DATE: 20030203
DOCKET: C32933, C35894 & C36868
COURT OF APPEAL FOR ONTARIO
MORDEN, MACPHERSON AND CRONK JJ.A.
B E T W E E N :
CHUJUN GU, CHINA SUN GROUP and GREENCOOL CANADA INC.
Paul J. Bates and Thomas D. Kerr for the appellants
Plaintiffs, Defendants by Counterclaim (Appellants, Respondents by Cross‑Appeal)
- and -
TAI FOONG INTERNATIONAL LTD., TAI FOONG INVESTMENTS LTD., DAVID LAM, ROBERT FU and GU COOLING SYSTEMS LTD.
Alan J. Butcher and Benjamin Na for the respondents
Defendants, Plaintiffs by Counterclaim (Respondents, Appellants by Cross‑Appeal)
Heard: October 15 and 16, 2002
On appeal from the judgments of Justice Arthur M. Gans of the Superior Court of Justice dated September 16, 1999, January 18, 2001 and July 18, 2001, reported at [1999] O.J. No. 3333, [2001] O.J. No. 113, and [2001] O.J. No. 2962.
BY THE COURT:
A. INTRODUCTION
[1] From its modest beginning as a suit provoked by a stolen computer, this action developed into a long and complicated trial in which, ultimately, the parties sought millions of dollars from each other. After a 47 day trial which unfolded in three separate stages over 27 months, and which the trial judge described in the first sentence of his judgment as having “more twists and turns than the Amalfi coastline”, the practical result was that only $50,000 moved from one side to the other. This tiny mouse of a result flowing from the mountain of litigation has provoked a flurry of appeals and a cross‑appeal which, together, raise issues of contract law, commercial law and damages.
B. FACTS
(1) The parties and the events
[2] Chujun Gu (“Gu”) is the inventor of a number of CFC‑free refrigerants which he developed in the People’s Republic of China for worldwide distribution. Gu holds patents for CFC‑free refrigerants under the laws of Canada and the United States and pursuant to an international patent convention. Gu’s business interests in China were conducted through the China Sun Group, a Chinese corporation, owned and managed by Gu.
[3] David Lam (“Lam”) is a Canadian chartered accountant who developed a successful business importing Asian and South American seafood products into North America. In his commercial ventures with Gu, Lam used two of the companies he controlled, Tai Foong Investments Ltd. and Tai Foong International Ltd.
[4] By 1992, the Gu refrigerant products were achieving commercial success in Asia and were attracting international attention from parties interested in the opportunity to distribute them. The stimulus for the emerging market was an international accord made in 1987 known as the “Montreal Protocol”, which required all participating nations to eliminate the production, and later the use, of CFC refrigerants. December 31, 1995 was a critical date under the Montreal Protocol; after that date, CFC‑free refrigerants were to be used in automobile, residential and industrial/commercial applications.
[5] In the autumn of 1992, Lam and one of his project managers, Robert Fu (“Fu”), went to Beijing for meetings with Gu and one of his project managers, Xiaohui Hu. On October 17, 1992, after approximately one week of negotiations, the parties (the “Gu Group” and the “Lam Group”) entered into a joint venture agreement (the “JVA”). The main terms of the JVA were:
(a) Gu and Lam agreed to establish a joint venture in Canada to market the Gu refrigerants in Canada, Mexico and the United States;
(b) Gu was to receive 60% and the Lam Group 40% of the shares of a Canadian corporation, Gu Cooling Systems Limited (“GCSL”), which was to be the joint venture vehicle;
(c) Gu’s capital contribution, which was valued at $6,000,000 U.S., was the right to use the Gu refrigerants (not a proprietary interest in them);
(d) the Lam Group was to make a capital contribution of $4,000,000 U.S., of which $3,000,000 U.S. was to be in cash and the balance in “kind” (e.g. premises and equipment);
(e) the Gu Group was to provide the gases, the technology, all “upgrades” to the refrigerants as they became available, technological support, training, and a “guarantee” that the technology complied with the Montreal Protocol; and
(f) Lam was to supply marketing and promotional expertise.
[6] The enterprise contemplated by the JVA failed almost from its inception. Gu was critical of Lam’s failure to advance capital towards the enterprise, especially the $3,000,000 U.S. that the JVA required Lam to contribute by December 15, 1992. Lam, ultimately, accused Gu of misrepresenting the success and marketability of the refrigerants.
[7] The relationship between the two groups drifted, somewhat aimlessly, through the first half of 1993. In July 1993, Gu came to Canada. There is a dispute, central to both the trial and the appeal, about what happened during Gu’s visit. The trial judge found that Gu terminated the JVA at that time. The dispute on appeal concerns the consequences of that termination.[^1] In any event, regardless of the legal situation with respect to the JVA in July 1993, it is clear that the two groups did not end their relationship at that juncture.
[8] During the summer of 1993, Gu and Lam entered into negotiations with Michael Elder (“Elder”) of Powerx Group Inc. (“Powerx”), an active investor in the refrigeration industry. The result of those negotiations was a new tripartite agreement among Gu, Lam and Powerx in November 1993.
[9] The key document establishing the new arrangement was the Founders Shareholders Agreement (“FSA”), which provided that the parties would market Gu refrigerants and technologies in Canada through an Ontario company called Greencool Corporation (“Greencool”) which was incorporated on November 10, 1993. Gu was to acquire 60% of the shares for a capital contribution of $6,000,000 U.S. made by executing a Distribution and License Agreement to confer on Greencool the Canadian distribution rights for Gu refrigerants and technologies. The Lam Group and Powerx were to contribute $1,000,000 U.S. each in exchange for 20% each of the shares in Greencool. Lam and Elder were required to make their capital contributions by specified dates by posting separate letters of credit.
[10] The FSA relationship was, if anything, even less successful than the earlier JVA relationship. By the spring of 1994, Gu was trying to disengage from his relationship with Lam and Elder. Lam resisted. A crucial event – at which point the trial judge found that “all hell broke loose” – was Gu’s firing of Fu, Lam’s project manager, in April 1994.
[11] In early May 1994, the Lam Group seized some of the Gu Group’s property, including Gu’s personal laptop computer. Several weeks later, the Gu Group commenced an action against the Lam Group for, among other claims, conversion and return of property, and for injunctive relief to restrain the Lam Group from using and marketing confidential information and technology associated with Gu refrigerants.
[12] The Lam Group responded with two separate lawsuits against the Gu Group. In an action, the Lam Group alleged breach of the JVA, misrepresentation, conversion of property, breach of fiduciary duty, and deceit. In an application, the Lam Group sought oppression remedies against the Gu Group.
[13] On July 21, 1994, Borins J. ordered the return of personal property to the Gu Group. He also ordered, on an interim basis, that the business of marketing and selling Gu refrigerants in North America be conducted by the Gu Group. Finally, Borins J. ordered the Gu Group to pay $506,000 into court as security for its undertaking as to damages, and for its occupancy of the Greencool premises.
[14] The Gu Group did not post the required security. On September 23, 1994, Borins J. essentially reversed his previous order. He ordered, on an interim basis, that the Lam Group conduct the business of marketing and selling Gu refrigerants in North America. The Lam Group provided the usual undertaking as to damages as a condition of obtaining that relief.
[15] Sixteen months later, in January 1996, the Gu Group moved to set aside Borins J.’s order of September 1994. On June 4, 1996, Lissaman J. varied Borins J.’s order to permit the Gu Group to conduct, on an interim basis, the business of marketing and selling Gu refrigerants, provided that the Gu Group pay $1,000,000 into court. This time the Gu Group made the required payment.
[16] In a series of other orders from 1996 to 1999, made by various judges, the three lawsuits were consolidated, certain issues relating to alleged contempt were reserved to the trial judge, and it was ordered that the trial of liability issues proceed first, to be followed by a trial relating to contempt, remedies and damages.
[17] The trial commenced before Gans J. on March 29, 1999. It proceeded in three stages. The first stage lasted from March 29 to June 30, 1999 and occupied 40 days. The second stage unfolded for five consecutive days from December 11‑15, 2000. The third stage took place on June 21 and 22, 2001.
(2) The trial judgments
[18] The trial judge wrote three comprehensive sets of reasons for judgment dated September 16, 1999, January 18, 2001 and July 18, 2001. He considered all of the material issues. His disposition of many of those issues is not contested on the two appeals and the cross‑appeal; accordingly, the summary which follows serves only as a brief description of the trial judge’s conclusions on the issues which are contested in this appeal proceeding.
[19] First, the trial judge held that Gu terminated the JVA in July 1993 by accepting the Lam Group’s repudiation of it. However, he also held that Gu elected to waive any action on the JVA. Accordingly, the Gu Group could not recover damages for the Lam Group’s breach of the JVA. The Gu Group appeals that holding.
[20] Second, the trial judge dismissed the Gu Group’s claim for damages arising from the undertaking as to damages provided by the Lam Group when it sought and obtained the interlocutory injunction referred to in paragraph 14 above. He reached that conclusion because he found that Gu disobeyed Borins J.’s order permitting the Lam Group, exclusively, to conduct the business of marketing and selling Gu refrigerants in North America. On this issue the trial judge concluded:
In my opinion, even though vindicated after trial, Gu’s actions in flouting the injunction and actively promoting his business in the U.S. constitute special circumstances sufficient to disentitle him to an inquiry into damages.
The Gu Group appeals that holding.
[21] Third, in the course of holding that the Lam Group repudiated the JVA, the trial judge held that any pre‑contractual representations, if made, of the Gu Group concerning the development stage and marketability of Gu refrigerants were “of no moment”. The Lam Group cross-appeals that component of the judgment.
[22] Fourth, as a corollary to his finding that the JVA was at an end in July 1993, the trial judge held that any claim by the Lam Group under that agreement must fail. Specifically, there was not room for the Lam Group’s claim under the oppression remedy sections of the Business Corporations Act, R.S.O. 1990, c. B. 16, s. 248. In the alternative, the trial judge held that “the OBCA oppression remedy sections cannot be invoked to enforce contractual remedies when the corporation through which an action is sought to be maintained was created to carry out a commercial transaction....” The Lam Group cross‑appeals that component of the judgment.
[23] Fifth, the trial judge awarded the Gu Group punitive damages of $50,000 for the Lam Group’s conversion of Gu’s personal laptop computer. The Lam Group appeals that holding.
(3) Observation
[24] There are other facts, relating to the parties, the events and the litigation, that are relevant to the disposition of the two appeals and the cross-appeal. However, it is convenient to deal with these additional facts in the context of the grounds of appeal and cross‑appeal to which they relate.
C. ISSUES
[25] The issues raised by the Gu Group’s appeal are:
(1) Did the trial judge err in holding that the Gu Group was not entitled to damages for breach of the Joint Venture Agreement?
(2) Did the trial judge err in dismissing the Gu Group’s claim for damages arising from the undertaking as to damages provided by the Lam Group when it sought and obtained an interim injunction?
[26] The issues raised by the Lam Group’s cross‑appeal are:
(3) Did the trial judge err by failing to give any legal effect to the pre‑contractual representations of the Gu Group?
(4) Did the trial judge err in finding that the Lam Group had no remedy for the oppression flowing from the Gu Group’s appropriation of the business of Gu Cooling Systems Ltd.?
[27] The issue raised by the Lam Group’s appeal is:
(5) Did the trial judge err by awarding punitive damages against the Lam Group for conversion of Gu’s laptop computer?
D. ANALYSIS
Gu Group’s Appeal
(1) Gu Group’s entitlement to damages for Lam Group’s breach of the JVA
[28] The trial judge held that the Lam Group breached the JVA by “not providing its full capital contribution as specified.” In addition, the trial judge held that Gu had not “affirmed” (condoned) the Lam Group’s breach of the JVA; on the contrary, the Lam Group’s “repudiation of the Agreement was in fact accepted by Gu and the contract was treated at an end.”
[29] At the trial, the Gu Group sought damages for the Lam Group’s breach of the JVA. Although the trial judge recognized that the Gu Group had a prima facie entitlement to damages at the date of the Lam Group’s breach, he held that in the circumstances of the case the Gu Group had lost its entitlement to damages. He reached that conclusion on the basis of the doctrine of waiver and, perhaps, the principle of abandonment.
[30] The Gu Group appeals the trial judge’s decision on that issue on four bases: (1) the trial judge erred by permitting the Lam Group to first advance the defences of abandonment and waiver at the conclusion of the trial when those defences had not been asserted in its pleadings; (2) he failed to distinguish rescission from repudiation; (3) he erred in applying the doctrine of waiver; and (4) he erred in applying the principle of abandonment.
(a) Pleadings
[31] The Gu Group contends that the trial judge ought not to have permitted the Lam Group to argue abandonment and waiver in its closing argument. The Gu Group submits that these were surprise affirmative defences which had not been pleaded by the Lam Group: see rule 25.07(4) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 and Strong v. Paquet Estate (2000), 50 O.R. (3d) 70 (C.A.).
[32] The trial judge dealt carefully with this issue during the trial. As he noted in his reasons, the Gu Group itself raised the issues of abandonment and waiver in its reply and defence to counterclaim in relation to the Lam Group’s obligations under the JVA. The Gu Group, therefore, was alert to the possible assertion of those defences by the Lam Group, at least in connection with the latter’s breach of the JVA.
[33] Moreover, the reality is that the ‘surprise’ defences advanced by the Lam Group in its closing argument were a direct response to a major ‘surprise’ sprung by the Gu Group during the trial. In its pleadings, and in the testimony of all of its witnesses except one, the Gu Group took the position that the JVA was terminated in February or March 1994. The exception to that position was a stunning one – Gu himself testified, alone on the Gu Group side of the case, that he had come to Canada and terminated the JVA in July 1993.
[34] This change in the Gu Group’s position meant that much of the evidence at the trial about events in the July 1993 – March 1994 period had to be viewed through the prism of post‑termination, not pre‑termination, conduct. In light of the Gu Group’s new assertion about the termination date of the JVA, the trial judge permitted the Lam Group to change its position as well and assert, for the first time, that it accepted Gu’s testimony on the issue of termination date. This position then served as a foundation for the Lam Group’s new argument that the Gu Group’s post‑termination conduct established that it had waived and/or abandoned its prima facie right to seek damages for the Lam Group’s breach of the JVA.
[35] Viewed from one perspective, there is an element of “two wrongs do not make a right” in what transpired late in the trial. Arguably, Gu should not have been permitted to testify contrary to his pleadings: see Kalkinis (Litigation Guardian of) v. Allstate Insurance Co. of Canada (1998), 41 O.R. (3d) 528 (C.A.); and the Lam Group should not have been permitted to argue defences it had not pleaded: see Strong v. Paquet Estate, supra.
[36] However, in the end,we cannot say that we think the trial judge erred in permitting the Lam Group to advance the defences in its closing argument. There was a simple explanation for the absence of the defences in the pleadings – they were a late unpleaded response to a late unpleaded position advanced in the evidence and in argument by the Gu Group. Moreover, we cannot disagree with the trial judge’s conclusion that the Gu Group was not prejudiced by the Lam Group’s arguments. Nor do we quarrel with the trial judge’s decision, on the last day of a 40 day trial, not to permit the parties to call further evidence on the basis that “there is nothing that can be asked of the witnesses who testified that would or could alter the events as they have been described to me.” In our view, the trial judge was in the best position to make that assessment.
(b) Confusion of concepts?
[37] The Gu Group contends that the trial judge did not distinguish Gu’s termination of the JVA on the basis of Lam’s repudiation from rescission. The effect of termination, asserts the Gu Group, is that an accepted repudiation “terminates” the contract to the extent that future obligations are extinguished but “[a]ccrued obligations under the contract continue to exist, at least in the form of a secondary obligation to pay damages”: see 1394918 Ontario Ltd. v. 1310210 Ontario Inc. et al. (2002), 57 O.R. (3d) 607 at 614 (C.A.); see also Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423. In contrast, rescission voids the contract ab initio and returns the parties to their original positions.
[38] We agree with the Gu Group’s statement of the law in this domain. However, we do not agree with its proposition that the trial judge misapprehended the law. Although the trial judge used the word “rescind” when he stated the issue, he was simply quoting the word the Gu Group used in its supplementary factum. Moreover, it is clear from a full reading of his reasons that the trial judge did not apply the doctrine of rescission. Indeed, if he had applied that doctrine, he would not have needed to embark upon an analysis of waiver and abandonment because the JVA would simply have been “voided ab initio by some vitiating element”: see Keneric Tractor Sales Ltd. v. Langille, [1987] 2 S.C.R. 440 at 455. But that is not what the trial judge found. He recognized that further analysis was required to determine whether the Gu Group had remedies, including damages, against the Lam Group after accepting the repudiation and terminating the contract.
(c) Waiver
[39] In our view, this is the central component of the Gu Group’s appeal. The Gu Group contends that the trial judge erred in holding that although the Gu Group lawfully terminated the JVA following the Lam Group’s repudiation of it, it nevertheless waived its right to seek damages for the breach because of its desire to enter into a new agreement with the Lam Group and Powerx.
[40] A leading case dealing with waiver in a contract law setting is Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., [1994] 2 S.C.R. 490. This case involved a life insurance policy that was terminated after the insured failed to make a timely payment. The insured did not collect its mail regularly and did not receive the requests for payment until it was too late. The waiver issue arose because the insurance company did not initially terminate the policy when it was entitled to do so, but rather extended a grace period to allow the insured to pay. The insured argued that the insurance company had waived its right to timely payment and was required to give notice before terminating the contract for lack of payment. The Supreme Court of Canada held that, although the insurance company had initially waived its right to timely payment, it was still entitled to return to its contractual right to terminate for lack of payment because the insured had not relied on the extended grace period. Indeed, the insured only found out about the extended grace period after the contract had been terminated.
[41] Writing for a unanimous court, Major J. said, at p. 500:
Waiver occurs where one party to a contract or to proceedings takes steps which amount to foregoing reliance on some known right or defect in the performance of the other party….
Waiver will be found only where the evidence demonstrates that the party waiving had (1) a full knowledge of rights; and (2) an unequivocal and conscious intention to abandon them. The creation of such a stringent test is justified since no consideration moves from the party in whose favour a waiver operates. An overly broad interpretation of waiver would undermine the requirement of contractual consideration.
See also: Northern Life Assurance Co. of Canada v. Reierson, [1977] 1 S.C.R. 390 at 398, and Griffiths v. Zambosco (2001), 54 O.R. (3d) 397 at 407 (C.A.).
[42] The decision in Saskatchewan River Bungalows confirms that an unequivocal and conscious intention to abandon rights may be manifest from the conduct of the party possessing such rights. Accordingly, the primary question here is whether the Gu Group, by its conduct, evinced “an unequivocal and conscious intention to abandon” rights known to it.
[43] On this issue, the trial judge examined both Gu’s testimony and the objective evidence available. In paragraph 53 of his reasons dated September 16, 1999, the trial judge set out several passages from Gu’s testimony which clearly indicate Gu’s firm position that the JVA was finished and that he strongly desired to enter into a new agreement. On three separate occasions in his evidence, Gu claimed that the purpose of the new agreement was to “replace” the JVA. Then, in paragraph 54, the trial judge turned to other evidence:
In my view, this testimony is in “harmony” with other more objective evidence, including but not limited to:
The detailed negotiations of the Founders Shareholder and Distribution and License Agreements;
The proposal by Gu to Elder of a Mexican Franchise;
The purchase by Tai Foong of $400,000 plus of the Gu Refrigerants from China Sun;
The incorporation of Greencool Corporation;
6.[sic] The execution of the Founders Shareholder and Distribution and License Agreements;
The conclusion of a settlement agreement with an earlier Gu licensee (the Dendera Agreement);
The posting of a million dollar L.C. by Lam in January 1994;
The provision by Gu of his cash contribution of $260,000 and the demand of Lam for an equal amount;
The wording of the Founders Shareholder Agreement in respect to its application and the respective capital contributions of Gu on the one hand and Lam and Elder on the other.
[44] Based on Gu’s testimony and the cited contextual evidence, the trial judge concluded that “the bits of evidence just described underscore Gu’s desire to end the [JVA] once and for all in July, 1993 and conclude a new arrangement on a new footing”. We note that, although the Gu Group was represented by counsel when the FSA was prepared, no agreement was proposed, or entered into, to preserve any of the Gu Group’s rights concerning the JVA, nor was the FSA expressed to be without prejudice to those rights. While the Gu Group was not required to expressly preserve its rights in order to defeat a subsequent waiver claim, those facts are indicative of the Gu Group’s intention concerning its right to seek damages for breach of the JVA. In addition, as the trial judge observed, although the Gu Group commenced litigation against the Lam Group in June 1994, it did not amend its pleadings, or otherwise indicate any intention, to include a claim for compensatory damages for the Lam Group’s breach of the JVA until approximately 1998, something that the trial judge thought “speaks volumes”. In our view, that fact also supports the conclusion that the Gu Group intended, when entering into the FSA, to abandon its rights under the JVA.
[45] Further, unlike Saskatchewan River Bungalows, in this case the trial judge found evidence that Lam relied on Gu’s waiver; he observed that “Lam would have been bereft of any sense in paying for the Gu Refrigerants in September [$400,000] and certain other accounts in November if at the same time he was under threat of suit.” He also observed that the Lam Group provided its $1,000,000 letter of credit, as required by the FSA. In combination, therefore, the Lam Group invested more than $1,400,000 under the new FSA. It is difficult to conceive that it would have done so had there been any live prospect then of it being exposed to an unresolved damages claim under the JVA.
[46] The Gu Group further asserts that its conduct was consistent with its legal duty to attempt to mitigate its damages, including through the exploration of the possibility of entering into an alternative agreement with the party in breach: see Nashville Contractors Ltd. v. Middleton, [1984] O.J. No. 99 (C.A.), and Payzu, Limited v. Saunders, [1918] 2 K.B. 581.
[47] We do not say that this submission is devoid of merit; at the time of the Lam Group’s breach, the Gu Group was certainly entitled to look to the Lam Group in mitigation, without waiving its right to damages. However, that is not the way the trial judge viewed the matter.
[48] In this case, in our view, the trial judge was entitled to conclude that Gu’s testimony and the surrounding contextual evidence concerning the conduct of the Gu Group established that the Gu Group in fact had waived its right to sue the Lam Group for damages in relation to the Lam Group’s repudiation of the JVA[^2]. After July 1993, both parties moved on, entered into negotiations, and took steps, including major financial steps, to reconstruct their relationship. It was open to the trial judge on the evidence to conclude that the Gu Group terminated the JVA in July 1993 (as Gu asserted), and that its post‑termination conduct amounted to a waiver of its right to sue the Lam Group in connection with the breach of the JVA.
(d) Abandonment
[49] The Gu Group contends that the trial judge held that the JVA was abandoned and that he erred in so holding. For two reasons, we are not inclined to consider this issue.
[50] First, our reading of the trial judge’s reasons leaves us in doubt that he reached a decision on this issue. It is true that he expressly permitted the Lam Group to argue the defence of abandonment in its closing argument. As well, when he summarized the Lam Group’s legal argument in his reasons, he referred specifically to the abandonment component of the argument. However, the trial judge then explicitly framed “the neat issue” as “whether there is evidence to support the notion that Gu also elected to waive action on the contract . . . .” He moved directly to a consideration of the evidence and reached his conclusion, all without mentioning abandonment again. Accordingly, we are not convinced that it is necessary to embark upon a consideration of the law relating to abandonment in a contract setting.
[51] Second, and in any event, our disposition of the waiver issue, which is the central argument advanced by the Gu Group, renders superfluous the need to address the abandonment issue. Even if we held that the trial judge addressed the abandonment issue, and erred in his resolution of it, nothing would turn on such a conclusion. The loss on waiver is determinative of the Gu Group’s appeal on the compensatory damages issue.
(2) Damages related to the Lam Group’s undertaking
[52] The facts relating to this part of the appeal are sketched briefly in paras. 13, 14 and 20 above. We shall now set forth more details. On September 23, 1994 Borins J. made a somewhat lengthy order which contained fourteen operative paragraphs. Paragraphs 3, 4, and 11 in that order provided:
This Court orders that save as specifically allowed for in this Order, or upon further Order of this Honourable Court, Chujun Gu, China Sun Group, Greencool Canada Inc. and any parties acting on their behalf shall be excluded and enjoined from the day to day control, direction, operation, management and business of GCS Ltd. and the commercial exploitation in the U.S.A., Canada and Mexico of Gu Refrigerants and Technologies, including without limiting the foregoing, all banking and financial matters and signing authority. Further, no resolution(s) of the shareholders and/or directors of GCS Ltd. shall have the effect of altering or varying this order, and shall have no legal force and effect. Without limiting the definition of Gu Refrigerants and Technology as found in the material filed with this Honourable Court, it shall include compositions sold as G2015, G2018, G2018(a), G2018(b), G2032, GF2010 and G2018.
This Court orders that until further Order of this Honourable Court, all business activities in Canada, the United States of America and Mexico to commercially exploit Gu Refrigerants and Technologies as defined in the materials before this Honourable Court shall be conducted exclusively through GCS Ltd. Without limiting the general wide meaning of commercial exploitation, it shall include the sale, marketing, distribution and manufacture of Gu Refrigerants and Gu Technologies.
This Court orders that until further order of this Honourable Court GCS Ltd, David Lam, Tai Foong Investments Ltd. and Tai Foong International Ltd. undertake to abide by any order concerning damages that this Court may make, as required by Rule 40.03 of the Rules of Civil Procedure.
[53] It can be seen that under paragraphs 3 and 4 of that order the Lam Group was given the right to exploit commercially Gu refrigerants and technologies in Canada, the United States, and Mexico through Gu Gooling Systems Ltd. and that the Gu Group was enjoined from engaging in “the day to day control, direction, operation, management and business of [Gu Cooling Systems Ltd.] and the commercial exploitation in the U.S.A., Canada and Mexico of Gu Refrigerants and Technologies”.
[54] By order of Lissaman J. dated June 4, 1996 Borins J.’s order was “superseded” and the commercial exploitation of Gu refrigerants and technologies was ordered to “be conducted through Greencool Canada Inc.” The Gu Group was ordered to provide security in the amount of $1,000,000 for its undertaking as to damages “provided for by Rule 40.03.”
[55] During the second segment of the trial, the trial judge heard the Gu Group’s application “for an inquiry to determine damages payable on the basis of the undertaking provided by the Lam Group pursuant to the Order of the Honourable Mr. Justice Borins dated September 23, 1994” (para. 2 of the judgment dated January 18, 2001). He dismissed the application and the Gu Group appeals from that dismissal.
[56] Broadly speaking, the Gu Group submits that, although the trial judge stated the correct test to determine whether the Lam Group should be relieved from paying damages pursuant to its undertaking, he erred in the application of the test. Specifically, the Gu Group submits that the trial judge gave weight only to one consideration, namely, that the Gu Group had contravened the injunction.
[57] In what follows we shall set forth the legal test and then consider the trial judge’s reasons in the light of the test and the Gu Group’s submissions. The test is set forth in Vieweger Construction Co. Ltd. v. Rush & Tompkins Construction Ltd. (1964), 48 D.L.R. (2d) 509 (S.C.C.) at 518 per Spence J. speaking for the court:
It would appear that the proper test was laid down by the Court of Appeal in Griffith v. Blake (1884), 27 Ch. D. 474. There, the Court of Appeal was concerned with a dictum of the late Master of the Rolls in Smith v. Day (1882), 21 Ch. D. 421, to the effect that the undertaking as to damages only applies where the plaintiff has acted improperly in obtaining the injunction, and all the members of the Court expressed dissent with that view. Baggallay, L. J. said, at p. 476:
If the defendants turn out to be right, it appears to me that they can, under the undertaking, obtain compensation for all injury sustained by them from the granting of the injunction.
And Cotton, L.J., said at p. 477:
But I am of opinion that his dictum is not well founded, and that the rule is, that whenever the undertaking is given, and the plaintiff ultimately fails on the merits, an inquiry as to damages will be granted unless there are special circumstances to the contrary. (The italics are my own.)
[58] The test was elaborated upon by the judgment of this court in Nelson Burns & Co. et al v. Gratham Industries Ltd. (1987), 23 C.P.C. (2d) 279 at 288 where Zuber J.A. said for the court:
Since the decision of the Supreme Court of Canada in Vieweger an important change has taken place in the law with respect to interlocutory injunctions. As a result of a decision of the House of Lords in American Cyanamid Co. v. Ethicon Ltd., [1975] A.C. 396, [1975] 1 All E.R. 504, the balance of convenience test has largely displaced an earlier view that an applicant could obtain an interlocutory injunction only if he could show a strong prima facie case. Whatever the differences may be between the two standards, it is now plain that in Ontario interlocutory injunctions are now easier to obtain than was the case prior to the American Cyanamid case.
Because of this change and because of the number of such injunctions that are sought, it is appropriate to emphasize the serious nature of the undertaking to pay damages which is a condition of the issuance of the interlocutory injunction. In the ordinary course the unsuccessful plaintiff must understand that he is obliged to pay damages in accordance with his undertaking without quibble, and Courts generally will be unsympathetic towards [t]hose who seek to resile from such an obligation.
[59] The trial judge, in his reasons under the heading “Acts of Circumvention”, found that the Gu Group breached the injunction by carrying on business in the United States. Gu was prepared to admit that he breached the injunction by “assisting” others in the sale of Gu gases and technologies in the United States and by performing other consulting services. This was presented on behalf of Gu as being akin to an honest mistake of law or fact based on Gu’s lack of understanding of the injunction order.
[60] The trial judge then observed that there were facts upon which he could conclude that Gu was not merely performing a consultative function but was the principal in two United States companies, Greencool Washington Inc. and Greencool Technology Inc. This was not disputed. The trial judge said:
I am more than satisfied on a balance of probabilities that Gu was the driving force of the U.S. operation in the period after the Borins order to the date of the Lissaman order in June 1996 and was not merely acting in a consultative capacity. The evidence in this respect is overwhelming and beyond mere coincidence. …
No matter how one might torture the language of the Borins order, the consultative assistance that Messrs. Gu and Hu admitted giving clearly resulted in the commercial exploitation of Gu refrigerants and technology – a prohibited act in and of itself.
[61] In his analysis, the trial judge found that:
Gu’s actions in flouting the injunction and actively promoting his business in the U.S. constitute special circumstances sufficient to disentitle him to an inquiry into damages. In addition, his explanation given in evidence, while perhaps motivated by the threat of the then pending contempt proceedings, was not only ill conceived but had the effect of exacerbating matters. I hasten to observe that I have arrived at this conclusion even though I was urged by Mr. Bates to have regard to the behaviour of the Lam Group both in the manner in which the injunction was obtained and its conduct thereafter.
[62] The trial judge then dealt extensively with the conduct of the Lam Group. This included his consideration of the Gu Group’s submission that the Lam Group “had no business taking over the control of the joint venture company”, and that the Lam Group “not only did not possess the requisite knowledge and skill to manufacture and market the Gu gases or their equivalent, but also had no intention to pursue the business itself.” Lam’s intention was to extort repayment of the money he had allegedly invested in a joint venture.
[63] The trial judge did not doubt that the evidence gave voice “to the above assertions” but, in any event, he observed:
Lam was unwavering in his assertion that the joint venture agreement [the JVA] was in effect right through to the conclusion of trial. Indeed, when Gu testified, he acknowledged that Lam always maintained the existence of the Agreement even though I found it had come to an end in the summer of 1993. Accordingly, Lam’s pleadings were perfectly consonant with this position.
The fact that Lam would rather have been paid out than operate the joint venture company to the exclusion of Gu does not taint his actions. There is nothing reprehensible or repugnant about this conduct.
The Lam Group’s activities and efforts subsequent to the date of the injunction, although far from stellar, are more an indication of Lam’s approach to business than they are of malfeasance. Lam is, from my observations, a tight fisted businessman who sought to spread the risk of an inherently risky venture.
I am not sure his actions in obtaining the injunction were as purposeful and high handed as was argued. I am more inclined to conclude that he backed into the injunction based upon the fact that Gu was unable to come up with the mandated security.
In the final analysis, I am not persuaded that Lam’s conduct amounted to an abuse of process, even if it were undertaken solely for the purpose of being paid money to which Lam thought he was entitled. As will be discussed in more detail below, such a motivation does not amount to a collateral purpose. In any event, even if such actions were undertaken for a collateral purpose, they do not amount to an abuse of process at law.
[64] The trial judge then referred to Gu’s submission that he did not have to “go so far as to find Lam’s actions amounted to an abuse of process to warrant a balancing of conduct”, and that the trial judge “only had to conclude that Lam’s actions amounted to misconduct to warrant censure.” He found that Lam’s activities after the injunction were “ ‘questionable’, again, not because they admit of misconduct, but because they were illogical.” He then said:
Furthermore, and more to the point, I do not think Lam’s actions in obtaining injunctive relief, albeit as a last resort, warrant comment or criticism of this court. Such is particularly the case where the actions taken can be said to logically flow from the claims originally made. That, regrettably, is the nature of the litigation beast.
[65] The trial judge concluded:
Finally, even if such actions amounted to misconduct, they do not amount to an abuse of process and do not warrant a balancing exercise. If such an exercise were warranted, I am not persuaded that Lam’s actions tip the scales sufficiently to negate Gu’s own conduct and thus permit an inquiry into the undertaking as to damages. Accordingly, this aspect of the Gu Group’s claim must fail.
[66] We do not think that the trial judge erred in the manner submitted by the Gu Group. At the end of the day, he concluded that if a “balancing exercise” were warranted he would give greater weight to Gu’s own conduct.
[67] We shall examine his reasons further in light of the applicable principles. There can be no doubt that Gu’s violation of the injunction was a highly relevant factor. His complaint was that the Lam Group’s interlocutory injunction prevented him from exploiting a business that was rightfully his. However, the facts as found and, it is important to observe, not challenged on this appeal, showed that by reason of his deliberate violations the injunction did not have this effect. In seeking the inquiry as to damages, he did not come to court with “clean hands”: see City of Toronto v. Polai, [1970] 1 O.R. 483 (C.A.) at 493-94.
[68] Gu, in making light of his conduct, appears to be submitting that a violation of an injunction should not count for much and that the enjoined party should still be entitled to pursue his claim for damages – setting off, it would seem, what he gained by his violation against the damages he incurred. This approach trivializes an injunction.
[69] In upholding the trial judge’s conclusion we do not intend to lay down the proposition that in any case where an enjoined party has breached the injunction he or she, for this reason alone, will not be entitled to an inquiry as to damages. All potentially relevant factors, including the nature of the breach, should be taken into account in determining the equities of the case before a decision is made.
[70] Further, applying what was said by this court in Nelson Burns, supra, we emphasize that the undoubted discretion that a judge has to relieve a party from its undertaking is a narrow one. We have no doubt that there is a strong presumption in favour of an inquiry into the enjoined party’s damages.
[71] In this case the violation of the injunction was not inadvertent or of a minor nature. Such a violation, depending on the other features of the case, might not ultimately count against an enjoined party. The violations in this case, however, were deliberate and flagrant and we cannot say that the trial judge erred in giving them the weight that he did and in not giving the weight that the Gu Group submitted should be given to the Lam Group’s conduct. See R. v. Rezaie (1996), 31 O.R. (3d) 713 (C.A.) at 719 respecting appellate review relating to “error[s] in principle”.
[72] With respect to the Lam Group’s conduct, although the trial judge’s reasons are not as clear as they might be, we are satisfied that he took its conduct into account even if it could not be characterized as “an abuse of process”. We accept that it would be too rigid an approach to consider the enjoining party’s conduct as a factor against directing an inquiry into damages only if it amounted to an abuse of process.
[73] In summary, we are satisfied that in determining whether an inquiry was warranted, the trial judge considered all of the relevant factors and, in the exercise of his judgment, gave predominant weight to the Gu Group’s contraventions of the injunction. We are not persuaded that he erred in arriving at this conclusion
Lam Group’s Cross-appeal
(3) Pre‑contractual representations of the Gu Group
[74] The Lam Group contends that the trial judge erred by failing to give any effect to the pre‑contractual representations of the Gu Group concerning the success and marketability of its refrigerants.
[75] The trial judge’s conclusion on that issue was that “any pre‑contractual representations, if made, are of no moment”. He offered three reasons for his conclusion:
Notwithstanding the time that these issues represented at trial, I am of the view that any pre‑contractual representations, if made, are of no moment. In the first place, my assessment of the evidence leads me to conclude that the Lam Group knew a lot more about the developmental stage and marketability of the Gu Refrigerants before going to China than they would have the court believe. Fu’s own notes suggest that he had (or could have) contacted relevant governmental authorities. I find he was (or, at worst, should have been) aware in the weeks before leaving for China that governmental approval of some form was necessary before the gases could be marketed commercially in Canada, at least. Furthermore, both he and Lam knew that they were embarking upon a risky venture with no proven track record. They were nevertheless prepared to run this risk.
Finally, even if the Gu Group had overstated its success, or the apparent marketability of the Gu Refrigerants, the Lam Group knew about any alleged misrepresentations early on in the relationship after their return to Canada. There was ample opportunity and occasion for Lam to ascertain the true state of the Gu Refrigerants from a myriad of sources. Once learned, they chose not to avoid the relationship and back out of the deal or even complain about the fact that they had, presumably, been misled. Indeed, this pattern of behaviour continued until the date the battle lines between the parties were drawn, well into 1994, when the first articulated complaints about misrepresentations first began to surface.
In my view, Lam, as a sophisticated businessperson, saw an opportunity which was virtually limitless in terms of potential. He was very much interested in securing whatever right or “option” he could for the North American market. He was not above making his own set of promises to Gu, which he undoubtedly thought he would be able to modify on his return to Canada and to which he hoped he might not be bound in future.
[76] The Lam Group contends that the trial judge erred in this passage by finding that the Lam Group was not entitled to rely on the alleged misrepresentations because of its own lack of diligence in rescinding, or otherwise complaining about, the agreement it had entered into because of them.
[77] We do not agree with this submission. A fair reading of the entire passage, in which the trial judge deals with several factors, is that the trial judge found that Lam did not rely on Gu’s representations about the marketability and success of the refrigerants. While he expresses some uncertainty about what the parties knew versus what they could or should have known, this is explained by the crucial fact that the trial judge did not believe most of Lam’s, or his project manager Fu’s, testimony (“I reject the evidence of Mr. Lam in its entirety and would observe that it was not assisted by the evidence of Mr. Fu”).
[78] Although the Lam Group also raises several other arguments in support of its position concerning the alleged misrepresentations of the Gu Group, in our view there is a simple bottom line on this issue. The trial judge found that Lam knew more than he admitted and would have entered into the JVA even if he knew that Gu was overstating the marketability and success of his products. Accordingly, the trial judge was entitled to hold that any misrepresentations, if made, were insignificant and did not vitiate Lam’s repudiation of the JVA by failing to make the required payments of capital.
(4) Oppression remedy
[79] The Lam Group contends that the trial judge erred by holding that oppression remedies were not available to it.
[80] We disagree. The Lam Group’s breach of the JVA and the trial judge’s decision that it was terminated in July 1993 defeat any oppression claim. In attempting to use the oppression remedy in this circumstance, the Lam Group is essentially asking the court either to uphold its rights under the JVA (which it repudiated) or, at the very least, to restrict the Gu Group to marketing its technology through the new GCSL with Lam as a partner, no matter how seriously the Lam Group had breached the agreement that brought the parties together. Either proposition, on the facts here, is untenable.
Lam Group’s Appeal
(5) Punitive damages
[81] The trial judge awarded the Gu Group $50,000 punitive damages in addition to $25,000 which the parties agreed the Lam Group would pay as a result of Lam’s conversion of Gu’s laptop computer. He found that Gu’s computer was one of his most important business tools, it was held with absolutely no justification, Lam attempted to delay its return through a ruse designed to extort concessions from Gu, Lam denied the gravity of this conduct throughout the trial, and Lam tried to access Gu’s files and damaged his hard drive in the process. Lam contends that there is no evidence to support the last finding.
[82] The leading case on punitive damages is Whiten v. Pilot Insurance Co. (2002), 2002 SCC 18, 209 D.L.R. (4th) 257 (S.C.C.). In that case, the court indicated that the general objectives of punitive damages are punishment, deterrence of the wrongdoer and others, and denunciation, and went on to state that “punitive damages should be resorted to only in exceptional cases and with restraint” (p. 288). Binnie J. also said, at p. 288:
[A]ll jurisdictions seek to promote rationality. In directing itself to the punitive damages, the court should relate the facts of the particular case to the underlying purposes of punitive damages and ask itself how, in particular, an award would further one or other of the objectives of the law, and what is the lowest award that would serve the purpose, i.e., because any higher award would be irrational [emphasis in original].
[83] The Lam Group contends that the trial judge’s award of $50,000 in punitive damages violates the rationality principle and is disproportionate when set against its conduct in this case.
[84] We disagree. Although the trial judge did not have the benefit of the decision of the Supreme Court of Canada in Whiten, a fair reading of his comprehensive reasons on the issue of punitive damages establishes that his reasoning was consistent with the analytical framework set out by Binnie J. The behaviour of the Lam Group concerning Gu’s personal computer was seriously blameworthy – the Lam Group stole the computer, damaged it, retained it for several weeks, attempted to use it to extract concessions from Gu and, at trial, minimized all of this misconduct. This constellation of conduct went well beyond the tort of conversion. In our view, both the decision to award punitive damages and the choice of quantum of $50,000 were rational and proportionate within the parameters of the principles set out in Whiten.
E. DISPOSITION
[85] We dismiss the appeals and the cross‑appeal, all without costs.
RELEASED: February 3, 2003 (“JWM”)
“J. W. Morden J.A.”
“J. C. MacPherson J.A.”
“E. A. Cronk J.A.”
[^1]: We will return in detail to this dispute when we consider both the Gu Group’s appeal and the Lam Group’s cross‑appeal in the Analysis section of these reasons.
[^2]: We note, parenthetically, that on Valentine’s Day, 1994, Lam personally guaranteed a loan so that Gu could purchase a new Lexus automobile. It is difficult to reconcile this event with a concern from Lam relating to a potential multi‑million dollar action for damages by Gu against Lam.