DATE: 20010514
DOCKET: C33902
COURT OF APPEAL FOR ONTARIO
FINLAYSON, CARTHY AND WEILER JJ.A.
B E T W E E N:
McCORMICK DELISLE & THOMPSON INC.
Steven W. Pettipiere, for the appellant
Appellant
- and -
MARK BALLANTYNE, HERBERT STADIG, DOUGLAS CATER and PROCESS IMPACT INC.
Jon-David Giacomelli, for the respondents
Respondents
Heard: April 17, 2001
On appeal from the February 22, 2000 decision of Justice Casimir N. Herold on damages alone.
FINLAYSON J.A.:
[1] The plaintiff appeals from the decision of the Honourable Mr. Justice Herold of the Ontario Superior Court of Justice on damages alone. The trial judge awarded damages in favour of the appellant in the amount of $30,324.00 against all of the respondents jointly and severally for breach of fiduciary duty and/or breach of employee duty not to exploit confidential information obtained during the course of employment.
Overview
i. Liability
[2] Although the issue of the respondents’ liability to the appellant is not under appeal, it is nevertheless important to review the factual underpinnings that gave rise to the claim in issue before assessing the proper measure and quantum of damages.
[3] The appellant is a management consulting firm. It provides services primarily to clients in the manufacturing industry in order to assist them in changing the method by which they manufacture their products. Because of the nature of the service the appellant provided, its relationships with prospective clients often required a twelve to nineteen month “maturing period” before a customer was secured and actual invoicing was done. Once a customer had been secured, 90% of the work was performed in the field by specialized service providers who were responsible for bringing about changes to the manufacturing process.
[4] The appellant company is owned and operated by Michael Delisle. It is basically a one-person organization with employees, three of whom were the respondents Ballantyne, Stadig and Cater.
[5] Mr. Delisle began his involvement with the company in 1991 and in January of 1995, he hired Mark Ballantyne as a sales representative. Mr. Ballantyne was an effective sales person whose sales when he left the appellant in late 1996 accounted for more than 50% of the appellant’s gross revenue.
[6] Herbert Stadig joined the company in January of 1996 as a service provider and was to act in a “hands on” capacity on the floors of the appellant’s customers. Douglas Cater also joined the company in January of 1996 as a service provider, with the main role of presenting the internationally recognized designation “ISO 9000” training packages.
[7] When Mark Ballantyne joined the appellant, he signed an Exclusive Sales Agent Agreement dated November 3, 1994, and on December 20, 1995, he signed a second Sales Agent Agreement, said to be effective as of January 1, 1996 through December 31, 1997. On April 3, 1996, Ballantyne also signed a Non-Competition and Confidentiality Agreement. Neither Stadig nor Cater was asked to sign employment agreements, but each was asked to sign the Non-Competition and Confidentiality Agreement. Both refused to do so.
[8] During the late spring and early summer of 1996, the three individual respondents were negotiating with the appellant in an attempt to buy into the company as equity partners. Negotiations eventually broke down and on September 9, 1996, the three individual respondents collectively agreed that they would go into business together, in a field similar to that occupied by the appellant.
[9] By December 23, 1996, all of the individual respondents had left the appellant’s employ. The very next day, they incorporated the respondent Process Impact Inc. The trial judge (in his reasons for judgment of September 20, 1999) described the respondent company’s formation, early operations and actions that gave rise to the appellant’s claim as follows:
…by January 6, 1997, [Process Impact Inc.] had hit the ground running with some very substantial and rewarding contracts. If one were to accept (and I do not) the preposterous evidence of the defendants [respondents] with respect to the way in which the business took off, one would have expected them to name the company Serendipity Consultants Inc. I do not, however, draw any adverse inference from their failure to do so.
Each of the three [individual respondents] testified that they did absolutely nothing to further their plan between September 8, 1996, and the time the resignations of Cater and Stadig were delivered on December 2nd. To say that this evidence is hard to believe is a significant understatement. …
As indicated earlier, Process Impact Inc. was incorporated on December 24, 1996 and on the very same day delivered two proposals to two very substantial customers of the plaintiff [appellant], namely, [the GSW Water Heating Company, hereinafter “GSW”] in Fergus and [John Hauser Ironworks Limited, hereinafter “Hauser”] in Waterloo.
The proposals delivered on December 24th were prepared on commercially manufactured Process Impact stationary.
The evidence of the defendants and Mr. Ballantyne in particular with respect to the manner in which these proposals came about would, if it were not given under oath, be laughable. The fortuitous combination of serendipitous events simply defies logic and common sense.
It should be noted that there is a dispute about the actual delivery date of the proposal to GSW. There is no dispute that the proposal to Hauser was delivered on December 24th.
With respect to the proposal to GSW, Mr. Ballantyne swore that the proposal which was dated December 24th was actually rewritten on or about January 2, 1997 and not presented to GSW until that date. A witness summoned by the plaintiff from GSW, Thomas Glover, swore that the proposal was delivered to him on December 24, 1996 and he was not challenged with respect to that evidence. …
There is a substantial divergence between Mr. Glover’s evidence with respect to initial contact as between himself and Mr. Ballantyne and the evidence of Mr. Ballantyne. Mr. Ballantyne swears that Glover telephoned Ballantyne at home. Mr. Ballantyne specifically recalls that the call came in at 5:10 p.m. but he does not know on what day. When asked about this somewhat peculiar memory, he advised that it was because his wife was not terribly happy about him getting calls at home of a business nature after 5:00 p.m. This in a family which was in mid December without the substantial income of their major breadwinner and having no idea when and from where their next income might arrive. The evidence is preposterous.
Mr. Glover on the other hand initially swore that Ballantyne had contacted him first by telephone. When counsel for the plaintiff pointed out to Mr. Glover that Ballantyne had sworn otherwise under oath at his examination-for-discovery, Glover allowed that perhaps Ballantyne’s version was correct…Mr. Glover’s general recollection of the timing of the call, by whomever it was made, was in or about the month of November, 1996, after he had become aware of the fact that Ballantyne was no longer employed by the plaintiff. …
That the defendants solicited is, in my respectful view, absolutely indisputable on the totality of the evidence. To conclude that the defendants were solicited by the customers, GSW and Hauser as they claim, is simply not available as a reasonable conclusion based on common sense and the evidence. I find as a fact that the defendants solicited during the month of December and probably even much earlier the two major customers GSW and Hauser who were active customers of the plaintiff and for whom the defendants began to work immediately after commencing their new venture.
[10] On the basis of the above noted facts, the trial judge found that each of Ballantyne, Stadig and Cater had a fiduciary duty to the appellant and a concurrent duty, within or without the fiduciary relationship, not to exploit confidential information obtained in the course of their employment to the detriment of the appellant. The trial judge further found that the individual respondents had breached their duties and that the consequences of their conduct to the appellant were “almost disastrous and the benefit to the [respondents] was substantial.” Finally, the judge found that the company formed by the individual respondents for the sole purpose of exploiting confidential information was equally liable to the appellant.
ii. Damages
[11] Having determined on September 20, 1999 that the respondents owed a fiduciary duty to the appellant (or failing such a duty, they had a common law duty not to exploit confidential information obtained by them in the course of their employment) and that the respondents breached those duties, the trial judge proceeded, at a later date, to determine the damages owed by the respondents to the appellant. The trial judge released his reasons for judgment on the subject of damages on February 22, 2000.
[12] In assessing the damages to which the appellant was entitled, the trial judge stated that:
In cases of this sort, the plaintiff regularly has the option of seeking damages based on its actual loss or based on a disgorgement by the defendants of profits improperly obtained. …
Counsel for the plaintiff, while urging an assessment of damages based on the lost profit of the plaintiff model, also suggested, not without some attractiveness, that one might look at the other side of the coin in considering the extent to which, if at all, the end result of ones analysis is appropriate.
[13] The trial judge found that in 1997, the respondents had gross sales to GSW, a major customer taken from the appellants by the respondents, in the amount of $212,400.00, and, in the following year, gross sales to GSW in the amount of $261.825.00.[^1] It was the appellant’s evidence that the GSW project that it lost to the respondents was anticipated to be implemented on a step-by-step basis over two to three years. For its services, the appellant had been charging GSW on a daily rate in the amount of $1,000.00.
[14] The trial judge further found that in 1997, the respondents had gross sales to Hauser, a company that had previously had some dealings with the appellant, in the amount of $43,525.00. Finally, the judge recognized that in 1997 and 1998, there were smaller sales, namely, $11,850.00 to Sowa Tool & Machine Company (“Sowa”), and $1,360.00 to Quadro Engineering Incorporated (“Quadro”), companies where existing proposals from the appellant were outstanding at the time when the respondents left the appellant. These figures amounted to total gross sales of $530,960.00 earned by the respondents from GSW, Hauser, Sowa and Quadro, in the two-year period up until the end of 1998.
[15] According to the trial judge, in the year ending January 31, 1998 (slightly more than thirteen months after the final departure of the last two of the three individual respondents), the gross sales of the appellant fell from $1,380,000.00 to $790,000.00. The appellant’s net earnings before tax in 1997 were $152,000.00 and its net loss before tax in 1998 was $136,000.00, a swing of almost $300,000.00. According to the appellant, these figures reflected the fact that many of its expenses continued notwithstanding the loss of sales.
[16] Before the trial judge, the appellant argued that in assessing damages based on loss, the proper approach was to calculate a margin rate which essentially allowed as the only expenses the commission paid obtaining the business and the direct salary paid to the service providers who did the work. Multiplying the appellant’s suggested margin loss rate of 45% to the amount of gross loss of sales earned by the respondents for a two-year period, and taking into account the lost incentive payments called for in the contracts in issue, would have generated a total net loss to the appellant in the area of $260,000.00.
[17] The judge rejected this submission and preferred the three step approach suggested by the respondents:
Determine the appropriate period of time, after the cause of action arose, during which damages should be considered.
Attempt, using the financial records available, to calculate the actual net loss to the appellant during the period selected.
Consider the extent to which, if at all, some reduction should be made to the total otherwise calculated to allow for contingencies.
[18] The trial judge concluded that the damages for which the respondents were responsible should be calculated on the basis of a twelve-month period from January 1, 1997 up to and including December 31, 1997, which he referred to as being at the “far end of the usual range.” The start date was chosen on the basis that no money was actually siphoned off from the appellant until the end of December 1996, and there was no hard evidence of blatant solicitation prior to December.
[19] In order to calculate the actual net loss of the appellant during the relevant period, the trial judge began by setting the gross loss of income to December 31, 1997 at $249,585.00.[^2] The trial judge then rejected the appellant’s submission that only the actual direct expenses incurred in earning the income should be deducted. Instead, the trial judge chose to take the appellant’s usual profit margin and apply it to the numbers generated in the first step of the analysis. The most attractive profit margin from the appellant’s perspective was determined by the trial judge to be the 16.2% achieved in 1996. Applying this to the figure mentioned above, the trial judge arrived at a loss, before contingencies, of $40,432.00.
[20] The trial judge’s final step was to calculate the appropriate contingency. The judge remarked that customers in the industry under consideration seemed “somewhat fickle, bearing in mind the quickness with which GSW jumped ship”. Recognizing that “it may be somewhat arbitrary – contingencies usually are”, the trial judge assigned 25% and reduced the figure to $30,324.00. The appellant was therefore awarded judgment against all four respondents jointly and severally for this amount.
Issues
[21] The following issues were raised on the appeal of the damages award:
(1) What is the appropriate method for calculation of damages for breach of fiduciary duty and/or breach of an employee’s duty not to exploit confidential information obtained in the course of employment?
(2) Did the trial judge err in assessing the period of time for which damages should be calculated?
(3) Did the trial judge err in using the appellant’s past profit margin in assessing damages payable to the appellant?
(4) Did the trial judge err in reducing damages by 25% for contingencies?
Analysis
[22] I do not think that it is necessary to deal with each issue separately. In my opinion, the approach of the trial judge to the issue of damages was flawed. This is not a case of three employees leaving their employment and failing to wait an appropriate grace period before approaching their employer’s clientele. Rather, this is a case of three employees who, in egregious breach of their duties to their employer, secretly solicited contracts from the most attractive of their employer’s clientele while they were still in its employ. In the words of the trial judge, the respondent company incorporated for this purpose by the three respondent employees “hit the ground running”. Whether a twelve-month grace period was appropriate or whether some other figure was called for was a moot issue. Based on the respondents’ use of confidential information obtained during the course of their employment, as well as their solicitation of some of the appellant’s clientele before their departure, no length of post-departure grace period would have protected the appellant from the consequences of the misconduct of these employees. In fact, the loss of clientele suffered by the appellant as a result of the respondents’ breach of duties almost put the appellant out of business.
[23] Contrary to the submissions made by the respondents, the four contracts selected by the appellant as the basis for its claim for damages were not short-term contracts, despite being terminable on thirty days notice. These contracts covered projects that involved substantial production changes in the clients’ businesses. There can be no question that the changeover in production methods would occasion considerable business disruption for the clients. Once the clients had committed to these projects, the prospect of abandoning them would be unattractive. In the case of the contracts that were already in the course of implementation, the probability of a change of actual service providers in mid-stream (as opposed to a change simply in consulting companies) was significantly reduced by the intense involvement of the appellant’s service provider personnel in the projects. This was not a case of the clients being fickle, as the trial judge suggested, but rather, it involved a situation where clients like GSW were placed in the dilemma of having to decide how much dislocation they were prepared to suffer out of loyalty to the appellant when the specialized personnel that had been assigned to the projects by the appellant announced that they were leaving the appellant and were prepared to continue on their own without any delay. It is significant that the four specific contracts in issue were not terminated prematurely and only came to an end after the completion of the respective projects by the appellant’s former personnel. In the case of GSW, this took three years, for Sowa it was two years, for Quadro one year, and for Hauser one year.
[24] Accordingly, the trial judge erred in restricting the period of lost sales to twelve months. The three respondents took advantage of the business relationships and favourable agreements cultivated and negotiated by the appellant’s Michael Delisle and simply agreed to take over projects that were either under contract to the appellant or that were subject to a proposal, at no additional cost to the customer. In the case of Quadro, they offered their services at a discount to what the appellant would have charged. The only change, which was of no consequence to the customers, was that the payments would now go to the company incorporated by the former employees of the appellant instead of to the appellant. Having found that this conduct of the respondent employees was in breach of their respective fiduciary duties and/or their common law duties to their employer, the trial judge should have treated the four contracts in issue as having been misappropriated by the respondents and should have awarded the value of the lost contracts to the appellant as damages.
[25] It is settled law that the general principle for awarding damages in a contract action is that “…the party complaining should, so far as it can be done by money, be placed in the same position as if the contract had been performed…”: see Wertheim v. Chicoutimi Pulp Company, [1911] A.C. 301 at 307 (P.C.). This principle has been applied to employment contracts: see Cockburn v. Trusts & Guarantee Co. (1917), 1917 CanLII 525 (ON CA), 33 D.L.R. 159 at 164 (Ont. S.C. (A.D.)), aff’d (1917), 1917 CanLII 10 (SCC), 55 S.C.R. 264.
[26] The case law indicates that there are two potential ways to calculate damages for breach of fiduciary duty in an employment context. One is an accounting of profits made by the party who breached the duty, while the other method focuses on the loss suffered by the party which was owed the duty: see Canadian Industrial Distributors Inc. v. Dargue (1994), 1994 CanLII 7319 (ON SC), 7 C.C.E.L. (2d) 60 at 70 (Ont. Gen. Div.). Perhaps unwisely, the appellant chose the second method, but also relied on the profits improperly obtained by the respondents as a measure of the reasonableness of the figure claimed as damages.
[27] As indicated above, based on contracts with GSW, Hauser, Sowa and Quadro, the respondents earned gross revenues of $530,960.00 in the two years following their departure, while the appellant’s gross sales dropped by $590,000.00 during the first thirteen months post-departure. In addition, the appellant, which had recorded positive net earnings of $152,000.00 before tax in 1997, suffered a net loss before taxes of $136,000.00 in 1998, a swing of almost $300,000.00. These figures clearly reveal the patent error of the trial judge’s finding that the quantum of the appellant’s loss was a mere $30,324.00.
[28] In the circumstances of this case, there is no reason why the appellant should not be compensated for its loss of the four clients’ contracts taken by the respondents upon leaving the appellant’s employment. The appellant submits that the reasonable loss is the loss of sales for the fixed terms of the contracts covering the relevant projects. According to the appellant, in assessing the quantum of damages, only those expenses which would reasonably have been incurred to earn income should be deducted from the gross sales, and it is entitled to its expected net profit from the expected gross revenues. It was further claimed that it is not appropriate to deduct general head office costs when those costs would be fixed even though the appellant did not obtain the sales.
[29] I agree with this approach. The respondents appropriated the contracts of two major customers (GSW and Hauser) and solicited two smaller contracts from customers who were in receipt of proposals by the appellant (Sowa and Quadro). In doing so, they also appropriated the effort and expenses laid out by the appellant during months of what appellant’s counsel described as “wooing the client”, for which the appellant received nothing. Those costs were absorbed in the appellant’s overall administrative costs that, on the evidence, continued without significant change during the period covered by the contracts in issue. In the normal course, these administrative costs would have been recovered by the billings for the work done on the job. Accordingly, what the appellant lost was the revenues that were to be generated from these contracts. Its only savings were the expenses of the personnel on the job and any commissions that would have been payable for securing the contracts. To suggest that the appellant should deduct from its claim for damages a factor for general overhead expenses would be to accept that the appellant should be penalized twice.
[30] I also disagree with the 25% contingency deduction applied by the trial judge. I think it is obvious from what has been said above, that when the damages claim is treated as a misappropriation of four specific customers who had been persuaded to, and did in fact, reorganize their businesses, there should be no such arbitrary across the board deduction.
[31] It must be remembered that the respondent employees acted with stealth and deceit to solicit these businesses, while leaving a paper trail of post dated contracts (Hauser and GSW) in an effort to disguise this fact. Moreover, they continued this attempted cover-up at trial. The fact that they were unsuccessful in their concealment does not excuse their conduct. In the circumstances, once exposed, it hardly lies in the respondents’ mouths to quibble about overhead and discounts, given that their reward for duplicity far surpassed the appellant’s damages award at trial.
Disposition
[32] It is my opinion that the appellant’s damages claim reflected considerable restraint in the circumstances. I would allow the appeal and vary the judgment below to substitute for the damage award the sum of $260,000.00. If this introduces cost consequences at trial, the parties should submit written argument to the court through the Registrar. The appellant should receive its costs of the appeal.
Released: MAY 14 2001 Signed: “G.D. Finlayson J.A.”
GDF “I agree J.J. Carthy J.A.”
“I agree K.M. Weiler J.A.”
[^1]: The figure of $212,400.00 is based on total salaries of $202,900 plus incentives of $9,500. The figure of $261,825.00 is based on total salaries of $231,425.00 plus incentives of $30,400.00.
[^2]: The 1997 gross loss figure used by the trial judge differs from the amount of gross loss suggested by the appellant by $9,500. The $9,500 appears to represent an incentive payment that the appellant claimed it would have received from GSW in 1997 and it is not clear why it was excluded.