COURT FILE NO.: CV-16-553772
DATE: April 9, 2018
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Sanford Gray v. Promark Electronics Inc.;
BEFORE: MASTER C. WIEBE
COUNSEL: Alan B. Dryer for Sanford Gray; Greg McGinnis for Promark Electronics Inc..
HEARD: March 27, 2018.
REASONS FOR DECISION
[1] The plaintiff, Sanford Gray, moves for an order that the defendant, Promark Electronics Inc. (“Promark”) produce a further and better affidavit of documents, and that the representative of Promark, Syd Knecht, answer questions he refused at his examination for discovery on September 18, 2017.
[2] In the underlying action Mr. Gray seeks damages for wrongful termination of his employment with Promark. He was employed as the Ontario sales manager for Promark, which sold electronic control equipment. He alleges he was constructively dismissed when Promark in 2015 unilaterally reduced his compensation package without cause.
[3] In its Amended Statement of Defence Promark alleged that its employment agreement with Mr. Gray gave Promark unfettered discretion to vary Mr. Gray’s commission structure from time to time. The pleading went on to allege that it used this discretion to adjust the Gray commission structure on four occasions when that structure became “misaligned with [Promark’s] business realities.” These occasions were in 2003, 2005, 2009 and 2015. The pleading indicated that the core relevant “business reality” was the company’s profitability; but the pleading also referred to the diversification of the sales portfolio. Most of Mr. Gray’s accounts were with Promark’s main customer, Skyjack. The pleading also alleged that Mr. Gray caused financial damage to Promark when he “resigned” from his employment in January, 2016.
[4] In his Statement of Claim and Reply, Mr. Gray denied that Promark had such unfettered discretion. He alleged that his compensation was based primarily on his sales, and that the changes to his compensation in 2003, 2005 and 2009 were negotiated. He alleged that in 2015 there was another negotiation that Promark undermined and that led to a unilateral change in his compensation, which he did not accept. Importantly, the Gray Reply at paragraph 9 also expressly challenged the bona fides of the Promark professed reliance on profitability to justify the 2015 compensation reduction. In that paragraph, Mr. Gray alleged that the real reason for the change was Promark’s need to “free up funds” to finance business expansion, takeover efforts and the lucrative compensation for Mr. Knecht’s son.
[5] Promark delivered an unsworn affidavit of documents in January, 2017. Mr. Dryer found it inadequate as it did not include documentation about Promark’s profits and losses over the course of Mr. Gray’s employment, and in particular the financial statements of the company for that period. Mr. Gray brought a motion originally returnable August 1, 2017 for a further and better affidavit of documents. Mr. Knecht swore an affidavit in the motion on July 18, 2017 wherein he disclosed sales, profit and loss information about the Skyjack account and the company in general for the period 2013 to 2016. He attached copies of the Promark Statements of Earnings for 2004, 2006, 2009 and 2016. He stated that Promark became unhappy with Promark’s declining profit margins, and with Mr. Gray’s performance in diversifying customers and managing the workforce, all of which caused Promark to change Mr. Gray’s compensation package in 2015. The motion was adjourned to allow for further disclosure and examinations for discovery.
[6] On August 9, 2017 Mr. McGinnis made the available and unaudited Promark financial reports available for inspection by Mr. Dryer. They were inspected on that day. However, these reports were not formally produced for the purpose of this litigation. A sworn version of the Promark affidavit of documents was delivered on September 18, 2017.
[7] Mr. Knecht was examined for discovery on September 18, 2017. He was asked several questions about the Promark pleading concerning “business realities” concerning the compensation changes in 2003, 2005, 2009 and 2015. He refused questions, nine of which remain outstanding.
[8] In this motion, Mr. Gray seeks an order for a further and better Promark affidavit of documents that will include the Promark financial books and records which demonstrate Promark’s financial performance throughout the years of Mr. Gray employment. Mr. Gray specifically wants the Promark financial statements and sales records. In addition, Mr. Gray seeks answers to the following discovery questions that Mr. Knecht has not answered:
| No. | Ques. | Page | Question |
|---|---|---|---|
| 1. | 272 | 62 | To produce sale records that show the sale volume for Sandy’s book of business and sales margins on Sandy’s book of business overall and broken down by customer for the whole period of his employment. |
| 2. | 274 | 63 | To produce the financial statements of the company to show its financial performance for the periods where Sandy Gray’s compensation package has changed over the years and how that correlated with changes in Sandy’s compensation package. |
| 3. | 278 | 65 | To review all of the electronic records or paper records that are still available and look for all of the excel spreadsheets that can shed light on the issues of Promark’s earnings as it correlates to Sandy’s compensation package, and if found, to produce them. |
| 4. | 525 | 122 | To advise what was the impact of an error that relates to the costing of a control panel given to Skyjack in 2016. |
| 5. | 700 | 166 | To produce the underlying records that came up with that calculation so the large discrepancy can be understood (see U/T given at page 166 question on 699) |
| 6. | 711 | 169 | To produce evidence of what actual costs are quoted to Skyjack and what actual components are put in there, and differences in the margin, so that it can be calculated whether they have any effect on the calculations that the Defendant is putting before the Court in this case. |
| 7. | 713 | 170 | To update the figures in the two tables found in the affidavit of Mr. Knecht and in paragraphs 5 and 6 of the Defendant’s Statement of Defence and to update them and provide the Plaintiff with the 2017 fiscal year and figures as well. |
| 8. | 279 | 65 | To advise whether at the time that Sandy’s compensation structure was changed, other people within the company had their compensation structure changed as well, including Mr. Knecht. |
| 9. | 289 | 67 | To produce the financial statements of the company to look at the fluctuations in overall compensation to whoever received compensation and overall profit over the period of Sandy’s employment, so that the assertion of conformity to business objective in the economic circumstances can be tested. |
[9] Mr. McGinnis’ essential argument was that Promark has produced the relevant financial records for the periods in which Mr. Gray’s compensation was changed. Mr. McGinnis does not deny that the requested documentation may be “relevant” in the broad sense given Promark’s pleaded reference to its “business realities,” but he argued that what is being sought after is of marginal relevance only and should not be allowed given the present, narrower scope of relevance and the doctrine of proportionality; see Yim et al. v. Song et al. 2015 ONSC 7605 at paragraph 26. He called the requested documents unimportant to the case, and a “fishing expedition.” He argued that these documents relate to the reasons for the previous changes in Mr. Gray’s compensation which he described as being a “collateral issue.”
[10] Mr. Dryer responded by arguing that his client needed the requested documentation to “test” the Promark position as to its discretion, its profitability and its use of the discretion it had, if any. In his factum, he pointed out that a document is relevant if it tends to prove or disprove a matter in issue in the pleadings; see Kulack v. Panolam Industries Ltd., 2016 CarswellOnt 12932 (SCJ) at paragraph 16. He pointed out that, where the financial status of a litigant is in issue, the courts have ordered production of financial documents; see French Estate v. French, 1994 CarswellOnt 539 (Ont. Gen. Div.) at paragraph 5 and Chaban v. Kramer, 2008 CarswellSask 127 (S.C.Q.B.) at paragraph 7.
[11] I do not agree with Mr. McGinnis. The reasons for the previous changes in Mr. Gray’s compensation are important to the case. Both parties rely on the course of conduct of the parties. Mr. Gray alleges that Promark had no discretion in setting his compensation; it was all about his sales. Promark, on the other hand, alleges it had complete discretion, and that in its course of conduct it was driven by its own “business realities” such as profitability and customer diversification. Mr. Gray is entitled to explore in detail the veracity of this pleaded Promark position to establish the circumstances in which previous negotiations of compensation change took place, all with a view to establishing that Promark in fact had no discretion to change. Furthermore, and most importantly, given Mr. Gray’s fallback pleading in his Reply as described above, the requested documentation is also important to show that, if Promark had discretion, any “business realities” that may have formed the basis of its exercise of discretion to change the compensation in the past did not form the basis of its exercise of discretion in 2015, thereby lending credence to Mr. Gray’s fallback position that Promark was in breach of contract in 2015 in any event, even if it had discretion. Therefore, I find as a general proposition that the requested documentation is relevant.
[12] However, the production must be reasonable and proportional. I do not believe that the financial books and records for the entire time of Mr. Gray’s employment are relevant. Only those financial books and records leading up to and including the changes in Mr. Gray’s compensation package are important to the case.
[13] I order, therefore, that Promark produce a further and better affidavit of documents that contains its financial books and records (including its financial statements and sales records) for the period, 2000 to 2016.
[14] I know that Promark is concerned about Mr. Gray misusing this information as he is apparently now working for a competitor. In my view, the deemed undertaking in Rule 30.1.01(3) should provide sufficient protection in this regard.
[15] Concerning the refusals, here is my ruling as correlated with my previous chart:
| No. | Ques. | Page | Ruling |
|---|---|---|---|
| 1. | 272 | 62 | This documentation is relevant for the reasons given, and must be produced as a part of the further and better affidavit of documents. |
| 2. | 274 | 63 | This documentation is relevant for the reasons given, and must be produced as part of the further and better affidavit of documents. |
| 3. | 278 | 65 | This documentation is relevant for the reasons given, and must be produced as part of the further and better affidavit of documents. |
| 4. | 525 | 122 | At Mr. Knecht’s discovery there was reference to correspondence between Mr. Gray and Mr. Knecht about sales to Skyjack for 2015 - 2016. In this correspondence, Mr. Gray referred to a mistake in the Skyjack pricing that resulted from missing the cost of some panels. Mr. Dryer asked for the cost of this mistake. In my view, this needs to be produced as it bears on the quantum of the sales for that year, which may affect Mr. Gray’s commission entitlement. |
| 5. | 700 | 166 | At Mr. Knecht’s discovery there was a discussion about the difference between the gross profit margin shown in the Knecht’s affidavit for 2015 and the lesser profit margin shown in the produced Statement of Operations for that period. Mr. Dryer asked for production of the underlying documents that explain the discrepancy. Mr. McGinnis answered by stating that the source documents for the numbers in the affidavit was the Promark “accounting software,” while the numbers in the Statement of Operations were prepared by the accountant using different variables. This bears on the issue of the Promark profit margin for 2015, which is an important issue. For the reason already indicated, the requested underlying documents must be produced as a part of the further and better affidavit of documents. |
| 6. | 711 | 169 | At discovery Mr. Knecht admitted that Promark used components to make products for Skyjack that were lower in cost than what Skyjack thought was being used. Mr. Dryer wanted evidence of the costs of the components quoted to Skyjack and the costs of what was actually used, all in order to determine the real profit margin for Promark. For the reasons already indicated, I find that this must be produced to elucidate the Promark profit margin. |
| 7. | 713 | 170 | I was given no evidence as to the relevance of 2017 financial information, as Mr. Gray left his employ in January, 2016. This question does not have to be answered. |
| 8. | 279 | 65 | The question of whether other people in the company had their compensation changed at the time of and in the same way as Mr. Gray’s changes, in my view, is of marginal relevance, if relevant at all. This does not have to be answered. |
| 9. | 289 | 67 | This documentation is relevant for the reasons given, and must be produced as part of the further and better affidavit of documents. |
[16] The ordered answers must be delivered within 45 days from the date of this order.
[17] At the conclusion of the argument, Mr. Dryer filed a costs outline that showed a claim for partial indemnity costs in the amount of $12,324.40 (HST inclusive). Mr. McGinnis did not file a costs outline, but indicated verbally that his client is seeking partial indemnity costs only for the attendance on the argument in the amount of $2,000 plus HST.
[18] Given the result, with Mr. Gray being successful on the vast majority of this motion, I find that he is entitled to the costs of this motion. As to the quantum, I find that the motion was of moderate complexity and importance, and that Promark should have been more forthright in disclosing the requested financial documentation, particularly as it was the one who raised the issue of its own “business realities” and has disclosed some of the financial records already. I also find, however, that much of the research in the plaintiff’s material, although interesting, was of marginal utility. I also have to consider the fact that the defendant has had some moderate success.
[19] Balancing all of the factors outlined in Rule 57.01, I have decided to award Mr. Gray $8,000 in partial indemnity costs, to be paid by Promark in 30 days.
DATE: April 9, 2018
MASTER C. WIEBE