Court of Appeal for Ontario

Date: March 13, 2018

Docket: C64077

Judges: Strathy C.J.O., Hourigan and Miller JJ.A.

Between

Mars Canada Inc. Plaintiff (Respondent)

and

Bemco Cash & Carry Inc., GPAE Trading Corp. and Aizic Ebert Defendants (Appellants)

Counsel:

• Patrick T. Summers, for the appellants
• Jim Holloway and Essien Udokang, for the respondent

Heard: January 15, 2018

On appeal from the judgment of Justice Frederick L. Myers of the Superior Court of Justice dated November 18, 2016, with reasons reported at 2016 ONSC 7201, and the costs judgment dated December 6, 2016, with reasons reported at 2016 ONSC 7643.

Strathy C.J.O.:

[1] Overview

[1] This appeal concerns the enforcement of contracts in restraint of trade, the court's jurisdiction to order a reference on a summary judgment motion, and the award of substantial indemnity costs.

[2] The following summary of the facts will put the issues in context.

A. Background

[3] The respondent Mars Canada Inc., an Ontario company, is related to the well-known American candy company. It sells candy products under Canadian-registered trademarks, including MARS, M&M's, MILKY WAY and SNICKERS.

[4] The appellant Aizic Ebert ("Ebert") owns and controls the corporate appellants, Bemco Cash & Carry Inc. ("Bemco") and GPAE Trading Corp. ("GPAE"). Through those companies, he sold "grey market" Mars products in Canada. He bought the products in the United States, imported them to Canada, and sold them at a price lower than those offered by the respondent. The law is unsettled as to whether a Canadian trademark holder can prevent this activity.

[5] In about 2006, the respondent discovered that Bemco was selling Mars products in Toronto. It brought an action in the Federal Court. After lengthy negotiations and legal advice, the parties settled the action (the "Bemco Settlement").

[6] Under the Bemco Settlement, Bemco agreed to identify the source of its grey market products. It also agreed that it would not import or sell Mars products in Canada without the respondent's consent or without obtaining a declaratory judgment in the Superior Court authorizing it to do so.

[7] After the settlement, Bemco disclosed that GPAE was its supplier of foreign Mars products.

[8] On disclosure of this information, the respondent demanded that GPAE cease its activities. GPAE agreed to do so. It agreed not to import or sell Mars products in Canada without the respondent's consent (the "GPAE Settlement"). The GPAE Settlement was to be binding on related companies and their shareholders – that is, Bemco and Ebert.

[9] In 2010, the respondent discovered that foreign products bearing its trademarks were once again being sold in Canada, through another company, in concert with Bemco and GPAE. It brought this action to enforce the Bemco Settlement and the GPAE Settlement and for damages. The appellants defended on the ground, among others, that the settlement agreements were in restraint of trade and, therefore, void.

B. The Motion Judge's Reasons

[10] The respondent brought a motion for summary judgment. It sought declaratory relief and damages. It also sought rectification of the Bemco Settlement, to correct an error in Bemco's corporate name.

[11] There was a voluminous documentary record, transcripts of cross-examinations and third party examinations, as well as an expert report.

[12] The Bemco Settlement was made in the name of Bemco Confectionary Sales, the company from which Ebert had purchased the business, rather than in Bemco's proper name. The motion judge found that both parties intended the agreement to be the name of Bemco and granted rectification. That order is not appealed.

[13] The motion judge also found that both Bemco and GPAE had breached their settlement agreements. Bemco by continuing to engage in grey marketing, and GPAE by continuing to import Mars products into Canada.

[14] The motion judge rejected the appellants' argument that the settlement agreements were void as being in restraint of trade. He applied the test identified by this court in Tank Lining Corp. v. Dunlop Industrial Ltd., 40 O.R. (2d) 219 (C.A.). For the purposes of argument, he was prepared to assume that the agreements were in restraint of trade and that they did not fall within one of the recognized exceptions. He found, however, that the agreements were reasonable in the interests of the parties and reasonable in the interests of the public. The agreements were made to settle litigation, a purpose favoured and supported by the law and by public policy. The respondent was entitled to enforce its registered trademarks. Finally, the products imported from the U.S. by the appellants did not comply with Canadian labelling and packaging laws.

[15] Having found that the appellants breached the agreements, he directed a reference as to damages pursuant to r. 20.04(3) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. He rejected the appellants' submission that this was an improper bifurcation of the proceedings without their consent, contrary to r. 6.1.01.

[16] In a subsequent endorsement, the motion judge granted costs to the respondent on a substantial indemnity basis, in the amount of $225,000, all-inclusive. He found that the appellants "brazenly breached" their settlement agreements, contrived to avoid the settlements they made, raised trivial grounds of argument and made the litigation lengthier and more expensive than it ought to have been.

C. Issues

[17] The appellants raise three issues on appeal.

[18] First, they submit that the motion judge erred in giving effect to the settlement agreements. He should have found they were void as being in restraint of trade.

[19] Second, they submit that the motion judge erred in directing a reference to determine damages. The appellants argue that the agreements could only be enforced if the respondent established that it suffered damages. Because the motion judge made no finding that the respondent had sustained damages, he improperly bifurcated the proceedings by ordering a reference. The appellants also argue that the bifurcation of liability and damages violated r. 6.1.01.

[20] Third, the appellants seek leave to appeal the award of substantial indemnity costs. They say that the motion judge erred in principle in awarding such costs as a result of their conduct prior to the commencement of the litigation. They also argue that the respondent itself increased the cost of the proceedings by asserting claims that were abandoned at the outset of the hearing.

D. Analysis

(1) Agreements in Restraint of Trade

[21] Before the motion judge, the restraint of trade issue was argued and decided on the basis of the leading case, Tank Lining.

[22] In Tank Lining, Blair J.A. stated that the test requires a four-stage inquiry (at p. 223). The first and second stages ask whether the covenant is in restraint of trade and, if so, whether it falls within one of the limited exceptions to the rule that such restraints are void. The third question asks whether the restraint can be justified as reasonable in the interests of the parties. The fourth asks whether it is reasonable with reference to the interests of the public. Blair J.A. noted, at p. 225, that the onus is on the party seeking to enforce the covenant to show that it is reasonable in the interests of the parties. The onus is on the party opposing enforcement to show that the covenant is not reasonable in the public interest: see also Martin v. ConCreate USL Ltd. Partnership, 2013 ONCA 72, 359 D.L.R. (4th) 123, at paras. 49-50.

[23] The appellants focused their argument on the question of whether the restraint can be justified as reasonable in the interests of the parties. The appellants argue that because the judge made no finding that the respondent had sustained damages, he did not consider whether the respondent had demonstrated that it had an interest in need of protection. In effect, they say that a determination that the respondent suffered damages was a necessary prerequisite to the motion judge's conclusion that the settlement was not void in restraint of trade. No authority was cited to us to support the appellants' submission that proof of damages is a necessary requirement of an action to enforce an agreement in restraint of trade.

[24] To be reasonable between the parties, the agreement must not be wider than necessary to protect the legitimate or proprietary interests of the party in whose favour it was granted: see Tank Lining, at p. 225; MEDIchair LP v. DME Medequip Inc., 2016 ONCA 168, 129 O.R. (3d) 161, at para. 38. The factors relevant in determining whether the restraint on trade is reasonable are the geographic coverage of the agreement, the period of time that it is in effect and the extent of the activity prohibited: Martin v. ConCreate USL Ltd. Partnership, at para. 54.

[25] However, as noted by Blair J.A. in Tank Lining, at p. 225, "[w]hen two competently advised parties with equal bargaining power enter into a business agreement, it is only in exceptional cases that the courts are justified in over-ruling their own judgment of what is reasonable in their respective interests".

[26] In the circumstances of this case, the respondent has legitimate interests tied to its trademark rights. As recognized by the motion judge, at para. 42, "[t]he [respondent] has an obvious interest in the enforcement of its intellectual property rights which, as noted above, remain valid unless or until declared otherwise."

[27] The appellants have identified no error in the motion judge's application of Tank Lining. The settlement of the litigation was unquestionably reasonable in the interests of the parties. It resolved their dispute and defined the scope of the parties' trading rights. It was also reasonable in the public interest. It prevented confusion between the respondent's trademarked products and the appellants' improperly labelled grey market products.

[28] I would therefore reject this ground of appeal.

(2) Directing a Reference

[29] The appellants submit that the motion judge erred in ordering a reference without having found that the respondent had, in fact, sustained damages. They point to the judge's conclusion, at para. 50, in refusing to order the appellants to provide an accounting, that "[t]he [respondent's] damages, if any, are the damages that reasonably flow from the breach. They are readily calculable as lost profits" (emphasis added). The appellants say that without a specific finding that the respondent sustained damages, it was improper to order a reference.

[30] The appellants also argue, as they did below, that the motion judge had no jurisdiction to bifurcate liability and damages, relying on Bondy-Raphael v. Potrebic, 2015 ONSC 3655, 128 O.R. (3d) 767 (Div. Ct.).

[31] I would reject both submissions. As to the first, there was evidence before the motion judge to support a conclusion that the respondent sustained some damages. There was evidence given by the respondent's witness that every sale of a grey market Mars bar by the appellants represented a loss of a sale by the respondent. As well, the appellants' own expert testified that the appellants' sales would "cannibalize" the respondent's sales.

[32] In any event, the respondent's action was in breach of contract. The motion judge found that the appellants were in breach of their agreements. He granted a declaration to that effect. Unlike in tort, damages are not an essential element of a cause of action for breach of contract. The plaintiff need only establish the existence of a contract with the defendant and its breach: Angela Swan and Jakub Adamski, Canadian Contract Law, 3rd ed. (Markham: LexisNexis Canada Inc., 2012), at §2.16.1.

[33] Having established a valid contract and a breach, the respondent was entitled to damages, even nominal damages. Nominal damages are always available in a breach of contract action: see Place Concorde East Ltd. Partnership v. Shelter Corp. of Canada Ltd., 270 D.L.R. (4th) 181, at para. 76 (Ont. C.A.).

[34] As to the bifurcation argument, Bondy-Raphael does not assist the appellants in any way. That case involved the interpretation of r. 6.1.01, which provides as follows:

With the consent of the parties, the court may order a separate hearing on one or more issues in a proceeding, including separate hearings on the issues of liability and damages.

The majority of the Divisional Court held, at paras. 37-38, that a judge did not have inherent jurisdiction to bifurcate a trial into a determination of liability and a damage assessment without the consent of the parties. The majority of the Divisional Court was careful to observe, at para. 39, that the decision should be confined to its particular context:

It is important when dealing with Rules of new and potentially broad application to not decide anything more than is specifically before the court in the given case. … [W]here there is provision in the Rules for deciding an issue by summary judgment or by a ruling on a point of law, that situation might not necessarily be the same as a motion for bifurcation of a trial, such that Rule 6.1.01 might not be paramount. Our ruling in this case should be confined to the specific issue before us –whether a motion judge can order bifurcation of a trial without the consent of the parties.

[35] I agree with the motion judge that on a motion for summary judgment the court's jurisdiction is governed by r. 20.04(3), which provides:

Where the court is satisfied that the only genuine issue is the amount to which the moving party is entitled, the court may order a trial of that issue or grant judgment with a reference to determine the amount.

[36] I reject the appellants' submission that r. 6.1.01 applies to summary judgment motions. It is inconsistent with r. 20.04(3) and the underlying philosophy of the summary judgment process, described in Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87. Its application would gut the efficacy of summary judgment. The appellants' argument has been rejected in the Superior Court cases that have considered it. In this case, the motion judge stated at para. 51:

Summary judgment is not a separate hearing under Rule 6.1.01. There will not be two trials or a trial of one issue followed by a separate trial of a second issue. Summary judgment is its own, alternative model of adjudication. It is not a hearing as contemplated by Rule 6.1.01.

[37] The motion judge came to a similar conclusion in Anjum et al. v. Doe et al., 2015 ONSC 5501, at para. 8. See also Fontenelle v. Canada (Attorney General), 2017 ONSC 6604, at paras. 136-141; Abuajina v. Haval, 2015 ONSC 7938, at paras. 42-45.

[38] It is conceivable that a judge hearing a summary judgment motion could decline to determine liability and order a reference as to damages because of a risk of inconsistent findings on liability and damages. This is not such a case.

[39] It follows that I reject the appellants' submissions that the motion judge had no jurisdiction to order a reference as to damages and that it was necessary to establish that the respondent had sustained more than nominal damages, before ordering a reference.

(3) Substantial Indemnity Costs

[40] The motion judge identified the principles to be applied in fixing costs under s. 131 of the Courts of Justice Act, R.S.O. 1990, c. C.43, and considered the factors set out in r. 57.01.

[41] He also considered the appellants' argument that the costs award should have reflected the fact that the respondent advanced several causes of action, some of which it ultimately withdrew. He found this was reasonable "given the lengths to which the [appellants] would go to try to avoid accountability for their conduct" (at para. 5).

[42] The motion judge found that the appellants brazenly breached the settlements. They relied on an obvious slip (the misnomer of Bemco) to try to avoid living up to their agreements. Their efforts to undermine the agreements were dishonourable and deserving of censure. They altered a document in a transparent attempt to hide their illicit activities. He found that their conduct of the action "reprehensibly maximized costs and delay" (at para. 5). Their "kitchen sink approach" lengthened the proceedings and they made the litigation lengthier and more expensive than it ought to have been.

[43] The applicable principles can be summarized as follows:

a. the fixing of costs is discretionary and the motion judge's costs award attracts a high level of deference – it should be set aside on appeal only if the trial judge erred in principle or if the award is plainly wrong: see Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, [2004] 1 S.C.R. 303, at para. 27;

b. costs on a substantial indemnity basis should only be awarded "where there has been reprehensible, scandalous or outrageous conduct on the part of one of the parties": Young v. Young, [1993] 4 S.C.R. 3, at p. 134; and

c. the kind of conduct that will justify an elevated level of costs is not limited to conduct in the proceedings and can include the circumstances that gave rise to the litigation: Mortimer v. Cameron, 17 O.R. (3d) 1 (C.A.), at p. 23; Clarington (Municipality) v. Blue Circle Canada Inc., 2009 ONCA 722, 100 O.R. (3d) 66, at para. 30.

[44] The motion judge applied these principles. In awarding substantial indemnity costs, he was entitled to consider that the litigation was caused by the appellants' duplicitous breach of agreements made in settlement of the previous litigation: see Mark M. Orkin, The Law of Costs, looseleaf, 2nd ed. (Toronto: Thomson Reuters, 1987), at §219. He properly had regard to the appellants' conduct during the litigation, including litigating what was clearly a technical slip, altering a document, and engaging in tactics that increased costs. He considered the appellants' argument that the respondent had increased the costs by asserting claims that were ultimately abandoned and gave reasons for rejecting it.

[45] The appellants have not demonstrated an error in principle in the motion judge's award of costs and I would not grant leave to appeal.

E. Disposition

[46] For these reasons, I would dismiss the appeal. I would award costs to the respondent, fixed at $20,000, inclusive of disbursements and all applicable taxes.

Released: March 13, 2018

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

"I agree. C.W. Hourigan J.A."

"I agree. B.W. Miller J.A."

Footnote

[1] Rule 6.1.01: With the consent of the parties, the court may order a separate hearing on one or more issues in a proceeding, including separate hearings on the issues of liability and damages.