DATE: 20060602
DOCKET: C41878
COURT OF APPEAL FOR ONTARIO
WEILER, GILLESE and BLAIR JJ.A.
B E T W E E N :
3COM CORPORATION and 3COM CANADA, INC.
Alan J. Lenczner, Q.C. and
Nicholas Tibollo
Plaintiffs (Respondents)
for the appellants
- and -
James C. Orr and
Michael Osborne
ZORIN INTERNATIONAL CORP., SAM MAROTTA, DOMENIC SICILIA and THE LEARNINGSTATION.COM LLC
3COM Corporation and
3COM Canada, Inc.
Mervyn D. Abramowitz
Defendants (Appellants)
for the respondent
Tech Data Canada Inc.
A N D B E T W E E N:
TECH DATA CANADA INC.
Third Party (Respondent)
Heard: March 6, 2006
On appeal from the judgment of Justice Russell G. Juriansz of the Superior Court of Justice dated April 29, 2004.
WEILER J.A.:
INTRODUCTION
[1] The appellants, Zorin International Corp. (“Zorin”) and its principals, Sam Marotta (“Marotta”) and Domenic Sicilia (“Sicilia”), appeal the order allowing the respondent 3Com Corporation’s (“3Com”) action against them for the tort of deceit and ordering them to pay 3Com an amount in Canadian currency equivalent to the sum of US $7,832,083.00 inclusive of interest.
The Parties
[2] 3Com is an American company that manufactures computer equipment. 3Com Canada, Inc. (“3Com Canada”) is a wholly owned subsidiary of 3Com. Tech Data Canada Inc. (“Tech Data”) is a wholesaler and an authorized distributor of 3Com products in Canada.
[3] Zorin is a computer reseller that purchased 3Com products from Tech Data. Marotta and Sicilia are principals of Zorin. They are also owners and principals of Learningstation Canada. The Learningstation.com LLC (“The Learningstation.com”) is an American company that provides educational programs to schools through the internet on a subscription basis. Learningstation Canada had an exclusive reseller agreement with The Learningstation.com to sell its products and services in Canada as an independent contractor.
The Meet Comp Policy
[4] 3Com offers preferential pricing by way of marketing initiatives. One such initiative is known as Meet Comp or SPQ (Special Price Quote). Under the Meet Comp policy, 3Com approves discounts where they are necessary to affect a large sale and where the transaction has the potential of leading to future sales opportunities.
[5] To offer the discounts under the policy, 3Com requires that it be provided with information establishing the identity of the end-user of the product and the location of the product installments. This ensures that the sale of the product meets the objectives of the Meet Comp policy and it guards against the diversion of discounted products into the general market.
[6] 3Com requires information from both the distributor and reseller under the Meet Comp policy. Once approved, 3Com provides a rebate to the distributor that reflects the discount under the Meet Comp policy. The distributor then passes the discount on to the reseller. 3Com adopts this process because the distributor has already purchased the product from 3Com at regular wholesale prices.
Overview of the Trial Judge’s Reasons and the Appellants’ Position
[7] The trial judge noted that to conclude that the tort of deceit has been established, a court must find that each of the following five constituent elements has been proven:
(1) The defendant has made a false representation or statement;
(2) Which was knowingly false;
(3) Was made with the intention to deceive the plaintiff;
(4) Which materially induced the plaintiff to act; and
(5) Resulted in damage to the plaintiff.
See Harland v. Fancsali (1993), 1993 8457 (ON SC), 13 O.R. (3d) 103 at 107 (Gen. Div), aff’d (1994), 1994 10548 (ON SC), 21 O.R. (3d) 798 at 801 (Div. Ct.).
[8] The trial judge found that the appellants lied to 3Com about the identity and location of Zorin’s customers in order to induce 3Com to give Zorin special, discounted pricing on 3Com switches and other computer networking products. Specifically, the appellants falsely told 3Com that the 3Com products were destined for ministries of education in China and Australia as end-users. Relying on the appellants’ misrepresentations, 3Com approved the transactions for Meet Comp discounted prices. 3Com then paid rebates in the aggregate amount of US$6,499,899.19 to Tech Data, the distributor from whom Zorin purchased the 3Com products. However, instead of delivering the computer products to ministries of education in China and Australia, Zorin sold them to companies called Gamma Global and Computer Service Point, both of which trade in computer equipment. A significant portion of the products ended up in the market outside regular distribution channels, that is, “the grey market”. The trial judge found that, but for the appellants’ misrepresentations, 3Com would not have given the rebates to its Canadian distributor Tech Data and awarded the amount of the rebates (US$6,499,899.19) plus interest to 3Com as damages. He rejected the third party action against Tech Data.[^1]
[9] The appellants submit that the reasons for judgment of the trial judge disclose that he made errors in processing the evidence because he failed to appreciate relevant evidence and either disregarded or misapprehended much of the evidence. The evidence respecting which the appellants say the trial judge made processing errors is as follows: (i) Zorin did not make a false representation but only a forecast as to future sales; (ii) the appellants Sicilia and Marotta had no knowledge that what they said was false; (iii) 3Com was not materially induced to approve the Meet Comp discounts by what was said because it conducted its own investigation which showed that the products were not being shipped to China; and, (iv) 3Com acted to accommodate its Canadian subsidiary, 3Com Canada, and its distributor, Tech Data, so that they could make their third quarter numbers, and consequently the cause of any diminution in profit was these internal corporate relationships. In oral argument before us, the appellants asked this court alternatively to dismiss 3Com’s action, to reduce the damages or to order a new trial with respect to the liability of Zorin and Marotta and to dismiss the action as against Sicilia.
Overview of My Response to the Appellants’ Position
[10] For the reasons that follow, I would hold that the trial judge’s reasons do not disclose that he failed to consider relevant evidence or committed any other processing errors. Irrespective of any sales forecast, the trial judge did not err in holding that: (i) Zorin made a false representation as to where and to whom it intended to ship the 3Com computer parts it was buying from Tech Data, namely to ministries of education in China and Australia; (ii) both Sicilia and Marotta knew the representation was false; and (iii) although 3Com’s investigation caused it to be concerned that the parts were not being shipped to China as represented, based on the appellants’ further representations, 3Com decided to continue shipping to them. I would hold also that it was open to the trial judge to find that 3Com was entitled to the amount of the rebates it paid to Tech Data as damages. Consequently, I would dismiss this appeal.
ANALYSIS
The Standard of Review
[11] Legal errors are subject to review on a standard of correctness whereas findings of fact are subject to review on the basis of palpable and overriding error. A third, or middle, category is that of a question of mixed fact and law and the standard of review in this third category will lie along a spectrum. If, for example, the appellant alleges that the error is due to the judge’s failure to consider a required element of a legal test, the error will be characterized as an error of law and be subject to a standard of correctness. Where, however, the issue on appeal is the judge’s interpretation of the evidence as a whole, the general rule is that the judge’s interpretation should be reviewed on the basis of palpable and overriding error: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235; Jaegli Enterprises Ltd. v. Taylor, 1981 26 (SCC), [1981] 2 S.C.R. 2; Amertek Inc. v. Canadian Commercial Corp. (2005), 2005 23220 (ON CA), 76 O.R. (3d) 241 at paras. 67-68 (C.A.).
[12] The trial judge’s conclusion, that the elements of the tort of deceit had been proven, is based on his findings as to whether there were false representations and, if so, whether 3Com relied on them and involves a question of mixed fact and law. In relation to liability, the appellants do not allege that the trial judge misstated the law. Rather, their submissions concern the trial judge’s interpretation of the evidence as a whole. In such circumstances, the trial judge’s conclusions should be upheld unless they constitute a palpable and overriding error, or are clearly wrong, unreasonable or unsupported by the evidence: Amertek, supra; H.L. v. Canada (Attorney General), 2005 SCC 25, [2005] 1 S.C.R. 401 at paras. 55-56. In addition, however, the appellants raise questions of law related to the trial judge’s application of the law and the adequacy of the reasons. The appellants’ argument in relation to damages is also one of mixed fact and law and involves not only the trial judge’s interpretation of the evidence but also the conceptual basis for awarding damages. Thus, aspects of that argument are subject to the standard of palpable and overriding error while other aspects are subject to a standard of correctness.
[13] A palpable error is one that is obvious, plain to see or clear. An error is overriding when it discredits the result: see Housen, supra at para. 5; H.L., supra at para. 69. The palpable and overriding standard applies to all factual findings whether based on credibility assessments, the weighing of competing evidence, expert evidence, the interpretation of documents or the drawing of inferences from primary facts.
[14] The appellant alleges that the trial judge made certain “processing errors”. The term “processing errors” comes from this court’s decision in Keljanovic Estate v. Sanseverino (2000), 2000 5711 (ON CA), 186 D.L.R. (4th) 481 at 489-90, wherein O’Connor J.A., for the majority, said:
The second kind of error that may warrant appellate interference is what might be called a “processing error”, that is an error in processing the evidence that leads to a finding of fact. This type of error arises when a trial judge fails to appreciate the evidence relevant to a factual issue, either by disregarding or misapprehending that evidence. When the appellate court finds such an error it must first determine the effect of that error on the trial judge’s reasoning. It may interfere with the trial judge’s finding if it concludes that the part of the trial judge’s reasoning process that was tainted by the error was essential to the challenged finding of fact.
The Trial Judge’s Reasons
[15] In order to appreciate the appellants’ submissions it is first necessary to review the trial judge’s reasons in further detail.
[16] At the outset of his reasons the trial judge stated:
[I]t is unnecessary for me to even address the competing testimony about the oral representations that the defendants allegedly made, as the uncontested written documentation and the admissions of the defendants provide an adequate basis for the determination of this case.
[17] He added however:
While I find it unnecessary to refer to the many oral representations made in this case, some explanation of how The Learningstation.com was part of the context is necessary to properly understand the import of the written representations.
[18] The trial judge then reviewed the evidence that on December 9, 1999, representatives of Zorin invited representatives of 3Com to a meeting to acquaint them with The Learningstation concept. The primary aspect of the meeting was a presentation by Jim Pennington, co-founder and then employee of The Learningstation.com. Pennington had attended a conference in Banff the day prior. At that conference, he had collected business cards from a number of the representatives of the Ministry of Education in China as well as from Ministry representatives from Australia. The trial judge found that Pennington showed these cards to the 3Com representatives.
[19] The trial judge next turned to a review of five key documents or groups thereof that he said were sufficient to determine the result of this case.
[20] The first one was a five‑page document sent by e-mail on December 15, 1999, by Lee Redwood (“Redwood”), a Zorin employee. It had been sent in response to a request by 3Com for information about the end-users of the product and their relevant contact information.
[21] The document reads in part:
Hi Tim [Tim Scattolon (“Scattolon”), 3Com Canada representative who made the request], here is the information you request from us. Here are the 9 core products we are requesting pricing for. We have spoken to and handed a PO [purchase order] for $50,000,000.00 to Tech Data this morning. I hope we now can start doing business more efficiently from this time forward. We have these countries/locations involved for the 4 new 3Com [SPQ’s]:
9 products requested (6 month roll-out)[.]
The first location listed under the title “Phase I” is Beijing, China. The document says, “Installing at the Ministry of Education, Beijing, China. Need to install equipment to get site running at Learningstation performance specifications. China requirements for 3Com are as follows on 500,000 subscriptions”. There follows a list of equipment. The location stated for installation is “Ministry of Education, People’s Republic of China” and the name of a contact person and address is given. Under the heading “Phase II”, the United Kingdom is listed as well as the number of subscriptions and contacts’ addresses. Under the heading “Phase III”, Australia is listed and the number of subscriptions and contacts’ addresses are also given. The document is unsigned but the names of Marotta, Sicilia and Redwood are listed at the bottom of the document after the word “Respectfully”.
[22] It is common ground that no purchase order for $50,000,000.00 had been provided to Tech Data as of December 15, 1999. The trial judge rejected the appellants’ attempt to minimize the document by characterizing it as a loosely worded forecast. He held:
There are no words that indicate that the document is a forecast or business model. Rather, the letter’s use of the present tense coupled with its level of detail, indicates that the document addresses current matters and requirements for equipment. Indeed, the phrase “are as follows” found in each of the phases is inconsistent [with] a forecast, and the only reasonable meaning is that Learningstation.com had sold the stated number of subscriptions to the institutions listed.
[23] The trial judge referred to the fact that Marotta and Sicilia denied authoring the last page of the December 15, 1999, document and that Redwood did not recollect authoring it. He also noted that in closing submissions, counsel for the appellants suggested that an employee of 3Com Canada forged the last page to ensure that the transaction was approved by 3Com. The trial judge found as a fact that Zorin sent the disputed page to 3Com as well as the other pages in the e-mail. He found Marotta’s credibility to be “exceedingly weak” and rejected his claim that the original document did not include the last page. The trial judge also noted that on his examination for discovery, Marotta confirmed that the last page of this document contained information that he knew was going to 3Com and that the appellants had not suggested to 3Com’s representatives during cross‑examination that the last page was not part of the document received from Zorin.
[24] The second group of documents on which the trial judge relied contained two e-mails from Marotta at Zorin to Patrick Kewin (“Kewin”) of 3Com dated December 21, 1999. In the first e-mail, Marotta stated, “This is to confirm that the 3Com product purchased for the Learningstation will be sent to the Ministry of Education for the People’s Republic of China. Our contact is Mr. Lu Fu Yuan, he is located at 37 Damucang, Xidan, Beijing, China.” In the second e-mail, Marotta stated, “Learningstation.com is an ASP (Application Service Provider) for the Ministry of Education located in Beijing, China. We will be shipping to the below address that we are providing to you.” The name of a contact person and delivery address was included thereafter. After quoting from both of these e-mails, the trial judge found that they clearly indicated the end-user and destination of the specially discounted 3Com products.
[25] The third set of documents was made up of Tech Data purchase orders indicating that the 3Com product was being purchased by Zorin for resale to Learningstation Canada.
[26] The fourth group of documents contained the commercial invoices. Scattolon of 3Com Canada testified that he met Marotta on January 10 or 11, 2000, and received two invoices purportedly proving delivery of 3Com products to the Ministry of Education in China. The appellants disputed having created these fictitious documents and their counsel suggested that employees of 3Com Canada might have created them in order to gain 3Com’s approval of the transaction. However, the trial judge rejected this suggestion and found that the appellants created these invoices and that Marotta indeed provided them to Scattolon on January 10 or 11, 2000.
[27] The fifth document, called the Kamden Invoice, was an invoice from Kamden International Shipping (Canada) Inc. given to 3Com, which purported to show that the 3Com products purchased by Zorin from Tech Data on January 7, 2000 had been shipped to Hong Kong. The source for the invoice was not disclosed. Although Marotta, Sicilia and Redwood each denied supplying 3Com with this acknowledgely forged document, the trial judge found that it originated with Zorin and that “it [constituted] another representation from Zorin to 3Com that the products it purchased from Tech Data were delivered to China.” He made this finding on the basis (i) that Marotta testified that a similar invoice was the genuine Kamden invoice, (ii) that 3Com employees would not know which shipping company Zorin used or that Zorin as opposed to Learningstation Canada was the shipper so they could not have forged the document, (iii) that the forged invoice had the same reference number as the genuine document and the only people privy to this information were Zorin employees, and (iv) that Marotta acknowledged during his examination for discovery that Zorin would have provided 3Com with a shipping waybill that indicated that the products were going to China.
[28] The trial judge ultimately found that all of the representations in these documents were patently false.
[29] The evidence established that 3Com later learned that the products purchased by Zorin went to neither the Ministry of Education in China nor the Ministries of Education in Australia. Instead, as noted previously, Zorin sold the 3Com products to companies called Gamma Global and Computer Services Point. 3Com decided to purchase large amounts of its product on the grey market. The tracking of serial numbers established that much of the 3Com products purchased by Zorin under the Meet Comp program ended up in the grey market.
[30] At paragraph 40 of his reasons, the trial judge accepted the testimony of Jim Kirschner (“Kirschner”), president of The Learningstation.com, that The Learningstation.com had never bought hardware from Zorin or Learningstation Canada for its international operations, nor had it ever sold any subscriptions in China or in Australia.
[31] At paragraphs 41, 43, 44 and 45 of his reasons, the trial judge discussed the evidence of Marotta and Sicilia. He commented that these two individuals:
[D]id not provide any testimony or other evidence that Learningstation Canada did any business whatsoever in China or Australia. They admitted that Learningstation Canada was not the actual purchaser of the equipment. Mr. Sicilia testified that Zorin provided Tech Data with purchase orders from Learningstation simply so that Tech Data could fulfill its obligation to provide end-user documentation to 3Com. Learningstation Canada had no business reason to issue the purchase orders and it had no interest in the transaction.
[43] The response of Mr. Marotta and Mr. Sicilia to this damaging and clear evidence reveals a most desperate attempt at justification. Their counsel confronted 3Com witnesses with the possibility that parts of Zorin’s shipments were stolen in transit and that the stolen items ended up on the gray market. However, no evidence of any theft of a Zorin shipment was introduced at trial.
[44] Both Mr. Marotta and Mr. Sicilia testified that the 3Com products purchased by Zorin might well be located in China and Australia. In addition, Messrs. Marotta and Sicilia claimed that Gamma Global and Computer Service Point [the companies to which they sold the products obtained from 3Com] were partners of Learningstation.com, and had the rights to provide the hardware for its needs in China and Australia. They produced no evidence of such partnering agreements. Messrs. Marotta and Sicilia admitted in cross-examination they had no expectations as to where and to whom Gamma Global and Computer Service Point would resell the equipment.
[45] Given the extent and cogency of the evidence against them, I draw an adverse inference from the failure of the defendants to call witnesses from Gamma Global and Computer Service Point.
[32] The trial judge also found that Marotta and Sicilia were the controlling minds of Zorin and Learningstation Canada because they were involved in all important facets of each company’s business dealings. As they controlled and carried out the acts of these companies in these transactions, the trial judge held that both Marotta and Sicilia knew that the representations made to 3Com were false.
[33] Referring to the internal documents of 3Com introduced at trial, the trial judge found that 3Com relied on the appellants’ false representations in approving the transactions for the Meet Comp discounted prices. He rejected the appellants’ argument that if 3Com had exercised greater diligence it would not have approved the transactions under the Meet Comp policy. The trial judge therefore held that 3Com had established the tort of deceit.
[34] Finally, the trial judge found that 3Com had suffered damage in that it had paid rebates to Tech Data in the aggregate amount of US $6,499,899.19 and that the rebates were paid as a result of the appellants’ deceit. He described these paid out rebates as “actual out of pocket losses.”
[35] I will now address each of the issues raised by the appellants in detail.
ISSUES
Did the trial judge ignore the oral evidence as a whole?
[36] The appellants would have us read the trial judge’s comment that he found it “unnecessary to refer to the many oral representations made in this case” as if the trial judge said he was going to ignore the oral evidence presented over much of the thirteen-day trial. I would reject the appellants’ submission for three reasons.
[37] First, that is not what the trial judge said. The trial judge said he did not need to address the oral representations. What the trial judge was saying in the portion of his reasons reproduced at paragraphs 16 and 17 above was that he did not need to sort through the conflicting evidence as to whether false oral representations were made or not because the written documents made it clear the appellants had made false written representations.
[38] Second, the trial judge did not ignore the oral evidence in his reasons. The trial judge stated that some explanation as to the role of The Learningstation.com was needed to properly understand the import of the written representations. That explanation was derived from the oral evidence of Kirchner, the president of The Learningstation.com, Pennington, one of its founders, and the evidence of Marotta and Sicilia concerning the Canadian company with the same name (Learningstation Canada). The trial judge also referred to the oral evidence concerning the December 9, 1999, meeting between Zorin and representatives of 3Com, at which they learned about The Learningstation.com’s business model and international opportunities. Further, references to the oral evidence were interspersed throughout the trial judge’s reasons wherein, inter alia, he (i) rejected characterizing the December 15, 1999, e-mail as a forecast as opposed to a statement of committed sales; (ii) commented that none of the witnesses for 3Com was confronted with the suggestion that the last page of the December 15, 1999, e-mail was not part of the document sent by Zorin; (iii) rejected the denials of Marotta, Sicilia and Redwood that they created fictitious invoices for 3Com purporting to show delivery of computer products to the Ministry of Education in China; (iv) rejected the denials of Marotta, Sicilia and Redwood that Zorin supplied 3Com with the acknowledgedly forged Kamden shipping invoice; (v) rejected the suggestion raised in cross-examination of 3Com’s witnesses that parts of Zorin’s shipments of computer products were stolen in transit; and (vi) drew an adverse inference from the appellants’ failure to call witnesses from the companies to whom they had actually resold the equipment.
[39] Third, in this court’s recent decision in Enbridge Gas Distribution Inc. v. Ontario (Energy Board), 2006 10734 (ON CA), [2006] O.J. No. 1355 at para. 22, Doherty J.A. wrote that “the requirement that the reviewing court read reasons as a whole dictates that, where different parts of the same reasons can reasonably be read so as to maintain consistency within the reasons, that reading must be preferred over one which sends the reasons careening off in different directions and creates an error in law.” In my view, the interpretation of the trial judge’s impugned comment put forward by the appellants is not consistent with the balance of the judgment and therefore ought to be rejected.
Did the trial judge restrict himself to the December 15, 1999, e-mail in finding that the appellants made a false misrepresentation and did he mischaracterize that e-mail?
[40] A related submission is that the trial judge restricted himself to the December 15, 1999, e-mail to conclude that the appellants made an actionable representation and that it was false. I disagree. My review of the trial judge’s reasons indicates that before he concluded that the appellants had made a false, actionable misrepresentation to 3Com that the products Zorin purchased were being sent to ministries of education in China and Australia as end‑users, he reviewed five documents or groups of documents as well as aspects of the oral evidence. Accordingly, I would give no effect to this submission.
Did the trial judge err in law in rejecting the evidence that the December 15, 1999, e-mail was a forecast?
[41] The appellants allege that the trial judge erred in law because he interpreted through his own eyes the representation he found in the document e-mailed by Redwood at Zorin to Scattolon at 3Com Canada on December 15, 1999. The appellants submit that the trial judge’s characterization of this document as a statement of committed sales rather than a forecast is inconsistent with the evidence of the author and of the recipient of the document and, as such, was an error of law. To establish liability in deceit, the person making the representation must intend that the person to whom the representation has been made understands the representation in the sense in which it was false. Where a representation is ambiguous, the person to whom it was made must do more than show that in its ordinary meaning the representation was false: Goose v. Wilson Sandford & Co. (A Firm), [2000] E.W.J. No. 1299 at para. 41 (C.A. (Civ. Div.)). The question is not whether the representor honestly believed the representation to be true in the sense assigned to it by the court on an objective consideration of its truth or falsity; rather, the question is whether the representor honestly believed the representation to be true in the sense in which he or she understood, it albeit erroneously, when it was made: Akerhielm v. De Mare, [1959] A.C. 789 at 805. The meaning placed on the representation by the person making it, cannot, however, be so far removed from the sense in which it would be understood by a reasonable person that it would be impossible to hold that the representor honestly understood the representation to bear the meaning claimed by him or her and honestly believed it in that sense to be true.
[42] Before us, the appellants contend that both Redwood, the representative of Zorin who sent the December 15, 1999, e-mail, and Scattolon, the 3Com recipient, characterized the e-mail as a forecast of future sales. The appellants submit, therefore, that the trial judge was not entitled to find that the e-mail contained a representation that Zorin knew was false, namely, that Zorin had given 3Com’s distributor, Tech Data, a purchase order for $50,000,000.00 for computer parts for the countries and locations listed, the first one described as “the Ministry of Education, Beijing, China.”
[43] The respondents submit that, read as a whole, the December 15, 1999, e-mail is much more than a vague forecast. It constitutes a factual representation that Zorin had current and in some cases immediate requirements for 3Com equipment in China, the United Kingdom and Australia. It contains detailed information about the number of subscriptions and product required, and where the product is to be installed.
[44] While the figures for the total quantity of sales in the December 15, 1999, e-mail were arguably intended by the appellants to be a forecast, the email contains an unambiguous representation that there were educational end-users in China and Australia for the products being purchased from 3Com and it would be impossible to hold that the appellants believed this aspect of the representation to be true. Redwood, a Zorin employee and one of the representors, acknowledged in cross-examination at trial that he knew the identity of the end-user was important to 3Com, as did Zorin’s principals Marotta and Sicilia. They were also aware that end-user verification was relevant to the discount. The two follow-up e-mails sent by Marotta to Kewin at 3Com on December 21, 1999, continue and confirm the deliberate nature of the appellants’ deception.
[45] Even if the appellants intended the e-mail to be a forecast of the amounts shipped, they intended to represent and did represent that Zorin wished to buy 3Com’s equipment for sale to educational users in China, the United Kingdom and Australia. The trial judge therefore did not err in finding that the documents contained representations that the appellants knew were false and that they intended 3Com to rely on them.
Did the trial judge err in finding that 3Com relied on the appellants’ misrepresentation?
Did the trial judge ignore the evidence that demonstrated 3Com’s complete lack of reliance on any representation made to it by Zorin?
[46] These two issues are intertwined and will be dealt with together.
[47] At paragraph 49 of his reasons, the trial judge found:
The internal documents of 3Com introduced at trial clearly established that 3Com relied on the defendants’ false representations in approving the transactions for Meet Comp discounted prices.
After making this finding, the trial judge rejected the appellants’ argument that if 3Com had exercised greater diligence it would not have approved the transactions. In so doing, the trial judge relied on Siametis v. Trojan Horse (Burlington) Inc. (1979), 1981 1646 (ON CA), 104 D.L.R. (3d) 556 (Ont. H.C.J.), aff’d 1981 2977 (ON CA), 123 D.L.R. (3d) 767 (C.A.), to the effect that even if a fraud could be uncovered by a more sophisticated purchaser, a thief may not escape his/her fraud.
[48] The appellants submit that the trial judge ignored the following evidence demonstrating 3Com’s lack of reliance on any representation made by Zorin because he made no mention of it in his reasons:
• A December 21, 1999, internal 3Com e-mail that indicated that 3Com, on its own initiative, had taken steps to verify that there were indeed committed sales to the Ministry of Education in China and that 3Com staff were “currently awaiting response from C.F. Liao’s organization in China that information [regarding the destination of the product] is complete.”
• The expiry of the SPQ on December 31, 1999, and an alleged conversation with Marotta on December 24, 1999, in which he was told by 3Com that the deal was dead.
• Internal e-mails at 3Com, and between 3Com and its Canadian distributor Tech Data, that indicated that 3Com was concerned about losing the order from Zorin because of competing price bids from Intel, Nortel and Hewlett Packard.
• The fact that on or about January 7, 2000, Tech Data shipped computer equipment to Zorin without waiting for 3Com’s verification of the end‑user information and approval of the SPQ and without telling 3Com it was doing so. The invoices accompanying the goods contained no restriction on Zorin’s resale.
• Internal e-mails at 3Com indicating that required due diligence would be done prior to approval of the SPQ and, in particular, a January 10, 2000, e-mail from Kewin to his superiors stating that after making several high level inquiries with the Ministry of Education, 3Com’s investigator had reported that there were no deals with The Learningstation.com in China and adding, “If Learningstation is partnering with another firm in China, they need to identify them for us.”
• A January 10, 2000, e-mail from Nick Tidd, the president of 3Com, instructing Kewin that unless 3Com saw their equipment installed at China’s Ministry of Education or received information from Zorin as to where else it was installed, “WE WALK FROM THE NEXT ROUND OF BUSINESS” [emphasis in the original].
• Evidence that Marotta told Scattolon at 3Com that he would not provide additional information and would no longer promote 3Com products due to his “struggles” with 3Com.
• Evidence of a March 13, 2000, internal 3Com e-mail – sent after Tech Data had sold, delivered and received payment from Zorin for all the computer equipment – indicating that the SPQ had been subsequently approved and back‑dated to accommodate the financial performance of 3Com Canada and Tech Data. The e-mail reads, in part, as follows:
Oscar, as a follow-up to our conversation Emad and I both need you to approve the back dating of this SPQ . The value of the SPQ has already been accrued in the Q3 numbers. The difficulty here is that Tech Data shipped the product prior to the date of the SPQ being issued.
[49] In addressing the appellants’ submission that the trial judge ignored relevant evidence, the comments in Waxman v. Waxman, 2004 39040 (ON CA), [2004] O.J. No. 1765 (C.A.), are instructive. In that case, the court observed:
• The appellants bear the onus of demonstrating a failure to consider relevant evidence that was potentially significant to a material finding of fact (para. 343).
• Reasons for judgment “are not exhaustive contemporaneous notes of the process itself” (para. 283).
• “The mere absence of any reference to evidence in reasons for judgment does not establish that the trial judge failed to consider that evidence. The appellants must point to something in the trial record, usually in the reasons, which justifies the conclusion that the trial judge failed to consider certain evidence” (para. 343).
• The purpose of reasons is to explain the result of the trial judge’s reasoning process. The failure to refer to evidence in the course of otherwise careful and detailed reasons for judgment suggests not that the trial judge ignored it but rather that he or she did not regard that evidence as significant in the sense of explaining the result arrived at (para. 344).
[50] Although the trial judge does not specifically refer to the evidence described above in paragraph 45 in his reasons, I disagree, however, that he ignored it. In his reasons, the trial judge mentioned the evidence of Scattolon of 3Com Canada that on January 10 or 11, 2000, Marotta gave him two commercial invoices purportedly proving delivery of the 3Com products to the Ministry of Education in China. In addition, the trial judge noted that 3Com was given an invoice from Kamden International Shipping (Canada) Inc. that purported to show that the 3Com products purchased by Zorin from Tech Data on January 7, 2000, had been shipped to Hong Kong. The document was agreed by all to be a forgery and the trial judge rejected the suggestion made in argument that it could have come from anyone other than Zorin. The trial judge found that the forged invoice “constitutes another representation from Zorin to 3Com that the products it purchased from Tech Data were delivered to China.”
[51] It would appear then that the trial judge concluded that the appellants allayed 3Com’s suspicions by providing further false information and assurances in the form of the two commercial invoices and the Kamden invoice. The appellants, however, submit that the two commercial invoices were not accepted by 3Com as proof that the equipment had been shipped to China in view of an internal 3Com e-mail noting that copies of the international airway bills or airway bill numbers listing the carrier were missing. The trial judge did not make reference to this e-mail in his reasons. The trial judge also did not refer to the evidence of Jennifer Viola (“Viola”), the office manager for Zorin, who testified that the writing on one of the documents was not hers, nor did he refer to the inconsistencies between the two documents themselves, both of which arrived at the same value, but with different numbers for skids and pieces, thus indicating that at least one was false. To summarize, the appellants say that the trial judge ignored the evidence of a number of prior invoices provided by Zorin to Tech Data and 3Com, which were all in the same form, signed by Viola, and used the business name of Zorin. The appellants further submit that the trial judge engaged in impermissible speculation when he stated that “[e]mployees of 3Com Canada would have no knowledge of the form of commercial invoice used by Zorin, and no knowledge of which Zorin employee usually signs such invoices and the appearance of her signature.”
[52] Marotta acknowledged during his examination for discovery that Zorin would have provided 3Com with a shipping waybill that indicated that the products were going to China. The persons who would receive the greatest benefit from the provision of a false invoice were the appellants. Having regard to the evidence as a whole, the trial judge did not commit a palpable and overriding error in drawing the inference he did, namely, that the commercial invoices and the Kamden invoice originated from Zorin. The trial judge was also entitled to draw the inference that 3Com relied on this additional information concerning the end-user to make the Australian shipment. Internal e-mails exchanged on February 4, 2000, indicate that, in the face of uncertainty as to whether the product was shipped to China, 3Com decided to rely on the appellants’ representations because it had little evidence that the deal was not genuine. The trial judge’s finding respecting the commercial and Kamden invoices must be viewed in the context of his other conclusions that I have upheld, namely, his rejection of the appellants’ submission that 3Com was required to exercise greater diligence in discovering the deceit, and his rejection of the appellants’ position that 3Com should have known the transaction was fraudulent. Viewed in context, it is apparent that the trial judge did not overlook the evidence he did not mention, but implicitly rejected it.
[53] The appellants also submitted in oral argument that 3Com knew the deals may not have been legitimate but that it nevertheless completed the sales to fend off the competition.
[54] The trial judge found that the only reason the appellants could possibly have had for providing 3Com with the false information they did pertaining to the end‑use of the computer products was to obtain discounted pricing and that they intended for 3Com to rely on their false representations. He also found that the representations induced 3Com to act. These findings implicitly reject the appellants’ submission that 3Com knew the deal was not legitimate.
[55] Overall, the appellants’ submissions amount to an argument that the trial judge erred because he drew inferences from the evidence that were contrary to the inferences the appellants were advancing. A difference of opinion with the trial judge is not sufficient to show palpable and overriding error: Schwartz v. Canada, 1996 217 (SCC), [1996] 1 S.C.R. 254 at paras. 32-33; H.L., supra at para. 74. To the extent that the appellants’ submissions raise the issue of what constitutes sufficient reasons from a trial judge, the reasons are sufficiently amenable to appellate review as required by R. v. Sheppard, 2002 SCC 26, [2002] 1 S.C.R. 869 and R. v. Braich, 2002 SCC 27, [2002] 1 S.C.R. 903. While more comprehensive reasons could, perhaps, have been given in certain areas, the trial judge’s reasons demonstrate the rationale behind his conclusions on credibility and the bases for his other conclusions. The functional requirements of reasons, namely, to justify the result and to inform the losing parties why they lost are fulfilled.
Did the trial judge err in finding that the appellants’ actions caused the loss claimed by 3Com?
[56] The appellants submit that the trial judge erred in finding that the appellants’ actions caused the loss claimed by 3Com for essentially three reasons. First, they say that there was no evidence that 3Com sustained any loss on any computer equipment sold and delivered by Tech Data to Zorin and, in tort, only losses are to be compensated. Second, they say that there was no evidence to demonstrate that the equipment provided by Tech Data to Zorin would have sold for any other higher price. Third, they say that 3Com granted the SPQ to Tech Data in April 2000 and back‑dated it to February 2000 in order to accommodate its subsidiary, 3Com Canada, and indirectly its distributor, Tech Data. Accordingly, any diminution in profit was due to internal corporate relationships. Furthermore, because Tech Data agreed to sell its goods to Zorin at an agreed upon price with no restrictions as to end‑user identity or location written into the contract, the appellants submit that there was no obligation on 3Com to retroactively grant the SPQ to Tech Data and pay the rebates. These three arguments appear to be essentially the same arguments advanced at trial that the trial judge rejected.
[57] I agree with the trial judge’s rejection of the appellants’ arguments. The appellants’ first argument on damages overlooks the fact that, in tort law, “the plaintiff is to be put in the position it would have been in had the misrepresentation not been made”: see BG Checo International Ltd. v. British Columbia Hydro and Power Authority, 1993 145 (SCC), [1993] 1 S.C.R. 12 at 37. Although not written into the contracts, a vital condition to their formation was that the appellants deliver the goods to the persons to whom, and the places where, they said they were shipping the goods. The appellants were aware that the purchase price was based on the information they provided as to educational end-user and place. The fact that we are dealing here with a diminution in profit rather than an actual loss matters not. If the appellants had provided the respondents with the true customers and places of shipment, the respondents would have been entitled to a higher price for their goods or to refuse to sell their goods at the prices they did. The appellants deprived the respondents of this choice and made a greater profit because they did so. It was not necessary, in the circumstances of this case, to introduce evidence of a specific alternative third party buyer. In essence, the appellants’ first and second arguments amount to a submission that the difference between the SPQ and what 3Com’s pricing would have been should remain with the appellants. The appellants’ submission ignores the conceptual basis of tort law, which is restitutionary. The difference between the contract price and the price at which the appellants would otherwise have had to purchase the goods is a cost properly borne by the appellants.
[58] The appellants’ third argument is that 3Com did not have to pay the rebates it did to Tech Data because it had discovered the appellants’ deceitful conduct before it paid the rebates. Thus, the appellants submit that they should not be responsible for 3Com’s diminution of profit due to the rebates paid to Tech Data. It appears from the evidence that 3Com approved and paid rebates on two SPQs, one for China and one for Australia. On the facts as found by the trial judge, the appellants’ argument only applies to the SPQ and rebate for the Australia shipment. With regard to the China shipment, the trial judge found that prior to knowing the appellants had deceived them, 3Com suffered damage in that it paid rebates to Tech Data. These rebates “were actual out of pocket losses”, a natural consequence of the appellants’ deceit, and, again, the respondent is entitled to be restored to the position it would have been in but for that deceit.
[59] In relation to the second SPQ, i.e. the one for the Australia shipment, the appellants are in essence saying that the respondents did not mitigate their losses. As is well known, a plaintiff must take all reasonable steps to mitigate its loss and cannot claim any damages due to its neglect to take such steps: see e.g. British Westinghouse Electric and Manufacturing Company, Ltd. v. Underground Electric Railways Company of London, Ltd., [1912] A.C. 673 at 689 (H.L.).
[60] On the findings made by the trial judge, it appears that, at the time 3Com assured Tech Data it would pay them a rebate and asked them to ship the product, 3Com would not have known the appellants had deceived them. After shipping the goods, but prior to paying the rebate, 3Com had proof of the appellants’ deception. The Australian SPQ appears to have been back‑dated and paid so as to honour the assurances made by 3Com to Tech Data because 3Com felt legally and morally obliged to pay the rebate. Legally, 3Com was concerned that Tech Data would begin a lawsuit to enforce 3Com’s promise to pay the rebate. Morally, 3Com did not want to take advantage of Tech Data and suffer the probability that an important commercial relationship with its distributor would be ruptured. The trial judge was of the opinion that 3Com acted reasonably in paying the rebates under apprehension of legal action and I would agree with him.
[61] 3Com was not obliged to risk losing an important commercial relationship. In his text, The Law of Damages, Professor Waddams states that “in judging the reasonableness of the plaintiff’s conduct [with respect to avoiding or mitigating loss] a long view can be taken, and the plaintiff will not be bound to take a short‑term gain at the cost of jeopardizing a long-term interest”: see S. M. Waddams, The Law of Damages, looseleaf (Toronto: Canada Law Book, 1991) at 15‑9. This principle is reflected in the decision of the English Court of Appeal in James Finlay & Co., Ltd. v. N. V. Kwik Hoo Tong Handel Maatschappij, [1928] All E.R. Rep. 110 (C.A.). In that case, the defendant sellers agreed to send a quantity of Java sugar in each of July, August and September to Bombay. As was their custom, the plaintiffs entered into sub-contracts with buyers in Bombay. The agreements provided that the shipping documents were conclusive proof of the date of shipment. The defendants duly delivered the July and August shipments but, although the shipping documents indicated the sugar for September was shipped on the last day of September, it was in fact shipped on October 2nd. By the time the shipment arrived in Bombay the price of sugar had fallen. The plaintiffs chose not to enforce the strict terms of the contracts between themselves and their subcontractors but sued the defendants for the difference in price. The defendants pleaded that the plaintiffs had failed to mitigate their loss and that they should not be responsible. The court held that no plaintiff is obliged to take steps to minimize damages if by so doing the plaintiff would jeopardize its commercial reputation. In particular, Greer L.J. stated at p. 117 that “[p]eople have not got to consider merely what is right in a strict court of conscience, but they have got to consider what is the effect of their conduct upon their business relationships with other people, and I can have very little doubt that it would not have suited their business to have taken the extreme course which is suggested”.
[62] Similarly, in Banco de Portugal v. Waterlow & Sons, Ltd., [1932] A.C. 452 (H.L.), the defendant was a printer of bank notes for the plaintiff bank, which held an exclusive licence from the government of Portugal to issue bank notes as legal tender in that country. The defendant, in breach of contract, printed a quantity of these bank notes from the same plates or from plates made from the same dies as had been used to fulfil the plaintiff bank’s contract and delivered them to unauthorised persons. These persons put the forged bank notes into circulation. On discovering this fraud, the plaintiff bank cancelled the entire issue and exchanged bank notes of that issue then in circulation for authorized bank notes of equivalent value. Accordingly, many thousands of bank notes – both legitimate and forged – were exchanged for new, genuine bank notes. Even though the plaintiff bank was under no obligation to pay the forged bank notes, the House of Lords held that it had nonetheless acted reasonably, for if it had not exchanged new bank notes for all the notes from the issue (both legitimate and forged), it would have created an economic panic and caused grave damage to the credit of the bank. The following statement from Lord Macmillan is of particular relevance to the case at bar, despite the fact that it deals with a breach of contract rather than a tort:
Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easier after an emergency has passed to criticize the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken (p. 506).
[63] The appellants are responsible for the rebates paid under the Australia SPQ, not only because it appears that 3Com was obliged in law to pay them, but also because 3Com was not obliged to bear the risk of rupturing the commercial relationship it had with its distributor Tech Data.
[64] I would, therefore dismiss, the argument that the fraudulent misrepresentations made to and relied on by 3Com did not cause its loss.
The argument respecting the personal liability of Marotta and Sicilia
[65] The trial judge found that Marotta and Sicilia were the controlling minds of Zorin and the Learningstation Canada and were involved in all important facets of each company’s business dealings. The appellants submit that the trial judge’s findings are conclusory statements and that while there was evidence on which he might have made his findings, he could not have done so without dealing with the competing evidence. This position was particularly put forward in relation to Sicilia.
[66] I would disagree. The trial judge either expressly or impliedly dealt with the competing evidence at earlier points in his reasons. His comments respecting the personal liability of Marotta and Sicilia must be read in the light of his reasons as a whole.
DISPOSITION
[67] For the reasons set out above, I would dismiss the appeal.
[68] Costs of the appeal are to the respondent 3Com. The amount of costs, as agreed, is fixed in the amount of $15,000.00, all inclusive.
RELEASED: June 2, 2006 (“KMW”)
“Karen M. Weiler J.A.”
“I agree E. E. Gillese J.A.”
“I agree R. A. Blair J.A.”
[^1]: In their Notice of Appeal, the appellants appeal from the decision of the trial judge in its entirety – i.e. including his dismissal of the third party claim against Tech Data. At the hearing of this appeal, the appeal with respect to the third party claim was dismissed as abandoned with costs to Tech Data fixed in the amount of $3,500.00 all inclusive.