Citation: Expoed Inc. v. Anaca Technologies Ltd., 2017 ONSC 5849

COURT FILE NO.: CV-13-10292-00CL

DATE: 20171002

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Expoed Inc.

Plaintiff

– and –

Anaca Technologies Ltd.

Defendant

COUNSEL:

Matt Mulholland, counsel for the Plaintiff

Alan B. Merskey and Saeed Teebi, counsel for the Defendant

HEARD: September 25 to 29, 2017

BEFORE: F.L. Myers J.

The Claim and Outcome

[1] The plaintiff sues the defendant for a host of relief flowing from allegations that the defendant breached the terms of a software license agreement and an ancillary general security agreement each dated May 30, 2008. The plaintiff claims damages of more than $5 million, an accounting for royalties paid and due under the license agreement, and declarations that the software license has been validly terminated and that future royalties claimed under the license have been validly accelerated. The claims are for breach of contract and breach of the duty of honest dealing recognized by the Supreme Court of Canada in the case of Bhasin v. Hrynew, 2014 SCC 71, http://canlii.ca/t/gf84s. The plaintiff abandoned at an earlier date a claim for an oppression remedy under the corporate law. It made, but did not press at trial, a claim under the terms of its security for the appointment of a receiver and manager over the assets and undertaking of the defendant.

[2] For the reasons that follow, the action is dismissed. The plaintiff did not present evidence establishing breaches of either agreement between the parties, as properly interpreted, or a breach of the duty of honest dealing. I have no doubt that the plaintiff is frustrated in its dealings with the defendant and would love to be paid funds today to avoid future dealings with the defendant. But that is not the business deal that it made.

[3] The parties have not been able to deal with each other to adjust their relationship to their evolving needs and wants. That is the stuff of business negotiation. If the defendant is not listening, that does not prove dishonest dealing. Perhaps the plaintiff is just not saying the right things to attract the defendant’s attention in the desired manner. Negotiation is bilateral by definition. Absent proof of a material breach of duty however, the court cannot and will not intervene.

The Facts

a) The Parties’ Agreement

[4] The plaintiff is a wholly owned subsidiary of Exposoft Solutions Inc. Exposoft is a developer of computer software. Expoed was originally a division of Exposoft. Expoed developed a suite of career counselling software products for use in schools by students, parents, teachers, and school administration.

[5] Bassel Annab and Anthony Abbott founded Exposoft. By 2006, Mr. Abbott was focusing his full time and attention on the Expoed division. Mr. Abbott was the lead software developer and also managed the division including bringing the Expoed software to market and making sales. A few years earlier, Mr. Annab had purchased the bulk of Mr. Abbott’s shares in Exposoft.

[6] Around 2007 Exposoft determined that its Expoed division and software were impeding or at least were not attracting third party financing that it desired. It decided to look for a way to exit the business. By then, Mr. Abbott no longer figured in the main business or future plans of Exposoft.

[7] In 2007, the defendant was already a competitor of the plaintiff in the career counselling software business aimed at schools. It had an agreement with the Ontario Ministry of Education for the supply of its Career Cruising software to schools.

[8] Not surprisingly, both sides claim to have had a market edge over the other and that the transaction that they ultimately entered into was for the predominate benefit of the other. Nothing turns on this. Rather, there is no doubt that both parties saw benefits from entering into a transaction whereby Exposoft essentially sold its Expoed business to the defendant.

[9] For reasons to do with Exposoft’s capital structure, it was advantageous to Exposoft to structure the deal as a license rather than an outright sale of its software and divisional assets. The plaintiff was incorporated to accommodate the spinoff. The defendant also asked to hire the two key developers of the Expoed software, Messrs. Abbott and D’Mello. It cannot have been lost on Mr. Annab that this provided him with an opportunity to break up with Mr. Abbott with no severance cost while finding his former partner a soft landing.

[10] In 2007 each of the parties already had a suite of software products made up of individual modules (now think of “apps”). The modules overlapped in many ways. However, the defendant’s software was more advanced than the Expoed software in the depth of its resource database. Its Career Cruising module offered students access to information about careers, schools, and specific educational programmes available to qualify for desired careers. For its part, the Expoed software was more advanced in providing connectivity to school boards’ Student Information Systems. That is, the Expoed software provided online access to students’ actual course and grade history. Its course planning module could therefore help students pick courses based on whether they had taken the proper prerequisite courses or attained sufficient grades in necessary courses to allow them to choose courses needed to meet their future plans.

[11] The defendant had the ability to develop a module to allow its software to communicate with school boards’ Student Information Systems too. It estimated that the cost of doing so would be about $500,000. It viewed the opportunity to obtain the Expoed software that already had this functionality as a benefit at the right price as it would save time to get the product to market and the software had a proven track record.

[12] Mr. Annab testified that Exposoft wanted $3 million for its Expoed business. It is clear from the documents that the parties understood each other’s internal valuations. The agreement provides its own pricing formula as a result of negotiation. How each party chose to rationalize the deal terms to itself is not particularly relevant in the main.

b) The Terms of the License Agreement

[13] The parties entered into a software license and purchase agreement dated May 30, 2008. Subject to the next paragraph, the following are the main terms of relevance to the issues in this proceeding:[^1]

a. The parties recited that the defendant was in the business of providing an online educational service focused around career resources and planning and “seeks to add the Licensed Software to its existing service offerings;”

b. The plaintiff licensed its software to the defendant for an indefinite term;

c. For the first five years the defendant was required to pay the plaintiff an Annual Royalty of $100,000, $100,000, $100,000, $97,500 and $140,000 plus GST and PST if applicable. Total Annual Royalties were $537,500 before taxes;

d. The defendant also agreed to pay two streams of Revenue Royalties to the plaintiff on a quarterly basis:

i. Beginning on September 1, 2010 until August 31, 2016, a royalty equal to 10% of gross sales made by the defendant on the Licensed Software or Replacement Software outside of Ontario; and

ii. Throughout the term of the agreement, a royalty of 12.5% of gross sales within Ontario on the Licensed Software or Replacement Software up to a cap of $2 million. The defendant has the right to accelerate the payment of the $2 million cap at any time if it chose to do so;

e. Gross sales to determine royalties are to be determined from invoices rather than revenue recognition under GAAP or cash receipts;

f. The defendant agrees to provide security for its future payment obligations under the license “covering all assets of [the defendant] on the date of signing of this Agreement;”

g. At any time after May 30, 2010, if not in default, the defendant has the right to purchase the Licensed Properties by paying all remaining Annual Royalties (if any) and continuing to be liable to pay the two Revenue Royalty streams;

h. The agreement provides for an escalating dispute resolution process starting with meetings, followed by mediation, and then arbitration if desired by either party;

i. If the defendant proposes to “bundle” services (i.e. sell individual apps together at a single price) it shall advise the plaintiff in writing and the parties agree to negotiate in good faith “a fixed gross sale amount based on existing percentages;”

j. If the defendant makes a “fundamental change” to its pricing model, it shall advise the plaintiff in writing and the parties will “renegotiate in good faith the Revenue Royalties;”

k. The parties expressly recognized that “circumstances and business climates change over time and each intends this Agreement to be a dynamic document meeting the needs and expectations of both sides.” Therefore the agreement provides for a mandatory, formal annual meeting between the parties to be held “with a view towards making mutual changes that fit original expectations;” and

l. In case of breach of most terms of the license agreement, the plaintiff may provide the defendant with notice of default and 45 days to cure. If it terminates the agreement, the plaintiff has the right to the return of its Licensed Software and it maintains the right to receive its fixed Annual Royalties. The two streams of Revenue Royalties are no longer due after termination of the license.

[14] The most significant issues in this case fall to be determined by an interpretation of para. 1.9 of the license agreement that provides:

“Replacement Software Product” means any software…which performs functions that are substantially the same as or superior to the functions performed by the Licensed Software and which replaces the Licensed Software in the suite of software products offered by [the defendant].

[Emphasis added.]

c) Mr. Abbott Replaces the Expoed Course Selector Module with the Defendant’s Course Selector

[15] The parties understood at the outset that the defendants’ suite of products were developed in a different computer language than the language in which Mr. Abbot had written the plaintiff’s software. The defendant needed to develop its own software to integrate the licensed software functions into its existing suite. The deal was that the plaintiff would pay royalties on the resulting Replacement Software and it would own the Replacement Software. According to the definition above, Replacement Software (a) performs the same or better functions than the Expoed software; and (b) it replaces the Expoed software in the suite of products offered by the defendant.

[16] Upon closing the transaction, Mr. Abbott and Mr. D’Mello set about redeveloping the Expoed course selector module to work with the defendant’s existing suite. What they produced became known as “Course Selector” and eventually “ccPathfinder.” Mr. Abbott and Mr. D’Mello worked only on that module. The defendant added Course Selector to its other modules. This provided the defendant’s’ products with the ability to connect to student records in school boards’ database so that course selection could be based on online information integrated into the career counselling process.

[17] There was no real challenge to the evidence of Messrs. Abbott and D’Mello. There were no inconsistencies exposed in their testimony. There was no inherent implausibility of the evidence of either of them. Each presented in a helpful way and gave evidence that one would expect of a computer developer. Mr. Abbott in particular was forthright about his fuzzy memory of some aspects of the Expoed software that he developed. As the original Expoed software no longer exists and could not be reviewed by anyone for the purposes of this trial, Mr. Abbott’s memory, fuzzy as it was, was certainly the most credible as he was the principal author of the software and its supporting documentation. [^2]

[18] When the defendant revised the Expoed software to create its Course Selector module, it sold the module with its pre-existing Career Cruiser module. Users could not buy the replacement Course Selector module alone. Rather, it was sold to work with Career Cruiser. Users could buy Career Cruiser without Course Selector. But if school boards or schools wanted their students to have the course selection functions and the connectivity to students’ actual course history in the board of education databases, then they would buy the replacement Course Selector too. The plaintiff made some noises at points in the trial about this being inappropriate “bundling” by the defendant. But since each piece of software was sold independently for its own price, the “bundling” provisions of the license agreement do not apply.

d) The Defendant Breached the License Agreement by Repeated Late Payments

[19] The defendant was a slow payer of quarterly royalties. It claimed it had system problems that made it difficult for it to determine quarterly sales. Moreover, it was staffed thinly in administration. Mr. McQuillan frequently said that he too busy to see to the timely payment of the defendant’s royalty obligations. While perhaps an excuse, this is certainly not a valid justification for late payments.

[20] Most of the defendant’s late payments were cured within a very few days. However, there were several times when the defendant was late by weeks. This was an obvious irritant to the plaintiff. At the outset, the plaintiff was also unhappy with the defendant’s reporting. It requested better information. In 2012, the plaintiff asked to send its accountant in to audit the defendant’s sales as it was entitled to do under the license agreement. It took the parties a year to negotiate for the auditor to attend. The contemporaneous documentation however discloses much cooperation by the plaintiff and some, slow development of better reporting and payment processes by the defendant.

[21] The bottom line of this issue is that the plaintiff never gave notice of default for late payment. The agreement provides for notice and a 45 day cure period. By the time the plaintiff gave a notice of default, discussed below, the defendant was up-to-date in its payments.

e) The Plaintiff Claims that Revenue Royalties Should be Calculated by School Year

[22] Issues arose early on as well as to the manner used by the defendant in calculating sales for royalty purposes. The defendant invoiced its customers in advance of the commencement of the school year. That meant that when the time came for the defendant to pay royalties on sales outside Ontario (starting September 1, 2010) the defendant had already invoiced many of the sales for that school year in August. Using invoice dates to determine royalty payments as provided in the license agreement meant that royalties would not be due for those sales. The defendant assured the plaintiff that it would make those sales back in 2016 when the plaintiff would invoice in August 2016 for the school year starting September 1, 2016. The plaintiff would capture royalties for school year 2016 - 2017 sales although the royalty right expires on August 31, 2016. The plaintiff was not content to wait and it feared that the defendant could defeat its right to royalties in 2016 by just delaying its invoicing until after September 1, 2016.

f) The Defendant Bundles all of its software, including Course Selector (ccPathfinder) in ccEngage

[23] On May 18, 2012, the defendant disclosed that it had recently changed its sales strategy and had decided to bundle all of its career counselling software into a single product called ccEngage. The bundled suite would be sold at a price that was less than the total price of each module sold separately. The defendant hoped to increase profit by reducing individual module prices and increasing volume.

[24] The defendant proposed to pay the plaintiff royalties on the basis that ccPathfinder, the Replacement Software for its Course Selector, represented 40% of the bundled price. That was the percentage that its price bore of the total of all of the bundled modules when they were previously sold separately. While the plaintiff objected to the price decrease, it did not propose a different model. It asked for more information. Ultimately the parties went to mediation on this and other issues without successfully resolving matters.

g) The Defendant Buys The Real Game

[25] In 2012, the defendant bought the rights to an educational game from a third party called The Real Game. It is a paper-based game that is intended to be played in elementary school. It introduces students to basic concept about career planning such as careers, pay cheques, taxes, community projects, and the like. The Real Game has some online elements to track students’ progress for example. As part of the transaction by which it bought the rights to The Real Game, the defendant gave vendor take-back security over the purchased assets to the vendor of The Real Game. It did not notify the plaintiff that it had done so.

h) The Plaintiff give Notice of Default and Accelerates

[26] By letter dated May 30, 2012, the plaintiff gave notice of default to the defendant under the license agreement. It relied upon two alleged defaults. First, it claimed that the plaintiff had under-paid royalties by refusing to pay royalties on sales outside Ontario after September 1, 2010 that had been invoiced in August, 2010. Second, it claimed that the plaintiff was in breach of the general security agreement by granting security over The Real Game purchased assets. The plaintiff gave the defendant 45 days to cure its defaults. At the same time it purported to exercise its right to “accelerate” under the general security agreement. It claimed that it was entitled to payment on May 30, 2012 of $2 million less the Ontario sales’ royalties received to that time.

[27] On the expiry of the cure period, the plaintiff never communicated an election to terminate or to affirm the license agreement. However, it kept accepting quarterly Revenue Royalties and continued acting under the license and the security agreement as discussed below.

[28] By letter dated January 14, 2013, the plaintiff reasserted its claim that the defendant was required to pay it royalties based on sales for the September, 2010 school year despite invoicing those sales in August. It also asserted that the granting of security by the defendant over the assets of The Real Game was a breach of the general security agreement. Counsel referred to some offers and counter-offers that had not resolved the issues between the parties to that point. The plaintiff again purported to accelerate future royalties under the license agreement and demanded payment of approximately $2.3 million plus interest.

i) The Plaintiff Demands that the Defendant Escrow the Source Code of ccEngage

[29] Under the general security agreement, the plaintiff has the right to require the defendant to place a copy of the source code of Replacement Software in escrow with a third party. By letter dated June 7, 2013, the plaintiff demanded that the defendant place a copy of the code for the entire bundled suite of ccEngage into escrow. The defendant says that only ccPathfinder is “Replacement Software” so it has refused to escrow the code for the full ccEngage bundled suite of modules.

j) The Defendant Changes its Pricing for ccEngage

[30] In 2015, the defendant advised the plaintiff that it changed its pricing model for the ccEngage bundle from a “per school” price to a “per student” price. This is the same basis that the plaintiff used to price some of its software in 2007 and 2008 prior to granting the defendant’s license. Apparently, the Ministry of Education funds schools on a “per student” basis so that the defendant hopes to make the implications of its pricing more understandable to school administrators by expressing it in a compatible manner. Although the plaintiff used this manner of pricing previously, it objected to the defendant doing so. It offered no reason for its objection and made no alternative proposal for negotiation under the license agreement.

k) The Royalties have Increased Every Year

[31] The evidence is uncontradicted that the defendant has paid the plaintiff increased royalties each year since 2012 at least. That is, despite the price decrease incurred on the Replacement Software when the defendant bundled its software in 2012 and the change in pricing to a “per student” model in 2015, the plaintiff’s royalties have consistently gone up. During the trial, the plaintiff adduced no evidence that it has suffered any loss or loss of opportunity as a result of either of these changes. Any suggestion that the plaintiff could have earned more had the defendant not bundled its software or changed its pricing is just speculation. Moreover, the defendant retains 90% of its non-Ontario revenue and 87.5% of its Ontario revenue. Its economic incentive is to maximize its revenue and thereby maximize the plaintiff’s royalties. The plaintiff provided no evidence at the trial to support the allegation in its statement of claim that the defendant had artificially suppressed its revenue to limit the plaintiff’s royalties.

The Plaintiff’s Claims

[32] The plaintiff makes the following claims:

a. The defendant is in breach of its royalty obligations by paying royalties only on the percentage of revenues that it ascribes to ccPathfinder rather than on the whole of the sales revenue of the full ccEngage bundle;

b. The defendant is in breach of its obligation to negotiate in good faith a “fixed gross sale amount based on existing percentages” as it is obliged to do upon providing notice that it had bundled the Replacement Software with other software;

c. The defendant is in breach of its obligation to renegotiate in good faith the two Revenue Royalties that arose when it made a “fundamental change” to its pricing model by moving to a “per student” price;

d. The defendant is in breach of the license agreement by its late payments of royalties and its persistent lateness;

e. The defendant is in breach of the general security agreement by reason of it having granted security over The Real Game Assets without notice to or the consent of the plaintiff.

f. The defendant is in breach of the general security agreement by refusing to escrow the ccEngage code; and

g. The defendant is in breach of both agreements due to its breach of its duty of honest dealing or honest performance under Bhasin.

[33] The plaintiff argues that it terminated the license agreement in 2012. At the same time, it says it validly accelerated the remaining portion of the $2 million cap for Ontario future royalties. It also needs an accounting to assess royalties due on the full ccEngage suite.

Damages

[34] The plaintiff provided evidence from the its expert KPMG using inputs from the defendant’s expert PWC, that as of August, 2016, accelerating the remaining $2 million and expanding royalties to all of ccEngage would result in a payment due to the plaintiff of $5,282,631. This figure increases to $6,050,835 when brought forward to August, 2017. Calculated to August 31, 2012, the closest fiscal year end to the plaintiff’s alleged termination of the license, the number would have been $2,457,308.

[35] It is clear that the plaintiff did not terminate the license agreement in 2012. It gave notice of default as provided by the agreement. If the defendant was in default and failed to cure within the 45 days’ notice as provided then the plaintiff had the right to elect to terminate the agreement. But it made no such election. Rather, it continued to accept Revenue Royalties from the defendant’s sales. But Revenue Royalties cease on termination of the license. By accepting ongoing Revenue Royalties the plaintiff affirmed the continuation of the license agreement. Moreover, in June 2013, the plaintiff demanded that the defendant put source code into escrow and it relies on that demand as basis to claim that the defendant has breached the general security agreement. The demand presupposes that the general security agreement remained alive and entitled the plaintiff to make the demand when it did in.

[36] There is no basis in fact or in law to find that the plaintiff has terminated the license agreement or the general security agreement.

[37] The plaintiff’s claim for “acceleration” is also problematic. To be sure, the general security agreement allows for acceleration of indebtedness on breach. Indebtedness is defined in the general security agreement to include the defendant’s future liability for royalties. But the $2 million cap on the defendant’s future royalty obligation on its Ontario sales is what it says it is. It is a cap; a maximum. The defendant has not agreed to pay a fixed principal amount or guaranteed a minimum payment of $2 million. KPMG assumes that the defendant’s royalty obligation will hit $2 million in 15 years based on historic rates of royalties. But accelerating royalties for 15 years has to involve some accounting for the time value of money. If the defendant agreed to pay $2 million in 15 years and that principal amount was accelerated that would be a different set of facts. Here, the defendant is required to pay 12.5% of its sales revenue when earned in future until it pays up to $2 million in the aggregate. There is no $2 million principal debt to accelerate. The cap may never be reached. Accelerating payment of royalties to be earned in future involves estimates of the likelihood of the royalties to be earned each quarter and then determining the value of a capital sum needed today to produce a royalty stream that meets those estimates. I have not reviewed KPMG’s full report because, as a result of an issue that arose during the trial, Mr. Carlucci’s testimony was deliberately limited to the few discrete numbers that I set out above. That evidence is based on a calculation of payment now of a fixed $2 million less royalties paid to date. In my view, with no accounting for present value, that is not a fair calculation of the accelerated value of the defendant’s future royalty obligations.

Analysis of the Plaintiff’s Claims

a) Replacement Software

[38] The plaintiff’s main claim is that the full ccEngage bundled suite is Replacement Software. It says that royalties should be calculated on the full sales revenue of ccEngage rather than on just the percentage revenue attributed to ccPathfinder by the defendant.

[39] The plaintiff argues that while the defendant may only focus on the Course Selector functions, it licensed the plaintiff’s entire suite of offerings. Accordingly, to the extent that functions from any of its licensed suite of software can be found in any module of ccEngage, then that module of ccEngage qualifies as Replacement Software.

[40] The plaintiff called expert testimony given by Mr. Gary Leduc. Mr. Leduc found functionality from the Expoed’s original suite of licensed software in each of the modules of ccEngage. The defendant’s expert Jason Frankovitz could find support for Mr. Leduc’s assessment only in relation to the ccPathfinder module.

[41] The terms of the software license resolve this issue without the need to deal with the substance of the experts’ testimony although I will do so briefly for completeness only. As discussed above, Replacement Software (a) performs the same or better functions than the Expoed software; and (b) it replaces the Expoed software in the suite of products offered by the defendant. The plaintiff completely ignores the second half of the contractual definition. It says that its software used personalized folders, saved data, had a logon portal, and a number of other functions that virtually any online data-manipulating software would have. It finds those functions in the defendant’s modules and therefore claims that the defendant’s modules are Replacement Software because they perform the same functions as the plaintiff’s software. But the defendant’s other modules were either pre-existing (in the case of ccSpringboard) or were developed by or purchased from third parties (in the cases of ccSpark, ccAchieve, and The Real Game). Other than ccPathfinder, none of the other modules that make up the ccEngage bundled suite replaced the Expoed software in the suite of software products offered by the defendant as set out in para. 1.9 of the license. Therefore, whether those other modules share functionality with some of the plaintiff’s software or not, they do not qualify as Replacement Software.

[42] The simplest example is defendant’s module called ccThe Real Game. It is an actual paper-based role playing game for school children with some online capabilities. It was a new product added by the defendant in 2012. It did not replace anything in the plaintiff’s pre-existing offering. Mr. Leduc was able to find careers being discussed in The Real Game and noted that careers can be added to the game as they can be added to the plaintiff’s pre-existing Career Cruising database. He found that both The Real Game and the plaintiff’s software allow users to save their data. This let him conclude that The Real Game performs the same functions as the plaintiff’s pre-existing software. But nothing in his testimony goes to the next step and concludes that The Real Game (or any module other than ccPathfinder) replaced the plaintiff’s pre-existing software in the suite of products offered by the defendant.

[43] If necessary to go the next step and assess the competing experts’ testimony, I find that Mr. Leduc’s testimony was unsatisfactory and ultimately inadmissible. Mr. Leduc is a former public school superintendent. He is not a software expert. After he retired, he became involved in helping the plaintiff create and sell its software. His expertise was recognized as a user of career counselling software. He was qualified to give opinion evidence as an expert in the types of functions of computer software that are valuable to people engaged in administering school course selection processes. While his lack of complete independence was brought out in the voir dire, he undertook to give independent, objective testimony and under White Burgess Langille Inman v. Abbott and Haliburton Co., 2015 SCC 23, http://canlii.ca/t/ghd4f I ruled that the issue of independence went to the weight of his testimony.

[44] As it turns out, there was reason to be concerned with Mr. Leduc’s independence. No one has kept a functioning version of the Expoed suite of software that the plaintiff licensed to the defendant. Moreover no one has kept a copy of the object code for the software. The only place Mr. Leduc could turn to look for the functionality of the plaintiff’s licensed software therefore was a marketing manual that Mr. Abbott wrote that described some aspects of the software. The chart referred to throughout the trial as listing the functions of the plaintiff’s various pre-existing modules was a marketing blurb. It did not purport to be a comprehensive listing of functions or even a listing of the most important functions of the Expoed software. In relying on the plaintiff’s “manual” it was clear that many of the “functions” listed were generic and trivial (listing things like saving data, linking to websites, and printing). Mr. Leduc used those types of “functions” to claim that the defendant’s new modules performed the same functions as the plaintiff’s pre-existing software. But even to do that, Mr. Leduc agreed that he had to stretch. He admitted quite forthrightly that he took liberty in giving broad definitions to some of the listed functions. More pointedly, he admitted that he interpreted the functions listed in the plaintiff’s “manual” broadly “to be as inclusive as possible.” Mr. Leduc was honest to a fault. He is a highly experienced and trained school administrator. He knows the uses and valuable functionality of career counselling software. But he understood his role at the trial was to try as best as possible to show that the defendant’s modules had functions that were claimed to be part of the plaintiff’s pre-exiting offering. He understood that he should and would take liberties with word meanings and functionality descriptions as needed to fulfil his task. He viewed his role as being an advocate for the plaintiff to whom he was loyal rather than as an independent expert. In my view, Mr. Leduc’s testimony proved to be inadmissible. R. v. Abbey, 2017 ONCA 640, http://canlii.ca/t/h56zc.

[45] Even if Mr. Leduc’s evidence is admissible, Mr. Leduc did not testify to his experience as a school administrator discussing functionality that had special meaning to him as an expert. He just looked at a marketing document describing some app functions and then argued that those functions exist in parts of ccEngage. He had no expertise in this type of software analysis. Given his lack of software background, the fact that he did not have a running version of the plaintiff’s software to see, the inadequacy of the “manual” used, on top of the witness’s advocacy, I cannot give his testimony any real weight.

[46] Finally, I note that in cross-examination, Mr. Leduc also conceded that he has no knowledge of any function of the defendant’s ccEngage software, other than ccPathfinder, that the defendant derived from the plaintiff’s pre-existing software. His testimony did not disagree with Mr. Abbott’s evidence that the defendant’s ccSpringboard module was the next version of its own pre-existing Career Cruising suite rather than a replacement of the plaintiff’s licensed software. In all therefore, even if admissible, Mr. Leduc’s evidence does not assist the plaintiff in proving a breach of para. 1.9 of the license agreement.

[47] Mr. Annab also tried to give evidence that the defendant’s ccEngage had the same functions as the plaintiff’s pre-existing software. Apart from his obvious interest in taking that view, he admitted quite plainly that when he was examined in 2014, he had no recollection of the functionality of the plaintiff’s own pre-existing modules. He could not describe them. They no longer exist. Mr. Annab’s evidence at the trial was, by his own admission, based on “reconstructed memory” from the “manual” on which the plaintiff relies. That evidence therefore carries no weight as well.

[48] Anyone can read the “manual”. But that does not make its marketing blurbs fair reflections of the functionality of the plaintiff’s software modules. I accept Mr. Frankovitz’s evidence that while the definition of “functionality” is somewhat “mushy” it involves an assessment of a description of what a program does involving both technical considerations and user understanding. The plaintiff does not have a copy of its program or its code. Neither does the defendant. The plaintiff is therefore unable to prove the functions of its software except from the highest level of abstraction and to the extent admitted by the defendant. In any event, there is no evidence at all contradicting the defendant’s evidence that other than ccPathfinder, none of the other elements of the ccEngage bundled suite replaced the plaintiff’s licensed software.

[49] Mr. Merskey goes further and asks me to rule that it would be commercially unreasonable to interpret para. 1.9 of the license agreement to require the defendant to pay royalties on its own pre-existing software. I do not see how I can go that far in this case. While I accept that utterly generic functions like saving and printing cannot have been the types of functions that objective parties would expect to be compared under para. 1.9, had the defendant actually replaced some of its own software modules with elements of the licensed software, the defendant might well have found itself paying royalties although it had pre-existing software with the same functionality. All I need to say in this case is that the plaintiff failed to prove that the defendant’s ccEngage bundled suite meets the definition of “Replacement Software” except for the ccPathfinder module which the defendant admits and on which it has been paying royalties throughout.

[50] Accordingly, the defendant did not breach the license agreement or the general security agreement by paying royalties on sales of ccPathfinder only and not paying royalties on the whole of the revenue derived from sales of the full ccEngage bundled suite.

b) Bundling and the Duty to Negotiate

[51] The plaintiff argues that the defendant violated it obligation to negotiate in good faith a “fixed gross sale amount based on existing percentages” upon notifying the plaintiff of the bundling of its software into ccEngage. After the defendant gave notice of the bundling, it provided a description of its pricing methodology that attributed 40% of its revenue from ccEngage to the Replacement Software module ccPathfinder. The defendant asked for information.

[52] The parties mediated this among a number of issues. The mediation failed. Offers made at the mediation are not admissible so I am not in a position to make an assessment of the quality of the negotiations. That is, I cannot say why the mediation failed or whether one side or the other might have been at fault or might have failed to negotiate in good faith in the mediation.

[53] Mr. Annab testified that after the mediation, the defendant refused to arbitrate the issue of the pricing of the bundle. The plaintiff’s counsel asked for arbitration. The defendant’s counsel agreed in writing that the defendant would arbitrate the issue. Mr. Annab said in cross-examination that he was advised by his counsel that “arbitration was not proceeding.” That passive expression is a long way from proving that the defendant refused to arbitrate in face of Mr. Merskey’s written confirmation of his client’s willingness to do so.

[54] There is no evidence before me that the plaintiff delivered a notice to arbitrate to commence an arbitration. There is no evidence at all as to why arbitration did not proceed.

[55] In addition, no one was able to explain to me the meaning of the contractual phrase “fixed gross sale amount on existing percentages” that was to be the subject of the negotiation. The plaintiff presented no evidence that it made an offer or asked the defendant for an offer to fix that gross sale amount. I was not made aware of any effort on anyone’s part to negotiate the contractually mandated issue.

[56] In all, the plaintiff did not prove that the defendant committed a breach of the obligation to negotiate in good faith a fixed gross sale amount based on existing percentages as required by the license agreement. A failed mediation and an arbitration that does not proceed for unknown reasons is not proof of a lack of good faith by the defendant.

c) Change in Pricing Model

[57] The defendant changed its pricing model in 2015. It changed from billing on a “per school” basis to a “per student” basis. The plaintiff asked for information which was not forthcoming. The parties were in the midst of the litigation. There is no complaint by the plaintiff of any failure of the defendant to fulfill its production and disclosure obligations concerning this issue under the Rules of Civil Procedure. The plaintiff says that the change is a “fundamental change” that required the defendant to renegotiate in good faith the two Revenue Royalties. The only evidence concerning the change is:

i. Schools are funded on a “per student” basis so that billing on that basis might be more helpful to administrators;

ii. The plaintiff used the same pricing model in 2008; and

iii. Since making the change, revenue and hence royalties have increased.

[58] The plaintiff presented no evidence, case law, or argument on what makes the change a “fundamental change” for the purposes of the license agreement. Nor did the plaintiff adduce any evidence explaining the impact of the change. It appears to have been arithmetic rather than a qualitative change. The burden of proof lies on the plaintiff on this issue. The defendant’s counsel denied that the change was a “fundamental change.” In response, the plaintiff made no offer to negotiate. It did not invoke the dispute resolution process. The plaintiff presented no evidence at all of any real effort to engage the defendant in negotiations of the two Revenue Royalties after the change in pricing or of dishonesty or lack of good faith on the part of the defendant.

d) Late Payments by the Defendant

[59] The most recent late payment was on October 31, 2016. That payment was one day late. The last material late payment was on April 30, 2014. That breach was cured within 45 days. The plaintiff must be taken to have elected to affirm the agreement in failing to act on the material breaches for more than the two year limitation period.

[60] The license agreement does not provide a ground of termination based on persistent breaches that are cured or waived. There was no evidence, law, or argument presented on how such a term, enforceable three years after the most recent material but cured late payment, could be implied the parties’ agreements. Such a term is not necessary to give business efficacy to the agreements. There is already a term requiring annual meetings to discuss issues that arise (of which more will be written below). Neither would the proverbial officious bystander, or passenger on the Yonge Street subway line, answer “Of course” if asked whether the parties should be taken to have understood that such a term was always part of their bargain.

[61] The plaintiff also claimed in its January 2013 letter that the defendant was late with royalties due to it calculating royalties based on its invoice dates. The license agreement is clear that the parties agreed expressly that royalties are to be based on invoicing and not revenue recognition. Had the defendant failed to invoice the September, 2016 school year in August, so as to balance out the timing concern raised by the plaintiff, different considerations may have arisen. Otherwise, the defendant acted fully within the clear and express terms of the license agreement in calculating its royalties on invoice dates as provided for in the agreement. There was no breach of contract or late royalty payment on this ground. The plaintiff therefore cannot rely on this issue as a proper basis for enforcement of its security or as an aspect of its allegation that the defendant breached its duty of honest dealing under Bhasin.

e) The purchase of The Real Game and the grant of security over the purchased assets by the defendant

[62] The license agreement provides for the defendant to grant a charge over its existing assets to secure its future payment obligations. The general security agreement uses standard form language that includes existing and future assets within the grant of the charge. The Real Game was not an asset of the defendant on May 30, 2008. Under the license agreement, the defendant is authorized to grant security over the assets of The Real Game without notice to or the permission of the plaintiff. Under the definitions in the general security agreement, the defendant was not entitled to do so.

[63] The general security agreement begins with the following recitals:

Whereas the parties entered into a Software License and Purchase Agreement (the Transaction Agreement”) and a Sideletter Agreement on May 30, 2008;

And whereas the parties intend certain obligations of the [defendant] in respect of the aforementioned agreements to be secured by this Security Agreement;

[64] The provisions of the recitals do not alter the interpretation or the words of the general security agreement. But they do disclose the parties’ joint intentions that the license agreement is the principal transaction document and the general security agreement to be an ancillary agreement to give effect to the obligations under the license agreement and no more.

[65] Mr. Mulholland points to paras. 4 (10) (d) and 6 (12) (d) of the general security agreement in which the parties represent to each other that the license agreement and the general security agreement are valid and enforceable agreements. He argues that each is to be read separately in accordance with its terms.

[66] One could argue that the fact that the license agreement allows something that the general security agreement does not allow is not a basis to say that the agreements conflict. Compliance with the stricter will amount to compliance with both. The agreements do not create a conflict in the sense of requiring and prohibiting the same acts at the same time or otherwise mandating the impossible.

[67] Mr. Merskey argues that it is a principle of contract interpretation that agreements that all relate to the same transaction are to be read harmoniously if possible. Where one agreement discloses that it is ancillary to a main deal document, efforts should be made to give primacy to the terms of the deal. He points to para. 2 (2) of the general security agreement that only describes future security over liquid assets. In describing the scope of the charge on Intellectual property, such as the software in issue, para. 2 (2) refers only to IP that existed on the date of the agreement. Mr. Merskey argues that the court can interpret the scope of the security granted therefore as benign limited to existing IP and excluding future purchases of IP assets such as The Real Game.

[68] In my view, the plaintiff is taking advantage of a slip in the use of a standard form document. The effect of the interpretation sought by the plaintiff is to expand the deal and negate the limitation of the grant of security to existing assets as agreed upon in the license agreement. An ancillary agreement cannot contradict the main agreement or render a term of no force or effect without a proper amendment being agreed upon. Hawrish v Bank of Montreal, [1969] SCR 515 at p. 524, 1969 CanLII 2 (SCC), http://canlii.ca/t/1nlgn. In my view, whether by virtue of para. 2 (2) of the general security agreement or under Hawrish, it would be giving the plaintiff a windfall for which it did not bargain to recognize its security interest as extending to a children’s role playing game that the defendant purchased years after the license was entered into. The plaintiff negotiated for security over the defendant’s existing assets in 2008 only. Without amending the license agreement, the security agreement cannot be read to negate the agreed upon limited scope of the grant.

[69] Therefore, the general security agreement does not apply to The Real Game assets. The defendant committed no breach of the general security agreement by purchasing The Real Game without notice to the plaintiff or in granting a vendor takeback security interest over the purchased assets without the plaintiff’s consent.

f) The Defendant Refuses to Escrow the Code for ccEngage

[70] I have already ruled that only the ccPathfinder module is Replacement Software under the license agreement. The rest of the ccEngage bundled suite does not meet the definition of Replacement Software in para. 1.9 of the license agreement. As the general security agreement only entitles the plaintiff to compel the defendant to place in escrow the source code of Replacement Software, the defendant did not breach the general security agreement by refusing to escrow the code for the other modules of ccEngage.

g) The duty of honest dealing in Bhasin

[71] In his opening address, counsel for the plaintiff submitted that the plaintiff intended to establish that the defendant had intentionally deceived the plaintiff into agreeing to the terms of the license agreement and that the defendant had been dishonest in its performance during the term of the agreement.

[72] The plaintiff made no effort to try to prove that the defendant made a representation of fact prior to the agreement, that the representation was untrue, or that the defendant made the representation knowingly or with reckless disregard for its truth. There was no evidence at all that the defendant made any pre-contractual representation let alone an untrue one or a deliberately untrue one.

[73] The plaintiff made no effort to try to prove that the defendant told it a lie or was otherwise dishonest in its performance of the license agreement. To be sure, the plaintiff alleged that the defendant did not negotiate with it in good faith. The correspondence and Mr. Annab’s testimony shows that the plaintiff repeatedly sought more and better information from the defendant. It sent its accountant in to audit some information. It retained Duff & Phelps to audit royalties in full. Duff & Phelps made four extensive and intrusive information requests of the defendant. The contemporaneous documentary record establishes that the defendant provided the information sought on a fairly timely basis. There was no evidence of any contemporaneous complaint by Duff & Phelps or the plaintiff as to the disclosure of information by the defendant. In addition, the plaintiff chose not to put the Duff & Phelps report into evidence or to call a witness from the firm. While Mr. Annab said that the report was incomplete, there is no basis in the evidence to ascribe fault for any incompleteness. Moreover, were an inference to be drawn on this point, it would be adverse to the plaintiff. It had the ability to call Duff & Phelps and its failure to do so logically indicates that the evidence that the firm would give would not have assisted the plaintiff’s case. But, no adverse inference is required in this case to resolve this issue.

[74] In my view, it is important to understand what Bhasin did and did not do. I agree with Belobaba J. in Data & Scientific Inc. v Oracle Corp., 2015 ONSC 4178 in which he held:

[10]…In Bhasin, an obviously important development in the continuing modernization of Canadian contract law, the Court in essence, did two things: one, it recognized that the ‘situational’ and ‘relational’ examples or pockets of a judicially recognized good faith doctrine were aspects of a broader organizing principle of good faith – “that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily;” and two, the Court decided on the facts before it that it was time to recognize a new duty - “a general duty of honesty in contractual performance.”

[11] The Court made clear that this new duty of honesty in contractual performance flowed “directly from” and was an “aspect” (albeit “one of the most widely recognized aspects”) of the general organizing principle of good faith. In other words, the pre-existing situational and relational aspects or pockets of implied good faith (such as the obligation to exercise discretionary contractual powers reasonably) were not eliminated but were simply realigned under a broad organizing principle of good faith. And the newly established duty of honesty in contractual performance was applied on the facts in Bhasin to confirm that the defendant Can-Am breached this duty by misleading the plaintiff and acting dishonestly in numerous ways leading up to and including the non-renewal of their agreement.

[75] In addition, I agree with Justice Dunphy who wrote in Addison Chevrolet Buick GMC Limited et al v. General Motors of Canada Limited et al 2015 ONSC 3404, 2015 ONSC 3404 (S.C.J.):

[115] In suggesting this approach to the doctrine of good faith, Cromwell J. indicated that this “will bring a measure of coherence and predictability to the law and will bring the law closer to what reasonable commercial parties would expect it to be” (Bhasin, supra at para. 41). It would be ironic indeed if a ruling intended to bring coherence and predictability by underscoring the common sense minimum standards of honesty in the commercial context should be misconstrued as a pretext for injecting uncertainty and risk of arbitrary outcomes into the world of commercial agreements whose very raison d’être is the pursuit of predictability and certainty.

[116] Bhasin is no authority for unbridled creativity in the creation from whole cloth of obligations in a contractual context which the parties have not provided for or have addressed in a fashion which one party regrets in hindsight.”

[76] In my view, the Supreme Court has rationalized, renamed, and provided an overall framework for understanding several pre-existing aspects of duties of good faith that have been recognized by the law. In addition, it added one arguably new (arguably not new) duty not to lie to one’s contractual counterparty. At para. 62 of Bhasin, Cromwell J. wrote:

Commercial parties reasonably expect a basic level of honesty and good faith in contractual dealings. While they remain at arm’s length and are not subject to the duties of a fiduciary, a basic level of honest conduct is necessary to the proper functioning of commerce

[77] Mr. Annab says that the defendant would not negotiate with him. Counsel argued that the defendant simply asserted its will and the plaintiff had no ability to engage the defendant to get it to negotiate a different view. From this it argues that the defendant not only committed breach of the two duties to negotiate expressly set out in the agreement that are discussed above, but a more general breach of the duty of honesty and good faith in contractual dealings.

[78] I do not agree.

[79] Apart from there being no evidence of Mr. McQuillan ever lying or being dishonest, the plaintiff had many ways to engage with the defendant. First, it could have proposed a different outcome than the one suggested by the defendant. To be sure, the plaintiff repeatedly rejected the defendant’s unilateral assertions. It usually then asked for more information. It sent in its accountant and then Duff & Phelps. It is good at requiring and collecting information. There is little evidence that it used the information to commence a negotiation or to express a negotiating position (at least outside of mediation).

[80] There is also no evidence that the plaintiff ever sought to take advantage of para. 24.3 of the license agreement. That provision positively requires the parties to meet annually to discuss amendments to reflect the agreed upon dynamic nature of business climate and the parties’ needs. There is no evidence of the plaintiff convening a mandatory annual meeting. Every other annual meeting was to be at its office. If the plaintiff convened a meeting and the defendant refused to attend or acted dishonestly, none of this was in evidence before me. The agreement provided right within its terms a mechanism to bring issues to the fore and to try to require negotiations.

[81] As discussed above as well, the agreement contains a formal, escalating dispute resolution process. Paragraph 23.2 of the license agreement provides each party with the right to initiate arbitration if mediation does not succeed in resolving a dispute between the parties. If the plaintiff could not get the defendant to the bargaining table, it had at its disposal a binding arbitration process to put its position forward.

[82] In all, the plaintiff was not limited at all to just asking for information or else being subject to the defendant’s whims. It had the ability to engage in formal processes provided in the license agreement to compel negotiations or to obtain a resolution of issues with the defendant. It was not obliged to allow the defendant to dictate terms to it. Moreover, as noted above, if the plaintiff was not able to attract the defendant’s attention with the communications that it made, it could have tried saying something different and perhaps more attractive to the defendant.

[83] In all, the plaintiff did not prove that the defendant had the ability to assert its will or that it declined to negotiate issues in good faith. The plaintiff did not prove that the defendant acted dishonestly in the ways asserted in counsel’s opening or at all. Moreover, absent evidence of overt dishonestly, the making of the claim under Bhasin added nothing at all to the two specific contractual obligations to negotiate in good faith that were already discussed above.

Outcome

[84] The action is dismissed.

[85] The defendant may deliver no more than five pages of submissions on costs by October 13, 2017. The plaintiff may deliver no more than five pages of submissions on costs by October 27, 2017. All submissions shall be made in searchable PDF format and shall be delivered as attachments to an email to my Assistant. In addition to their submissions, both parties shall deliver costs outlines no matter what position they take on costs. In addition, both may deliver any offers to settle on which they rely. Neither side shall submit the text of any laws or cases. References to statutory material or case law, if any, shall be made by hyperlinks embedded in the parties’ submissions.

F.L. Myers

Released: October 2, 2017

[^1]: Capitalized terms are defined in the agreement. [^2]: Counsel made a suggestion in closing that a Mr. Abbot’s credibility might be affected by a loan he made to the defendant in 2008. The matter was not put to Mr. Abbott on cross-examination and the argument is ignored for the reasons that lie behind the rule in Browne v. Dunn (1893), 6 R. 69 (H.L.). Absent evidence about the loan and Mr. Abbot’s explanation, the argument is conjecture at best in any event.