider trading contrary to U.S. law. The SEC ordered the Appellant to repay the sum of $1,039,440 and pay a civil penalty of $2,000,000.

[23] On March 20^th, 2012, the Ontario Securities Commission found that the Appellant had contravened subsection 76 (2) of the Ontario Securities Act (the provision that deals with insider trading.) The OSC ordered that the Appellant disgorge the amount of $954,000 and pay an administrative penalty of $250,000 as well as costs. The Appellant has not paid these amounts.

Termination of the Appellant’s Contract

[24] On March 21^st, 2012, the third party indicated to the Respondent that upon discovering the breaches of the Securities Acts, they no longer wished the Appellant to work for them. The Respondent immediately advised the Appellant that his services would no longer be required.

[25] The Appellant was not paid for work he had already done on behalf of Alberta Justice in February and March of 2012 which amounts to $11,480.80 in fees plus HST. He also incurred $4,346.61 in reimbursable travel expenses for work.

Efforts to Recover Monies Owing

[26] The Appellant made inquiries of his contacts at Alberta Justice and CGI to collect his money. The Respondent advised him to stop as, “if you interfere with the client then you won’t be paid even when this gets all sorted out.” The Respondent further warned that “that would be interference and you would start hedging on our contract which could void any payment at all.”

[27] The Respondent’s representative testified that he made efforts to try to “get Shane [the Appellant] his dollars” by making several calls to various people, seeking repayment of the Appellant’s travel expenses and work done. He told the Appellant that the third party was being “unfair” in refusing to pay him for work done and expenses he had incurred doing the work.

[28] The Respondent asked the third party for payment of the outstanding amounts on numerous occasions. Finally, in November 2012, he received a response from the third party. In a letter dated November 27, 2012, the third party advised that, “the Designated Consultant provided a negative answer to the following question, ‘Have you ever been convicted of a work related penal or criminal offence for which you have not been pardoned?’ This response was false and known to be false by the Designated Consultant.”

[29] The respondent did not pursue the matter and told the Appellant that, “I apologize for both the length and outcome of this situation. While I believe they have overreacted, they [CGI] are only following their [Alberta Justice] lead and they [CGI] are too good of a client to take a stance when it doesn’t make sense monetarily.”

[30] The third party told the Respondent that as a result of the discovery of the Securities Act breaches, Alberta Justice performed a data sweep and the cost of the data sweep was two or three times the amount the Respondent was owed for the Appellant’s services.

[31] The Appellant suggests this was not necessary and in any event, the only data he had access to was “dummy data”, unrelated to any real person as his job was to build and test the information technology structure.

[32] The Appellant seeks damages from the Respondent for failure to act in good faith and make best efforts to recover the money owed to him for services rendered to Alberta Justice.

THE DECISION UNDER APPEAL

[33] In deciding whether the Respondent was obligated to pay the Appellant the unpaid invoices, the Small Claims Court judge held that,

[17] Regardless of whether [the Appellant] Suman was obligated to disclose his Insider Trading Offences or not, I accept on a balance of probabilities [the Respondent] Dawson’s evidence that for Justice Alberta, the discovery of Suman’s undisclosed offences was the reason for its termination of the contract and that it is reasonable that Justice Alberta had to expend money to ensure that its environment had not been compromised by Suman and to safeguard its databases.

[18] …CGI/Justice Alberta refused to pay the outstanding invoices following their discovery of Suman’s Insider Trading Offences …

[19] A “pay when paid” provision has been upheld by the Ontario Court of Appeal in the case of Timbro Development Ltd. v. Grimbsy Diesel Motors Inc., [1988] O.J. No. 448, as a legitimate condition precedent governing a subcontractor’s legal entitlement to payment.

[20] The court went on to state that pursuant to such a provision or clause a subcontractor clearly assumes the risk of non-payment by the owner to the contractor and if the contractor is not paid it is not obligated to pay the subcontractor. (at para. 3)

[21] Applying this principle to the case at bar, it becomes clear that since the defendant was not paid by CGI/Justice Alberta based on Suman’s failure to disclose his Insider Trading Offences, the defendant is therefore not obligated to pay the plaintiff. It is equally clear that any risk for non-payment in the circumstances of this case was assumed by the plaintiff pursuant to the “pay when paid” clause in the Secondary Agreement.

[24] Though the decision in the case of Crompton v. Norman Hill Realty Inc., [1995] O.J. No. 3407 can be distinguished on its facts, it nevertheless imposes a duty on the payor to make every effort to collect or negotiate a reasonable settlement for the payee.

[25] As stated by Rosenberg J. at para. 17:

The defendants have a duty to the plaintiff to collect the commission if they can and give the plaintiff their share of the commission. They have a duty to make every effort to collect the commissions or to negotiate a reasonable settlement. They cannot waive any right to commission in order to obtain an advantage for themselves which will not be an advantage to the plaintiff. That is, they cannot waive their right to a commission in order to continue to make further commissions by selling units and thereby deprive the plaintiff of her rights. [emphasis added]

[26] And as reinforced in Harris Steel (para. 75) the payor must use his “best efforts” to resolve the issues related to getting payment for the payee. In other words a payor cannot sit idly by and do nothing.

[27] On a balance of probabilities, I am satisfied that Dawson, for the defendant, did use his best efforts to resolve the payment issue with CGI and Justice Alberta.

[28] Given the circumstances of this case, in my view it was not necessary for the defendant to have sued CGI/Justice Alberta as submitted by the plaintiff. Dawson testified that it became evident to him that any lawsuit against CGI/Justice Alberta would have been vigorously resisted and would most likely have been met by a substantial countersuit for all the damages suffered to “sweep the environment” to ensure its integrity and failure to disclose the Inside Trading Offences. I accept Dawson’s explanation.

[34] The Trial Judge dismissed the action as he found the Respondent was not responsible for the termination of the contract with CGI/Justice Alberta, and it used best efforts to try to collect or reasonably settle the outstanding invoices.

THE LAW

[35] A “pay when paid” clause such as Clause 4 of the Agreement will be upheld where the clause is clear, unambiguous and enforceable and the subcontractor knew and accepted the risk. (Timbro Developments v. Grimsby Diesel Motors Inc., 1998 2289 (ON CA), [1998] OJ No. 448, 1988 CarswellOnt 733 (OCA).)

[36] In OEB International Inc. v. Leyden 1995 7332 (ON SC), [1995] 59 A.C.W.S. (3d) 234 (S.C.J.), the court held that “best efforts” means more than reasonable efforts.

It means taking, in good faith, all reasonable steps to achieve the objective. The meaning of “best efforts “is however, not boundless. It must be approached in the light of the particular contract the parties to it and the contract’s overall purpose as reflected in its language.

[37] Similarly, in Crompton v. Norman Hill Realty [1995] O.J. No. 3407, 1995 CarswellOnt at para 17 (OCJ), the court held that,

The defendants have a duty to the plaintiff to collect the commission if they can and give the plaintiff their share of the commission. They have a duty to make every effort to collect the commissions or to negotiate a reasonable settlement. They cannot waive any right to commission in order to obtain an advantage for themselves which will not be an advantage to the plaintiff.

ANALYSIS AND CONCLUSION

Did the Trial Judge correctly interpret the legal obligation of a payor to a “pay when paid” provision?

[38] As noted in his reasons set out above, the trial judge correctly articulated the legal obligation of a payor to “make every effort to collect the commissions or to negotiate a reasonable settlement.” As such, he made no error of law.

Did the trial judge make an error of fact or mixed fact and law in determining that the Respondent had made good faith efforts to recover money owing to the Appellant?

[39] The key issue on this appeal is whether the efforts taken by the Respondent were sufficient to satisfy the requirement that he take all reasonable efforts to secure the money owing to the Appellant or obtain a reasonable settlement. The Appellant claims errors of fact or mixed fact and law to which deference is owed to the trial judge. Therefore the Respondent need only show that the trial judge’s decision was reasonable not that it was necessarily correct.

[40] The evidence adduced before the trial judge on this point is as follows:

a. Prior to entering into the Agreement with the Respondent to perform services for the third party, the Appellant represented to the third party that he had never been convicted of a work-related “penal or criminal offence” for which he had not been pardoned.

b. Unbeknownst to the third party or the Respondent, at the time the Agreement was signed, the Appellant had been found to have engaged in insider trading contrary to U.S. law and ordered to repay $1,039,440 and a civil penalty of $2,000,000 which he did not pay.

c. In March 2012, the third party discovered this fact and the fact that the Ontario Securities Commission later found that the Appellant had contravened the insider trading provisions of the Ontario Securities Act and ordered him to disgorge $954,000 and pay an administrative penalty of $250,000.

d. In November 2012, the third party advised that they had terminated the Appellant’s services in March 2012 because the third party claimed he misrepresented that he had never been convicted of a work-related penal or criminal offence when he had.

[41] The wording in the question given to the Appellant was: “were you ever convicted of a work-related penal or criminal offence”. The word “or” suggests that the third party was asking about more than just criminal offences.

[42] The word “penal” (from the Latin penalty) is defined in the Concise Oxford Dictionary (11^th Ed.) 2004 as:

Relating to, used for, or prescribing the punishment of offenders under the legal system

1.1(Of an act or offence) punishable by law.

1.2(Especially of taxation or interest rates) extremely severe.

[43] Securities Act contraventions are acts punishable by law for which penalties are and were imposed.

[44] The third party’s solicitor wrote a letter to the Respondent explaining that the Appellant’s punishment for insider trading, albeit not criminal was nonetheless a breach punishable by law and was not disclosed to them prior to entering into the Agreement. The third party’s position was that this was a material non-disclosure which breached one of the prerequisite terms of the Agreement.

[45] It is reasonable to conclude that as a condition of entering the contract to use the Appellant’s services, the third party sought disclosure of all penal and criminal breaches. It is also reasonable to conclude that penal offences are distinct from criminal offences and that breaches of the Securities Act that attract penalties, are penal offences.

[46] It was therefore reasonable for the trial judge to conclude that the third party was entitled to terminate the services of the Appellant upon discovering that he had been found liable in Canada and the US of insider trading which he had not disclosed to them.

[47] The Respondent was not paid by the third party for work done by the Appellant in February or March of 2012 (when they discovered the purported breach) which amounts to $11,480.80 or for $4,346.61 in reimbursable travel expenses. The Respondent in turn did not pay the Appellant the above sums.

[48] The Respondent made many attempts to get an explanation from the third party.

[49] On November 27, 2012, counsel for the third party told the Respondent that as a result of the discovery of the Securities Act breaches, the Agreement was terminated and that the organization for whom the Appellant worked, Alberta Justice, thereafter performed a data sweep to ensure that their information was secure. The Respondent was told that the cost of the data sweep was two or three times the amount the Respondent was owed for the Appellant’s services.

[50] Given the nature of the Securities Act breaches and that the third party client was Alberta Justice, it was reasonable for the trial judge to conclude that the Respondent was entitled to accept the explanation given by the third party. I note that there is no evidence the Appellant advised the Respondent that he only had access to “dummy data” prior to trial.

[51] Moreover, the Respondent said he decided not to pursue the matter further because the third party was “too good of a client to take a stance when it doesn’t make sense monetarily.” This is consistent with the interpretation that the matter was not pursued because it would be futile to hurt a relationship with a good client where it was unlikely the money would be recovered in any event. (Emphasis added)

[52] It was reasonable for the trial judge to accept that the Respondent did not pursue the matter because there were grounds for termination, there were costs incurred to secure the third party site and it was unlikely the monies would be recovered.

[53] As such, it was reasonable for the trial judge to conclude that the Respondent had made good faith efforts to secure the Appellant’s pay and expenses.

[54] The Appeal is therefore dismissed.

[55] If the parties are unable to agree on costs, they may provide submissions on costs of no more than two pages.

Thorburn J.

Date: March 17, 2016

6157734 Canada Inc. v. Bluelime Enterprises Inc., 2016 ONSC 1794

Case Summary

ENDORSEMENT

REQUEST FOR RELIEF

THE ISSUES

JURISDICTION AND STANDARD OF REVIEW

THE EVIDENCE IN THIS CASE

The Parties

The Agreement

CGI Discovery Regarding the Securities Commission Decisions

Termination of the Appellant’s Contract

Efforts to Recover Monies Owing

THE DECISION UNDER APPEAL

THE LAW

ANALYSIS AND CONCLUSION

Did the Trial Judge correctly interpret the legal obligation of a payor to a “pay when paid” provision?

Did the trial judge make an error of fact or mixed fact and law in determining that the Respondent had made good faith efforts to recover money owing to the Appellant?

Judge

Counsel

Parties

Areas of Law

Fact Patterns

Financial Outcomes

Issues

Statutory Provisions 2

Legal Tests 2

Legislation 2