Sharwood & Company v. Municipal Financial Corporation et al. [Indexed as: Sharwood & Co. v. Municipal Financial Corp.]
53 O.R. (3d) 470
[2001] O.J. No. 927
Docket No. C31165
Court of Appeal for Ontario
Carthy, Laskin and Goudge JJ.A.
March 20, 2001
Restitution--Unjust enrichment--Unrequested services --Incontrovertible benefits--Plaintiff engaged to find new financing for defendant trust company--Agreement permitting trust company to sell assets without obligation to plaintiff --Plaintiff obtaining letter of interest from bank --Defendant terminating engagement and paying plaintiff's fees--Defendant selling its assets to the bank--Plaintiff suing for unjust enrichment--Action dismissed.
In the fall of 1995, Municipal Financial Corporation ("MFC"), a trust company, was in financial difficulty, and it engaged Sharwood & Co. ("Sharwood") to raise debt or equity financing. The parties signed an agreement under which Sharwood was to receive a work fee, an engagement fee, a success fee for obtaining financing and a termination fee. The agreement provided that MFC could sell its assets without obligation to Sharwood. In December 1995, MFC asked Sharwood to accelerate its efforts to find financing and to increase the amount of the financing being sought. Later that month Sharwood produced several letters of interest including a letter from the National Bank of Canada. During this period, Sharwood considered that its mandate had changed, and it asked MFC to terminate or renegotiate the terms of the engagement. MFC rejected the proposal to renegotiate, and on February 6, 1996, it exercised its right of early termination and paid Sharwood the engagement fee, the work fee and the termination fee for a total of $100,000.
In the winter of 1996, MFC retained CIBC Wood Gundy to market MFC's assets. In June 1996, MFC sold all of its assets, other than its car leasing business, to National Bank for $42 million. CIBC Wood Gundy was paid a fee of $950,000 for its work on the transaction.
Sharwood sued MFC for breach of their agreement or for unjust enrichment. Juriansz J. dismissed the claim for breach of contract, holding that Sharwood had no contractual entitlement to a success fee on the sale of assets. He, however, awarded Sharwood $420,000 for unjust enrichment. MFC appealed.
Held, the appeal should be allowed with costs.
To make out a claim for unjust enrichment, a claimant must establish: (a) an enrichment; (b) a corresponding deprivation; and (c) the absence of a just reason for the enrichment. None of these requirements were met in this case. First, there was no enrichment or benefit. MFC did not request Sharwood to find a buyer for its assets and, thus, if there was an enrichment, it would have to be on the basis that the unrequested services "incontrovertibly benefited" MFC. Some commentators have rejected the principle of incontrovertible benefits but, assuming that incontrovertible benefits can amount to an enrichment, this could only happen in the immediate case, if Sharwood established that National Bank's expression of interest causally contributed to the subsequent asset sale to the Bank. Juriansz J. inferred that this was the case because of MFC's failure to call anyone from CIBC Wood Gundy to testify. This inference of causation was not justified. Sharwood itself could have called the evidence but declined to do so. Second, there was no corresponding deprivation or loss. Sharwood was paid for its efforts and expertise. Third, there was no unjust retention. Assuming that a benefit had been conferred, it was not unjust for MFC to retain the benefit which came in the form of services. It was not unjust because MFC did not freely accept the services and Sharwood could not reasonably expect to be compensated for providing the services. Sharwood reasonably expected to be compensated for finding financing, but it could have no reasonable expectation of compensation on a sale of assets because the agreement permitted MFC to sell assets without having to pay compensation.
APPEAL from a judgment granting an award for unjust enrichment.
Cases referred to Athey v. Leonati, 1996 CanLII 183 (SCC), [1996] 3 S.C.R. 458, 140 D.L.R. (4th) 235, 203 N.R. 36, [1997] 1 W.W.R. 97, 31 C.C.L.T. (2d) 113; Pettkus v. Becker, 1980 CanLII 22 (SCC), [1980] 2 S.C.R. 834, 117 D.L.R. (3d) 257, 34 N.R. 384, 8 E.T.R. 143, 19 R.F.L. (2d) 165; Rathwell v. Rathwell, 1978 CanLII 3 (SCC), [1978] 2 S.C.R. 436, [1978] 2 W.W.R. 101, 1 E.T.R. 307, 1 R.F.L. (2d) 1, 83 D.L.R. (3d) 289; Snell v. Farrell, 1990 CanLII 70 (SCC), [1990] 2 S.C.R. 311, 107 N.B.R. (2d) 94, 72 D.L.R. (4th) 289, 110 N.R. 200, 267 A.P.R. 94, 4 C.C.L.T. (2d) 229; Sorochan v. Sorochan, 1986 CanLII 23 (SCC), [1986] 2 S.C.R. 38, 46 Alta. L.R. (2d) 97, 29 D.L.R. (4th) 1, 69 N.R. 81, [1986] 5 W.W.R. 289, 23 E.T.R. 143, 2 R.F.L. (3d) 225 Authorities referred to Fridman, G.H.L., Restitution, 2d ed. (Toronto: Carswell, 1992) Goff, Lord R. and G. Jones, The Law of Restitution, 3d ed. (London: Sweet & Maxwell, 1998) Maddaugh, P.D. and J.D. McCamus, The Law of Restitution (Aurora, Ont.: Canada Law Book, 1990)
Ronald D. Manes and Duncan Embury, for respondent. Malcolm M. Mercer, for appellants.
The judgment of the court was delivered by
[1] LASKIN J.A.:--In the fall of 1995, Municipal Financial Corporation ("MFC"), a trust company, was in financial difficulty. It engaged Sharwood & Company to raise debt or equity financing. Under their written agreement, Sharwood was to receive a work fee and an engagement fee whether or not MFC obtained financing, a success fee if MFC did obtain financing from an investor introduced by Sharwood and a termination fee if MFC terminated Sharwood's engagement. The agreement also provided that MFC could sell any or all of its assets "without restriction or obligation to Sharwood".
[2] In December 1995, MFC asked Sharwood to accelerate its efforts and to obtain greater financing than originally contemplated. Later that month, Sharwood produced several letters of interest, including one from the National Bank of Canada. However, no debt or equity financing was ever raised and therefore MFC did not pay Sharwood a success fee.
[3] In February 1996, MFC terminated Sharwood's engagement and paid it $100,000, the amount it was entitled to under the agreement. MFC then retained CIBC Wood Gundy to find a buyer for its assets. In June 1996, MFC sold almost all of its assets to the National Bank for $42 million. CIBC Wood Gundy was paid $950,000 on the sale.
[4] Sharwood sued MFC for breach of their agreement. The trial judge, Juriansz J., dismissed the claim in contract on the ground that Sharwood had no contractual entitlement to a success fee on the sale of assets. However, he awarded Sharwood $420,000 for unjust enrichment. The trial judge concluded that Sharwood had established the three requirements of an unjust enrichment claim: an enrichment, a corresponding deprivation, and the absence of a just reason for the enrichment. MFC appeals. In my view, Sharwood did not meet any of the requirements for unjust enrichment. I would therefore allow the appeal and dismiss the action.
Facts
[5] MFC retained Sharwood to find investors willing to inject capital into the corporation, by debt or equity or both. As Mr. Harrison, the chair of the MFC audit committee, explained, MFC needed the financing to bolster its balance sheet "so that it could get through its short term obligations and have sufficient equity to keep the corporation going on a going concern basis for at least two years". The parties agreed to the terms of Sharwood's engagement in a letter agreement dated October 23, 1995.
[6] Under the agreement, Sharwood was to provide the following services: assist MFC and its subsidiaries to arrange new debt or equity financing in the Canadian market; work with MFC to formulate a financial structure consisting of debt and equity capital that was attractive and workable from the perspective both of MFC and of potential investors and lenders; prepare a detailed information memorandum incorporating MFC's business plan and financial forecasts; market the financial product and obtain commitments.
[7] In return for these services, Sharwood was to be paid an engagement fee of $20,000, a work fee of $10,000 per month for a maximum of three months and a success fee if MFC obtained debt or equity financing within 12 months of the expiry or termination of the agreement, from any investor introduced by Sharwood. The success fee was based on a percentage of the gross proceeds of financing. The agreement did not limit the amount of financing to be raised, but for the purpose of calculating the success fee, the agreement capped financing at $15 million U.S.
[8] The duration of Sharwood's engagement was 180 days. MFC could terminate the engagement earlier by paying a termination fee of $50,000. Of fundamental importance to this appeal is clause 4 of the agreement in which "Sharwood acknowledges that MFC may sell, dispose or otherwise deal with any of its assets during the term of the engagement without restriction or obligation to Sharwood."
[9] At the end of November 1995, representatives of Sharwood met with MFC's audit committee and were told that MFC's financial position had become more precarious. Sharwood was told to accelerate its timetable and find prospective investors urgently. Although initially Sharwood thought it had to raise between $9 to $13 million, it was now told to raise up to $30 million. It was also told to change its marketing approach. Instead of helping MFC structure a transaction to be priced to the market, Sharwood was to prepare an information document for prospective investors and ask investors to propose their own financing terms. Sharwood, however, was not told to try to sell any of MFC's assets.
[10] Sharwood considered that its mandate had changed. On December 1, 1995 it asked MFC to terminate or renegotiate the terms of its engagement. MFC did not reply. Nonetheless, Sharwood continued to work on the retainer. Mr. DeTuba, the senior vice-president of Sharwood, contacted presidents or chief executive officers of companies that might be interested in reviewing an information document once it was prepared. Between December 21 and December 27, 1995, Sharwood obtained three verbal expressions of interest and six written expressions of interest, including the following letter from the National Bank dated December 22, 1995:
With reference to our recent telephone conversations, we understand that you are engaged in an advisory capacity to the above corporation and that you have requested us to register our level of interest in reviewing the corporation's affairs, with a view to proposing some form of financial arrangement.
As part of the Bank's strategic future direction, it is our policy to review any situation that may fit our criteria for growth, profit, investment and/or strategic market share acquisition, and therefore we would have an interest in discussing potential outcomes with your principals.
To assist you, our main interest will lie in the Trust Company business, typically being loan assets and deposit liabilities, the branch infra-structure and personnel complement. It is premature to provide any assessment of other activities, such as real estate development and leasing, however as you are aware, these lines of business are discontinued at our Bank.
We trust that this will be of use -- for the record, this letter does not constitute any form of commitment on the part of the Bank and should be viewed only in the context of your request of us.
We look forward to hearing from you.
[11] Sharwood presented these expressions of interest to the Board of Directors of MFC. It did not, however, circulate an information document and, indeed, did no further work to find potential investors.
[12] On January 5, 1996, Mr. DeTuba told the Board of MFC that Sharwood "would like to renegotiate our engagement letter to reflect the changed circumstances of our engagement". Sharwood proposed an increased monthly work fee, a substantially increased success fee and a doubling of the termination fee. MFC rejected the proposal. On February 6, 1996, MFC exercised its right of early termination and paid Sharwood $100,000 -- the $20,000 engagement fee, $30,000 in work fees, and the $50,000 termination fee called for under the agreement.
[13] Meanwhile, in late January 1996, Mr. and Mrs. Rotstein, the controlling shareholders of MFC, reluctantly decided that the company had to be sold. CIBC Wood Gundy was retained to market MFC's assets. In June 1996, MFC sold all of its assets other than its car leasing business, to National Trust for $42 million. CIBC Wood Gundy was paid a fee of $950,000 for its work on the transaction.
Discussion
[14] The main claim asserted by Sharwood against MFC was for breach of the October 23, 1995 agreement. The trial judge dismissed this claim, holding that the "clear and unambiguous" language of clause 4 of the agreement permitted MFC to sell its assets to the National Bank without any obligation to Sharwood. Selling the trust company's assets differed from raising debt or equity financing. MFC did not obtain debt or equity funding from the National Bank or from any other party introduced by Sharwood.
[15] However, the trial judge held that Sharwood was entitled to succeed in a claim for unjust enrichment. He awarded Sharwood compensation equivalent to the maximum success fee under the October 23, 1995 agreement, $420,000 CDN (at the exchange rate prevailing at the time). Sharwood does not appeal the dismissal of its claim in contract. I therefore turn to consider MFC's appeal against the finding of unjust enrichment.
[16] Simple fairness underlies an unjust enrichment claim: "As a matter of principle, the court will not allow any man unjustly to appropriate to himself the value earned by the labours of another." Rathwell v. Rathwell, 1978 CanLII 3 (SCC), [1978] 2 S.C.R. 436, [1978] 2 W.W.R. 101, per Dickson J. at p. 455. In Canadian law, the basic requirements of an unjust enrichment claim have been derived from matrimonial property cases. As the trial judge correctly stated, to make out a claim in unjust enrichment a claimant must establish: (a) an enrichment; (b) a corresponding deprivation; and (c) the absence of a just reason for the enrichment. In other words, Sharwood had to establish that it conferred a benefit on MFC, that it suffered a corresponding loss and that MFC's retention of the benefit would be unjust.
[17] The trial judge held that Sharwood established each of these three requirements. I respectfully disagree. In my view, Sharwood met none of the requirements and its unjust enrichment claim must therefore fail.
(a) No enrichment or benefit
[18] A person confers a benefit on another if the person performs services at the request of or beneficial to the other. Here, MFC did not request Sharwood to find a buyer for its assets. However, unrequested services may still amount to a benefit or an enrichment. Maddaugh and McCamus make this point in their excellent text, The Law of Restitution (Aurora: Canada Law Book, 1990) at p. 42. They emphasize that the defendant must have been "incontrovertibly benefited" by the services:
In our view, the most useful analytical device for distinguishing cases in which recovery is appropriate from those in which it is not is to ask, in each instance, whether the defendant has been genuinely or, as others have said, "incontrovertibly" benefited by the conferral in question. The defendant will be incontrovertibly benefited, of course, by the receipt of a money payment. As well, however, incontrovertible benefit can be established, in our view, by the conferral of a benefit which represents an expenditure the defendant would otherwise have sustained or, alternatively, even where this is not so, the conferral has created an asset in the defendant's hands which has a value that the defendant has realized, or perhaps has a value that is realizable by the defendant.
Did then Sharwood perform services that incontrovertibly benefited MFC, services that genuinely enriched MFC? That question can be answered affirmatively only if Sharwood established that the expression of interest it obtained from the National Bank caused or materially contributed to the subsequent asset sale to the bank.
[19] Sharwood led no evidence that its efforts contributed to the sale of MFC's assets to the bank. And Mr. Rotstein denied that the expression of interest Sharwood obtained from the bank was of any benefit in negotiating the asset sale. Nonetheless, the trial judge concluded that Sharwood's efforts did materially contribute to the sale to the bank. The trial judge reached this conclusion because MFC did not call a representative of CIBC Wood Gundy to testify whether it knew about or acted on the expression of interest Sharwood had obtained. Because of MFC's failure to call anyone from CIBC Wood Gundy, the trial judge inferred that Sharwood's introduction of the bank materially contributed to the asset sale. In drawing this inference, he relied on the Supreme Court of Canada's judgment in Snell v. Farrell, 1990 CanLII 70 (SCC), [1990] 2 S.C.R. 311, 107 N.B.R. (2d) 94. In my opinion, he was wrong to do so.
[20] Snell v. Farrell was a medical malpractice case. The Supreme Court was concerned that, in medical malpractice cases, because of the inequality of knowledge between the patient and the doctor and the "complexities of proof, the probable victim of tortious conduct will be deprived of relief". In other words, proving causation may be difficult for the patient because the doctor has a better knowledge of the facts and therefore is in a better position to know what caused the injury. The Supreme Court held that where a defendant has superior knowledge of the facts, the plaintiff, though still having the ultimate burden of proof, need adduce very little affirmative evidence of causation. If the plaintiff leads some evidence, the court may justifiably draw an adverse inference of causation absent evidence to the contrary from the defendant.
[21] The considerations that prompted Snell v. Farrell -- and the case that followed it, Athey v. Leonati, 1996 CanLII 183 (SCC), [1996] 3 S.C.R. 458, 140 D.L.R. (4th) 235 -- do not apply here. The kind of inequality that characterizes the typical doctor-patient relationship does not exist between Sharwood and MFC. Both were commercially sophisticated parties, engaged in straightforward commercial dealings. Moreover, Sharwood led no affirmative evidence of causation at all. It led no evidence that CIBC Wood Gundy's knowledge was known only by MFC. Sharwood itself could have called a representative of CIBC Wood Gundy to testify but declined to do so. In my view, the trial judge was not justified in inferring causation because MFC did not lead that evidence. As counsel for MFC pointed out, the potential purchasers of a Canadian trust company like MFC are obvious: the other major financial institutions in the country, including the National Bank.
[22] In this court, Sharwood tried to buttress its argument on causation by referring to MFC's refusal on discovery to answer questions about CIBC Wood Gundy's knowledge. MFC's refusals do not assist Sharwood's claim. Sharwood never moved on the refusals. Moreover, the refusals may well have been justified because Sharwood did not even plead a claim in unjust enrichment against MFC arising out of the sale to the bank.
[23] For these reasons, I cannot accept the trial judge's finding of an enrichment or a benefit.
(b) No corresponding deprivation or loss
[24] Nor can I agree with the trial judge's finding of a corresponding deprivation. He found a deprivation in Sharwood's expenditure of time and energy and use of its expertise to urgently identify potential investors in MFC. This finding, however, fails to take into account that Sharwood was paid for its efforts and its expertise. Sharwood did not establish that its "deprivation" exceeded the $100,000 it received from MFC. Sharwood was retained to do work for MFC. It did the work and it was paid for the work. It received exactly what it was contractually entitled to receive. It suffered no deprivation.
(c) No unjust retention
[25] I have already concluded that Sharwood did not confer a benefit on MFC in connection with the sale to the bank and that it did not suffer a corresponding loss. However, even if I were to accept the trial judge's finding of an enrichment and a corresponding deprivation or loss -- and I do not -- Sharwood has not met the third requirement for unjust enrichment. In other words, even if Sharwood conferred a benefit on MFC -- because its services contributed to the subsequent sale to the Bank -- and suffered a corresponding deprivation, it would not be unjust for MFC to retain the benefit of these services. It would not be unjust because MFC did not freely accept these services and Sharwood could not reasonably expect to be compensated for providing them.
[26] Sharwood's claim depends on the receipt of services. Services differ from money. The receipt of money is always a benefit to the defendant. The receipt of services may not be a benefit because the defendant may not have wanted the services or may not have wanted them if it had to pay for them. And unlike money, services cannot be restored. Therefore, under our law, a plaintiff claiming unjust enrichment for providing services must show that the defendant freely accepted these services and that the plaintiff reasonably expected to be compensated for providing them. Dickson C.J.C. discussed this third requirement both in Pettkus v. Becker, 1980 CanLII 22 (SCC), [1980] 2 S.C.R. 834 at p. 849, 117 D.L.R. (3d) 257, and Sorochan v. Sorochan, 1986 CanLII 23 (SCC), [1986] 2 S.C.R. 38 at p. 46, 46 Alta. L.R. (2d) 97. In Pettkus v. Becker, he wrote at p. 849:
As for the third requirement, I hold that where one person in a relationship tantamount to spousal prejudices herself in the reasonable expectation of receiving an interest in property and the other person in the relationship freely accepts benefits conferred by the first person in circumstances where he knows or ought to have known of that reasonable expectation, it would be unjust to allow the recipient of the benefit to retain it.
He repeated the elements of unjust retention in Sorochan at p. 46:
The third condition that must be satisfied before a finding of unjust enrichment can be made is also easily met on the facts of this case. There was no juristic reason for the enrichment. Mary Sorochan was under no obligation, contractual or otherwise, to perform the work and services in the home or on the land. In Pettkus, the Court held that this third requirement would be met in situations where one party prejudices himself or herself with the reasonable expectation of receiving something in return and the other person freely accepts the benefits conferred by the first person in circumstances where he or she knows or ought to have known of that reasonable expectation.
[27] The trial judge did not consider whether MFC freely accepted Sharwood's services in finding a buyer rather than an investor. In my view, the evidence does not support a finding that MFC accepted these services or accepted having to pay MFC on a sale of the trust company's assets. Indeed, the parties' agreement expressly said otherwise. Had MFC known that it had to pay Sharwood $420,000 on a sale, it may well have declined Sharwood's services.
[28] However, the trial judge found that "Sharwood's expectation that it would be compensated if its introduction of an interested investor to MFC led to fruition was reasonable" and that "Sharwood reasonably expected to be compensated for its work and the board expected that the Engagement would be renegotiated." These findings do not establish unjust retention.
[29] Sharwood reasonably expected to be compensated for finding a debt or equity investor. But Sharwood could have no reasonable expectation of compensation on a sale because the agreement permitted MFC to sell without having to pay compensation. An agreement does not necessarily bar an unjust enrichment claim but this agreement reflects the reasonable expectations of the parties. Sharwood provided services under the agreement and in return received everything it contracted for and therefore expected.
[30] The trial judge seemed to suggest that MFC's direction to Sharwood to find investors willing to provide $30 million in financing went beyond the terms of the agreement. The agreement did not put an upper cap on financing. But even if MFC's direction to find $30 million in debt or equity financing was not contemplated by the agreement, it does not follow that Sharwood could reasonably expect to be compensated on a sale. That Sharwood had no such expectation is evident from its request to renegotiate the terms of the agreement. Sharwood requested an increase in the existing success fee and termination fee but never sought a fee on a sale.
[31] Therefore, even if the agreement had been renegotiated as Sharwood requested, it would not have received a fee on the sale to the National Bank. The trial judge's decision yields the anomalous result that Sharwood is awarded more than even it requested under its proposed revised agreement, a revised agreement that MFC would not sign.
[32] The Supreme Court of Canada decisions in matrimonial property cases state that the defendant's free acceptance of services knowing of the plaintiff's reasonable expectation of compensation remains an integral part of the third requirement of an unjust enrichment claim. In my opinion, Sharwood has not met this third requirement.
[33] However, some of the text writers on restitution have taken the position that a plaintiff can succeed in unjust enrichment if its services incontrovertibly benefited the defendant, though the defendant did not request or freely accept those services. Maddaugh and McCamus take this view in the passage from their text I referred to earlier in these reasons. So too do Goff and Jones in their book The Law of Restitution, 3d ed. (London: Sweet & Maxwell, 1998) at p. 25:
To allow recovery because a defendant has been incontrovertibly benefited is to accept that he may have benefited even though he did not request or freely accept the benefit. . . . To accept the principle of incontrovertible benefit is to admit a limited, and, in our view, desirable exception. The burden will always be on the plaintiff to show that he did not act officiously, that the particular defendant has gained a realisable financial benefit or has been saved an inevitable expense and that it will not be a hardship to the defendant, in the circumstances of the case, to make restitution.
Professor Fridman, on the other hand, in his book Restitution, 2d ed. (Toronto: Carswell, 1992) at pp. 299-300 rejects the principle of "incontrovertible benefit":
To force a person to retain and pay for services rendered or work done which he or she did not want and perhaps could not afford seems as unjust as to deprive a plaintiff of recovery for work done or services rendered which confer a clear benefit on the defendant. There is no unjust enrichment in such circumstances . . . It would appear, therefore, that, in Canada, if not also in England, the possibility of a quantum meruit action for services rendered or work performed without there being a contract between the parties cannot be founded solely on the conferral of a benefit on the defendant, however incontrovertible that benefit might be.
[34] However, even if I were to accept that an incontrovertible benefit alone can amount to unjust enrichment, Sharwood cannot succeed. As I have already said in discussing the first requirement for unjust enrichment, Sharwood's services did not incontrovertibly benefit MFC. Its services did not materially contribute to the sale to the bank.
Conclusion
[35] I would allow the appeal, set aside the judgment at trial and dismiss the action. MFC is entitled to its costs of the trial and of the appeal.
Appeal allowed with costs.