Boyd v. Wright Environmental Management Inc., 2008 ONCA 779

CITATION: Boyd v. Wright Environmental Management Inc., 2008 ONCA 779

DATE: 2008-11-21

DOCKET: C47054

COURT OF APPEAL FOR ONTARIO

Juriansz, Watt and Epstein JJ.A.

BETWEEN:

Ed Boyd Plaintiff (Respondent)

and

Wright Environmental Management Inc., 1207974 Ontario Ltd., James Wright and Eileen Wright Defendants (Appellants)

COUNSEL: Michael Kleinman and Paul Wronski for the defendants (appellants) Chris Dockrill for the plaintiff (respondent)

HEARD: June 25, 2008

On appeal from the judgment of Justice Keith A. Hoilett of the Superior Court of Justice dated April 2, 2007.

Juriansz J.A.:

[1] Wright Environmental Management Inc. (WEMI), 1207974 Ontario Ltd. (120), James Wright (Jim) and Eileen Wright (Eileen) appeal the judgment at trial in favour of the respondent Ed Boyd (Ed).

[2] WEMI, Ed’s former employer, terminated his employment without cause on March 12, 2004. The trial judge awarded Ed damages in the sum of $57,160.49 for wrongful dismissal, reflecting a notice period of 10 months.

[3] Jim is an officer and director of WEMI. His wife, Eileen, is its sole registered shareholder. Jim is the inventor of the composter technology that was manufactured and marketed by WEMI. At the date of trial, 120 owned the patents to this technology. Jim is the sole shareholder of 120.

[4] In addition to the damages for wrongful dismissal, the trial judge granted Ed judgment:

1. declaring that Ed was entitled to a 5% equity interest in both WEMI and 120;
2. declaring that the appellants had conducted the business in a manner that was oppressive and unfairly prejudicial to Ed’s interest in the two companies;
3. directing a reference to determine the value of Ed’s interest in WEMI and 120;
4. requiring the corporate appellants to redeem and/or the individual appellants to purchase Ed’s equity interest in the corporate appellants for fair value without minority discount after the reference;
5. exemplary damages in the sum of $25,000 jointly and severally against all appellants; and
6. damages in the sum of $30,000 for breach of fiduciary duty payable jointly and severally by all appellants.

[5] The trial judge awarded Ed costs on a substantial indemnity scale fixed in the sum of $105,000 and prejudgment interest in the sum of $9,569.22, payable jointly and severally by all the appellants.

[6] In this appeal, the appellants seek:

1. a reduction in the notice period for wrongful dismissal from ten months to eight months;
2. a finding that Ed is not entitled to any equity interest in the business, or in the alternative, limiting his equity interest to 5% of WEMI;
3. to have the exemplary damages and damages for breach of fiduciary duty set aside;
4. to have the oppression remedy set aside;
5. to have the order for a reference set aside;
6. to have the judgments granted against the individual appellants set aside;
7. to have the substantial indemnity costs awarded reduced; and
8. their costs of the appeal.

[7] For the reasons that follow I would allow the appeal in part.

Facts

[8] Jim and Ed became friends when Jim bought a boat from Ed in 1987. In 1992-1993 the two entered into an informal arrangement; Ed would work for Jim without salary while continuing as a boat salesman. Jim, who was then developing his business, was unable to pay Ed a salary. However, in the event that Ed made any sales, Jim would pay him a commission. Ed also provided some short-term financial assistance to Jim’s business, for which he was later reimbursed. During this period, Jim and Ed discussed Ed’s participation in the business over and above any commissions he might earn. While they did not record their discussions in writing, Ed wrote to Jim in December 1993 confirming their verbal agreement that he “would be given shares in the company.”

[9] Ed became a full-time employee of WEMI in 1995 at a salary of $60,000 per year. When he was terminated on March 12, 2004 Ed was earning $75,000 a year and received a car allowance of $600 a month and other benefits.

[10] Throughout the years of his employment, Ed continued to press for the equity interest in the business that he had been promised. On these occasions Jim reiterated, in vague terms that Ed would receive an interest in the business and offered reasons why there were delays in that happening. Eventually, Ed retained counsel who arranged a meeting with WEMI’s counsel to address Ed’s share agreement with WEMI. The meeting was scheduled to take place on Monday, March 15, 2004. The meeting did not take place however, because WEMI summarily terminated Ed’s employment on Friday, March 12, 2004. Ed sued and at trial was awarded the relief described above.

Issues

Notice Period

[11] The appellants submit that the trial judge based his calculation of the notice period for wrongful dismissal on the entire time that Ed promoted the sale of WEMI’s technology and not just the time when he was an actual employee. They submit that the trial judge erred by considering the time that Ed worked without salary to be part of his length of service.

[12] The trial judge did comment that the “the record contemporary to the plaintiff’s entire association with the defendant bespeaks a valued and dedicated employee.” However he made this comment in the course of rejecting the appellants’ attempt to portray Ed as an ineffective employee. The appellants had led evidence that was “pejorative of the plaintiff’s character and contribution to the defendant’s operation.” The trial judge’s observation that contemporaneous documents showed that the appellants regarded Ed as a dedicated employee at all times was well grounded in the evidence. As I read his reasons, the trial judge commented on Ed’s entire association with the company in this context, not for the purpose of calculating Ed’s length of service.

[13] In any event, a notice period of 10 months was well within the appropriate range for an employee of Ed’s age, responsibilities and qualifications whether he is regarded as a nine year or an eleven year employee. There is no basis for reducing the trial judge’s assessment of the notice period.

Ed’s Entitlement to an Equity Interest

[14] The trial judge’s finding that Ed was promised and was entitled to an equity interest in the business was abundantly supported by the evidence. Ed kept notes of many of his discussions with Jim and documents written by the appellants or their representatives confirmed the existence of an agreement that Ed would receive shares in the business. I need note only some examples.

[15] The business plan of WEMI drawn up in 1996, which was produced for potential investors, clearly indicated that Ed held 5% of the company. It doesn’t matter that the business plan was prepared only for discussion purposes with potential investors and was never implemented. Even considered as a draft, it is a document prepared by WEMI and corroborates Ed’s claim.

[16] In a letter dated January 26, 2001 Jim wrote to Ed stating “Walter Bowen at Castles [sic] Brock has frozen your 5% shares. The structure of the company will be put in place including issuing all shares to current shareholders before any investors come on board.”

[17] Howard Schwartz, president and chief operating officer of WEMI wrote to Ed on February 4, 2003 and referred to Ed’s claim of an allocation of 5% shares in the family holding company. Schwartz wrote:

As you may be aware this would be subject to the prior interest of Jim because of the time and money spent by him in the development of the patents and other intellectual property rights. As was discussed with you, there were 5 people who had the same allocation, those being with you, Stephen Wright [Jim’s son], Carol Osborne [Jim’s daughter], Dennis Osborne [Jim’s son-in-law] and Burt Baillie, who started Wright Environmental with Jim Wright.

[18] Not only was Ed’s claim corroborated by the available documents, but in addition the trial judge made credibility findings that were determinative. He said “[d]istilled to its essence, the narrative inherent in the plaintiff’s evidence is true; that inherent in the defence is inherently false. Collectively, the evidence given by James and Stephen Wright, as well as that given by Patrick Michaud was tendentious, contrived and in some instances callous. It was designed to portray the plaintiff in the darkest of shades in the face of compelling circumstances that gave the lie to their evidence.” He described Jim’s evidence as more distinguished for its bias than for its contents. The trial judge found Jim’s memory to be more convenient than convincing, with obfuscation being one of the hallmarks of his evidence. He concluded that Jim’s evidence was “not defined by candour or credit.” The trial judge concluded that Ed’s evidence should be believed whenever there was a conflict between Ed’s evidence and that of any of the principal witnesses for the appellants.

[19] The trial judge’s credibility findings are manifestly justified on the record. Those findings and the compelling documentary evidence make untenable the appellants’ argument that Ed was not entitled to 5% equity interest in the business.

The scope of Ed’s equity interest

[20] The trial judge concluded that Ed was entitled to “a 5% interest in the company, in its broadest sense.” His formal judgment granted Ed a 5% interest in 120 as well as in WEMI. These were the only corporations named as defendants. The appellants submit that the trial judge erred by granting Ed a 5% interest in 120. I agree.

[21] Ed’s evidence about the arrangement that entitled him to a 5% equity interest in “the business”, while extensive and adamant, was not precise. As the trial judge noted, Ed did not have a sophisticated understanding of corporations generally and little knowledge of the corporate structure of WEMI. The arrangement was an oral one, and neither Ed nor Jim had legal advice at the time they made it. Ed variously described what he had been promised as 5% “family shares”, “founding WEMI shares”, “original Wright family holding company shares”, “founding shares”, and “family founding shares”. For example, Ed’s diary entry of June 3, 1996 indicated that Jim had affirmed that he held “family shares at 5%” but could take “normal Wright shares” if he wanted. None of these terms were used in the corporate documents relating to corporate structure of the business.

[22] The trial judge summed up Ed’s position as understanding that he was to be “regarded as part of the inner circle and would be treated as a ‘family member’”. This is consonant with what Ed pleaded in paragraph 20 of his statement of claim: that he always understood the term “family founding shares to reflect the fact that he’d been granted equity in the business.” [Emphasis added.]

[23] “The business”, for which Ed worked initially without salary, that eventually employed him, and to which he contributed some capital was the marketing of the composter technology that Jim invented. The draft business plan prepared in 1995/1996, upon which Ed relied to establish his 5% claim, indicates clearly that Jim held the patents and had granted WEMI the licence to directly exploit the technology in all markets, except in the U.K. and New England.

[24] Later, 120 was created to hold the patents. 120 owns no shares of WEMI and WEMI owns no shares in 120. Jim is the sole shareholder of 120. No “family member” or part of “the inner circle” holds shares in 120.

[25] In describing the oral arrangement as it was first made, Ed never testified that he was promised part ownership of the patents or even that Jim told him that WEMI owned or would own the patents. As noted above, Ed’s earliest claim was that he “would be given shares in the company.” The company at that time was WEMI. In the absence of any evidence that at the time the contractual arrangement was made the contracting parties agreed that WEMI or “the family” owned or would own the patents, there was no basis for awarding Ed a proprietary interest in the patents. Ed, at most, was entitled only to the same treatment as other family members.

[26] I would set aside the trial judge’s award to Ed of a 5% interest in 120, leaving the award of a 5% interest in WEMI in place.

Breach of Fiduciary Duty

[27] The trial judge provided scant reason to support his award of $30,000 damages for breach of fiduciary duties payable jointly and severally by all the appellants. He merely said that these damages were to recognize “the unique relationship that was created between the plaintiff and Jim which required the latter to act in good faith and with candour in his dealings with the former.”

[28] Neither 120 nor Eileen had a relationship with Ed. For most of the time 120 did not exist and when it was created, the only thing it did was hold the patents that WEMI was licensed to exploit. Eileen and Ed were fellow shareholders in WEMI. The evidence discloses no basis upon which either Eileen or 120 could be found to be a fiduciary of Ed.

[29] Arrangements entitling employees or others to shares in a business are not unique or even unusual. Other than the ability to honour or breach the contract with Ed, Jim and WEMI held no discretion or power that they could unilaterally exercise to affect his interests and to which he was peculiarly vulnerable. More than a contract entitling Ed to equity in the business is required to create a fiduciary relationship.

[30] I would set aside the trial judge’s finding of a breach of fiduciary duty and the consequent award of damages he made for breach of that duty.

Exemplary Damages

[31] At the hearing, the appellants submitted that the trial judge’s award of exemplary damages of $25,000 should be set aside. They argued that the appropriate remedy, if one were warranted, would be an award of Wallace damages against WEMI by increasing the notice period. They asserted that the trial judge, by awarding exemplary damages, was punishing them for the manner in which their counsel conducted the trial. In addition, they argued that the award of exemplary damages against Jim could not stand as there was no finding of an actionable wrong independent of Ed’s employment.

[32] The trial judge stated he was not satisfied that the circumstances surrounding Ed’s termination mandated the application of the Wallace principle. He made clear the exemplary damages he awarded were not compensatory in nature but punitive. He stated that he regarded the breach of the employment contract as “almost incidental” to the breach of the agreement to give shares in the business.

[33] The premise of the appellants’ argument that Wallace damages and not punitive damages might have been appropriate is that there was but one contract – an employment contract, a term of which entitled the employee to shares in the business. However, the trial judge took the view there were two separate contracts—one for a share of the business and the other for employment. The fact that the agreement to give Ed a share of the business was made years before he was employed by WEMI makes the trial judge’s analysis justifiable. The breach of the employment agreement was incidental to the breach of the prior agreement to give Ed a share of the business.

[34] The appellants are correct that exemplary damages are rarely awarded in a contract case and in any event, require an “actionable wrong” in addition to the breach sued upon. Here, this was the related breach of the employment contract. WEMI fired Ed just before the meeting arranged by his counsel to deal with his contract for shares in the business. The circumstances of the breach were egregious and rightly offended the conscience of the court. The trial judge made it clear that this award of damages was not compensatory, but was intended to indicate the court’s displeasure with the heinousness of the defendants’ conduct.

[35] I would not interfere with the award of exemplary damages against WEMI.

Oppression

[36] The trial judge’s simply stated that his award of the oppression remedy was well founded on the facts as he found them. Reading his reasons as a whole makes evident that the basis for the award is that Ed earned his equity in the business by “sweat labour” but was unfairly deprived of the interests and rights of a shareholder by the way the affairs of the corporation were conducted. Granting the oppression remedy on such a basis was within the scope of the trial judge’s discretion. I see no basis to interfere.

[37] While a court must guard against too easily resorting to the oppression remedy when other remedies are adequate, here the oppression remedy is required to support the trial judge’s order that Ed’s shares be redeemed. The facts as found by the trial judge make an order that the Ed’s share interest be redeemed sensible in the circumstances.

The Reference

[38] Rule 54.02 permits a judge, without the consent of the parties, to order a reference where a prolonged examination of documents or investigation is required that cannot conveniently be made at trial or where there is a substantial issue in dispute that requires the taking of accounts. Here a reference is required to assess the value of Ed’s share interest in WEMI. There is no merit to the appellants’ submission that the trial judge erred by bifurcating the trial by ordering a reference.

[39] That being said, the directions the trial judge gave for the reference need to be modified in some respects.

[40] First, those directions are predicated on Ed being entitled to a 5% interest in both WEMI and 120. I would amend paragraphs 6 (e), (f), (g), and (h) of the judgment to delete all references to 120. The reference can inquire into the affairs of 120 to the extent that it is an “associated and affiliated business entity” of WEMI, or that improperly inflated licence fees were paid to it.

[41] Second, the trial judge’s directions provide that Jim and Eileen return to WEMI any money found to have been improperly taken from it. This order is unnecessary given the order that Ed’s share interest be redeemed. Once any money improperly taken out of WEMI is accounted for in the evaluation of Ed’s share interest, it is immaterial if the money is actually returned or not.

Substantial indemnity costs

[42] The appellants did not contest the trial judge’s award of substantial indemnity costs, but submitted that the amount awarded should be reduced to the extent of their success on appeal. While the appellants have succeeded on some issues, I would not interfere with the trial judge’s discretion in awarding substantial indemnity costs at trial. He made it clear that he awarded that scale of costs because of the way the appellants conducted the trial, commenting that they wasted much trial time attempting to tarnish Ed’s reputation.

Parties

[43] The judgment at trial was made against all defendants jointly and severally except for the damages for wrongful dismissal, which were awarded only against WEMI. The trial judge did not explain why he pierced the corporate veil for the remaining relief granted but it is evident that he thought it was just and equitable to do so.

[44] The “just and equitable” ground for piercing the corporate veil, suggested in earlier cases, was firmly rejected by Sharpe J. in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co., 1996 CanLII 7979 (ON SC), 28 O.R. (3d) 423, [1996] O.J. No. 1568 and upheld on appeal to this court. In Transamerica Sharpe J. quoted from Gower, Modern Company Law, 5th ed. (1992) which sets out only three circumstances in which the courts can pierce the corporate veil:

(1) When the court is construing a statute, contract or other document.

(2) When the court is satisfied that a company is a “mere facade” concealing the true facts.

(3) When it can be established that the company is an authorized agent of its controllers or its members, corporate or human.

[45] The eighth edition of Gower & Davies, Principles of Modern Company Law published in 2008 says, at page 206:

Although the interests of justice may provide the policy impetus for creating exceptions to the doctrines of separate legal personality and limited liability, as an exception itself it suffers from the defect of being inherently vague and providing to neither courts nor those engaged in business any clear guidance as to when the normal company law rules should be displaced. Consequently, it is difficult to find cases in which “the interests of justice” have represented more than simply a way of referring to the grounds identified above in which the veil of incorporation has been pierced.

[46] The evidence in this case established none of these circumstances and therefore, I see no basis for piercing the corporate veil. This, together with the appellants’ success on other issues, makes a cataloguing of the relief against the various parties appropriate. I would amend the relief granted as follows:

1. the relief granted in paragraph one of the judgment, damages for wrongful dismissal against WEMI, remains in place;
2. WEMI, alone, is liable for the exemplary damages granted in paragraph two of the judgment;
3. the damages for breach of fiduciary duties awarded in paragraph three of the judgment are set aside;
4. paragraph four of the judgment is limited to granting a 5% equity interest in WEMI;
5. the oppression remedy granted in paragraph five of the judgment applies primarily to WEMI, but also supports the order that its director Jim, and its majority shareholder Eileen redeem Ed’s share interest if WEMI does not;
6. the reference ordered in paragraph six is to determine the value of Ed’s 5% equity interest in WEMI;
7. paragraphs seven, eight and nine apply only to WEMI; and
8. paragraph ten does not apply to 120.

Conclusion

[47] I would allow the appeal in part and grant judgment in accordance with these reasons.

[48] In view of its success on appeal, 120 is entitled to its costs of the appeal, which I fix in the amount of $7500. 120 is also entitled to its costs at trial. Counsel are urged to settle those costs, but if they are unable to do so they may make written submissions through the court’s senior legal counsel.

[49] WEMI has been substantially unsuccessful and I fix costs against it in the amount of $10,000. The individual appellants have had mixed success. I would fix costs in their favour in the amount of $5000. All amounts are on the partial indemnity scale and include disbursements and GST.

“R.G. Juriansz J.A.”

“I agree David Watt J.A.”

“I agree G. Epstein J.A.”

RELEASED: November 21, 2008