Court File and Parties

COURT FILE NO.: 53498/12 (St. Catharines) DATE: 20160913

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

THE PRIM8 GROUP INC. Plaintiff William J. Hayter, for the Plaintiff and the Defendants by Counterclaim

- and -

RICHARD JAMES TISI and IAN MACARTHUR Richard James Tisi and Ian MacArthur appeared without counsel Defendants

AND BETWEEN:

RICHARD JAMES TISI Plaintiff by Counterclaim

- and -

THE PRIM8 GROUP INC., PHILIP KIRWIN and DIANNE WRIGHT Defendants by Counterclaim

HEARD: April 21, 22, 25 & 26, 2016, May 9, 10, 12, 16, 17 & 24, 2016 & written submissions dated June 6 to 24, 2016

R. A. Lococo, J.

REASONS FOR JUDGMENT

I. Introduction

[1] This action arose out of a dispute between the shareholders of a communications agency based in St. Catharines. The firm was founded in 2003 by Philip Kirwin and Dianne Wright, a married couple, and was subsequently incorporated under the Canada Business Corporations Act as The Prim8 Group Inc. Mr. Kirwin and Ms. Wright were the initial shareholders, directors and officers of Prim8.

[2] In 2008, Richard Tisi began working with Prim8 on a contract basis, consulting on web-based solutions. In that capacity, he worked with Prim8 staff to develop interactive websites for Prim8 clients who wanted a presence on the internet. In doing so, he used customized content management software previously written by contracted programmers under Mr. Tisi’s direction. This software is sometimes referred to in these reasons as the CMS.

[3] In 2010, Mr. Tisi became a one-third shareholder, director and officer of Prim8, with responsibility for web-based solutions. While there was no written agreement relating to Mr. Tisi’s share purchase (or other aspects of his joining Prim8), I am satisfied that the CMS became a Prim8 asset at that time, as indicated further below. Mr. Kirwin retained overall creative responsibility for Prim8. Ms. Wright was responsible for strategy and marketing. Mr. Kirwin and Ms. Wright continued to have day-to-day responsibility for financial matters, working with an accountant and a bookkeeper each of whom was retained externally.

[4] Also in 2010, Ian MacArthur joined Prim8 Group as an employee, working as a senior programmer. He reported to Mr. Tisi. Mr. MacArthur had worked with Mr. Tisi in the past on a contract basis, including when Mr. Tisi previously worked with Prim8 as a consultant. Prior to joining Prim8 as an employee, Mr. MacArthur was one of the programmers involved in writing the CMS under Mr. Tisi’s direction.

[5] In 2011, Mr. Tisi became concerned about financial management issues relating to Prim8. On two occasions, Mr. Tisi advanced personal funds to Prim8 to cover immediate needs. Mr. Tisi was also concerned about funds advanced from Prim8’s bank account to pay a contractor for renovations to the residence of Mr. Kirwin and Ms. Wright (subsequently repaid). Following discussions with Prim8’s bankers, Prim8 entered into a new line of credit and loan arrangements, cosigned by Mr. Kirwin, Ms. Wright and Mr. Tisi as well as Mr. Tisi’s wife (who had no other involvement in Prim8). In September 2011, Mr. Kirwin, in conjunction with Prim8’s external accountant and bookkeeper, provided Mr. Tisi with further financial information at his request. Over the following weeks, they responded to additional inquiries and concerns that Mr. Tisi raised.

[6] On November 28, 2011, the Canada Revenue Agency (CRA) issued a notice to Prim8 with respect to arrears of Harmonized Sales Tax (HST) of over $111,000, and froze Prim8’s bank accounts. Mr. Tisi declined to participate in a meeting arranged with CRA officials or to sign a waiver that would have made the three shareholders personally liable for unpaid HST.

[7] On December 7, 2011, Mr. Tisi attended at Prim8’s offices after hours and removed electronic office equipment. That equipment consisted of an iPhone, a computer, and other computer hardware that included the development server on which the development versions of client websites were saved, as well as other data storage devices. The next day, he advised Mr. Kirwin and Ms. Wright that he had taken his computer. On December 9, 2011, at a meeting between the three principals with their legal counsel, Mr. Tisi advised that he would be leaving Prim8, and would be offering web-based services through his own firm. Mr. Tisi was removed as a director of Prim8Group on January 10, 2012. Mr. MacArthur resigned on January 19, 2012, and subsequently joined Mr. Tisi’s competing firm.

[8] By the end of January 2012, Prim8 brought an action claiming damages and other relief against Mr. Tisi and Mr. MacArthur arising from their departure from Prim8, including the alleged wrongful removal of assets and restricting access to proprietary Prim8 information. Mr. Tisi and Mr. MacArthur defended the action, denying any liability. Mr. Tisi also counterclaimed against Prim8, adding Mr. Kirwin and Ms. Wright as defendants by counterclaim.

[9] Mr. Tisi and Mr. MacArthur were both represented by counsel during the pre-trial stages of the action, but were self-represented at trial. Prim8, Mr. Kirwin and Ms. Wright were represented by experienced trial counsel throughout. The trial lasted ten days, followed by closing submissions in writing.

[10] Prim8 seeks damages against the defendants (including punitive damages) for: breach of fiduciary duty; breach of duty of good faith and loyalty, including by failing to give reasonable notice of resignation; conversion; inducing breach of contract; conspiracy; and intentional interference with economic relations. Prim8 also seeks cancellation of Mr. Tisi’s Prim8 shares at a price to be determined by the court.

[11] Mr. Tisi and Mr. MacArthur deny that they breached any duty, conspired together or otherwise acted contrary to the interests of Prim8. Among other things, Mr Tisi claims that he acted to recover property that was his or that contained information that he needed to secure in the event of litigation.

[12] By way of counterclaim, Mr. Tisi seeks repayment of the balance of his loans to Prim8 and the payment of dividends. He also seeks an order that Prim8 provide financial statements in the form required by the Canada Business Corporations Act, and claims compensation under that statute as an “aggrieved person”. As well, he seeks a declaration that he is the rightful owner of the CMS. As against Mr. Kirwin and Ms. Wright, he seeks return of misappropriated funds and punitive damages.

[13] With the above background, the matters to be determined are therefore as follows:

1. Breach of duty – Are the defendants liable for breach of fiduciary duty or breach of duty of good faith and loyalty?
2. Conversion – Are the defendants liable for conversion of Prim8 property?
3. Inducing breach of contract – Is Mr. Tisi liable for inducing breach of Mr. MacArthur’s employment contract?
4. Conspiracy – Are the defendants liable for conspiracy?
5. Intentional interference with economic relations – Are the defendants liable for intentional interference with economic relations?
6. Prim8’s damages – If the defendants are liable, what are Prim8’s damages or other remedies?
7. Counterclaim – Are Prim8 or its principals liable to Mr. Tisi under the counterclaim?

[14] I will deal with each of these matters in turn.

II. Breach of duty

(a) Legal principles

[15] Employees owe their employers a general duty of good faith and loyalty (or fidelity) as an implied term of their employment contract. As indicated by the Supreme Court of Canada in RBC Dominion Securities v. Merrill Lynch, 2008 SCC 54, [2008] 3 S.C.R. 79, at paras. 19 and 22, that duty requires the employee to provide reasonable notice of termination of the employment relationship. An employee may be held liable to the employer for failing to provide such notice.

[16] In addition, a senior officer of a corporation owes the corporation a further duty. Under section 122(1) of the Canada Business Corporations Act, a director and officer of a corporation is required to act honestly and in good faith with a view to the corporation’s best interests. As indicated by the Supreme Court of Canada in Canadian Aero Service Ltd. v O’Malley, [1974] S.C.R. 592, at paras. 23-24, senior officers, like directors, owe a fiduciary duty to the corporation, which the Court describes as requiring “loyalty, good faith and avoidance of conflict of duty and self-interest.” The Court also indicated that senior officers were not “mere employees”, and that they had a “larger more exacting duty.”

[17] Prim8 claims that Mr. Tisi by his actions relating to his departure from Prim8 breached his fiduciary duty to Prim8 as a senior officer and director, as well as his duty of good faith and loyalty as a Prim8 employee. Prim8 claims that Mr. MacArthur also breached his duty to Prim8 requiring him to provide reasonable notice of the termination of his employment, thereby breaching the implied term of his employment contract under which he owed Prim8 a duty of good faith and loyalty.

[18] In order to consider the validity of Prim8’s position, it would be helpful to consider in more detail its position with respect to each defendant and the evidentiary basis for it. In this regard, I will deal separately below with Mr. Tisi and Mr. MacArthur.

(b) Breach of duty – Tisi

[19] According to Prim8, Mr. Tisi breached his duty to Prim8 by his actions relating to his departure from the firm. In particular, he removed corporate assets from Prim8 that were not his to take, that is, the computer and other equipment he removed from the premises on December 7, 2012. That equipment included the development server on which the development versions of client websites were saved, as well as two other data storage devices referred to as the Lacey hard drive and the Buffalo server. Those actions together with Mr. Tisi’s other actions (referred to further below) interfered with Prim8’s ability to service its clients. In particular, Prim8’s ability to make changes to clients’ websites when requested to do so was compromised. As result, among other things, Prim8 was required to commission the development of new content management software at a cost of over $120,000 in order to replace the CMS that Mr. Tisi appropriated.

[20] By way of background, various witnesses at the trial explained the process by which clients’ websites are created and periodic changes are made to their content. In addition to Mr. Kirwin, the plaintiff’s witnesses were Scott Teglasi and Serge Paquin. Mr. Teglasi was the Prim8 programmer hired to replace Mr. MacArthur. Mr. Paquin is the principal of Skycomp Solutions Inc., an internet service provider that Prim8 contracted to “host” most of the websites for Prim8 clients. The plaintiffs also called Ryan Conte, a business valuator formerly with Deloitte LLP, as an expert witness with respect to the valuation of Prim8’s shares. The only witnesses testifying for the defendants were Mr. Tisi and Mr. MacArthur.

[21] To a significant extent, there was no real dispute about the process by which websites were created for Prim8 clients and their content subsequently amended, and it is not necessary to go into undue technical detail. In general terms, development of a website is carried out on a development server, where it is tested before it “goes live” over the internet. A copy of the CMS computer code that constitutes the website is generally retained on the development server. A public user can access the website over the internet, but cannot change the content of the website. The client on whose behalf the website was created would have a password that would allow the client to make only very limited changes to website content (for example, changing a calendar date), using what is referred to as “front door” access to the website through the internet. If the client requires a more significant change to the website affecting its functionality, that change would be made by a Prim8 programmer, using “control panel” access (also referred to as “c-panel” or “back-door” access), which involves use of a further password. In order to make such a change to the website, the usual procedure is that the programmer would (i) copy the live website to the development server, (ii) make the required changes to the computer code, (iii) test the amended website to make sure it worked properly, and (iv) upload the amended website to the live site, replacing the previous version. As an alternative, if a copy of the website already existed on the development server, changes could be made to that version, and the amended version uploaded to replace the live site. However, there may be technical difficulties with using that approach if it turns out that the version of the website on the development server is not exactly the same as the version on the live site because of subsequent changes to the live version of the website.

[22] Based on the testimony of the plaintiff’s witnesses, plaintiff’s counsel alleged that Mr. Tisi breached his duty to Prim8 in a number of ways. Mr. Tisi removed from Prim8’s premises electronic equipment that did not belong to him and refused to return it. The equipment included the development server, which contained the development versions of client websites. By his actions, Mr. Tisi, with Mr. MacArthur’s cooperation, interfered with Prim8’s ability to make changes to client websites, including as described below.

(a) Mr. Tisi denied Prim8 access to the development versions of client websites stored on the development server except for a brief period in January 2012, when remote access was permitted. (b) Once Prim8 received access to the development versions of client websites, it did not consider it safe to assume that the development versions were identical to the “live” versions of the websites, once again impeding Prim8’s ability to make any required content changes. (c) Once Mr. MacArthur left Prim8 in January 2012, Prim8’s ability to obtain access to the “live” versions of client websites was impeded, since Mr. MacArthur failed to provide Prim8 with the required passwords before he left. (d) As well, commencing in November 2011, at Mr. Tisi’s direction, Mr. MacArthur “encrypted” client websites, using an encryption device (called an Ion Cube) that Mr. Tisi purchased for that purpose. Therefore, even if Prim8 was able to obtain access to live websites, the encryption provided a further impediment to making changes to website content.

[23] Mr. Tisi disputed the plaintiff’s position that Mr. Tisi had acted in a manner that breached his fiduciary duty to Prim8. According to Mr. Tisi, the property he removed from Prim8’s premises on December 7, 2011 included either property he brought into Prim8 when he joined the firm in 2010, or replacements for items that he had at the time joined Prim8 (for example, his iPhone). As further justification for taking possession of those items, he indicated that it was necessary to “secure” the information they contained to prevent it from being altered or deleted by Prim8 in the event of litigation. He also testified that the device contained information personal to him, which he did not want to fall into Prim8’s hands.

[24] As well, Mr. Tisi, supported by Mr. MacArthur, argued that he had not in fact impeded access to the contents of the websites of client websites. Among other things, they denied that any encryption of the live client websites was for the purpose of impeding Prim8’s access to those sites, arguing that it was Mr. Tisi’s policy as Prim8’s head of web solutions to encrypt access to the websites as a matter of course as an added security feature to prevent unauthorized access. As well, in January 2012, Mr. Tisi provided Prim8 access to the contents of the development server then in his possession, which should have enabled Prim8 to make any website changes that clients requested. They denied tampering with the development versions, but also indicated that it would not have been difficult or unduly time consuming to compare the development version with the live version to identify any differences between them. They also testified that versions of client websites were also available elsewhere within Prim8 for disaster recovery purposes, and could have been used by Prim8 as an alternative basis for making changes to client websites as required. They also took the position that the means was available to penetrate the encryption of the live websites, providing an additional means of access to their content.

[25] Considering the evidence as a whole, I have concluded that Prim8 has met its onus of establishing that by his actions relating to his departure from Prim8, Mr. Tisi breached his fiduciary duty as a senior officer and director of the corporation, as well as his duty of good faith and fidelity as a Prim8 employee. In particular, he converted to his own use Prim8 computer and other equipment that he removed from the premises in December 2011, including the development server containing development versions of Prim8’s client websites. I am satisfied that all the items were Prim8 assets when they were originally acquired or they became Prim8 assets when Mr. Tisi joined the firm as a shareholder and senior officer. With respect to the latter assets, while there was no written agreement relating to Mr. Tisi “buy-in” as a shareholder when he joined Prim8 in 2010, I am satisfied that the assets he used in his work (including the CMS) became Prim8 assets when he joined the firm. In any case, while some of the assets that Mr. Tisi removed from the premises (or predecessor devices) were assets that he brought with him when he joined Prim8, that was not true of all the items taken, including the development server and other data storage devices.

[26] As well, I am satisfied that by Mr. Tisi’s actions, Mr. Tisi impeded Prim8’s ability to make requested changes to client websites, with adverse financial consequence to Prim8. In that regard, I was not satisfied that there was a consistent Prim8 “policy” of encryption of client websites as a further protection against unauthorized access, as the defendants alleged. As well, I found to be unpersuasive and self-serving the defendants’ testimony that Prim8 was not harmed by these actions since Prim8 had alternate means of obtaining access to the content of Prim8 client websites. Even if Prim8’s ability to access client websites was not completely frustrated, it was clear that on the evidence that Prim8’s ability to service its clients was impeded by access restrictions to the development server, as well as by failure to provide passwords and otherwise restricting access to live versions of client websites. It is not a sufficient answer to say that Prim8 eventually figured it out, or that they should have figured it out sooner. By restricting access in this way, Mr. Tisi was clearly acting contrary to his duty to Prim8.

[27] One other aspect of Mr. Tisi’s actions is worth noting. The websites of Prim8’s clients were created and the contents managed using the CMS that Mr. Tisi brought to Prim8 when he joined the firm. By his actions and his words, it is clear that Mr. Tisi considered the CMS to be his, something that he was entitled to take with him when he left. To the extent that Mr. Tisi believes this reasoning to justify his actions, he is clearly mistaken.

(c) Breach of duty – MacArthur

[28] Prim8 claims that prior to Mr. MacArthur’s departure from Prim8, he acted in a manner that was not consistent with his duty of good faith and loyalty, thereby breaching the implied term of his employment contract under which he owed Prim8 that duty. As well, Prim8 claims that Mr. MacArthur also breached that duty by failing to provide reasonable notice of the termination of his employment. To be clear, those claims were based on Mr. MacArthur’s duty of good faith and loyalty (or fidelity) as a Prim8 employee. Prim8 did not allege that Mr. MacArthur owed a more expansive fiduciary duty to Prim8, nor did I see any basis that would support that position.

[29] As explained further below, I am satisfied that Mr. MacArthur breached his duty of good faith and loyalty in connection with his departure from Prim8. In that regard, he failed to give Prim8 reasonable notice of the termination of his employment, with resulting financial loss to Prim8. As well, he was in a position to mitigate the effect of his actions by providing information that Prim8 was entitled to receive, in particular CMS access codes (which included so-called ”super-user” or “root access” codes that provided an enhanced level of access), but did not do so. However, I am not satisfied that Prim8 met its onus of establishing that Mr. MacArthur breached his duty of good faith and loyalty in the period prior to his decision to leave Prim8 shortly before he resigned.

[30] Plaintiff’s counsel argued that Mr. MacArthur breached his duty prior to his departure from the firm by cooperating with and providing information to Mr. Tisi in contravention of express direction to the contrary. As previously noted, at a meeting on December 9, 2011, Mr. Tisi confirmed to Mr. Kirwin and Ms. Wright that he was leaving Prim8. Thereafter, there was no dispute that Prim8 staff was promptly advised that Mr. Tisi had “decided to go in a different direction” (in the words used in an email from Ms. Wright to Prim8 staff on Sunday, December 11, 2008). Mr. MacArhur was also aware that Mr. Kirwin and Ms. Wright were to be copied on any further email communication with Mr. Tisi. However, Mr. Tisi did not immediately sever his connection with Prim8. For example, he continued to communicate with an outside consultant to document Prim8’s claim for a tax credit from the Canada Revenue Agency under the Scientific Research and Experimental Development Tax Incentive Program, and in this regard, both before and after December 9, 2011, Mr. Tisi caused time dockets for previous periods to be entered into a computer program to document Prim8’s entitlement to tax credits. As well, he continued to communicate with Mr. MacArthur about specific issues that arose with various client websites that required immediate attention. That communication was evident from the electronic communication placed in evidence at trial, and also included oral communication between Mr. MacArthur and Mr. Tisi by Skype and telephone.

[31] In all the circumstances, including the timing of the communications between Mr. Tisi and Mr. MacArthur, plaintiff’s counsel argued that I should draw the inference that Mr. MacArthur was an active participant in Mr. Tisi’s activities in the period after December 9, 2011, constituting a breach of his duty of good faith and loyalty prior to his departure from Prim8. I do not agree with plaintiff’s counsel that I should draw that inference. While employed at Prim8, Mr. MacArthur reported to Mr. Tisi as the senior officer responsible for web solutions and took direction from him in the performance of his duties. While he was clearly aware on or after December 11, 2011 that Mr. Tisi would be “moving a different direction”, Mr. Tisi did not leave immediately. Mr. MacArthur continued to work with Mr. Tisi to a limited extent on Prim8 business, including the servicing of Prim8 clients. Mr. Tisi in fact continued to be a director and officer until removed shortly before Mr. MacArthur himself resigned.

[32] As indicated in an email exchange between Mr. MacArthur and his girlfriend on January 17, 2012 (two days before he resigned), Mr. MacArthur continued to feel torn about his future with Prim8 before reaching a decision to resign after a long conversation with Mr. Tisi earlier that day. In that conversation, Mr. Tisi and Mr. MacArthur discussed a resignation “strategy”, the execution of which, in my view, led to a breach of Mr. MacArthur’s duty to Prim8 (as explained further below). However, in all the circumstances, I am not satisfied that Mr. MacArthur breached his duty prior to that time.

[33] Turning now to the circumstances of Mr. MacArthur’s resignation, I am satisfied on the evidence that Mr. MacArthur failed to provide reasonable notice of his termination of employment, thereby breaching the duty of good faith and loyalty he owed to Prim8 as an implied term of his employment contract. It is not disputed that Mr. MacArthur resigned by letter to Prim8 on January 19, 2012. Consistent with the strategy he discussed with Mr. Tisi on January 17, Mr. MacArthur then went quiet for a period of time, during which he did not respond to Prim8’s attempts to reach him, and did not provide requested information, including access codes. Thereafter, he provided little or no assistance to Prim8 in its attempts to access client websites and to obtain other information that would have assisted Prim8’s continuing staff in carrying out the duties that Mr. MacArthur previously performed.

[34] Consistent with the Supreme Court of Canada’s decision RBC Dominion Securities v. Merrill Lynch, Mr. MacArthur was required to provide reasonable notice of termination of his employment relationship with Prim8. He did not do so. He also failed to provide Prim8 with information that it was entitled to receive, which, if he had, would have mitigated the consequences of his failure to provide reasonable notice of his termination. As a result, Prim8’s ability to service its clients was impeded, with adverse financial consequences to Prim8.

III. Conversion

[35] Are the defendants liable for conversion of Prim8 property?

[36] As indicated by Justice Diamond of this court in DCM Erectors Inc. v. Ottawa (City), 2015 ONSC 5171, [2015] O.J. No. 4391, at para. 46, a person is liable for the tort of conversion if that person wrongfully interferes with the goods of another in a manner that is inconsistent with the rights of the true owner.

[37] As previously indicated, I am satisfied that the property Mr. Tisi took from the Prim8 premises on December 7, 2011 were the assets of Prim8. Prim8 acquired them directly or they became Prim8 assets when Mr. Tisi joined the firm. Mr. Tisi refused to return them to Prim8 after demand for their return. In all the circumstances, I am satisfied that he is liable to Prim8 for conversion of those assets.

[38] I have reached the same conclusion with respect to the CMS, which became a Prim8 asset when Mr. Tisi joined Prim8 as a shareholder and senior officer. As indicated previously, Mr. Tisi by his actions impeded Prim8’s access to the CMS, causing financial harm to Prim8. In all the circumstances, I am satisfied that he is liable for conversion of that Prim8 asset.

[39] Turning to Mr. MacArthur, I am not satisfied on the evidence that he had any prior knowledge of Mr. Tisi’s intention to remove Prim8 assets. While he knew that the ownership of the assets was a matter of dispute between Mr. Tisi and Prim8, the evidence does not establish that he had sufficient knowledge of the relationship between Mr. Tisi and Prim8 to conclude that Mr. Tisi had no right to the assets. In all the circumstances, I see no sufficient basis for concluding Mr. MacArthur was also liable for conversion of those assets.

IV. Inducing breach of contract

[40] Is Mr. Tisi liable for inducing breach of Mr. MacArthur’s employment contract?

[41] As indicated by the Ontario Court of Appeal in Drouillard v. Cogeco Cable Inc., 2007 ONCA 322, 86 O.R. (3d) 431, at para. 26, in order to establish the tort of inducing breach of contract, Prim8 would have to establish the following four elements:

(a) Prim8 had a valid and enforceable employment contract with Mr. MacArthur; (b) Mr. Tisi was aware of the existence of that contract; (c) Mr. Tisi intended to and did procure the breach of the contract; and (d) As a result of the breach, Prim8 suffered damages.

[42] In this case, there is no dispute that Prim8 had an enforceable employment contract with Mr. MacArthur that included a duty of good faith and loyalty as an implied term. Mr. Tisi was clearly aware of the contract as a senior officer of Prim8. As well, I have already found that Mr. MacArthur breached of an implied term of that contract by failing to provide reasonable notice of his termination, causing adverse financial consequences to Prim8. Therefore, the first two elements and the fourth element of the tort of inducing breach of conduct have been established. As a result, the remaining issue is whether Mr. Tisi intended to and did procure the breach of the contract, the third element of the tort.

[43] In the Drouillard decision, the Court provided further guidance with respect to the third element, stating that in order to satisfy this element, “the procurement of the breach must be intended and direct.” The Court also quoted the following passage from John G. Fleming’s text, The Law of Torts:

Merely that the breach was a natural consequence of his conduct is not sufficient: he must have intended it. Not that he need have actually known the precise terms of it or that his object could be accomplished only through its breach. If – turning a blind eye – he went about it regardless of whether it would involve a breach, he will be treated just as if he had knowingly procured it. Indifference is equated with intent.

[44] In this case, I am satisfied that the third element of the tort of inducing breach of contract has been satisfied, that is, Mr. Tisi intended to and did procure the breach. I have already found that Mr. MacArthur in fact breached his contract by failing to give Prim8 reasonable notice of his termination. As evidenced by Mr. MacArthur’s email exchange with his girlfriend, Mr. Tisi and Mr. MacArthur discussed the specific strategy of resigning that Mr. MacArthur adopted, that is, deliver a letter of resignation and then to “hide for a few hours”, in order to avoid “high pressure tactics” to reverse his decision. Mr. MacArthur also noted in his email to his girlfriend that “Even though [Mr. Tisi] said he wasn’t pressuring me he was.” By way of explanation, Mr. MacArthur testified that he may have felt pressure from Mr. Tisi (whether or not Mr. Tisi intended it) because of personal loyalty to Mr. Tisi, but in any case he decided to leave Prim8 of his own free will. Even accepting that statement at face value, I am satisfied that Mr. Tisi clearly wanted Mr. MacArthur to leave Prim8 with immediate effect, and discussed with Mr. MacArthur a strategy for doing so shortly before Mr. MacArthur resigned. His involvement was more than “indifference” or “turning a blind eye”. He had an active role in the process. In all the circumstances, I consider this to be a clear case for treating Mr. Tisi “just as if he knowingly procured” a breach of Mr. MacArthur’s employment contract.

[45] Accordingly, I find that Mr. Tisi induced Mr. MacArthur to breach his employment contract with Prim8.

IV. Conspiracy

[46] Are the defendants liable for conspiracy?

[47] Prim8 alleges that the defendants are liable for civil conspiracy in this case. In its 1983 decision in Canada Cement LaFarge Ltd. v. British Columbia Lightweight Aggregate Ltd., [1983] 1 S.C.R 452, at 471, the Supreme Court of Canada identified two categories of civil conspiracy. Two or more defendants who act in combination engage in civil conspiracy where:

(a) The predominant purpose of the defendants’ conduct is to cause injury to the plaintiff, whether the means used by the defendants are lawful or unlawful; or (b) If the defendants’ conduct is unlawful, the conduct is directed toward the plaintiff, and the defendants should know that in the circumstances injury to the plaintiff is likely to and does result.

[48] The second category of civil conspiracy was more recently considered by the Ontario Court of Appeal in its 2011 decision in Agribrands Purina Canada Inc. v. Kasamekas, 2011 ONCA 460, 106 O.R. (3d) 427, at para. 26. The Court referred to this category of civil conspiracy as unlawful conduct conspiracy, and identified the following elements of the cause of action:

(a) The defendants act in combination, that is, in concert, by agreement or with a common design; (b) Their conduct is unlawful; (c) Their conduct is directed towards the plaintiff; (d) They should know that, in the circumstances, injury to the plaintiff is likely to result; and (e) Their conduct causes injury to the plaintiff.

[49] In Agribrands, the Court also indicated that there are two separate categories of conduct that can be described as comprising the unlawful conduct required for unlawful conduct conspiracy: (i) conduct amounting to an independent tort or other actionable wrong; and (ii) conduct not actionable in itself, including criminal or quasi-criminal conduct. The Court went on to indicate as follows:

What is required, therefore, to meet the "unlawful conduct" element of the conspiracy tort is that the defendants engage, in concert, in acts that are wrong in law, whether actionable at private law or not. In the commercial world, even highly competitive activity, provided it is otherwise lawful, does not qualify as "unlawful conduct" for the purposes of this tort.

[50] Prim8 takes the position that a finding of civil conspiracy is supportable in this case on the basis of either category articulated by the case law. In the plaintiff’s closing submissions, plaintiff’s counsel argued among other things that the defendants acted in concert to commit wrongful acts. Those acts included having Mr. MacArthur leave Prim8’s employment without notice and then hiding, thereby inducing Mr. MacArthur’s breach of contract and causing economic harm to Prim8, as well as denying or interfering with Prim8 access to its property. Plaintiff’s counsel also argued that the predominant purpose of Prim8’s actions was to cause harm to Prim8, and that harm did in fact occur.

[51] Having considered the evidence and the submissions of counsel, I have concluded that Prim8 has not established a civil conspiracy of the first category in this case. However, I am satisfied that there was an unlawful conduct conspiracy relating to Mr. MacArhur’s departure from Prim8, as describe further below.

[52] With respect to the first category of civil conspiracy, I have concluded that Prim8 has not established that the predominant purpose of the defendants’ conduct was to cause injury to Prim8. Mr. Tisi decided to leave Prim8, and to take with him what he believed to be his property or property he was otherwise entitled to secure. I have found that he was wrong in law to act as he did, and that Prim8 was economically harmed as a result. However, there is no direct evidence that his primary purpose was to cause injury to Prim8, nor do not consider the evidence to be sufficient to support an inference that such was the case. I have reached the same conclusion with respect to Mr. MacArthur as well.

[53] With respect to the second category of civil conspiracy, I have concluded that Prim8 has established the elements of an unlawful conduct conspiracy in connection with Mr. MacArthur’s departure from Prim8. However, I am not satisfied that Prim8 established that there was an unlawful conduct conspiracy in the period prior to Mr. MacArthur’s decision to leave Prim8 shortly before he resigned.

[54] Dealing first with the circumstances of Mr. MacArthur’s resignation, I am satisfied on the evidence that as of January 17, 2012, two days before Mr. MacArthur’s resignation, the defendants agreed on a strategy whereby Mr. MacArthur would deliver a letter of resignation and thereafter not return to work. He would go quiet for a period of time, not responding to requests for information, including access codes that would have facilitated access to client websites. In so doing, Mr. MacArthur engaged in unlawful conduct, that is, he acted contrary to his duty of good faith and loyalty to Prim8 and thereby breached an implied term of his employment contract. Mr. Tisi was also engaging in unlawful conduct, that is, he breached his fiduciary duty to Prim8 and induced Mr. MacArthur to breach his employment contract. Their conduct was directed toward Prim8. They should have known that Prim8 was likely to suffer economic loss as a result, and Prim8 suffered such loss. The elements of an unlawful conduct conspiracy have therefore been established.

[55] As previously indicated, however, I am not satisfied that Prim8 established that there was an unlawful conduct conspiracy in the period prior to Mr. MacArthur’s decision to leave Prim8 shortly before he resigned.

[56] Plaintiff’s counsel argued that the evidence before the court supported the inference that from at least some time in December 2011, after Prim8 staff was notified that Mr. Tisi would be “moving in a different direction”, the defendants were acting in concert as part of an unlawful conduct conspiracy against Prim8. This argument parallels Prim8’s position relating to Mr. MacArthur’s alleged breach of duty prior to his departure from Prim8. Plaintiff’s counsel argued that I should draw the inference that there was an agreed course of action between the defendants based on the Skype and other communications between them during December 2011 and January 2012. As was the case relating to Mr. MacArthur’s alleged breach of duty during that period, I am not prepared to draw that inference.

[57] As indicated previously, while employed at Prim8, Mr. MacArthur reported to Mr. Tisi and took direction from him in the performance of his duties. While he was aware on or after December 11, 2011 that Mr. Tisi would be leaving Prim8, Mr. Tisi did not leave immediately. Mr. MacArthur continued to work with Mr. Tisi to a limited extent on Prim8 business, including the servicing of Prim8 clients. Mr. Tisi continued to be a director and officer until removed shortly before Mr. MacArthur himself resigned. As evidenced by Mr. MacArthur’s email exchange with his girlfriend on January 17, 2012, two days before he resigned, he had clearly cast his lot with Mr. Tisi as of then. However, I do consider the evidence to be sufficient to conclude that he did so prior to that time.

V. Intentional interference with economic relations

[58] Are the defendants liable to Prim8 for intentional interference with economic relations?

[59] According to Prim8, Mr. Tisi is liable to Prim8 for the tort of intentional interference with economic relations. In that regard, Prim8 relied on the 2007 Ontario Court of Appeal decision in Drouillard v. Cogeco Cable Inc., which indicated that the plaintiff needed to prove the following elements in order to establish that tort:

(a) The defendant intended to injure the plaintiff’s economic interests; (b) The interference was by illegal or unlawful means; and (c) The plaintiff suffered economic loss as a result.

[60] In the plaintiff’s written submissions, plaintiff’s counsel argued that Mr. Tisi clearly intended to injure Prim8 when he unlawfully appropriated Prim8’s assets, both hardware and software. He refused to return those assets and otherwise interfered with Prim8’s ability to access the CMS. As a result, Prim8 suffered economic loss. Therefore, the elements of the tort of intentional interference with economic relations were established.

[61] The tort of intentional interference with economic relations was more recently considered by the Supreme Court of Canada in its 2014 decision in A.I. Enterprises Ltd. v. Bram Enterprises Ltd., 2014 SCC 12, [2014] 1 S.C.R. 177. While that decision did not take issue with the elements of the tort as identified in the Drouillard decision, Justice Cromwell analyzed in greater detail the rationale for that tort and provided direction with respect to its application. In his introductory summary, Justice Cromwell provided the following direction with respect to the scope of liability for that tort:

In light of the history and rationale of the tort and taking into account where it fits in the broader scheme of modern tort liability, the tort should be kept within narrow bounds. It will be available in three-party situations in which the defendant commits an unlawful act against a third party and that act intentionally causes economic harm to the plaintiff. (Other torts remain relevant in two-party situations, such as, for example, the tort of intimidation.)

[62] By way of further explanation, Justice Cromwell stated as follows, referring to a 1793 English decision to indicate the narrow application of the tort:

The unlawful means tort creates a type of "parasitic" liability in a three-party situation: it allows a plaintiff to sue a defendant for economic loss resulting from the defendant's unlawful act against a third party. Liability to the plaintiff is based on (or parasitic upon) the defendant's unlawful act against the third party….

An old case will serve as an example. The defendant, the master of a trading ship, fired its cannons at a canoe that was attempting to trade with its competitor, the plaintiffs' trading ship, in order to prevent it from doing so. The defendant was held liable, Lord Kenyon being of the opinion that these facts supported an action: Tarleton v. M'Gawley (1793), Peake 270, 170 E.R. 153. The plaintiffs were able to recover damages for the economic injury resulting from the defendant's wrongful conduct toward third parties (the occupants of the canoe) which had been committed with the intention of inflicting economic injury on the plaintiffs.

[63] As noted previously, the submissions of plaintiff’s counsel with respect to Mr. Tisi’s liability for this tort are based on his alleged wrongful conduct against Prim8 that caused harm to Prim8. I have already held that Mr. Tisi is liable to Prim8 for that conduct on other grounds. However, as indicated in the A.I. Enterprise Inc. decision, liability for interference for economic relations must be based on a wrongful act against a third party that caused harm to Prim8. On that basis, Prim8 has not established that Mr. Tisi is liable to Prim8 on the basis of interference with economic relations.

VI. Prim8’s damages

[64] If the defendants are liable, what are Prim8’s damages or other remedies?

[65] In my reasons above, I have found the defendants liable to Prim8 on the following bases:

(a) Mr. Tisi is liable for (i) breach of fiduciary duty, (ii) the tort of inducing breach of contract, and (iii) the tort of conversion; and (b) Both defendants are liable for (i) breach of contract (implied term imposing duty of good faith loyalty), and (ii) the tort of conspiracy.

[66] The basis for calculation of compensatory damages may vary for different causes of action. In general terms, the measure of damages for breach of contract is the amount sufficient to place the plaintiff in the same position in which it would have been had the contract been performed. For tort and equity claims, the policy objective is to restore the plaintiff to the position it would have occupied but for the breach. However, for equity claims (including breach of trust and breach of fiduciary duty), the amount of damages may be higher since the measure of damages is the actual loss to the trust estate. In addition, for the tort of inducing breach of contract, damages are at large, which allows the plaintiff to be awarded damages without proof of specific damage. As well, the court has the discretion to award punitive damages in some circumstances, as indicated further below.

[67] In the plaintiff’s written submissions, based on the evidence presented at trial, Prim8’s counsel calculated Prim8’s damages claim as follows:

Create replicas of encrypted live websites (personnel time) S. Teglasi (55%) $ 33,578 D. Doyle (50%) 17,916 P. Kirwin (20%) 9,500 D. Wright (10%) 4,750 $ 65,744 Replace development server & licensed Adobe software 1,667 Replace CMS 120,000 Damages at large (for inducing breach of contract) 25,000 Damages for fiduciary duty breach Tisi’s 2012 billings to former Prim8 website clients (actual) 23,467 Tisi’s 2012 billings to former Prim8 website clients (estimated) 14,190 Prim8’s billings to website client written off after Tisi left 9,040 46,697 $259,108

[68] By way of explanation for the first category of damages Prim8 claimed, Mr. Kirwin testified that in the period after the departures of Mr. Tisi and Mr. MacArthur, Prim8 personnel were required to spend a significant amount of time in the creation of replicas of client websites to which they were unable to obtain unimpeded access because of the wrongful conduct of the defendants. The defendants disputed responsibility for any part of the cost Prim8 incurred for this purpose. However, I am satisfied that costs of this nature resulted from the defendants’ wrongful conduct and it is appropriate that they form the basis for calculating damages for which the defendants should be jointly and severally responsible. The amounts claimed were estimates only, however, and I consider it fair to conclude that the estimates were somewhat on the high side. In all the circumstances, I would fix the amount of such costs at $40,000.

[69] With respect to the balance of the items referred to in the above table, I have concluded that Mr. Tisi alone (and not Mr. MacArthur) would be liable to Prim8 for such amounts, to the extent proven. Prim8’s claim for damages for breach of fiduciary duty was against Mr. Tisi alone, as was the claim for inducing breach of contract. As well, I have found Mr. Tisi alone liable for conversion of Prim8 assets, including the development server and the CMS.

[70] Based on the evidence before me, I assess the additional damages for which Mr. Tisi is liable at $51,167. This amount was calculated based on the following elements: (i) $1,167, being the full amount claimed for replacement of the development server (including licensed Adobe software), (ii) $30,000 for development of new content management software, and (iii) $20,000 for breach of fiduciary duty.

[71] With respect to the amount claimed to replace the CMS, I am satisfied that to some degree, Prim8’s need to develop new content management software was attributable to Mr. Tisi’s wrongful act of conversion. However, I was not satisfied that Mr. Tisi should be responsible for the full amount that Prim8 estimated it spent developing new content management software, which included use of contracted personnel in Europe. While the evidence relating to the efficacy of the CMS that Mr. Tisi converted was not conclusive, there seemed to be a consensus that the CMS developed over time as somewhat of a patchwork, with resulting technical issues. Both Prim8 and Mr. Tisi moved away from continued use of it after Mr. Tisi’s departure. In my view, it is reasonable to conclude that new content management software would have been required in the future in any event. In all the circumstances, I consider $30,000 to be the appropriate amount to attribute to Mr. Tisi’s wrongful act of conversion of the CMS.

[72] Turning to the amount Prim8 claimed from Mr. Tisi for breach of fiduciary duty, that amount was based on billings that Mr. Tisi made to Prim8 clients in the year following his departure from Prim8, both actual amounts (where invoices were disclosed by Mr. Tisi) and amounts estimated based on previous Prim8 billings to those clients (where invoices were not disclosed). The amount claimed also included an account written off when a client refused to pay a Prim8 account for services that Mr. Tisi rendered prior to leaving Prim8.

[73] I accept that as a fiduciary, Mr. Tisi was accountable to Prim8 to the extent that he benefited from conduct (including after his departure) that breached his fiduciary duty to Prim8. For example, while there was no conclusive direct evidence that Mr. Tisi was soliciting Prim8 clients for his own benefit prior to leaving the firm, I consider it reasonable to infer that he did so to some degree, including in relation to clients for whom he performed services prior to joining Prim8. As well, as noted by plaintiff’s counsel in his submissions, Prim8 would inevitably have incurred additional economic loss as a result of Mr. Tisi’s breach of fiduciary duty that is difficult to quantify. In all the circumstances, I assess Prim8 damages arising from Mr. Tisi’s breach of fiduciary duty at $20,000.

[74] In calculating the additional damages payable by Mr. Tisi, I have not included any additional amount for damages at large for inducing breach of contract. While such damages amount may be awarded without proof of specific damage, in all the circumstances, I consider the amount already awarded for compensatory damages to be sufficient in this case. Therefore, I do not consider it appropriate to award an additional amount for damages at large.

[75] Prim8 also claimed an additional amount from the defendants for punitive damages. As indicated by the Supreme Court of Canada in Whiten v. Pilot Insurance Co., 2002 SCC 18, [2002] 1 S.C.R. 595, at para. 94, an award of punitive damages is very much the exception rather than the rule. The discretion to award them should be most cautiously exercised. Punitive damages are imposed only if there has been high-handed, malicious, arbitrary or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behaviour. As well, punitive damages are awarded only where compensatory damages, which are punitive to some extent, are insufficient to accomplish the objectives of retribution, deterrence and denunciation, ordinarily the purview of criminal or quasi-criminal proceedings.

[76] Plaintiff’s counsel argued that the high threshold established for an award of punitive damages had been exceeded in this case. He alleged in particular that the action of Mr. Tisi, abetted by Mr. MacArthur, had been high-handed and motivated by a desire to cripple Prim8, and did in fact injure Prim8.

[77] While I have found that Prim8 was entitled to damages from the defendants for their wrongful conduct, I do not agree that an additional amount should be awarded as punitive damages. In particular, I do not agree that either defendant was motivated by a desire to cripple Prim8, which in fact continues to carry on business. In all the circumstances, I consider the amounts already awarded as compensatory damages to be sufficient without an additional award of punitive damages.

[78] In the Statement of Claim, Prim8 also requests an order requiring Mr. Tisi to deliver to Prim8 for cancellation his shares at a price to be determined by the court having regard for all the circumstances, including Mr. Tisi’s unlawful actions and their adverse impact on the value of Prim8. In the plaintiff’s written submissions, plaintiff’s counsel repeats this claim, without citing any authority or making further submissions. Attached as an appendix to the plaintiff’s written submissions is Part XX (Remedies, Offences and Punishment) of the Canada Business Corporations Act, with portions of sections 241 and 243 highlighted, which I assume to be the basis for the remedy claimed.

[79] Under section 241, the so-called oppression remedy, a “complainant” may apply to the court for certain remedies in respect of specified conduct, including an order directing the issue or exchange of securities (section 241(3)(d)) and an order directing the corporation to purchase a security holder’s securities (section 241(3)(f)).

[80] Under section 243, if the name of a person is alleged to be wrongly entered or retained in the security registers or other records of a corporation, the corporation, a security holder or any “aggrieved person” may apply to a court for an order that the registers or records be rectified. On such an application, the court may, among other things, make an order determining the right of a party to have their name entered or retained in the registers or records (section 243(3)(c)) and an order compensating a party who has incurred a loss (section 243(3)(d)).

[81] Neither section 241 nor 243 has any application in this case. Among other things, Prim8 does not fall within the definition of a “complainant” for purposes of the oppression remedy in section 241. With respect to section 243, there is no basis for concluding that Mr. Tisi’s name was wrongly entered or retained on Prim8’s security register. According, I see no legal basis for making an order requiring the corporation to purchase Mr. Tisi’s Prim8 shares for cancellation.

[82] Had I decided that there was a legal basis for making such an order, I would have set the value of Mr. Tisi’s shares at $20,000. The evidentiary basis for that amount was the expert report of Deloitte LLP and the testimony of Ryan Conte, which valued all the shares of Prim8 at $60,000 as at December 7, 2011.

VII. Counterclaim

[83] Are Prim8 or its principals liable to Mr. Tisi pursuant to the counterclaim?

[84] By way of counterclaim, Mr. Tisi seeks the following relief from Prim8:

(a) Repayment of the balance of loans he made to Prim8 in 2011 in the amount of $2,500; (b) Payment of dividends in the amount of $10,000; (c) An order that Prim8 provide financial statements in the form required by the Canada Business Corporations Act; (d) An order for compensation under the Canada Business Corporations Act as an “aggrieved person” in the amount of $100,000; and (e) A declaration that he is the rightful owner of the CMS.

[85] As against Mr. Kirwin and Ms. Wright, Mr. Tisi seeks return of misappropriated funds in an amount to be determined and punitive damages in the amount of $250,000.

[86] As previously indicated, Mr. Tisi’s counterclaim arose for concerns that Mr. Tisi expressed about financial management issues for Prim8 commencing in 2011. Mr. Tisi advanced personal funds to Prim8 in February and July 2011 totaling $15,000 to cover Prim8’s immediate needs. According to Mr. Tisi, all but $2,500 of that amount had been repaid before Mr. Tisi left Prim8. Mr. Tisi was also concerned about funds advanced from Prim8’s bank account to pay a contractor working on renovations to the residence of Mr. Kirwin and Ms. Wright (since repaid). New loan arrangements were entered into with Prim8’s bankers, pursuant to which Mr. Tisi and his wife were required to co-sign with Mr. Kirwin and Ms. Wright. In the process, Mr. Tisi sought more detailed information about Prim8’s financial affairs, as evidenced by various email and other exchanges involving Mr. Tisi, Mr. Kirwin, Ms. Wright and Prim8’s external accountant and its bookkeeper. As previously indicated, Prim8 came under further financial pressure when CRA froze its bank account for nonpayment of arrears of HST in late November 2011.

[87] With that background, it was understandable that Mr. Tisi had concerns about financial management issues at Prim8, and sought further information relating to its financial affairs. While the response he got was sometimes less than satisfactory to him, Mr. Kirwin indicated that he had similar difficulties obtaining information from Prim8’s external auditor and bookkeeper. Based on the evidence before the court, I saw no sufficient basis for concluding that Prim8 was withholding financial information to which Mr. Tisi was entitled as a shareholder and senior officer.

[88] Based on the information ultimately placed before the court in evidence, I found no sufficient basis for giving effect to Mr. Tisi’s claims for relief under the counterclaim, other than with respect to the repayment of the remaining amount of Mr. Tisi’s loans to Prim8 in the amount of $2,500. I am otherwise dismissing Mr. Tisi’s counterclaim. I will address each of the other items of relief claimed in turn below.

[89] With respect to the claim for $10,000 in dividends, as a matter of law, no amount is payable by way of a dividend unless or until a dividend is declared by the board of the corporation. There was no evidence before the court that Prim8’s board declared a dividend that remains unpaid. Accordingly, there is no evidentiary basis for Mr. Tisi’s claim.

[90] With respect to Mr. Tisi’s request for financial statements in proper form, Mr. Kirwin testified that such financial statements were prepared by Prim8’s external accountant, copies of which were placed in evidence. In all the circumstances, I see no grounds for making the requested order.

[91] With respect to Mr. Tisi’s claim against Prim8 for $100,000 as an “aggrieved person”, I also see no evidentiary basis for that claim. In this regard, I took into account, among other things, the concerns that Mr. Tisi expressed in his testimony about what he considered to be irregularities in the shareholder loan accounts. However, I found to be credible the explanation Mr. Tisi received, that is, that the shareholder loan accounts were used as a suspense account, with adjusting entries at year end when the annual financial statements were prepared. I saw no basis for concluding that any misappropriation or other wrongdoing occurred, nor did I see any other grounds for making the requested order.

[92] Addressing Mr. Tisi’s request for a declaration that he is the rightful owner of the CMS, I have already found that Prim8 was the owner of the CMS, not Mr. Tisi, for the reasons previously indicated. As well, as previously indicated, the evidence does not support Mr. Tisi’s allegations of misappropriation against Mr. Kirwin or Ms. Wright, nor would any award of punitive damages against them be justified.

VIII. Conclusion

[93] For the foregoing reasons, judgment will issue as follows:

1. The defendants are jointly and severally liable to Prim8 for damages in the amount of $40,000;
2. Mr. Tisi is liable to Prim8 for damages in the additional amount of $51,167;
3. Prim8 is entitled to prejudgment interest on the forgoing amounts at the statutory rate, commencing February 1, 2012;
4. Under the counterclaim, Prim8 is liable to Mr. Tisi in the amount of $2,500, plus prejudgment interest at the statutory rate commencing February 1, 2012;
5. The issue of costs shall be determined following written submissions; and
6. The balance of the parties’ claims under the Statement of Claim and the Counterclaim are dismissed.

[94] If the parties cannot agree on costs, the plaintiff may serve and file brief written submissions (not to exceed three pages) together with a bill of costs and any pertinent offers within 21 days. The defendants will have 21 days after receipt of the plaintiffs’ submissions to respond by brief written submissions. The plaintiff may reply by brief written submissions within seven days. All such submissions are to be forwarded to the Trial Coordinator and me at at 59 Church Street, 4th Floor, St. Catharines ON, L2R 7N8. If no submissions are received within the specified timeframe, the parties will be deemed to have settled the costs issue.

The Honourable Mr. Justice R.A. Lococo

Released: September 13, 2016