COURT FILE NO.: CV-11-9476-00CL
DATE: 20120301
SUPERIOR COURT OF JUSTICE - ONTARIO
COMMERCIAL LIST
BETWEEN:
ROYAL LASER CORP. and VENTURE STEEL INC.
Plaintiffs
- and –
RUBEN RIVAS, 1452939 ONTARIO LIMITED, CASSELS BROCK & BLACKWELL LLP and STIKEMAN ELLIOT LLP
Defendants
BEFORE: Justice Newbould
COUNSEL: William E. Pepall and Jason Squire, for Cassels, Brock & Blackwell LLP
P. James Zibarras and Kevin D. Toyne, for the plaintiffs
DATE HEARD: February 14, 2012
E N D O R S E M E N T
[1] The defendant Cassels Brock & Blackwell LLP ("Cassels") moves for summary judgment dismissing this action. The action against the remaining defendants has been dismissed on consent.
[2] This action arises out of the purchase by the plaintiff Royal Laser Corp. (“Royal Laser") of the shares of the plaintiff Venture Steel Inc. ("Venture"). Cassels acted for Royal in that purchase. At the time of the purchase, William Link had commenced an action against Venture for wrongful dismissal. Venture had purported to acquire his minority shares in Venture and Mr. Link claimed in his action for the value of his shares in Venture based upon the purchase price paid by Royal Laser for its acquisition of the shares of Venture. As part of the purchase agreement, the vendor provided an indemnity to Royal Laser of $1.4 million for the contingent liability of Venture to Mr. Link, and that amount was held back by Royal Laser from the purchase price. Mr. Link eventually obtained a judgment against Venture for in excess of $4 million plus interest and costs. The plaintiffs claim against Cassels Brock for alleged negligence in the amount of $3.9 million, representing the difference between the indemnity of $1.4 million and the ultimate liability to Mr. Link.
Test on motion for summary judgment
[3] Under rule 20.04, on a motion for summary judgment a court shall grant summary judgment if it is satisfied that there is no genuine issue requiring a trial. In determining whether there is a genuine issue requiring a trial, a judge may weigh the evidence, evaluate the credibility of a deponent and draw any reasonable inference from the evidence unless it is in the interests of justice for such powers to be exercised only at a trial.
[4] In Combined Air Mechanical Services v. Flesch, 2011 ONCA 764, the Court of Appeal considered in some depth the scope of the recent changes to rule 20. It articulated a "full appreciation" test for determining whether a claim could be disposed of on a summary judgment motion. The Court stated:
In deciding if these powers should be used to weed out a claim as having no chance of success or be used to resolve all or part of an action, the motion judge must ask the following question: can the full appreciation of the evidence and issues that is required to make dispositive findings be achieved by way of summary judgment, or can this full appreciation only be achieved by way of a trial?
[5] The Court went on to provide guidance as to when a full appreciation could or could not be met by providing the following two examples:
In cases that call for multiple findings of fact on the basis of conflicting evidence emanating from a number of witnesses and found in a voluminous record, a summary judgment motion cannot serve as an adequate substitute for the trial process. Generally speaking, in those cases, the motion judge simply cannot achieve the full appreciation of the evidence and issues that is required to make dispositive findings. Accordingly, the full appreciation test is not met and the "interest of justice" requires a trial.
In contrast, in document-driven cases with limited testimonial evidence, a motion judge would be able to achieve the full appreciation of the evidence and issues that is required to make dispositive findings. Similarly, the full appreciation test may be met in cases with limited contentious factual issues. The full appreciation test may also be met in cases where the record can be supplemented to the requisite degree at the motion judge's direction by hearing oral evidence on discrete issues.
[6] In Combined Air, the Court recognized the continuation of principles long established in motions for summary judgment, namely that each side must put its best foot forward with respect to the existence or non-existence of material issues to be tried and that a party is not entitled to sit back and rely on the possibility that more favourable facts may develop at trial.
[7] Documentation produced by Royal Laser in this action and on this motion for summary judgment is virtually non-existent. Cassels produced its entire file dealing with the Link litigation on a previous motion by Royal Laser to amend the statement of claim to add Cassels as a defendant.[^1] Included in the Cassels productions are notes of various Cassels persons of conversations with officers and directors of Royal Laser, including notes of advice given to the board of directors, and it is agreed that the comments recorded in the notes are accurate. Also included is a memorandum of Mr. Hamilton, a litigation partner with Cassels, which was e-mailed to certain persons at Royal Laser.
[8] Royal Laser has not produced any documents on this motion. Only an affidavit of Mr. Niral Merchant has been produced. Mr. Merchant was the CFO of Royal Laser at the time of the purchase of the Venture shares, but is no longer an employee. He was not a director of Royal Laser at the time[^2]. Mr. Merchant did not produce any notes of any discussions that he or anyone else at Royal Laser had with anyone at Cassels nor any documents of any kind from Royal Laser. His affidavit attached only excerpts from the file that Cassels has produced in this litigation.
[9] Although the purchase of Venture by Royal Laser was approved at a board meeting of Royal Laser, at which advice was given by Cassels, no minutes of that meeting have been produced by Royal Laser, although they were requested by Cassels many times, nor have any notes of any of the directors or other Royal Laser persons in attendance at that meeting. In his factum, Mr. Zibarras said that significant efforts have been made to find the minutes of the board meeting of April 25, 2006 but they have not been recovered. This is more than passing strange. Royal Laser was listed on the TSX at the time and it is inconceivable that minutes of the meeting approving a $43.5 purchase were not kept. Although there were a number of discussions with senior officers of Royal Laser, including Mr. Bill Iannacci, the chief executive officer of Royal Laser, Mr. Mike Farrugia, the president and chief operating officer and Mr. Greg van Staveren, a director of Royal Laser, no affidavit from these persons was filed nor were any notes of them of any kind produced.
[10] In my view, this case is one in which it is possible to achieve a full appreciation of the evidence and issues without the need for a trial. The case is largely, although not entirely, driven by documents. There is only one witness, Mr. Merchant, whose evidence could be said to require a consideration of its reliability in that there is a conflict between what he stated in his affidavit and what he stated on cross-examination. Other than that there is no conflict in the evidence. The case largely depends upon the inferences and conclusions to be drawn from uncontested evidence.
[11] Nor is this a case in which further production would be helpful. Cassels has long produced its entire file, and delivered affidavits of its main actors, who have been cross-examined. Mr. Zibarrras acknowledged in argument that it was unlikely that there would be any further documents produced in the litigation if this motion for summary judgment fails. For whatever reason, Royal Laser has taken a tactical decision to not put forward any evidence of Mr. Iannacci, the chief executive officer Royal Ventures, or of Mr. Farrugia, the president and chief operating officer or of any director at all. It was the directors whose decision it was to proceed with the purchase of the Venture shares. I am entitled to assume that Royal Venture has put its “best foot forward”.
Relevant factual background
[12] Venture was founded by Ruben Rivas, its president, and William Link, its general sales manager, and others in the fall of 1996. The company prospered. By 2004, a shareholders agreement was entered into which, among other matters, allocated 9% of the common shares in Venture to Mr. Link. Mr. Rivas was the majority shareholder.
[13] On February 21, 2005, Mr. Rivas purported to fire Mr. Link for just cause.
[14] Pursuant to the 2004 shareholders agreement, each management shareholder, including Mr. Link, granted to Mr. Rivas an irrevocable option to acquire all of his common shares in Venture exercisable by Mr. Rivas within 90 days following a “Terminating Event”, which included the termination of the employment of a management shareholder with or without cause.
[15] In the event Mr. Link was terminated with cause, Mr. Rivas was entitled pursuant to the shareholders agreement to purchase his shares for $1. Venture, on behalf of Mr. Rivas, purported to do so on May 17, 2005. Mr. Link refused to tender his shares, so on October 28, 2005 the directors of Venture resolved that the corporation purchase for cancellation Mr. Link’s common shares for $1. The shares were cancelled as of the effective date of May 17, 2005. Thereafter, Mr. Rivas represented himself as controlling 100% of Venture’s issued and outstanding shares.
[16] In the event of a termination of a management shareholder without cause, the exercise of Mr. Rivas’ option to purchase that management shareholder’s shares would be priced at the value of the management shareholder’s proportionate share of the net book value of Venture. Venture estimated that figure for Mr. Link, if he was entitled to his proportionate share of net book value, at approximately $700,000.
[17] If Mr. Rivas received an offer from a third party to purchase all or a majority of his shares, section 3.4 the shareholders agreement provided that the other shareholders would be entitled to participate rateably in (or “piggy back”) that offer. That right survived for six months after the exercise by Mr. Rivas of his option to acquire the shares of another shareholder such as Mr. Link.
[18] If Mr. Rivas and other shareholders holding more than 50% of the common shares wished to accept an offer to purchase all the shares of Venture, the remaining minority shareholders could be compelled to also tender their shares (referred to as a “drag-along” right) pursuant to section 3.5 of the shareholders agreement.
[19] Mr. Link retained Alan J. Lenczner Q.C. and commenced litigation against Venture and Mr. Rivas by statement of claim dated June 3, 2005 in which damages of $9 million were claimed. In their statement of defence, Venture and Mr. Rivas pleaded that Mr. Link had been properly dismissed for cause and asserted a counterclaim seeking $10 million in damages for fraud, conspiracy, negligence, breach of contract, breach of fiduciary duty, unjust enrichment, making secret profits and kickbacks.
[20] While the Link litigation was pending, Royal Laser and Mr. Rivas entered into discussions which ultimately resulted in an agreement that Royal Laser purchase 100% of the shares of Venture from its then remaining management shareholders for $43.5 million. On March 28, 2006, Royal Laser made an offer to purchase 100% of the shares of Venture, on conditional terms, including due diligence. Ultimately the offer was accepted and the transaction closed on April 30, 2006.
[21] Accordingly, once Royal Laser had made its offer to acquire the shares of Venture, the termination of Link’s employment would have one of at least three consequences on the purchase price paid for his shares:
(a) If Mr. Link was dismissed for cause, his shares were properly redeemed and cancelled for $1;
(b) If Mr. Link was terminated without cause, then
(i) if he was not entitled to participate in Royal Laser’s purchase of Venture, he would receive 9% of the net book value of Venture, valued at approximately $700,000; or
(ii) if he was permitted to participate in Royal Laser’s acquisition of Venture’s shares, he would be entitled to be paid 9% of the $43.5 million purchase price, i.e. approximately $3.9 million.
[22] On March 29, 2006, Royal Laser made a public announcement that it had entered into a binding letter agreement with Mr. Rivas, as majority shareholder of Venture, to acquire all of the shares of Venture for a total purchase price of $43.5 million.
[23] On the following day, Mr. Lenczner wrote to Royal Laser by letter dated March 30, 2006 and asserted that Mr. Link owned 9% of the common shares of Venture and was therefore entitled to $4.74 million for his shares and at least an additional $500,000 for outstanding options he held. Mr. Lenczner suggested that Royal Laser hold back those amounts from Royal Laser’s payments to Mr. Rivas or any other shareholders, and asserted that that money was properly payable to Mr. Link.
[24] Earlier in March, Cassels Brock had been retained by Royal Laser to act for it in the purchase of the shares of Venture. Mr. Plener was the partner responsible for the matter. Mr. Bullen, an associate, was involved, as was another associate Mr. Vitesse and a litigation partner named Arthur Hamilton.
[25] Upon receiving Mr. Lenczner’s letter, Mr. Niral Merchant, the CFO of Royal Laser, forwarded it on to Mr. Bullen of Cassels Brock and asked: “We just received this fax. In it [Mr. Link’s] lawyer purports that he is still a shareholder. Do you concur based on your review of the minute books? What does [Stikeman’s] have to say about this?” Mr. Bullen responded that he was looking at it. Stikeman Elliot were the lawyers for Venture in the transaction.
[26] There followed a series of discussions by members of Cassels with Mr. McCarthy of Stikeman Elliot, Marvin Huberman of Teplitsky Colson who was defending the action of Mr. Link on behalf of Venture and with representatives of Royal Laser. A memorandum was prepared by Mr. Hamilton of Cassels, a litigator, regarding the Link litigation and it was e-mailed to Messrs. Merchant and Farrugia of Royal Laser as an attachment to another e-mail. It is two sentences of that memorandum that Royal Laser now seizes on in support of its claim for negligence. There was also a memorandum prepared by Mr. Huberman, litigation counsel to Royal Laser defending the Link litigation, the contents of which were provided to Royal Laser.
[27] During the course of the negotiations for the sale of the Venture shares to Royal Laser, Mr. Rivas said he would provide an indemnity of $1.4 million against the risk of the Link litigation. This provision ended up in the sale agreement following the completion of the due diligence by Royal Laser.
[28] Ultimately, the board of directors of Royal Laser at a meeting on April 25, 2006 approved of the purchase of the shares of Venture for $43.5 million. The share purchase agreement was entered into effective April 30, 2006. An indemnity of $1.4 million was provided in the agreement in favour of Royal Laser and that amount was held back from the purchase price.
[29] On November 14, 2008, in the action of Mr. Link against Venture, Echlin J. held that Venture did not have cause to dismiss Mr. Link and that although he was purportedly dismissed on February 20, 2005, he was entitled to one year's notice of termination and thus was not dismissed at law until February 20, 2006. He held further that the purported acquisition of Mr. Link's shares of Venture on May 17, 2005 was of no legal effect as Mr. Link had purported to acquire them for $1, which would only have been possible had Mr. Link been dismissed for cause, and that Mr. Link still owned his common shares of Venture at the time of the purchase by Royal Laser of the shares of Venture. He held that Mr. Link was entitled therefore to participate in the sale of the shares Venture to Royal Laser pursuant to his piggyback rights under section 3.4 of the shareholders agreement, and was entitled to be compensated for those shares in the amount of approximately $3.2 million. The award was upheld in the Court of Appeal.
Claim against Cassels
[30] The statement of claim alleges (i) that Cassels advised Royal Laser that Mr. Link's shares had been acquired by Mr. Rivas and the Mr. Link did not own any shares at the time of the acquisition of Venture by Royal Laser and (ii) that Cassels advised Royal Laser that its maximum exposure in the Link litigation was $1.4 million. It alleges generally that that Cassels was negligent in failing to properly advise Royal Laser on the risks associated with the repurchasing of Mr. Link's shares, including failing to advise that there was a significant risk that the vendors to Royal Laser did not own Mr. Link’s shares and that Mr. Link could be entitled to be paid the same price for his shares as the other vendors to Royal Laser, and failing to protect Royal Laser's interests and ensure that its exposure to liability arising from the termination of Mr. Link's employment did not exceed the holdback of $1.4 million.
Analysis
(a) Shares acquired by Royal Laser
[31] I will deal first with the argument of Royal Laser that Cassels was negligent in failing to ensure that Royal Laser acquired 100% of the shares of Venture. In my view there is no case on this point.
[32] Royal Laser paid $43.5 million for 100% of the shares of Venture. It acquired 100% of the shares of Venture from Mr. Rivas. In his action for wrongful dismissal, Mr. Link did not claim any kind of declaration that he was still the owner of his shares of Venture. He claimed damages based on his shareholdings and his right to sell his shares to Mr. Rivas. It is certainly the case that Echlin J. held that the acquisition of Mr. Link's shares of Venture by Royal Laser was legally ineffective and that Mr. Link was entitled to participate in the sale of Venture to Royal Laser pursuant to his piggyback rights in section 3.4 of the shareholders agreement. Echlin J. did not, however, make any determination that Mr. Link still owned shares in the sense that he was entitled if he wished to hold onto the shares. Such a finding would have been something that Mr. Link did not request and would have flown in the face of section 3.5 of the shareholders agreement which gave Mr. Rivas the "drag-along" rights to require Mr. Link to sell his shares into the bid by Royal Laser. Consistent with this position, the Court of Appeal added to the trial judgment that Mr. Link be required to surrender his Venture common shares to Royal Venture upon payment of the damages awarded in respect of those shares.
(b) Negligence of Cassels
[33] The real issue in this action is whether Cassels was negligent in the advice it gave to Royal Venture regarding the risk that Venture might have to pay Mr. Link the price per share which was paid by Royal Laser, i.e. the risk that Mr. Link would be entitled to 9% of the purchase price of $43.5 million based upon his 9% shareholding in Venture.
[34] There is no doubt that in acting for Royal Laser, Cassels was required as its solicitor to bring reasonable care, skill and knowledge to the performance of the professional services which it undertook. The requisite standard of care has been variously referred to as that of the reasonably competent solicitor, the ordinary competent solicitor and the ordinary prudent solicitor. See Central Trust Co. v. Rafuse, 1986 CanLII 29 (SCC), [1986] 2 S.C.R. 147 and Folland v. Reardon, (2005), 2005 CanLII 1403 (ON CA), 74 O.R. (3d) 688 (C.A.).
[35] If Cassels was negligent in failing to properly advise Royal Laser as to the risks involved in the action by Mr. Link against Venture, Cassels would be liable if Royal Laser established that the negligence of Cassels caused it to suffer damages. The appropriate causation test in professional negligence cases against solicitors is the "but for" test. In Folland v. Reardon, Doherty J.A. stated:
“But for” causation has been employed in solicitor’s negligence cases, particularly those where the plaintiff contends that he received negligent advice and would have acted differently had he received appropriate advice. In those cases, the plaintiff must show on the balance of probabilities that if properly advised, he would have proceeded in a manner that avoided the damages suffered or obtained the benefit lost as a result of the negligence advice.
[36] The statement of claim alleges specifically that Cassels expressly advised Royal Laser that Royal Laser's "maximum possible exposure in the Link Litigation was $1,400,000, which amount was expressly provided for in the share purchase agreement on Cassel's advice" (para. 29 (e)) and that Cassels failed to act with the degree of care reasonably to be expected of commercial lawyers of ordinary prudence by "failing to protect Royal Laser's interests and ensure that their exposure to liability arising from the termination of Link’s employment and the Link Litigation did not exceed the agreed up holdback amount of $1,400,000" (para. 30(h)).
[37] It is clear that at various times Cassels advised different persons at Royal Laser that the risk of exposure in the action by Mr. Link against Venture exceeded $1.4 million and that Royal Laser was aware of the exposure. On April 4, 2006 Mr. Merchant of Royal Laser told Mr. Bullen of Cassels in a telephone conversation that the action by Mr. Link could be a $7-$8 million hit and that if it could not be resolved, they would hold back more cash.
[38] In a conference call on April 10, 2006 among Mr. Merchant of Royal Laser, Mr. Farrugia the president and chief operating officer of Royal Laser, Mr. Plener of Cassels, Mr. Bullen of Cassels, Mr. Hamilton of Cassels, Marvin Huberman, litigation counsel for Venture defending the action of Mr. Link, Mr. McCarthy of Stikeman, counsel to Venture and the vendors on the sale transaction, and Craig Kennedy, the chief financial officer of Venture, Mr. Kennedy of Venture suggested that Mr. Link’s right to tag along on the sale to Royal Laser had expired as it was more than six months after the termination of Mr. Link. Mr. Hamilton of Cassels responded by saying that Mr. Lenczner for Mr. Link was seeking specific performance of the without cause language in the shareholders agreement in asserting his right to receive his portion of the purchase price to be paid by Royal Venture and that Mr. Link might be entitled to receive one year's notice of severance in the event that a court found no cause for dismissal, i.e. Mr. Hamilton was telling the participants in the call that Mr. Kennedy may not be right and that Mr. Link might be entitled to participate in the sale to Royal Laser
[39] During the call Mr. Kennedy on behalf of Venture said that Mr. Rivas would agree to a cap on liability for the litigation at $1.4 million. Later that day there was a second call among Mr. Merchant and Mr. Farrugia of Royal Laser and Messrs. Plener, Bullen and Hamilton of Cassels. During that call Mr. Hamilton expressed the exposure represented by the Link litigation to be:
$4.74 million – common shares
$2.0 million – two years severance
$500,000 – additional notice [Wallace damages]
$500,000 – irrevocable options
$7.7 million plus”
[40] Mr. Plener suggested that Royal Laser should hold back $7 million to $8 million of the purchase price.
[41] Mr. Farrugia set out Royal Laser’s options:
settle before closing
fight after closing and escrow an amount ($7.7 million)
fight it all after and take our chances
[42] After Mr. Rivas had made plain that he would not provide an indemnity for the Link litigation above $1.4 million, Mr. Hamilton prepared a three page memorandum of April 13, 2006 that was forwarded to Mr. Merchant and Mr. Farrugia of Royal Laser on the following day as an attachment to an e-mail from Mr. Bullen.
[43] Mr. Hamilton’s evidence, which I accept, was that he was to consider whether the indemnity of $1.4 million was sufficient protection for Royal Laser, or whether there was exposure above that amount. The contents of his memorandum confirm that. The memorandum did not purport to opine on the extent of the exposure of Venture to Mr. Link but only if the $1.4 million indemnity was adequate. Mr. Hamilton’s evidence that there was no way, taken that the action was only at the pleading stage, that one could peg the outcome of the Link litigation, makes complete sense.
[44] The memorandum of Mr. Hamilton stated at the end:
At this point, under no circumstances do I believe that Cassels can give a clean opinion to Royal Laser that the full amount of the exposure in respect of the Link Litigation is $1.4 million or less. Indeed, the aggregate amounts of Link’s one year notice period and his options represent $1 million in and of themselves. On Venture’s best case scenario of the repurchase rights of Link, the net book value appears to be an additional $700,000. Interest, costs and reimbursement of legal costs of Link increase the exposure further.
[45] The following paragraph appeared earlier in the memorandum and is heavily relied upon by Royal Laser in this action:
Our research regarding the proper interpretation of the actual date which constitutes the Terminating event progresses. To remind you, section 3.6(2)(b) of the Shareholders Agreement provides a mechanism for the calculation of the Net Book Value to which Link is entitled in respect of his shares if the Terminating Event is Link’s termination without cause. In this respect, our research to date has indicated that there is a distinction between share purchase rights and share options. With respect to share purchase rights generally (and subject of course to the specific language of the Shareholder Agreement) the notice period to which Link may be entitled is irrelevant as the right to share purchase is triggered by the employee’s discharge (or put another way, his termination). Consequently, the employee is not entitled to benefit from any subsequent increase in value of the shares past the discharge date, as it cannot be said to have been within the reasonable contemplation of the parties that such a result would occur, particularly where, in our fact situation, Link did not contribute in any way to the sale of the shares of Venture to Royal Laser. With that being said, the relevant date for the purposes of calculating “Net Book Value” may well be open to the interpretation of the Court, due in part to the indecipherable definition of that term, coupled with the circuitous definition of Terminating Event within the Shareholders Agreement. Without being overly critical of the language employed by the Shareholders Agreement, there may not be a clean opportunity for Venture to argue that the date of discharge, in February of 2005, coupled with the mechanism for calculating Net Book Value requires that Link’s rights to have his shares purchased are determinable as at January 31, 2005, the last full month prior to the date of his discharge from Venture (VSI).
[46] On April 25, 2006, the board of directors of Royal Laser met by teleconference. Mr. Merchant also participated, as did Messrs. Plener and Bullen from Cassels. On the agenda was the $1.4 million indemnity for the Link litigation. Mr. Merchant stated that he felt that they could settle for $1.4 million. A director asked about an earlier offer by Mr. Link to settle for $3 million, an offer that had in fact expired. Mr. Bullen told the directors that the liability to Mr. Link could exceed $3 million. Mr. Iannacci, the chief executive officer of Royal Laser and chairman of the board of directors, said that they wanted to fight it out, to drag Mr. Link through the mud and that they would charge him criminally. Both Mr. Bullen’s and Mr. Plener’s notes indicate that the directors agreed to accept liability over $1.4 million. This evidence of the discussion at the board meeting can only be taken to be an acknowledgment by the board of Royal Laser that they were aware of the potential liability to Mr. Link of more than $1.4 million and were prepared to run that risk and fight it out.
[47] On April 26, 2006, the day following the board meeting, Mr. Merchant advised Mr. Bullen that he was ok with assuming Mr. Link’s litigation liability over $1.4 million.
[48] Although the statement of claim pleads that Cassels expressly advised Royal Laser that Royal Laser's maximum possible exposure in the Link litigation was $1.4 million, the affidavit of Mr. Merchant filed on behalf of Royal Laser is somewhat different. He states that while he understood that there was a chance that Royal Laser would have to assume some exposure over $1.4 million, he believed based on Cassels analysis that the exposure was much closer to $1.4 million than the $9 million claimed by Mr. Link. He said he understood that the potential exposure from the Link litigation was approximate $3 million consisting of (i) severance of $1-$1 million; (ii) Wallace damages of $0-$200,000; (iii) the cost of repurchasing Mr. Link's shares of $1 or $700,000; (iv) the cost of repurchasing Mr. Link's options of $533,509; and (v) interest and costs of $0-$500,000.
[49] Mr. Merchant then stated:
- Royal Laser did not view these risks to be significant. If Royal Laser had been told Link still owned his shares or could trace into the Transaction [i.e. be paid 9% of the purchase price based on his shareholding], it would not have proceeded with the share purchase agreement on the agreed terms, or at all.
[50] Thus although the statement of claim relies upon a plea that Cassels advised that the maximum exposure was $1.4 million and failed to ensure that the exposure was no more than that, being the agreed upon holdback, Mr. Merchant asserts that he at least understood the potential exposure to be larger than that amount and further that Royal Laser did not view the risk of the higher amounts to be significant.
[51] As mentioned, Royal Laser has zeroed in on two sentences in paragraph 4 of the Hamilton memorandum that states that “with respect to share purchase rights generally (and subject of course to the specific language of the Shareholder Agreement) the notice period to which Link may be entitled is irrelevant as the right to share purchase is triggered by the employee’s discharge (or put another way, his termination). Consequently, the employee is not entitled to benefit from any subsequent increase in value of the shares past the discharge date, as it cannot be said to have been within the reasonable contemplation of the parties that such a result would occur…” Mr. Zibarras contends that this statement was in error as it contradicts the case relied on by Echlin J. to provide Mr. Link with a value derived from the Royal Laser purchase price of $43.5 million.
[52] The case in question relied on by Echlin J. was Veer v. Dover Corp (Canada) Ltd, (1999), 1999 CanLII 3008 (ON CA), 45 C.C.E.L. (2d) 183 (Ont. C.A.). In that case an employee dismissed for purported cause was successful in establishing at trial that no cause existed. His contract provided him with options to acquire shares in the employer so long as he had not been terminated. It was held that termination in the contract must mean lawful termination, absent clear language in the contract to the contrary. Thus the employee was entitled to the value of his option during the period of reasonable notice to which he was entitled. Echlin J. held that the termination of Mr. Link was not lawful and thus as the sale to Royal Laser occurred within the one year period of notice of termination to which Mr. Link was entitled, Mr. Link was entitled to his tag-along rights to be paid for his shares based on the value set by the Royal Laser purchase.
[53] It may be that Mr. Hamilton was in error in his statement in paragraph 4 of his memorandum relied on by Royal Laser, although there is no expert evidence that Mr. Hamilton breached the appropriate standard of care,[^3] and the paragraph began by stating that their research regarding the proper interpretation of the actual date which constitutes the terminating event “progresses”.
[54] I also think it relevant to this issue that Mr. Zibarras, counsel to Royal Laser, also acted for Venture in defending the Link litigation at trial and in the Court of Appeal. In the Court of Appeal, he argued points that are directly contrary to the position now taken by Royal Laser. For example, in the Court of Appeal, it was argued on behalf of Venture (i) that the relief awarded by the trial judge was not pleaded, as what was pleaded was a claim for net book value pursuant to section 3.6(2)(b) of the shareholders agreement which was premised on the notion that Mr. Link could not have still been a shareholder; (ii) that there was no pleading that Mr. Link was still a shareholder; (iii) that the letter of Mr. Rivas of May 17, 2005 constituted a valid exercise of the option to acquire Mr. Link’s shares under section 3.6(1) of the shareholders agreement regardless of the price that was proposed and the fact that it was $1 rather than net book value that was proposed as the price did not alter the legal result that Mr. Rivas had acquired Mr. Link’s shares.
[55] The fact that the argument in the Court of Appeal on behalf of Venture was contrary to what is now argued by Royal Laser is not in itself an answer to a claim for negligence that is otherwise made out. But it is some indication that the legal effects of what had happened and the meaning of the relevant agreements was not so clear at the stage of the Link litigation when Cassels looked at it as to conclude that Cassels was negligent. As a general rule, it is not possible to determine professional negligence in a given situation without the benefit of expert evidence, subject to two exceptions. The first applies to cases of nontechnical matters or those of which an ordinary person may be expected to have knowledge and it is therefore possible to reliably determine the standard of care without the assistance of expert evidence. The second applies to cases in which the impugned actions of the defendant are so egregious that it is obvious that his or her conduct has fallen short of the standard of care, without even knowing precisely the parameters of that standard. See Krawchuck v. Scherbak (2011), 2011 ONCA 352, 106 O.R. (3d) 598 at paras. 132-135. Without cogent expert evidence in this case, I would be very hesitant in concluding that the relevant standard of care had been breached by Cassels.
[56] However, assuming the statement in the Hamilton memorandum relied on by Royal Laser was negligent, it in my view does not result in liability of Cassels.
[57] Cassels points out that the paragraph in question dealt with the means of valuing the net book value of the shares of Mr. Link, and that what occurred was not that but a value based on the sale price. It points to paragraph 5 of the memorandum that dealt with the claim asserted by Mr. Lenczner to the full share value based on the sale price and the statement of Mr. Hamilton that it was an exposure that Royal Laser could not discount down to zero at this stage of the legal proceedings. The paragraph stated:
- Based on the letter from counsel for Link, they intend to rely upon the indecipherable nature of the key provisions of the Shareholders Agreement to argue that the value Royal Laser has now placed on 100% of the shares of Venture is the determining factor in calculation of the value of Link’s right to have his shares repurchased. Further, given the Subsequent Sale provision in section 3.6(3) of the Shareholders Agreement, Link may argue that earnest discussion between Royal Laser and Venture began within the 6 month period contemplated by section 3.6(3). This is another exposure to Venture which Royal Laser cannot discount down to zero at his stage of the legal proceedings between Venture and Link.
[58] It is clear that the two sentences in paragraph 4 of the Hamilton memorandum were not intended to be a prognostication of what the outcome of the litigation would be. The opening sentence of paragraph 4 indicates that it was a work in progress. The memorandum commenced with the statement “ As we continue to review the litigation aspects of the Royal Laser/Venture transaction, our analysis has advanced such that I can provide the following comments and observations”. There followed 6 numbered paragraphs and then two concluding paragraphs. The first concluding paragraph, to which I have referred, stated that under no circumstances did Mr. Hamilton believe that Cassels could give a clean opinion to Royal Laser that the full amount of the exposure to Mr. Link was $1.4 million or less. The second stated that “Our work continues with respect to this litigation” and that he would report further as their analysis advanced.
[59] What Cassels was doing at the time of the Hamilton memorandum, dated 12 days before the board of Royal Laser agreed to proceed with the purchase of Venture, was to see if Royal Venture could safely rely on the $1.4 million indemnity that was the maximum protection it was getting from the vendors of Venture. Mr. Hamilton was not intending to opine on the likely exposure of Venture to Mr. Link, and had he been he would indeed have been foolish. Cassels were not acting for Venture. The Teplitsky Colson firm was defending the Link action on behalf of Venture, and had stated in a letter to Venture that was given to Cassels and provided in a memorandum to Royal Laser that the claim for $9 million was in the documentary discovery stage, to be followed by oral examinations for discovery. The Teplitsky Colson letter then stated that it was therefore premature to predict the outcome of the litigation or make an assessment of damages. That is consistent with the evidence of Mr. Hamilton which I have accepted.
[60] Neither the chief executive officer, nor the president of Royal Ventures nor any of the other directors who approved the purchase of Venture has given any evidence that they even saw or read the Hamilton memorandum or relied on it in any way in forming their decision to accept the indemnity of $1.4 million provided by the vendors. In my view this is fatal to the claim of Royal Ventures. Causation has not been proven, even assuming the Hamilton memorandum contained a sentence that was incorrect and below the standards of a prudent solicitor.
[61] Mr. Merchant swore in his affidavit that “I recall focusing on Hamilton’s advice that Link could only trace into the Transaction if negotiations had began within 6 months of Link’s termination (which everyone agreed had not happened). Hamilton further advised that if Link was fired without cause, his notice period was irrelevant to his ability to trace into the Transaction”.
[62] I am afraid I cannot accept Mr. Merchant’s statement that he recalled focusing on anything in the memorandum. On his cross-examination he was asked about the Hamilton memorandum and whether he had his copy with him. His testimony was less than inspiring. He said “define my copy”. When Mr. Pepall then said he was referring to the copy that had been sent to him, he said he didn’t have it. Mr. Zibarras then said “Are you asking whether he printed it, because it was an e-mail?”, suggesting that perhaps it had not been printed by Mr. Merchant. Mr. Pepall then asked what Mr. Merchant did with the e-mail when he received it. Mr. Merchant replied that he did not recall. Mr. Pepall then asked Mr. Merchant if he read the e-mail, to which Mr. Merchant replied:
“A. I read it. I recall that…more likely than not, read it yes.”
[63] The purport of Mr. Merchant’s evidence on cross-examination is that he does not recall what he did with the Hamilton memorandum, and that “more likely than not” he read it. He did not have a copy. I do not accept his statement in his affidavit over five and a half years later that “he recalls focusing on Hamilton’s advice”. He cannot say for certain if he even read the memorandum.
[64] Moreover, the paragraph of the affidavit relied on by Royal Laser, which I shall set out again, is really no more than an assertion regarding “Royal Laser”, not a statement of evidence of what the views of any particular officer or director were. It stated:
- Royal Laser did not view these risks to be significant. If Royal Laser had been told Link still owned the shares or could trace into the Transaction [i.e. be paid 9% of the purchase price based on his shareholding], it would not have proceeded with the share purchase agreement on the agreed terms, or at all.
[65] Even if Mr. Merchant had identified which directors of Royal Laser held the views he asserted, it would be hearsay evidence. Mr. Merchant was not Royal Laser or a director.
[66] The same can be said of paragraph 42 of his affidavit in which he asserts what led the directors of Royal Laser to proceed. It is not evidence of what any director thought and it would be hearsay if it were. It stated:
- On April 25, 2006, there was a conference call with the Royal Laser board of directors (RLC Board). The RLC Board agreed to accept the potential liability over $1.4 million based on (a) the Defendant’s representations and opinions the Link’s shares had been re-purchased; and (b) Cassel’s opinion that Link’s notice period was irrelevant and Link could only “tag along” into the Transaction if negotiations had started within 6 months of Link’s termination (which everyone agreed had not occurred). Royal Laser, based on this, considered its total exposure associated with the Link Litigation to be at most $3 million ($1.4 of which Rivas was agreeing to pay for). This was a level of risk that Royal Laser was prepared to accept.
[67] It must be remembered that there is no evidence that any of the directors saw or read the Hamilton memorandum or were advised of its contents[^4]. Mr. Merchant is not in any position to give evidence as to what motivated the directors to act. It is for them to have provided that evidence.
[68] Thus there is no cogent evidence that the decision makers knew of or relied on the statement of Mr. Hamilton in paragraph 4 of his memorandum. I would also say that if such evidence had been given, it would have been unreasonable for any director to conclude that Mr. Hamilton or Cassels was attempting to provide in that memorandum an opinion of the size of the exposure to Mr. Link, other than that they could not say it would not be in excess of $1.4 million. Moreover, the memorandum did not purport to be final or definitive and various risks were pointed out.
[69] The best evidence of what was in the minds of the directors is contained in the notes of Mr. Bullen and Mr. Plener of prior discussions with directors and of the board conference call of April 25, 2006 when the board agreed to proceed with the transaction. The senior officers and some board members had earlier been told that the exposure could be $7.7 million, and during the board meeting were told that the exposure could be above $3 million. Mr. Merchant is quoted as saying during the conference call that he felt they could settle for $1.4 million. He is not quoted as saying anything about advice from Cassels that the exposure will not be substantially more. Mr. Iannacci, the chief executive officer of Royal Venture and chairman of the board, is quoted as saying together with Mr. Niral that they want to fight it out and they are going to drag Mr. Link through the mud. A statement was made that they will charge Mr. Link criminally. These were fighting words and indicated a desire to fight. There is no suggestion they were told by Cassels that the liability would be at or substantially near $1.4 million and that they would be substantially protected by the indemnity for $1.4 million. They are quoted as agreeing that they would accept liability over that figure.
[70] On my view of the evidence, and I so find, Cassels has established that there is no genuine issue requiring a trial and that the action should be dismissed. The plaintiffs have not established that Cassels was negligent or that any negligence, if it existed, caused it any damage. Applying the “but for” test, the plaintiffs have not established that but for the Hamilton memorandum, Royal Laser would not have acted as it did and would not have closed the purchase of the shares of Venture with the indemnity of $1.4 million.
Conclusion
[71] The motion for summary judgment by Cassels is allowed and the action is dismissed. Cassels is entitled to its costs of the action. If costs cannot be agreed, brief written submissions along with a proper cost outline may be made in writing within 10 days, and brief reply submissions is writing may be made within a further 10 days.
Newbould J.
DATE: March 1, 2012
[^1]: Marrocco J. dismissed the motion to add Cassels as a defendant but this was overturned in the Court of Appeal.
[^2]: Although his affidavit stated that at all material times he was a director of Royal Laser, it is agreed that Mr. Merchant was not a director at the time of the purchase of Venture.
[^3]: At the opening of the motion for summary judgment, Mr. Zibarras sought to rely on an expert report of Mr. Howard Levitt delivered three days earlier on February 11, 2012. Mr. Levitt had been retained the day before. This was long after the agreed timelines for filing material had passed. Spence J. had five days earlier on February 9, 2012 refused an adjournment of the summary judgment motion to permit Royal Laser to retain an expert. It would have been unfair and prejudicial to Cassels to permit the report to be used, for reasons I gave, and I refused it.
[^4]: The e-mail from Mr. Bullen to Mr. Merchant of April 14, 2006 that attached a copy of the Hamilton memorandum was copied to Mr. Farrugia. No evidence has been given that Mr. Farrugia read the e-mail or the attached Hamilton memorandum.