Court File and Parties

COURT FILE NO.: 07-CV-345986 PD2

DATE: 20120417

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

FAST MOTION MEDIA GROUP INC.

Plaintiff

– and –

GINO PRIOLO

Defendant

Michael Ellis & Christopher Karpacz, for the Plaintiff

Richard Hammond & Alex Flesias, for the Defendant

HEARD: January 16-20, 23-27 & Feb. 6-8, 2012

LEDERER J.:

Reasons for Decision

[1] The principals of the plaintiff, Fast Motion Media Group Inc. (“Fast Motion”), saw an opportunity. There was a demand for “motion capture” to be utilized in motion pictures and video games. This work records movement; in this case, the actions of actors. The recordings are used to animate characters that appear in films and games. Fast Motion was incorporated to design, choreograph and create the action elements used in these forms of entertainment.

[2] To succeed, it was decided that the company should establish its own studio in the City of Toronto. In furtherance of this plan, Fast Motion entered into a contract with Seneca College (“Seneca”), a community college with several campuses within Toronto and its environs. Seneca offers training leading to careers in a broad range of technical areas. Put simply, the contract called for Seneca to provide the specialized equipment that was used in recording movement (referred to as “the Vicon Motion Capture Equipment”). Fast Motion was to provide what was referred to in evidence as the “commercial aspect”: the services and manpower required for the execution of the work undertaken by the studio in connection with projects that involved motion capture. The revenue was to be shared. Fast motion was to receive seventy-five percent (75%) of all gross revenue generated through any of the motion capture facility’s projects with the remaining twenty-five percent (25%) going to Seneca.

[3] It was the responsibility of Fast Motion to provide the facility. A building was located at 2 Denison Road West, in the City of Toronto. It was owned by the defendant, Gino Priolo. For the building to be used as a motion capture studio, changes had to be made. In particular, the ceilings were not high enough for “wire work”, which is used to capture movement to make it appear as if the characters depicted on film or as part of a video game are flying or undertaking similar physical feats. Gino Priolo proposed that this fault could be overcome by removing the ceiling that separated the first floor from the second floor of what had been and would remain as the studio area. This would require the removal of the pillars that held up the roof and their replacement with steel beams, on top of the building that would hold the roof from above rather that support it from below. A catwalk was required around the studio space and a re-organization of some of the interior space. Included was a new exit to the roof. The work was described in a document which was attached as Schedule “C” to the Agreement of Purchase and Sale.

[4] The purchase price of the building totalled $800,000. $500,000 of this was attributed to the real estate and the building and $300,000 to the purchase of fixtures, chattels, equipment and the construction work that had been set out in Schedule “C”. The application for a building permit that was completed on June 21, 2007 says that the value of the construction project was $150,000 suggesting that the fixtures were similarly valued ($150,000 for the work + $150,000 for the fixtures, chattels and equipment = $300,000). There was to be a deposit of $10,000 and a further $289,640.75 was to be paid at closing. The remaining $500,000 was to be the subject of a first mortgage taken back by Gino Priolo as the vendor. The mortgage provided that it would bear no interest until after the work set out in Schedule “C” was completed and that, if the work was not done within sixty days of closing, the mortgagee would credit the mortgagor with $600 per month off the principal until the work was done. As the plaintiff sees it, this amounted to a term requiring that the work be finished sixty days after closing. To my mind, this is not so clear. Rather, these provisions recognize that the work may take longer than sixty days, but provide an incentive for the mortgagor to complete the work within that period of time. In the event that the work is not complete, the mortgage puts the penalties in place. For his part, the defendant said his understanding was that he had to complete the Schedule “C” work before any mortgage payments were to be made. The defendant indicated that he knew the building had to be ready for the scholastic year beginning in the fall of 2007.

[5] The mortgage was entered into on the understanding that the defendant would undertake, and be responsible for the work outlined in Schedule “C”. The principals of the plaintiff accepted that he had the necessary experience. The defendant determined to proceed without a building permit. His approach was to complete the work and then apply for the permit. If, at that point, there were deficiencies which prevented a permit from being issued, changes would be made and the work made to comply. Counsel for the defendant was at pains to suggest that the plaintiff agreed to proceeding in this way. Counsel was insistent that I make a finding in this regard. I do not agree that this was part of the arrangement. Plato Fountidakis was one of the principals of the plaintiff. He testified in court. In evidence, he made it clear that the plaintiff accepted and relied on the experience of the defendant in respect of the work that was required. The plaintiff understood that the defendant had constructed the building. The plaintiff did not agree as to how the work should proceed. They left that to the defendant. It was illegal to begin construction without having a building permit in hand (see: Building Code Act, 1992, S.O. 1992, Ch. 23 at s. 8).

[6] If this was not apparent to the defendant from the outset, it would have been following March 21, 2007. On that day, Andrew Wild, who was at the time a building inspector with the City of Toronto, visited the site. He had received a complaint from the local councillor. There was a concern that a roof sign was being constructed on the building without the requisite approval. Andrew Wild noted that there was structural work ongoing on the roof and renovations being undertaken inside. Andrew Wild gave evidence at the trial. He told the court that, on March 21, 2007, he advised the defendant of the need to apply for a building permit. He described their conversation as a little confrontational, but not out-of-line with what happens when an order is issued. As a result of his visit to the site, on the same day, Andrew Wild issued an Order to Comply. This Order lists two contraventions:

(1) Roof addition and reinforcing added; and,

(2) Interior alterations in West portion of the building.

[7] In respect of both, the Order to Comply refers to s. 8(1) of the Building Code Act, 1992 and lists the required action as: “Apply for a building permit or remove the offending construction”. The Order goes on to indicate that failure to comply “could result in a Stop Work Order” (see: Building Code Act, 1992, s. 14) and “is an offence which could result in a fine” (see: Building Code Act, 1992, s. 36).

[8] Accordingly, by March 21, 2007, it must have been apparent to the defendant that a building permit had to be obtained. Nonetheless, it was not until three months later, on June 21, 2007, that the application for a building permit was prepared. It is marked as being received by the City of Toronto on June 25, 2007. The building permit was refused. This was communicated to Fast Motion by a letter, dated Monday, July 9, 2007. The letter indicates that: “Information submitted was incomplete and failed to demonstrate that the application for a permit was in compliance with the Ontario Building Code”. In particular: “Drawings were not submitted with sufficient details to enable the determination of whether the proposed construction, demolition or change of use will conform to the Act, the Building Code and any other Applicable Law”. Further requirements of the drawings were listed. The letter advised that the project required an Architect and a Professional Engineer. Andrew Wild observed that these comments were general in nature and that, as a result of these failings, no meaningful review could be undertaken.

[9] On July 31, 2007, the application was re-submitted. The next day, the city responded confirming, among other things, that: “Design and General Review by an Architect is required.” On August 15, 2007, a substantive response to the re-submission was sent by the City of Toronto jointly to one of the principals of Fast Motion (Paul Rapovski) and the defendant. It advised that, from the perspective of the city, no progress had been made. The deficiencies which had existed at the time of the first submission continued. It does appear that, following the issuance of the Order to Comply, very little progress was made on the project. Plato Fountidakis testified that worked slowed a couple of months after the closing. Angelo Furgiuele was hired by the defendant to assist him on the project. He testified that his last day onsite was May 1, 2007. The defendant testified that he made efforts to meet with city staff and, in response to their request, had floor plans of the existing building prepared. Be that as it may, so far as the city was concerned, the deficiencies present in the first submission remained in the second. This was not the only the problem which occurred during this period of time. A letter dated, August 8, 2007, was received from the City of Toronto indicating that there were tax arrears which needed to be accounted for. The plaintiff had made the tax payments for the year 2007. The arrears referred back to 2005 and 2006 and were the responsibility of the defendant. This was referred to the defendant, by Fast Motion, and the issue was dealt with within a few days.

[10] On July 12, 2007, the solicitor acting on behalf of the plaintiff wrote to the defendant's lawyer, among other things, expressing concern for the delay in dealing with the “concerns about the roof” and the failure to complete “a number of the provisions set out in Schedule ‘C’ of the contract”. On August 19, 2007, the solicitor again wrote to the lawyer acting for the defendant. This was the letter which enclosed the notice of tax arrears. It renewed the concerns for the failure of the defendant to complete the work. In part, the letter said:

The realty tax issue pales compared to your client's continuing failure to complete the premises as per his agreement. I am attaching the most recent letter that we have received in connection with the building permit matters and the City of Toronto. Your client refuses to provide the City with plans that are approved by an Architect. The roof still leaks. Other work is not complete and there may be changes that the City will require to gain their approval to the building permit. My client cannot use the space as they imagined and have prepared to use.

[11] The letter went on to advise that if plans, as required by the City, were not prepared under the seal of an architect and submitted by Wednesday, August 22, 2007 at 5:00 p.m., and if arrangements had not been made to have the roof repairs and all the work completed by Friday, August 25, 2007 at 5:00 p.m., Fast Motion would make separate arrangements for the plans to be prepared and for the work to be completed. By August 24, 2007, the plaintiff had retained litigation counsel. On that day, he wrote to the defendant. This letter indicated that, if the work was not completed by September 4, 2007, including the obtaining of all necessary permits, a claim would be issued seeking compensation for losses suffered by the plaintiff as a result of the failure of the defendant to complete the work and for whatever costs Fast Motion would be required to expend in finishing those items included in Schedule “C” that had not been completed by the defendant.

[12] On September 10, 2007, Paul Rapovsky wrote to the Building Plan Examiner at the City of Toronto requesting that, in the future, staff of the city communicate with the two principals of Fast Motion. The letter advised that the defendant had been removed from the project. It appears that no immediate effort was made to advise the defendant of this change. At 8:22 p.m., on September 10, 2007 (later the same day as the letter written by Paul Rapovsky), the defendant sent an e-mail to the Building Plan Examiner. Presumably because he received no response, the defendant telephoned the city official on September 18, 2007 and received an e-mail advising that he should communicate with Paul Rapovski “regarding your position for the above building permit application”. The defendant continued to inquire and, on September 27, 2007, the city sent a further e-mail. This one briefly reviewed the problem, advised that Paul Rapovski had indicated that a new submission would be forthcoming, and, again, asked that the defendant communicate with Paul Rapovski regarding his position with respect to the building permit. In his evidence, Plato Fountidakis suggested that the defendant had not been terminated. Rather, the defendant had decided to withdraw. It may be that work was no longer being undertaken, at the site, and that no further progress was being made. To my mind, it does not make any difference whether the defendant was fired or left. Nor does it matter whether the contract required the work to be done within sixty days or some time thereafter. It is clear that the defendant was in breach the contract. He did not complete the work as required. By the fall of 2007, the plaintiff had no option but to take over in order to minimize the damage.

[13] What was the damage? The plaintiff claims for the cost of completing the work required by Schedule “C” and for its lost profit arising from the delay in completing the work.

[14] Following the departure of the defendant from the project, the plaintiff went about the business of completing the work. It began by retaining Denis Poletti, an architect with the firm of Core Architects Inc. Denis Poletti advised the court that he was retained on August 28, 2007. It may be more accurate to say that he met with representatives of the plaintiff in August and that, on that day, he took a tour of the building. On September 21, 2007, he delivered a “Fee Proposal” to Plato Fountidakis and was formally retained shortly thereafter. Core Architects Inc. was engaged to provide the necessary documentation, to co-ordinate with the structural engineer and obtain a building permit and an occupancy permit for the premises. Denis Poletti took on the role of lead consultant. He began by making inquiries as to the status of the work. He learned that the structural drawings had been delivered, but that these had been rejected by the City. No architectural drawings had been filed. Someone had been working on them, but that person did not have a copy. Evidently, they had been given to the defendant. Denis Poletti concluded that it would be wise to continue to use the services of the same structural engineer. The engineer had already done work and, on this basis, it was decided not to change. Nonetheless, Robert Holroyd, also a structural engineer, was retained as back-up and to undertake a peer review of the work performed by the original structural engineer.

[15] The project included significant changes to the building. The project required a building permit. It was the evidence of Denis Poletti that construction could not start without one. There were problems with the work that had been done. Apart from the absence of the required drawings, Denis Poletti found a range of other problems, including but not limited to:

• support rods and plates supporting columns along the west wall required replacement and substitution to galvanized steel;

• non-compliant barrier-free access and washroom acquirements;

• non-compliant egress from the second floor and catwalk;

• non-compliant guard rail details surrounding the catwalk;

• missing guards along the catwalk and at overhead door locations;

• steel access stair to the roof was not anchored correctly;

• rooftop air-handling unit was not supported properly

• rooftop storage was not anchored to the roof;

• flashing at all locations of the rooftop support beams was substandard; and,

• roofing membrane around roof penetrations at the support beams required repair, leaking was still prevalent.

[16] The structural engineer retained by Core Architects Inc. undertook a design review of selected elements within the building “for general conformity with relevant codes and standards”. They concluded that the drawings required additional work before they could be considered to be in compliance with the 2006 Ontario Building Code. The structural engineer included a list of concerns which, in summary, demonstrated concern for the design. As one might expect, a number of these concerns reflect on whether the drawings demonstrate, and the design properly considered, the ability of the beams, knee braces, hangers for the catwalk and the structure to hold the weight they would be required to bear. For example, the roof joists required bridging between them to stop the torsion (twisting) of the joists under the weight of the roof. The Code prescribes the spacing between the bridges, depending on the length of the joists. On the site visit, some of the needed bridging was noted as missing. The structural engineer required that they be reinstated.

[17] An application for a building permit was filed. “[D]rawings, specifications, details and information were submitted with the application.” It was issued by the City of Toronto on December 7, 2007. The work required to finish the renovation outlined on Schedule “C” was completed. The work: “ ‘interior alterations to existing TV. [sic] Production building, remove second floor slab to provide 22’ ceiling height & provide new support for roof’ [was] inspected and complied in accordance with the plans issued under the [building] permit”. An Occupancy Permit was issued on August 8, 2008.

[18] The plaintiff claims as damages the cost of having this work done. The total amount claimed on account of this work is $162,582.49. This includes $7,000 apparently paid to the father of Plato Fountidakis for work he did as a general labourer. The problem is there is no proof supporting this part of the claim. There are no timesheets, no invoice and no proof of payment. This would reduce the claim to $155,582.49.

[19] Counsel for the defendant reviewed the cheques and invoices presented in support of this claim. He proposed that there should be further significant reductions as follows:

• Eight circumstances in which cheques were provided without any invoices demonstrating the charges. These total (Brad Bennett $536.89 + $143.44 + Nitro Industrial Sales $145.80 + $47.25 + $61.58 + Alpha Garage Doors $80 + $150 + Quality Duct Cleaning $367.47 + Cheryl Quiacos $55 + Jason Evans $500 + TMS Plumbing & Heating $600 + Neil Davidson $143) $2,830.43.

• Another series of charges in which a company identified as GP Custom provided a quote for “Structural Steel Reinforcing and Architectural Railing requirements”. The quote totaled $48,800. Ultimately, cheques totalling ($15,000 + $15,000 + $7500 + $15,000 + $13,000 + $8112.75) $73,612.75 were paid. Counsel submitted that the claim should be reduced by at least the difference between the amount paid and the value of the quote taking into account the value of the tax. The tax represents 13% of the amount charged. 13% of $48,800 is $6,344. The amount charged would be ($48,800 + $6,344) $55,144. On this basis, the amount of the claim would be reduced by ($73,612.75 - $55,144) $18,468.75.

• A single charge from “kreitmaker inc.” where there is an invoice but no demonstration of payment. The value of the invoices was $255.66.

[20] I will not reduce this part of the claim by any of the amounts referred to. The calculation was undertaken by counsel. No witness was referred to this or questioned as to the absence of this material. Plato Fountidakis reviewed his understanding of the work done by all those involved except the architects and the engineers (both of which gave evidence) and the two cheques made payable to Brad Bennett which totalled $680.33. The architect, Denis Poletti, testified that, once the building permit was obtained, he confirmed that the drawings were followed, the work was reviewed and found to be satisfactory. There were deficiencies, but they were cleared up and an Occupancy Permit obtained on August 6, 2008. Denis Poletti advised the court that the cost was reasonable and explained that some of the work was more expensive than it would have been in the normal course because, as a result of the condition it was in when the defendant left, it had to be completed on site rather than in a work shop. In this regard, he referred specifically to the revisions to the beams on the roof. They were already in place, but had to be extended in order to increase the area that was to bear the weight of the beams and the roof they were designed to hold in place. Denis Poletti explained that it would have cost more to shore up the roof, to hold it in place, while the beams were replaced.

[21] I award $155,582.49 to be paid by the defendant to the plaintiff.

[22] The plaintiff also claims for the profits it says were lost as a result of the delay in the work being completed. The plaintiff says that it expected the work to be completed within sixty days of closing (by March 13, 2007) and requests compensation for the loss of profit for the succeeding seventeen months, until the Occupancy Permit was issued August 6, 2008. In furtherance of demonstrating the magnitude of this loss, an economic consultant was retained. Adrian Karoly was a witness at the trial. His work considered two constituent factors:

(a) loss of operating profit expected to recur year after year; and,

(b) loss of profit associated with an extraordinary opportunity that was missed as a result of the delay.

[23] In examining the first of these factors, the witness considered the revenue of Fast Motion for the two years immediately before the purchase and renovation of the new studio (2005 and 2006) and for the two years immediately following the project (2009 and 2010). In the intervening years (2007 and 2008), while the work was being done, the revenues were lower than they had been in the two years before and substantially lower than they were in the two succeeding years. Having reviewed this with the two principals of Fast Motion, the witness accepted that this was as a result of the attention of Plato Fountidakis and Paul Rapovski being diverted by the studio project and, in the circumstances, was reasonable.

[24] Starting from this foundation, Adrian Karoly assessed loss of recurring profit based on two scenarios.

[25] In the first scenario, he assumed that the new studio was the catalyst for the increase in revenue which occurred after it was available. On this basis, he assumed that the annual revenue for the 2009 fiscal year, which was $528,906, was representative of the revenue levels which Fast Motion “could” have generated annually but for the delay. He assumed that it would have taken three months from March 13, 2007, the day it was anticipated the studio renovations were to be complete, to prepare the facility for production and that no revenue would be generated during this period. This led him to conclude that, under his first scenario, “but for the delay”, Fast Motion would have generated revenue of $322,764 for the year 2007 and $525,000 for the year 2008. This demonstrated a loss of revenue of:

For the year 2007: $322,764 (“but for” revenue) - $125,039 (actual revenue) = $197,725

For the year 2008: $525,000 (“but for” revenue) - $279,741 (actual revenue) = $245,259

[26] In the second scenario, Adrian Karoly assumed that, with the studio being available, growth would have continued, uninterrupted, from the levels demonstrated by two prior years, in a linear fashion, to meet the revenue earned in the two succeeding years. This resulted in revenue for the year 2007 being lower than for the year 2006 because it was assumed, again, that during the three-month period set aside to prepare the studio for production, no revenue would be earned. This led Adrian Karoly to conclude that, under his second scenario, but for the delay, Fast Motion would have generated revenue of $300,000 for the year 2007 and $464,000 for the year 2008. This demonstrated a loss of revenue of:

For the year 2007: $300,000 (“but for” revenue) - $125,039 (actual revenue) = $174,961

For the year 2008 $464,000 (“but for” revenue) - $279,741 (actual revenue) = $184,529

[27] In order to estimate lost profit which would be the demonstration of damage caused by the delay, Adrian Karoly was required to estimate how much of the incremental revenue would have been taken up by incremental operating costs. From a review of the income statements of Fast Motion, particularly for the time the studio was operating (2008 and 2009), and through discussions with the management of Fast Motion, Adrian Karoly, estimated that Fast Motion “could have incurred incremental operating costs as high as 63% of incremental revenue”.

[28] The defendant also retained an economic consultant. Anthony Cusimano did not accept that 63% was the appropriate value representing the incremental cost. In his view, it was just as logical to use 97%, the figure he calculated as the percentage of revenue taken up by costs in the year immediately preceding the studio purchase and renovation (2006). I do not accept this as reasonable. The whole point of the purchase of the studio was to improve the performance of the plaintiff. As counsel for the plaintiff observed, with the studio operating, the plaintiff was working under an entirely different business model. It would not be appropriate to calculate the loss of incremental profit associated with the delay in the studio becoming operational on the basis of what occurred before the studio was in place.

[29] Utilizing the estimates of incremental revenue and operating expenses to which I have referred, Adrian Karoly calculated that the operating profits which “could” have been generated by Fast Motion during the occupancy delay, as follows:

For scenario one: $442,984 (lost revenue) - $279,080 (63% as incremental operating expenses) = $162,004

For scenario two: $359,220 (lost revenue) - $226,309 (63% as incremental operating expenses) = $132,911.

[30] I turn now to the second of the constituent factors of the claim for loss of profit: the loss associated with an extraordinary opportunity that was missed as a result of the delay.

[31] Resident Evil is the name of a successful video game franchise. At some point, the owner of the franchise which, as I understood the evidence is resident in Japan, decided to produce Resident Evil 5 which, I assume, was the fifth edition or version of the game. Reuben Langdon gave evidence at the trial. He resides in Los Angeles, California. His company, Just Cause Productions, was awarded a contract to work on the “cinematics” for Resident Evil 5. They needed someone to do the motion capture associated with the project. Reuben Langdon knew the two principals of Fast Motion. Plato Fountidakis told him that they had the capacity to do the work. They were asked to and did provide a bid. It was lower than the bid of the principal competitor. As a result of his prior experience with them, Reuben Langdon expressed great confidence in Plato Fountidakis and Paul Rapovski. He was leaning towards hiring Fast Motion. He said they would have been more than willing to hire fast Motion. The thrust of his evidence suggested Fast Motion would have gotten the work. The project required significant studio and manpower resources over the period from January to March 2008. The problem was that, as it became apparent that completion of the studio would be delayed, Fast Motion had to, and did, advise Reuben Langdon that it would not be ready. The competitor was selected.

[32] This was a major piece of work. Reuben Langdon told the court that the overall cinematic budget for Resident Evil 5 was $3,000,000. The bid delivered by Fast Motion was for $449,505. In preparing his report, Adrian Karoly did speak to Reuben Langdon. The report prepared by Adrian Karoly states the project had generated approximately $700,000 of revenue for the competing production company. The report says that Fast Motion had advised that Resident Evil 5 could have generated approximately $425,000 of revenue and $200,000 of gross profit.

[33] Fast Motion told Adrian Karoly that the work on Resident Evil 5, had it been awarded the contract, could have conflicted with another project which Fast Motion did complete during the relevant time. That project generated approximately $55,000 of revenue for Fast Motion. Based on Fast Motion’s actual gross margin for the 2008 fiscal year (38.2%), Adrian Karoly calculated that approximately $21,000 of gross profit was garnered from this work. In considering the profit that was lost as a result of the failure to obtain the work associated with Resident Evil 5, Adrian Karoly assumed that it would not have been possible for Fast Motion to do both projects. He subtracted the profit earned from the profit lost: ($200,000 - $21,000) $179,000. He reduced this figure by a further $20,000, based on the assumption that the operating expenses would have been that much higher for Resident Evil 5. On this basis, he assumed that the operating profit lost, due to the loss of the Resident Evil 5 project, was $159,000. Subsequent to the preparation of his report, it became apparent that Adrian Karoly had failed to account for the fact that, under the agreement with Seneca, it would have received a portion of the gross revenue. Once this was accounted for, the operating profit that would have been earned was reduced to $140,250. As counsel for the plaintiff sees it, this amount should be included in whatever is awarded to the plaintiff on account of lost profits.

[34] In his final submissions, counsel for the defendant suggested that the work undertaken by Adrian Karoly, when he took into account the distribution of revenue to Seneca, should not be accepted. According to him, there were other items where 25% of the revenue should have been credited to Seneca. He drew this from evidence he said was provided by Plato Fountidakis. Counsel for the plaintiff denied this. Counsel for the defendant undertook his own calculations. He determined that, if this work were done properly, it would reduce the profits associated with Resident Evil 5 to $104,200. These calculations were not reviewed, in evidence, with either Adrian Karoly or Anthony Cusimano. Counsel also questioned the basis for the further reduction of $20,000 for additional costs. In essence, he wondered why an arbitrary number should be relied on. Why was it not higher? From the perspective of the counsel for the plaintiff, accounting for any increased costs was demonstrative of the conservative approach taken by Adrian Karoly. As he saw it, there was no immediate reason to do this. It was a precaution to be sure not to overstep and make a claim that was not demonstrably reasonable. Counsel for the defendant went further. He suggested that a marginal rate of 3% should be applied to the revenue that would have been earned by Fast Motion had it carried out the work on Resident Evil 5. I am not prepared to accept any of these submissions, made by counsel for the defendant, in considering an award for lost profits. Having said this, there are other more general concerns which should be borne in mind.

[35] To suggest, as Adrian Karoly did, that an award for lost profits should include the amount demonstrated by the first of his two scenarios and the full amount of the loss he found to be associated with the failure to get the contract for Resident Evil 5, is asking too much. To make such an award would assume that everything would have worked to the benefit of Fast Motion – that none of the vagaries that can affect any work and any job would have occurred. Everything would have been done within the time and within the cost predicted. The danger in this has been reviewed, as follows:

It is well settled that the governing purpose of damages is to put the party whose rights have been violated in the same position, so far as money can do so, as if his rights had been observed: (Sally Wertheim v. Chicoutimi Pulp Company). This purpose, if relentlessly pursued, would provide him with a complete indemnity for all loss de facto resulting from a particular breach, however improbable, however unpredictable. This, in contract at least, is recognized as too harsh a rule.

(Victoria Laundry (Windsor) LD. v. Newman Industries LD., [1942] 2 K.B. 528 at p. 539, quoted in Asamera Oil Corporation Ltd. v. Sea Oil & General Corporation, 1978 CanLII 16 (SCC), [1979] 1 S.C.R. 633 at p. 645 and Mainville v. McAra, [1998] O.J. No. 5940, at para. 45)

[36] This leads to the understanding that the aggrieved party is only entitled to recover that part of the loss that was reasonably foreseeable as liable to result from the breach (see: Victoria Laundry (Windsor) LD. v. Newman Industries LD., supra, at p. 539). In this case, to accept that Fast Motion should receive the amounts suggested by Adrian Karoly is to propose that it was reasonably foreseeable that, for the year 2008, Fast Motion would have earned revenue of (scenario 1 for the year 2008: $525,000 + Resident Evil 5: $425,000) $950,000. This would not have been reasonably foreseeable. In the two years prior to the development of the studio, the revenue earned by Fast Motion was for 2005: $198,300 and for 2006: $335,703. In the two years that the planning and construction of the studio was underway, the revenue was: for 2007: $125,039 and for 2008: $279,741. Even during the two years after the studio was operating, the revenue has not approached what is now being sought. The revenue for 2009 was $528,906 and for 2010 was $594,068.

[37] Despite the evidence of Reuben Langdon, there is no certainty that the contract for the work on Resident Evil 5 would inexorably have gone to Fast Motion. I point out that, in his evidence, Reuben Langdon observed that one of the advantages he attributed to Fast Motion was the fact that its bid was in Canadian dollars. He understood that, at the material time, the Canadian dollar was lower in value than the American dollar which was the currency used in the bid that was successful. Reuben Langdon was surprised to learn that this was not correct. It is impossible to know how this would have impacted on any evaluation of the respective proposals.

[38] In addition, if I were to adopt the position taken on behalf of the plaintiff, not only would it be fully rewarded for Resident Evil 5, I would accept the evaluation of scenario one and award damages on the basis that the improved revenue of Fast Motion was due entirely to the studio and not in any way to the reputation or skill of its two principals. In short, I would have to find that the revenue of Fast Motion would not have improved without the studio.

[39] Finally, I note that the claim is based on the understanding that the work was to have been completed within two months of closing. It took from September, 2007 to August, 2008 (eleven months) for the work to be completed by Core Architects Inc. and those working with it. It is in these circumstances that the plaintiff claims for seventeen months delay.

[40] Bearing these factors in mind, I award $86,001.19 lost profit that recurs from year-to-year. I arrive at this as follows.

[41] I am not prepared to accept that all of the improvement in the revenue of Fast Motion was due to the studio becoming operational. The whole basis for moving forward was the opportunity the industry offered. There was evidence as to the background of Plato Fountidakis and Paul Rapovski. It demonstrated that they both had the background, knowledge and skill to take advantage of the demand. Revenues grew considerably from 2005 to 2006 ($198,300 to $335,703).There is no reason to assume that the business would not have continued some level of growth without the studio.

[42] On this basis, I do not accept the loss associated with scenario one. I prefer scenario two (lost profit: $132,911).

[43] The contract recognized that the work might not be finished within two months (by March 13, 2007). It imposed penalties to which the parties agreed. On the other hand, the defendant acknowledged that he knew the work had to be done by the start of the school year to accommodate the contract between Fast Motion and Seneca. As that time approached, letters were written making it clear that this time-frame had to be met. When it was not, the contract ended. It is at that moment that the breach occurred. It is from that time that damages began to accrue. There is nothing in the evidence to suggest that Core Architects Inc. and those who took over responsibility for completing the work did anything other than move with reasonable speed to get the work done. With the benefit of hindsight, it appears to me that the defendant took on a project that would have been difficult to complete by the start of the school year. He exacerbated the problem by moving forward without a building permit. Had he begun on the day the transaction closed (January 12, 2007), he would have had eight months, to early September, to obtain the permit and get the work done. It might have been possible but he would have had to take a different approach than he did.

[44] In the circumstances, I find the appropriate period for the assessment of damages is eleven months (September, 2007 to August, 2008). On this basis, I calculate the lost profit from the recurring business to be ($132, 911 divided by 17) $7818.29 per month, for a total of ($7818.29 multiplied by 11 months) $86,001.19.

[45] The consideration of the factors that cause me concern with respect to the claim for the loss associated with Resident Evil 5 being $140,250 does not lend itself to any mathematical calculation. It was not reasonably foreseeable. There was no assurance that the contract would necessarily have been awarded to Fast Motion and no reason to accept that the work on Resident Evil 5 would have been saved from the difficulties and unexpected problems that can occur on any project. It was reasonably foreseeable that, in this industry, an unusual opportunity could appear and would be taken advantage of.

[46] Bearing these factors in mind, I award $70,125 lost profit associated with the opportunity presented by the Resident Evil 5 project.

[47] There was a counterclaim. The defendant said that there were extras requested and betterment over what was originally found in Schedule “C” to the Agreement of Purchase and Sale. The defendant provided a document entitled, “Description of Jobs in Excess of Schedule ‘C’ ”. It includes values in respect of each of the items listed. The problem is that these figures are estimates made by the defendant after the action was commenced. He was forthright in his evidence that he never intended to charge for these items. He made the decision to do so only after the action was commenced. There was some discussion in the evidence as to how these changes came to be made. Some were at the request of the defendant, who felt these changes would assist him by making the job easier (i.e., the width of the catwalk). Others could be accommodated without difficulty (i.e., eye bolts on the beams). There were claims made for items that, it was conceded, were included in Schedule “C” (i.e., “demolish and despose [sic] studio floor concrete stairs and tier” etc.). What is clear from this is that, for the most part, no agreement was struck that the plaintiff would be required to pay for these changes outside the price agreed to in the original contract. There were exceptions. There was an agreement that $10,000 would be paid to “[c]over interior studio block walls with 2” rigid duct insulation”. As well, the estimate included a charge of $7,500 for a “Tuscan 8’ by 4’ oil painting hanging in foyer”. During the trial, the counsel for the plaintiff indicated that this painting would be returned and could be picked up by the defendant at any time. Absent agreement, there is no basis for an award of any of the remaining items.

[48] In Komorowski v. Van Weel (1993), 12 O.R. (3d) 464 (Gen. Div.), the court was faced with a claim “for the value of certain extra work and materials (herein called the ‘throw-ins’) which the plaintiffs … initially and from time to time agreed to provide to the defendants without charge” (at para. 45). There, the plaintiff acknowledged at trial “that he resurrected (or put forth) the claims in respect of the throw-ins in order to put pressure on the defendants to pay him at the time more than the…” (at para. 46). The judge agreed with the Master, whose endorsement was being appealed, that the claim of the plaintiff for throw-ins should be denied on the ground that it was too late for the plaintiff to change its position in that regard. In his decision, the judge was cognizant that “there was an understanding that the throw-ins would be free of charge” (para. 50). This applies here.

[49] There is no basis for an award in quantum meruit. For such a claim to apply, among other things, both parties must have had or should have had an expectation that the work was not being rendered gratuitously (see: Fairwood Industries Ltd. v. Lin (1997), 1997 CanLII 4292 (BC SC), 33 C.L.R. (2d) 111 at 120). In this case, such an expectation is not present.

[50] I am not prepared to pay any adherence to the submission made on behalf of the defendant to the effect that the plaintiff failed to properly mitigate. There is nothing to suggest that Core Architects Inc. and those who assisted them did not move with reasonable expedition to complete the work and nothing to suggest that, in the two years during which the work was being done (2007 and 2008), the principals of Fast Motion could reasonably have done anything further to maintain their business. The studio was a major project and they did continue to work. There is nothing to suggest anything would have been gained by attempting to rent alternate space.

[51] In the result, I award the following to the plaintiff:

(a) $155,582.49 on account of the work to complete the project;

(b) $86,001.19 for loss of profits expected to recur from year to year; and,

(c) $70,125 for loss of the opportunity presented by Resident Evil 5;

and to the defendant on account of the counterclaim:

(d) $10,000 pursuant to the item agreed to between the parties.

[52] Overall, the plaintiff is awarded: $301,708.78 plus pre- and post-judgment interest, pursuant to the Courts of Justice Act, R.S.O. 1990 c. C.43.

[53] Finally, there is the question of the status of the mortgage and whether or not it is outstanding. At the outset, I was advised by counsel that this was not something I would be asked to deal with. It was not an issue for this trial.

[54] No submissions were made as to costs. In the event, that the parties are unable to agree, I will consider submissions in writing, on the following terms:

1. Submissions on behalf of the plaintiff are to be no later than fifteen days after the release of these reasons. Such submissions are to be no longer than four pages, double-spaced, not including any Costs Outline, Bill of Costs or case law that may be provided.

2. Submissions on behalf of defendant are to be no later than ten days thereafter. Such submissions are to be no longer than four pages, double-spaced, not including any Costs Outline, Bill of Costs or case law that may be provided.

3. Submissions, in reply, on behalf of plaintiff no later than five days thereafter. Such submissions are to be no longer than two pages, double-spaced.

LEDERER J.

Released: 20120417

COURT FILE NO.: 07-CV-345986 PD2

DATE: 20120417

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

FAST MOTION MEDIA GROUP INC.

Plaintiff

– and –

GINO PRIOLO

Defendant

JUDGMENT

LEDERER J.

Released: 20120417