CivicLife.com Inc. v. The Attorney General of Canada, 2006 ONCA 20837

DATE: 20060621

DOCKET: C43915

COURT OF APPEAL FOR ONTARIO

WEILER, ROSENBERG and BLAIR JJ.A.

B E T W E E N :

CIVICLIFE.COM INC.

Lynn Marchildon and Simon Fothergill

Plaintiff (Respondent,

for the appellant, respondent

Appellant by way of cross‑appeal)

by way of cross‑appeal

• and -

THE ATTORNEY GENERAL OF CANADA

K. Scott McLean and David R. Elliott for the respondent, appellant

Defendant (Appellant,

by way of cross‑appeal

Respondent by way of cross‑appeal)

Heard: May 8, 2006

On appeal from the judgment of Justice Michel Z. Charbonneau of the Superior Court of Justice dated June 28, 2005.

WEILER J.A.:

THE NATURE OF THE APPEAL AND CROSS‑APPEAL

[1] The Crown appeals both the trial judge’s finding of liability for breach of contract and his award of $2.52 million as damages plus $400,000 punitive damages against it.

[2] With respect to liability, the Crown submits that the trial judge erred in finding that Industry Canada breached its contractual obligations to CivicLife.com Inc. (“CivicLife”), an internet software developer, by deliberately and secretly undermining the objectives of their agreement and by implying a term of good faith on the part of Industry Canada in carrying out the contract. With respect to damages, the Crown submits that CivicLife was paid the full amount under the contract and the trial judge erred in awarding any damages for the Industry Canada’s alleged failure to properly test the software CivicLife developed. The Crown further submits that the trial judge grounded his award of punitive damages on the very same conduct he used to conclude that Industry Canada had breached its contract, namely breach of an implied duty of good faith, and that he erred in law in holding that breach of the duty of good faith entitled CivicLife to punitive damages. In addition, the Crown submits that the amount of punitive damages is not rational.

[3] CivicLife cross-appeals the award of damages on the basis that although the trial judge awarded it compensation for the money it spent and the pilot tests it was promised, no award was made to address the value and opportunity that CivicLife once had, but lost, because of Industry Canada’s failure to perform the contract in good faith. CivicLife seeks additional damages of $14,520,000, on the basis that CivicLife was worth this amount and was destroyed, plus $4,000,000 for the reasonable expectation that a national rollout of the software would occur.

[4] For the reasons that follow, I would dismiss the Crown’s appeal with respect to liability and damages but I would allow the appeal with respect to punitive damages. I would dismiss the cross-appeal.

BACKGROUND

[5] The trial judge’s decision is reported at [2005] O.J. No. 3485. The following background is sufficient for the purposes of this appeal.

[6] Starting in the mid 1990s, the Information Highway Applications Branch (“IHAB”) of Industry Canada put in place a number of on-line programs intended to make the internet accessible to schools and communities and to encourage the use of the internet. The director of IHAB, Doug Hull, envisioned that a program known as “Access.ca” would make all information and services of federal ministries and agencies accessible on-line. In order to do so, a portal had to be created. In 1999, a pilot of such a portal was attempted in Prince Edward Island by SmartSources.com Technologies Inc. (“SmartSources”), another software developer. IHAB decided to proceed further with the project.

[7] In May 1999, Mr. Hull met Kevin Higgins, the president of FreeBalance, a software company that was already working on a software application that could be used to access government services. In September 1999, Mr. Hull attended a demonstration of the FreeBalance prototype and was impressed by it. Because the FreeBalance board of directors decided not to take on the Industry Canada project, Mr. Higgins resigned his position and in January 2000, he incorporated CivicLife with two other former FreeBalance executives.

[8] Industry Canada decided that CivicLife would be the prime contractor of the portal and that SmartSources would provide two specific components for the portal, a search engine and a context information manager. CivicLife’s responsibility was to integrate the two components supplied by SmartSources and deliver a completed portal ready for implementation of pilot projects at up to twenty different sites across Canada.

[9] Negotiations led to five contracts signed on February 4, 2000. Industry Canada[^1] entered into two supply agreements, one with CivicLife and one with SmartSources. According to the provisions of the two supply agreements, the portal was to be delivered in stages with the final product due May 31, 2000. In return, Industry Canada agreed to pay $1.52 million to CivicLife in one supply agreement and $0.5 million to SmartSources in the other. Aside from the cost of the contract, the supply agreements were identical. Similarly, Industry Canada entered into an Intellectual Property (“I.P.”) agreement with each of CivicLife and SmartSources. The fifth contract was a development and commercial agreement between SmartSources and CivicLife.[^2]

[10] The development of the portal did not proceed as anticipated. Despite the tight time frame envisaged by the contract, SmartSources and CivicLife did not work together. On July 14, 2000, Industry Canada brought together representatives of SmartSources and CivicLife. At that meeting, the parties orally agreed to a “minimal integration approach” whereby the two companies would work on their software independently and later link them by remote access. Industry Canada requested that Xwave, the independent software technology company it had retained to evaluate the portal software, assist the parties in devising a technical plan for integrating the two products.

[11] On January 18, 2001, CivicLife advised that it had been unable to integrate the SmartSources search engine into its software. In May 2001, it delivered a portal software program using an off-the-shelf search engine. After some modifications, Xwave approved the CivicLife portal and Industry Canada ultimately paid the remaining amount owing under the contract.

[12] Instead of supplying Industry Canada with the two components it had agreed to provide, in early 2001 SmartSources provided Industry Canada with an entirely separate stand-alone portal using its search engine and context information manager.

[13] The CivicLife and SmartSources portals were each independently tested at only two separate pilot locations. CivicLife was hired to launch the two pilot tests of its portal for $390,000. Industry Canada did not involve CivicLife in any further expansion of the Access.ca program. CivicLife ultimately went into receivership.

SUMMARY OF THE TRIAL DECISION

The context in which the agreement came to be

[14] The following is a summary of the salient portions of the trial judge’s reasons.

[15] Throughout the period of negotiation, Mr. Hull, who had the authority to negotiate this deal with CivicLife, represented that the national rollout was going to take place. CivicLife understood, and Industry Canada was fully aware of CivicLife’s understanding, that the national rollout was an integral and fundamental term of the deal. There was no real money in the development of the portal. The real money was in the marketing of the portal after rollout and in numerous incidental economic opportunities that would arise in Canada and abroad from the wide use of the CivicLife portal in Canada. The I.P. agreements were, therefore, “the golden egg” of the transaction. All parties understood that the full potential of the I.P. agreements could only be achieved with the national rollout. This is obvious from the very large revenue projections conveyed by the Assistant Deputy Minister to the Deputy Minister. A careful reading of the memorandum of offering issued by CivicLife clearly shows that the cornerstone of CivicLife’s overall business plan was the national rollout, which was expected to provide the impetus and groundwork from which all revenues would emerge.

[16] The five contracts signed February 4, 2000 represent one contractual arrangement. Interpretation of one must take into account the terms and conditions of the four others.

What legal obligations did Industry Canada breach?

[17] Although the parties anticipated and firmly believed that Access.ca would be launched nationwide, the agreement did not go so far as to impose on Industry Canada the legal obligation to proceed with the national launch. The national launch remained contingent on the performance of CivicLife, SmartSources and “other planning considerations”, which included final Treasury Board approvals and the continued support of the government officials. CivicLife assumed the risk that the national rollout might not occur if certain of those conditions were not met.

[18] It was a term of the agreement that Industry Canada would act fairly and take all reasonable steps to achieve the objectives of the agreement and the expectations of the parties. Simply paying the amount owed under the contract to CivicLife was not the sum total of Industry Canada’s legal obligations. It was an implied term of the agreement that Industry Canada would at all times deal fairly with CivicLife in order not to nullify the reasonable expectations that Industry Canada had itself fostered. Industry Canada breached this implied term and the duty of good faith it owed to CivicLife in many respects.

[19] Roger Casselman, the Industry Canada representative who was responsible for the deliverables from CivicLife and SmartSources, with the acquiescence of his IHAB supervisors, deliberately encouraged SmartSources to provide its own portal. By doing so, Industry Canada destroyed the relationship of trust and cooperation required between SmartSources and CivicLife to accomplish integration of the SmartSources components. The secret “un-official” emails between Mr. Casselman and SmartSources’ principal, Nathan Nifco, paint a picture of deceit and sabotage. CivicLife took all reasonable steps it could to integrate the SmartSources components. If not for the deliberately uncooperative attitude of SmartSources, integration could have been completed within two to three months of May 31, 2000. SmartSources’ decision not to cooperate in the integration was promoted and encouraged by Industry Canada. Further, Industry Canada encouraged SmartSources to supply its stand-alone portal in direct breach of the terms of the agreement.

[20] As part of the bargain, it is reasonable to conclude that CivicLife would obtain a properly tested portal at the end of the deal. Accordingly, it was a term of the agreement that Industry Canada would act fairly and reasonably in proceeding to adequately test CivicLife’s portal. To be adequately tested, the portal had to undergo a substantial number of pilots. Section 4 of the supply agreement contemplates the requirement for a substantial amount of pilot testing, specifically, up to twenty pilot trials in communities across Canada. It is meaningful that the last sentence in s. 4 reads, “The Intellectual Property Agreement provides the terms and conditions of the use of the Intellectual property by the Parties.”

[21] Industry Canada failed to adequately test the portal. On the one hand, it tested a competitor’s portal in clear breach of the agreement and, on the other, it only tested CivicLife’s portal at two pilot locations. That was clearly inadequate testing well below what was contemplated by the agreement. There is cogent evidence Industry Canada knew that the testing was inadequate.

[22] CivicLife was never notified it had not met its part of the bargain. Industry Canada never terminated the agreement. To the contrary, throughout the relevant period Industry Canada continued to encourage CivicLife to proceed with the project.

[23] Industry Canada never provided any evidence to explain: (a) what position it took when the portal was not delivered on May 31, 2000; (b) whether it ever rejected or found fault with any of the products supplied by CivicLife; (c) why it decided to ask SmartSources to provide a stand-alone portal; (d) why it proceeded only with the pilots it did; and (e) why it did not proceed with the national launch.

[24] Industry Canada was required to act fairly and take all reasonable steps to achieve the objectives of the agreement. These objectives included working cooperatively in the development, supply and commercialization of the Civic Portal so as to have it ready to market. Industry Canada breached its duty of good faith and in many respects, particularly in its dealings with SmartSources, deliberately took steps to nullify the contractual objectives.

[25] Specifically, Industry Canada breached its duty of good faith in the following ways:

(a) It deliberately and secretly interfered with the relationship between SmartSources and CivicLife thereby significantly contributing to CivicLife’s failure to integrate the SmartSources components;

(b) It encouraged SmartSources to compete with CivicLife by soliciting and accepting from SmartSources another portal;

(c) When dealing with SmartSources, Industry Canada deliberately kept these transactions secret;

(d) It failed to notify CivicLife that it contemplated not proceeding with the national launch and instead communicated with CivicLife in such a way as to indicate that the project was proceeding as planned; and

(e) It failed to adequately test CivicLife’s portal and proceeded to test the portal supplied by SmartSources.

Damages

[26] The general principle governing the award of damages for breach of contract is that the complaining party should, insofar as can be done by money, be placed in the same position as if the contract had been performed.

[27] The damages that are recoverable are the losses a reasonable person at the time of making the contract would contemplate as being a serious possibility. Once a foreseeable consequence occurs, all the damages of that kind are recoverable.

[28] CivicLife claims damages under three main headings. The first of these claims relates to alleged wasted expenditures.

[29] CivicLife incurred expenditures that it would not have had to make but for Industry Canada’s interference between CivicLife and SmartSources. CivicLife identified seven specific items in its quantification of the alleged loss. All of these sums, totalling $3,130,712.90, are said to have been spent during the life of the project over and above the amounts received from Industry Canada under the contract. Industry Canada did not challenge the actual quantification and validity of these expenses. CivicLife spent the amounts claimed. The question was: What amounts could be said to flow directly from Industry Canada’s breach? The trial judge was not satisfied that three of the items flowed directly from Industry Canada’s breach. In addition, some of the additional expenditures were incurred as a result of Xwave’s deficiency reports.

[30] The trial judge accepted CivicLife’s evidence that the external beta version of the portal could have been delivered as required within approximately two to three months after the original deadline of May 31, 2000. A good proportion of the deficiencies noted by Xwave were due to the integration difficulties. Industry Canada was obliged to assume responsibility for those.

[31] As a result of the Crown’s breach, it took CivicLife at least double the time and resources to finally obtain approval of the portal. In the circumstances, it was just and reasonable to double the cost of the contract from $1.52 million to $3.04 million. CivicLife’s damages under this head were therefore fixed at $1.52 million.

[32] The second claim was for the loss of three types of opportunities related to the contract, namely: (a) Pilot and Post Pilot Enhancement; (b) National Rollout; and (c) Community Program.

[33] The last two items can only arise if Industry Canada had a legal obligation to proceed with the national rollout. Since it did not, no damages can be awarded for these two items. The same applies to post pilot enhancements, which would only have been carried out in final preparation for the national rollout.

[34] As for the claim for the loss of pilot testing, if Industry Canada had performed its contractual obligation to properly test the portal at least one pilot would have proceeded in each province and likely two in Quebec and Ontario, for a total of twelve pilots. Brian Awrey’s (CivicLife’s Chief Financial Officer) estimate of a financial return of $100,000 per pilot is very reasonable. That estimate was in no way challenged by Industry Canada. CivicLife would likely have been retained to proceed with all pilots. Taking into account the two pilots carried out (for which CivicLife was paid $390,000), damages under this head were fixed at $1 million.

[35] CivicLife’s final claim was for punitive damages. The law is clear that in commercial contract cases punitive damages should only be awarded in the most exceptional circumstances and only for very harsh and outrageous conduct. This is such a case. Instead of treating CivicLife fairly, Industry Canada engaged in very oppressive and highhanded conduct. For instance:

(a) Industry Canada engaged in a deliberate and protracted course of duplicitous conduct;

(b) The conduct was aimed at destroying the very core of the reasonable expectations that CivicLife was entitled to hold;

(c) The misconduct was carried out in secret while all along Industry Canada was telling CivicLife the project was proceeding as agreed, and when CivicLife learned of the portal submitted by SmartSources, Industry Canada invented a false story to convince CivicLife that its position was not altered;

(d) Even though Industry Canada knew CivicLife was in dire financial straits and needed to be told the truth as soon as possible, it deliberately chose not to respond to CivicLife’s many letters and kept silent to allow CivicLife to drown in useless and expensive attempts to keep the project alive.

[36] The Crown chose not to call one single officer to try to give a reasonable explanation for Industry Canada’s conduct. (Those that were called were called by CivicLife as adverse witnesses.) The court can only conclude that Industry Canada did not have any explanation to offer for its outrageous conduct.

[37] $400,000 is a just amount of punitive damages to denounce Industry Canada’s very high handed and oppressive conduct.

ANALYSIS OF THE ISSUES IN THE APPEAL

(1) Did the trial judge err in finding that Industry Canada deliberately and secretly undermined its contractual agreement with CivicLife?

[38] The Crown submits that the trial judge erred, “factually and legally”, in concluding that Industry Canada acted deliberately to undermine the objectives of the contract.

[39] The appellant’s submission raises the issue of the applicable standard of review. Matters of law 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.

[40] Where, as here, one of the issues 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 at para. 36; Jaegli Enterprises Ltd. v. Taylor, [1981] 2 S.C.R. 2 at 4; Amertek Inc. v. Canadian Commercial Corp. (2005), 76 O.R. (3d) 241 at paras. 67-68.

[41] The Crown submits that the trial judge made a palpable and overriding error in finding that the conduct of Industry Canada, or any of its employees, led to a breach of its contractual obligations to CivicLife.

[42] More specifically, the Crown’s submissions concerning the trial judge’s findings respecting the conduct of Industry Canada and my response are as follows:

1. Crown: Industry Canada was entitled to communicate privately with SmartSources. These secret communications did not breach any term of the agreement it had with CivicLife. It was a term of the commercial and development agreement between SmartSources and CivicLife that SmartSources communicate all pertinent information to CivicLife. Industry Canada had no such obligation.

Response: This submission ignores: (a) the fact that the supply agreements with each of CivicLife and SmartSources specifically required that all five agreements be read together; (b) the purpose of the secret communications between Industry Canada and SmartSources which was to encourage SmartSources to provide its own portal in direct breach of the terms of the agreement; and (c) the expectations of the parties set out in the supply agreement between Industry Canada and CivicLife. In addition, the communications had the effect of undermining Industry Canada’s obligation under the I.P. agreement to assist CivicLife with the commercialization of its portal. Mr. Casselman testified at trial that he understood that CivicLife must be a part of or advised of all cogent communications made between SmartSources and Industry Canada, and he admitted that part of his responsibility was to keep the contractors equally informed. Yet, as found by the trial judge, when CivicLife learned of the portal submitted by SmartSources, Industry Canada invented a false story to cover up what was happening.

2. Crown: There is no evidence to support the finding that Mr. Casselman set out to sabotage CivicLife. In Mr. Casselman’s view, the integration problems were due to CivicLife’s failure to communicate with SmartSources. Mr. Casselman understood that his role on the Access.ca project was to ensure that Industry Canada got what it paid for. To elevate his intention to one of deliberate sabotage is a patently unreasonable interpretation of the evidence.

Response: Upon becoming engaged in the project, Mr. Casselman stated that it was his intention to redirect the Access.ca project in support of SmartSources, but at trial he was not able to identify what information, if any, he used to form his stated preference for the SmartSources architecture. A substantial email record established his involvement in forming an agreement with SmartSources to develop a secret competing portal. Mr. Casselman’s conduct was contrary to the supply agreement between Industry Canada and CivicLife that required CivicLife and SmartSources to have clearly defined roles, and which specified the individual elements that each party was to contribute to the overall deliverables. The agreement further required that any changes be done by mutual agreement between the parties. Industry Canada’s decision to encourage SmartSources to develop a competing portal was a change that was not done by mutual agreement between the parties. The trial judge correctly found that Industry Canada’s agreement with SmartSources to produce a competing portal was in direct breach of the terms of their overall agreement. Further, in the I.P. agreement, Industry Canada agreed “to use its best efforts to assist CivicLife during the currency of [the] Agreement with the commercialization of the Civic Portal Software and to make available its expertise and marketing materials in connection therewith.” By plotting to replace the CivicLife portal with a SmartSources portal, Mr. Casselman did the opposite.

3. Crown: As the project went on, Mr. Casselman eventually became frustrated with CivicLife’s failure to deliver what was required by the CivicLife supply agreement. However, CivicLife only raised the integration problems they were having with SmartSources in June 2000, after CivicLife failed to deliver the external beta software incorporating SmartSources’ components by May 31, 2000. In Mr. Casselman’s view, these problems were due to CivicLife’s failure to communicate with SmartSources.

Response: See my response above. Further, the trial judge accepted the evidence of CivicLife’s Karl Gretton, as he was entitled to do, that Mr. Gretton took all reasonable steps he could to integrate the SmartSources components. The trial judge further found that CivicLife could have completed the integration within approximately two or three months of May 31, 2000, well in advance of the end of December 2000 (the date the pilots were to begin), had it not been for the deliberately uncooperative attitude of SmartSources. On the evidence, the trial judge was entitled to come to the conclusion he did.

4. Crown: The trial judge’s finding that but for Mr. Casselman’s communications with SmartSources and SmartSources’ resulting intransigence, CivicLife would have been able to complete the portal within two to three months of the initial completion date of May 31, 2000 contrasts with the evidence of Xwave, the third-party company retained to independently assess CivicLife’s portal.

Response: While early Xwave reports were critical of CivicLife’s progress, a good proportion of the deficiencies noted by Xwave were due to difficulties encountered with integration, for which the trial judge found Industry Canada solely responsible. In addition, Mr. Casselman instructed Xwave to test CivicLife’s components against a standard of 100 per cent completion even though the product was in early stages of development. In the end, CivicLife passed Xwave’s final report, and another report prepared by Communications Research Centre Canada praised CivicLife deliverables. The fact is CivicLife did deliver a stand-alone portal that was approved by the independent body chosen by Industry Canada to test it. As I have already indicated, the trial judge was entitled to make the finding that, but for the actions of Mr. Casselman and SmartSources, CivicLife’s completion of the portal would have been much more timely.

5. Crown: The trial judge’s conclusion that Industry Canada acted deliberately to undermine the objectives of the contract is contrary to the evidence of Mr. Casselman (of Industry Canada), Mr. Nifco (of SmartSources) and David Klein (of Xwave, the independent assessor of CivicLife’s software).

Response: The fact that the trial judge’s conclusion is contrary to the evidence of Messrs. Casselman, Nifco and Klein is not of itself a palpable and overriding error. It is not enough that there is a difference of opinion with the trial judge: Schwartz v. Canada, [1996] 1 S.C.R. 254 at paras. 32-33; H.L. v. Canada (Attorney General), 2005 SCC 25, [2005] 1 S.C.R. 401 at para. 74. A core function of a trial judge is to accept all, part or none of the evidence of a witness.

6. Crown: The trial judge gave no explanation for finding Mr. Nifco not credible. The reasons for decision provide no insight into the fact-finding process that led to his conclusion. Mr. Nifco testified that it was never SmartSources’ objective to take over the Access.ca project. In July 2000, he raised concerns about the platform upon which CivicLife had chosen to build the portal and also stated he had doubts about CivicLife’s commitment to working with SmartSources. He only agreed to provide a stand-alone portal once it became clear that CivicLife could not do so.

Response: Overall, the trial judge gave detailed reasons on credibility. The trial judge’s reasons for rejecting the evidence of Mr. Casselman, an adverse witness, and for accepting the evidence of CivicLife’s witness, Mr. Higgins, apply in large measure to Mr. Nifco, a witness whose self-interest in the project was obvious. The trial judge is not required to comment on the evidence of each and every witness. Reasons for judgment are not a running commentary on the trial process but are intended to explain the result arrived at: Waxman v. Waxman, [2004] O.J. No. 1765 at para. 283 (C.A.).

There is evidence that in May 2000, Mr. Nifco was having discussions with Industry Canada about the delivery of a SmartSources portal without CivicLife’s involvement. Up to that point, SmartSources had not provided its deliverables and had not cooperated in integrating its deliverables with the CivicLife portal. Industry Canada never gave evidence as to what position it took when the portal was not delivered on May 31, 2000. The supply agreement provided for “Excusable Delays” when a party is prevented from performing a contractual obligation by circumstances beyond its reasonable control. No submissions were addressed to this provision. CivicLife did in fact deliver a stand-alone portal that was approved by the independent body (Xwave) chosen by Industry Canada to test it, and no evidence was led by the Crown that the delay in production, for which Industry Canda was in large measure responsible, meant that the project was no longer practicable.

7. Crown: CivicLife failed to design software to integrate the SmartSources components. Mr. Klein testified that CivicLife’s lack of documentation describing how the CivicLife and SmartSources software would fit together was “a key element that would affect integration”. The trial judge’s inflation of the role SmartSources played in CivicLife’s delay is inconsistent with Mr. Higgins’ own evidence that SmartSources’ two components were relatively minor in the context of the overall Access.ca project.

Response: The trial judge was entitled to find, as he did, that CivicLife was to be the prime contractor on the project. This accorded with the contracts and the amounts paid to each party. The trial judge’s finding in this regard is in no way inconsistent with his finding concerning the role SmartSources played in CivicLife’s delay. The trial judge was entitled to accept the evidence of Mr. Gretton that all reasonable steps had been taken by CivicLife to integrate the SmartSources components. There is no evidence that Industry Canada found fault with CivicLife’s portal despite the fact that it did not integrate the SmartSources software.

[43] In conclusion, the essence of the Crown’s appeal is an attempt to show that the trial judge made a palpable and overriding error in finding that Industry Canada secretly and deliberately undermined the contractual framework of its agreement with CivicLife. I have reviewed the Crown’s main challenges directed to the trial judge’s findings of fact above. The trial judge made no clear and obvious errors. The Crown has failed to meet the high standard required to overturn these findings of fact. The trial judge was entitled to come to the conclusion he did that there was a causal link between Industry Canada’s conduct and CivicLife’s delayed performance.

(2) Did the trial judge err in law in holding that Industry Canada owed an implied duty of good faith to CivicLife?

[44] As noted previously, the trial judge held that Industry Canada breached its duty of good faith in the following ways:

(a) It deliberately and secretly interfered with the relationship between SmartSources and CivicLife thereby significantly contributing to CivicLife’s failure to integrate the SmartSources components;

(b) It encouraged SmartSources to compete with CivicLife by soliciting and accepting from SmartSources another portal;

(c) When dealing with SmartSources, Industry Canada deliberately kept these transactions secret;

(d) It failed to notify CivicLife that it contemplated not proceeding with the national launch and instead communicated with CivicLife in such a way as to indicate that the project was proceeding as planned; and

(e) It failed to adequately test CivicLife’s portal and proceeded to test the portal supplied by SmartSources.

[45] The Crown submits that it was not a specific term of the contracts that it act in good faith and that by implying a term to act in good faith, the trial judge added a substantive, unbargained for contractual term to the contracts.

[46] The question of when a term may be implied in a contract was considered by the Supreme Court of Canada in M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., [1999] 1 S.C.R. 619. The issue was whether a “privilege clause”, which allowed the person calling for tenders to disregard the lowest bid in favour of any other tender, allowed acceptance of a non‑compliant tender or whether the court should imply terms. In coming to its conclusion that there was an implied term only compliant tenders would be accepted, the court confirmed its decision in Canadian Pacific Hotels Ltd. v. Bank of Montreal, [1987] 1 S.C.R. 711, as to when a term may be implied in a contract. One of the bases for implying a term is presumed intention – i.e. “the implication of a term as necessary to give business efficacy to a contract or as otherwise meeting the ‘officious bystander’ test as a term which the parties would say, if questioned, that they had obviously assumed”: Canadian Pacific Hotels, at 775. Based on the presumed intention of the parties, the court concluded that persons tendering in response to the tender specifications assumed only compliant tenders would be accepted and implied that term. In determining the intention of the parties, the court considered the express terms of the contract to see whether the suggested implication was necessary, fit in with what had been agreed upon and the precise nature of what had been implied.

[47] In this case, there are a number of express provisions from the agreements that bear on the issue of the parties’ intentions:

• All five of the agreements between Industry Canada, CivicLife and SmartSources are, as stated in the supply agreement between Industry Canada and CivicLife, “part of a complete whole.”

• The recitals at the beginning of each of the five agreements include the phrase: “Industry Canada wishes to design and develop a comprehensive civic portal through CivicLife for use by the Government of Canada to deliver information and services throughout the various regions of Canada on a user friendly basis”.

• The supply agreements provide that “[Industry Canada] is in the process of developing and rolling out a national ACCESS.CA service to be launched in December 2000.”

• In article VII of the I.P. agreement with CivicLife, Industry Canada agreed “to use its best efforts to assist CivicLife during the currency of this Agreement with the commercialization of the Civic Portal Software and to make available its expertise and marketing materials in connection therewith.”

• In the development and commercial agreement between CivicLife and SmartSources, one of the agreements that was part of the “complete whole”, the parties agreed “to be true and faithful to each other in all dealings and transactions relating to the Civic Portal Software.”

[48] Having regard to the above provisions, the overall intention of the parties was that Industry Canada would facilitate cooperation between CivicLife and SmartSources to build a single portal that it planned to rollout on a national basis. The trial judge found in effect that the actions of Industry Canada undermined the reasonable expectations of the parties in five specific ways and did not fit with what they had agreed upon. The trial judge used the term breach of good faith to globally encompass his conclusion that Industry Canada had acted in such a way as to undermine the very objectives of the contract. He further found that as a result of the actions of Industry Canada it took CivicLife at least twice as long to build its portal. The business efficacy of the contract was seriously affected.

[49] The classical theory of contract interpretation emphasizes that courts should ascertain and give effect to the intention of the parties: Ruth Sullivan, “Contract Interpretation in Practice and Theory” (2000) 13 S.C.L.R. (2d) 369. In Transamerica Life Canada Inc. v. ING Canada Inc. (2003), 68 O.R. (3d) 457 (C.A.), O’Connor A.C.J.O. for the majority at para. 53 and Laskin J.A. in dissent at para. 87 held respectively that this court and other courts have used the doctrine of good faith to ensure that the parties do not act in such a way as to defeat the objectives of the agreement or to police the bargain the parties have already made.[^3] In his recent book, The Law of Contracts (Toronto: Irwin Law, 2005) at 784-805, Professor McCamus examines a number of Canadian cases in which good faith has been found to be an implied term of the contract and groups them into three categories: (a) those imposing a duty to cooperate in achieving the objectives of the agreement; (b) those imposing limits on the exercise of discretionary powers provided for in the contract; and (c) those precluding parties from acting to evade contractual duties, such as by engaging in conduct not strictly prohibited by the letter of the terms of their agreement but that has the effect of defeating rights under the agreement. In his opinion, the result in each case could have been, and was, explicitly grounded in the application of traditional contract doctrine. In the event that a generalized duty of good faith is adopted as part of the Canadian common law of contracts, he suggests that the duty might be defined in terms of these three categories, although he acknowledges such a definition is more restrictive than the general duty found in the American Uniform Commercial Code.

[50] In addition to breaching the necessity of cooperation and undermining the very objectives of the contract, Industry Canada’s conduct would also appear to be an abuse of its discretion under the contract. In oral argument before us, the Crown conceded that Industry Canada’s duty to use its “best efforts” to assist CivicLife in the commercialization of the portal involved the exercise of a discretion that had to be exercised reasonably and fairly. That concession is well founded. In Greenberg v. Meffert, supra, a real estate company had an agreement with its real estate agent that, after termination of their relationship, payment of commission was payable “at the sole discretion” of the company. This court held that these words meant the company must act reasonably in exercising its discretion, and also honestly and in good faith. Since the company had not done so, the agent was entitled to his commission. Additionally, in Shelanu Inc. v. Print Three Franchising Corp. (2003), 64 O.R. (3d) 533 at para. 96 (C.A.), this court affirmed that a discretion under a contract must be exercised reasonably, fairly and with regard to how the other party’s interests are affected. See also F. Paul Morrison and Hovsep Afarian, “Good Faith in Contracts: A Continuing Evolution” in The Honourable Justice Todd Archibald & Michael Cochrane, eds., Annual Review of Civil Litigation, 2003 (Toronto: Carswell, 2004) 197 at 213-223; John D. McCamus, “Abuse of Discretion, Failure to Cooperate and Evasion of Duty: Unpacking the Common Law Duty of Good Faith in Contractual Performance” (2005) 29 Advocates’ Q. 72.

[51] Thus, Industry Canada’s conduct appears to come within each of the three categories that courts have recognized as giving rise to the imposition of a duty of good faith. For the purposes of this appeal it is unnecessary for me to enter into the debate as to whether Industry Canada’s misconduct should be characterized as a breach of the duty of good faith, as an abuse of the exercise of discretion or simply as undermining the reasonable expectations of the parties to the agreement. The trial judge was entitled to find, as he did, that Industry Canada’s conduct breached its contractual obligations to CivicLife. I will deal more fully with the Crown’s submissions concerning the trial judge’s finding that Industry Canada was required to adequately test the portal below.

[52] Before leaving this point I wish to mention that in oral argument the Crown submitted that the presence of “entire agreement” clauses in the supply and I.P. agreements between CivicLife and Industry Canada precluded the trial judge from holding that Industry Canada breached its contract with CivicLife because nowhere did the agreements say that there was a duty of good faith or a duty to exercise a discretion reasonably and fairly. There are several responses to this submission. The first is that an entire agreement clause will not preclude the implication of a term of the contract, such as a duty of good faith performance or the duty not to abuse a discretion, because such a term is already part of the existing agreement. The trial judge was not adding a term to the agreement that was not part of the parties’ bargain; he was enforcing the reasonable expectations of the parties under the agreement. Second, neither of the entire agreement clauses here says that their agreement contains no implied terms. Indeed, it would be difficult to set out every aspect of the expectations of the parties to a contract. The wording of the entire agreement clauses does not preclude the implication of a term. Third, an agreement in writing may be varied by a subsequent oral agreement. Here, at the July 2000 meeting the parties orally agreed to vary their written arrangement and adopt a “minimal integration approach”. The entire agreement clause does not affect the reasonable expectations of the parties with respect to that oral agreement. Fourth, based on the Supreme Court of Canada’s decision in Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423, even if the entire agreement clause did cover the conduct at issue here, the court has a discretion to refuse to enforce it where to do so would be unconscionable, unfair, unreasonable or otherwise contrary to public policy: Shelanu, supra, at paras. 30-35.

[53] For the reasons given above, the trial judge did not err in holding Industry Canada liable to pay CivicLife damages for breach of contract.

(3) Did the trial judge err in finding that Industry Canada was obligated to finance twelve pilot tests of CivicLife’s portal software?

[54] In the event this court found that Industry Canada breached its contract with CivicLife, the Crown did not appeal the amount of damages awarded for wasted expenditures ($1.52 million).

[55] However, the trial judge also found that Industry Canada breached its contractual obligation to properly pilot test CivicLife’s portal software in twelve different communities. Because CivicLife’s portal was only tested in two communities, the trial judge awarded CivicLife $1 million in damages, based on CivicLife’s estimated financial return of $100,000 per pilot. The Crown challenges this finding of fact as well as the trial judge’s calculation of damages in this regard. The Crown submits that the agreement provided that CivicLife would be paid $1.52 million for the delivery of the portal software and that testing of the portal in twelve different communities was not part of the contract.

[56] On the issue of whether testing of the portal in twelve different communities was part of the contract, in addition to the provisions of the parties’ agreements mentioned already in these reasons, the following additional provisions from the supply agreement between Industry Canada and CivicLife are relevant:

4. Context and Scope

IC [Industry Canada] is in the process of developing and rolling out a national ACCESS.CA service to be launched in December 2000. In preparation for the national launch, IC requires a functioning portal to be available by the Completion Date for technical verification and immediately thereafter for up to 20 Pilot Trials in communities across Canada. Pilot Trials would be operational until launch of the national service at the end of 2000.

Annex A contains a list of communities that are candidates for Pilot Trials. Other communities may be added to this list. IC will determine the list of Pilot Trial communities and the priority sequence for Pilot Trials. [Annex A states in part, “Pilots will be implemented according to a schedule to be established by IC, and will continue until the national launch of ACCESS.CA service.” There then follows a list of 48 communities.]

CivicLife, in partnership with SmartSources, will develop and supply Civic Portal software with the capabilities set out in Section 7 Deliverables, that will be capable of being scaled to provide service in all of the Pilot Trial communities. The software shall be further scalable for national launch and growth. CivicLife and SmartSources will also provide the design and other specifications and requirements for the server hardware and software necessary to host the Civic Portal software in a sufficient scale to provide simultaneous access in the Pilot Trial communities, and subsequently for national launch and growth. These specifications will be provided in document form within 10 working days of receipt of the final list of pilot trial communities and concurrent user estimates from IC.

The contracted cost of the work up to the Completion Date is $1.52 M (Canadian Funds). Decisions regarding specific approach for launch and further expenditures will be dependent on the performance of CivicLife and SmartSources, and other planning considerations.

6. Milestones, Schedule of Work and Payments

6.2 Schedule Elements

After the Completion Date, CivicLife and SmartSources will provide support as defined in Section 7.10 Operational and Technical Support to Industry Canada for a period of 1 year.

[57] The trial judge awarded damages for ten pilot tests that did not occur on the basis of the principle that a plaintiff is entitled to recover losses that directly and naturally result in the ordinary course of events from the breach of contract. As can be seen, s. 4 of the supply agreement between Industry Canada and CivicLife contemplates the requirement for a substantial number of pilots (up to twenty) in order to adequately test the CivicLife portal. The trial judge rejected the Crown’s argument that the purpose of the pilots was to test the portal concept as opposed to the functionality of the CivicLife portal. No palpable and overriding error has been shown respecting this finding.

[58] While the Crown relies on the wording of the supply agreement, which makes decisions about the specific approach for the national rollout and further expenditures contingent on “the performance of CivicLife and SmartSources, and other planning considerations”, it led no evidence indicating that (a) Industry Canada ever rejected or found fault in any of the products supplied by CivicLife, or (b) that planning considerations prevented testing of the portal.

[59] The uncontradicted evidence of Mr. Higgins, whom the trial judge found to be credible, was that he left the company where he was employed, incorporated CivicLife and pursued negotiations until a deal was reached in the expectation that the portal would be properly tested and rolled out nationally.

[60] Throughout, the parties governed themselves in the expectation there would be a number of pilots. The pilot testing that actually took place was watered down because it only occurred on two occasions, and because the communities in which it was tested, Lanark County and Ste. Hyacinthe, Quebec, did not give any national exposure. In addition, CivicLife’s portal was tested along with SmartSources’ competing portal, and Industry Canada was in clear breach of the agreement. In order to determine if the portal was worth rolling out nationally it had to be tested nationally and the government study of proposed sites supported the proposition that at least one pilot site per province was required to establish the portal’s efficacy. Moreover, CivicLife purchased enough software licenses to support twenty pilots. The trial judge’s finding that damages should be awarded for Industry Canada’s failure to conduct ten more pilots, one in each province and an additional one in Ontario and Quebec, is therefore supportable on the evidence. A foreseeable consequence of Industry Canada’s breach of contract with CivicLife was that pilot testing would be affected. Accordingly, the trial judge did not err in awarding damages for Industry Canada’s failure to adequately test CivicLife’s portal.

[61] In fixing the amount of the award at $1 million, the trial judge found that CivicLife would have been retained to proceed with all the pilots. The trial judge accepted the evidence of Mr. Awrey that each of the pilots had a value of $100,000, a figure the trial judge found to be “very reasonable.” The Crown says that Mr. Higgins, who also testified for CivicLife, indicated that CivicLife could have reasonably expected $100,000 of revenue (as opposed to profit) per pilot. The trial judge, however, relied on Mr. Awrey’s estimate of what each pilot was worth to CivicLife (which was not challenged by the Crown), and he knew that CivicLife had been paid $390,000 for two pilot tests in small communities. Accordingly, it was open to the trial judge to come to the conclusion he did.

(4) Did the trial judge err in awarding punitive damages to CivicLife?

[62] Unlike the situation when a court is reviewing compensatory damages, when dealing with punitive damages courts have a much greater scope and discretion on appeal: Hill v. Church of Scientology of Toronto, [1995] 2 S.C.R. 1130 at para. 197.

[63] As the trial judge recognized, punitive damages will rarely be awarded in a case involving breach of contract. In fact, they can only be recovered if the plaintiff can establish a separate actionable wrong – i.e. the breach of a different obligation under the contract or other duty, such as a fiduciary obligation.[^4] This is because in contract cases, the remedies open to the plaintiff are only those that arise from the contractual relationship, whereas in tort cases the injured party is entitled to be made whole: see Vorvis v. Insurance Corp. of British Columbia, [1989] 1 S.C.R. 1085 at 1106‑1107.

[64] CivicLife relies on the decision of the Supreme Court in Whiten v. Pilot Insurance Co., 2002 SCC 18, [2002] 1 S.C.R. 595, in support of its position that a breach of the contractual duty of good faith can justify an award of punitive damages. In that case, Binnie J. held at para. 79:

In the case at bar, Pilot acknowledges that an insurer is under a duty of good faith and fair dealing. Pilot says that this is a contractual duty. Vorvis, it says, requires a tort. However, in my view, a breach of the contractual duty of good faith is independent of and in addition to the breach of contractual duty to pay the loss. It constitutes an “actionable wrong” within the Vorvis rule, which does not require an independent tort.

[65] The problem is that in this case, unlike in Whiten, supra, the breach of the duty of good faith is the basis for the trial judge’s award of compensatory damages. In awarding these damages, the trial judge’s description of Industry Canada’s conduct is strikingly similar to his description of the conduct grounding his award of punitive damages. For example, in dealing with compensatory damages, the trial judge held that Industry Canada breached its duty of good faith to CivicLife in that:

The defendant [Industry Canada] failed to immediately notify the plaintiff [CivicLife] that it contemplated not proceeding with the national launch and instead communicated with the plaintiff in such a way as to indicate to the plaintiff the project was proceeding as planned.

In describing Industry Canada’s conduct that merited punitive damages, the trial judge stated:

When the project was faltering, the defendant [Industry Canada], knowing that the plaintiff was in dire financial straits and needed to be told the truth as soon as possible, deliberately chose not to respond to the plaintiff’s many letters and in fact deliberately kept silent to allow the plaintiff to drown in useless and expensive attempts to keep the project alive.

The gravamen of Industry Canada’s conduct in each case is its silence and its encouragement of CivicLife all the while acting as it did with SmartSources.

[66] Moreover, when reviewing an award of punitive damages, the question the reviewing court must ask both with respect to entitlement as well as quantum is whether punitive damages serve a rational purpose: Hill, supra, at para. 197; Whiten, supra, at para. 101. That rational purpose is achieved when punitive damages are required to deter the conduct in issue and to denounce it: Hill, at para. 197; Whiten, at para. 103. Two of the factors the court is to consider in deciding whether an award of punitive damages is rational are the relative vulnerability of the plaintiff and any advantage or profit gained by the defendant. However, the wisdom of CivicLife’s business plan in choosing to put most of its “eggs in one basket” by entering into the portal contracts cannot be laid at the feet of Industry Canada. CivicLife’s vulnerability was largely self-imposed. Moreover, there is no evidence that Mr. Casselman’s misconduct (i.e. his secret and deliberate encouragement of SmartSources to provide its own portal) was part of the general culture at Industry Canada, or that Industry Canada profited from the misconduct as in Whiten, supra. To punish Industry Canada and, ultimately, the Canadian taxpayer for the actions of a rogue employee over a relatively short time frame would not serve a rational purpose in such a case as this where substantial compensatory damages have already been awarded. Furthermore, I do not think an award of punitive damages is necessary to deter such conduct in the future. Accordingly, I would allow the appeal with respect to punitive damages and set aside the award of punitive damages.

THE CROSS-APPEAL

[67] CivicLife raises two issues in its cross-appeal:

1. Is CivicLife entitled to its lost market value, and if so, what is the total loss of value to be awarded in damages?

2. Does CivicLife’s understanding and reasonable expectation of a national rollout entitle it to additional damages in the amount of $4 million?

[68] At paragraphs 71 and 72 of his reasons the trial judge held:

[71] The second claim [for damages] arises out of loss of three types of opportunities related to the contract, namely:

(a) Pilot and Post Pilot Enhancement

(b) National Rollout

(c) Community Program

[72] The last two (2), items (b) and (c), can only arise if the defendant [Industry Canada] had a legal obligation to proceed with the national rollout. As I have found this not to be the case, no damages can be awarded for these two heads of damages. The same applies to post pilot enhancements which would have been carried out only in final preparation for the national rollout.

In accordance with his reasons the trial judge awarded damages for pilot testing but did not award any further damages.

[69] Before us, CivicLife accepted the trial judge’s finding of fact that Industry Canada had no obligation to proceed with a national rollout of the portal. CivicLife submits, however, that the trial judge did not correctly apply the law of damages to the facts. Had he done so, CivicLife submits it ought to have been awarded damages for loss of value and opportunity because a national rollout did not take place as well as because the community program did not proceed. CivicLife submits that the measure of the damages for the lost value of the company is the diminution in market value of the company. On December 31, 2000, CivicLife’s Class A Preferred Shares issued for cash were approximately 5 per cent of the total shares issued and outstanding. Based on this percentage and the amount of third party investments ($712,612), CivicLife submits that its implied valuation equaled $14,520,000. CivicLife also submits that it is entitled to an additional award of $4 million in order to compensate it for lost opportunities it claims would have reasonably flowed from the national rollout. Specifically, CivicLife estimated it would have received $2 million for the technical support that would have been a necessary part of the national rollout of Access.ca and a further $2 million in income for software enhancements and community technical support also associated with a national rollout as well as for sales of the portal outside Canada.

[70] The trial judge properly found that CivicLife assumed the risk that a national launch of Access.ca might not occur. There is no objective evidence concerning CivicLife’s chances of success as a newcomer in a competitive portal market. Nor is there any such evidence that, because of Industry Canada’s actions, CivicLife lost the opportunity to make sales of its portal outside of Canada. In Ticketnet Corp. v. Air Canada, [1993] O.J. No. 289 (Gen. Div.), appeal allowed in part, [1997] O.J. No. 4638 (C.A.), a decision on which CivicLife relies, the trial judge found that there was a window of opportunity in which the plaintiff’s product would be accepted in the marketplace and that Air Canada actively prevented Ticketnet from selling its virtually completed software. Here, the trial judge did not make any such finding. Nor did he find that Industry Canada’s actions caused the demise of CivicLife or that the likelihood of CivicLife’s collapse in the event no national rollout took place was within the reasonable contemplation of the parties at the time they entered into their contracts.

[71] Mr. Higgins, one of the principals of CivicLife, admitted that in January 2001 there was a “crack in the market” that caused potential investors in CivicLife to retrench. The result was that these “dot-com” companies became inward-looking and conservative and investment activities stopped at such large companies as Sun Microsystems as well as at other companies involved in the internet economy. No evidence was led concerning the effect of this collapse in the market on the value of CivicLife or on the likelihood of its ability to make sales of its portal outside of Canada.

[72] In any event, diminution in the value of CivicLife would not even be the appropriate measure of damages if CivicLife was deserving of compensation for the fact that the national rollout did not occur and the community program did not proceed. The appropriate measure of damages would be the value of the lost opportunity to receive income from future sales and technical support that would have reasonably flowed from the national rollout. However, CivicLife’s evidence in this regard falls well short of the evidence required to sustain an award for lost opportunity where the loss in question is incapable of exact proof.

[73] In Canlin Ltd. v. Thiokol Fibres Canada Ltd. (1983), 40 O.R. (2d) 687 (C.A.), where damages were awarded for a manufacturer’s loss of future swimming pool sales, the plaintiff had a proven history of sales with particular customers and adduced evidence as to the volume of business expected to continue with those customers. Similarly, in National Satellite Newservice Inc. v. Canadian Satellite Communications Inc., [1997] O.J. No. 159 (Gen. Div.), the plaintiff adduced expert evidence regarding its loss of future profit in addition to its own analysis of projected revenue per customer in its fledgling public dissemination service. Even where damages by their inherent nature are difficult to assess, the onus is still on the party claiming damages to prove the facts upon which the damages are based and must adduce proper evidence: Martin v. Goldfarb (1998), 163 D.L.R. (4th) 639 at para. 80 (Ont. C.A.). That onus has not been discharged here.

[74] Having regard to the evidence before him, the trial judge did not err in making no further award of compensatory damages. Accordingly, I would dismiss the cross-appeal.

COSTS

[75] I would award costs of the appeal to CivicLife fixed in the amount of $40,000. I would award the Crown $5,000 with the respect to the cross‑appeal.

RELEASED: June 21, 2006 (“KMW”)

“Karen M. Weiler J.A.”

“I agree M. Rosenberg J.A.”

“I agree R. A. Blair J.A.”

Appendix A

Relevant Excerpts from the Supply Agreement between Industry Canada and CivicLife

2. Definitions and References

References

This Agreement is related to the following separate agreements, all of which taken together are part of a complete whole. The Agreement’s requirements must be complied with in concert with the requirements of all these agreements[.] [The I.P. agreements between Industry Canada and CivicLife and Industry Canada and SmartSources, the supply agreement between Industry Canada and SmartSources and the development and commercial agreement between SmartSources and CivicLife are then listed.]

4. Context and Scope

IC [Industry Canada] is in the process of developing and rolling out a national ACCESS.CA service to be launched in December 2000. In preparation for the national launch, IC requires a functioning portal[^5] to be available by the Completion Date for technical verification and immediately thereafter for up to 20 Pilot Trials in communities across Canada. Pilot Trials would be operational until launch of the national service at the end of 2000.

Annex A contains a list of communities that are candidates for Pilot Trials. Other communities may be added to this list. IC will determine the list of Pilot Trial communities and the priority sequence for Pilot Trials. [Annex A states in part, “Pilots will be implemented according to a schedule to be established by IC, and will continue until the national launch of ACCESS.CA service.” There then follows a list of 48 communities.]

CivicLife, in partnership with SmartSources, will develop and supply Civic Portal software with the capabilities set out in Section 7 Deliverables, that will be capable of being scaled to provide service in all of the Pilot Trial communities. The software shall be further scalable for national launch and growth. CivicLife and SmartSources will also provide the design and other specifications and requirements for the server hardware and software necessary to host the Civic Portal software in a sufficient scale to provide simultaneous access in the Pilot Trial communities, and subsequently for national launch and growth. These specifications will be provided in document form within 10 working days of receipt of the final list of pilot trial communities and concurrent user estimates from IC.

The contracted cost of the work up to the Completion Date is $1.52 M (Canadian Funds). Decisions regarding specific approach for launch and further expenditures will be dependent on the performance of CivicLife and SmartSources, and other planning considerations.

5. Expectations of the Parties

IC requires that CivicLife and SmartSources have established a formal agreement that clearly defines roles, and individual elements that each party contributes to the overall deliverables as defined in this Agreement.

6. Milestones, Schedule of Work and Payment

6.1 Milestones

The project will be conducted over a four-month period commencing in February 2000 and completing in May 2000.

6.2 Schedule Elements

After the Completion Date, CivicLife and SmartSources will provide support as defined in Section 7.10 Operational and Technical Support to Industry Canada for a period of 1 year.

6.3 Project Funding

. . .

Proposed Investments

This proposal requests [Industry Canada] funding in the amount of $2.020 million to be applied as shown in the following summary table. Specific deliverables are associated with each payment, on a detailed schedule as per ANNEX D, Detailed Deliverables and Payments by Stage of Work.

[There then follows a chart containing the milestone dates, stage of work expected on those dates and the amount of the payment on those dates to CivicLife and SmartSources, which, when totalled, adds up to $2.020 million. For the period May 31, 2000 to May 31, 2001, the stage of work is described as “Pilot Operations–operational and technical support (S).” No amount is filled in in the spaces provided to indicate the amount of payment to be made to CivicLife and SmartSources at this stage.]

8. Change Process

This Agreement may be changed by mutual agreement between the parties.

Changes will be formally recorded in new Annexes. They will identify the nature of the change, and may trigger the requirement to issue revised text for various sections of this agreement and/or its annexes. There will also be a recording of the consequent changes in costs and responsibilities of the parties.

Changes may be initiated by either party by providing a request in writing.

Changes will not be unilaterally by either party.

12. Entire Agreement

This Agreement constitutes and expresses the entire Agreement of the parties hereto and any amendment or addition thereto shall be in writing and signed by respective parties.

15. Excusable Delays

The dates and times by which any Party is required to perform any obligation under this Agreement shall be postponed automatically to the extent, for the period of time, that the Party is prevented from so performing by circumstances beyond its reasonable control….

Relevant Excerpts from the Intellectual Property Agreement between CivicLife and Industry Canada

[In the recitals section of the agreement:]

WHEREAS Industry Canada wishes to design and develop a comprehensive civic portal through CivicLife for use by the Government of Canada to deliver information and services to citizens throughout various regions of Canada on a user friendly basis[.]

ARTICLE I

DEFINITIONS

1.01 Definitions

“Canadian Pilot Phase” means the Canadian Pilot Phase as defined in the CivicLife Supply Agreement;

ARTICLE IV

CONDITIONS

4.01 License Conditions

(g) if Industry Canada enters into a licensing agreement in a developed country or a developing country and is requested to provide the installation, operation and on-going support services required pursuant to such agreement, Industry Canada shall ensure that CivicLife.com is always included on the list of qualified vendors for the supply of such services; and

(h) Industry Canada acknowledges that CivicLife shall have the exclusive right to market, operate, license and commercialize the Civic Portal Software outside of Canada and the United States…In such ventures, CivicLife shall provide Industry Canada with a revenue share equivalent to the 45% license share earned by Industry Canada in comparable licensing arrangements…or on reasonable terms to be negotiated by the Parties.

ARTICLE VII

TRADE MARKS

7.01 Trade Marks

Industry Canada agrees to use its best efforts to assist CivicLife during the currency of this Agreement with the commercialization of the Civic Portal Software and to make available its expertise and marketing materials in connection therewith.

ARTICLE XI

MISCELLANEOUS

11.05 Entire Agreement

This Agreement constitutes the entire agreement between the Parties pertaining to the matters contemplated hereby and superseded all prior agreements, understandings, negotiations and discussions, whether oral or written, of the Parties.

Relevant Excerpts from the Development and Commercial Agreement Between SmartSources and CivicLife

ARTICLE V

SMARTSOURCES RESPONSIBILITY

5.04 Relations with Industry Canada

Although CivicLife is the prime contractor to Industry Canada, it is recognized that SmartSources may have continuing relations with Industry Canada or its Agents, and may be the recipient of inquiries concerning the SmartSources Deliverables. Therefore, any cogent communications invited by Industry Canada or its Agents directly with SmartSources concerning any matter involving this Agreement or the Civic Portal Software shall not be deemed to be a breach of this Agreement, provided CivicLife is notified of such contact by SmartSources prior to the contact where possible or, where not possible, subsequently in a timely manner.

ARTICLE VII

PROPRIETARY INFORMATION

7.02 Non-Disclosure

The Parties agree to be true and faithful to each other in all dealings and transactions relating to the Civic Portal Software….

[^1]: Innovative Solutions Agency (PEI) Inc. (subsequently replaced by Prince Edward Island Business Development Inc.) actually entered into the agreements on behalf of Industry Canada but we are advised nothing turns on this and throughout the appeal the parties refer to Industry Canada.

[^2]: The agreements contain certain relevant headings, recitals and provisions that are attached to this judgment as Appendix A.

[^3]: See also Dynamic Transport Ltd. v. O.K. Detailing Ltd., [1978] 2 S.C.R. 1072; GATX Corp v. Hawker Siddeley Canada Inc. (1996), 27 B.L.R. (2d) 251 ((Ont. Ct. J. (Gen. Div.)), Blair J.; Greenberg v. Meffert (1985), 50 O.R. (2d) 755 (C.A.), leave to appeal to S.C.C. refused, 1985 3114 (SCC), 56 O.R. (2d) 320; LeMesurier v. Andrus (1986), 54 O.R. (2d) 1 (C.A.), leave to appeal to the S.C.C. refused (1986) 74 N.R. 239n (S.C.C.); MDS Health Group Ltd. v. King Street Medial Arts Centre Ltd. (1994), 12 B.L.R. (2d) 209 (Ont. Ct. J. (Gen. Div.)), Haley J.; Gateway Realty Ltd. v. Arton Holdings Ltd. (1991), 106 N.S.R. (2d) 180 (S.C.(T.D.)), aff’d (1992), 1992 NSCA 70, 112 N.S.R. (2d) 180, (S.C.(A.D.)); Multi-Malls Inc. v. Tex-Mall Properties Ltd. (1980), 108 D.L.R. (3d) 399 (Ont. H.C.), aff'd (1981), 128 D.L.R. (3d) 192 (Ont. C.A.), leave to appeal to the S.C.C. refused (1982), 41 N.R. 360n (S.C.C.).

[^4]: Where, however, the facts underlying the breach of contract also give rise to a separate cause of action in tort, a claim for punitive damages can be made. In this case, for example, it may have been possible to plead that Industry Canada committed the tort of interference with economic relations between CivicLife and SmartSources.

[^5]: CivicLife submitted that “functioning” means tested.