COURT OF APPEAL FOR ONTARIO
CITATION: AB2000 Software Corporation v. Infinium Capital Corporation, 2015 ONCA 829
DATE: 20151202
DOCKET: C57543
Cronk, Lauwers and van Rensburg JJ.A.
BETWEEN
AB2000 Software Corporation, Alexandre Bevziouk
Appellants
(Plaintiffs by Counterclaim)
and
Infinium Capital Corporation
Respondent
(Defendant to the Counterclaim)
Alexandre Bevziouk, acting in person
Daniel J. Stern, for the respondent
Heard: September 2, 2015
On appeal from the judgment of Justice Alfred J. O’Marra of the Superior Court of Justice, dated July 29, 2013, and from his costs endorsement, dated October 24, 2013, with reasons reported at 2013 ONSC 5022 and 2013 ONSC 6616.
van Rensburg J.A.:
A. Overview
[1] This is an appeal from the dismissal of the appellants’ counterclaim against the respondent. The appellants assert that the trial judge erred in concluding that the contract governing the relationship between the parties had been terminated for cause and in rejecting the appellants’ claims for commissions and other compensation. The appellants also seek leave to appeal the costs awarded against them in favour of the respondent.
[2] For the reasons that follow, I would allow the appeal in part with respect to the unpaid salary and bonuses, and would allow the costs appeal in part. I would dismiss the appeal on all remaining issues.
B. Facts
[3] In March 2004, the appellant Alexandre Bevziouk was hired as the Chief Technology Officer (“CTO”) for the respondent Infinium Capital Corporation (“Infinium”). Infinium was founded in 2002 as a securities trading company engaged in proprietary capital trading. While employed elsewhere full-time, Mr. Bevziouk, working as a software developer, had helped Infinium to develop its electronic trading platform in 2003. After he was hired as CTO, Mr. Bevziouk developed, installed, and operated an algorithmic trading system for inter-listed arbitrage (the “algo-trading system”) for Infinium.
[4] There were two consecutive service agreements entered into between Infinium and Mr. Bevziouk’s corporation, AB2000 Software Corporation (“AB2000 Software”). The service agreements provided for the terms and conditions of the work to be performed by Mr. Bevziouk, and his compensation.
[5] The first service agreement was dated March 30, 2004. In March 2006, the parties executed a mutual release of their obligations under that agreement and entered into a second agreement with somewhat different terms, including an increase in the monthly payment to AB2000 Software, and eliminating Mr. Bevziouk’s stock option (for which Infinium paid him $50,000). The second service agreement, which was backdated to December 1, 2005, was in effect when Mr. Bevziouk’s services were terminated.
[6] On October 2, 2006, Infinium terminated the service agreement for cause, alleging that Mr. Bevziouk was competing with it and taking steps to sabotage the algo-trading system. Shortly thereafter, Infinium commenced a legal action against Mr. Bevziouk, his company and other defendants, for damages and other relief, including injunctive relief that was granted on consent. The appellants counterclaimed in the action, asserting a claim for unpaid compensation under the service agreement and damages for wrongful dismissal.
[7] The main action was discontinued against the other defendants in September 2012. A few weeks before the trial of the counterclaim, the main action was discontinued on consent against the appellants, with costs to be determined by the trial judge.
C. The Trial Decision
[8] The trial judge dismissed the counterclaim. He rejected the claim that AB2000 Software was owed commissions, salary and bonuses under the service agreement. He concluded that Infinium’s concerns about competition and sabotage were well-founded and that the termination of Mr. Bevziouk’s services was for just cause. The trial judge awarded costs of the action to Infinium in the sum of $260,599.38, payable by both appellants.
D. The Appeal
[9] The appellants appeal the judgment dismissing their claim, and seek leave to appeal the costs award against them. The appellants raise three issues on appeal. First, they contend that the trial judge erred in his interpretation of the service agreement with respect to compensation. Mr. Bevziouk asserts that he was entitled to receive three types of compensation that had been earned at the time of termination but not paid: commissions on trades made by Infinium traders using the algo-trading system he had developed, salary for the last month before his termination, and bonuses (which were paid but not in the amounts claimed by Mr. Bevziouk).
[10] Second, the appellants contend that the trial judge erred in finding that the service agreement was terminated for just cause.
[11] Third, the appellants seek leave to appeal the costs award, asserting that it was an error in principle for the trial judge to award Infinium costs for a claim that it withdrew on the eve of trial and, further, that the costs award is excessive.
[12] Infinium asserts that there was no error on the part of the trial judge, and that all the findings now challenged by the appellants, which were findings of fact, were amply supported by the evidence. Further, the trial judge’s costs award reflects a proper exercise of his discretion having regard to, among other things, the fact that Infinium bettered its offer to settle at trial.
E. Analysis
(1) The Service Agreement
[13] The service agreement in force at the time of termination, under the heading “Compensation”, provided the following with respect to monthly payments and bonus:
a) Pay-out:
In determination of your monthly pay-out, the Company will assess its monthly trading profit earned from trading utilizing strategies developed and personally supervised by you, less deductions applicable to your trading, including execution, clearing and capital costs, if any. Your individual compensation target is set to 10% (ten per cent) of the monthly net trading profit attributable to your trading or $14,583.33, whichever is greater. Payment will be made in the month immediately following the applicable trading month.
b) Discretionary Bonus, paid, if any, quarterly. Restricted component of the Discretionary Bonus, if any, shall be vested in two years from the date granted.
[14] During the course of his employment, Mr. Bevziouk received a monthly payment, which at the time of his dismissal was $14,583.33. While employed pursuant to the second service agreement, he also received two bonuses of $12,500, for the first two quarters of 2006.
(2) Claim for Commissions
[15] By far the most significant aspect of the appellants’ claim at trial was the claim for commissions. The algo-trading system developed by Mr. Bevziouk was deployed in 2005. He asserted a claim for a 10% commission on all the trading profits generated by the algo-trading platform from January to September 2006, in the amount of $686,801.25. He relied on the terms of the service agreement as expressly providing for the payment of commissions. Mr. Bevziouk maintained that the algo-trading platform he developed realised considerable profits for Infinium, resulting in increased earnings from $6.8 million to over $100 million annually. Mr. Bevziouk expected to receive commissions from Infinium’s profitability based upon his contributions.
[16] The claim for commissions was rejected by the trial judge. His conclusion that there was no contractual right to the payment of commissions was fully supported by the evidence. First, the wording of the agreement with respect to commissions does not fit with the role of Mr. Bevziouk within Infinium’s organization. He was a software developer, not a securities trader. The trial judge accepted the evidence of Infinium’s principals that the “pay out” wording in the service agreement was based on a template used by Infinium for contracts with its strategists and traders, and that Infinium never intended to compensate AB2000 Software by payment of commissions.
[17] The trial judge also accepted the opinion of an expert in the administration and application of securities law and regulation in Ontario that Mr. Bevziouk could not have been a “trader” as understood in the terms of the service agreement, because he was not qualified or registered as such under the applicable regulations.
[18] Further, no commissions were ever paid under either service agreement. Although Mr. Bevziouk was persistent in seeking enhanced compensation in his emails with Infinium’s principals, he focused on the question of bonus and salary, and never raised the issue of commissions. The trial judge specifically rejected Mr. Bevziouk’s testimony at trial that he had made verbal requests for commissions as inconsistent with these email exchanges. Rather, he found that the claim for commissions was first asserted in the appellants’ counterclaim.
[19] Under the terms of the service agreement, Mr. Bevziouk would only have been entitled to commissions on trades utilizing strategies he had developed “and personally supervised”. However, Mr. Bevziouk had never devised a trading strategy or supervised its use. As the trial judge observed, the traders and strategists provided Mr. Bevziouk with the strategies for which he was to design software to execute the trading ideas.
[20] In all the circumstances, I see no error in the trial judge’s rejection of the appellants’ claim for commissions. To the contrary, I agree with it.
[21] The trial judge did not address in any detail the appellants’ claims for unpaid salary and bonuses, which were admittedly a very small portion of the $12 million in damages claimed by them at trial. He simply concluded that Infinium had not breached its contract with the appellants. I turn now to those claims.
(3) Claim for Unpaid Salary
[22] The service agreement was terminated on October 2, 2006. Infinium did not make the monthly payment of $14,583.33 to AB2000 Software for September 2006. At trial, Infinium explained that it withheld payment as a set-off against the damages it believed that it had suffered as a result of the appellants’ conduct in the context of the law suit it was contemplating, and that Mr. Bevziouk had not in fact performed any duties and had not delivered anything that month. As Sergei Tchetvertnykh, a principal of Infinium, explained: “our original decision to go and sue him for damages was, in our mind, much greater than the sum that we owed him for September”.
[23] I agree with the appellants that there was no basis for Infinium to withhold the monthly payment for September 2006, which covered a period before the service agreement was terminated. While the appellants’ failure to perform may have justified Infinium’s termination of the service agreement, it is not a reasonable interpretation of the agreement that Infinium was entitled to withhold payment. Further, Infinium discontinued its claim against the appellants and is therefore not entitled to a set-off for September’s salary. AB2000 Software therefore is entitled to the sum of $14,583.33 for the month of September 2006, plus prejudgment interest on that amount.
(4) Claim for Unpaid Bonuses
[24] The service agreement provided for the payment of a quarterly bonus as follows: “Discretionary Bonus, paid, if any, quarterly. Restricted component of the Discretionary Bonus, if any, shall be vested in two years from the date granted”.
[25] For each of the first two quarters of 2006, Infinium advised Mr. Bevziouk that he had earned a quarterly bonus of $25,000. However, Infinium withheld one half of the amount, paying the total sum of $25,000 in two instalments of $12,500. The appellants contend that they are entitled to the sum of $25,000 for the first two quarters of 2006 (the balance that was withheld), as well as the sum of $25,000 for a bonus that was declared for the third quarter of 2006 but never paid.
[26] Infinium contends that the bonus was discretionary and based on satisfactory performance, and that the appellants have no right to challenge the amounts that were paid or withheld.
[27] The trial judge did not specifically deal with the bonus issue.
[28] The evidentiary record discloses that Infinium declared the appellants’ entitlement to a $25,000 bonus in each of the first two quarters of 2006. The explanation for withholding the bonus was that Mr. Bevziouk would be participating in a “long term incentive plan” as a result of which half of the bonus was “restricted” and would be paid subject to satisfactory performance two years later. There was, however, no agreement by the appellants to participate in such a plan. In any event, Infinium admitted at trial that no other employee participated in this “plan” and that no plan was ever formalized. In these circumstances, although the bonus was discretionary, once declared, there was no basis for Infinium to impose unilateral terms on its payment. AB2000 Software is therefore entitled to the sum of $25,000, plus prejudgment interest.
[29] The appellants claim entitlement to a bonus for the third quarter of 2006 on the basis that a bonus was declared for that quarter but not paid. The appellants rely on an email dated July 18, 2006 where Mr. Tchetvertnykh says that Mr. Bevziouk would “definitely get the bonus this quarter”, but that he could not sign off on it at that moment because Infinium had not completed its mid-year reviews. Infinium argues that this email referred to the bonus for the second quarter, which was in fact paid to the appellants.
[30] I agree with Infinium’s contention that this email clearly refers to the bonus for the second quarter of 2006. Mr. Bevziouk admitted this interpretation of the email in his cross-examination at trial. The record discloses no evidence that Infinium ever declared a bonus for the third quarter; indeed, having regard to the concerns about Mr. Bevziouk’s conduct at that time, it would be surprising if Infinium had decided to pay him a bonus for the third quarter of 2006.
[31] Accordingly, I would reject the appellants’ claim for a 2006 third quarter bonus.
(5) Cause for Termination
[32] The appellants contend that the trial judge erred in concluding that Infinium had just cause for termination of the service agreement. The trial judge found that Mr. Bevziouk had taken various steps in an effort to control access to the algo-trading system and to compete with Infinium. Mr. Bevziouk acknowledged that he removed the source code from the server and inserted a password protected zip file. He also acknowledged inserting extra code into the server code to prevent it from loading. The effect of these steps was that Mr. Bevziouk had complete control over the algo-trading system, and that, without his intervention, the system would not work.
[33] The trial judge considered and rejected Mr. Bevziouk’s contention that there was a bona fide security reason for the actions he had taken. He accepted the evidence of Infinium’s expert witness that the insertion of the code did not provide any theft deterrence, and that its only purpose was to permit Mr. Bevziouk to have complete control over the loading of the system, with no benefit to Infinium. He also accepted that the code, or “malware”, had the potential to cause serious disruption to Infinium’s securities trading operations.
[34] Further, there was overwhelming evidence at trial that Mr. Bevziouk, while engaged by Infinium under the terms of the service agreement, was attempting to promote certain software that would enable Infinium’s competitors to engage in algorithmic trading. The fact that his negotiations with third parties did not bear fruit is irrelevant.
[35] The trial judge did not err in concluding that Mr. Bevziouk’s employment was terminated for cause. This finding was amply supported by the evidence at trial.
(6) Costs of the Proceedings
[36] The appellants seek leave to appeal the trial judge’s award of costs in favour of Infinium in the sum of $260,599.38.
[37] Infinium, having been successful at trial in defending the counterclaim, sought costs of the proceedings in the sum of $299,499.35. This amount was comprised of its costs from the commencement of the counterclaim until May 14, 2013 on a partial indemnity basis and thereafter on a substantial indemnity scale. The claim for substantial indemnity costs after May 14, 2013 was based on the conduct of the appellants and their counsel, and also on the fact that, on May 30, 2013, shortly before the trial, Infinium had served an offer to settle the counterclaim by payment of the sum of $105,000, plus costs. In the alternative, Infinium sought partial indemnity costs of $260,599.38 for the entire proceedings. This is the amount that was awarded by the trial judge.
[38] The appellants submit that the trial judge erred in principle in making a costs award that effectively allowed Infinium its costs of pursuing the main action, which was discontinued before trial of the counterclaim. Given that Infinium discontinued the main action two months before trial, there should have been no costs ordered to either side. Alternatively, the appellants contend that the costs award was grossly disproportionate having regard to the fact that the trial lasted only six days.
[39] Leave to appeal costs is granted sparingly. Further, this court will interfere with a discretionary award of costs only where there has been an error in principle or the costs award is plainly wrong: Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, [2004] 1 S.C.R. 303, at para. 27. For reasons I will explain, I conclude that the test for leave is met in this case. On the merits, I would allow the costs appeal in part, based on what I view as the trial judge’s error in principle in dealing with Infinium’s offer to settle.
[40] The trial judge concluded that, where a defendant in an action that is dismissed at trial made an offer to settle pursuant to r. 49 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, a “bonus” in the form of substantial indemnity costs to the defendant is appropriate following the date the offer to settle was served. However, in this case, he found that “any bonus increase to costs as result of the Rule 49 offer being beaten in result will be offset by costs thrown away by the plaintiff by counterclaim.” Ultimately, he appears to have accepted that Infinium would have been entitled to the costs claimed of $299,499.35 (which included substantial indemnity costs from the date of its offer), but awarded instead costs on a partial indemnity basis throughout, in the amount of $260,599.38. The difference, the sum of $38,899.97, represents a discount of Infinium’s costs to recognize that the appellants would have been entitled to a set-off of some costs for their defence of the main action that was discontinued.
[41] The first problem with this approach is that no “bonus” for Infinium bettering at trial its offer to settle the counterclaim was warranted. Rule 49.10 provides that where a plaintiff offers to settle and obtains a judgment at least as favourable as its offer to settle, the plaintiff is entitled to substantial indemnity costs from the date of the offer, unless a court orders otherwise. However, as this court explained in St. Elizabeth Home Society v. Hamilton (City), 2010 ONCA 280, 319 D.L.R. (4th) 74, at para. 90, “there is no corresponding provision entitling a defendant to substantial indemnity costs where it makes an offer to settle that is greater than the amount ultimately awarded.” Costs on a substantial indemnity basis will only be warranted where the trial judge finds that the behaviour of the plaintiff was so egregious as to deserve a sanction: Clarington (Municipality) v. Blue Circle Canada Inc., 2009 ONCA 722, 312 D.L.R. (4th) 278, at para. 40; St. Elizabeth Home Society, at para. 92.
[42] In this case, the trial judge explicitly concluded that the conduct of the appellants at trial was not vexatious and that it did not unnecessarily lengthen the proceedings. He specifically refused Infinium’s request for substantial indemnity costs based on the appellants’ conduct. Consequently, costs on a substantial indemnity basis were never available to Infinium, and the trial judge erred in finding that they were. Infinium, as the successful party in the defence of the counterclaim, was entitled to its costs on a partial indemnity basis.
[43] The trial judge ought to have considered separately the question of the appellants’ costs of defending the discontinued main action, and whether the appellants were entitled to set-off those costs against any costs of the counterclaim. Having defended the main action up to only weeks before trial, the appellants would reasonably have expected an award of costs for their defence of the main action. As I have said, the main action was discontinued on consent, with costs of that action to be determined by the judge presiding at the trial of the counterclaim.
[44] Unfortunately, the appellants did not provide the trial judge with a bill of costs for the defence of the main action. They simply took the position in their costs submissions that there should be a complete set-off of costs up to the time the main action was discontinued, except for an additional amount of $5,000 for the appellants’ costs in preparing to defend a contempt motion that was never argued. In awarding Infinium the amount it claimed for partial indemnity costs, when he was of the view that Infinium was entitled to substantial indemnity costs from the date of its offer to settle, the trial judge in effect fixed the appellants’ costs thrown away in defending the main action (which would include the motion costs claimed) at $38,899.97, which is the difference between the two costs amounts claimed by Infinium.
[45] I would not interfere with the trial judge’s set-off of $38,899.97 on account of the appellants’ costs of defending the main action as against Infinium’s costs of the counterclaim proceeding. The appellants did not present a bill of costs, and there were numerous overlapping issues between the main action and the appellants’ counterclaim. Accordingly, on the available record, the set-off amount cannot be considered unreasonable.
[46] As for the appellants’ argument that the costs award was excessive, apart from the error noted above, I see no error in principle that would justify any further reduction in the costs awarded to Infinium. While the costs award is significant, the trial judge considered the complexity of the issues in the action, and the fact that the proceedings were outstanding for some six years. The award, in my view, is not plainly wrong.
[47] Finally, I have considered whether the appellants’ partial success on appeal justifies a reduction of the costs awarded at trial. The central issues in these proceedings concerned the claims for commission and whether Mr. Bevziouk had been terminated for cause. On the disposition of the appeal that I propose, the appellants have achieved only partial success, with respect to their compensation claim and costs. This, in my view, is not a sufficient reason to further reduce the costs ordered by the trial judge.
F. disposition
[48] Accordingly, I would allow the appeal in part. I would set aside the judgment of the trial judge dismissing the counterclaim, and grant judgment to the appellants in the sum of $39,583.33 (comprised of unpaid salary and bonuses), plus applicable prejudgment interest under the Courts of Justice Act, R.S.O. 1990, c. C.43. I would vary the trial judge’s costs award by substituting an order for costs in favour of Infinium in the sum of $221,699.41 ($260,599.38 - $38,899.97). Infinium has asked that any amounts awarded to the appellants on this appeal be set off against the trial costs they are required to pay, and I would so order.
G. COSTS ON APPEAL
[49] As success was divided on the main appeal and the costs appeal, I would order no costs in this court.
Released: (E.A.C.) December 2, 2015
“K. van Rensburg J.A.”
“I agree E.A. Cronk J.A.”
“I agree P. Lauwers J.A.”