COURT OF APPEAL FOR ONTARIO DATE: 20240605 DOCKET: COA-23-CV-0996
van Rensburg, Sossin and Dawe JJ.A.
BETWEEN
Patrick Farrell Plaintiff (Respondent)
and
Ronald Riley Defendant (Appellant)
Stephen Moreau and Christopher Perri, for the appellant Christopher Freeman, for the respondent
Heard: May 7, 2024
On appeal from the judgment of Justice Grant R. Dow of the Superior Court of Justice, dated August 22, 2023, with reasons reported at 2023 ONSC 3333.
Sossin J.A.:
[1] This litigation arises out of an alleged contract for the purchase and sale of the respondent’s Mr. Farrell’s goodwill in a book of investment business to the appellant, Mr. Riley. The trial judge found that there was a contract or, in the alternative, that Mr. Riley had been unjustly enriched. Mr. Riley appeals this decision. For the reasons that follow, I would dismiss the appeal.
FACTS
[2] In 2013, Mr. Farrell joined an investment firm, Gravitas Securities Inc., and brought with him a portfolio of clients with investments in excess of $20 million. Mr. Farrell was an Investment Advisor and, as such, his discretion to make trades required client approval. This is contrasted with a Portfolio Manager (“PM”), who is empowered by the client to make trades without prior client approval.
[3] Mr. Farrell agreed that his clients would have their investments handled by a PM. This was necessary under applicable securities laws, given the nature of the clients’ accounts. The PM was initially another individual but, in mid-2016, Mr. Riley became the PM for these clients.
[4] Trading securities in Mr. Farrell’s book of business generated between $250,000-$320,000 per year in revenue for Gravitas. Gravitas kept 40% of this revenue, and the remaining 60% was split between Mr. Farrell and Mr. Riley (the “participation rights”).
[5] In May 2017, Mr. Riley began to contact the clients, without informing Mr. Farrell in advance, to “update their investment needs”. Mr. Farrell was unhappy with this conduct, which he interpreted as an attempt to take over the book of business.
[6] The parties met to discuss the situation, and several emails were exchanged in which Mr. Riley raised proposals to acquire Mr. Farrell’s participation rights. These discussions culminated in a meeting on July 28, 2017 between the parties, Gravitas’ Chief Compliance Officer, Mr. Bowering, and the Branch Manager, Mr. Santoli. At this meeting, they discussed the purchase of Mr. Farrell’s participation rights, with both Gravitas and Mr. Riley co-guaranteeing the sale. This was to ensure that Mr. Riley was liable if he moved to another firm and took the clients.
[7] However, Mr. Riley was subsequently asked by Gravitas to contact Mr. Farrell directly to come to an arrangement themselves. This was because Mr. Riley would be responsible for payment to Mr. Farrell given that he would be the principal beneficiary of the sale.
[8] On July 31, 2017, Mr. Farrell forwarded Mr. Riley, Mr. Santoli and Mr. Bowering an email written to him by his own lawyer that aimed to set out Mr. Farrell’s position and find a way “to finalize everything to mutual satisfaction all round” (the “July 31 Email”).
[9] The second page of the July 31 Email set out proposed terms for the purchase of Mr. Farrell’s book of business by Gravitas. Before setting out the terms, the July 31 Email states:
I set out below the things that can or should be done in order to move forward, and want to make it absolutely clear that these suggestions are made on an entirely without prejudice basis , and none of the suggestions below will either individually or taken together constitute an agreement unless and until they are set out in writing and signed by all relevant parties .” [Emphasis added.]
[10] One of the terms set out in the July 31 Email was that Mr. Riley provide security for the purchase price. While Mr. Riley did receive the July 31 Email, he did not acknowledge receipt at the time, or indicate agreement with the proposal set out in the July 31 Email.
[11] In a follow-up meeting held on September 7, 2017 with one of Gravitas’ directors, Mr. Farrell was told that Gravitas could not provide any guarantee of payment and that he would have to deal with Mr. Riley directly. Subsequently, Mr. Farrell’s intention shifted from a sale to Gravitas (which was contemplated in the July 31 Email) to a sale directly to Mr. Riley.
[12] On September 27, 2017, Mr. Riley emailed Mr. Farrell and offered to buy his participation rights for $90,000, payable in 36 equal monthly payments of $2,500 or, alternatively, a lump sum payment of $76,500. The offer did not reference any security.
[13] On October 2, 2017, Gravitas terminated Mr. Farrell’s employment.
[14] On October 4, 2017, Mr. Farrell emailed Mr. Riley accepting the offer, leaving the payment option up to Mr. Riley (i.e., the choice between installments or a lump sum payment). He stated that he would have his lawyer draw up a promissory note and a security agreement to sign, and that once those were signed, he would assist with client handover to encourage the clients to stay with Mr. Riley and the firm.
[15] On October 5, Mr. Riley emailed Mr. Farrell accusing him of not negotiating in good faith and stating that his offer was null and void.
[16] Mr. Farrell responded the following day maintaining that there was a binding contract and attaching the promissory note and security agreement to be signed and returned to him.
[17] A few more emails were exchanged with each party again setting out their position. In an October 6 email, Mr. Riley stated that he and Mr. Farrell “don’t have a firm and binding contract”, but repeated his offer to pay Mr. Farrell $2,500 a month for 36 months. However, he added that he was “not prepared to sign any sort of promissory note, nor GSA”.
[18] Mr. Riley never made any payment to Mr. Farrell. On October 26, 2018, Mr. Farrell commenced an action against Mr. Riley for $90,000 in damages for breach of contract.
[19] In the 36 months following Mr. Farrell’s termination and his attempt to accept Mr. Riley’s offer of payment for the goodwill in his book of business, Mr. Riley received over $180,000 in fees and commissions.
DECISION BELOW
[20] The trial judge found that there was a binding contract between the parties.
[21] He held that the essential terms had been agreed upon by the parties in the September 27 email. Those terms were that there would be payment by Mr. Riley to Mr. Farrell of either $2,500 per month for 36 months or a discounted lump sum of $76,500.
[22] The trial judge distinguished this situation from Bawitko Investments Ltd. v. Kernels Popcorn Limited (1991), 53 O.A.C. 314 (C.A.), where the essential terms were not clear from the oral agreement.
[23] The trial judge rejected Mr. Riley’s argument that the July 31 Email required that any agreement between the parties be set out in writing. He found that the July 31 Email was neither acknowledged nor accepted by Mr. Riley and that, in any event, it clearly stated it was “without prejudice”.
[24] As a result, the trial judge found that the September 27 offer was capable of acceptance, which occurred on October 4. He relied on the statement in Bawitko, at p. 12, that:
[w]hen [the parties] agree on all of the essential provisions to be incorporated in a formal document with the intention that their agreement shall thereupon become binding, they will have fulfilled all of the requisites for the formation of a contract. The fact that a formal written document to the same effect is thereafter prepared and signed does not alter the binding validity of the original contract.
[25] The trial judge also found that a reasonable person with knowledge of the material facts would conclude that the parties had agreed on the essential terms by an objective reading of the language, as opposed to an inquiry into the state of mind of the parties: Olivieri v. Sherman, 2007 ONCA 491, 86 O.R. (3d) 778, at para. 44.
[26] He found that the book of business had value, which Mr. Riley recognized, and that the value of the participation rights had been negotiated by the parties. Mr. Riley had repeated the offer in a later email, and it was clear that he benefited from the book of business.
[27] The trial judge found that the provision of a promissory note and security agreement was not an essential term of the contract, but rather was a term being insisted on by Mr. Farrell [1] and intended to facilitate enforcement if payment was not made. The trial judge distinguished this from Alkin Corporation v. 3D Imaging Partners Inc., 2020 ONCA 441, since there was no requirement in the September 27 offer that the agreement would only be effective when executed by both parties. He again noted that the July 31 Email was never accepted or relied on by Mr. Riley before October 4. Furthermore, Mr. Farrell’s examination for discovery evidence (which was read in as evidence at the trial) showed that quantum was the deal breaker, not security.
[28] The trial judge found that there was no failure by Mr. Farrell to mitigate his losses. Mr. Riley relied on Mr. Farrell’s failure to introduce him to clients and endorse him. However, the trial judge accepted Mr. Farrell’s evidence that sufficient steps were taken because he did not do anything to undermine Mr. Riley, which was evidenced by Mr. Riley benefiting from the book of business following his takeover. Given the circumstances, he found that Mr. Farrell could not reasonably or honestly have endorsed Mr. Riley.
[29] In the alternative, the trial judge found that Mr. Riley was unjustly enriched, applying the three requirements from Moore v. Sweet, 2018 SCC 52, [2018] 3 S.C.R. 303, at para. 35. First, he found that Mr. Riley was enriched by a financial benefit in excess of $180,000 following his takeover of Mr. Farrell’s clients. Second, Mr. Farrell suffered a corresponding deprivation, since he lost his ongoing share in these commissions. The trial judge found that Mr. Farrell’s goodwill had value and that it was the goodwill that resulted in the above noted financial benefit and deprivation. Third, there was no juristic reason for the enrichment. He rejected Mr. Riley’s submission that Mr. Farrell’s wrongful dismissal claim against Gravitas made him whole, such that there was a juristic reason to allow him to retain the enrichment. The trial judge found that there was no evidence that the settlement in that claim had included the value of the contract or the enrichment.
ANALYSIS
[30] There are four grounds of appeal raised by Mr. Riley:
- Did the trial judge err in finding that the parties had formed the necessary intention to create a binding legal relationship?
- Did the trial judge err in finding the parties had agreed to all essential terms?
- Did the trial judge err in concluding that Mr. Riley was unjustly enriched at Mr. Farrell’s expense?
- Did the trial judge err in finding that Mr. Farrell mitigated his losses?
(1) Standard of Review
[31] The parties differ on their view of the appropriate standard of review for the trial judge’s decision.
[32] Mr. Riley argues that the standard of review is correctness, since there is an extricable error of law. He claims this error is that the trial judge failed to apply the substantive legal test for the formation of a contract by failing to account for relevant factual surrounding circumstances (i.e., the July 31 Email) when interpreting the alleged contract.
[33] Mr. Farrell argues that this court should apply a standard of palpable and overriding error, and conclude that the trial judge did not fail to account for any relevant facts and his findings are entitled to deference.
[34] The issue of contract formation is an issue of mixed fact and law, reviewable for palpable and overriding error unless there is an extricable error of law: Angus v. CDRW Holdings Ltd., 2023 BCCA 330, 53 R.P.R. (6th) 173, at paras. 31-36.
[35] In my view, Mr. Riley has not established that there was an extricable error of law, for which there is a high bar (see Angus, at para. 36, as well as Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 36; Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 54-55.) Rather, I see his argument as one rooted in the trial judge’s findings of mixed fact and law in relation to the July 31 Email, and the subsequent correspondence establishing a contract. Therefore, the standard of review I would apply is one of palpable and overriding error.
(2) There was a contract between the parties
[36] The first two grounds of appeal concern whether the trial judge erred in finding the parties had entered into a binding contract that contained all essential terms. They can be addressed together.
[37] Mr. Riley asserts that the trial judge wrongly disregarded the July 31 Email. In essence, he argues first that the July 31 Email explicitly stated that a contract would not be formed unless and until it was reduced to writing; and second, that the July 31 Email set out the essential terms required of any contract and those terms were not in the alleged offer and acceptance in this case.
[38] With respect to the first argument, Mr. Riley relies on Bawitko for the proposition that where the understanding or intention of the parties is that their legal obligations will be deferred until a formal contract has been approved and executed, the preliminary agreement cannot constitute an enforceable contract. He contends that the July 31 Email establishes this understanding.
[39] The trial judge considered and rejected this argument, in part, because the terms of the July 31 Email included a reference to the proposed settlement being “without prejudice” and the proposal as a whole was never acknowledged by Mr. Riley.
[40] Mr. Riley argues that the “without prejudice” label should be disregarded because courts in the past have reviewed such documents when determining contract formation.
[41] In my view, however, the trial judge did not disregard the July 31 Email because it included a reference that the terms of the proposed settlement were “without prejudice.” Rather, he concluded that the reference in the July 31 Email that, “none of the suggestions below will either individually or taken together constitute an agreement unless or until they are set out in writing and signed by all relevant parties”, had to be read together with the phrase immediately preceding it in the July 31 Email, that it be "absolutely clear that the suggestions are made on an entirely without prejudice basis". This finding was open to the trial judge on the record and I see no basis to interfere with it.
[42] In any event, the trial judge did not view the July 31 Email as constituting a “framework” for any potential contract – rather, the contract was contained in the September 27 offer and October 4 acceptance.
[43] Mr. Riley’s argument on the second issue, related to the agreement on the essential terms, also depends on considering the July 31 Email in the context of the email exchanges of September 27th and October 4th. Again, in this context, the trial judge properly considered the July 31 Email as part of the surrounding circumstances in determining the essential terms on the contract.
[44] The trial judge rejected that security or the promissory note raised by Mr. Farrell constituted an “essential term.” The trial judge relied on Mr. Farrell’s examination for discovery evidence (read in at trial by Mr. Riley) where he was clear that the “ultimate deal breaker” was quantum, not the term for security.
[45] In sum, I see no error with the trial judge’s finding with respect to the existence of a binding contract, offered by Mr. Riley on September 27, 2017, and accepted by Mr. Farrell on October 4, 2017.
(3) Unjust enrichment
[46] The trial judge found, as an alternate basis for recovery, that Mr. Riley had been unjustly enriched by keeping all of the commissions for himself and denying Mr. Farrell the revenue that would have accrued from his participation rights.
[47] Mr. Riley argues that the purported enrichment and deprivation had nothing to do with Mr. Farrell’s goodwill. Since there was no actual transfer of goodwill, there could be no enrichment or deprivation based on the receipt of the goodwill by Mr. Riley. He argues that the trial judge erred by not focusing his unjust enrichment analysis on the goodwill.
[48] In my view, the trial judge’s reasoning on the unjust enrichment finding is not entirely clear. As I would affirm the primary basis for the trial judge’s award of damages, it is not necessary to reach a conclusion on whether this finding should be upheld, and I would refrain from doing so.
(4) Mitigation
[49] Mr. Riley argues that Mr. Farrell could have mitigated his losses by moving to another brokerage and asking his clients to come with him. He submits that the trial judge erred in finding that by doing nothing, Mr. Farrell mitigated his losses because he could not endorse Mr. Riley and any efforts to undermine him would have reduced the profitability of the book of business.
[50] I would dismiss this ground of appeal. While I do not necessarily agree with the trial judge’s analysis that doing nothing constituted mitigation, Mr. Riley did not meet his onus to show that mitigation was possible in the circumstances: Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51, [2012] 2 S.C.R. 675, at paras. 45-46.
[51] Mr. Riley did not bring any evidence to show that there were specific opportunities that were available to Mr. Farrell at other brokerages. Mr. Riley’s argument was (and remains so before this court) entirely hypothetical. In the absence of any other evidence, the trial judge accepted the Mr. Farrell’s choice not to undermine Mr. Riley as reasonable in the circumstances. Given that a finding of whether a party could have mitigated is a finding of mixed fact and law reviewable on a palpable and overriding error standard of review (Southcott Estates, at para. 47), I would not interfere with the trial judge’s finding.
Disposition
[52] For these reasons, I would dismiss the appeal.
[53] The respondent is entitled to costs. In accordance with the agreement of the parties on the quantum of costs, Mr. Riley shall pay costs in the amount of $10,000 all-inclusive, to Mr. Farrell.
Released: June 5, 2024 “K.M.v.R.” “L. Sossin J.A.” “I agree. K. van Rensburg J.A.” “I agree. J. Dawe J.A.”
[1] The trial judge said at para. 27 of his reasons that the requirement for a promissory note and general security agreement was a term being insisted on by the “defendant”, but it is clear from the context he meant to say the “plaintiff”.