COURT OF APPEAL FOR ONTARIO

2016 ONCA 434

DATE: 20160602

DOCKET: C60952

Strathy C.J.O., Blair and Lauwers JJ.A.

BETWEEN

Doug Kechnie and Kechnie Financial Group Inc.

Plaintiffs

(Appellants)

and

Sun Life Assurance Company of Canada, Sun Life Financial Investment Services (Canada) Inc. and Sun Life Financial Distributors (Canada) Inc.

Defendants

(Respondents)

Jeffrey Larry and Alysha Shore, for the appellants

Stephen F. Gleave and Richelle M. Pollard, for the respondents

Heard: May 13, 2016

On appeal from the Judgment of Justice E. M. Stewart of the Superior Court of Justice, dated November 25, 2015, with reasons reported at 2015 ONSC 3714.

R.A. Blair J.A.:

Factual Overview

[1] The appellants seek to set aside the judgment of Stewart J. dismissing their claim against Sun Life Assurance Company of Canada for the payment of certain commissions.

[2] Doug Kechnie is an insurance agent and investment advisor who sold Sun Life insurance and financial products to his clients for more than 30 years, through his company Kechnie Financial Group Inc. ("KFG"). Sun Life terminated its agreements with Mr. Kechnie and KFG (together, "the Kechnies"), as it was entitled to do, in October 2008.

[3] At the time, the Kechnies had accumulated a "book of business" that would entitle them to post-termination commissions of $22,435.19 per month for a period of 10 years (roughly $1.85 million in present value terms) in accordance with what is known as Sun Life's Commissions on Release ("CORe") program. Under that program, Sun Life's advisors and agents were paid commissions following termination over a 10-year period, based on a percentage of the value of the estimated commissions that Sun Life reasonably anticipated would be payable on the products sold by them but remaining with Sun Life following termination for that period.

[4] But the CORe agreements also provided, in s. 6.7.2, that no further commissions would be payable if, after termination and during the 10-year period, the advisor "advises, counsels or induces a Client holding a Policy on which such Commissions are being paid, to: (a) terminate, surrender, cancel, or Replace the Policy; (b) allow the Policy to lapse; or (c) reduce the amount of the Premiums being paid under the Policy." It is the enforceability of Sun Life's ability to terminate the Kechnies' CORe payments pursuant to this clause that is at the heart of the dispute.

[5] Following the termination, Mr. Kechnie joined his son at another insurance and financial advisory agency. Although there is a dispute over the extent to which it occurred, and the value of the business involved, it is uncontestable on the record that Mr. Kechnie "advised, counselled or induced" a significant number of his Sun Life clients to terminate or replace their Sun Life products and policies and to transfer them to his new business. Upon discovering this – after payment of the first monthly amount – Sun Life terminated the future stream of CORe payments. The Kechnies' claim to recover them was dismissed at trial.

[6] The Kechnies appeal, arguing that their CORe rights were "vested" proprietary rights at the time of termination, that the CORe termination provisions were unenforceable forfeiture provisions, and that they were entitled to relief from forfeiture and, therefore, to the payment of the commissions (or at least the CORe commissions less the commissions Mr. Kechnie admits to have received from the transferred business). They contend that the trial judge erred in failing to hold that their rights to the payment of CORe commissions were "vested" rights at the time of termination and by holding, instead, that they were "contingent" rights conditional upon the appellants' compliance with the payment-for-release requirements in the CORe agreements.

[7] I reject these submissions.

Analysis

The CORe Program

[8] Although it may be expressed in differing ways, the central concept driving the CORe program is the following. In exchange for the terminated advisor's book of business remaining within the Sun Life constellation – for transition to other Sun Life advisors who are willing to pay a price for receiving them – and in recognition of the advisor's contribution in creating that asset for Sun Life, the terminated advisor is to be paid commissions reflecting some portion of the continuing premium and other incidental revenue generated by that business over a period of 10 years. The terminated advisor profits from a continuing flow of revenue, tied to the previous business, for an extended period. Sun Life profits by retaining the benefits of the long-term retention of existing business and the potential for the generation of new business from those clients; it does so through its ability to transfer the business to new advisors for a price. To protect the integrity of the CORe program, however, the terminated advisor loses the right to the stream of post-termination commissions if the advisor engages in "replacement" activities that result in the book of business being transferred elsewhere. Were it otherwise, the entire purpose of the CORe program would be undermined: new advisors would be unwilling to pay for a book of business that might well be enticed away from them by a terminated advisor with an existing long-standing client relationship; Sun Life would therefore lose the long-term benefits of retention of the business; and the terminated advisor would profit twice over, by receiving both the CORe payments based on the released book of business in addition to the revenues and other benefits derived from the book of business the advisor is supposed to have released, but rather entices away.

[9] The key is that the book of business remains with Sun Life. As the respondent observes: "It is for this exact reason that CORe is called Commission on Release" (emphasis added). In relation to the termination of the CORe payments, the agreements also stipulated in s. 6.7.4:

The Advisor acknowledges and agrees that:

(b) in agreeing to the terms of [the Schedule setting out the CORe payments] the Company assumes that the Advisor and the Representative will not engage in the conduct referred to in section 6.7.2 of this Agreement.

[10] The trial judge accurately captured the sense and purpose of the CORe program when she stated, at para. 28:

The clear language of the Agreements demonstrates that the parties intended that continuation of the CORe payments was to be contingent upon compliance with the obligations imposed upon the Agents, and [upon the Agents'] refraining from interfering with Sun Life's arrangements to retain the business of those clients historically serviced by the Plaintiffs. If the Plaintiffs were not prepared to comply, they were free to engage in such conduct subject to any non-solicitation provision. By so doing, however, they would give up all entitlement to receipt of CORe payments.

The Vesting Issue

[11] At trial and on appeal the appellants argued that their right to CORe payments was a vested proprietary right that had been fully earned, and to which they had become fully entitled, prior to termination. They see the resolution of the vesting issue as a threshold question that must be dealt with before the secondary question regarding the enforceability of the CORe termination provisions can be considered. In their view, it is a "legal pre-requisite" that an advisor's right to CORe payments be vested "in order for the [relief from] forfeiture analysis to apply".

[12] The appellants submit that the trial judge failed to conduct a proper analysis of the issue and erred in failing to hold that their right to CORe payments was vested.

[13] I see it differently.

[14] The foregoing observations about the nature and purpose of the CORe program apply equally whether the right to the future stream of commissions is characterized as "vested" or "contingent". If the Kenchies' entitlement to CORe payments was a "vested" right, it was subject to being "divested", or forfeited, upon their choice to engage in the targeted economic activity; if it was a contingent contractual right, it was subject to being defeated, or forfeited, if the conditions underpinning that right to payment were not satisfied because of that same choice.

[15] The appellants provide no authority for the proposition that relief from forfeiture only lies where a contractual provision operates to deprive a defaulting party of a vested or proprietary right and, in my view, the jurisprudence does not impose such a requirement.

[16] Accordingly, while a finding that the CORe program provided the Kechnies with a vested proprietary right to the future stream of payments may provide them with a stronger footing to resist forfeiture – because of a general reluctance by the courts to deprive people of a vested property right – such a finding is not necessary for a determination of the proceeding. A contractual term that provides for the forfeiture of the right to future payments in the event the holder of the right engages in certain conduct in the future may or may not be enforceable by the courts, whether the right has become vested or not. As I explain below, enforceability depends on whether the forfeiture clause has penal consequences and, if so, whether it would be unconscionable for the innocent party to receive the benefit of the forfeiture: 869163 Ontario Ltd. v. Torrey Springs II Associates Ltd. Partnership (2005), 2005 CanLII 23216 (ON CA), 76 O.R. (3d) 362 (C.A.). Whichever path is followed – a vested property right or a contingent contractual right – each leads to the same gateway through which the appellants must pass: relief from forfeiture.

[17] The real issue here is not whether the Kechnies' right to CORe payments was vested or contingent. The real issue is whether the CORe payment termination provision is properly characterized as a forfeiture clause with penal consequences and, if so, whether the Kechnies are entitled to relief from forfeiture in the circumstances. The trial judge adopted this overall approach. In the process, she analysed the nature of the CORe agreements for this purpose and concluded that they provided for a contingent right to the future payments, subject to the Kechnies complying with the non-replacement restrictions of s. 6.7.2. That she declined to adopt the appellants' submission that the rights were vested was not fatal to her ultimate decision rejecting their claim.

The Forfeiture Analysis

[18] The appellants rightly refrain from asserting that the CORe payment termination clause is a "penalty" and therefore unenforceable because of the common law's reluctance to enforce such clauses. A penal clause involves the payment of a sum as a consequence of a breach that does not represent a genuine pre-estimate of damages at the time the contract is entered into: Dunlop Pneumatic Tyre Co. v. New Garage & Motor Co., [1915] A.C. 79 (H.L.), at pp. 86-87.

[19] The CORe payment termination clause is not such a provision. However, it may properly be characterized as a "forfeiture clause", because it involves "the loss, by reason of some specified conduct, of a right, property, or money": Torrey Springs, at para. 22. And it could, potentially, involve "penal consequences", since the right forfeited by the defaulting party might in some circumstances bear no relation to the loss suffered by the innocent party. Counsel for the appellant gave us an example of the latter when he posited a situation where termination of a significant CORe payment stream occurred after a terminated advisor enticed away a de minimus portion of the total book of business the advisor had released to Sun Life on termination.

[20] Default triggering the operation of a forfeiture clause attracts a relief-from-forfeiture analysis where there are concerns about "penal consequences" and about "unconscionability". The jurisprudence recognizes – in the spirit of honouring parties' rights to freedom of contract and their right to define their own consequences of breach – that penal clauses and forfeiture clauses (referred to below as "stipulated remedy clauses") may be enforced unless these two requirements underlying the granting of relief from forfeiture weigh against it.

[21] For this reason, the appellants are incorrect when they assert that the trial judge erred in considering whether the CORe payment termination clause had penal consequences. Penal consequences are the first concern in the relief-from-forfeiture inquiry. Equity does not relieve against all forfeiture consequences that may be negotiated by parties. It relieves against "penal" forfeitures. The analysis is conducted as of the time of the default, and not on the basis of a hypothetical situation.

[22] Sharpe J.A. put it this way in Torrey Springs, at paras. 25-26:

Equity, on the other hand, considers the enforceability of forfeitures at the time of breach rather than at the time the contract was entered.[^1] Equity also looks beyond the question of whether or not the stipulated remedy has penal consequences to consider whether it is unconscionable for the innocent party to retain the right, property, or money forfeited. As explained by Denning L.J. in Stockloser v. Johnson, [1954] 1 All E.R. 630 (Eng. C.A.) at 638: "Two things are necessary: first, the forfeiture clause must be of a penal nature, in the sense that the sum forfeited must be out of all proportion to the damage; and, secondly, it must be unconscionable for the seller to retain the money."

... The central pillar of the appellant's argument, as I understand it, is that there is an iron-clad rule to the effect that all stipulated remedy clauses, whether penalties or forfeitures, assessed at the date of the contract as having penal consequences will not be enforced. In my view, that proposition does not represent an accurate statement of the law. Not all stipulated remedy clauses having penal consequences are unenforceable. In particular, the equitable doctrine of relief from forfeiture enforces such penalty clauses, where they are in the form of a forfeiture, where it is not unconscionable to do so. [Emphasis added.]

[23] Much of the analysis in Torrey Springs was directed towards smoothing out the rigid distinction between the common law's treatment of penal clauses (unenforceable at common law) and equity's treatment of forfeiture clauses (subject to relief if the penal consequences and unconscionability requirements are met), concluding, at para. 32, that, "courts should, whenever possible, favour analysis on the basis of equitable principles and unconscionability over the strict common law rule pertaining to penalty clauses." While this distinction is not important for this appeal, the underlying principle for moving away from the distinction – a reluctance to extend the strict common law rule refusing to enforce penalty clauses – is of some significance because it reinforces the growing tendency in the jurisprudence favouring the enforcement of stipulated remedy clauses that have been freely negotiated by the parties. Referring to the reluctance to extend the common law rule and to the enforcement of stipulated remedy clauses, Sharpe J.A. added the following, at para. 34 in Torrey Springs:

This is closely related to the fourth factor, namely, the policy of upholding freedom of contract. Judicial enthusiasm for the refusal to enforce penalty clauses has waned in the face of a rising recognition of the advantages of allowing parties to define for themselves the consequences of breach. As I have already noted, in Elsley, supra,[^2]Dickson J. labeled the penalty clause doctrine as "a blatant interference with freedom of contract," a sentiment echoed by the English Court of Appeal in Else.[^3]

[24] What flows from this is that the trial judge was required to determine whether the CORe payment termination clause had penal consequences – a determination that is made as of the time of default – and, if so, whether relief from forfeiture should be granted because it would be unconscionable to permit Sun Life to retain the benefits of the unpaid CORe amounts. That is precisely the analysis in which she engaged.

Relief from Forfeiture

[25] After examining the provisions of the CORe agreements and arriving at her interpretation of their meaning, beginning at para. 44, the trial judge addressed the question whether the provisions disentitling the appellants to receive the CORe payments were "unenforceable as punitive forfeiture clauses or an unreasonable restraint of trade".[^4] She held they were not.

[26] The appellants accept that trial judge applied the proper test for granting relief from forfeiture, as set out in Kozel v. Personal Insurance Co., 2014 ONCA 130, 119 O.R. (3d) 55, at para. 31:

In exercising its discretion to grant relief from forfeiture, a court must consider three factors: (i) the conduct of the applicant, (ii) the gravity of the breach, and (iii) the disparity between the value of the property forfeited and the damage caused by the breach.

[27] However, they submit that she erred in in applying the test. I disagree.

[28] Whether to grant or refuse relief from forfeiture, as an equitable remedy, is a purely discretionary decision: the Courts of Justice Act, R.S.O. 1990, c. C.43, s. 98; Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., 1994 CanLII 100 (SCC), [1994] 2 S.C.R. 490, at para. 32. Here, the trial judge reviewed the record in the context of all three of the foregoing factors. In substance, the appellants simply disagree with the findings she made.

[29] For example, the appellants contend that the disparity between their loss of the CORe payments and any damage Sun Life suffered from the breach was entirely disproportionate. They submit that they lost over $1.8 million in CORe payments, while recovering only about $600,000 from the transferred business and that Sun Life benefitted additionally by receiving almost $675,000 from other Sun Life advisors who purchased portions of the Kechnies' book of business. They say that Mr. Kechnie's conduct was reasonable and did not constitute a blatant or intentional breach of the terms of the agreement, and that Sun Life treated the Kechnies badly.

[30] The trial judge did not see it that way, however. She accepted Sun Life's evidence and held that its reconstructed data was "more reliable than the figures offered by the Plaintiffs" (para. 57). She found that: Mr. Kechnie had transferred over 600 Sun Life clients and 60 life insurance policies to his son's firm; roughly $20 million of Mutual Funds assets were moved from Sun Life to the new business; the market value of the mutual funds and segregated funds in the book of business formerly serviced by Mr. Kechnie at Sun Life decreased by 84% between 2008 and 2014; and Mr. Kechnie could earn between $2-3 million in revenue from the transferred business with the result that he would earn from those clients revenue that was at least equal to or greater than the CORe payments he would otherwise have received (paras. 33-40). She also found that Mr. Kechnie "knew very well the nature of the provisions he had contracted to and their implications for conduct following termination" and, indeed, had been "directly involved in the various internal discussions which occurred surrounding the rollout of the new system" (paras. 49 and 52).

[31] On the basis of this evidence the trial judge characterized Mr. Kechnie's activities as "a systematic attack on the goodwill in the former block of business" (para. 33) and (on his premise that he would be entitled to receive the CORe payments) as "a flagrant breach of contractual obligations" (para. 53).

[32] In the end, the trial judge determined that the CORe payment termination provisions were not punitive in nature or a penalty, nor were they contrary to public policy. Having so found, she correctly concluded that the principles of relief from forfeiture were not engaged. Nonetheless, she went on to address the appellants' claim that the operation of the provisions was unconscionable, harsh and inequitable. Her findings led her to reject these claims as well.

[33] These conclusions were amply supported by the record and completely justify the trial judge's conclusion that the appellants were not entitled to relief from forfeiture in the circumstances.

Other Considerations

[34] Because it is unnecessary to characterize the CORe payment right as "vested" or "contingent" for the purposes of resolving this proceeding, I need not address the jurisprudence referred to us in which courts have characterized payments made under the CORe program, or similar programs, for other purposes and in other contexts such as those related to compensation payments (e.g., Levinsky v. Toronto-Dominion Bank, 2013 ONSC 5657), or to the calculation of equalization payments in family law situations (e.g., Dunham v. Dunham, 2012 ONSC 2338; Brandt v. Brandt, 1998 CanLII 28188 (MB QB), [1998] M.J. No. 531 (Man. Q.B.)).

[35] Nonetheless, the trial judge's decision is consistent with other authorities supporting the enforceability of forfeiture provisions in contracts of a similar nature to the CORe payment termination clause.

[36] For example, Inglis v. The Great-West Life Assurance Co., 1941 CanLII 85 (ON CA), [1942] 1 D.L.R. 99 (Ont. C.A.), involved a forfeiture clause respecting payments by an insurer to an insurance agent following termination of employment. The clause provided that the company would continue to pay the agent "the commissions on business written during the continuance of this agreement to which the Agent would have been entitled if this agreement had remained in force"; however, if the agent became "connected with or [did] business directly or indirectly for any other life insurance company" the commissions were forfeited. The agent subsequently began to work for another life insurance company. His claim to recover the commissions was unsuccessful. The Court of Appeal held that the forfeiture clause did not constitute a penalty. Its reasoning is instructive for the present appeal. At p. 102, Masten J.A. said:

We are of the opinion that the provisions of [the forfeiture clause] are not in the nature of a penalty. Whether it is to be considered as part of the remuneration provided by the agreement when read as a whole, or as a separate provision entered into in consideration of the right of either party to cancel on notice, appears to the Court to be immaterial. In either case it is the agreement of the parties, not a penalty. The plaintiff agreed that if he chose to join another life insurance company these payments would cease. He did so choose, and their cessation is not in the nature of a penalty but is in pursuance of the agreement by which the plaintiff voluntarily bound himself in the beginning.

[37] The Court also agreed that the clause was not in restraint of trade. Other authorities holding that similar forfeiture provisions are valid and enforceable against the defaulting party, either because they do not constitute a penalty or because they do not operate in restraint of trade, or both, include: Webster v. Excelsior Life Insurance Co. (1984), 1984 CanLII 682 (BC SC), 50 B.C.L.R. 381 (S.C.), at p. 382; Roy v. Assumption Mutual Life Insurance Co. (2000), 2000 CanLII 46937 (NB QB), 222 N.B.R. (2d) 316 (Q.B.), at paras. 56-61; Burgess v. Industrial Frictions & Supply Co. (1987), 1987 CanLII 2722 (BC CA), 12 B.C.L.R. (2d) 85 (C.A.), at pp. 89-90. These decisions support the trial judge's conclusions.

Disposition

[38] For the foregoing reasons, I would dismiss the appeal.

[39] In accordance with the agreement of counsel I would fix the costs of the appeal in favour of the respondents in the amount of $24,600 inclusive of disbursements and all applicable taxes.

Released: June 2, 2016

"R.A. Blair J.A."

"I agree G.R. Strathy C.J.O."

"I agree P. Lauwers J.A."

[^1]: In contrast to the common law, which focused on whether a clause was a penalty clause as at the time the contract was made. [^2]: Elsley v. J. G. Collins Insurance Agencies Ltd., 1978 CanLII 7 (SCC), [1978] 2 S.C.R. 916. [^3]: Else (1982) Ltd. V. Parkland Holdings Ltd., [1993] E.W.J. No. 4674 (C.A.). [^4]: The appellants do not assert a restraint of trade argument on appeal.