CITATION: Brand Solutions By Promotion Solutions Inc. v. Elsey, 2015 ONSC 2895
COURT FILE NO.: 4921/14
DATE: 2015-05-04
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
BRAND SOLUTIONS BY PROMOTION SOLUTIONS INC. and I.D.P. HOLDINGS LIMITED
Applicants
– and –
ROBERT ELSEY, THE NEXT TREND DESIGN INC. and TRICOD INC.
Respondents
Gayle Wadden, for the Applicants
Pathik Baxi, for the Respondents Robert Elsey and Tricod Inc.
Amandeep Sidhu, for the Respondent, The Next Trend Design Inc.
HEARD: March 31, 2015
REASONS FOR JUDGMENT
GRAY J.
[1] This is an application for an injunction. To be clear, what is requested is a final order and not an interlocutory injunction. Accordingly, the tests for whether this injunction should be granted are different from those set out in RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 S.C.R. 311, which dealt with interlocutory injunctions.
[2] The Court is confronted with two apparently contradictory principles: an injunction should be granted only if damages are not an appropriate remedy; and on the other hand, an injunction is the preferred remedy if a negative restrictive covenant has been violated. How to resolve these competing principles is central to this dispute.
Background
[3] The applicant Brand Solutions by Promotion Solutions Inc. (“Brand Solutions”) is engaged in the business of providing promotional products and services. The applicant I.D.P. Holdings Limited (“IDP”) is the sole shareholder of I.D.P. Marketing Ltd. which operates a business called Promotion Solutions. Promotion Solutions engages in the business of providing marketing and promotional services to its clients.
[4] Promotion Solutions had worked with the respondent Robert Elsey when he was employed by the respondent The Next Trend Design Inc. (“TNT”). He left TNT in 2011, as he wanted to start his own business called Brand Builders. He is the sole shareholder of Tricod Inc. (“Tricod”).
[5] In 2012, discussions began regarding a possible arrangement between the applicants and Mr. Elsey. IDP was interested in getting into the promotional products business. Mr. Elsey agreed that there would be a good fit between his business and Promotion Solutions. They agreed that a new company would be incorporated, to be called Brand Solutions by Promotion Solutions Inc., to be the vehicle through which the new venture would be conducted.
[6] On March 29, 2012, a shareholders agreement was entered into between IDP, Tricod, Brand Solutions and Mr. Elsey. Mr. Elsey consulted with a lawyer and obtained independent legal advice.
[7] Mr. Elsey, when he left TNT, was subject to a non-competition clause, which would expire about one year after the shareholders agreement was entered into on March 29, 2012.
[8] One hundred common shares in Brand Solutions were issued. Tricod held 35 class B shares and IDP held 65 class A shares. The signatories to the shareholders agreement were IDP; Tricod; Brand Solutions; and Mr. Elsey.
[9] Certain provisions of the shareholders agreement are particularly relevant to the issues in this case. They are:
- CONSULTING ENGAGEMENT
(i) All of the Shareholders agree to at all times act diligently and faithfully in the best interests of the Company. Tricod and Robert agree that they will not in any way, either directly or indirectly, compete or contract with any person or/persons, body of persons, real or corporate, or be engaged in or involved with, in any capacity whatsoever, any business which is similar to that of the Company, whether direction or indirectly, as an officer, partner, shareholder, principal, employee, agent or manager of any such business, during the currency of this Agreement and for a period of five (5) years following Tricod ceasing to be a Shareholder of the Company anywhere within the Greater Toronto Area which shall be the City of Toronto and the surrounding Regional Municipalities of Durham, Halton, Peel and York, except with the express written consent of IDP first being obtained.
(j) Tricod and Robert acknowledge and agree that IDP has provided to them details of IDP’s customers and that IDP has developed customer relations with those customers during all of its years in business. Tricod and Robert agree that all of the IDP customer lists and customers, accounting documents, invoices, diaries, manuals and every other document of every nature and kind whatsoever which may be used by the Company or the parties hereto in the ordinary course of the Company’s affairs are the property exclusively of IDP and that neither Tricod or Robert has any personal right to same. In the event of Tricod and Robert leaving the Company, the said customer lists and customers, accounting documents, invoices, diaries, manuals and every other document of every nature and kind whatsoever used by the Company or the parties hereto in the ordinary course of the Company’s affairs, are the property exclusively of IDP and that neither Tricod or Robert has any personal right to same. In the event of Tricod and Robert leaving the Company, the said customer lists and customers, accounting documents, invoices, diaries, manuals and every other document of every nature and kind whatsoever used by the Company or the parties hereto in the ordinary course of the Company’s affairs shall remain the sole and exclusive property of IDP.
- PURCHASE BY IDP OF SHARES HELD BY TRICOD
(a) IDP may, upon giving notice as hereinafter provided, purchase at any time after 36 months of incorporation the whole of the shareholdings held by Tricod.
(b) In the event IDP elects to purchase all of the shareholdings held by Tricod, then and in that event IDP shall be obliged to purchase the shareholdings of that shareholder and IDP shall at least 30 days before the date specified for the purchase provide notice to Tricod of its intention to purchase the shareholdings of that shareholder. IDP must purchase all and not less than all of the shares held by Tricod.
(c) The purchase price shall be the amount equal to the product of the value determined for each Share held by Tricod in accordance with paragraph 5 hereof multiplied by the number of shares held by Tricod. The purchase price shall be payable in accordance with the provisions of paragraph 5(b) of this Agreement.
- SALE OF SHARES HELD BY TRICOD TO IDP
(a) Tricod may require IDP to purchase at any time all of the Shares held by Tricod.
(b) In the event Tricod elects to sell all of the shareholdings held by it, then and in that event IDP shall be obliged to purchase the shareholdings of that shareholder upon receiving at least 30 days prior notice before the date specified for the purchase and sale. Tricod must sell all and not less than all of the shares held by it.
(c) The purchase price to be paid for the shares being sold pursuant to paragraph 7(a) hereof shall be product of the value determined for each Share in accordance with paragraph 5 hereof multiplied by the number of shares held by Tricod.
(d) The price to be paid for the shares shall be paid in accordance with the provisions of paragrapah 5(b) of this Agreement.
- TERMINATION
(a) This Agreement has an indefinite term, subject to earlier termination in the event of:
(i) the liquidation, dissolution, winding up or other termination of the corporate existence of the Company;
(ii) an agreement in writing of all of the Shareholders; or
(iii) all of the voting shares being owned by a single Shareholder.
(b) This agreement ceases to be binding on a Shareholder when he has fully disposed of all of his Shares.
[10] Things did not go well. Ultimately, on May 6, 2014, Mr. Elsey advised Jason McDonagh, the president of Brand Solutions, that he intended to return to TNT and work with them. He proposed that TNT and Brand Solutions could potentially work together. On May 8, 2014, Mr. Elsey sent an email in which he made it clear that he would be rejoining TNT. His LinkedIn page created shortly after joining TNT describes his position as “Director of Business Development and Marketing” at TNT.
[11] On June 6, 2014, counsel for Brand Solutions wrote to TNT and Mr. Elsey and took the position that Mr. Elsey was in breach of the shareholders agreement and demanded that Mr. Elsey terminate his relationship with TNT.
[12] On July 7, 2014, TNT posted a news release advising that Mr. Elsey had returned to work at TNT as Director of Business Development and Marketing.
[13] In the affidavit material filed on behalf of the applicants, the position is taken that Mr. Elsey is contacting on behalf of TNT the same prospective clients that he had been contacting on behalf of Brand Solutions. Further, the position is taken that Brand Solutions have some clients who are no longer returning calls from Brand Solutions.
[14] In his affidavit material, Mr. Elsey deposes that during his meeting with Mr. McDonagh on May 6, 2014, he proposed that he return his shares in Brand Solutions in exchange for being released from his obligations under the non-competition provision in the shareholders’ agreement. He says he subsequently returned the shares owned by Tricod, and thus Tricod ceased to be a shareholder of Brand Solutions.
[15] Mr. Elsey acknowledges that on June 2, 2014, he entered into an independent contractor agreement with TNT as Marketing and Business Development Consultant and Coordinator.
[16] Mr. Elsey takes the position that prior to entering into the shareholders’ agreement, his prospects with Brand Solutions were misrepresented. He alleges he was not introduced to new clients, nor was he assisted in generating sales. Notwithstanding, as a result of his efforts, a “pipeline” of new clients and opportunities was created.
[17] Mr. Elsey acknowledges contacting certain potential clients after rejoining TNT, but takes the position that none of those potential clients had engaged in any business with Brand Solutions.
[18] Mr. Elsey also takes the position that he and/or Tricod disposed of Tricod’s shares in Brand Solutions by returning them, and thus takes the position that the shareholders’ agreement is no longer binding on him.
[19] In the affidavit material filed on behalf of TNT, the position is taken that since Mr. Elsey gave up his shares in Brand Solutions, the shareholders’ agreement is no longer binding on him or Tricod. The deponent of the affidavit does not deny that Mr. Elsey is contacting potential clients on behalf of TNT.
[20] Paragraphs 32, 33 and 34 of the affidavit of Jason McDonagh sworn October 17, 2014 read as follows:
Mr. Elsey is clearly acting in a sales capacity in his employment with TNT and is soliciting clients. On Mach 26, 2014, Mr. Elsey contacted Sophie Gatt, a marketing specialist at Enersource Corporation. Enersource Corporation is a corporation listed on one of Brand Solution’s marketing databases. On June 17, 2014, shortly after beginning to work for TNT, Mr. Elsey again contacted Ms. Gatt to solicit business. He proposed meeting with her to assist with putting together a marketing plan. Attached as Exhibit “S” to my affidavit is a copy of the email correspondence between Mr. Elsey and Ms. Gatt, and attached as Exhibit “T” to my affidavit is a copy of the Brand Solutions’ database entry identifying Enersource as a Brand Solutions’ contact.
On March 26, 2014, Mr. Elsey contacted James Duff, Marketing Manager of Keyscan Inc., on behalf of Brand Solutions. On June 17, 2014 Mr. Elsey again contacted Mr. Duff asking to meet with Mr. Duff to discuss a strategy for promotional products. Attached as Exhibit “U” to my affidavit is a copy of the email correspondence from Mr. Elsey to Mr. Duff. Attached as Exhibit “V” to my affidavit is a copy of Brand Solutions’ database entry identifying Mr. Duff as a Brand Solutions’ contact.
On March 27, 2014 Mr. Elsey contacted Eric Nachman, Director of Marketing, Customer Relationship Management and Research for Maple Leaf Sports and Entertainment Ltd., on behalf of Brand Solutions. On June 17, 2014 Mr. Elsey again contacted Mr. Nachman asking to meet with Mr. Nachman to discuss strategy for promotional products. Attached as Exhibit “W” to my affidavit is a copy of the email correspondence from Mr. Elsey to Mr. Nachman. Attached as Exhibit “X” to my affidavit is a copy of Brand Solutions’ database entry identifying Mr. Nachman as a Brand Solutions’ contact.
[21] Mr. Elsey purports to explain those paragraphs, in his affidavit sworn November 3, 2014, by stating: “None of the people contacted through these emails had engaged in any business with Brand Solutions and were contacts that I had developed and contacted for the purposes of setting up appointments for the TNT sales force to meet and assess promotional product needs.”
Submissions
[22] Counsel for the applicants submits that the covenants in the shareholders’ agreement are clear and unambiguous. The agreement was entered into after negotiations and after Mr. Elsey received independent legal advice.
[23] Counsel submits that the agreement is a commercial contract, and it is to be interpreted in a manner that gives meaning to all its terms and avoids an interpretation that would render one or more if its terms ineffective. She submits that it would be absurd to interpret the non-competition covenant as being no longer binding once Tricod’s shares were returned. The non-competition covenant specifically states that the time begins to run from the time Tricod ceases to be a shareholder.
[24] Counsel points out that the covenants, being found in a commercial agreement, should be more generously construed in favour of the applicants than they would be if they were found in a contract of employment.
[25] Counsel points out that the shareholders’ agreement required that Mr. Elsey and Tricod be furnished with confidential client and other business information that had been developed by IDP over many years. Thus, IDP and Brand Solutions were vulnerable, and the need for a non-competition clause was obvious.
[26] Counsel submits that a non-competition clause will be found to be reasonable and enforceable if its term and geographical scope are reasonable, and where it is necessary for the protection of the legitimate interests of the party in whose favour it was granted.
[27] Counsel submits that in this case, both the term and geographical scope are reasonable. The term is five years, which is reasonable to protect the interests of Brand Solutions and IDP. The nature of the business is such that relationships with clients develop over a period of time. A “hands off” period of five years is reasonable protection for the applicants in these circumstances. The geographic scope is restricted to the Greater Toronto Area, and this is clearly reasonable.
[28] Counsel also submits that Mr. Elsey and Tricod were fiduciaries of Brand Solutions, and had obligations at common law to Brand Solutions. Counsel submits that those obligations were breached in the circumstances of this case.
[29] Counsel for Mr. Elsey and Tricod submits that the shareholders’ agreement ceased to be binding once Mr. Elsey had disposed of Tricod’s shares. This is the clear effect, it is submitted, of article 17(b) of the shareholders’ agreement. Once the agreement ceased to be binding, the non-competition clause was no longer binding.
[30] Counsel submits that to the extent that there is any ambiguity in the shareholders’ agreement, it must be resolved in favour of Mr. Elsey and Tricod. The shareholders’ agreement was drafted by the lawyers of Promotion Solutions, and thus the principle of contra proferentem is applicable. In such a case, any ambiguity is to be resolved against the drafter.
[31] Counsel points out that the non-competition covenant applies only to Mr. Elsey and Tricod. Thus, the other shareholders were not prohibited from competing with Brand Solutions and the restrictive covenant was essentially a contract of adhesion.
[32] Counsel for Mr. Elsey and Tricod thus submit that the application should be dismissed.
[33] Counsel for TNT submits that the non-competition clause is not enforceable. Counsel submits that the period of time during which the restriction would operate is unreasonable.
[34] Counsel submits that upon Tricod disposing of the shares of Brand Solutions, the shareholders’ agreement ceased to be binding. Accordingly, the restrictive covenant also ceased to be binding.
[35] Counsel points out that the restrictive covenant does not specify which customers Elsey and Tricod are prohibited from contacting. Nor does the covenant specify which businesses are prohibited from employing them. Thus, the restriction is ambiguous in its application and effectively prohibits Tricod and Mr. Elsey from competing in any fashion with Brand Solutions for half a decade. This is clearly unreasonable.
[36] Counsel also submits that the application should be dismissed as the applicants have not demonstrated that they will suffer irreparable harm.
Analysis
[37] I will dispose of the contractual issue first. In my view, the shareholders’ agreement is clear and unambiguous.
[38] I do not accept the argument of Mr. Elsey and Tricod that article 17(b) effectively nullifies the non-competition clause. If it did, it would render meaningless the words of article 3(i) of the agreement, which provides that the restrictive covenant will apply “for a period of five (5) years following Tricod ceasing to be a shareholder of the company…”
[39] A commercial contract is to be interpreted as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective. An interpretation should be preferred that is in accordance with the language the parties have used in the written document and based upon the cardinal presumption that they have intended what they have said: see Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust (2007), 2007 ONCA 205, 85 O.R. (3d) 254 (C.A.), at para. 24; and 3869130 Canada Inc. (c.o.b. I.C.B. Distribution 2001) v. I.C.B. Distribution Inc., 2008 ONCA 396, [2008] O.J. No. 1947 (C.A.), at para. 31.
[40] Since article 3(i) of the shareholders’ agreement expressly contemplates that the restrictive covenant will operate for a period of five years after Tricod ceases to be a shareholder, the drafting parties must have intended exactly that result. General language contained in article 17(b) of the agreement cannot, on any sensible interpretation, be taken to have nullified the language in article 3(i).
[41] The contra proferentem principle does not assist the respondents. It applies where language is ambiguous, and there is no ambiguity here. In any event, it applies primarily to “take it or leave it” contracts, or what are sometimes called contracts of adhesion, such as insurance contracts: see Consolidated-Bathurst Export Limited v. Mutual Boiler and Machinery Insurance Company, 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888. I do not accept that the contract at issue here is a contract of adhesion, simply because one of the parties has greater rights than the other. The parties obviously thought IDP had more risk, and required more protection, than Mr. Elsey.
[42] In any event, the contra proferentem principle has little application where, as here, the parties had an opportunity to negotiate and had access to legal advice. As stated by the Alberta Court of Appeal in Ironside v. Smith, 1998 ABCA 366, [1999] 6 W.W.R. 256 (Alta. C.A.), at para. 67, “Contra proferentem should not be used to construe an agreement against its drafter unless it is clear that the non-drafting party had no meaningful opportunity to participate in the negotiation of the instrument.” In this case, it is clear that both parties had an opportunity to negotiate and had access to legal advice.
[43] I am also not persuaded that the restrictive covenant is unenforceable. I am assisted in this respect by the decision of the Supreme Court of Canada in Payette v. Guay Inc., 2013 SCC 45, [2013] 3 S.C.R. 95. While that was a Quebec case, nevertheless the analysis of the court is of assistance in considering the issue of the enforceability, or otherwise, of any restrictive covenant.
[44] The court made it clear that there is a distinction between a restrictive covenant that is contained in an employment contract and one that is in a commercial contract. In Payette, the covenant was contained in an agreement regarding a sale of assets.
[45] In the case before me, the agreement did not involve the sale of assets. However, it was of a commercial nature. Both parties to the agreement operated separate businesses. They entered into an arrangement under which both parties brought different attributes to the table, but hoped that the synergy between the businesses operated by each party would result in increased business and increased revenue.
[46] Under the agreement, Mr. Elsey and Tricod were being given access to the entire client base and confidential client and other business information of IDP. It was entirely reasonable, in my view, for IDP and Brand Solutions to insist on a significant degree of protection if the new business did not work out, or even if it did work out and the relationship came to an end. I see no reason, in these circumstances, why protection for them should not run for five years. A five year covenant was upheld in Payette, and likewise I think it is reasonable here.
[47] The geographic area covered by the restriction is reasonable. In effect, it covers only the GTA.
[48] In the final analysis, I conclude that the restrictive covenant is reasonable, and thus enforceable.
[49] No attack is made on article 3(j) of the agreement. Nor could there be. It simply provides that IDP’s property, consisting of customer lists, accounting documents, invoices, diaries, and manuals used by IDP in the ordinary course of its business remain IDP’s property. It can hardly be argued that a clause of this nature is unreasonable.
[50] It is clear, in my view, that Mr. Elsey is competing with Brand Solutions. He does not dispute that he contacted the people referred to in paragraphs 32, 33 and 34 of the affidavit of Jason McDonagh sworn October 17, 2014. He contacted them while Tricod was a shareholder of Brand Solutions, and he contacted them again after he rejoined TNT. To take the position, as he now does, that none of these people had actually engaged in any business with Brand Solutions, notwithstanding that they were listed in Brand Solutions’ database, is somewhat disingenuous. They were clearly potential clients of Brand Solutions, and Mr. Elsey contacted them as such when he was associated with Brand Solutions.
[51] The real issue in this case is what remedy should be awarded by the court. Should the court award an injunction, or should the applicants be left to a remedy in damages? In answering this question, the court must balance what appear to be two conflicting principles: namely, that a negative obligation should be enforced by the court through injunctive relief; and the principle that an injunction should be granted only where damages are not an appropriate remedy.
[52] The first principle is encapsulated by Sharpe J.A. in his text, Injunctions and Specific Performance (Looseleaf Edition; Canada Law Book) at §9.10, as follows:
In many cases, injunctive relief will be appropriate as the specific remedy for breach of contract. Where a party has by contract undertaken not to do something, specific performance of that obligation is achieved by enjoining its breach. Where specific performance is sought of a positive obligation, the plaintiff must establish that the ordinary remedy of damages would be inadequate. In the case of negative obligations, however, the courts have more readily granted injunctive relief. Reference is almost invariably made to the dictum of Lord Cairns L.C. in Doherty v. Allman (1878), 3 App. Cas. 709 (H.L.), at p.720:
If parties, for valuable consideration, with their eyes open, contract that a particular thing shall not be done, all that a Court of Equity has to do is to say, by way of injunction, that which the parties have already said by way of covenant, that the thing shall not be done; and in such case the injunction does nothing more than give the sanction of the process of the court to that which already is the contract between the parties. It is not then a question of the balance of convenience or inconvenience, or of the amount of damage or of injury – it is the specific performance, by the Court, of that negative bargain which the parties have made, with their eyes open, between themselves.
[53] On the other hand, at §1.60, the author states: “The traditional rule is that an injunction will be granted only where damages would provide an inadequate remedy.”
[54] How is one to resolve these competing principles?
[55] In my view, in the context of enforcing a restrictive covenant that has been upheld by the court as being reasonable, damages will rarely provide an adequate remedy. If damages were considered to be adequate, they would really be a licence fee for the right to continue violating the covenant. Furthermore, damages would only be payable if the plaintiff could prove them. The defendant would be in the position of saying, in effect, “Catch me if you can – I will violate the covenant and will only pay damages if you can prove them.”
[56] It is better, in my view, that the party who has made an enforceable bargain be held to that bargain. Once he has lost any argument as to the enforceability of the covenant, surely he must be obliged to live up to it rather than simply pay a licence fee.
[57] TNT must also be required to respect the bargain. While it is not a party to the covenant, it retained Mr. Elsey to perform work on its behalf and was aware of the restrictive covenant by which Mr. Elsey was bound. TNT was familiar with non-competition covenants, because Mr. Elsey had been subject to one after he left TNT. The only position it has taken on this application is that the covenant is unenforceable. Since the covenant has been found to be enforceable, it must respect the covenant just as Mr. Elsey must.
[58] In this case, the applicants should be awarded an injunction to require the respondents Elsey and Tricod to live up to their bargain, and the respondent TNT to respect it. An injunction will issue.
[59] If there is any difficulty over the form of the injunction, I may be spoken to.
[60] I invite the parties to file written submissions with respect to costs, not to exceed three pages, together with a costs outline or bill of costs. Counsel for the applicants shall have five days to file her submissions, and counsel for the respondents shall have five days to respond. Counsel for the applicants shall have three days to reply.
Gray J.
Released: May 4, 2015
CITATION: Brand Solutions By Promotion Solutions Inc. v. Elsey, 2015 ONSC 2895
COURT FILE NO.: 4921/14
DATE: 2015-05-04
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
BRAND SOLUTIONS BY PROMOTION SOLUTIONS INC. and I.D.P. HOLDINGS LIMITED
Applicants
– and –
ROBERT ELSEY, THE NEXT TREND DESIGN INC. and TRICOD INC.
Respondents
REASONS FOR JUDGMENT
GRAY J.
Released: May 4, 2015