Court of Appeal for Ontario

Citation: Cana International Distributing Inc. v. Standard Innovation Corporation, 2018 ONCA 145

Date: February 14, 2018

Docket: C63087

Judges: Laskin, Sharpe and Fairburn JJ.A.

Parties

Between

Cana International Distributing Inc. c.o.b. Sexy Living Plaintiff (Appellant)

and

Standard Innovation Corporation Defendant (Respondent)

And Between

Standard Innovation Corporation Plaintiff by Counterclaim (Respondent)

and

Cana International Distributing Inc. c.o.b. as Sexy Living and Micheline Ciolli Defendants by Counterclaim (Appellants)

Counsel

For the Appellants: Shaun Laubman and Laura M. Wagner

For the Respondent: Peter Mantas and Tala Khoury

Hearing and Appeal

Heard: January 23, 2018

On appeal from: The judgment of Justice P. Smith of the Superior Court of Justice, dated November 18, 2016, with reasons reported at 2016 ONSC 7197.

Reasons for Decision

Introduction

[1] The appellants submit that the trial judge erred in finding that there were no agreements reached between the appellant, Cana International Distributing Inc. ("Cana"), and the respondent, Standard Innovation Corporation ("SIC"), for exclusive rights to distribute SIC's product, a sex toy called the "We-Vibe". The appellants also argue that the trial judge erred by failing to consider their alternate claim for quantum meruit and by refusing to deal with the defence of qualified privilege to the respondent's defamation counterclaim.

The Alleged Agreements

[2] Cana is a distributor of adult sexual health and wellness products. The parties had extensive discussions relating to the distribution of SIC's We-Vibe. These discussions involved two streams of distribution. The first was the mainstream industry targeting retail outlets such as food and drug stores. The second was the adult industry, also referred to as the "sex toy industry". The appellants assert that separate agreements were reached giving them exclusive distribution rights for the We-Vibe in both streams. The trial judge rejected both contractual claims, finding that no binding agreement was reached for either stream.

[3] For the following reasons, we conclude that the trial judge erred in finding no mainstream industry agreement and that a binding agreement was made and subsequently breached by the respondent. We do not, however, accept the submission that the trial judge erred in finding that no agreement was reached for the adult industry stream. We also reject the submission that he erred in failing to consider the alternate claim for quantum meruit and the defence of qualified privilege.

The Mainstream Agreement

[4] The trial judge's finding that no agreement was reached was a finding of fact or mixed fact and law attracting a deferential standard of review in this court. However, we are satisfied that the trial judge made palpable and overriding errors of fact and an extricable error of law that justifies appellate intervention with respect to the mainstream agreement.

[5] The terms of the agreement were negotiated by Nelson Wood, president of SIC, and Micheline Ciolli, owner and president of Cana. On August 18, 2009, they exchanged emails requesting signatures on a written "term sheet". Wood asked Ciolli to sign the signature page and fax it back and stated "I will sign and fax back a copy to you." He added "I look forward to growing the mainstream market with you" and noted "[n]ow we can do a term sheet for the Sex Toy Industry." Ciolli signed the term sheet and mailed it as requested. Wood was away from the office at the time but on September 22, 2009 returned by email a scanned signature page of what he described as "our mainstream agreement".

[6] Internal SIC emails and memoranda indicate that SIC was proceeding on the basis of a concluded agreement. Both parties conducted themselves in this manner until their relationship broke down in May 2010. Cana performed its obligations as exclusive distributor, secured new customers and dealt with warranty claims. In November 2009, SIC notified its Canadian customers that Cana was the exclusive distributor for the We-Vibe in Canada. SIC and Cana issued a joint press release to the same effect.

[7] In SIC's original statement of defence, it admitted that a mainstream agreement had been reached. While that admission was withdrawn several years later, it corresponds with the tenor of the email exchanges and the way that SIC conducted itself up to that point. In an affidavit filed on an interlocutory injunction motion in September 2010, Wood swore that "[t]he parties entered into an agreement in or about August 2009 for the sale of the We-Vibe II into the Food and Chain Drugstore market". He also swore: "As far as I am aware, there is no dispute regarding the Mainstream Agreement. It has operated relatively smoothly." It was only well into this litigation in February 2014 that SIC changed its position and obtained an order permitting it to withdraw the admission it had made in its statement of defence.

[8] In his reasons for judgment, at para. 23, the trial judge described the August – September 2009 email exchange and the signing of the term sheet in the following way: "[A]t best, the two separate signed copies were two unique offers, neither having been accepted by the other party. This is evidenced by subsequent negotiation of their intended agreement." At para. 124 he stated: "The emails of August and September 2009, referring to a signed copy of the agreement, evidence, at best, two distinct offers, neither of which was accepted by the other party. Moreover, the parties continued to negotiate the terms of this agreement."

[9] In our respectful view, these findings reflect both a palpable and overriding error and an extricable error of law.

[10] The trial judge's characterization of the August and September 2009 exchange of emails as an exchange of "two unique offers" cannot be reconciled with the evidence. There were not "two unique offers" but rather two copies of the same document signed in counterpart by both parties. That is borne out not only by the fact that Ciolli and Wood both signed the same document but also by the subsequent emails and conduct of the parties, particularly that of SIC, treating the term sheet they signed as constituting their agreement. The trial judge did not consider SIC's internal emails indicating that an agreement had been reached. Nor did he advert to the fact that SIC had, until late in the day, taken the position from the pleading stage and through two interlocutory injunction motions that an agreement had been reached.

[11] If the basis for the trial judge's finding was that by signing in the way they did, the parties had not reached an agreement, he made an extricable error of law by ignoring the legal doctrine that an agreement signed in counterparts is a binding agreement. As stated in Foley v. R., [2000] 4 C.T.C. 2016 (T.C.C.), at para. 32: "Agreements signed in counterpart are a part of commercial life."

[12] The trial judge placed considerable weight on the fact that there were ongoing negotiations subsequent to August and September 2009. These discussions were prompted by Wood in November 2009, who suggested changes to certain details of the agreement. The proposed changes were discussed and while the parties never signed an amending agreement, they continued to conduct their affairs on the basis of the exclusive distribution agreement formed in August – September 2009. In our view, these negotiations concerned relatively minor matters of the kind that would be expected to arise within the framework of a long-term exclusive distributorship agreement. We see nothing in the subsequent dealings between the parties that undermines the existence of the agreement they both signed in August and September 2009 and under which they operated until their relationship broke down in May 2010. Continuing negotiations between contracting parties do not necessarily negate or alter the agreement they reached, particularly if they continue to conduct themselves on the basis of their agreement: Angela Swan & Jakub Adamski, Canadian Contract Law, 3rd ed. (Markham: LexisNexis Canada, 2012) at p. 254.

[13] Accordingly, we conclude that the trial judge's finding that no mainstream agreement was reached cannot survive. We are satisfied that on the record, an agreement was made out and we so find.

[14] We do not accept SIC's submission that the "Term/Cancellation" term is fatal to Cana's claim to exclusivity for the three year period following March 31, 2010. The term sheet of the mainstream agreement provides as follows under the heading "Territory, Market Channel":

SEXY LIVING [the name under which Cana operated] will have exclusive rights, described herein, to import and redistribute the We-Vibe to the Food and Chain Drugstore Channel in Canada ("Territory"). SEXY LIVING and SIC are to develop a marketing and sales plan for the Territory.

[15] Under the heading "Term/Cancellation" the term sheet provides:

SIC agrees that Sexy Living has the right of first refusal for exclusivity in the Territory, until March 31, 2010, subject to mutually agreed performance criteria after that, with an initial three-year term, following that, and with subsequent renewals for two-year periods after the initial three-year term.

[16] While there is no evidence of a formal exercise of the right of first refusal, it is clear from the record that the parties proceeded on the basis that Cana did have exclusive rights up to March 31, 2010. At that point, the trial period ended and the initial three-year term was triggered.

[17] There is no dispute that SIC terminated Cana's distribution of the We-Vibe in March 2012 at the conclusion of the interlocutory injunction proceedings. It follows that Cana was denied its exclusive distributorship rights for a period of one year up to March 2013. The trial judge made no findings as to Cana's damages for that breach and we accept Cana's submission that the issue of damages ought to be remitted to the trial judge.

The Adult Industry Agreement

[18] We are not persuaded that the trial judge made a palpable and overriding error of fact or an extricable error of law in finding that no agreement had been reached with respect to the adult industry stream. The parties exchanged and discussed draft terms but Ciolli admitted they never signed an agreement. The draft term sheet they did discuss contained no reference to exclusivity. The trial judge characterized the dealings between the parties in relation to the adult stream at para. 116 as follows:

Without a document that can be reliably identified as the Adult Agreement, the record supports the position of Standard Innovation that the parties had a distribution relationship and worked on an ad hoc basis from one purchase order to the next.

[19] The trial judge recognized, at para. 117, that the absence of a written agreement is not necessarily fatal, and that the terms of an oral agreement may be sufficiently clear and identifiable to establish an agreement, but concluded at para. 120, that in the present case, there were "too many conflicting documents and emails going back and forth over a lengthy course of time that create significant uncertainty."

[20] In our view, there was evidence in the record to support the trial judge's findings and we see no basis upon which this court should interfere with respect to the adult stream.

The Quantum Meruit Claim

[21] At trial, Cana alleged that oral discussions had led to an agreement between the parties in relation to the international market for the We-Vibe, the first step of which was for Cana's representatives to attend two U.S. trade shows directed at that market. Cana does not appeal the trial judge's finding that no agreement for the international market was reached. However, Cana does submit that the trial judge erred by failing to consider its quantum meruit claim for certain expenses Cana incurred in preparing for and attending the first trade show.

[22] Cana concedes that the quantum meruit claim was not argued before the trial judge but points out that the claim was advanced in the statement of claim and argues that the trial judge erred in law by failing to consider the claim.

[23] We would not give effect to this submission. The argument advanced on appeal was not made at trial and, in any event, we are not satisfied that it is supported by the record. SIC did agree to reimburse Cana for certain expenses. Cana invoiced SIC for those expenses and SIC paid the invoice. We are not persuaded that there is any basis in law to require SIC to pay the additional expenses now claimed on appeal.

Qualified Privilege

[24] SIC counter-claimed for damages for defamation. After the breakdown of the parties' relationship, Ciolli wrote a lengthy letter to Health Canada alleging that she had received 100 – 150 letters complaining of defects and safety concerns with respect to several We-Vibe products. The trial judge found that Ciolli's statements to Health Canada were ill-founded and awarded SIC damages for defamation.

[25] The trial judge refused to consider the defence of qualified privilege, which was raised by Ciolli for the first time during closing argument at trial. The trial judge ruled that Ciolli did not plead qualified privilege or the factual basis to support the defence.

[26] Ciolli concedes that her pleading does not mention qualified privilege but submits that the facts necessary to support the claim are contained in the pleading.

[27] We would not give effect to this argument. In our view, it would take a strained reading of the facts pleaded in the reply and defence to counterclaim to discern a defence of qualified privilege. Moreover, even if the pleading were sufficient, the trial judge made the following finding at para. 204: "The evidence demonstrates that the statements made are false and were timed and intended to cause harm to Standard Innovation and the sale of its products." That finding contains all the ingredients necessary for malice, which would defeat any possible claim of qualified privilege.

[28] Accordingly, we dismiss the appeal from the judgment on the counterclaim.

Disposition

[29] For these reasons the appeal is allowed in part. The dismissal of the plaintiff's claim for breach of the mainstream agreement is set aside and the issue of damages for that breach is remitted to the trial judge.

[30] The parties may make written submissions on the appropriate disposition of the trial judge's order as to the costs of the trial and the costs of this appeal in light of these reasons.

"John Laskin J.A."

"Robert J. Sharpe J.A."

"Fairburn J.A."