DATE: 20010117

DOCKET: C32470

COURT OF APPEAL FOR ONTARIO

FINLAYSON, LABROSSE and WEILER JJ.A.

BETWEEN:

INFINITE MAINTENANCE SYSTEMS LTD. Appellant (Plaintiff)

–and–

ORC MANAGEMENT LIMITED Respondent (Defendant)

Martin G. Banach, for the appellant (plaintiff)

Inga B. Andriessen, for the respondent (defendant)

Heard: November 2, 2000

On appeal from the judgment of Justice John D. Ground dated May 12, 1999 and June 14, 1999.

WEILER J.A.:

Overview

[1] The issue on this appeal is the enforceability of a clause in a contract that provided for compensation to the appellant in the event that personnel it supplied its customer was hired directly by the customer. For the reasons that follow, I would allow the appeal and award the appellants $12,600 in damages.

Facts

[2] The appellant company is engaged in the provision of maintenance and janitorial services. The respondent is a multi-purpose health club for squash, tennis, fitness, aerobics and swimming. The respondent had been encountering a high staff turnover and a problem with supervision of staff. There were complaints about the cleanliness of the facilities. After speaking with the appellant’s representative, the respondent entered into a seven-day-a-week cleaning contract with the appellant on May 1, 1997. Pursuant to the contract, the appellant provided cleaning services seven days a week at a rate of $5,600 a month.

[3] The contract also contained a clause, hereinafter referred to as the compensation clause. It stated as follows:

TERMINATION OF CONTRACT

This contract may be terminated by either party by the giving of thirty (30) days notice in advance thereof in writing by one to the other by registered mail.

In the event of the services herein provided for being continued beyond the period of this contract, then all the terms and conditions of this contract including the hereinafter set out provisions for termination shall apply and the contract shall continue on a basis or yearly service.

The contractor reserves the right to terminate this contract, in the event of non-payment of the account for more than thirty days by the Contractor giving to the other party not less than five days’ notice in writing, and on any such termination, all accounts between the parties shall be settled and paid.

The customer covenants and agrees that it will not either directly or indirectly employ, engage or become associate with any team member or employee of Infinite Maintenance Systems Ltd. employed by the contractor on the customer’s premises directly or indirectly at any time either during the term hereof or during a period of twelve months following the termination hereof. If engages in any manner, will be subject to the one year payment of compensation. [Emphasis in original.]

[4] The duration of the contract was not specified. However, a clause in the contract stated that, in the event services continued “beyond the period of this contract”, the contract would continue on a basis of yearly service and the termination provisions would apply. The termination provision enabled the contract to be terminated by either party at any time on thirty days notice in writing.

[5] On September 30,1997, the respondent gave notice of termination of the contract effective October 31, 1997. On November 1,1997, the respondent hired two of the “team members” that had been supplied by the appellant to the respondent (Deborah and Martin).

[6] When the appellant learned that the respondent had hired two of its team members, it sued the respondent for damages for breach of the compensation clause. The word “compensation” is not defined in the contract. The amount claimed by the appellant was the gross amount of the contract for one year.

[7] The trial judge found that the contract was entered into by two business organizations represented by sophisticated business persons. He further found that the respondent breached the covenant that it would not engage a person who was part of the team supplied by the appellant to work at the club for a period of one year by immediately hiring Deborah and Martin. The trial judge then correctly delineated the issue before him as being whether the clause in question was a penalty clause or liquidated damages. He observed:

The plaintiff (appellant) does not allege that a payment equal to one year’s payments under the contract was a genuine pre‑estimate of the damages which Infinite would incur as a result of the breach of contract by ORC and in fact the evidence of Mr. Charles of Infinite is that Infinite incurred no damages as a result of such breach of contract. The Compensation clause is therefore in my view clearly a penalty clause and may be struck down by the Court on such terms as to compensation or otherwise as are considered just; see Section 98 Courts of Justice Act, R.S.O. 1990, C. c-43.

It seems to me that the case law supports the proposition that, if a clause cannot be regarded as in any sense a genuine pre-estimate of damages and the amount payable bears no relation to the damages incurred by the non-defaulting party, the clause should be struck down as a penalty. In view of the fact that Infinite incurred no damages as a result of the breach of contract by ORC and that the purpose of the clause was, according to the evidence, to discourage customers of Infinite from hiring employees of Infinite, it does not appear to me that any terms as to compensation or otherwise ought to be imposed on the striking of the Compensation Clause. The action is accordingly dismissed.

[8] Mr. Charles, who gave evidence on behalf of the appellant, testified that he had suffered no “damages”. The contract with ORC was terminated with the requisite one month’s notice. The appellant did not lose any contracts because it did not have enough employees. Restricting the damage analysis to this evidence alone, the trial judge dismissed the appellant’s action.

Analysis

[9] Although I substantially agree with the trial judge, I would not restrict the inquiry into damages in the same manner. While the appellant did not suffer losses relating to lost income or lost contracts, it nonetheless did suffer a loss as a result of the respondent’s actions. After the appellant received notice its contract with the respondent would be terminated, Deborah and Martin agreed to work as part of the team supplied by the appellant on a new contract with Novotel. Just before the Novotel job was to commence, Deborah and Martin told the appellant they had changed their minds. After one-and-a-half to two weeks of interviewing, the appellant found two people to replace Deborah and Martin for the Novotel job. Mr. Charles testified that, after finding two persons to replace Deborah and Martin, he had to go through the same training process he went though with them. The compensation clause was intended to compensate the company for the “value-added” to the experience and skills the company had given its team members or employees through its training program. The process relating to the hiring and training of Deborah and Martin is described in the evidence:

• The back record of the various applicants was checked and an inquiry was undertaken to ascertain whether they were capable of being bonded.

• After interviewing about forty people, six to eight people were chosen. Eventually, a couple, Deborah and Martin were selected for training. The others were not punctual; did not have the right appearance in terms of cleanliness; or could not follow instructions respecting cleaning. Deborah had a very good attitude.

• There is a big difference between house cleaning, which Deborah had done, and commercial cleaning. Specific training is required for commercial cleaning. For example, when you hit a squash ball it leaves a black mark on the wall. In order to remove it, you have to know what product to use. If you do not do it properly you damage the wall and the glass around. Toilet bowl cleaning requires the use of an acid bowl cleaner and you have to make sure you do not leave a spot of it on the seat or it will burn.

• Deborah and Martin were asked to do certain areas of the club the first night they came. When they were finished, Mr. Charles pointed out to them what was “wrong” and how to properly clean and noted other things that were not done. Mr. Charles uses an itemized inspection sheet as a check list.

• The second day, Deborah and Martin came to the appellant’s office and watched videos on safety instruction as well as handling hazardous material.

• They had to be taken at least three days in the morning for recycling training in addition to their work on the site.

• The appellant provided extra people who were experienced to work with Deborah and Martin and who could train them on the job. These people taught Deborah and Martin how to do the grout cleaning every day in the shower area; how to clean the washrooms so there was no soap line; how to properly clean a toilet and check to see it is clean under the rim with a mirror; how to clean the whirlpool area and make sure none of the cleaning chemicals fall into the whirlpool; how to sanitize the lockers; how to use the commercial laundry machines; how to do minor repairs on the machines. They were shown how to clean the windows using a squeegee in a certain direction. They were also shown that different flooring material requires different chemicals to clean the floor. Deborah and Martin were taught how to use the machines to scrub the floors, how to buff the floors, how to run the tennis court machine, as well as how to clean the carpets.

• For the first two to three weeks, Mr. Charles was at the job site in addition to a site supervisor. Thereafter, he attended two or three times a week. A log book was placed on site and the appellant’s personnel were trained to write notes if they had a request or if something broke down so it could be fixed.

• Training is an ongoing matter. You don’t have a person trained after two or three weeks. After a period of four to six months, Deborah and Martin were fully trained as professional cleaners.

[10] The evidence of Mr. Charles as to the length of time and effort required to train a person to do commercial cleaning is supported by the description of the training program that was part of the contract booklet given to the respondent. Under the heading “Skills” respecting heavy duty cleaners, that is, persons who clean floors and empty garbage etc., the contract states: “To become fully competent in the execution of the job about three months on the job training is required.” In the case of light duty cleaners, two weeks on the job training is required after hiring.

[11] The appellant was aware that a team member might form a personal relationship with persons in the organization where the team member worked. The appellant’s position is that the non-solicitation clause was drafted because it is not a personnel agency and it tries to avoid having a high turnover. That is the reason for the compensation clause.

[12] Although the appellant testified that it had not suffered “damages”, the appellant did give evidence that it suffered a loss as a result of the respondent hiring Deborah and Martin. It is difficult to quantify the cost of interviewing, doing a background check and training a person to do professional cleaning.

[13] The trial judge recognized that the compensation clause which was intended to discourage solicitation of its personnel was prima facie enforceable. The onus of establishing that the clause is a penalty is on the respondent as the person seeking to set it aside: Canadian General Electric Co. v. Canadian Rubber Co. of Montreal (1915), 1915 CanLII 45 (SCC), 52 S.C.R. 349. Although the clause contains no definition of compensation, the trial judge held that the clause was not so vague as to render it void for uncertainty. He held that it must be given a commercially reasonable interpretation. I agree. To allow the appellant’s claim for its gross contract price would not be a commercially reasonable interpretation. Nor would it be commercially reasonable to construe the clause as a genuine pre-estimate of damages. In claiming the gross amount of the contract as damages in its statement of claim, the appellant was overreaching. Before us, the appellant acknowledged that its profit was $2,100 a month on the contract. This amount would be the highest potential pre‑estimate of loss.

[14] In determining whether a clause is a pre-estimate of damages or a penalty, the most important factor a court will consider is quantum. As stated by Lord Justice Dunedin in Dunlop Pneumatic Tyre Co. v. New Garage & Motor Co., [1915] A.C. 79 at 87:

It [a “liquidated damage” clause] will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.

[15] When a court characterizes a provision as a penalty clause, it will nevertheless award the damages that have been proved. For example, in H.F. Clarke Ltd. v. Thermidair Corp, 1974 CanLII 30 (SCC), [1976] 1 S.C.R. 319, the Court found the clause which provided for payment of $200,000 was a penalty but awarded the plaintiff its provable damages of $90,000. On the view I take of the case, had the respondent not hired Deborah and Martin, the appellant would have had the benefit of their services and would not have had to incur the expense and effort to find, hire, and retrain two other team members. The loss of Deborah and Martin as members of the appellant’s team meant that the appellant lost the future profit it would have made from the value it added to their skills that took place over a period of approximately six months. It had to expend time, effort and expense to train two new team members. I would quantify this loss by taking the time required to train two persons and multiplying it by the profit the appellant earned during the training period ($2,100 a month). The result is that the appellant is entitled to $12,600 as its loss.

[16] I appreciate that a case can be made to reduce this amount as damages. Deborah and Martin were largely trained on the job and they were not the only personnel the appellant supplied to the respondent.

[17] Although the actual quantum of damages is difficult to quantify, as was stated by Masten J.A. in Carson v. Willitts, 1930 CanLII 413 (ON CA), [1930] 4 D.L.R. 977 (Ont. Sup. Ct. (A.D.) at 980: “… the difficulty in estimating the quantum is no reason for refusing to award damages.” The respondent’s breach was a flagrant one and, accordingly, I do not think it necessary to make any adjustment to the damages.

Additional Issue

[18] During oral argument, the respondent asserted that the termination clause applied only to “employees” and not “team members”. The appellant company has a different working relationship with its team members than it does with its employees

[19] A team member is a person who does piece work for the appellant. The appellant provides Workers Compensation for its team members but does not make any source deductions for them. The appellant also provides semi-private hospital insurance, a prescription plan, life insurance, short and long-term disability and uniforms to its personnel. Team members are entitled to come in to work when they want and to leave when they want provided that the job or area they are assigned to clean has been done. The appellant provides the cleaning equipment and supplies to the team members.

[20] The respondent’s submission in oral argument that the clause did not apply because the persons hired by the respondent were not employees clearly must fail. It is abundantly clear upon reading the plain wording of the clause that it refers to both “team players” and “employees”. To the extent that the submission may have been an indirect attempt to suggest that the appellant had no proprietary interest worthy of protection respecting its team members, I would disagree. As these reasons indicate, the appellant expended considerable time and effort in order to recruit and train suitable personnel for commercial cleaning. These efforts resulted in “value-added” to the skills of its team members. In my opinion, this can and does qualify as a proprietary interest capable of protection similar to goodwill or business association: See e.g. Lyons v. Multari (2000), 2000 CanLII 16851 (ON CA), 3 C.C.E.L. (3d) 34 (Ont. C.A.).

Conclusion

[21] I would allow the appeal, set aside the judgment at first instance, and substitute an award in favour of the appellant of $12,600. If the parties wish to do so, they make submissions in writing with respect to costs within fourteen days of today’s date. In the absence of submissions as to costs, I would award the appellant its costs of the appeal and at trial.

Released: JAN 17 2001 Signed: “Karen M. Weiler J.A.”

GDF “I agree G.D. Finlayson J.A.”

LABROSSE J.A. (dissenting):

[22] I have read the reasons of my colleague Weiler J.A. I agree with her that the trial judge correctly concluded that there was a breach of contract by the respondent (“ORC”) and that the Compensation Clause was a penalty clause that ought to be struck down “on such terms as to compensation or otherwise as are considered just” (s 98, Courts of Justice Act.) Clearly, the Compensation Clause is not a genuine pre-estimate of the damages and the amount payable bears no relation to the damages which the appellant (“Infinite”) would have incurred as a result of the breach of contract by ORC.

[23] However, I am unable to agree with my colleague’s assessment of the damages.

[24] Infinite claimed a one-year payment of compensation for the breach of the Compensation Clause (for our purpose, $5,600 X 12 months = $67,200). My colleague agrees that Infinite did not suffer any damages relating to lost income or lost contracts. Nevertheless, she maintains that it suffered a loss as a result of ORC’s actions.

[25] In order to structure an assessment of damages, she relies on the evidence of Mr. Charles of Infinite that he had to go through the same hiring and training process with the new replacement cleaners for the Novotel job that he had gone through with ORC’s cleaners, Deborah and Martin. She notes that to allow Infinite its contracted one-year payment would not be a commercially reasonable interpretation of the contract, but it would be valid to allow its acknowledged profit of $2,100 a month. In so finding my colleague takes the monthly profit of $2,100 ($5,600 minus the $3,500 paid to the cleaners), which she terms as the highest potential pre-estimate of loss, multiplies this amount by 6 (representing the training period of six months), and arrives at a total “loss” of $12,600. Although she acknowledges that this amount would be subject to a reduction because “Deborah and Martin were largely trained on the job and were not the only personnel the appellant supplied to the respondent”, she refrains from making any adjustment. In sum, the “loss” is derived from a profit that was never lost.

[26] I agree with my colleague that to allow Infinite its gross contract price would not be a commercially reasonable interpretation. It has already been determined that the amount bears no relation to the loss.

[27] I further agree, as my colleague states and restates, that the loss is difficult to quantify. However, in my view this is solely because there is no evidence of such loss. It was Mr. Charles’ testimony that Infinite had suffered no damages. On the evidence, Infinite made the same profit with Novotel that it would have made, irrespective of ORC’s actions. Although it was open to Infinite to attempt to prove how many hours and the rate per hour related to the finding, hiring and training of the new cleaners, there is no evidence submitted of the expenses and costs attributable to that purpose. The “loss” structured by my colleague bears no relation to the time, effort and expense to train the two new cleaners. It bears no more relation to the loss than the Compensation Clause, except that it is for a lesser amount.

[28] My colleague makes a calculation of damages based on the assumption that Infinite’s intention was to protect itself from the loss for the “value added” to the experience and skills the company had invested in its cleaners and to compensate for any loss or expense in hiring and training workers. Yet, the contract does not express this intention and there is no definition of compensation in the contract prepared by Infinite. The contract neither explicitly nor implicitly states that the compensation of one year’s payment is to protect the value-added investments of training. This assumption is being read into the contract.

[29] Further, there was no evidence submitted at trial to indicate that the damages sought were calculated on this intent and thus, no evidence to support the assessment of damages. As stated earlier, the evidence given at trial was that Infinite did not suffer any loss because Deborah and Martin ceased to work for it. In his evidence, Mr. Charles stated:

No. I’m not asking for any damages or anything. What I’m asking for is my fee, my 20 years’ experience, know how put into those people. That’s the reason this clause is put in here that everyone who is there not to hire our people… This is what I’m asking for is merely a fee, fee for people not to engage directly and indirectly with our people.

While this statement is evidence that there was a value-added investment, there is nonetheless no evidence of a loss of the value added. Without any evidence of a loss there was no evidence to either quantify nor justify the payment of a fee in the form of damages.

[30] My colleague based her assessment of damages on assumptions that are outside the realm of surrounding circumstances that the court can consider in the construction of the contract. (See Thermidaire, supra at p. 331.) It is not the function of this court to rewrite the contract.

[31] The contract provided for a one-year payment of compensation. Infinite never claimed anything else. The loss of profit is not claimed in the pleadings, nor was it argued before the trial judge or considered in his reasons. It was raised for the first time during the appeal and promptly endorsed by counsel for Infinite.

[32] Infinite, as plaintiff, was entitled to present its case as it wished and it was incumbent upon it to prove its damages. ORC defended the case that was presented. As the loss of profit issue was not raised at trial ORC never had the chance to dispute it.

[33] Further, this issue evolved out of a bare statement made by Mr. Charles without any supporting evidence. On his evidence, Infinite was responsible for providing all cleaning and sanitizing supplies and all necessary equipment. There is no evidence as to these costs nor as to the costs associated with supervision. The word “profit”, as used by Mr. Charles, referred to gross profit and was subject to numerous expenses. In light of this, its adoption by my colleague as the basis for the assessment of damages is seriously flawed.

[34] In the end, it is my view that the assessment of damages structured by my colleague is not supported by the evidence.

[35] In any event, it was reasonable for the trial judge to find that Infinite suffered no damages. This finding is clearly supported by the evidence and there is no basis for interference by this court.

[36] Accordingly, I would dismiss the appeal with costs.

Signed: “J.M. Labrosse J.A.”