Court File and Parties

COURT FILE NO.: CV-08-00359782-00 DATE: 20160713 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: STEVEN R. KARK, Plaintiff – and – DAVID M. POTTER, Defendant

Counsel: Harvey S. Consky, for the Plaintiff David M. Potter, Self-Represented

HEARD: January 25, 2016

S.A.Q. Akhtar J.

FACTUAL BACKGROUND AND OVERVIEW

[1] Steven Kark and David Potter worked in the financial services industry as investment advisors. At the beginning of 2006, both were registered members of the Mutual Fund Dealers Association of Canada. Potter and Kark negotiated to merge their businesses, with Potter purchasing Kark’s Book of Business (“the Book”) – this consisted of around 50 clients valued at approximately $8.3 million.

[2] On 23 March 2006, Potter sent Kark an email entitled “Our Revised Agreement” containing a number of contractual terms defining the manner in which Potter would acquire the Book and the set-up of a new joint business venture. The agreement was amended by Potter in handwritten annotations and ultimately signed by both parties on 10 April 2006.

[3] The “Revised Agreement” specified that, for a period lasting three years, Kark would be paid all commissions received from business conducted with the Book clients pre-dating the merger. By contrast, Potter would receive the commission from any new business arising from the Book’s client base. In addition, the parties agreed that all new business earnings would be split evenly after the deduction of costs.

[4] As will be discussed later in these reasons, Potter now disputes that the signed “Revised Agreement” constituted a final agreement.

[5] Initially, the arrangement worked well and the Book transitioned to Potter and his company, Potter & Partners, over the course of the following year. However, relations between the two parties soured. The valuation of the Book turned out to be less than had been expected at the time of the agreement, amounting to approximately $6.1 to $6.8 million. In December 2006, Kark decided that he no longer wished to work as an investment dealer and resigned from Potter’s company.

[6] The commissions owing to Kark under the “Revised Agreement” were paid sporadically. In total, Kark received five payments totalling $55,853.94 as part of his share of the Book commissions. This, according to Kark, was a substantial underpayment of agreed funds. Kark argues that, under the terms of the agreement, he is owed additional monies, and he brings this action to recover those funds.

Position of the Parties

[7] Kark submits that the “Revised Agreement” was a binding contract which obliged Potter to pay him the entire commission for business with clients that predated the Book’s sale and for any new business referrals made to Potter. Kark submits that Potter has received commissions owing to him and failed to transfer those funds to Kark. Moreover, Kark claims that, as part of the agreement, he referred five or six new clients to Potter. To date, he has only been paid $55,853.94, an amount that he argues is woefully short of the real total owed to him calculated using the accounting figures provided by Potter.

[8] Potter, on the other hand, argues the 23 March 2006 email was not a formal agreement but a letter of intent which was never legally formalised. Consequently, no binding agreement existed between the parties. He argues that any arrangement was ongoing and subject to discussion. Alternatively, he argues that if the 23 March 2006 email did create a formal contract, Kark was in breach of its terms and therefore cannot seek enforcement. Potter further submits that he paid Kark in accordance with their agreement and stopped only when he realised that Kark had failed to comply with its terms. Since Kark had breached the agreement, Potter was no longer bound to pay him the previously agreed commission.

WAS THE EMAIL AN AGREEMENT?

Legal Principles

[9] The most recent Supreme Court of Canada jurisprudence on contractual interpretation is Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633. In Sattva, the court revisited the analysis required to determine contractual intention. Rothstein J., writing for the majority, observed at para. 47 that the “overriding concern is to determine the intent of the parties and the scope of their understanding.” He continued, at paras. 47-48:

To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning:

No contracts are made in a vacuum: there is always a setting in which they have to be placed. . . . In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.

(Reardon Smith Line, at p. 574, per Lord Wilberforce)

The meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement. …

[10] Later in the judgment, at paras. 57-58, the court set out the limits upon use of surrounding circumstances:

While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement: Hayes Forest Services Ltd. v. Weyerhaeuser Co., 2008 BCCA 31, at para. 14; and Hall, [Geoff R. Canadian Contractual Interpretation Law, 2nd ed. Markham, Ont.: LexisNexis, 2012], at p. 30. The goal of examining such evidence is to deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract (Hall, at pp. 15 and 30-32). 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: Glaswegian Enterprises Inc. v. B.C. Tel Mobility Cellular Inc. (1997), 101 B.C.A.C. 62.

Analysis

[11] As noted, Potter denies that the 23 March 2006 email amounted to a binding agreement. In his submission, he posits that the email was only a letter of intent to be developed as time progressed.

[12] I disagree on the basis that the evidence demonstrates the opposite, as follows.

[13] There is no dispute that there had been prior negotiations between the two, a fact reflected in the subject line of the email entitled “OUR REVISED AGREEMENT”. It is clear from both the unambiguous tone and content of the communication that Potter was setting out final terms governing the working relationship between himself and Kark. Moreover, the email had been printed out, amended with handwritten additions and signed by the parties. There was no reason to do this if the email was only meant to be a letter of intent.

[14] Although Potter points to paragraph 3(f) of the email as indicating its true purpose as a letter of intent, I do not read the paragraph the same way. The paragraph states that “signed acceptance of this email as our letter of understanding going forward to formal agreement stage.” In my view, 3(f) signalled the fact that once the document was signed it would become a binding agreement which could, if the parties so wished, be legally formalised by their respective counsel. The absence of lawyers and a formalised process did not remove the agreement’s binding nature. I find support for this view in the existence of later correspondence in which Potter refers to the email as “our agreement” – for example, in the email sent to Kark on 15 February 2007.

[15] Potter also submits that paragraph 1(c) of the Revised Agreement, requiring him to pay a $40,000 deposit, was not complied with, thereby demonstrating the lack of an agreement. If I accepted this argument, I would be permitting Potter to rely on his own breach of the agreement to justify avoiding his binding contractual obligations. In any event, I accept Kark’s testimony that even though the Agreement specified the $40,000 to be paid in advance, Kark was willing to accept that amount as part of the commission payment.

[16] The only modification to the Revised Agreement was the notion, agreed at trial by both parties, that in the case of life insurance, each party could keep his own clients.

[17] For the above reasons, I find the 23 March 2006 email signed by both parties to be a binding agreement.

THE ALLEGATIONS OF KARK’S BREACHES OF THE AGREEMENT

[18] Potter’s alternative argument is that if there was an agreement he was entitled to cease payments due to Kark’s own actions, the nature of which constituted a breach of the agreement.

[19] Potter alleges a multitude of sins on Kark’s part with respect to his failure to live up to the agreed arrangement. I find very little support for any of these allegations.

Did Kark Agree to Become a Partner?

[20] Potter alleges that Kark reneged on his part of the agreement to become Potter’s business partner with the goal of expanding the business and making sufficient profits to satisfy both parties. He argues that Kark’s actions in giving up his licence to set up a new business venture in the area of critical illness insurance was a betrayal of the partnership deal and a breach of their agreement.

[21] I reject these arguments. There is no reference at all to a partnership within the Revised Agreement, something that would be expected if both parties expected Kark to become a partner. In fact, the Agreement, under the heading “NEW CLIENT BOOK - JOINT VENTURE NEW BUSINESS DEVELOPMENT”, explicitly refers to Kark as “an associate of Potter & Partners”. In my view, that was exactly what Kark was.

The Failure to Deliver the Promised Assets

[22] Potter alleges that a breach of the agreement occurred when Kark delivered a client book of $6.1 million in assets instead of the $8 million specified in the Revised Agreement. There is some dispute as to the actual amount of assets that were transferred over by Kark, as he recalls the value as being $6.8 million. Irrespective of the correct figure, I reject Potter’s argument that failure to deliver the amount specified in the agreement amounted to a breach of contract.

[23] Paragraph 1(a) of the Agreement, under the heading “PRICE TO BE PAID FOR EXISTING CLIENT BOOK”, indicated that the Book to be acquired by Potter “represents a minimum asset value of $8 million as at the time of sale”. It is clear from the wording of the paragraph that the Agreement was describing the value of the Book at a fixed point in time and must therefore have envisaged the possibility that the value might well appreciate or depreciate between the date of sale and transfer.

[24] The paragraph governing the actual amount of client assets required to complete the transaction is contained in paragraph 1(c), which states that an advance payment would be released to Kark within 60 days after Potter took on his clients. It continues that “if at least 70% of the clients’ assets are not transferred over within the 60 day period” an extension of 30 days could be negotiated. If, however, the 70% threshold was not met “or this proposed agreement not work out for any major reason as determined by either party, then either party reserves the right to terminate the agreement”.

[25] If Potter was dissatisfied with the Book value when transferred, it was open for him to terminate it on the grounds that an insufficient value had been transitioned. His failure to do so indicates that he was not dissatisfied and that Kark had fulfilled his part of the Agreement’s terms.

Was Kark Obliged to Work Minimum Hours and/or Entitled to Leave?

[26] Potter complains that Kark agreed to work 30 hours per week for Potter and failed to fulfil that commitment. He further submits that Kark’s unilateral departure from Potter & Partners in December 2006, some eight months after agreeing to the sale of the Book, was a breach of the agreement and meant that Kark resiled from his promise to assist Potter by providing referrals to grow a new joint client book of business. For the reasons that follow, I reject these arguments.

[27] Contrary to Potter’s assertions, there is nothing in the Revised Agreement specifying a minimum amount of hours that Kark was obliged to work as part of his tenure with Potter & Partners. In fact, paragraph 2 of the Revised Agreement made it clear that Potter agreed to leave the amount of hours worked up to Kark by permitting him “to decide on how much time, effort and personal writing and administering you want to do as an associate of Potter & Partners”.

[28] Further, it is undisputed that, as part of the transitioning process, Kark devoted close to 80 hours a week to ensure that his Book was properly transferred.

[29] With respect to Kark’s withdrawal from Potter & Partners, of significance is paragraph 5 of the Revised Agreement, entitled “MUTUAL RIGHT TO PURCHASE EITHER PARTYS (sic) BOOK”. It deals explicitly with either party’s departure from the business by specifying that “should either party leave the business, the other should have the right to buy the other’s book of business and a buy sell agreement should be included for this purpose.” This paragraph indicates, in my view, that either party had the right to leave the business when they chose to do so. Nothing prohibited Kark from leaving the business as he did.

[30] Finally, even after Kark’s departure, the two parties continued to work together, with Kark producing $573,000 worth of client work in referrals to Potter. Potter continued to pay Kark in accordance with the terms of the Revised Agreement with regard to commissions. Such a working arrangement is inconsistent with Potter’s assertions.

[31] I would add, in response to Potter’s complaint that the $573,000 was a disappointment compared to the target set by himself after evaluating Kark’s sales abilities, that target was not a contractual term that Kark had to successfully perform. The fact that Kark failed to live up to Potter’s expectations did not constitute a breach of the Agreement.

[32] Accordingly, this argument fails.

Potter’s Troubles with the Mutual Fund Dealers Association of Canada

[33] Around this time, Potter had separate problems with the Mutual Fund Dealers Association of Canada (“MFDA”), which is the national regulatory body of the Canadian mutual fund industry. Potter was suspended in May 2009 pending disciplinary findings and, on 4 July 2011, he voluntarily agreed to be permanently prohibited from conducting securities-related business. The sanction arose out of Potter’s acceptance of direct remuneration from clients with respect to his fee-for-service business, which was a violation of MFDA rules. Other findings made by the MFDA with respect to Potter include that he engaged in securities related business beyond the terms of his registration as a mutual fund salesperson; he provided misleading information that he did not “generally” charge for fee-for-services to clients knowing that to be untrue; and he failed to comply with the binding policies and procedures prohibiting fee-for-service arrangements contained in MFDA Rules.

[34] Potter claims that Kark was implicated in this wrongdoing by virtue of Kark’s “agreeing to it” and accepting monies from it. Potter claims that Kark should not benefit from the arrangement because it cost him his career whilst costing Kark very little. Potter claims that he protected Kark by not reporting him to the MFDA even though he had “all the evidence” to do so.

[35] Assuming, without deciding, that Potter’s assertions are true, I reject this argument, as Potter seeks to avoid liability by relying on his own wrongful actions. The fact that Potter contravened rules to pay Kark monies that Kark was contractually owed - and was punished for doing so - does not absolve Potter from fulfilling his contractual duties.

The ATM Revelations

[36] The only aspect of Potter’s allegations that I find troubling are those concerning Kark’s activities in setting up an ATM business on his own and without permission from regulators. Kark sold ATM machines to clients who would earn revenue each time a customer used the machine for a financial transaction.

[37] Potter contends that this conduct led to a conflict with Kark’s obligations to Potter & Partners to grow the business. Kark does not dispute the fact that he had to disclose this enterprise but, remarkably, could not remember whether he revealed it or not. When confronted with his contract with IPC, Kark agreed that he hadn’t disclosed it. He was unaware of the implications because no one had ever approached him about it.

[38] I found Kark to be evasive when giving evidence on this point and conclude that he knew that he had contravened industry regulations when operating his ATM business. However, I do not agree that Kark’s operation of the ATM business impacted the Agreement between Kark and Potter. First, it is unclear how operating the ATM business would have affected Potter & Partners’ potential growth. Second, there is no evidence that clients using Kark’s ATM business would have conducted alternative business with Potter & Partners. In other words, the impact of the ATM business on Potter’s business is complete speculation. Thirdly, although Potter claimed, in his Statement of Defence, to have discovered the ATM business venture after Kark left Potter & Partners, in cross-examination he corrected himself and agreed that he had found out about the ATM business in May or June 2006, shortly after the Agreement had been signed and well before Kark departed from Potter & Partners. If the ATM business was so objectionable and a breach of the Agreement, Potter could have terminated the Agreement at that point. His decision not to do so indicates that he was not concerned about the ATM venture and did not find it to be a breach of the Agreement.

Did leaving Potter & Partners disentitle Kark to compensation?

[39] Potter makes a number of other claims that he alleges constitute a breach of the Agreement. He argues that Kark’s demands that he be paid for “fee for services” be dismissed because that was not contained in the Agreement. In cross-examination, however, he conceded that the Agreement did contemplate payment for “fee for services” but that ceased when Kark gave up his licence and therefore was “no longer eligible” to receive fee-for-service payments. In effect, Potter unilaterally decided that, since Kark left, he was no longer entitled to receive the fee for service. For obvious reasons, I reject this argument. It was not for Potter to decide to change the nature of payment simply because he was unhappy with Kark’s departure.

[40] A large part of Potter’s rebuttal and counter claim, however, centred on Kark’s responsibility for the failure of his business. According to Potter, Kark’s early departure doomed the business and led to its cessation.

[41] This position ignores the reality of the situation. After the Agreement was made, Potter got what he agreed to. After Kark left, Potter was in charge of the business and responsible for servicing his own clients and the clients transferred from Kark. Any failure to reap the benefits of the business fell at Potter’s feet. Most significantly, Potter was disciplined by the MFDA in 2011 for several breaches of the MFDA rules. He was suspended as a result and the business had to be sold at a value far less than its 2006 value. Irrespective of the cause and reasons of the suspension, none of which, in my view, have any connection to Kark, it is clear that the misfortune suffered by Potter & Partners occurred after the three-year period covered by the Agreement.

[42] In fact, due to Potter’s suspension from the financial industry by the MFDA, it is arguable that Potter himself breached the Agreement by being suspended from trading in mutual funds. If Potter had continued to pay Kark, he could have referred clients to him under their agreement. Once suspended, any referrals that might have taken place were irrelevant because Potter was no longer involved in the business.

Did Kark fail to mitigate any losses?

[43] Potter argues that if Kark had been entitled to any damages for breach of contract, he was under an obligation to avoid loss by buying back the Book that he sold. Since he failed to do so, and, in fact did not take steps to mitigate his loss, he is not entitled to any damages.

[44] The principle of mitigation or avoidable loss is built on the foundation that a plaintiff cannot recover for losses that could have reasonably been avoided. The idea is that a defendant’s breach does not cause further avoidable loss and that justice encourages a motivation to avoid economic waste. A plaintiff, however, is not bound to take all possible steps to reduce his or her loss. For example, a plaintiff is not required to take substantial financial risks to mitigate their loss: Pilkington v. Wood [1953] Ch. 770, [1953] 2 All E.R. 810 (Eng. Ch. Div.); Foremost Foods Ltd. v. U.F.C.W., Local 2000, (1989), 62 D.L.R. (4th) 201 (B.C. C.A.).

[45] As the contract breaker, the burden of proving that Kark should have mitigated his loss falls at Potter’s feet: Keneric Tractor Sales Ltd. v. Langille, [1987] 2 S.C.R. 440, at para. 35. He has failed to do so. The loss in this case (the non-payment of commission) had already been incurred by the time Potter fell into hardship and had to sell the business. Buying Potter & Partners would not have helped avoid Kark’s losses: they had already been incurred. Further, Kark was not obliged to buy Potter’s failing business in order to mitigate his damage, as he arguably may well have taken on further risk and loss.

[46] Potter’s argument accordingly fails.

CONCLUSION

[47] For the above reasons, I find that Kark has proven his claim against Potter.

[48] Potter disputes the damages claimed by Kark. However, Potter’s own accountant calculated that the amount owing under the agreement would have equalled $159,279.33 after deductions.

[49] Using that figure, I award Kark damages in the amount of $159,279.33.

Costs

[50] At the conclusion of the hearing, it was agreed that the unsuccessful party would pay costs in the amount of $12,500. Accordingly, costs in the amount of $12,500.00 are to be paid by Potter to Kark within 30 days.

S.A.Q. Akhtar J.

Released: 13 July 2016