Court of Appeal for Ontario

Date: 20200309 Docket: C66698

Brown, Huscroft and Nordheimer JJ.A.

Between:

RINC Consulting Inc., c.o.b. as Roustan Capital and Walter Graeme Roustan, in his personal capacity as trustee of the Walter Graeme Roustan Trust Plaintiffs (Appellants/Respondents by way of cross-appeal)

And:

Grant Thornton LLP Defendant (Respondent/Appellant by way of cross-appeal)

Counsel: M. Philip Tunley and Jennifer P. Saville, for the appellants/respondents by way of cross-appeal Peter Downard and Rachel Laurion, for the respondent/appellant by way of cross-appeal

Heard: January 8, 2020

On appeal from the judgment of Justice James Diamond of the Superior Court of Justice, dated January 14, 2019, with reasons reported at 2019 ONSC 7725, 2019 ONSC 808, and 2019 ONSC 1844.

Huscroft J.A.:

Overview

[1] The appellants lost several million dollars when they sold their shares in Performance Sports Group (PSG) at a loss. They sued the respondent accounting firm, Grant Thornton LLP (GT), alleging that the loss was caused by GT’s refusal to complete a survey of PSG’s business practices the appellant Roustan had engaged the firm to conduct. Roustan argued that, had he known the results of the survey, he would have arranged to sell his shares well before PSG sustained the losses that caused its share price to tumble.

[2] The trial judge concluded that although GT breached the contract to complete the survey, the appellants did not suffer any damages as a result of the breach. Thus, he dismissed the action and awarded GT $175,000 in costs, on the basis that it was the more successful of the two parties.

[3] The appellants argue that the trial judge erred in finding that GT’s breach did not cause their loss and in failing to award damages for lost opportunity, share loss, special damages, and nominal damages. The respondent GT seeks leave to cross-appeal, arguing that the trial judge erred in awarding it only a portion of its costs on the basis that there was mixed success.

[4] I would dismiss both the appeal and the cross-appeal for the reasons that follow.

Background

[5] The appellant Roustan was the Chairman of the Board of PSG from 2008-2012. PSG is a sports equipment company that manufactured and sold Bauer hockey equipment. In 2014, Roustan owned approximately 1.4 percent of PSG’s common stock through the vehicle of a trust.

[6] In January 2015, Roustan wrote to PSG’s then-current Chairman, requesting that he be re-appointed to the PSG Board of Directors. While his request was pending, PSG announced that it planned to become a retailer of hockey equipment, while continuing to supply products for sale by retail partners. Roustan strongly opposed this plan, and in May 2015 he retained GT to conduct a survey of ten of PSG’s major retail partners to obtain their views on PSG and its practices. Roustan intended to distribute GT’s report to PSG’s officers, directors, and shareholders at an upcoming meeting.

[7] Roustan devised a 30-question survey for GT to administer, which among other things asked: whether the retailer had ever been asked by PSG to move any orders forward to an earlier quarter; whether the retailer trusted PSG to be both a product supplier and retail competitor at the same time; and whether the retailer trusted the CEO of PSG. The survey was to be answered in confidence and Roustan was not to be informed which retailers had given specific answers to the questions.

The engagement letter

[8] The appellant Roustan signed the engagement letter with GT on May 12, 2015. The letter included the following three provisions:

[9] The “reputation clause”:

In addition, Grant Thornton reserves the right, in whole or in part, to decline the performance of any Service(s) if, in the sole discretion of Grant Thornton, the performance of any of the Service(s) may cause Grant Thornton to be in violation of any applicable law, regulations, professional standards or obligations or which may otherwise result in damage to Grant Thornton's reputation.

[10] The “termination clause”:

Either The Company or Grant Thornton may terminate the Engagement upon fourteen (14) days prior written notice to the other party. In addition to the foregoing, Grant Thornton may also terminate the Engagement in the event of a breach of any term of the Engagement by The Company which is not cured by The Company within ten (10) days of receipt of written notice as to the breach.

[11] The “limitation clause”:

In any action, claim, loss or damage arising out of the Engagement, you agree that our liability will be several and not joint and several and you may only claim payment from us of a proportionate share of the total liability based on degree of fault as finally determined.

The total liability assumed by us for any action, claim, loss or damage arising out of or in connection with the Engagement, regardless of the form of action, claim, loss or damage, be it tort, contract or otherwise, shall in no event exceed the aggregate of the professional fees paid to us under the terms of the Engagement. In addition, we shall not under any circumstances, be liable for any special, direct or consequential damages including, without limitation, loss of profit or revenue, failure to realize expected costs reductions or savings or similar losses of any kind.

The conduct of the survey

[12] By May 15, 2015, seven of ten retailers contacted by GT had replied to the survey. On May 18, 2015, PSG wrote to GT informing it that the survey “risked significant harm to PSG’s relationships with its retailers” and demanding that GT cease and desist with the survey. PSG also asked that it be provided with the identity of the shareholder for whom the survey was being conducted, a list of the retailers that had been contacted, the survey questions, and any reports or draft reports that had been prepared.

[13] GT continued to perform the survey despite PSG’s letter, following up with an eighth retailer and beginning to prepare a draft report. On May 21, 2015, the Chairman of PSG sent an email to GT’s CEO. He stated that GT was “engaged in an effort to disrupt PSG’s business plans and retail relationships” on behalf of Roustan and expressed the view that the survey was motivated by PSG’s refusal to appoint Roustan to the Board, his opposition to PSG’s business plans, and his personal animosity. The Chairman of PSG wrote:

The survey questions appear designed to advance Mr. Roustan's personal agenda and seem to be written in a manner to elicit negative responses from PSG's retailers, insinuating that PSG and its management are untrustworthy, sabotaging PSG's retail relationships, and fabricating support for Mr. Roustan's campaign against PSG's plans to open Bauer retail stores.

Questions that ask whether PSG has been honest and by what percentage retailers intend to reduce their purchase from Bauer, for example, are consistent with an attack on the company, not a professional market survey that one would expect to receive from a firm such as Grant Thornton. Moreover, the public release of answers to these biased, illegitimate questions would pose significant risk to PSG's business relationships, business plans, and shareholder value.

[14] On May 25, 2015, a representative of GT asked Roustan whether he would change the title of the report from “survey” to “questionnaire” and asked him not to disclose the report beyond PSG’s institutional shareholders. Roustan agreed to the first request but not the second.

GT withdraws its services

[15] On May 28, 2015 GT wrote Roustan, informing him that it was withdrawing its services and refunding the $2,000 deposit he had paid. Citing the reputation clause, the letter stated that the decision to terminate the agreement was reached after concluding that “continuing with this engagement will result in damage to Grant Thornton’s reputation”.

Post-termination events

[16] Roustan asked GT to release the results of its survey to him prior to his upcoming meeting with PSG even if its report was not complete, but GT refused to do so. Roustan then attempted to conduct his own survey of PSG’s retail partners using an online survey tool called “SurveyMonkey”. This survey used the same questions as the GT survey and five of PSG’s ten major retailers responded to it. Three of those five retailers answered that they had been asked to move orders to an earlier quarter, something Roustan regarded as “channel stuffing”.

[17] Roustan attended a meeting with the PSG Board on June 5, 2015 but failed to convince the Board to abandon its proposed sales plan. PSG proceeded to implement the new sales plan in the late summer of 2015. On June 12, 2015, Roustan prepared a draft letter to PSG’s Board of Directors. The subject of that letter was “Possible Sales Manipulation”. Roustan outlined the informal survey of PSG’s retailers that he had conducted and mentioned concerns that had arisen from the survey, including the concern that PSG had asked several retailers to move orders forward into an earlier quarter. He said that this was “very alarming to me and I believe should be alarming to you.” The letter went on to say that he believed extreme discounting was taking place to make quarterly numbers. The impression, he said, was that PSG was improperly manipulating prices – in essence, running a Ponzi scheme of sorts – and further investigation was required.

Roustan’s stockholding

[18] Roustan did not sell any of his shares in PSG following his meeting with the Board. On the contrary, between the meeting on June 5, 2015 and November 30, 2015 he purchased additional PSG shares, taking advantage of a decline in PSG’s share price.

[19] The price of PSG shares continued to drop in 2015. On March 18, 2016, PSG shares lost 66 percent of their value in one day, in response to a downward revision of PSG’s revenue and earnings guidance. Roustan liquidated his shares that month. PSG filed for protection under the Companies’ Creditors Arrangement Act, R.S.C., 1985, c. C-36.

The trial judge’s decision

[20] The appellants sued GT for breach of fiduciary duty and breach of contract, alleging that Roustan lost between $9.5 and $12.4 million as a result of the drop in PSG’s share price.

[21] The trial judge dismissed the appellants claim against GT for breach of fiduciary duty. He found the parties’ relationship was contractual in nature and that GT had never undertaken to act in the appellants’ best interests or solely for his benefit. The trial judge declined to create a new type of fiduciary relationship. GT had no power over Roustan beyond the rights it had under its contract with him. It was simply carrying out a survey of questions he had written, and the vulnerability necessary to ground a fiduciary relationship did not exist.

[22] However, the trial judge went on to conclude that GT had breached its contract in exercising its discretion to withdraw its services. He found that GT was not entitled to withdraw its services in accordance with its “reputation clause”, as it asserted in its May 28, 2015 letter. The trial judge rejected the submission that the survey was potentially defamatory of PSG and its CEO and that GT’s reputation would be at risk by participating in publication of the survey results. He found that nothing that occurred following the commencement of the survey should have come as a surprise to GT in any event. Specifically, GT knew that: Roustan opposed PSG’s proposed sales initiative and was seeking to obtain evidence to help him oppose it; Roustan intended to distribute the survey results at his meeting with the Board, so they would likely enter the public domain; PSG would have reacted unfavourably to this; and some of the survey questions, which GT had approved, potentially disparaged both PSG and its CEO.

[23] Accordingly, the trial judge found that GT had not exercised its discretion to terminate the contract reasonably and in good faith. All of the reasons proffered by GT for relying on the reputation clause were known to GT before the contract was entered. As the trial judge put it: “At the outset, GT knew, underwrote and assumed the very risks which it now seeks to resurrect as grounds for terminating the Engagement Letter.” The implicit threat of litigation by PSG was not a new fact that allowed GT to exercise its discretion anew.

[24] The trial judge found, further, that GT could not rely on the limitation clause in the contract limiting its exposure to damages to the aggregate of the fees paid to it under the contract, as the limitation clause did not apply to the particular factual circumstances of the dispute. However, he concluded that the appellants were not entitled to damages for PSG’s breach of contract in any event.

[25] The appellants’ theory of damages that was presented at trial was that if GT had disclosed the survey results to Roustan – and in particular, that five of the eight major retailers had confirmed that PSG was engaging in misrepresenting the strength of their business by channel stuffing – then Roustan would have begun to liquidate PSG shares at that time, resulting in a much smaller loss. However, the trial judge did not find that the relevant question in the survey led to the channel stuffing conclusion. There was no evidence that product orders had in fact been moved, that deep product discounts had been promised, or that there was a repeat practice of doing so.

[26] The trial judge found that the claim failed even looking at the issue from Roustan’s subjective perspective. Roustan purchased additional shares of PSG after the June 5, 2015 meeting, even though he had information from his SurveyMonkey survey that was essentially the same as the GT survey would have revealed. The trial judge noted that, subjectively, Roustan viewed the SurveyMonkey information as credible.

The r. 59.06(1) motion

[27] Following release of the decision, the appellants brought a motion under r. 59.06 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, arguing that the trial judge had failed to adjudicate four issues raised in their action: nominal damages, special damages, damages for purchase of new shares, and damages for loss of chance.

[28] The trial judge held that the appellants’ theory of damages was based on “fictitious losses” and that an award of nominal damages should be rejected as well, citing this court’s decision in Rosenhek v. Windsor Regional Hospital, 2010 ONCA 13, 257 O.A.C. 283, leave to appeal refused, [2010] S.C.C.A. No. 89, for the proposition that “an award of nominal damages presumes that there are perhaps some unquantified damages which a party has failed to prove”. The trial judge rejected the appellants’ claim for special damages because the appellants failed to establish a causal link between the services performed for the appellants and GT’s breach of contract. He refused to entertain the appellants’ request for damages for the purchase of the additional shares, because he found that Roustan purchased the shares for his own strategic investment goals in a declining market. Finally, the trial judge refused to entertain the appellants’ request for damages for loss of an opportunity to secure resignations of PSG Board members and to convince PSG to abandon its new sales strategy, a theory not pursued at trial and for which there was insufficient evidence in any event.

Costs

[29] The trial judge concluded that there was mixed success in the proceeding. He found that GT had breached the contract but also that no damages flowed from any of his findings. He rejected the other claims made by the appellants, both at trial and on their r. 59.06 motion. In summary, the trial judge concluded that GT was the more successful party and was entitled to a portion of its costs on a partial indemnity basis.

[30] Taking all these considerations into account, and noting the numerous issues, the complexity of the case, and the size of the appellants’ claim, the trial judge awarded GT costs fixed at $175,000. He specifically rejected GT’s claim for disbursements relating to expert opinion evidence that he had rejected as irrelevant and inadmissible.

Issues on appeal

[31] The appellants advance two principal arguments on appeal. First, they say that the trial judge erred in determining causation of the loss in the value of the shares that they incurred. Second, the trial judge erred in failing to award damages for lost opportunity, share loss, special damages, and nominal damages.

The causation issue

[32] The appellants assert that the trial judge made several palpable and overriding errors. Specifically, the trial judge:

• failed to find that affirmative answers to the “channel stuffing” question could lead to a conclusion that it was occurring as a practice;
• wrongly found that the SurveyMonkey information was substantially or essentially the same as the information that GT would have provided had it completed its report; and
• wrongly found that Roustan subjectively believed that the SurveyMonkey results were credible information, despite finding that Roustan was a sophisticated investor and that he purchased additional shares on margin after receiving the SurveyMonkey results.

[33] I see no such errors.

[34] First, it was for the trial judge to interpret the meaning and significance of the “channel stuffing” question. He found that the relevant question did not ask whether the retailers were offered deep discounts; it did not ask whether the retailers had in fact moved any orders into an earlier quarter; and it did not establish a practice in any event, because a retailer could have answered yes to the question while only having been asked to move an order forward on a single occasion. These findings were open to the trial judge. Moreover, it was for the trial judge to determine what, if anything, was to be inferred from the retailers’ answers to the survey. He was not obliged to accept either Roustan’s view that PSG was engaged in channel stuffing or his evidence as to the effects of engaging in channel stuffing.

[35] Second, the trial judge was entitled to conclude that despite GT’s failure to complete the survey, Roustan obtained essentially the same information as a result of the SurveyMonkey survey. The trial judge noted that 60 percent of the retailers who responded to the SurveyMonkey survey answered the “channel stuffing” question affirmatively, whereas 62.5 percent of the respondents to the GT survey answered affirmatively. The conclusion that the information is essentially the same cannot be characterized as an error, much less a palpable and overriding error that would justify overturning the trial judge’s decision.

[36] Third, the trial judge cannot be said to have erred in concluding that Roustan believed the SurveyMonkey information was credible. The trial judge rejected Roustan’s evidence that he could not rely on the SurveyMonkey answers because the retailers had been threatened by PSG, noting that no evidence had been presented to show that PSG threatened any major retailers. Moreover, the draft letter Roustan prepared, but did not send to the Board, amply supports the conclusion that he had a subjective belief that the SurveyMonkey information was credible. In that letter, Roustan describes the information that several retailers have been asked to move orders forward as “very alarming to me”, adding that he had “received credible information which led me to believe that extreme discounting is taking place”, which he speculated could be PSG “dumping products”. The letter went on to state that the information gave rise to the perception that PSG was improperly manipulating prices – “conduct [that] emulates a Ponzi scheme of sorts”.

[37] The appellants parse this letter, emphasizing the tentative nature of some of its language. But the trial judge’s interpretation cannot be impugned on this account. The trial judge’s finding as to Roustan’s subjective belief is amply supported by the record.

[38] The appellants’ argument also fails for another reason. The appellants argued that if GT had disclosed the survey results, they would have begun to liquidate their shares at that time. But as the trial judge concluded, this was wholly inconsistent with Roustan’s action in buying a further 163,962 PSG shares on margin following his unsuccessful meeting with PSG on June 5, 2015. The appellants argue that it would have been irrational for a sophisticated investor like Roustan to purchase additional shares if he believed the SurveyMonkey information. This argument seeks to make a virtue out of Roustan’s improvident decision to purchase additional shares of PSG. The purchase of additional shares does not undermine the trial judge’s findings, let alone demonstrate palpable and overriding error.

[39] At the end of the day, the appellants simply invite this court to relitigate the case. The appellants go so far as to assert that all the findings made in support of the trial judge’s causation conclusion are tainted by palpable and overriding error. None of them are, and there is no basis for this court to interfere with them.

The r. 59.06 motion

[40] The appellants argue that the trial judge erred in dismissing their motion under r. 59.06 by applying the wrong test. This was not a case in which they alleged that the judge erred in his reasons, nor did the appellants seek to vary matters that had been decided. The motion concerned four matters that had not been adjudicated upon. In these circumstances, the appellants say, the trial judge had a broad discretion to grant relief on their motion if it was in the interests of justice to do so.

[41] The trial judge did not apply the wrong test. He recognized that r. 59.06 was to be used for the purpose of correcting errors in a judgment, not in the reasons, as this court explained in Meridian Credit Union Ltd. v. Baig, 2016 ONCA 942. In that case, the court explained that there is no jurisdictional impediment to a court reconsidering a decision if an order has not been taken out and entered, but a party seeking to re-open an appeal faces a high hurdle. As the court noted at para. 7, citing Mujagic v. Kamps, 2015 ONCA 360, 125 O.R. (3d) 715, leave to appeal refused, [2015] S.C.C.A. No. 330, a trial judge may re-open an appeal prior to the entering of an order “sparingly and only where it is clearly in the interests of justice” to do so.

[42] In this case, given that a judgment had not been taken out and entered, it was open to the trial judge to entertain the appellants’ motion. He proceeded to consider and reject all the grounds raised by the appellants. I will address the alleged errors in the order raised by the appellants.

Loss of opportunity

[43] The appellants argue that the trial judge erred in refusing to entertain their alternative claim for loss of opportunity to use the GT report to secure resignations from the PSG Board of Directors, thereby changing the direction of the Board and avoiding the share loss later incurred. The appellants submit that they were entitled to damages for the loss of a chance, which they assess at least 50 percent of the loss of share value – approximately $4.7 million. The appellants acknowledge an “inadvertent failure” to address this matter in their closing submissions.

[44] The respondents point out that the appellants did not claim this relief in their 72-page written argument or oral submissions and characterize the motion as an attempt to reopen final argument.

[45] I agree.

[46] The trial judge cannot be faulted for not addressing a matter that the appellants admitted was not pursued at trial or in their written or closing oral submissions, despite it being raised in their pleadings. The trial judge found that because the matter was not before the court, it was not a matter that had been overlooked by the court, and as a result he was not prepared to entertain the request. But the trial judge provided cogent reasons for concluding that the claim would have failed in any event. He found that there was insufficient evidence in the record to support a claim of damages for a loss of opportunity. Specifically, he found that “[n]othing was going to change the course of PSG’s new sales strategy”. That finding is fatal to the claim for damages for loss of opportunity and there is no basis to interfere with it. Moreover, as the respondent notes, Roustan’s evidence was that if he had the GT survey information, he would have sold his shares before his meeting with the Board. He could not get damages for the loss of an opportunity that he would not have pursued.

Damages for the loss of value on the 2015 share purchase

[47] The appellants argue that GT should be liable at least for the damages resulting from Roustan’s purchase of additional shares on margin, because he would not have purchased these shares if GT had completed the survey.

[48] There is no merit to this submission. The trial judge’s finding that Roustan purchased the shares despite his concerns that “channel stuffing” was occurring is entitled to deference and is dispositive of this claim for damages.

Special damages for professional fees

[49] The appellants submit that they were entitled to approximately $300,000 for professional fees they incurred in bringing the action. They say that the trial judge misconstrued the case law and failed to give effect to Roustan’s uncontroverted evidence concerning the professional services he retained in pursuing the action.

[50] The trial judge found that it was difficult, if not impossible, to find a causal link between the services performed for the appellants and GT’s breach of contract. Moreover, the trial judge found that the appellants evidence was “far from clear and cogent, and lacking in particulars.” In short, he found that the appellants failed to meet their onus to establish that they were entitled to special damages. This was the trial judge’s call to make and there is no basis to interfere with it on appeal.

Nominal damages

[51] Finally, the appellants argue that the trial judge erred in refusing to award nominal damages. The appellants say that, having established a valid contract and a breach, they were entitled to nominal damages, as such damages are “always available”: Mars Canada Inc. v. Bemco Cash & Carry Inc., 2018 ONCA 239, 140 O.R. (3d) 81, at para. 33; see also Place Concorde East Ltd. Partnership v. Shelter Corp. of Canada Ltd. (2006), 270 D.L.R. (4th) 181 (Ont. C.A.), at para. 76.

[52] It is well established that nominal damages may be awarded where a breach of contract has been established but damages flowing from that breach have not. Nominal damages are a trivial amount – typically one dollar – and serve a symbolic rather than a compensatory purpose: they mark a breach of contract in the same way that a declaration would. See, generally, S.M. Waddams, The Law of Damages, 5th ed. (Toronto: Thomson Reuters, 2012), at c. 10.10-10.30; James Edelman, McGregor on Damages, 20th ed. (London: Thomson Reuters (Professional) UK Limited, 2018), at c. 12-001-12-013.

[53] The award of nominal damages might be important in some cases. For example, in the context of an ongoing contract in order to clarify future performance obligations, or to vindicate a party’s rights. But there are no such special circumstances in this case. The appellants did not bring their action merely to seek a judicial statement or declaration that the respondent had breached the contract; they brought their action with the intention of claiming over $9 million in damages as compensation for losses they claim to have suffered as a result of the respondent’s breach of contract.

[54] The trial judge declined to exercise his discretion to award nominal damages on the basis that the appellants failed to prove that the respondent’s breach of contract caused their losses. The trial judge appears to have thought that the court’s discretion to award nominal damages depends on the existence of unquantified damages. It does not.

[55] But the trial judge’s error is of no moment, for the award of nominal damages would have served no purpose in this case. The appellants appear to assume that an award of nominal damages would have turned their substantive lack of success into a basis for awarding them costs. It would not. Even if the trial judge had awarded the appellants nominal damages, it would still be within the discretion of the trial judge to make no award of costs to the appellants, or to make the award of costs to the respondent that he did on the basis of the extreme disparity between “the amount claimed and the amount recovered in the proceeding”: r. 57.01(1)(a).

The cross-appeal

[56] The respondent’s cross-appeal seeks leave to appeal the trial judge’s costs order. The respondent says that the trial judge erred in finding that 1) the reputation clause in the engagement letter did not authorize its withdrawal from the engagement; 2) it was not entitled to rely on the limitation clause in the contract; and 3) its expert evidence was irrelevant and inadmissible. These errors, the respondent says, caused the trial judge to conclude that success was mixed, and to award it $175,000 instead of $485,736.42 on a partial indemnity basis.

[57] The first two arguments do not concern the costs order. Instead, they concern the trial judge’s reasons for dismissing the action and, as such, they are not properly the subject of a costs appeal. The only basis on which leave to appeal the costs order could be granted is the respondent’s third argument, which concerns the trial judge’s decision not to award special damages for the expert evidence.

[58] The test for leave to appeal costs is well established. Costs awards should be set aside on appeal only if the trial judge erred in principle or made an award that is plainly wrong: Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, [2004] 1 S.C.R. 303, at para. 27. The trial judge found that the expert evidence was of “little to no evidentiary value”, as it was both irrelevant and arguably inadmissible. There is no error in principle here, nor is the award plainly wrong. The award of special damages was a matter within the trial judge’s discretion and his decision is entitled to deference. The trial judge gave clear reasons for fixing the costs in the amount that he did.

[59] I would deny leave to appeal the costs order.

Conclusion

[60] I would dismiss the appeal and cross-appeal.

[61] In light of the divided success, each party should bear its own costs.

Released: March 9, 2020 “Grant Huscroft J.A.” “I agree. David Brown J.A.” “I agree. I.V.B. Nordheimer J.A.”