Court File and Parties
COURT FILE NO.: CV-16-561889 DATE: 20170705
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
LOUIE COSOLO Plaintiff – and – GEO. A. KELSON LIMITED Defendant
COUNSEL: Patrick J. Monaghan and Mei Li (Michelle) Fan for the Plaintiff Geoff R. Hall and Patrick Pengelly for the Defendant
HEARD: May 30, 2017
PERELL, J.
REASONS FOR DECISION
A. Introduction
1The Plaintiff, Louie Cosolo, is an engineer, and between 2005 and October 30, 2015, he was employed by the Defendant engineering firm Geo. A. Kelson Limited (“Kelson”), ultimately achieving the position of Vice President, Supply Chain & Procurement. During his employment, he acquired and sold 43,000 Class E common shares of Kelson for $891,820, for which he was to receive ten installment payments of $89,182 plus interest on the outstanding balance. He received the first installment before his employment ended, but in 2016, after he was no longer an employee and had become the CEO of a rival engineering firm, the installments stopped. Kelson refused to make further payments and it alleged that he had breached his fiduciary duties.
2Mr. Cosolo sued Kelson for $802,638 plus interest for breach of contract, and Kelson defended and asserted by way of defence an overtopping right of setoff for damages from the breach of fiduciary duty.
3Mr. Cosolo now moves for a summary judgment, which is resisted by Kelson, which submits that there are genuine issues for trial.
4For the reasons that follow, I grant judgment to Mr. Cosolo for $750,000, all inclusive.
B. Evidentiary Record
5Mr. Cosolo supported his motion for summary judgment with the following evidence:
a. An expert’s report dated February 13, 2017 from Gerry Bowman, CPA, CMA, CFF, of Matson Driscoll & Damico Ltd., a forensic accounting firm. Mr. Bowman was cross-examined. b. An affidavit dated March 16, 2017 from Joseph Daniel La Civita, a former Kelson employee. He was cross-examined. c. Affidavits from Mr. Cosolo dated February 13 and March 16, 2017. Mr. Cosolo graduated from the University of Toronto in 1983 with a degree in engineering and he obtained his P. Eng. designation in 1997. He was cross-examined. d. Affidavit dated March 16, 2017 from Craig Fleary, a former Kelson employee. He was cross-examined. e. Affidavit dated March 16, 2017 from Payam Rahmany, a former Kelson employee. He was cross-examined. f. Affidavit dated March 16, 2017 from Jo Benedict Reyes, a former Kelson employee. He was cross-examined. g. Affidavit dated March 16, 2017 from Eric Vainio, a former Kelson employee. He was cross-examined.
6Kelson resisted the summary judgment motion with the following evidence:
a. Affidavit dated February 28, 2017 from Vesna Hadzimustafic, a current Kelson employee. Ms. Hadzimustafic has a M.A. in mechanical engineering and is a Senior Project Manager for Kelson. b. Affidavit dated March 1, 2017 from Michelle Kelson. Ms. Kelson is the Chief Executive Officer of Kelson. She was cross-examined. c. Affidavit dated March 1, 2017 from Mark Schoenrock, a current Kelson employee. Mr. Schoenrock has a degree in civil engineering and is a Senior Project Manager for Kelson. d. Affidavit dated March 7, 2017 from Carolyn Seaquist, attached to which was an expert’s report dated March 5, 2017. Ms. Seaquist is a Chartered Accountant licensed to practice in Ontario, and a partner in the Litigation Accounting and Valuation Services Group at Collins Barrow LLP in Toronto.
C. Legal Background – The Duties of a Departing Employee
7The nucleus of this summary judgment motion is whether there are genuine issues for trial about whether Mr. Cosolo breached his fiduciary duties owed to Kelson or misappropriated Kelson’s confidential information. There is also a significant issue about whether a trial is necessary to determine the present value of Mr. Cosolo’s claim for payment of the outstanding installments of the purchase price for the common shares. There is also a legal issue about whether Mr. Cosolo is entitled to damages for breach of contract or something akin to specific performance of the installment payment contract.
8Before describing the factual and procedural background, it is helpful and indeed necessary to describe the law associated with the fiduciary duties of a departing senior executive who is not also bound by a written employment contract that might restrict his or her rights to compete against the former employer. It is this law that will be applied to determine whether there are genuine issues requiring a trial about Kelson’s defence of equitable setoff.
9I will describe the law about equitable setoff, and the remedies for breach of contract in the analysis and discussion that follows the factual and procedural background, but I shall describe the law about the fiduciary obligations of a departing employee here.
10In T. Edgar Alberts Ltd. v. Mountjoy (1977), 16 OR (2d) 682 at pp. 686-89 (HCJ), Chief Justice Estey, as he then was, described the duties of a departing employee, and he stated that a departing servant has the right to compete with his former employer and he or she may bring to that business the knowledge and skill acquired while in the former service, including knowledge and skill directly obtained from the previous employer. Further, the departing employee may solicit business from the former employer’s customers provided that: (a) there is no valid restrictive clause preventing him or her from doing so; (b) the departing employee does not use material obtained or retained in fraud of the employer; and (c) the departing employee does not misappropriate the employer’s confidential information. See also Boehmer Box L.P. v. Ellis Packaging Ltd., [2007] OJ No. 1694 (SCJ).
11Where the departing employee is also a fiduciary of the employer, he or she may not directly solicit the former employer’s customers for the reasonable period of time necessary to enable the former employer to retain the loyalty of the customers and to ameliorate the disruption caused by the fiduciary’s departure: T. Edgar Alberts Ltd. v. Mountjoy, supra; Anderson, Smyth & Kelly Customs Brokers v. World Wide Customs Brokers (1996), 184 AR 81 (CA); Boehmer Box L.P. v. Ellis Packaging Ltd., supra.
12The duration and the extent to which fiduciary obligations continue after an employee with fiduciary obligations departs is determined on a case by case basis and depends upon a matrix of factors. In the leading case of Canadian Aero Services Limited v. O’Malley, [1974] SCR 592 at p. 620, Justice Bora Laskin, as he then was, stated:
The general standards of loyalty, good faith and avoidance of conflict of duty and self-interest to which the conduct of a director or senior officer must conform, must be tested in each case by many factors which it would be reckless to attempt to enumerate exhaustively. Among them are the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness and the director’s or managerial officer’s relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or, indeed, even private, the factor of time in the continuation of fiduciary duty where the alleged breach occurs after termination of the relationship with the company, and the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge.
13After employment ends, the fiduciary employee generally cannot directly solicit the employer's customers for a reasonable period of time, but in the absence of a restrictive covenant, the fiduciary is free to otherwise compete once his or her employment ends, provided that he does not do so unfairly: Veolia ES Industrial Services Inc. v. Brulé, 2012 ONCA 173 at para. 33; Computer Enhancement Corp. v. J.C. Options, 2016 ONSC 452; Cygnal Technologies Corp. v. Taylor, [2005] OJ No. 3093 at para. 16 (SCJ); Sanford Evans List Brokerage v. Trauzzi, [2000] OJ No. 1394 at para. 49 (SCJ); T. Edgar Alberts Ltd. v. Mountjoy, supra, at paras. 21-26.
14The law, however, is cautious in imposing restrictive duties on departing employees in less than clear circumstances because of the public interest in free competition and the public policy of allowing citizens the freedom to pursue economic advantage through mobility in employment: Barton Insurance Brokers Ltd. v. Irwin (1999), 170 DLR (4th) 69 at para. 39 (BCCA); Boehmer Box L.P. v. Ellis Packaging Ltd., supra at paras. 49-53.
15After the termination of the fiduciary relationship, competition, as such, is not prohibited because the law does not favour restraints on trade or impeding a person’s ability to make a living. Rather, the prohibitions focus on the manner of the competition, which must be fair and honourable: Alberts v. Mountjoy, supra; R. Love Ltd. v. Bulk Steel & Salvage Ltd. (1983), 40 OR (2d) 1 (HCJ); Re Berkey Photo Canada Ltd. v. Ohlig (1984), 43 OR (3d) 518 (HCJ).
16The former fiduciary may accept orders from former clientele of the employer, but the former fiduciary may not directly solicit that trade until a reasonable period of time has elapsed: White Oaks Welding Supplies v. Tapp (1983), 42 OR (2d) 445 (HCJ); Wallace Welding Supplies Ltd. v. Wallace (1986), 8 CPC (2d) 157 (Ont. HCJ); Quantum Management Services Ltd. v. Hann (1989), 69 OR (2d) 26 (HCJ), affd. (1993), 11 OR (3d) 639 (CA); Canadian Industrial Distributor Inc. v. Dargue (1994), 20 OR (3d) 574 (Gen. Div.). Similarly, it is a breach of fiduciary duty if a former fiduciary solicits the former employer’s exclusive suppliers to switch their allegiance to supply a business until a reasonable period of time has passed: Canadian Industrial Distributor Inc. v. Dargue (1994), 20 OR (3d) 574 (Gen. Div.).
17What is a reasonable length of time for fiduciary duties to persist is determined on a case-by-case basis. In Anderson Smyth and Kelly Custom Brokers Ltd. v. World Wide Custom Brokers Ltd., supra at para. 32, the Court described the test as follows:
- The duty of a departing fiduciary employee subsists for as long after his termination as is reasonable in the circumstances to enable the former employer to himself contact his clients and attempt to retain their loyalty. The length of period will obviously be affected by the nature of the position held by the departing employee. Generally, the higher the level of trust and confidence reposed in the employee, with corresponding vulnerability of the employer, the longer the period will be.
D. Factual and Procedural Background
18Kelson is a privately-held, family owned company founded in 1944 by George Kelson. It carries on business as a mechanical contractor for industrial, commercial, and institutional construction. Its Chief Executive Officer is Michelle Kelson. Her brother, Josh Kelson, is Executive Vice President and Legal Counsel. Kelson has approximately 400 employees.
19In 2005, Kelson hired Mr. Cosolo. Before joining Kelson, Mr. Cosolo worked for almost 12 years at S. Breda & Associates, mechanical engineers, where he achieved the position of Vice President and was in charge of estimating. At Kelson, Mr. Cosolo was hired as a Pre-Fabrication Manager, charged with creating production schedules, scheduling the CAD department, and preparing productivity reports.
20In 2007, Mr. Cosolo was assigned to the Purchasing Department, where he was responsible for purchasing sheet metal, plumbing materials and fixtures, controls, insulation and mechanical equipment. In 2010, he became the Director of Procurement and Proposals and was involved in all aspects of purchasing materials and equipment and of contracting with trades. During this period, he worked with the estimating department to prepare tenders. In July 2011, he was promoted to Vice President Preconstruction working with the Estimating and Procurement Departments preparing bids on large projects. In 2014, his role changed again and he became Vice President, Supply and Procurement, and his work focused exclusively on procurement, delivery, and performance review of suppliers and trades.
21Throughout his employment, there was no written employment contract. At the time of his departure, Mr. Cosolo was one of the five senior executives of Kelson. The senior executives were: (1) Ms. Kelson, CEO; (2) Mr. Kelson, Executive Vice President; (3) Enzo Primiani, Executive Vice President; (4) John Will, Vice President, Design and Build; and (5) Mr. Cosolo, Vice President, Supply and Procurement.
22Although the matters are disputed, I accept Kelson’s argument that Mr. Cosolo had access to sensitive, confidential and proprietary information about Kelson's business, its workplace, and its overall affairs. I accept Kelson’s argument, and I find as a fact that Mr. Cosolo had a fiduciary relationship with Kelson. I find as a fact that he had confidential information about suppliers’ discounts and information about the pricing of materials and items in the context of complex construction projects and I find that he knew the details of Kelson’s relationships with various subcontractors and suppliers. I find that from time to time during his tenure with Kelson, Mr. Cosolo was involved in preparing bids for projects and was privy to confidential internal budget information and pricing methodology.
23Beginning in 2011, until 2014, under an employee stock purchase plan, Mr. Cosolo acquired 43,000 Class E common shares of Kelson stock.
24For present purposes, Articles 2 and 6 of the Share Ownership Agreement are pertinent.
25Under Article 2.1(f) a Participant Shareholder represented and warranted that he or she would not contravene the provisions of any indenture, agreement or other instrument to which such Participant Shareholder is a party or by which such Participant Shareholder may be bound.
26Article 6 of the Share Ownership Agreement states:
- No Participant Shareholder will without the consent of [Kelson], directly or indirectly communicate or disclose . . . or make use of any confidential knowledge or information . . . relating to or concerning the customers, products, trade secrets, systems or operations, or other confidential information regarding the property, business and affairs of [Kelson]... If the Participant Shareholder ceases to be a shareholder of [Kelson], the Participant Shareholder . . . will not, directly or indirectly, use for the Participant Shareholder's own purposes, and [confidential information] discovered or acquired by the Principal Shareholder.
27In May and through the summer of 2015, Mr. Cosolo was approached by Kimmel & Associates, an executive recruiter, a “head-hunter,” seeking to secure a Chief Executive Officer for Cofely Adelt Ltd.
28At that time, Cofely Adelt Ltd. was a small mechanical contractor, that Kelson sometimes used as a sub-contractor for the supply of sheet medal. Cofely Adelt Ltd. shortly became a part of ENGIE Multi Tech, which is a large global engineering firm and a direct competitor of Kelson. ENGlE has approximately 150,000 employees worldwide.
29In August of 2015, pursuant to an agreement in writing, Mr. Cosolo sold all of his Kelson shares to Kelson $891,820. This sum was to be paid in 10 annual instalments of $89,182, plus interest on the outstanding principal at the prime rate. The written terms of payment stated:
In accordance with the terms of a share ownership agreement in respect of the Purchaser dated as of May 25, 2011 (the "Share Ownership Agreement”) the undersigned hereby promises to pay to Louie Cosolo (the "Purchaser") the principal sum of $891,820, due and payable in ten (10) equal annual instalments of $89,182; with the first payment on August 14, 2015 and subsequent instalments payable on the anniversary of the first payment, together with interest on the principal amount outstanding from time to time calculated and payable annually on payment of each such instalment at the prime rate quoted from time to time, during such annual period by such institution as deemed appropriate by the undersigned.
30On August 18, 2015, Kelson paid Mr. Cosolo the first installment of $89,182.
31After the sale of the shares, for income tax purposes, Kelson issued a T5 with respect to its purchase of Mr. Cosolo’s shares, which was treated as the receipt by Mr. Cosolo of eligible dividends in the amount of $554,270.
32In the last week of October 2015, Cofely Adelt Ltd. offered Mr. Cosolo the CEO position, and on October 30, 2015, Mr. Cosolo tendered a letter of resignation to Kelson, effective 30 days later. He was immediately escorted from the Kelson’s headquarters, and his computer and cell phone were repossessed.
33A new Vice President Vice President, Supply and Procurement was immediately appointed and assumed the position by November 2, 2015.
34On January 9, 2016, Mr. Vainio, Director of Engineering, Design Build resigned from Kelson to join ENGIE as Director of Engineering, Design Build. Ms. Kelson deposed that she believes that Mr. Cosolo enticed Mr. Vainio to leave Kelson.
35On January 11, 2016, Mr. La Civita, Estimator, resigned from Kelson to join ENGIE. Ms. Kelson deposed that she believes that Mr. Cosolo enticed Mr. La Civita to leave Kelson.
36On February 24, 2016, Mr. Fleary, Estimator, resigned from Kelson to join ENGIE. Ms. Kelson deposed that she believes that Mr. Cosolo enticed Mr. Fleary to leave Kelson.
37In March 2016, Mr. Cosolo had a phone conversation with Mr. Schoenrock of Kelson. Mr. Schoenrock deposed that Mr. Cosolo asked him if he was happy working at Kelson and whether he was interested in moving and trying something new. Mr. Schoenrock told Mr. Cosolo that he appreciated his offer but that he was content with his job at Kelson.
38Apart from denying that he asked Mr. Schoenrock whether he was happy working at Kelson, Mr. Cosolo’s version of the conversation is similar to Mr. Schoenrock’s version. In my opinion, for the purposes of the summary judgment motion, nothing turns on the differences in the accounts. I say this because I find as a fact that Mr. Cosolo did not breach his fiduciary duties or cause any harm to Kelson as a result of his conversation with Mr. Schoenrock.
39On May 12, 2016, Mr. Rahmany, CAD Designer/Detailer resigned from Kelson to join ENGIE. Ms. Kelson deposed that she believes that Mr. Cosolo enticed Mr. Rahmany to leave Kelson.
40On May 16, 2016, Mr. Reyes, CAD Designer/Detailer resigned from Kelson to join ENGIE. Ms. Kelson deposed that she believes that Mr. Cosolo enticed Mr. Reyes to leave Kelson.
41Messrs. La Civita, Fleary, Rahmany, Reyes, and Vainio all deposed that: they each initiated the contact with Mr. Cosolo; they did not receive any enticement or special treatment from him; and they respectively had their own reasons for leaving Kelson to obtain employment or career advancement elsewhere.
42On August 16, 2016, Mr. Cosolo had a telephone conversation with Ms. Hadzimustafic of Kelson. Ms. Hadzimustafic’s testimony was that Mr. Cosolo asked if she was happy working at Kelson and whether she was currently busy. She said he asked about various projects that Ms. Hadzimustafic was involved in, including the Bay Adelaide Centre project, which was ongoing. He said that ENGIE was pursuing large projects, including potential work at Mount Sinai Hospital, a site which Ms. Hadzimustafic had worked at extensively. She indicated that she was not thinking of leaving her job at Kelson.
43Mr. Cosolo’s version of this communication was that Danny Seravalle, an ENGIE employee, had advised him that Ms. Hadzimustafic was looking for employment opportunities and he called her. His account of the conversation differs to varying degrees from Ms. Hadzimustafic’s account.
44In my opinion, for the purposes of the summary judgment motion, nothing turns on the differences in the accounts. I say this because I find as a fact that Mr. Cosolo did not breach his fiduciary duties or cause any harm to Kelson as a result of his conversation with Ms. Hadzimustafic.
45After his departure from Kelson, apart from his communications with Mr. Schoenrock and Ms. Hadzimustafic, there were no material communications between Kelson and Mr. Cosolo until August 16, 2016, when he sent an email requesting payment of the second installment for his common shares.
46Kelson did not pay the second instalment, and by email dated August 24, 2016, Mr. Kelson advised that no further payments would be made because Mr. Cosolo had made misrepresentations and had breached his fiduciary duties owed to Kelson. Mr. Kelson’s email stated:
Lou,
You have been paid all amounts due. There are no further payments. In particular, with respect to your Class E common shares (the "Shares") of Geo. A Kelson Company Limited ("Kelson"), in connection with which you agreed to the Share Ownership Agreement made as of May 25, 2011 (the "Agreement") and this has been a part of all agreements made with Kelson:
Under s. 2.1(f) of the Agreement, a shareholder represents and warrants that performance of his obligations under the Agreement will not contravene "the provisions of any indenture, agreement or other instrument to which such Participant Shareholder is a party or by which such Participant Shareholder may be bound". By entering into an employment agreement with ENGIE pursuant to which you solicited Kelson employees, you breached your duties to Kelson (including but not limited to s. 6 of the Agreement) and breached your fiduciary duty as a former executive (among other improper acts). Since you clearly violated your duties to Kelson (including under the Agreement), you have breached said representation, which constitutes a misrepresentation for which Kelson's remedy is rescission (you would only be entitled to a refund of your purchase price).
Further, although s. 3.6(d) of the Agreement gives Kelson the consequent right to repurchase your shares at Fair Value: (i) Kelson need not do so at all (see in particular the wording of s. 2.6(f), which begins "[i]n the event that the Corporation exercises its right to purchase any Triggered Shares, ..."; and (ii) because you have breached your Agreement as well as your fiduciary duty, Kelson is entitled to disgorgement of all of your gains flowing from that breach (including your salary, wages, bonuses, etc., earned at ENGIE).
This claim for disgorgement is a "debt owed to Kelson, and therefore Kelson is entitled to rely on s. 4.2(a) to set off the debt against any Fair Value sale proceeds. This means we do not owe you any money, and could mean you owe us money.
These are just some of the reasons why you will not receive and are not entitled to a payment.
Cheers,
Josh
47In reaction to the email, Mr. Cosolo retained legal counsel, and by letter dated September 23, 2016, Mr. Cosolo’s lawyers accepted on his behalf the repudiation of the Share Sale Agreement and demanded payment of $826,268.54 for breach of contract.
48Shortly thereafter, Mr. Cosolo commenced an action against Kelson.
49On November 24, 2016, Kelson delivered a Statement of Defence in which it asserted a defence of setoff.
50On December 5, 2016, Mr. Cosolo delivered his Reply.
51In her affidavit for the summary judgment motion, Ms. Kelson explained the basis for the setoff defence in paragraphs 26-28 of her affidavit as follows:
The employees who departed from Kelson and joined ENGIE brought value to ENGIE. Mr. La Civita and Mr. Fleary brought skills as estimators, and Mr. Rahmany, and Mr. Reyes brought skills in respect of information modelling. Mr. Vainio gained experience at Kelson through the Company's development of mechanical concepts and designs, and such experience would be very valuable to a competitor for the purpose of pursuing complex projects. I believe that these new resources gave ENGIE the appearance of a competitive edge that it did not previously have. Kelson experienced this impact while pursuing various projects in the industry.
For example, the Company pursued a $30M project involving the Etobicoke General Hospital. Kelson was on a team with Ellis-Don. ENGIE was on a team with Walsh Canada. ENGIE's team was successful on the bid. Given my experience in the industry, and in light of the fact that ENGIE's predecessor company. Cofely Adelt Ltd. was a smaller service contractor, I do not believe that ENGIE would have been successful on a healthcare project of this size without the addition of Mr. Cosolo and Mr. Vainio, as ENGIE had no resume in comparable healthcare projects. Mr. Vainio worked on the very same project at Kelson prior to his departure and was part of the design and pricing. We were informed that concepts from the Kelson design were incorporated into the design for ENGIE and a similar price was submitted by ENGIE. Kelson stood to make over $1 million on this project.
ENGIE was also recently successful on a bid for a $55M project involving Mount Sinai Hospital. Kelson also pursued this project, but was unsuccessful. In my experience, this is also not a job that ENGIE or its predecessor Cofely Adelt Ltd. typically pursued in the past, or perhaps, was capable of completing. Kelson stood to make over $1 million on this project.
52Mr. Cosolo deposed that ENGIE's bid for the Etobicoke General Hospital was complete before he joined ENGIE.
53Mr. Vainio’s departure from Kelson took place after the bids were submitted for the Etobicoke General Hospital project and could have had no influence on the bid pricing or design submitted by ENGIE.
54On February 14, 2017, Mr. Cosolo brought a motion for a summary judgment.
55In early 2017, Mr. Cosolo hired Mr. Bowman of Matson Driscoll & Damico Ltd., a forensic accounting firm, with expertise in economic damage quantification. Mr. Bowman prepared a report dated February 13, 2017. Mr. Bowman opined that the present value of Mr. Cosolo’s claim was between $841,838 and $863,916.
56In preparing his report, Mr. Bowman assumed that the interest payable was based on the prime rate of interest as published by CIBC, Kelson's financial institution. He used the prime rate as of January 27, 2017 and prepared two scenarios to calculate the present value of the payments owed to Mr. Cosolo. Under Scenario 1, he applied a discount rate of 1.82% based on the riskfree rate of 10-year Government of Canada bond yields. Under Scenario 2, he applied a discount of 2.7% based on the prime bank rate agreed to by the parties. Under both scenarios, he applied a nominal discount rate (not adjusted for inflation) and assumed interest on the outstanding principal was not compounded.
57In response to the summary judgment motion, Kelson delivered an expert report from Ms. Seaquist. In her report, she stated that she had not been provided with sufficient information to recommend an appropriate discount rate in this matter and she did not provide an opinion as to the present value for Mr. Cosolo’s claim.
58Ms. Seaquist was critical of Mr. Bowman’s opinion. She stated that it was her opinion that the terms of the payment are, in substance, similar to an unsecured loan to Kelson by Mr. Cosolo, and in calculating the present value of future amounts owing under such a loan, it is appropriate to utilize a discount rate that approximates the interest rate that Kelson would have obtained from an arm's length lender, similar to Mr. Cosolo, under a loan agreement with the same or similar terms and conditions. She said that neither of Mr. Bowman’s scenarios considered any risk specific to Kelson as a going concern and thus neither scenario used an appropriate discount rate to calculate the present value of future payments. She said that all else being equal, a higher discount rate results in a reduction in the present value of future payments. She said that Mr. Bowman’s scenarios overstated the present value of the future payments owed to Mr. Cosolo.
59Ms. Seaquist stated that she had not been provided with sufficient information to recommend an appropriate discount rate. However, for illustrative purposes, she provided a table that set out the net present values of future unpaid installments using alternative discount rates:
| Discount Rate | Net Present Value |
|---|---|
| 0.00% | $913,000 |
| 1.82% | $864,000 |
| 2.70% | $842,000 |
| 3.00% | $835,000 |
| 4.00% | $811,000 |
| 5.00% | $789,000 |
| 6.00% | $768,000 |
| 7.00% | $749,000 |
| 8.00% | $730,000 |
60In her report, Ms. Seaquist stated that given that Kelson is significantly smaller and less diversified than companies that could secure low interest rates on loans, it was likely that the risk of default would be assessed by a lender as greater than for Canadian corporations that are able to borrow at or close to the prime rate, and, therefore, the appropriate discount rate applicable to future payments should be greater than the prime rate, possibly significantly greater.
E. Discussion and Analysis
1. The Position of the Parties
(a) Mr. Cosolo’s Argument
61Mr. Cosolo’s argument is that after the first installment was paid, Kelson repudiated its agreement to pay for his common shares in ten installments and that he is entitled to the present value of the nine outstanding installments, which he has proven to have a present value of between $841,838 and $863,916.
62Mr. Cosolo denies that Kelson has any defence of equitable setoff, and he submits that there are no genuine issues requiring a trial.
(b) Geo. A. Kelson Limited’s Argument
63Kelson’s argument is that Mr. Cosolo was a senior executive with fiduciary duties and that he breached his fiduciary duties by: (1) enticing former Kelson co-workers to leave their employment with Kelson to join him at ENGIE; and (2) using Kelson's valuable confidential information to compete against Kelson, which harmed Kelson's business.
64Kelson submits that Mr. Cosolo’s breaches of his fiduciary duties constitutes a breach of the Share Ownership Agreement, and, therefore, it may setoff its claim for damages against any remaining monies owing under the agreement or it may rescind the agreement to pay Mr. Cosolo for the common shares.
65Kelson submits in any event, that the case is not amenable to summary judgment and there are genuine issues requiring a trial about: (a) Mr. Cosolo's breaches of his fiduciary duties; (b) the quantification of the damages suffered by Kelson; (c) the proper calculation of the present value of Mr. Cosolo's entitlements; and (d) if Kelson does not have a complete defence to Mr. Cosolo's claims whether the appropriate remedy is a lump-sum award of damages or whether the appropriate remedy is an order directing future installment payments as they become due.
66Kelson submits that the determination of these issues requires a discovery plan, a fulsome production effort, and a trial because the evidence produced by Mr. Cosolo is incomplete as it does not deal with the setoff issues raised by Kelson and Mr. Cosolo did not provide ENGIE’S confidential bid proposals, which was relevant evidence for Kelson’s setoff claim and defence.
2. Jurisdiction to Grant Summary Judgment
67Rule 20.04(2)(a) of the Rules of Civil Procedure provides that the court shall grant summary judgment if: “the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence.” With amendments to Rule 20 introduced in 2010, the powers of the court to grant summary judgment have been enhanced. Rule 20.04(2.1) states:
20.04 (2.1) In determining under clause (2)(a) whether there is a genuine issue requiring a trial, the court shall consider the evidence submitted by the parties and, if the determination is being made by a judge, the judge may exercise any of the following powers for the purpose, unless it is in the interest of justice for such powers to be exercised only at a trial:
- Weighing the evidence.
- Evaluating the credibility of a deponent.
- Drawing any reasonable inference from the evidence.
68In Hryniak v. Mauldin, 2014 SCC 7 and Bruno Appliance and Furniture, Inc. v. Hryniak, 2014 SCC 8, the Supreme Court of Canada held that on a motion for summary judgment under Rule 20, the court should first determine if there is a genuine issue requiring trial based only on the evidence in the motion record, without using the fact-finding powers introduced when Rule 20 was amended in 2010. The analysis of whether there is a genuine issue requiring a trial should be done by reviewing the factual record and granting a summary judgment if there is sufficient evidence to fairly and justly adjudicate the dispute and a summary judgment would be a timely, affordable and proportionate procedure.
69If, however, there appears to be a genuine issue requiring a trial, then the court should determine if the need for a trial can be avoided by using the powers under rules 20.04(2.1) and (2.2). As a matter of discretion, the motions judge may use those powers, provided that their use is not against the interest of justice. Their use will not be against the interest of justice if their use will lead to a fair and just result and will serve the goals of timeliness, affordability, and proportionality in light of the litigation as a whole.
70Hryniak v. Mauldin, supra does not alter the principle that the court will assume that the parties have placed before it, in some form, all of the evidence that will be available for trial. The court is entitled to assume that the parties have advanced their best case and that the record contains all the evidence that the parties will present at trial: Dawson v. Rexcraft Storage & Warehouse Inc., [1998] OJ No. 3240 (CA); Bluestone v. Enroute Restaurants Inc. (1994), 18 OR (3d) 481 (CA); Canada (Attorney General) v. Lameman, 2008 SCC 14 at para. 11. The onus is on the moving party to show that there is no genuine issue requiring a trial, but the responding party must present its best case or risk losing: Pizza Pizza Ltd. v. Gillespie (1990), 75 OR (2d) 255 (Gen. Div.); Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 28 OR (3d) 423 (Gen. Div.), aff’d [1997] OJ No. 3754 (CA).
71To grant summary judgment, on a review of the record, the motions judge must be of the view that sufficient evidence has been presented on all relevant points to allow him or her to draw the inferences necessary to make dispositive findings: Ghaeinizadeh (Litigation guardian of) v. Garfinkle Biderman LLP, 2014 ONSC 4994, leave to appeal to Div. Ct. refused, 2015 ONSC 1953 (Div. Ct.); Lavergne v. Dominion Citrus Ltd., 2014 ONSC 1836 at para. 38; George Weston Ltd. v. Domtar Inc., 2012 ONSC 5001.
3. The Merits of Kelson’s Claim of Equitable Setoff for Breach of Fiduciary Duty
72In certain circumstances, a defendant may set off his or her liquidated or unliquidated claim against the plaintiff’s claim. Equitable setoff is available where: (1) the defendant can show some equitable ground for being protected against the plaintiff’s demands; (2) the equitable ground must go to the very root of the plaintiff's claim; (3) the setoff must be clearly connected with the plaintiff’s demand that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross-claim; and (4) the plaintiff's claim and the setoff need not arise out of the same contract: Telford v. Holt (1987), 41 DLR (4th) 385 at pp. 398-99 (S.C.C.); Coba Industries Ltd. v. Millie's Holdings (Canada) Ltd. (1985), 20 DLR (4th) 689 at pp. 696-97 (BCCA); Federal Commerce & Navigation Co. Ltd. v. Molena Alpha Inc., [1978] 3 All ER 1066 (C.A.), aff’d on other grounds at [1979] AC 757 (HL); Algoma Steel Inc. v. Union Gas Ltd. (2003), 63 OR (3d) 78 at para. 26-29 (CA).
73If Mr. Cosolo breached his fiduciary duties or if he breached the Share Ownership Agreement, I accept that Kelson has an equitable setoff. However, there is no genuine issue requiring a trial that he did either.
74As explained at the outset of these Reasons for Decision, a departing employee with fiduciary duties is entitled to compete against his former employer provided he or she does so fairly and does not misappropriate confidential information.
75Mr. Cosolo’s new employer ENGIE was entitled to compete with Kelson for business in Ontario, and there was nothing unfair or improper in Mr. Cosolo’s recruitment of Messrs. La Civita, Fleary, Rahmany, Reyes, and Vainio, and even if Mr. Cosolo’s conversations with Mr. Schoenrock and Ms. Hadzimustafic were a breach of fiduciary duty, which I find they were not, it was a meaningless breach because they are both still employed by Kelson.
76In her affidavit, Ms. Kelson expressed some angst about the departure of Mr. Vainio with his design expertise, but Mr. Vainio was just a departing employee, and if he misappropriated confidential information, which he did not, then that would not lay at the feet of Mr. Cosolo. Mr. Vainio was entitled to use the knowledge and skill directly obtained from his previous employer and, in any event, none of Mr. Vainio’s designs were incorporated in the bid for the Etobicoke General Hospital, which was made before Mr. Vainio arrived at ENGIE.
77There is no genuine issue requiring a trial about the alleged breaches of fiduciary duty, and I find that Mr. Cosolo did not use any confidential or proprietary information from Kelson while he was at ENGIE.
78Hryniak v. Mauldin, supra does not alter the principle that the court will assume that the parties have placed before it, “in some form,” all of the evidence that will be available for trial. In “some form” means that it is not necessary for a party to proffer evidence in as comprehensive or exhaustive non-summary way as befits a trial, but it means that the party must at least show that there is some substance to his or her claim or defence that can be further developed at a trial. In the case at bar, there is no substance to Kelson’s breach of fiduciary duty setoff claim and there are no genuine issues requiring a trial.
4. Breach of Contract and The Quantification of Mr. Cosolo’s Claim
79There is no genuine issue requiring a trial about Mr. Cosolo’s claim for damages. I find as a fact that Kelson repudiated its contract to pay Mr. Cosolo in installments for the common shares. When a contract is breached, the innocent party is entitled to damages, which is a remedy designed to use money to put the innocent party in the same economic position he or she would have been in had the contract been performed.
80With a few exceptions, when a contract is breached, the only remedy of the civil law is damages. The case at bar involves a normative assessment of those damages. There is no merit to Kelson’s submission that there is a genuine issue requiring a trial about whether instead of damages the proper remedy is an order directing Kelson to make the installment payments as they become due, annually, until all ten installments have been paid.
81There is no basis for such an order, which would be akin to awarding specific performance for a breach of contract to make installment payments. It is trite law that specific performance is generally not available for breach of contract save for contracts involving real property or for the sale of goods that are rarities like a Stradivarius. Even in the context of contracts for the sale of land, there has been a paradigm shift, and the modern view is that specific performance is not available in the normal course and this remedy must be justified by showing that damages are inadequate in the circumstances: Asamera Oil Corp. v. Seal Oil & General Corp., [1979] 1 SCR 633; Semelhago v. Paramadevan, [1996] 2 SCR 415; Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51.
82Thus, the only issue in the immediate case is the determination of the present value of the outstanding nine installment payments. It is necessary to determine the present value in order to place Mr. Cosolo in the same economic position he would have been had the contract promises been performed and not in a better economic position.
83When a contract fails to close because of the default of one of the parties, the other party’s expectations will have been disappointed. In contract law, an award of damages addresses the disappointment in expectations and compensates by using money to put the innocent party in the same economic position in which he or she would have been had the contract been performed: Bank of America Canada v. Mutual Trust Co., 2002 SCC 43 at para. 26; Dasham Carriers Inc. v. Gerlach, 2013 ONCA 707 at para. 29; Asamera Oil Corp. v. Seal Oil & General Corp., [1979] 1 SCR 633 at para. 18.
84This goal for damages is refined and qualified by requirements that, to be recoverable: (1) the damages must be reasonably foreseeable (the remoteness principle); Hadley v. Baxendale (1854), 9 Exch. 341; Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd., [1949] 1 All ER 997 (CA); Koufos v. C. Czarnikow Ltd. (The Heron II), [1967] 3 All ER 686 (HL); (2) they must be unavoidable in the sense that the innocent party is treated as if it had an obligation to take reasonable steps to avoid loss; that is, to mitigate: Southcott Estates Inc. v. Toronto Catholic District School Board, supra; British Columbia v. Canadian Forest Products Ltd., 2004 SCC 38; Red Deer College v. Michaels, [1976] 2 SCR 32; and (3) the damages must be proved with some certainty: Penvidic Contr. Co. v. Int. Nickel Co. of Canada (1975), 53 DLR (3d) 748 (SCC); T.T.C. v. Aqua Taxi Ltd. (1957), 6 DLR 721 (Ont. HCJ); Haauk v. Martin, [1927] SCR 413; Chaplin v. Hicks, [1911] 2 KB 786 (KB).
85If an innocent party establishes that the breach of contract caused it a particular loss, then difficulties in quantifying that loss will not disqualify the innocent party from compensation and the court will make the best estimate possible based on the evidence provided to it: Eastwalsh Homes Ltd. v. Anatal Developments Ltd. (1993), 12 OR (3d) 675 (CA), leave to appeal to the SCC ref’d (1993), 15 OR (3d) xvi; T.T.C. v. Aqua Taxi Ltd. supra; Houweling Nurseries Ltd. v. Fisons Western Corp. (1988), 49 DLR (4th) 205 at p. 207 (BCCA); Webb & Knapp (Canada) Ltd. v. Edmonton (City), [1970] SCR 588; Whitehead v. R. B. Cameron Ltd. (1967), 63 DLR (2d) 180 (NSSC App. Div.).
86In the case at bar, Mr. Cosolo is the innocent party, and he has proven the loss of the unpaid installments, but I agree with Ms. Seaquist’s critique that Mr. Bowman has set the discount too low in his calculation of a present value and that the rate would be higher than the prime rate.
87Making the best estimate based on the evidence provided to me, I find that on the balance of probabilities that the appropriate discount rate is between 6% and 8%, and I conclude that the present value of Mr. Cosolo’s claim is $750,000.
88I see no purpose and I regard it as both unfair and inappropriate to order a trial to be more precise about the discount rate. It was within Kelson’s power to provide more information to Ms. Seaquist, but apparently to increase its chances to avoid a summary judgment and to have the issue delayed and determined at trial, it did not provide her with readily available information.
89Mr. Bowman conceded in his report that there were alternative approaches to calculate the present value that would take into account something more than the interest rate specified in the payment agreement. I am confident that on the balance of probabilities, a trial judge would come to the same conclusion that I have reached that the appropriate discount rate is between 6% and 8% with a corresponding judgment of $750,000.
F. Conclusion
90For the above reasons, I award Mr. Cosolo judgment for $750,000, all inclusive, plus post-judgment interest in accordance with the Courts of Justice Act, RSO 1990, c. C.43.
91If the parties cannot agree about the matter of costs, they may make submissions in writing beginning with Mr. Cosolo’s submissions within 20 days of the release of these Reasons for Decision, followed by Kelson’s submissions within a further 20 days.
Perell, J.
Released: July 5, 2017
