COURT FILE NO.: CV-12-462359 DATE: 20160629 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Greenfix Golf Inc., Plaintiff – and – Sportcover International Inc., Defendant

Counsel: Scott Rosen, for the Plaintiff Iain A.C. MacKinnon, for the Defendant

HEARD: June 13 to 16, 2016

Penny J.

Overview and Issues

[1] In this action, Greenfix sues for breach of a distribution agreement for minimum royalties due and not paid on sales of a golf tool used to repair ball marks on putting greens. There is no dispute that the minimums were not paid. Sportcover defends on the basis that the minimums contemplated by the distribution agreement were not meant to be payment obligations but were meant to protect Sportcover from early termination, by Greenfix, of the distribution agreement.

[2] At the heart of the dispute lies the interpretation of the distribution agreement itself and the scope and role of evidence of the “factual matrix” surrounding the formation of the contract and the subsequent conduct of the parties in relation to the contract.

[3] There is a counterclaim by Sportcover for alleged negligent misrepresentation relating to the sales of the golf tool that were likely to be achieved post-2010 when the distribution agreement was entered into.

[4] There are four issues:

(1) Does the distribution agreement provide for annual minimum royalty payments by Sportcover to Greenfix? (2) If so, did the parties’ subsequent conduct in anyway disentitle Greenfix from insisting upon payment of the annual minimum royalties? (3) If no, what is the proper measure of damages? (4) And, in any event, is Greenfix liable to Sportcover for negligent misrepresentation?

Background

[5] Danny Edwards is the principle of Greenfix. He is a professional golfer who lives and works in the United States. In the early 2000s, Mr. Edwards developed a new and improved golf tool for repairing ball marks and divots on golf greens. Greenfix Golf Inc. was incorporated to own the golf tool patents and to manufacture and distribute the green repair tool. It is common ground that all rights of Greenfix Golf Corporation under the 2010 distribution agreement were validly assigned to Greenfix Golf Inc.

[6] Sportcover is a sportswear and equipment distributor focusing on the golf industry. Ken Kennedy, who is the principal of Sportcover, became aware of the golf tool in about 2007. He approached Edwards about selling and distributing the golf tool.

[7] Later that year, Kennedy and Edwards entered into an oral agreement whereby Sportcover took over manufacturing the golf tool through Kennedy’s contacts in China. Sportcover distributed the golf tool to its own customers and sold the golf tool to Greenfix at wholesale prices for resale by Greenfix to its own customers.

[8] Sportcover agreed to pay a 15% royalty on golf tools it sold in the U.S. and a 5% royalty on golf tools it sold elsewhere. It is common ground that at no time did Greenfix ever grant Sportcover an exclusive licence.

[9] The 2008 financial crisis had a significant and long-lasting impact on the golf industry, including the golf accessories market.

[10] For the first 18 months of the oral agreement, it appears that the cost of Greenfix’s purchases of the golf tool from Sportcover exceeded the amount of royalties Greenfix earned on Sportcover’s golf tool sales such that no royalties were paid.

[11] In 2009, Greenfix decided to get out of the distribution business altogether. The oral agreement changed to reflect the assumption by Sportcover of all of Greenfix’s customer accounts. It is common ground that sales to former Greenfix customers would attract a 25% royalty rate in the first year, 20% in the second year and return to the normal 15% for all U.S. sales in the third year.

[12] In August 2009 (Sportcover’s fiscal year is August to July) Sportcover began paying Greenfix an advance of $6,250 per month. Kennedy testified that $6,250 was the monthly amount that correlated to the minimums they were contemplating incorporating into their agreement at the time.

[13] Kennedy, without the benefit of legal advice, drafted an agreement to record what he thought were the operating principles of the parties’ relationship in August 2009. There is no documentary evidence that this agreement was ever sent to Edwards, although it seems likely that Edwards saw it at some point. The agreement was certainly never signed by either party; that much is admitted.

[14] It is also common ground that some, but not all, of the provisions of the August 2009 draft were followed in the succeeding months leading up to December 2010. For example, the draft agreement provided that Sportcover would pay Greenfix $6,250 per month as an advance, to be set off against royalties earned. Those amounts were advanced monthly until August 2010 and were set off against royalties earned. Other provisions of the August 2009 draft, such as a right of first refusal granted to Sportcover to acquire Greenfix, or its patent rights to the golf tool, were clearly never agreed to.

[15] Paras. 4 and 5 of the draft agreement dealt with guaranteed annual minimum royalties payable to Greenfix. Para. 4 of the draft provided for a guaranteed minimum of $30,000 in royalties on Sportcover sales in the first year, $60,000 in the second year and $90,000 in the third year. To those guaranteed minimum royalties on Sportcover sales would be added existing Greenfix sales, “which we anticipate will generate approximately $100,000 in total royalties in the 1st year, $120,000 in the 2nd year and $135,000 in the 3rd year” [emphasis added].

[16] Para. 5 of the draft agreement provided that Greenfix could not cancel the contract as long as minimum annual royalties were being met. Para. 5 of the draft, however, went on to propose minimum annual royalties of $50,000 in the first year, $80,000 in the second year and $100,000 in the third year, including Greenfix sales that were turned over to Sportcover. Para. 5 of the draft provided that should minimum annually royalties not be met and/or Sportcover wish to opt out of the contract, “then this can occur with a minimum of 90 days’ notice.” It went on state that the intent of para. 5 “is to protect the investments of both” Greenfix and Sportcover.

[17] Para. 7 of the draft provided that as the royalties were paid over time, “and minimum guaranteed royalty amounts are met or exceeded,” Sportcover would earn a 10% equity interest upon royalties reaching $500,000 and another 5% equity interest for every additional $250,000 of royalties paid, up to and including 50% of the equity interest in Greenfix. There is no suggestion that Sportcover ever had, or earned, equity in Greenfix.

[18] In the fall of 2010, Ron Kelly, a friend of Edwards and a director of Greenfix, began corresponding with Kennedy about a formal written distribution agreement. The evidence was that Mr. Kelly was a non-practising lawyer called to the bar of Ontario living in Arizona. Kelly did not testify at the trial.

[19] It is clear that drafts of the new agreement were sent to Kennedy and that at least some of Kennedy’s comments were incorporated into subsequent drafts of the agreement. The distribution agreement, as negotiated by Kelly and Kennedy, was signed on December 8, 2010. Kennedy did not have a lawyer review it before signing but admitted he had every opportunity to do so.

[20] The distribution agreement is the only signed agreement between Greenfix and Sportcover. It provides that Sportcover will pay the royalty amounts in Appendix B (15% for U.S. sales, 5% for sales outside the U.S. and 25% for Greenfix “house” accounts in the first year, 20% in the second year and the standard 15% for all U.S. sales thereafter).

[21] Section 1.4 of the distribution agreement provides that Sportcover will continue to pay a monthly advance of $6,250 USD which is to be considered an advance on royalties and will be offset against royalties earned under the agreement. This paragraph goes on to provide that the largest credit that Sportcover will have to advance to Greenfix for royalties is $50,000. Any accruing royalties to Greenfix will be used to keep Greenfix underneath the $50,000 maximum credit owing. Until the credit reaches more than $50,000, the monthly payments of $6,250 USD will continue to be paid.

[22] In section 3.2 of the distribution agreement, Sportcover specifically agreed to pay the minimum royalty outlined in Appendix C. Appendix C contains the following royalty table:

August 1, 2009 – July 31, 2010 – 30,000 August 1, 2010 – July 31, 2011 – 50,000 August 1, 2011 – July 31, 2012 – 75,000 Each August 1 – July 30 12 month period thereafter – 75,000

There was one subsequent amendment agreed to in writing by virtue of which the August 31, 2009 – July 31, 2010 minimum royalty of $30,000 was, at Kennedy’s request, simply excised from Appendix C because Sportcover had been “short” on the $30,000 minimum royalty that year.

[23] Reference is also made to the minimum royalty requirements in section 10.2(a)(ii) of the distribution agreement. Section 10.1 of the agreement provides that, unless otherwise terminated, the agreement will continue for a period of 10 years. Section 10.2(a) provides that either party will have the right at its option to terminate the agreement “only as follows”:

(i) upon notice to the other party if such other party materially breaches this Agreement and fails to remedy such breach within ninety (90) days after delivery of notice by the Terminating Party of such breach; (ii) by Greenfix giving prior written notice to Sportcover that it has not met the minimum Royalty requirements as set forth on Appendix C, in which case the termination shall be effective 6 months from the delivery of such notice in writing from Greenfix; provided however that at the request of Sportcover, Greenfix may waive, in its absolute discretion, a breach by Sportcover for failure to meet the Minimum Royalty requirements on Appendix C; or (iii) by Greenfix giving 6 months prior written notice to Sportcover, but only after the Initial Term.

1. Does the Distribution Agreement Provide for Annual Minimum Royalty Payments to Greenfix?

[24] The defendant argues that the Appendix C minimums were never intended to be a payment obligation of Sportcover’s. It says the minimums were merely a target amount which, provided it was met, would protect Sportcover from termination of the distribution agreement by Greenfix.

[25] The defendant says the repayment of advances by Greenfix required under section 1.4 of the distribution agreement makes no sense if Sportcover was obliged to pay Greenfix a minimum royalty under Appendix C. This is so, the defendant argues, because the monthly advances required under section 1.4 of $6,250 represented a total of $75,000 per year. In the (as amended) second year, August 1, 2011 to July 31, 2012, the minimum royalty was $75,000. Thus, if Sportcover was obliged to pay $75,000 in minimum royalties, and to pay $6,250 in monthly advances, there were no royalties to be “earned” to “offset” against the amount advance. This, the defendant argues, renders that part of section 1.4 requiring the advances to be offset against royalties earned meaningless.

[26] I do not find this argument persuasive.

[27] The Court of Appeal for Ontario has recently affirmed that, in interpreting a commercial contract, the court must give effect to the intention of the parties as derived from the words they have used, in the context of the contract as a harmonious whole and the factual matrix in which it was entered into, Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673, 268 O.A.C. 279, at para. 16:

When interpreting a contract, the court aims to determine the intentions of the parties in accordance with the language used in the written document and presumes that the parties have intended what they have said. The court construes the contract 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. In interpreting the contract, the court must have regard to the objective evidence of the “factual matrix” or context of the underlying negotiation of the contract, but not the subjective evidence of the intention of the parties. The court should interpret the contract so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity. If the court finds that the contract is ambiguous, it may then resort to extrinsic evidence to clear up the ambiguity. Where a transaction involves the execution of several documents that form parts of a larger composition whole – like a complex commercial transaction – and each agreement is entered into on the faith of the others being executed, then assistance in the interpretation of one agreement may be drawn from the related agreements.

See also Bell Canada v. The Plan Group, 2009 ONCA 548, 96 O.R. (3d) 81, at paras. 37-38; De Beers Canada Inc. v. Ootahpan Company Limited, 2014 ONCA 723, [2014] O.J. No. 4904, at para. 3; and 798839 Ontario Limited v. Platt, 2016 ONCA 48 at paras. 23 and 24.

[28] The Supreme Court of Canada has also recently held that “[c]ontractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix: see Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 50.

[29] However, in Sattva Capital Corp. supra, the Court was clear that the overriding concern is to determine the intent of the parties. While the surrounding circumstances will be considered in interpreting the terms of the contract, they must never be allowed to overwhelm the words of the agreement. The goal of examining such evidence is to deepen the decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. Interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract. While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement (para. 57).

[30] While the nature of the evidence to be considered as surrounding circumstances varies from case to case, it should consist only of objective evidence of the background facts at the time of the execution of the contract. This involves knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting (para. 58).

[31] The parol evidence rule precludes admission of evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing. The rule precludes, among other things, evidence of the subjective intentions of the parties. The purpose of the parol evidence rule is primarily to achieve finality and certainty in contractual obligations, and secondarily to hamper a party’s ability to use fabricated or unreliable evidence to attack a written contract (para. 59).

[32] The defendant’s assertion that the purpose of the minimums was to protect Sportcover from early termination is nowhere found in the words of the distribution agreement. The argument, in my view, is really based on inadmissible subjective evidence of intention.

[33] The 2009 draft, I find, was never an agreement as such. Some provisions reflected the de facto oral agreement under which the parties operated, but some did not.

[34] The 2009 draft, however, like the 2010 distribution agreement, contemplated minimum royalties payable to Greenfix. While no legal obligations arose to pay minimum royalties under the 2009 draft, it nevertheless reflects, as part of the factual matrix, an understanding by the parties of what annual minimum royalties were and that they were clearly being contemplated as a feature of the parties’ contractual relationship. Annual minimum royalties, in other words, were not something that popped up at the last minute in 2010 or caught Kennedy by surprise.

[35] In addition, section 11.12 of the distribution agreement contains an entire agreement clause by which the distribution agreement superseded all prior representations, discussions, negotiations and agreements.

[36] Section 1.4 of the distribution agreement is not internally inconsistent or meaningless when read in conjuction with the annual minimum royalties provided for in section 3.2 and Appendix C. The original starting year was to have been August 2009 to July 2010 (with a $30,000 minimum annual royalty). This provision was excised from the agreement at Kennedy’s request because Sportcover had not sold enough product that year (the year before the signing of the distribution agreement) to generate the minimum of $30,000 contemplated for that year -Sportcover had been, in Kennedy’s words “short.” Kennedy sought, and received, an acknowledgment that the 2009/2010 minimum royalty was not part of the contract precisely because he did not want to be held liable for a minimum royalty for a year that had already ended before the distribution agreement was signed.

[37] Further, the as originally contemplated August 2009 to July 2010 year and the following year, August 2010 to July 2011 (with a $50,000 minimum royalty), both had minimum annual royalties less than $75,000. Thus, in both years, it would have been possible for the advances paid to Greenfix of $6,250 per month to exceed the minimum royalties for those years, requiring an offset of future royalties against advances paid if additional royalties above the minimums in those two years were not earned. That is, in fact, precisely what happened.

[38] There is, I find, nothing contradictory or commercially absurd about annual minimum royalties. They create an incentive on the part of the distributor (which, it must be remembered, was promoting and selling hundreds of other products for other manufacturers) to promote and grow sales of Greenfix’s repair tool.

[39] It is Sportcover’s interpretation, not Greenfix’s, which does violence to the clear intent of the parties as derived from the words they used in the distribution agreement, interpreted as a whole and in its proper context.

[40] I find, therefore, that Sportcover was obliged to pay minimum annual royalties of $50,000 in the August 2010 to July 2011 year and $75,000 per year thereafter.

2. Did the Parties’ Subsequent Conduct Disentitle Greenfix from Insisting Upon Payment of the Annual Minimum Royalties?

[41] The defendant relies on post-contractual conduct as constituting an estoppel, or waiver, of the rights now asserted by Greenfix under the distribution agreement.

[42] First, the defendant argues that on two occasions (once in 2010 and again in 2011) Edwards acknowledged to the defendant’s accountant that he had received advances against royalties on future sales of a little over $40,000 in each case. This was, Kennedy testified, so that Sportcover would not be taxed on those amounts as income. The defendant argues that if Greenfix was entitled to minimum royalties of $50,000 and $75,00, respectively, in those two years, why was Edwards acknowledging advances of over $40,000?

[43] Second, the defendant relies on Edwards’ conduct in 2011, during which he was continuously begging for money and did not once, until his lawyers’ letter of May 31 2012, assert that he was entitled to a minimum annual royalty of $50,000 for the period August 31, 2010 to July 31, 2011 or $75,000 for the period August 31, 2011 to July 31, 2012.

[44] Promissory estoppel requires evidence of a detrimental change of position by the party relying on the other’s conduct as having changed the terms of their bargain. In this case, there was simply no evidence capable of constituting any detrimental reliance on Sportcover’s part. This was effectively acknowledged in argument.

[45] Waiver requires an unequivocal demonstration of an intention to release legal rights. I do not think the communications or conduct relied on here are capable of constituting an unequivocal intention to release all rights to annual minimums. Edwards clearly needed money in 2011. Without the benefit of legal advice, Edwards was simply trying to keep his head above water, accepting whatever payments he could get most expeditiously at the time. This conduct says nothing about Greenfix’s legal rights under the distribution agreement.

[46] Edwards’ acknowledgment of advances in 2010 and 2011 is similarly not an acknowledgment that he had no entitlement to annual minimum royalties. There is nothing inconsistent about acknowledging an advance, even though it might or will be offset later by an annual minimum royalty obligation. It is merely a question of timing.

[47] In addition, section 11.5 of the distribution agreement specifically provides that no term or provision of the agreement may be waived unless such waiver is in writing signed by the party against which the waiver is claimed.

[48] The defences of estoppel and waiver were not made out and are, therefore, rejected.

3. What is the Proper Measure of Damages?

Quantum

[49] Section 10.1 of the distribution agreement provides that the agreement will continue, unless otherwise terminated under section 10, for a period of 10 years (that is, to July 31, 2020).

[50] Greenfix concedes that Sportcover is entitled to a credit for advances which exceeded earned royalties in the period August 2009 to July 2010 and August 2010 to July 2011. Beginning August 2011, however, Greenfix was entitled to a minimum annual royalty, for the year ending July 31, 2012, of $75,000. The only payment received during that year was $2,500, which brought the balance owed by Greenfix to Sportcover to $43,519.93 as of September 2012. No payments have been made by Sportcover with respect to royalties since that date. Sportcover has, in fact, retained all revenue on sales of the golf tool as a set off to pay down the $43,519.93 advance.

[51] Greenfix claims it is entitled to a prorated annual $50,000 minimum royalty for November 1, 2010 to July 31, 2011 of $37,500, the amount of $368,750 to the end of June 2016 (four years and 11 months) and, for the period July 1, 2016 to July 31, 2020, an additional $306,250, subject to a present value calculation, less a credit to Sportcover for the accumulated advance of $43,519.93 as of September 2011.

[52] Subject to mitigation, which is dealt with below, I did not understand the defendant substantially disagreed with the plaintiff’s calculations. There was, however, no evidence and no submission on the appropriate present value factor for dealing with the future loss of royalty payments post-June 2016. The parties shall confer on the appropriate present value factor. If they are unable to agree, brief written submissions (not to exceed two typed, double-spaced pages) may be filed by the plaintiff within seven days of the release of these reasons and responding submissions (subject to the same page limit) may be filed by the defendant within a further seven days.

Mitigation

[53] The defendant pleaded, and argued following the trial, that the plaintiff had failed to mitigate its damages. There was precious little evidence elicited on this issue at trial. There was no evidence of efforts by Greenfix to find additional distributors one way or another, no evidence of what a reasonable patent holder in Greenfix’s shoes should or might have done in similar circumstances and no evidence that other deals similar to the distribution agreement were available. What is known is that: a) Greenfix did not contract with another material U.S. or international distributor; and b) Sportcover has continued to market and sell the Greenfix repair tool, albeit at levels substantially below those contemplated by the annual minimum royalties in Appendix C to the distribution agreement. It is on these facts that the defendant argues that Greenfix failed to mitigate its damages by finding another distributor for the golf tool.

[54] The plaintiff says that failure to mitigate is a defence alleged by the defendant and that the onus of proof is on the defendant to show, on a balance of probabilities, that other deals were available and that, had the plaintiff acted with reasonable diligence, it could have secured another distribution contract, thereby reducing or eliminating any damages. There being no such evidence, the defendant says, the failure to mitigate defence must fail.

[55] The plaintiff also says that, in any event, it had no duty or obligation to mitigate. It relies on two arguments. First, the plaintiff argues that by virtue of having a contract for a fixed term, the parties, as matter of law, agreed there was no mitigation obligation. The plaintiff relies for this argument on the decisions of the Court of Appeal for Ontario in Bowes v. Goss Power Products Ltd., 2012 ONCA 425 and Howard v. Benson Group Inc., 2016 ONCA 256.

[56] Second, the plaintiff argues that this was not an exclusive distributorship agreement. Because of this, the plaintiff was always at liberty to enter into new distributorship agreements with other distributors and that these agreements would and could not have affected the defendant’s obligation to pay annual minimum royalties under the distribution agreement. The plaintiff relies on Apeco of Canada Ltd. v. Windmill Place, [1978] 2 S.C.R. 385; Morguard Real Estate Investment Trust v. Pita Pizza Inc. and Vancouver Canucks Limited Partnership v. Canon Canada Ltd., 2013 BCSC 866.

[57] Where it is alleged that the plaintiff has failed to mitigate, the defendant bears the burden of proving that the plaintiff has failed to make reasonable efforts to mitigate and that mitigation was possible, Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51, [2010] 2 S.C.R. 675 at p. 677. While it might be possible, on the evidence at trial, to conclude that the plaintiff failed to make reasonable efforts to mitigate, there is simply no evidence that mitigation was possible. For this reason alone, I would be inclined to reject the defence of failure to mitigate.

[58] The plaintiff’s argument that, by virtue of having a contract for a fixed term, the parties, as matter of law, agreed there was no mitigation obligation, is based on cases in the employment context. In Bowes, supra, the Court of Appeal reasoned that parties contracting for a specified period of notice are choosing to opt out of the common law approach, under which every contract of employment has an implied obligation to give reasonable notice of termination of the employment contract, or pay compensation in lieu of notice. An employment agreement that stipulates a fixed term of notice (or payment in lieu) should be treated as fixing liquidated damages. It follows that, in such cases, there is no obligation on the employee to mitigate his or her damages.

[59] In Howard, supra, the Court of Appeal reiterated its essential finding in Bowes - “there is no duty to mitigate where the contract specifies the penalty for early termination.” It does not matter whether the penalty is specified (as in Bowes) or is by default the wages and benefits for the unexpired term of the fixed term contract (para. 39).

[60] I am not satisfied that the principles espoused in Bowes and Howard are applicable outside the employment context. It is not clear to me that the fixed term of 10 years in the distribution agreement was an attempt to specify a “penalty” for early termination. There is no implied common law rule governing the termination of commercial contracts as there is in the employment context. The duty to mitigate is based on sound commercial sense – the plaintiff in a breach of contract case ought not to be compensated for a loss it could reasonably have avoided. I would not have relieved Greenfix of its duty to mitigate based on the Court of Appeal’s rulings in Bowes and Howard.

[61] The plaintiff relies on the basic measure of contract damages – that it must be put in the position it would have been in had the contract been performed. Had the contract been performed, Greenfix would have been entitled to a minimum annual royalty payment of $50,000 in the first year and $75,000 in each subsequent year.

[62] Sportcover had no right to exclusivity under the distribution agreement. Thus, any royalties earned by additional sales through other distributors would not have affected Sportcover’s obligation to pay minimum royalties under the distribution agreement. This is what has been described as the “lost volume” principle. The lost volume principle is illustrated by the following example taken from the reasons of the Court of Appeals of New York in Neri v. Retail Marine Corporation 334 NYS 2d 164 (1972) (at pp. 169-170):

If a private party agrees to sell his automobile to a buyer for $2,000, a breach by the buyer would cause the seller no loss (except incidental damages, i.e., expense of a new sale) if the seller was able to sell the automobile to another buyer for $2,000. But the situation is different with dealers having an unlimited supply or standard-priced goods. Thus, if an automobile dealer agrees to sell the car to a buyer at the standard price of $2,000, a breach by the buyer injures the dealer, even though [the dealer] is able to sell the automobile to another for $2,000. If the dealer has an inexhaustible supply of cars, the resale to replace the breaching buyer costs the dealer a sale, because, had the breaching buyer performed, the dealer would have made two sales instead of one. The buyer’s breach, in such a case, depletes the dealer’s sales to the extent of one, and the measure of damages should be the dealer’s profit on one sale.

See also Vancouver Canucks Limited Partnership v. Canon Canada Ltd., supra at para. 252.

[63] The “lost volume” principle is, in effect, a qualification on the duty to mitigate. The question is whether the fruits of a transaction which was entered into subsequently and independently of the distribution agreement could be deducted from the damages to which Greenfix would otherwise be entitled by reason of the Sportcover’s breach. In British Westinghouse Electric and Manufacturing Co. v. Underground Electric Railways, [1912] A.C. 673, Viscount Haldane held that the “subsequent [i.e., mitigating] transaction, if to be taken into account, must be one arising out of the breach and in the ordinary course of business.”

[64] Here, Greenfix’s ability to sell more golf tools did not arise from Sportcover’s decision not to pursue its sales obligation forcefully or to breach the contract by failing to pay minimum royalties. Supply always exceeded demand. Greenfix was always at liberty to enter into other distribution agreements with other distributors for the payment of additional royalties. In exactly these circumstances, Canadian courts have routinely held that additional “sales” by the plaintiff are not to be deducted from the plaintiff’s damages, see Apeco of Canada Ltd. v. Windmill Place, supra, at pp. 388 - 390 and Morguard Real Estate Investment Trust v. Pita Pizza Inc., supra, at paras. 28 - 30.

[65] I agree with the plaintiff that if additional royalties from other distributors were not deductible from the plaintiff’s damages due to Sportcover’s breach, there effectively was no duty to mitigate in the circumstances of this case. Thus, Greenfix’s failure to secure additional distribution contracts could not be grounds for a reduction of the damages to which Greenfix is otherwise entitled for Sportcover’s breach in failing to pay minimum royalties.

4. Is Greenfix Liable to Sportcover for Negligent Misrepresentation?

[66] Sportcover relies on certain oral representations said to have been made by Edwards in 2008 and early 2009. These representations concerned the number of customers Greenfix had and, by implication, the likely sales that might have been expected to be derived from former Greenfix customers when Sportcover took over those accounts. Sportcover says it relied on these representations, that they were made negligently, and that they turned out to be untrue.

[67] There was some controversy in the evidence about the precise nature of the representations made. It is not necessary to resolve those controversies, however, because I find on the evidence that:

(a) there was not, and could not have been, any reliance by Sportcover upon any oral representations made by Edwards; and (b) in any event, reliance on any oral representations is precluded by the express terms of the entire agreement clause agreed to by the parties in the distribution agreement.

[68] The alleged misrepresentations were made before Greenfix got out of the distribution business and before Sportcover took over Greenfix’s customers. However, Kennedy admitted that from early 2008 to August 2009, Sportcover had full knowledge of the volume and cost of all products sold by Sportcover to Greenfix for further sale by Greenfix to its customers. Sportcover, accordingly, had actual knowledge of Greenfix’s sales. As well, from August 2009 to December 2010, Sportcover had full access to all of Greenfix’s customer information and customer lists. During this 17 month period, it was Sportcover which sold products to former Greenfix customers because Greenfix had ceased selling products and become a pure licensor. I note that, by December 2010, the financial crisis had also been in full swing for over two years. Finally, Kennedy had ample knowledge of Greenfix’s customer base and all relevant information he needed before signing the distribution agreement in December 2010.

[69] On the basis of this chronology and these admissions, the claim that Sportcover relied on oral representations by Greenfix concerning sales to its customers (or former customers) cannot be sustained. Sportcover had actual knowledge of these sales before it entered into the distribution agreement.

[70] In any event, the distribution agreement, as noted above, contains an entire agreement clause by which the distribution agreement superseded all prior representations, discussions, negotiations and agreements. Such clauses are enforceable in accordance with their terms, subject to evidence of unconscionability, bad faith, promissory estoppel etc. There is no evidence to justify allowing the defendant to avoid the effect of this term of the distribution agreement.

[71] For these reasons, the counterclaim is dismissed.

Costs

[72] The parties shall seek to reach an accommodation on the issue of costs. Failing agreement, the plaintiff may request costs by filing a brief written submission (not to exceed three typed double-spaced page), together with a Bill of Costs, within 10 days of the release of these reasons. The defendant may file a brief written response (subject to the same page limit) within a further seven days.

Penny J. Released: June 29, 2016