TRIAL DECISION

Justice Belobaba:

[1] The main issue in this breach of contract action is the enforceability of a Consulting Services Agreement (“CSA”) that consultant Ben Banerjee entered into with his client iseemedia in May, 2010.[^1] The defendants say the CSA should be set aside on the ground of fraudulent misrepresentation. However, if the CSA is rescinded, a secondary issue arises: the enforceability of the more modest Transitional Consultant Fee Agreement or TCFA that was also signed by the parties in May, 2010.

[2] The matter first came before me as a motion by the plaintiffs for summary judgment. In a decision released on May 29, 2013, I dismissed the motion, finding that a trial was needed to resolve the dispute.[^2] With the parties’ consent, I agreed to hear the trial on an expedited basis and I told the parties that my decision would be released shortly thereafter. This is my trial decision.

[3] For the reasons set out below, I find that the CSA was based on a fraudulent misrepresentation and is therefore set aside (rescinded). However, the TCFA, which would have been superseded by the CSA, remains valid and can be enforced by the plaintiffs. The upshot is this: the plaintiffs fail on their CSA claim but succeed on their TCFA claim.

Background

[4] The case turns in large part on what was said at a meeting on February 22, 2010. It was this meeting that precipitated the negotiation and signing of the CSA. To place the meeting in context, some background is needed.

[5] Iseemedia, was a small, start-up, global messaging company that was publicly-traded on the TSX Venture Exchange. Ben Banerjee began working as a salesman in early 2009 under a consulting contract through his company EQ2IQ. By all accounts, he was a superb salesman. He was knowledgeable and aggressive, with excellent contacts in the Indian wireless technology market. In short order, he brought in two large Indian business deals. It was soon evident to the Iseemedia executives that Banerjee and his Indian business pipe-line was the start-up’s “chief asset.”

[6] Banerjee was aware of this and by the fall of 2009 he began demanding a compensation package that in his view reflected this reality. Although his consulting agreement was not unreasonable - a base salary and sales commissions – Banerjee began pressing Anthony DiCristofaro, Iseemedia’s CEO, for greater recognition and compensation, specifically demanding shares in Iseemedia. He thought that two million shares (then trading at about 25 cents per share) would be an appropriate compensation package.

[7] The matter came to a head at the meeting at Marvin Igelman’s office on February 22, 2010. Four people were in attendance: Anthony DiCristofaro, CEO; David Berman, CFO; Ben Banerjee, sales consultant; and Marvin Igelman, a more senior consultant who also sat on the company’s advisory board. The group was excited about the possibility that Synchronica, a large U.K. based competitor, might be interested in acquiring Iseemedia. Everyone agreed that this possibility should be seriously pursued.

[8] Banerjee took this opportunity to make clear that if his oft-requested share package wasn’t provided to him immediately, he would leave Iseemedia, take his business clients and his deal pipe-line with him, and join Synchronica, and Iseemedia would be “destroyed.”

[9] According to the other three who were present at this meeting, Banerjee also advised the group that he was currently being courted by Synchronica and that its CEO was offering a significant share package (either 2 million or $2 million worth of Synchronica shares – the witnesses are not ad idem on this point) if Banerjee were to leave Iseemedia and join Synchronica. Banerjee’s evidence is that he told the meeting that Synchronica was courting him but denies saying anything about a lucrative share package being offered to him by Synchronica.

[10] In any event, after the February 22nd meeting, DiCristofaro began to work on a compensation package (the CSA) to “counter” the compensation package that was supposedly being offered by Synchronica.

[11] The initial structure of the CSA - a compensation package that was based on the issuance of company shares, as proposed by Banerjee – was not approved by the TSXV. However, the TSXV staff suggested a “finder’s fee” approach. In due course, the final form of the CSA (based on a finder’s fee compensation structure) was agreed to by the parties. If and when Iseemedia was acquired by Synchronica, or by another third party that was introduced to Iseemedia by Banerjee, Banerjee would get a ten per cent finder’s fee which meant that, arguably, he stood to make more than a $1 million.

[12] The CSA was executed on May 16, 2010. Shortly thereafter, Synchronica launched a takeover bid for Iseemedia. At a bilateral meeting of executives on June 30, Iseemedia learned for the first time, when it was asked about the CSA, that Banerjee’s representations at the February 22nd meeting (about the share-based offer from Synchronica) were false: Synchronica’s CEO was adamant that no offers or any sort had been made to Banerjee and certainly not the 2 million or $2 million share-based offer as described by Banerjee.

[13] The Iseemedia and Synchronica executives decided that they would not confront Banerjee with this information, and in essence accuse him of misrepresentation, until after the takeover bid was completed. The acquisition was completed several months later in September, 2010. Banerjee and his company EQ2IQ commenced this action in November, 2010. The defendants’ counter-claimed for damages for breach of contract, breach of fiduciary duty and fraudulent or negligent misrepresentation.

Findings of fact

[14] The plaintiffs’ evidence consisted of two witnesses, Ben Banerjee and his lawyer, Lonnie Kirsch, as well as read-in’s from the examination of Angus Dent, the former CFO (and later the CEO) of Synchronica. The defendants’ relied on four witnesses, Anthony DiCristofaro, David Berman, Marvin Igelman and David Ellison (the company’s lawyer) as well as read-in’s from the examination of Angus Dent. I also had before me the affidavit material that had been filed by both sides on the summary judgment motion. I should note that Carsten Brinkshulte, the Synchronica CEO who allegedly offered the share-based compensation package to Banerjee was not called by either side.

[15] As already noted, this case turns to a large extent on what was said at the February 22nd meeting. Have the defendants shown on a balance of probabilities that Banerjee falsely stated that he was being offered a significant block of shares by Synchronica’s CEO to leave Iseemedia and join Synchronica? I find that they have and I do so for the following reasons.

[16] First, I accept the evidence of DiCristofaro and Berman. Although they were once employed by Iseemedia, they are currently employed elsewhere, and in my view have no vested interest and no apparent reason to be other than completely truthful. Both of them were candid and credible witnesses. They provided detailed and consistent evidence about the February 22nd meeting: that Banerjee was adamant about getting company shares and was insisting that this must be done immediately; that if this wasn’t done immediately, he would leave the company, take his Indian business deals, present and future, with him, and join Synchronica, and Iseemedia would be “destroyed.” And, that Synchronica was offering Banerjee a large share-based compensation package if he left Iseemedia and joined Synchronica.

[17] The only point on which DiCristofaro and Berman differed was with respect to the size of the compensation package that was supposedly being offered by Synchronica: DiCritofaro recalls hearing “2 million shares” and Berman remembers Banerjee saying “$2 million in shares.” In my view, this is not a significant discrepancy. Both witnesses agree that Banerjee told them that Synchronica was offering a substantial share-based compensation package.

[18] Second, the evidence of Marvin Igelman. Even if I had reason to discount the evidence of DiCristofaro and Berman, as two former Iseemedia executives, I have no reason to discount the testimony of Marvin Igelman. He had no executive connection to Iseemedia and his evidence, by any measure, was fair and balanced He openly acknowledged Banerjee’s extraordinary sales abilities and overall value to the company, and candidly recognized the limits of his own memory. Igelman’s evidence was that Banerjee told the meeting that he had a “big compensation” offer from Synchronica’s CEO that included Synchronica shares. Igelman added this: “I don’t recall the number that Ben mentioned, but I do recall him mentioning a specific number.” In my view, Mr. Igelman’s evidence was completely credible and highly probative,

[19] Third, the minutes of Iseemedia’s Board of Directors meeting just three days later on February 25th confirm the defendants’ version of what was said. The minutes indicate that DiCristofaro, Berman and three others were on the teleconference call and record the following as the fourth item of business:

Ben Banerjee

o He is driving very hard for 2.5 million shares for building iseemedia.

o He has 4 or 5 deals in the funnel brewing.

o Being courted hard by competitor Synchronica.

Damian Cristani asked why doesn’t he take the offer from Synchronica? Anthony mentioned his loyalty. BOD asked about a two-year commitment.

Michael Lipton said to be reasonable while trying to retain him and to not issue shares unless he performs.

[20] DiCristofaro and Berman had obviously briefed the board about the February 22nd meeting and told them that Banerjee was being “courted hard” by Synchronica and had received an “offer” from Synchronica. The latter point is supported by Damian Cristani’s question: “Why doesn’t [Banerjee] take the offer?” I also note, from the last sentence, that the board was, essentially, giving DiCristofaro the go-ahead to do whatever was necessary, within reason, to keep Banerjee happy and on board. All of this adds support to the defendants’ evidence that it was Banerjee’s (false) representation about Synchronica’s lucrative share-based compensation offer that induced and led to the CSA.

[21] Finally, I note that in his own evidence, Mr. Banerjee made much of the fact that he never said he received a “written offer” from Synchronica, leaving open the possibility that he may well have received and said something about an oral offer. Also, in his closing written submissions, counsel for Banerjee notes that at the February 22nd meeting, “Ben … may have mentioned shares as part of the discussion with Carsten [the Synchronica CEO.][^3]” Both points add support to the defendants’ version of what was said.

[22] In sum, based on the evidence set out above, and in particular the evidence of Mr. Igelman and the minutes of the February 25th board meeting, I find that Banerjee told Iseemedia that if he wasn’t granted Iseemedia shares immediately, he would leave the company, take his Indian business deals and business pipe-line with him, and join Synchronica, a major competitor, and that Synchronica was offering him a lucrative share-based compensation package to do so. I find that the representation about the lucrative share-based compensation offer from Synchronica was one of the reasons why Iseemedia negotiated and signed the CSA.[^4] I further find, based on the evidence presented by DiCristofaro about what he learned at the June 30th meeting, and in particular, based on the read-in evidence of Angus Dent, that the representation about a share-based compensation offer was false.[^5]

Legal analysis

Fraudulent misrepresentation

[23] There is no dispute about the applicable law. To set aside the CSA on the ground of fraudulent misrepresentation, the defendants must establish on a balance of probabilities that Mr. Banerjee knowingly or recklessly made a false factual statement, with the intention that it would be acted on, that it was acted on and that the defendants suffered damage as a result.[^6]

[24] The case law is clear that the misstatement of fact must be material in the sense that the misrepresentation must relate to a matter that would be considered by a reasonable person to be relevant to the decision to enter the agreement. The case law is also clear that the misrepresentation need not be the exclusive or even a predominant inducement for entering the agreement. It must be established, simply, that it was an inducement.[^7]

[25] In my view, all of these prerequisites have been established. As I have already found, Banerjee knowingly, and at the very least recklessly, stated falsely that he was being offered a lucrative share-based compensation package to leave Iseemedia and join Synchronica. He did so with the intention that his threat to leave and “destroy” Iseemedia would be taken seriously and would be acted on immediately, in the form of a new agreement that gave Banerjee what he was demanding, namely 2.5 million shares in Iseemedia. There is no doubt in my mind that this misrepresentation about the lucrative offer from Synchronica induced Iseemedia to enter into the CSA. There is also no doubt that if the defendants were required to pay the finder’s fee under the CSA that damages would be sustained.

Estoppel by acquiescence

[26] Banerjee argues that even if I find a fraudulent misrepresentation, the defendants are estopped from asserting this claim because they waited until after the takeover transaction was completed (almost three months) before raising the misrepresentation issue and questioning the validity of the CSA. There are several answers to this submission.

[27] One, the obligation to pay the finder’s fee did not crystallize until the acquisition was completed. There was therefore no obligation on the defendants to even consider the CSA and its ramifications until the deal closed.

[28] Two, after learning about the misrepresentation at the June 30th meeting, the defendants said nothing that would lead Banerjee to believe that the CSA was being affirmed or that the finder’s fee would be paid in full – the most that was said was that the CSA would be given due consideration after the deal had closed. And that’s what happened.

[29] Three, the defendants candidly explained that they decided not to convey their concerns about the misrepresentation to Banerjee before the closing because they didn’t want to jeopardize the takeover transaction. The case law is clear that in deciding whether a party’s conduct bars him from seeking rescission, “the court must look at the realities of the situation.”[^8] A party is not precluded from successfully invoking the remedy of rescission where its conduct is simply to mitigate damages and does not amount to an affirmation of the contract.[^9]

[30] Four, there is no evidence of detrimental reliance on the part of Banerjee. There is no evidence that Banerjee changed his own conduct or suffered any detriment as a result of having to wait until after closing to learn that the defendants had concerns about the CSA. The fact that Banerjee tendered his 700,000 Iseemedia shares to the takeover bid did not deprive him of any leverage that he otherwise might have had: his 700,000 shares were such a tiny quantum in the overall that they would have had absolutely no impact on the transaction.

[31] The CSA is therefore set aside on the ground of fraudulent misrepresentation.

Damages: if the CSA had been valid and binding

[32] Had I found in favour of the plaintiffs and ruled that the CSA was valid and binding, I would have based my damages award on the following precepts:

(i) The sale of RealBiz360 would not have figured in my damages calculation. This real estate-related business division was sold off pre-merger at the request of Synchronica to get cash and help bolster Iseemedia’s share price (and the value was thus reflected in Iseemedia’s overall share price.) More importantly, the sale of RealBiz360 did not trigger the finder’s fee provision in s. 5(2) of the CSA because the Montreal buyer was not “introduced to the company by the consultant [Banerjee].”

(ii) The so-called “financing shares” would not have been included in the valuation of the final “sales transaction.” I fully accept Mr. Ellison’s evidence on this important point. It was Mr. Ellison who suggested that the private placement financing (that was needed by Synchronica for working capital) go through Iseemedia rather than Synchronica in part to avoid the hold-period issues. This financing was never intended to be part of the purchase price. It generated no value to Iseemedia. The money went to Synchronica, not Iseemedia, shareholders. I agree with Mr. Ellison that including the “financing shares” in the valuation of the final “sales transaction” would lead to an “absurd” result.

(iii) The value of the “sales transaction” would have been determined by the actual share price at closing (8½ cents) and not by the share price that was optimistically set out in the Directors’ Circular (11½ cents). The measurable benefit to Iseemedia shareholders is what the shares were worth when they were actually sold, namely $5,015,317.

(iv) The 10 per cent finder’s fee would have required the approval of the TSXV under Policy 5.1. I agree with Mr. Ellison that because Synchronica was listed on the TSXV after it acquired Iseemedia, it was obliged to comply with TSXV policies and directives, including getting approval for the amount of the finder’s fee. I also agree with Mr. Ellison that in the absence of special circumstances (and none were suggested by the plaintiffs) it is likely that the TSXV would have applied the guidelines in Policy 5.1: namely, 10 per cent on the first $300,000 of the sales transaction; 7.5 per cent on the next $700,000; and 5 per cent on the remaining amount.

[33] I would therefore have concluded that the value of the sales transaction under the terms of the CSA was $5,015.317 (using the $0.086 share price). I would then have concluded, under the TSXV guidelines, that the finder’s fee owing to Banerjee was $283,265, payable in cash or in shares as provided for in the agreement.

[34] However, as already noted, the CSA has been rescinded so no such damages can be awarded. The next issue is whether there is any recovery under the TCFA.

The TCFA

[35] The parties presented conflicting evidence about the Transitional Consulting Fee Agreement (a one-page letter agreement) that was dated May 1, 2010. Banerjee viewed the TCFA as a “side letter” that would pay him a fee of $150,000 “over and above” the finder’s fee that was payable under the CSA. DiCristofaro’s evidence was that the TCFA, which would have been superseded by the CSA, was intended to protect Banerjee if Iseemedia was sold before the CSA was finalized. I find the explanation provided by DiCristofaro to be more reasonable and thus more credible – that is, if the company was sold before the CSA was executed or if the company was sold and no CSA was ever executed, Banerjee (or more accurately EQ2IQ) would be entitled to $150,000.

[36] Here, the CSA was executed but has now been rescinded ab initio. Consequently, the TCFA which would otherwise have been superseded by the CSA, remains a valid and enforceable agreement. Indeed, counsel for Iseemedia agrees. In her Supplementary Closing Argument she notes the following: “If the CSA is voided, the TCFA represents the agreement reached between the parties.”

[37] Is Banerjee entitled to claim the $150,000 that was promised under the TCFA? In my view, he is - for the following reasons.

[38] One, there was no evidence, and indeed no suggestion at trial, that the TCFA was induced by any misrepresentation on the part of Banerjee. Or, that the misrepresentation that voided the CSA could somehow be stretched to taint the TCFA as well. To the contrary, as already noted in the previous paragraph, counsel for the defendants said this: “If the CSA is voided, the TCFA represents the agreement reached between the parties.”

[39] Two, the pre-conditions set out in the TCFA, namely the completion of a one-month project “putting in the processes and managing the day to day operation of the [sales] transaction”, were never intended to be taken literally. I make this finding because the TCFA provided that the “one-time payment” would be made “upon completion of the [sales transaction] or thirty days for the completion of the project – whichever is first.”

[40] In other words, Banerjee could collect the $150,000 fee as soon as the sales transaction closed even though no “project” had yet been commenced. He could also collect the fee thirty days after he started on the “project” even though the sales transaction had not been “completed” and the “integration and transition” services were presumably premature. In short, just as the CSA was not really a “finder’s fee” agreement, the TCFA was not really a consulting fee agreement. I find that the TCFA was provided to Banerjee and his consulting company EQ2IQ as a fall-back payment if the CSA did not materialize, and was therefore more akin to a break-up fee.

[41] Three, if I am wrong in this characterization of the TCFA and a one-month consulting project was actually intended, it must therefore follow that it was up to the defendants to green-light the project and direct Banerjee accordingly. I am not persuaded on the evidence presented by the defendants that Banerjee was ever specifically directed to undertake this project. The evidence seems clear that Banerjee continued to work full-out and in good faith from May, 2010 (when the two agreements were signed) to November, 2010 (when he was terminated for commencing this lawsuit) travelling to the UK and India and otherwise doing everything that he was asked to do. In my view, it would be ironic (and I think unfair) in the extreme if the defendants could, on the one hand, rely upon the “one month project” language to deny payment of the TCFA fee while, on the other hand, never asking or directing Banerjee to undertake any such project.

[42] Four, if TSXV approval for the $150,000 TCFA fee was needed, it would most likely have been granted because the amount in question would easily have fallen within the Policy 5.1 guidelines.

[43] In sum, I am persuaded that the $150,000 fee under the TCFA is due and owing.

Unjust enrichment

[44] I should add a word about the unjust enrichment discussion. If I had denied recovery under both the CSA (because it was rescinded) and the TCFA (because the “one month project” condition was not satisfied), I would have allowed the plaintiffs’ post-trial motion to amend the claim and specifically plead unjust enrichment because all of the underlying facts had been pleaded and no prejudice would have ensued. Would I have awarded an unjust enrichment claim based on Banerjee’s admittedly modest efforts in arranging the meeting in Barcelona that led eventually to the merger with Synchronica? Probably, but not without some reservations.

[45] After all, neither side ever intended the CSA to be a finder’s fee agreement. It was structured this way after many “share-based” drafts to accommodate the concerns of the TSXV and obtain their approval. The reason for the “finder’s fee” structure was pure expediency and had nothing to do with compensating Banerjee for finding a buyer. On the other hand, it was Banerjee who used his connections to set up the key meeting in Barcelona that introduced Iseemedia to Synchronica and that led to the takeover of the former by the latter. And, whatever the real motivation for the CSA “finder’s fee” structure, the agreement did provide for a finder’s fee.

[46] In my view, it would not be fair or reasonable if Banerjee was denied both the CSA and TCFA claims and was also denied his unjust enrichment claim in circumstances such as these where he played a brief but important role in the chronology of the merger discussions that resulted in a multi-million dollar sale to Synchronica.

[47] Therefore, on balance, I am persuaded that I would have awarded $150,000 on the unjust enrichment claim if both the CSA and TCFA claims had failed. I would have done so for two reasons: this is the fall-back amount that Banerjee would have received if the sales transaction had closed but the CSA was not finalized; and, this is the ‘unjust enrichment’ amount suggested by counsel for the defendants in her closing submissions, minus a $60,200 credit for the 700,000 shares that Banerjee received in October, 2010. However, as explained below in paragraph 47, no such claw-back credit can be claimed.

[48] Thus, I would have awarded $150,000 in unjust enrichment had I denied recovery under both the CSA and the TCFA.

Disposition

[49] The CSA is set aside on the ground of fraudulent misrepresentation. However, the TCFA is valid and enforceable and the plaintiffs are entitled to the $150,000 fee.

[50] The defendants’ counter-claim for damages is dismissed. The 700,000 shares that were issued to Banerjee in October, 2010 were issued ex gratia, (as a “gesture” said Angus Dent) to persuade Banerjee to resolve the dispute “reasonably” and join Synchronica as an employee. The defendants cannot now claim damages for this unrequested and unrequired gesture of goodwill.

[51] And, there is no basis for any claim under the “non-compete agreement” of October 13, 2009. The only plausible damages claim – having to pay the $150,000 TCFA fee – does not flow from a breach of any of the pre-termination or post-termination provisions that are set out in this 2009 agreement.

[52] Costs will no doubt be claimed by the parties. Given the costs deferred on the summary judgment motion, and the divided success on the trial, the final costs award will require a nuanced analysis. I therefore encourage the parties to come to an agreement or perhaps an overall settlement in this regard.

[53] If the parties are unable to agree on costs, I will be pleased to receive brief written submissions from the defendants within 21 days, and from the plaintiffs within 14 days thereafter. If more time is needed, please advise.

[54] I am obliged to counsel for their co-operation and assistance both at the summary judgment motion and at the trial.

Belobaba J.

Released: December 30, 2013

COURT FILE NO.: CV-10-413563

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Anupam (Ben) Banerjee and EQ2IQ Consulting Limited

– and –

iseemedia Inc. and Synchronica PLC

REASONS FOR JUDGMENT

Justice Edward Belobaba

Released: December 30, 2013

[^1]: Although the correct spelling of the company name is iseemedia (the first letter in lower case), I will refer to the company as Iseemedia (with the first letter in upper case) for easier readability. About a year or so after Iseemedia was acquired by Synchronica PLC, the latter was acquired by the Myriad Group. For the purposes of this litigation, however, the defending parties are Iseemedia and Synchronica. [^2]: Banerjee v iseemedia, (Unreported, May 29, 2013). [^3]: See paras. 17 and 18 of Plaintiffs’ Memorandum of Fact and Law. [^4]: I say “one of the reasons” because there was another on-going reason that was once quite legitimate – namely, Banerjee’s continuing and high-pressured compaign for a share package that began in the fall of 2009 and that did not (yet) involve the misrepresentation about Synchronica’s share offer. There was nothing wrong with a super-star salesman trying to leverage his position for a better compensation package. This is a commonplace in our market-based economy. What made it wrong was the misrepresentation. [^5]: The email exchanges between Banerjee and Carsten Brinkshulte about Banerjee getting Synchronica shares took place on February 26 and 26, after the meeting of February 22nd. In any event, Brinkshulte made it clear to Banerjee that compensation in shares was not possible. [^6]: 101849 Ontario Inc. v Fea Investments Ltd., 1999 CarswellOnt 2959 (C.A.) at para. 30, and see generally McCamus, The Law of Contracts (2005) at 330-31. [^7]: McCamus, supra, note 6, at 330-31. [^8]: Brown & Root Services Corp. v. Aerotech Herman Nelson Inc., 2004 MBCA 63, 2004 CarswellMan 189 (C.A.) at para. 54. [^9]: Ibid., at para. 63.

Banerjee v. iseemedia Inc., 2013 ONSC 6643

Case Summary

TRIAL DECISION

Background

Findings of fact

Legal analysis

Fraudulent misrepresentation

Estoppel by acquiescence

Damages: if the CSA had been valid and binding

The TCFA

Unjust enrichment

Disposition

REASONS FOR JUDGMENT

Judge

Counsel

Parties

Areas of Law

Fact Patterns

Financial Outcomes

Issues