TSP-INTL Limited et al. v. Mills et al. [Indexed as: TSP-INTL Ltd. v. Mills]
81 O.R. (3d) 266
Court of Appeal for Ontario,
Simmons, Cronk and MacFarland JJ.A.
July 4, 2006
Judgments and orders -- Reasons for judgment -- Trial judge erring in finding defendants liable on basis not pleaded or argued -- Unfairness to defendants not being cured by fact that trial judge gave parties opportunity to make further written submissions addressing new liability theories which she raised on her own motion after evidence was completed.
The defendant was engaged by the plaintiffs to provide systems engineering services to the plaintiffs' clients, including S Co. The defendant was an independent contractor, and there was no written contract governing the relationship between the plaintiffs and the defendant. The defendant subsequently went to work for S Co., providing it with the same services that he had previously provided on behalf of the plaintiffs. The plaintiffs brought an action for damages for breach of fiduciary duty and, in the alternative, breach of confidence. After the evidence was completed at trial and the first round of written submissions was received, the trial judge raised new theories of liability on her own motion and asked for further written submissions on those issues. Ultimately, she dismissed the claims for breach of fiduciary duty and breach of confidence, but found that the parties were under a mutual obligation and duty of good faith in the performance of their contractual duties, and that the defendant breached that obligation. In the alternative, she concluded that if the duty of good faith did not apply, the defendant's conduct in moving to S Co., and thereby effectively cutting out the plaintiffs, was unconscionable. In the further alternative, the trial judge concluded that while there was no clear oral contract between the parties dealing with proprietary rights to the plaintiffs' clients, there was an implied term, based on past conduct, that the defendant would not "secretly" negotiate a deal for himself with the plaintiffs' clients. The defendant appealed and the plaintiffs cross-appealed.
Held, the appeal should be allowed; the cross-appeal should be dismissed.
The basis upon which the trial judge found liability was not pleaded nor was it addressed in any way in the evidence. At no time did the plaintiffs move to amend their pleadings, not even after the trial judge sought argument on the alternative theories of liability that she had raised. As a result, the alternative theories of liability were not subjected to the rigors of the adversarial process. In the circumstances of this case, it was no answer that the defendant was afforded the opportunity to make further written submissions addressing the new liability theories addressed by the trial judge. The parties did not frame their lawsuit or conduct of the trial on those bases. The defendant was effectively deprived of knowing the case he had to meet, and of any opportunity to meet that case throughout the trial. The defendant was seriously prejudiced and treated unfairly. The judgment could not stand.
The trial judge did not err in finding that the relationship between the parties was not fiduciary in nature. The defendant, to the plaintiffs' knowledge, worked for third parties during his employ. He was a completely independent contractor in his relationship with the plaintiffs, and there was nothing special or unusual about that relationship that would bring it into the category of a fiduciary. As for [page267] the breach of confidence, the trial judge applied the proper legal test and correctly concluded that the relationship between the plaintiffs and the defendant was not one of confidence and that there was no information received by the defendant from the plaintiffs that had the necessary quality of confidence about it.
APPEAL AND CROSS-APPEAL from the judgment of J. Wilson J. (2005), 2005 3945 (ON SC), 74 O.R. (3d) 461 (S.C.J.), for the plaintiffs.
Cases referred to A-C-H International Inc. v. Royal Bank of Canada, 2005 17769 (ON CA), [2005] O.J. No. 2048, 197 O.A.C. 227, 254 D.L.R. (4th) 327, 6 B.L.R.(4th) 33 (C.A.); Rodaro v. Royal Bank of Canada (2002), 2002 41834 (ON CA), 59 O.R. (3d) 74, [2002] O.J. No. 1365, 22 B.L.R. (3d) 274 (C.A.)
Harry W. McMurtry, for appellants. P. Christopher Lloyd and Ellen V. Swan, for respondents.
The judgment of the court was delivered by
MACFARLAND J.A.: --
Introduction
[1] This is an appeal from the judgment of Wilson J. dated February 17, 2005, wherein she ordered that the defendants, Bill Mills and Mills Data Select, [See Note 1 below] were to pay the plaintiffs, TSP-INTL Limited and /TECH/SUPPORT+ Corporation, the sum of $38,650.39.
[2] The plaintiffs ("TSP") carry on business selling technical support, computer hardware and internet products.
[3] The defendants ("Mills") were engaged by the plaintiffs to provide systems engineering services to the plaintiffs' clients including, most notably, Scepter Corporation ("Scepter").
[4] Mills provided services to Scepter on behalf of TSP from the time of his engagement by TSP in December 1998 until he joined Scepter on September 1, 2002.
[5] No written contract governed the relationship between TSP and Mills. Both parties in their pleadings describe Mills as an independent contractor. When TSP learned that Mills had joined Scepter and would be providing it with the same services that he had previously provided on behalf of TSP, these proceedings were commenced.
[6] In their statement of claim and amended statement of claim, the plaintiffs sought damages for breach of fiduciary duty [page268] and, in the alternative, for breach of confidence. [See Note 2 below] As the trial judge wrote in her reasons for judgment [at para. 1]:
The plaintiffs sue the defendants, Bill Mills, and Mills Data Select (Mills) for an accounting of profits earned due to breach of their contractual agreement, fiduciary duties, or alternatively for breach of confidence. At my request counsel also addressed the question of whether a duty of good faith was applicable in the facts of this case.
[7] The trial judge dismissed the claims for breach of fiduciary duty and confidence. She then concluded that the parties were under a mutual obligation and duty of good faith in the performance of their contractual duties, and that the obligation was breached by the defendants.
[8] In the alternative, she concluded that if the duty of good faith did not apply, Mills' conduct in moving to Scepter, and thereby effectively cutting out TSP, was unconscionable.
[9] In the further alternative, the trial judge concluded that while there was no clear oral contract between the parties dealing with proprietary rights to TSP clients, there was an implied term, based on past conduct, that Mills would not "secretly" negotiate a deal for himself with TSP clients.
[10] In their pleadings, the plaintiffs did not raise the issues of any duty of good faith, unconscionability or breach of any implied term of their contract with Mills. Apart from an unrelated issue, their action was pleaded solely on the basis of breach of fiduciary duty and, in the alternative, breach of confidence.
[11] After the case was tried and written submissions had been tendered, the trial judge informed counsel that she wished to have their submissions on additional issues, not argued, about which she had concerns: this took place on the date that had been scheduled for the trial judge to deliver oral reasons for judgment. In this regard, it is important to quote in full what the trial judge said:
THE COURT: I don't know whether you were given a message because I had asked. My secretary was away and I had asked a different secretary to be in touch with you to say I would not be giving judgment today because I've looked into the law, but I wanted to bring you people here because I want to give you the opportunity to make some submissions in writing.
It appears to me that clearly the fiduciary standard was very directly addressed. The standard of unconscionability was, I think, implicitly addressed which was sort of your position. I know it wasn't specifically said. There are three [page269] standards of sort of care in a contract, and what I think happened is only one was addressed. I would like your submissions with respect to the duty of good faith and whether that applies and what flows from that and the unconscionability standard.
As well, it appears from the evidence, the argument was made that there was an oral contract and there's obviously a dispute about that, but there's also, I think, an argument to be made that there is an implied contract by conduct and I just want to give counsel the opportunity to respond to those issues which appear to me have not been squarely raised in a legal perspective. It is my habit, if something comes up or cases come up that aren't canvassed to give counsel an opportunity to respond. So I would like to put a timeline on that and I don't want to make it overly onerous.
MR. MCMURTRY: Your Honour, may I address the good faith and unconscionability? These issues haven't been raised by the plaintiff.
THE COURT: They are being raised by me. I mean I think I have to decide what standard of care applies and if the fiduciary standard doesn't apply, then I have to determine what standard does apply and what flows from that. I think it's raised there that fiduciary applies, and obviously if fiduciary applies, I don't need to address the other two. You have argued fiduciary doesn't apply and it appears to me I need to address the duty of good faith and the standard of unconscionability and what flows from that, both in terms of obligation between the parties but also in terms of remedies.
Part of the problem was I didn't start thinking about this. The trial happened and the argument happened and when I started to think about it and do my work, it just happened very quickly. It wasn't squarely raised by counsel, but I think it's raised in the issues and it's implicitly raised if the fiduciary standard doesn't apply, then what does apply and what are the consequences of that?
Nobody has to respond to anything. I just want to be candid and put on the table my concerns and give counsel an opportunity to respond. So what I suggest is a timeline. The evidence is the same. This was mostly about the legal test that applies. It wasn't really about the evidence. There was really very little factual dispute.
[12] Squarely raised on this appeal is the question of the propriety of a trial judge raising issues on her own motion and determining liability on the basis of those new issues, where those issues were neither pleaded nor raised by the plaintiffs.
The Facts
[13] There is little dispute about the facts. In November 1998, a mutual friend introduced Mills to Brown, the principal of TSP. [page270]
[14] Scepter had been a client of TSP since 1996. Initially Brown did work for Scepter, but he was not trained in all of the required applications needed by Scepter. Mills had been recommended as possessing the necessary expertise for Scepter.
[15] The Brown and Mills relationship began with a handshake and little formality or discussion. On the findings of the trial judge, specific formal contractual terms were never discussed. Mills was to perform the work required for the TSP clients, including Scepter, for a specified hourly rate, keep track of his hours and bill TSP. TSP, in turn, would bill the client using its system of pre-paid blocks of time.
[16] For four years, Mills worked for one to three days a week at the Scepter premises. He had an office there and access to all levels of Scepter personnel. During their association, Mills worked primarily for TSP but, with the plaintiffs' knowledge, he also conducted work for others as an independent contractor.
[17] Scepter was TSP's largest client and Mills' most significant source of revenue. Mills had complete responsibility for the Scepter account and, after Mills' involvement, Brown had virtually no further contact with Scepter.
[18] Early on, Mills spoke to Brown about a software application that he had developed on his own time and in which Scepter had expressed an interest. Brown agreed that Mills could bill Scepter directly for the program, and Mills did so.
[19] In late 2001 and 2002, problems began to surface at TSP. The independent contractors were unhappy with management and clients, too, were expressing concern. Two of those clients approached Mills and asked that he work directly for them. Mills told Brown of the approaches and that he had declined to work for them.
[20] During 2001 and 2002, Mills worked on a data imaging system program that he had developed outside his working hours, but for which he was billing Scepter directly. He did not seek Brown's permission for this project, and Brown remained unaware of it until it was disclosed in the course of this litigation.
[21] In July 2002, Scepter expressed its dissatisfaction with TSP to Mills and asked him to work directly for Scepter. The negotiations that followed resulted in a written agreement between Mills and Scepter dated September 1, 2002. On the trial judge's finding, Mills performed for Scepter and provided the same services to it as he had furnished during his contract with TSP.
[22] The trial judge placed particular reliance on the "conduct" of Mills and the plaintiffs, which she found "illustrated the parties' contractual expectations with respect to proprietary rights to the TSP clients". [page271]
The Decision Below
[23] The trial judge in her legal analysis concluded that the plaintiffs had not proved all the required elements for a fiduciary relationship.
[24] The trial judge next proceeded to examine at length what she described as "the standard of good faith", ultimately concluding that the parties were under a mutual obligation and duty of good faith in the performance of their contractual duties and that this obligation had been breached by the defendants.
[25] Defence counsel had objected to consideration by the trial judge of these issues. In her reasons, the trial judge responded to the defendants' objection in the following language [at para. 87]:
In the defendants' supplementary materials, counsel submits that the plaintiffs did not plead the standard of good faith and thus the defendants are unfairly prejudiced. The standard of good faith is in essence a lesser included standard of the fiduciary standard. The issue of fiduciary standard was before the court. The facts relevant to the fiduciary standard are the same facts relevant to the good faith standard. No new factual issues arise. Both parties had the opportunity to address good faith through supplementary written submissions. Since the standard of care is a matter of law, the relevant and evolving law must be applied. In these circumstances, any prejudice has been answered by the opportunity to make supplementary submissions, and perhaps may be relevant to the question of costs.
[26] Next, the trial judge considered what she described as the "unconscionability standard" and concluded as follows [at para. 94]:
If unconscionability is the governing standard, then Mills is entitled to protect his own self-interest, but not in excess, or in an exploitative manner. In my view Mills' conduct crosses the line. He was working directly for the client while retained by TSP. The work was major, continued for a year, and was not disclosed to Brown. While retained by TSP, Mills negotiated the terms of a contract with a TSP client that would have the effect of cutting out the plaintiff, with significant advantages to Mills. The defendants' hourly rate doubled. The client too achieved an advantage. This was the largest client of TSP, and Mills was aware that the loss of the client would be significant for TSP. In my view, this conduct when considered through the eyes of a business community in a commercial relationship exhibits excessive self-interest and is inherently exploitative. It offends all sense of fairness. It is unconscionable.
[27] The trial judge then considered breach of an implied term of a contract. In this respect, she concluded [at paras. 99-102]:
Due to the evidence of actual past conduct of the parties, it is not necessary to consider the alternative reasoning for an implied term of a contract known as the "officious bystander" test as described in Fridman, supra at pp. 502-03 and cited by Justice Iacobucci in M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 677 (SCC), [1999] 1 S.C.R. 618, [1999] S.C.J. No. 17, 170 D.L.R. (4th) 577, at p. 635 S.C.R., p. 588 D.L.R. [page272]
In the past Mills had sought permission to conduct work directly for Scepter for a programme he had developed on his own time. Similarly, in the past Mills had advised Brown when a TSP client was disgruntled, and had declined the clients' offers to work directly for the client to the detriment of TSP.
This time Mills did not advise Brown with respect to the status of the client. He chose to secretly negotiate a deal while performing work on behalf of TSP. This behaviour is in breach of the prior pattern of conduct established by the parties as reasonably reflecting their intentions.
Had I not found that the defendants were in breach of the obligations of good faith, I would have concluded that the defendants were in breach of the implied terms of the contract between the parties, based upon their past conduct.
[28] Finally the trial judge addressed breach of confidence and concluded that such a claim did not fit the facts of this case.
The Analysis
[29] Unfortunately, the basis upon which the trial judge found liability was not pleaded, nor was it addressed in any way in the evidence.
[30] At no time did the plaintiffs move to amend their pleadings, not even after the trial judge sought argument on the alternative theories of liability that she had raised. In such circumstances, it is obvious why the defendants did not seek to re-open the trial.
[31] In my view, and for the reasons that follow, the trial judgment cannot stand.
[32] In Rodaro v. Royal Bank of Canada (2002), 2002 41834 (ON CA), 59 O.R. (3d) 74, [2002] O.J. No. 1365 (C.A.), at paras. 59-63, Doherty J.A. noted:
Mr. Rodaro did not plead that RBC's improper disclosure to Barbican deprived him of the opportunity to negotiate a "package deal" involving the sale of the debt and his equity in the project. At no time during the months of trial or the course of lengthy argument did Mr. Rodaro suggest that the improper disclosure had caused him to lose the opportunity described by Spence J. That theory appeared for the first time in the reasons of Spence J.
It is fundamental to the litigation process that lawsuits be decided within the boundaries of the pleadings. As Labrosse J.A. said in 460635 Ontario Limited v. 1002953 Ontario Inc., 1999 789 (ON CA), [1999] O.J. No. 4071 at para. 9 (C.A.) (QL):
. . . The parties to a legal suit are entitled to have a resolution of their differences on the basis of the issues joined in the pleadings. A finding of liability and resulting damages against the defendant on a basis that was not pleaded in the statement of claim cannot stand. It deprives the defendant of the opportunity to address that issue in the evidence at trial . . . [page273]
By stepping outside of the pleadings and the case as developed by the parties to find liability, Spence J. denied RBC and Barbican the right to know the case they had to meet and the right to a fair opportunity to meet that case. The injection of a novel theory of liability into the case via the reasons for judgment was fundamentally unfair to RBC and Barbican.
In addition to fairness concerns which standing alone would warrant appellate intervention, the introduction of a new theory of liability in the reasons for judgment also raises concerns about the reliability of that theory. We rely on the adversarial process to get at the truth. That process assumes that the truth best emerges after a full and vigorous competition amongst the various opposing parties. A theory of liability that emerges for the first time in the reasons for judgment is never tested in the crucible of the adversarial process. We simply do not know how Spence J.'s lost opportunity theory would have held up had it been subject to the rigours of the adversarial process. We do know, however, that all arguments that were in fact advanced by Mr. Rodaro and were therefore subject to the adversarial process were found wanting by Spence J.
Spence J. erred in finding liability on a theory never pleaded and with respect to which battle was never joined at trial. This error alone requires reversal.
[33] Similarly in A-C-H International Inc. v. Royal Bank of Canada, 2005 17769 (ON CA), [2005] O.J. No. 2048, 254 D.L.R. (4th) 327 (C.A.), Blair J.A. wrote at paras. 15-18:
The trial judge dismissed the conspiracy claim, and appears on his own initiative to have shifted the ground for liability to a new theory, not pleaded or argued at trial, namely, conversion supported by a decision to pierce the corporate veil. In this sense, the case is similar to Rodaro v. Royal Bank of Canada (2002), 2002 41834 (ON CA), 59 O.R. (3d) 74 (C.A.), a situation in which this Court reversed a trial judge for having founded liability on a new theory first raised in his reasons. Speaking for a unanimous court in Rodaro, Doherty J.A. affirmed that "it is fundamental to the litigation process that lawsuits be decided within the boundaries of the pleadings" (para. 60), and pointed out that this notion is based on concepts of fairness: a party has the right to know the case it has to meet, and to have the opportunity to meet it. He went on to add (at paras. 62-63) [omitted]: . . . . .
Similarly, we do not know how the trial judge's conversion theory would have fared, had it been exposed to the rigours of the adversarial process. Believing that the case against him was based upon the tort of conspiracy to defraud, as pleaded, Mr. Courtney elected to call no defence and to move for a non-suit at the end of the cross-claimant's evidence. Like the bank in the Rodaro case, he succeeded on the ground that had been litigated. But the trial judge shifted to a new theory that had not been pleaded.
Had Mr. Courtney and his counsel known that they were required to meet a case based on the tort of conversion and the court's equitable jurisdiction to pierce the corporate veil, they might well have conducted their preparations for the case, and their handling of the case at trial, differently. They might have conducted the cross-examination of RBC's witnesses on a broader basis. They might have decided to call a defence, generally. In particular, [page274] they might well have decided to call Mr. Courtney in his own defence (perhaps to provide the explanation that the trial judge felt was necessary in the context of the conversion claim, but that was apparently not necessary in the context of the conspiracy claim).
Because the appellant and his counsel did not know they were facing a case about conversion and personal liability based on corporate veil principles, they were not in an informed position to make the foregoing decisions. As a result, we do not know how these theories of liability would have survived, had the battle been joined, as Doherty J.A. said in Rodaro.
[34] While the alternative theories on which the trial judge found liability here did not appear for the first time in her reasons for judgment, those theories were only raised by her after the evidence was completed and the first round of final written submissions received.
[35] As a result, these theories were never, as Doherty J.A. put it in Rodaro [at para. 62]"[subjected] to the rigours of the adversarial process". They were never pleaded and battle was never joined in respect of them in the trial process. In my view, in the particular circumstances of this case, it is no answer at this stage of the process that the defendants were afforded the opportunity to make further written argument addressing the new liability theories raised by the trial judge. The difficulty here is that the parties did not frame their lawsuit or conduct the trial on these bases. In the context of this case, the defendants were effectively deprived of knowing the case they had to meet, and of any opportunity to meet that case throughout the trial.
[36] The plaintiffs sought damages for breach of fiduciary duty or breach of confidence. The trial judge found that the plaintiffs had not met the onus of proof in respect of either of those theories.
[37] It was not until the trial judge suggested it, that the plaintiffs sought to rely on breach of a duty of good faith, unconscionability or breach of an implied contractual term.
[38] We cannot know at this stage what evidence the plaintiffs might have led at trial in support of those alternative theories anymore than we can say what evidence the defendants might have led in response. This fact alone raises serious concerns.
[39] Not knowing the case they had to meet and having been denied their right to a fair opportunity to meet that case, the defendants have been seriously prejudiced and treated unfairly. In finding liability on the bases she did, the trial judge committed reversible error. Consequently, in my view, the judgment cannot stand and the appeal must be allowed.
[40] Given my conclusion on this ground, it is unnecessary for me to address the appellants' other grounds of appeal, namely, [page275] whether the trial judge erred in her conclusions on good faith, unconscionability and implied contractual terms.
The Cross-Appeal
[41] The respondents ask by way of cross-appeal that the trial judgment be varied by findings of this court that:
(1) The trial judge erred in finding that the defendants did not owe a fiduciary duty to the plaintiffs.
(2) The trial judge erred in finding that the defendants did not commit a breach of confidence.
[42] In respect of fiduciary duty, the trial judge noted [at para. 57]:
I have difficulty finding that the relationship between the parties illustrates a mutual understanding that Mills had relinquished his self-interest and agreed to act solely for TSP. I conclude therefore that the plaintiffs have not proved all the required elements for a fiduciary relationship.
[43] I agree with this conclusion. It is clear on the facts that Mills, to TSP's knowledge, worked for third parties during his employ. He also did some work for Scepter on his own time and for which he billed Scepter directly with the blessing of TSP. He was a completely independent contractor in his relationship with TSP, and there is nothing special or unusual about that relationship that would bring it into the category of a fiduciary.
[44] As for breach of confidence, the trial judge correctly stated the legal test [at para. 103]:
(1) That the information received by Mills have the necessary quality of confidence about it;
(2) That the information was communicated to Mills in circumstances in which an obligation of confidence arose; and
(3) That Mills misused or made an unauthorized use of the information.
[45] She concluded [at para. 104]:
In my view the claim of breach of confidence does not fit the facts of this case, and this alternative claim of the plaintiffs is dismissed.
[46] I agree with this conclusion. The relationship between Mills and TSP was simply not one of confidence. There was no information received by Mills from TSP that had the necessary quality of confidence about it.
[47] Accordingly, I would dismiss the cross-appeal. [page276]
Conclusion
[48] Given the disposition that I would make of the appeal and the cross-appeal, the plaintiffs' action failed. The trial judge dismissed the only claims raised by the plaintiffs. In these circumstances, I would allow the appeal and dismiss the cross-appeal, set aside the trial judgment and, in its place, substitute judgment dismissing the action with costs. The trial judge concluded that it was reasonable for the plaintiffs to have commenced the proceeding under the ordinary procedure of the rules of court. She awarded costs to the plaintiffs on a partial indemnity scale. In view of the disposition of the appeal and the cross-appeal, the defendants are entitled to their costs of the action on a partial indemnity basis, to be assessed.
[49] I would award the costs of the appeal and the cross-appeal to the appellants and respondents by cross-appeal, fixed in the sum of $15,000 in relation to the appeal and in the sum of $5,000 in respect of the cross-appeal. Both amounts are inclusive of disbursements and GST.
Appeal allowed; cross-appeal dismissed.
Notes
Note 1: Any distinction as between the two plaintiff corporations and as between the defendant Mills and his sole proprietorship, Mills Data Select, are irrelevant to the issues raised on this appeal.
Note 2: The plaintiffs also claimed four months rent for an apartment leased to Mills.