SUPERIOR COURT OF JUSTICE – ONTARIO
C0MMERCIAL LIST
COURT FILE NO.: CV-13-10370-00CL
DATE: 20151120
IN THE MATTER OF THE BANKRUPTCY OF SHS SERVICES MANAGEMENT INC./GESTION DES SERVICES SHS INC. AND SHS SERVICES LIMITED PARTNERSHIP
IN THE MATTER OF AN APPLICATION PURSUANT TO SECTION 243 OF THE BANKRUPTCY AND INSOLVENCY ACT, R.S.C. 1985, c.B.3, AS AMENDED
BEFORE: L. A. Pattillo J.
COUNSEL:
Brett Harrison and Stephen Brown-Okruhlik
For the Receiver
Douglas Langley
For the Respondents
Adam Slavens
For Sears Canada Inc.
HEARD: April 28, 2015
ENDORSEMENT
Introduction
[1] This is a motion by PricewaterhouseCoopers Inc. (PwC”) in its capacity as receiver (the “Receiver”) of SHS Services Management Inc./Gestion Des Services SHS Inc. and SHS Services Limited Partnership (collectively “SHS”) for an order compelling the ten respondents identified in Appendix “A” hereto (the “Respondents”) to pay to the Receiver amounts it alleges are owed to SHS for work performed following the receivership order.
Background
[2] On December 13, 2013, the Receiver was appointed as interim receiver under s. 47 of the Bankruptcy and Insolvency Act (BIA) and receiver under s. 101 of the Courts of Justice Act of all the assets, undertakings and properties of SHS. By order dated January 9, 2014, PwC was discharged as interim receiver and appointed as receiver under s. 243 of the BIA (both orders the “Receivership Order”).
[3] Paragraphs 14 and 15 of the January 9, 2014 Receivership Order (paragraphs 10 and 11 of the December 13, 2013 order) provide as follows:
THIS COURT ORDERS that no Person shall discontinue, fail to honour, alter, interfere with, repudiate, terminate or cease to perform any right, renewal right, contract, agreement, license or permit in favour of or held by the Debtors, without written consent of the Receiver or leave of this Court.
THIS COURT ORDERS that all Persons having oral or written agreements with the Debtors or statutory or regulatory mandates for the supply of goods and/or services, including without limitation, all computer software, communication and other data services, centralized banking services, payroll services, insurance, transportation services, utility or other services to the Debtors are hereby restrained until further Order of this Court from discontinuing, altering, interfering with or terminating the supply of such goods or services as may be required by the Receiver, and that the Receiver shall be entitled to the continued use of the Debtors’ current telephone numbers, facsimile numbers, internet addresses and domain names, provided in each case that the normal prices or charges for all such goods or services received after the date of this Order are paid by the Receiver in accordance with normal payment practices of the Debtors or such other practices as may be agreed upon by the supplier or service provider and the Receiver, or as may be ordered by this Court.
[4] At the time of its receivership, SHS operated the full suite of interior and exterior home renovations, repairs and home maintenance services on behalf of Sears Canada Inc. (“Sears”) pursuant to an agreement dated December 20, 2012 between Sears and SHS called the Branded Concession Agreement ( the “BCA”). Also on December 20, 2012, Sears and SHS entered into an agreement called the Asset Transfer Agreement (the “ATA”) by which Sears transferred to SHS those assets needed to carry out the BCA.
[5] Prior to both the BCA and the ATA, Sears had been providing home services to its customers for years through agreements with various individuals and companies across Canada. In respect of both carpet cleaning and duct cleaning services, Sears entered into license agreements with the service providers.
[6] The license agreements entitled the licensees to provide specified products and services within designated geographical areas to Sears’ customers. They also permitted the licensees to use certain trademarks belonging to Sears and received support from Sears, including the generation of leads, advertising and other business infrastructure and support. The license agreements provided for the remittance of payment made by customers to the licensees back to Sears. Sears would then pay the licensees according to a formula specified in the license agreements.
[7] As part of SHS taking over Sears’ home services business, it acquired the rights and obligations of Sears under the license agreements pursuant to the terms of the ATA.
[8] The Respondents are small operators from across Canada who provided carpet cleaning and duct cleaning on behalf of Sears for a number of years and had all entered into license agreements with Sears setting the terms and conditions of their contractual relationship. Although their license agreements had expired by their terms prior Sears assigning them to SHS, the Respondents continued to provide the services in accordance with their terms, both to Sears and subsequently SHS. At the time of the receivership, the Respondents were owed a total of $597,478.84 by SHS for services rendered but not yet paid.
[9] On December 14, 2013, the day following its appointment, the Receiver shut down the SHS computer system (the “Centah System”) by which the licensees received leads for service calls. On December 16, 2013, the Receiver sent an email to the Respondents, among others, stating that it would not be carrying on or continuing the operations of SHS, except for very limited transitional services.
[10] The Respondents, many of whom had worked on behalf of Sears for many years, suffered great hardship because of the actions of the Receiver in shutting down the Centah System and from the provisions of the Receivership Order which prevented them from terminating the license agreements and requiring them to continue to provide services to SHS (paras. 14 and 15 of the Receivership Order). The absence of leads or service calls as generated by Centah resulted in a large loss of business for each Respondent with substantial consequences. The service calls they received were generated by local advertising and their reputation in the community.
[11] Further, the terms of the Receivership Order prevented the Respondents from being able to obtain work from other service providers who were not prepared to risk being in violation of the Receivership Order.
[12] On January 2, 2014, the Receiver sent notice to the Respondents and other licensees who had previously performed carpet, upholstery and duct cleaning services stating that SHS wished to confirm the provision of services under the terms of an enclosed Confirmation Agreement. The Confirmation Agreement set out the terms under which the work would be performed. It required, among other things, that the licensees acknowledge and agree that entering into the agreement would not in and of itself entitle the licensee to receive any pre-receivership amounts owed by SHS. The email stated that once the Confirmation Agreement was signed and confirmation of insurance coverage provided, “we will reactivate your access to the Centah customer management system in order to resume access to leads generated through our call centre.” The Respondents all refused to sign the Confirmation Agreement.
[13] On January 14, 2014, and in order to address the concerns of other service providers, the Respondents requested the Receiver consent to their release from the provisions of paragraphs 14 and 15 of the Receivership Order preventing termination of the license agreements. The Receiver declined.
[14] The Receiver’s position resulted in the Respondents having to bring a motion. On February 4, 2014, the Respondents obtained an order from the court lifting the stay in paragraph 14 and 15 of the January 9, 2014 Receivership Order as against them for the limited purpose of permitting the Respondents to terminate their respective license agreements and terminating such license agreements (the “Termination Order”).
[15] The Termination Order was granted on the agreement of the parties that it was without prejudice to the Respondents taking the position that the license agreements had been terminated at an earlier date. It also required each of the Respondents to provide the Receiver with an accounting of the work performed by them under the license agreements during the 53 days between the date of the December 13, 2013 Receivership Order and the Termination Order.
[16] On February 14, 2014, the Respondents provided the Receiver with an accounting of monies received for the work performed by them during the 53 days. The amount of commission owing by the Respondents pursuant to the license agreements is $266,295.62. At the same time, the Respondents provided details of the respective amounts owing to each of them by SHS prior to the receivership and advised the Receiver that no amounts were owing by them to the Receiver due to the Receiver’s repudiation of the license agreements and/or their set-off of any amounts owing against monies owing to them by SHS which are well in excess of the amounts claimed by the Receiver. A listing of the individual Respondents together with the amounts owed to them by SHS prior to the Receivership and the commissions due pursuant to the license agreements for work performed by them during the subsequent 53 day period is set forth in Appendix “A”.
Position of the Parties
[17] The Receiver’s motion seeks payment of the $266,295.62 from the Respondents. It submits that the license agreements continued in force up to the date of the Termination Order and accordingly, pursuant to the terms of the license agreements, the Respondents are required to pay the monies sought on account of the work they performed. In the event the court holds the license agreements were terminated before February 4, 2014, the Receiver submits that the Respondents still owe the monies based on unjust enrichment or quantum meruit.
[18] In response, the Respondents submit that the Receiver, by its actions, repudiated or frustrated the license agreements such that they were no longer bound by their terms and were free to carry out the work with no obligation to pay SHS or the Receiver in respect of such work. In the alternative, the Respondents submit that if the license agreements were still in force, they are entitled to an equitable set-off of the monies earned during the 53 days against the monies SHS owed to them prior to the Receivership.
[19] The Receiver denies that in the circumstances of the Receivership, equitable set-off is available to the Respondents.
Discussion
[20] Initially the Receiver took the position in its factum that the provisions of the license agreements continue to apply notwithstanding that they expired and were not renewed by Sears or SHS. The Respondents did not raise the issue and do not contest it.
[21] In my view, given that the Respondents continued to provide services to Sears’ customers in accordance with the terms of the license agreements following their expiry, the license agreements and their terms continued to govern the relationship between the Respondents and initially Sears and, after December 12, 2012, SHS. See: Saint John Tug Boat Co. Ltd. v. Irving Refinery Ltd., 1964 88 (SCC), [1964] S.C.R. 614 (S.C.C.).
[22] The real issue is whether, by its actions, the Receiver repudiated the license agreements such that the licensees were no longer bound by them.
Repudiation of the License Agreements
[23] The Parties agree that repudiation of a contract takes place when one of the parties to the contract, by words or conduct, evinces an intention not to be bound by the terms of the contract. See: Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240, 337 D.L.R. (4th) 207 (Alberta C.A.) at paras. 46 & 47.
[24] The Respondents submit that the Receiver repudiated the licence agreements immediately after its appointment on December 13, 2013 by its actions in cutting off the Centah System on December 14, 2013 which repudiation was confirmed by its subsequent actions in sending an email saying that it would not be carrying on or continuing the operations of SHS and sending out the Confirmation Agreement.
[25] The Receiver denies that its actions repudiated the license agreements. It denies it terminated the operations of SHS and submits that the withdrawal of the Centah System was not such a defect in performance to give rise to repudiation.
[26] In my view, the actions of the Receiver in shutting down the Centah System followed almost immediately by the email stating that it would not be carrying on or continuing the operations of SHS evidenced a clear intention by the Receiver not to be bound by the license agreements. The sending of Confirmation Agreements on January 2, 2014 confirmed that the Receiver did not consider itself bound by the license agreements.
[27] The shutdown of the Centah System was extremely serious. The evidence supports and I accept that cutting off the Centah System had a devastating impact on the Respondents’ businesses. All of the Respondents suffered a significant drop in sales which ranged from 30% to 80%. All had to lay off employees and/or cut the hours of work. One ended up being driven out of business.
[28] The Receiver submits that as there was no obligation on SHS to provide the Centah System in the license agreements and therefore the withdrawal of it was not significant enough to support an allegation of repudiation on its part. In my view, however, the Centah System was vital to the relationship between the Respondents and SHS. Access to it generated the vast majority of the Respondents’ business. The importance of the Centah System is evident from the significant effects its withdrawal had on the Respondents.
[29] The Receiver submits that it did not terminate the operations of SHS but rather endeavored to continue its operations. That is contrary to the Receiver’s First Report which states that the Receiver suspended substantially all business operations of SHS. There is no question that the Receiver dealt with completion of existing orders and agreed with Sears to make efforts to re-commence the carpet upholstery cleaning and duct cleaning businesses. It did not, however, confirm or reinstate the license agreements. Rather, as noted, it sought to enter into a new agreement with the Respondents. That action confirms that the Receiver did not consider itself bound by the license agreements.
[30] The Receiver further submits that the Respondents are estopped from asserting repudiation given the position they took on their motion for the Termination Order. That position is not tenable given the notation of the motion judge in his endorsement that the parties agreed that the Respondents’ motion was without prejudice to its position that the license agreements had been terminated at an earlier date. Accordingly, the Respondents’ position that the license agreements had ended before the Termination Order was clearly in issue.
[31] In my view, the Receiver by its actions as set forth herein clearly repudiated the license agreements with the Respondents on December 14, 2013. Further, the Respondents accepted the repudiation by subsequently attempting to obtain work from other service providers and by asking the Receiver to terminate the license agreements to release them from the stay provisions of the Receivership Order.
Unjust Enrichment and Quantum Meruit
[32] In my view, the Receiver is also not entitled to payment of the monies sought from the Respondents based on either unjust enrichment or quantum meruit.
[33] The Receiver’s claims for both unjust enrichment and quantum meruit are based on its position that the Respondents were enriched by delivering goods and services to customers using trademarks, goodwill, advertising infrastructure and the existing client relationships of Sears and SHS.
[34] The Respondents evidence, which I accept, is that the service calls after December 13, 2013 were generated by local advertising and their reputation in the community. There is no evidence that SHS carried out any advertising. Further, three of the Respondents had ceased using all Sears’ trademarks and the remaining seven were in the process of removing them from their businesses. Even accepting that the Respondents utilized Sears’ trademarks during the relevant period, SHS did not acquire any title to or interest in Sears’ intellectual property under the ATA. Any claim for use of Sears’ intellectual property therefore remains with Sears.
[35] Unjust enrichment and quantum meruit are equitable remedies. In my view, even if the facts might support such claims, the actions of the Receiver in repudiating the license agreements and then requiring the Respondents to abide by the stay in the Receivership Order do not entitle it to any relief against the Respondents in equity. The Receiver’s actions placed the Respondents in an impossible position.
[36] In light of my determination that the license agreements were repudiated by the Receiver on or about December 14, 2013 and that it is not entitled to any equitable relief against the Respondents, the Receiver’s motion is dismissed.
[37] Having dismissed the Receiver’s motion, it is not necessary to deal with the Respondents’ alternate claim for relief based on equitable set-off.
[38] The Respondents have been successful on the motion and are entitled to their costs on a partial indemnity basis. The Receiver and the Respondents have agreed that the successful party should receive costs of $30,000. In my view, given the issues, that amount is both fair and reasonable.
[39] Accordingly, costs to the Respondents, fixed at $30,000.
L. A. Pattillo J.
Released: November 20, 2015
APPENDIX “A”
Respondent
Amount Owing by SHS Pre Receivership
Commission on Amount Earned During the 53 Days
The 53 Days
The 53 Days
144700 Ontario Ltd.
$32,000.00
$18,618.40
484081 B.C. Ltd
$66,173.83
$55,630.72
709999 Alberta Ltd.
$127,823.31
$97,181.59
777911 Alberta Ltd.
$36,294.30
$24,061.52
3543978 Canada Inc.
$99,988.89
$12,196.71
Gestion Cristofaro Ltee
$77,142.70
$9,023.40
977218 Ontario Inc.
$47,000.00
$30,388.08
1847135 Ontario Inc.
$45,396.80
$5,034.89
1812731 Ontario Inc.
$26,661.73
$9,702.05
2177059 Ontario Inc.
$38,997.28
$4,458.26
Total:
$597,478.84
$266,295.62