COURT FILE NO.: CV-15-55372 (Hamilton) DATE: 20181009

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Honey Bee (Hong Kong) Limited Plaintiff/Defendant by Counterclaim

AND:

VitaSound Audio Inc., Mark Chamberlain and Gora Ganguli Defendants/Plaintiffs by Counterclaim

COUNSEL: Walter Kravchuk, for the Plaintiff/Defendant by Counterclaim J. Barry Eakins, for the Defendants/Plaintiffs by Counterclaim

HEARD: February 26-28 and March 1-2, 2018 in Hamilton

R. A. Lococo J.

REASONS FOR JUDGMENT

I. Introduction

[1] Honey Bee (Hong Kong) Limited is in the business of manufacturing electronic devices. VitaSound Audio Inc. is in the business of providing software and hardware technologies designed to improve the performance and safety of personal audio devices.

[2] For a number of years, Honey Bee and VitaSound had an ongoing business relationship intended for their mutual benefit. VitaSound was developing software to improve the quality of personal audio devices, using what is known as neuro-compensator technology. Honey Bee was interested in manufacturing audio devices that incorporated that technology.

[3] Honey Bee provided operating funds to VitaSound, initially pursuant to a loan agreement. The loan was guaranteed by two individuals who were principals of VitaSound.

[4] Honey Bee then made an investment in VitaSound shares pursuant to an investment agreement. Part of Honey Bee’s purchase price for the VitaSound shares was payable in cash, and the balance by the delivery to VitaSound of a specified model of personal audio devices on an agreed timetable. Under the investment agreement, Honey Bee also had the exclusive right to manufacture and supply the hardware for the products, incorporating neuro-compensator technology.

[5] The relationship between Honey Bee and VitaSound subsequently broke down. VitaSound did not repay the loan to Honey Bee when it came due. Honey Bee later stopped filling VitaSound’s orders for personal audio devices. Honey Bee then sued VitaSound and its two principals, seeking repayment of the loan to VitaSound, including interest to the date of payment. Honey Bee also seeks payment from VitaSound’s two principals under their personal guarantees.

[6] In response, the defendants do not dispute their obligation to pay amounts due under the loan and the personal guarantees. However, they say that their obligation to pay further loan interest ended when Honey Bee breached its obligations under the investment agreement. According to the defendants, Honey Bee breached the investment agreement when it stopped supplying personal audio devices to VitaSound.

[7] The defendants also say that by oral amending agreement, Honey Bee agreed to fill VitaSound’s purchase orders for other models of personal audio devices in satisfaction of the amount that Honey Bee agreed to invest in VitaSound shares, even though those devices were not the model specified in the investment agreement. The defendants claim against Honey Bee for the shortfall between (i) the value of the personal audio devices Honey Bee was required to deliver to VitaSound pursuant to the investment agreement (as amended by the oral amending agreement), and (ii) the value of the personal audio devices Honey Bee actually delivered to VitaSound. By way of equitable set-off and counterclaim, the defendants say that they are entitled to offset (i) the amount of the delivery shortfall, against (ii) the amount due to Honey Bee under the loan and guarantee agreements.

[8] In response to the defendants’ defence and counterclaim, Honey Bee denies that there was any oral agreement amending the terms of the investment agreement. According to Honey Bee, it was VitaSound that breached the investment agreement when it declined to accept further shipments of the specific model of personal audio devices set out in the investment agreement. Honey Bee also says that equitable set-off is not available in this case. Honey Bee also contests VitaSound’s calculation of the alleged delivery shortfall of personal audio devices.

[9] The issues to be determined are as follows:

1. Defendants’ liability for Honey Bee’s loan to VitaSound – Are the defendants liable for amounts due to Honey Bee under the loan agreement and the personal guarantees?
2. Oral amendment to Investment Agreement – Was there an enforceable oral agreement under which Honey Bee agreed to fill VitaSound’s orders for other models of personal audio devices to satisfy the amount that Honey Bee agreed to invest under the investment agreement?
3. Alleged Investment Agreement breaches – Did VitaSound breach the investment agreement when it declined to accept further shipments of the specified model of personal audio set out in the investment agreement? Did Honey Bee breach the investment agreement when it stopped delivering personal audio devices to VitaSound?
4. Equitable set-off – Are the defendants entitled to equitable set-off with respect to any delivery shortfall by Honey Bee of personal audio devices required to be delivered to VitaSound?
5. Calculation of delivery shortfall – If there is a delivery shortfall, what is its value?

[10] In the balance of these Reasons, I will first set out further information about the parties and the events involved in this litigation. I will then address in turn each of the issues outlined above.

II. Factual background

A. The parties

[11] Honey Bee is an established electronics manufacturer, based in Hong Kong. Honey Bee’s chief executive officer is Way Leung (Michael) Chan, who has the title of Managing Director. Michael Chan is Cantonese-speaking, with limited knowledge of English. He works closely with other Hong Kong-based Honey Bee employees who are fluent in English, including members of his family and Wai Lun (Alan) Cheng, Honey Bee’s Marketing Manager. Michael Chan and Alan Cheng were both witnesses at the trial. Michael Chan testified through a Cantonese interpreter.

[12] VitaSound’s hearing technology business is based in Hamilton, Ontario. VitaSound’s President and Chief Executive Officer is the defendant Gora Ganguli, who is also a VitaSound director. Mr. Ganguli works closely with the defendant Mark Chamberlain, VitaSound’s Chairman of the Board. Gora Ganguli and Mark Chamberlain were both defence witnesses at the trial. The defence also retained Michael R. Carnegie, CPA, to provide expert evidence on the quantification of the parties’ claims.

B. Written agreements between the parties

(a) Commercial Agreement

[13] The first business contact between Honey Bee and VitaSound occurred in 2011 in the context of trade shows in North America attended by representatives of those companies. In subsequent meetings and other communications in Canada and Hong Kong, the parties discussed the prospect of doing business together.

[14] Following from those discussions, Honey Bee and VitaSound entered into a “Commercial Agreement” dated March 31, 2012. While the Commercial Agreement is not central to the matters in issue in this action, the terms of that agreement provide useful background, including as an indication of the level of cooperation between the parties that was anticipated at the early stage of their relationship.

[15] In the Commercial Agreement, the parties recited that (i) VitaSound has exclusive rights relating to neuro-compensator (“N/C”) technology and related proprietary software, (ii) Honey Bee wishes to manufacture personal audio devices that incorporated N/C technology and software (“N­­­/C audio devices”), (iii) Honey Bee and VitaSound have agreed to work together to develop, commercialize, market and sell N/C audio devices.

[16] The Commercial Agreement uses the acronyms “PSAP” (Personal Sound Amplifier Product) and “NC-PSAP” (PSAP incorporating N/C technology and software), the latter term meaning the same as “N/C audio devices” as used in these Reasons. Although not explicitly stated in the Commercial Agreement, trial testimony indicated that N/C audio devices are intended to enhance the quality of sound for persons who are hard of hearing, using N/C technology.

[17] Among other things, the Commercial Agreement provides as follows: (i) the parties will work together jointly to develop product specifications for N/C audio devices and work diligently to complete successful testing and qualification; (ii) the parties will work together jointly to develop worldwide marketing and commercial strategies and plans for the sale of N/C audio devices; (iii) the term of the agreement shall commence upon the date of successful qualification of the first N/C audio device model and continue for three years, with two automatic renewals for two years terms unless terminated earlier in accordance with the agreement; (iv) VitaSound grants Honey Bee the exclusive right to manufacture N/C audio devices and market and sell them to customers in Asia; (iv) Honey Bee will promote and sell the N/C audio devices to customers in Asia; (v) VitaSound will promote and sell N/C audio devices to customers outside Asia; and (vi) Honey Bee will pay a royalty to VitaSound of US$1.00 per N/C audio device sold, with US$500,000 being payable in advance within 30 days of Honey Bee’s first sale. The Commercial Agreement also has an “entire agreement” provision, which also includes a stipulation that no oral or written representation that is not expressly contained in the agreement is binding on VitaSound.

(b) Loan Agreement

[18] A short time later, Honey Bee and VitaSound entered into a “Term Loan and Security Agreement” dated April 24, 2012 (the “Loan Agreement”). Under the Loan Agreement, the parties agreed as follows:

1. Honey Bee will provide VitaSound with a loan in the principal amount of US$500,000, repayable with interest at the end of its term.
2. The term of the loan will be (i) two years, if the testing and qualification of the N/C audio device contemplated by the Commercial Agreement is successfully completed within six months, or (ii) six months, if the testing and qualification are not completed in that time period.
3. Interest will be payable (i) at the end of the term at the rate of 10 percent per annum, and (ii) thereafter at the default rate of 20 percent per annum on any unpaid amounts.
4. Mark Chamberlain and Gora Ganguli will each provide a personal guarantee of the loan in the form attached as appendices to the Loan Agreement.
5. The Loan Agreement has an entire agreement provision.

[19] It is common ground between the parties that (i) Honey Bee advanced US$500,000 to VitaSound on May 2, 2012, (ii) Mark Chamberlain and Gora Ganguli provided the required personal guarantees, (iii) testing and qualification of the N/C audio device was successful, with the result that the loan had a two year term, repayable on May 2, 2014, (iii) the loan was not repaid on its due date, and (iv) no subsequent payments of principal or interest were made under the Loan Agreement or the personal guarantees.

(c) Investment Agreement

[20] As of April 1, 2013, Honey Bee and VitaSound entered into a third agreement entitled the “Investment Agreement”, the terms of which are described below.

1. Honey Bee will provide US$2 million to VitaSound for use in its business operations, payable as follows: (i) US$600,000 by electronic transfer to VitaSound’s bank account, and (ii) the balance of US$1.4 million by the transfer to VitaSound of 10,000 units of a specified model of N/C audio device referred to as “PAE-300” at a per unit price of US$140. PAE stands for “personal audio enhancers”. Although not explicitly stated in the Investment Agreement, trial testimony indicated that “PAE-300” refers to a specific multi-function model of N/C audio device known by that name, as further described later in these Reasons. The delivery schedule for the 10,000 PAE-300 units is set out in Schedule B of the Investment Agreement, as follows: (i) first production lot of 2000 units, on or about May 15, 2013; (ii) second production lot of 3000 units, on or about May 30, 2013; and (iii) third production lot of 5000 units, on or about June 30, 2013.
2. VitaSound will issue common shares to Honey Bee equivalent to 16.67 percent of VitaSound’s outstanding shares.
3. Honey Bee will be entitled to select one individual to serve as a director of VitaSound.
4. Honey Bee will be the exclusive manufacturer and supplier of all hardware associated with VitaSound’s products.
5. VitaSound will have exclusive rights to sell VitaSound’s products in North America. Honey Bee will have exclusive rights to sell VitaSound’s products in Asia. The parties will share exclusive rights to sell VitaSound’s products in Europe.
6. The Investment Agreement has an entire agreement provision, which also provides that the Investment Agreement can be modified only in writing by a document signed by both parties.

[21] It is common ground between the parties that pursuant to the Investment Agreement, (i) Honey Bee advanced US$600,000 to VitaSound, (ii) VitaSound issued common shares to HoneyBee, and (iii) Michael Chan became a director of VitaSound.

[22] With that additional background, I will now address the outstanding issues previously identified.

III. Defendants’ liability for Honey Bee’s loan to VitaSound

[23] Are the defendants liable for amounts due to Honey Bee under the Loan Agreement and the personal guarantees?

[24] As indicated in the Fresh Amended Statement of Defence and Counterclaim and the trial testimony of Gora Ganguli and Mark Chamberlain, the defendants accept that they are liable for amounts owed to Honey Bee under the Loan Agreement and the personal guarantees. What is in dispute is (i) the extent of their liability, and (ii) whether the aggregate amount owing may be offset by amounts due to them arising from Honey Bee’s alleged breach of the Investment Agreement.

[25] Subject to those caveats, there is no dispute that Honey Bee would be entitled to recover the following amounts under the Loan Agreement and the personal guarantees:

1. US$500,000, being the principal amount due on May 2, 2014;
2. US$100,000, being interest at 10 percent per annum due on May 2, 2014; and
3. Interest thereafter on the amount owing at the default rate of 20 percent per annum until either (i) the date of payment (according to Honey Bee), or (ii) the date that Honey Bee breached the Investment Agreement by failing to deliver any further N/C audio devices (according to the defendants).

[26] As indicated further below, the defendants say that the latter date occurred in November 2015.

[27] Accordingly, in Honey Bee’s action against the defendants, the real matter in dispute is the extent of the defendants’ liability to Honey Bee for default interest under the Loan Agreement and the personal guarantees. I will address that issue in the balance of these Reasons, along with whether the defendants are entitled to offset any amount by way of equitable set-off or counterclaim.

IV. Oral amendment to Investment Agreement

[28] Was there an enforceable oral agreement under which Honey Bee agreed to fill VitaSound’s orders for other models of N/C audio devices not specified in the Investment Agreement in satisfaction of the amount that Honey Bee agreed to invest under the Investment Agreement?

A. Background

[29] As previously indicated, the Investment Agreement provides that of the US$2 million that Honey Bee agreed to invest in VitaSound, the amount of US$1.4 million would be satisfied by Honey Bee’s transfer to VitaSound of 10,000 PAE-300 units at a price of US$140 per unit. Trial testimony indicated that the model known as PAE-300 was a specific “all-in-one” model of N/C audio device intended to enhance the quality of sound with respect to the following functions: TV, Talk (for face-to-face conversation), phone and tinnitus.

[30] The evidence also indicated that pursuant to purchase orders from VitaSound before the April 2013 effective date of the Investment Agreement, Honey Bee delivered 2,000 PAE-300 units to VitaSound for an aggregate price of US$280,000 (US$140 per unit). It was common ground that such units were intended to count as part of 10,000 PAE-300 units to be delivered to VitaSound in partial satisfaction of Honey Bee’s investment obligation under the Investment Agreement. [1]

[31] The evidence also indicated that pursuant to purchase orders from VitaSound in July 2013, Honey Bee delivered an additional 1,600 PAE-300 units to VitaSound at the agreed unit price of US$140. [2] However, there were no further deliveries of PAE-300 units to VitaSound. By way of explanation, Mr. Ganguli indicated that during VitaSound’s marketing efforts for PAE-300 units, prospective purchasers expressed a preference for devices with a different mix of functions. For example, PAE-200 units (like PAE-300 units) employed N/C technology to enhance the quality of sound, but for only one function (TV) of the four functions incorporated in PAE-300 units. Similarly, PAE-100 units incorporated only the “Talk” function. Among other N/C audio device models, VitaSound subsequently ordered (and Honey Bee supplied) PAE-200 units for the lower price of US$70 per unit.

[32] Consistent with the testimony of Gora Ganguli and Mark Chamberlain, VitaSound’s position is that at meetings that occurred in Hamilton in or about June 2013 that included Alan Cheng and Michael Chan, there was an oral agreement that Honey Bee would accept VitaSound’s orders for N/C audio devices other than PAE-300 units, and would supply those other devices to VtiaSound in satisfaction of the amount that Honey Bee agreed to invest under the Investment Agreement. Among other things, VitaSound relies on an email chain in July 2013, in which Sam Mok (VitaSound’s marketing manager) refers to an “early agreement with Mr Chan” in the context of VitaSound’s request for price information for an anticipated order of PAE-100 and PAE-200 units. Honey Bee’s Cary Au responded, indicating that he had discussed the matter with Mr. Chan, who was “very disappointed” that VitaSound was not going to take the PAE-300 units at that time, and also advised that Mr. Chan had not decided on final prices for the other models.

[33] Consistent with the testimony of Alan Cheng and Michael Chan, Honey Bee denies that there was any oral agreement to amend the clear terms of the Investment Agreement. Honey Bee acknowledges filling purchase orders from VitaSound to supply models other than PAE-300 units after July 2013, without requiring immediate payment on delivery, but denies any agreement that the value of those devices would be in satisfaction of Honey Bee’s agreed investment in VitaSound. As discussed further below, Honey Bee says that it was VitaSound that breached the Investment Agreement when it later declined to accept further shipments of PAE-300 units, as contemplated by the Investment Agreement.

[34] As additional support for Honey Bee’s position that there was no oral agreement to amend the Investment Agreement, Honey Bee relies on Cary Au’s responding email referred to above, which (like Sam Mok’s email) makes no reference to any agreement by Honey Bee that the value of other N/C audio units that it supplied to VitaSound would be in satisfaction of Honey Bee’s agreed investment in VitaSound. As well, Honey Bee relies on the absence of any written amending agreement signed by the parties, as expressly required by the Investment Agreement to amend its terms.

B. Legal principles – interpretation of contracts

[35] In its recent decision in Sattva Capital Corp. v. Molycorp Inc., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 46-61, the Supreme Court of Canada provided guidance on the Canadian law of contractual interpretation. The principles set out in Sattva are summarized in Noseworthy v. Noseworthy, 2017 ONSC 2752, 138 O.R. (3d) 291, at para. 16, as follows:

Although [Sattva] was actually a case concerning leave to appeal from a commercial arbitration award, the Court took the opportunity to revisit the Canadian law of contractual interpretation. [Sattva] stands for the following principles:

a. Generally speaking, interpretation of a written contract is a question of mixed fact and law in which the context and purpose of the agreement will inform the interpretation. b. The objective of contractual interpretation is to ascertain the objective intentions of the parties having regard to the wording of the contract and the factual matrix in which it was constructed. The decision maker must read the contract as a whole giving the words used their ordinary and grammatical meaning consistent with the surrounding circumstances know to the parties at the time of the formation of the contract. c. Evidence of surrounding circumstances will be used to deepen the decision maker's understanding of the contract but cannot be allowed to overwhelm the words used. Courts cannot use evidence of context to deviate from the text so as to effectively create a new agreement. d. The admissible evidence of context is objective evidence of the facts that were known or reasonably ought to have been known to both parties at the time the contract was formed. It does not include the subjective intentions each of the parties. e. The parol evidence rule remains good law. This is the rule that precludes admission of evidence outside the words of the written contract that would add to, subtract from, vary or contradict a contract that has been wholly reduced to writing. [Footnotes omitted.]

C. Analysis

[36] Among other things, defence counsel argues that when interpreting the Investment Agreement, its terms should be considered in conjunction with the terms of the Loan Agreement and the Commercial Agreement. In his submission, those three agreements are interrelated and together define the relationship between the parties and their obligations to each other. That submission is considered further below in the context of the alleged breaches of the Investment Agreement that the parties have advanced.

[37] In the context of determining whether there was an oral agreement to amend the Investment Agreement, it is clear from principles of contractual interpretation set out in Sattva that it is appropriate to consider all three agreements as part of the factual matrix in which the Investment Agreement came into existence. It is also clear from those principles that other evidence forming part of the factual matrix cannot be allowed to “overwhelm” the words used in the Investment Agreement. Where there is no ambiguity in the wording of an agreement, extrinsic evidence cannot be relied on to “effectively create a new agreement”: see Noseworthy at para. 16; Sattva at para. 57; Eli Lily and Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129 at para. 55.

[38] Applying those principles, I have concluded that there was no enforceable oral agreement under which Honey Bee agreed to fill VitaSound’s orders for models of N/C audio devices other than PAE-300 units in satisfaction of the amount that Honey Bee agreed to invest under the Investment Agreement. As well, as explained further in the next section of these Reasons, I have also concluded that VitaSound was not acting in accordance with the Investment Agreement when it declined to accept delivery of further PAE-300 units from Honey Bee in satisfaction of the amount Honey Bee agreed to invest under the Investment Agreement.

[39] The entire agreement provision of the Investment Agreement includes a provision that the agreement “can be modified only in writing by a document signed by both Parties.” This provision is clear and unambiguous. There is no evidence that any such amending document exists.

[40] In addition, even apart from those express words of the Investment Agreement, I am not satisfied that evidence establishes that the parties orally agreed to an amendment to the Investment Agreement. There is no dispute that after the last delivery of PAE-300 units to VitaSound in July or August 2013, Honey Bee filled purchase orders to supply models other than PAE-300 units to VitaSound, without requiring immediate payment on delivery. However, I am not satisfied that there was an express agreement between the parties that delivery of those devices would satisfy the amount that Honey Bee agreed to invest in VitaSound. In that regard, I accept the testimony of Mr. Cheng and Mr. Chan that Honey Bee’s purpose in filling the orders was to support VitaSound’s sales efforts, in the hope that VitaSound would in due course be able to repay the amount it owed to Honey Bee under the Loan Agreement. I also accept that Honey Bee later lost confidence that the loan would be repaid (as evidenced by a formal demand letter from Honey Bee’s legal counsel in July 2014), and subsequently declined to fill any additional purchase orders.

[41] In making those findings, I accept the testimony of the Honey Bee witnesses in preference to that of the VitaSound witnesses, including Honey Bee’s explanation for continuing to fill orders for other N/C audio device models without altering the express terms of the Investment Agreement. As well, VitaSound’s evidence left me in doubt as to the essential terms of the alleged amending agreement. The Investment Agreement as written set out a fixed price per unit for the PAE-300 units to be delivered, together with a set delivery schedule. The alleged oral amending agreement, as far as I could tell, did not have any agreed price or delivery schedule. In my view, the amorphous nature of the terms of the alleged amending agreement undermines the assertion of the agreement’s existence.

[42] In reaching the conclusion that there was no amendment to the Investment Agreement, I also considered the July 2013 email messages between representatives of Honey Bee and VitaSound referred to above, but did not find them of assistance. In particular, that email exchange did not address the key issue in dispute, that is, whether the parties agreed that delivery of N/C audio devices other than PAE-300 units would satisfy the amount that Honey Bee agreed to invest in VitaSound. Honey Bee’s responding email indicated that it was “very disappointed” with the position that VitaSound was taking. That email did not indicate Honey Bee’s agreement with that position. Therefore, quite apart from the fact that the email exchange did not meet the formal requirements for an amending agreement, I did not find the email exchange to be helpful to the defence position.

[43] In reaching the conclusion that there was no subsequent oral agreement in this case, I also considered the principles set out by the Supreme Court of Canada in Hunter Engineering Co. v. Syncrude Canada Ltd., [1989], 1 S.C.R.426, applied by the Ontario Court of Appeal in Shelanu Inc. v. Print Three Franchising Corp. (2003), 64 O.R. (3d) 533 (C.A.). Those decisions were referred to in materials included in the defendants’ authorities brief.

[44] In two sets of concurring reasons in Hunter Engineering, four out of five members of the Supreme Court panel indicated that in a commercial contract between business parties, an exclusionary clause was prima facie enforceable, except where to do so would be either (i) unconscionable (per Dickson C.J.C. and La Forest J.), or (ii) unfair or unreasonable on policy grounds (per Wilson and L’Heureux-Dubé JJ.). [3]

[45] Applying the principles in Hunter Engineering, the Court of Appeal in Shelanu found that in the circumstances of that case, an oral agreement varying the terms of written franchise agreements was enforceable even though the written agreements contained provisions excluding oral amendments. Among other things, the Court of Appeal in Shelanu indicated as follows:

1. The terms of the exclusion clauses did not unambiguously cover the oral agreement that the parties agreed to (Shelanu paras. 39-52).
2. The party arguing against giving effect to the oral amending agreement conceded the existence of the oral agreement, but argued that the terms of the written agreement should be enforced instead. The court considered that submission to be “contrary to the classical theory of contract interpretation which emphasizes that courts should ascertain and give effect to the intention of the parties” (Shelanu at para. 55).
3. “Enforcing an exclusion clause that is contrary to the reasonable expectation and understanding of the parties in these circumstances would not be fair and reasonable”, justifying the court’s decision to refuse to enforce the exclusion clause on the exceptional basis that to do so would be unconscionable or would be unfair or unreasonable on policy grounds (Shelanu at paras. 35 and 59-60).

[46] I consider the decision in Shelanu to be clearly distinguishable from the matter before me. Unlike in Shelanu, I have found that the terms of the Investment Agreement unambiguously exclude an amending agreement that is not reduced to writing and signed by the parties. I have also found that there was no meeting of the minds between the parties with respect to the oral agreement that the defendants allege. As well, I see no basis for concluding that it would be unconscionable, or would be unfair or unreasonable on policy grounds, to refuse to enforce the exclusion clause in the Investment Agreement. In that regard, it is relevant that the parties were sophisticated business persons with access to professional advice.

V. Alleged investment agreement breaches

[47] Did VitaSound breach the Investment Agreement when it declined to accept further shipments of PAE-300 units? Did Honey Bee breach the Investment Agreement when it stopped delivering N/C audio devices to VitaSound?

A. Introduction

[48] Honey Bee and VitaSound each alleges that the other breached its obligations under the Investment Agreement.

[49] Honey Bee says that VitaSound’s breach occurred in July 2013, when HoneyBee declined to accept further shipments of PAE-300 units. Honey Bee raises that alleged breach in response to VitaSound’s claim for Honey Bee’s alleged shortfall in the delivery of N/C personal audio devices to VitaSound. Honey Bee does not claim any other relief relating to that alleged breach in its action against the defendants pursuant to the Loan Agreement and the personal guarantees.

[50] VitaSound says that Honey Bee’s breach occurred in November 2015 when Honey Bee stopped delivering N/C audio devices to Vita Sound. VitaSound raises that alleged breach in its defence to Honey Bee’s claim for of Honey Bee’s loan to VitaSound. According to VitaSound, its obligation to pay default interest on the loan ceased at that time. VitaSound also relies on that alleged breach to support its claim against Honey Bee for the alleged delivery shortfall of N/C personal audio devices to VitaSound. The defendants are not pursuing the claim set out in their pleadings for other consequential damages or punitive damages arising from that alleged breach.

[51] These alleged breaches of the Investment Agreement are addressed below.

B. Analysis

[52] Honey Bee alleges that VitaSound breached the Investment Agreement in July 2013 when it declined to accept further shipments of PAE-300 units. As indicated explained below, I have concluded that VitaSound was not acting in accordance with the Investment Agreement when it declined to accept delivery of further PAE-300 units from Honey Bee in satisfaction of the amount Honey Bee agreed to invest under the Investment Agreement.

[53] As noted above, the Investment Agreement provides that of the US$2 million that Honey Bee agreed to invest in VitaSound, the amount of US$1.4 million would be satisfied by Honey Bee’s transfer to VitaSound of 10,000 PAE-300 units at a price of US$140 per unit. The delivery schedule attached to the Investment Agreement contemplated the delivery of these units to VitaSound by on or about June 30, 2013. The evidence indicated that by July or August 2013, pursuant to purchase orders from VitaSound, Honey Bee had delivered N/C audio devices, which included 3,600 PAE-300 units at a price per unit of US$140. However, as previously indicated, VitaSound advised Honey Bee in July 2013 that it would not be ordering any further PAE-300 units at that time. I accept Mr. Cheng’s testimony that Honey Bee was in a position to deliver the balance of the PAE-300 units at the time, as contemplated by the Investment Agreement, had VtiaSound provided purchase orders indicating its willingness to accept delivery of the units. That evidence supports my finding that VitaSound was not acting in accordance with the Investment Agreement when it declined to accept delivery of further PAE-300 units at that time, as contemplated by the Investment Agreement.

[54] In reaching that conclusion, I also considered defence counsel’s submission that if Honey Bee considered VitaSound’s failure to accept delivery of further PAE-300 units in July 2013 to constitute an event of non-compliance with the Investment Agreement, it was incumbent on Honey Bee to provide VitaSound with clear notice of its position, whether by formal notice of default under paragraph 17.3 of the Investment Agreement or otherwise. Defence counsel relied on Honey Bee’s failure to do so as supporting its position that it was Honey Bee who breached the Investment Agreement since, among other things, Honey Bee’s notice of VitaSound’s alleged non-compliance would have allowed VitaSound to make alternative arrangements for the manufacture and supply of N/C audio devices if Honey Bee stopped accepting VitaSound’s purchase orders (as Honey Bee later did).

[55] I did not find defence counsel’s submissions on this point to be persuasive. Among other things, there is no evidence that in July 2013, Honey Bee had any intention refusing to fill VitaSound’s purchase orders for N/C audio devices. The evidence in fact indicates that Honey Bee continued to do so until November 2015, without requiring immediate payment on delivery. As well, as explained further below, I am not satisfied that Honey Bee breached the Investment Agreement when it stopped filling VitaSound’s purchase orders for N/C audio devices after November 2015.

[56] An email from Gora Ganguli to Honey Bee dated November 20, 2015 indicates that Honey Bee had recently filled an order for units of another model of N/C audio device. In that email, Mr. Ganguli states that VitaSound had an order from the same third-party customer for further units, and that a purchase order was also expected from another customer. Honey Bee did not respond to either that email or Mr. Ganguli’s follow up email dated November 26, 2015.

[57] The following day, HoneyBee issued its Statement of Claim dated November 27, 2015, seeking recovery of the amounts owing under the Loan Agreement and the personal guarantees. In December 2015, each of the defendants responded with a statement of defence and counterclaim. The defendants’ pleadings were consolidated, amended and restated in January 2018 as the Fresh as Amended Statement of Claim and Counterclaim.

[58] By way of justification for not continuing to fill VitaSound purchase orders and commencing its action, Honey Bee’s witnesses indicated that by that time, Honey Bee had lost confidence in VitaSound’s capacity to meet its obligations under the Loan Agreement and the personal guarantees. The loan to VitaSound had been due but unpaid since May 2013. Formal demand for payment had been made in July 2014, without any arrangements being made to satisfy the amount outstanding. The evidence indicated that in the latter part of 2014, VitaSound advised Honey Bee of a prospective deal with well-known electronics firm to brand VitaSound’s products with that firm’s name, along with the prospect of additional third-party funding. However, by early 2015, the prospective deal and funding had fallen through. According to Honey Bee, by November 2015, Honey Bee decided they had held off long enough taking action to recover the amount owed under the Loan Agreement and the personal guarantees.

[59] Subsequent to the commencement of Honey Bee’s action, there were two additional email messages from VitaSound (Mark Chamberlain) to Honey Bee (Gary Chan, the son of Michael Chan) relating to the supply of N/C audio devices. By email dated April 8, 2016, VitaSound indicated that it was continuing to establish channel distribution contracts for “PAE All-in-One, Talk and TV products”, and were in need of 3,000 TV and 1,000 Talk products immediately. By email dated June 29, 2016, VitaSound indicated that it had a pending order from a third party for the supply of N/C audio devices with the approximate annual value of US$2,500,000 consisting of 8,000 to 12,000 PAE TV units and 8,000 Talk units. In each case, VitaSound set a deadline for a response from Honey Bee to indicate its willingness to supply those units. In each case, Honey Bee did not respond. By way of explanation, Honey Bee’s witnesses indicated that they had already determined that they no longer had confidence in VitaSound’s capacity to meet its obligations, and had no reason to change their view since the commencement of its action against the defendants. They also indicated that if VitaSound followed through and provided a firm order for PAE-300 products, Honey Bee would not have been in a position to fill the order approximately three years after the delivery time contemplated by the Investment Agreement, since battery-life limitations would have meant that any on-hand inventory of that device would not have been reliable. Honey Bee’s counsel also argued that given the timing of the email messages months after Honey Bee’s action was commenced, those communications should be considered a litigation tactic and afforded little or no weight.

[60] Defence counsel argued that by failing to supply any further N/C audio devices after November 2015, Honey Bee breached its obligations under the Investment Agreement. In his submission, that failure was a fundamental breach, with the result that the defendants’ obligation to pay further default interest on Honey Bee’s loan to VitaSound was at an end.

[61] In support of the latter submission, defence counsel cited authorities that included the Ontario Court of Appeal decision in Spirent Communications of Ottawa Ltd. v. Quake Technologies (Canada) Inc., 2008 ONCA 92, 88 O.R. (3d) 721. In that case, the plaintiff agreed to sublease premises to the defendant, with occupancy on a specified date. Prior to the occupancy date, the plaintiff sub-lessor advised the defendant that the premises would not be ready until six weeks after the contracted date. The defendant then advised that it would not proceed with the lease. The plaintiff sublet the premises to another party at a reduced rate and sued the defendant for the difference. The defendant argued that the anticipated delay in occupancy was a fundamental breach justifying termination of the sublease agreement. The defendant was successful at trial, but the decision was reversed on appeal.

[62] In reaching its decision, the Court of Appeal found (at para. 35) that the trial judge was correct in stating that (i) only a fundamental breach by one party would give the other party the right to terminate the contract, and (ii) a fundamental breach is one that deprives the innocent party of substantially the whole benefit of the contract. The Court of Appeal also indicated (at para. 37) that “[a]n anticipatory breach sufficient to justify termination of a contract occurs when one party, whether by express language or conduct, repudiates the contract or evinces an intention not to be bound by the contract before performance is due”, applying a reasonable person standard. The Court of Appeal also stated that in making that determination, the analysis is once again based on “whether the breach deprives the innocent party of substantially the whole of the benefit of the contract.” At para. 36, the Court of Appeal reiterated the factors to be considered in determining whether that standard is met:

As the trial judge also correctly noted, this court has repeatedly stated that there are five factors that can be considered when determining whether conduct has deprived the innocent party of substantially the whole benefit of the contract. The five factors are: (1) the ratio of the party's obligations not performed to that party's obligations as a whole; (2) the seriousness of the breach to the innocent party; (3) the likelihood of repetition of such breach; (4) the seriousness of the consequences of the breach; and (5) the relationship of the part of the obligation performed to the whole obligation.

[63] Applying those factors, the Court of Appeal (at para. 45) did not accept the trial judge’s conclusion the consequences for the defendant sub-lessee were sufficiently serious to constitute a fundament breach by the plaintiff sub-lessor. The Court of Appeal also noted that in the context of a three-year lease, a six-week delay in occupancy is not so significant that it amounts to deprivation of substantially the whole benefit of the agreement. As well, the Court of Appeal found (at paras. 46-48) that the evidence did not support a finding that the plaintiff sub-lessor evinced an intention not to be bound by the agreement to sublease. The Court of Appeal therefore allowed the appeal and found for the plaintiff.

[64] Defence counsel argues that (i) by failing to supply any further N/C audio devices after November 2015, Honey Bee fundamentally breached its obligations under the Investment Agreement, and (ii) the defendants’ obligation to pay further default interest on Honey Bee’s loan to VitaSound was therefore at an end. I disagree, for a number of reasons.

[65] In Spirent Communications, the Court of Appeal considered the issue of whether the defendant sub-lessee was entitled to terminate the agreement to sublease based on an alleged fundamental breach of that agreement. In the case before me, defence counsel argues that the defendants were entitled to treat their obligations under the Loan Agreement and the personal guarantees as at an end based on a fundamental breach of another agreement, that is, the Investment Agreement. In his oral submissions, defence counsel appeared to accept that the Loan Agreement and the Investment Agreement were separate agreements with stand-alone obligations, as indicated by the entire agreement provision in each agreement. At the same time, as previously indicated, defence counsel argued that when interpreting those two agreements, their terms should be considered together with the terms of the Commercial Agreement. In his submission, those three agreements are interrelated and together define the relationship between the parties and their obligations to each other. Those obligations include Honey Bee’s obligations arising from (i) its agreed status as the exclusive manufacturer of VitaSound’s N/C audio devices, and (ii) the fact that Michael Chan has fiduciary obligations to VitaSound as Honey Bee’s representative on VitaSound’s board, with ongoing access to information as to its financial condition. Defence counsel also argued that VitaSound’s ability to repay the loan was dependent on Honey Bee’s supply of N/C audio products as contemplated by the Investment Agreement, supporting the position that Honey Bee’s failure to supply further devices justified termination of VitaSound’s obligation to pay further default interest.

[66] As previously indicated, I agree with defence counsel that when interpreting an agreement between the parties, it is appropriate to consider the entire factual matrix, including the parties’ obligations under other agreements between them and the parties’ conduct relating to those obligations. However, I see no basis for concluding that the defendants were entitled to treat their obligation to pay further default interest under the Loan Agreement and the personal guarantees as at an end as a result of a fundamental breach of the Investment Agreement.

[67] The considerations supporting these conclusions include the following:

1. The defendants’ obligations under the Loan Agreement and the personal guarantees are independent of the parties’ obligations under the Investment Agreement, consistent with the applicable entire agreement provisions. The evidence does not support the conclusion that breach of the Investment Agreement can be relied on as terminating any obligation under the Loan Agreement or the personal guarantees.
2. In any case, the evidence does not support the conclusion that Honey Bee’s failure to fill VitaSound’s purchase orders for further N/C audio devices was a fundamental breach that deprived VitaSound of “substantially the whole of the benefit” of the Agreement. Among other things, VitaSound received a US$600,000 cash injection, and by July or August 2013 also took delivery of 3,600 PAE-300 units valued at $504,000 (based on the agreed price of US$140 per unit). The balance of the 10,000 PAE-300 units were available for delivery had VitaSound been willing to accept them, as contemplated by the Investment Agreement. In that regard, I have already found that there was no oral amending agreement to permit other N/C audio devices to be substituted in satisfaction of Honey Bee’s agreed investment in VitaSound.
3. As well, it does not avail VitaSound to say that it was willing to accept delivery of PAE-300 units in 2016, some three years after the time required by the Investment Agreement. In any case, I also accept the testimony of HoneyBee’s witnesses that through no fault of Honey Bee, they no longer had inventory available to supply further PAE-300 units at that time. As well, I agree with plaintiff’s counsel that the timing of VitaSound’s intended purchase order several months after this litigation was commenced was suspect and should be afforded little or no weight.
4. I did not find persuasive defence counsel’s submission that VitaSound’s ability to repay the loan was dependent on Honey Bee’s supply of N/C audio products as contemplated by the Investment Agreement. Consistent with Spirent Communications, one of the factors for consideration is the seriousness of the alleged breach to the other party. In this case, the alleged breach occurred in November 2015, over 18 months after the loan was due. Until that time, Honey Bee was filling VitaSound’s purchase orders for other N/C audio devices, without requiring immediate payment on delivery of those devices. In all the circumstances, the evidence does not support the conclusion that VitaSound’s inability to repay the loan was the result of (or otherwise related to) the breach that the defendants allege.

[68] In any event, apart from the issue of fundamental breach, I have also concluded that Honey Bee did not breach its obligations under the Investment Agreement by failing to supply N/C audio devices to VitaSound after November 2015. The considerations supporting that conclusion include the following:

1. The Investment Agreement required Honey Bee to deliver 10,000 PAE-300 units by on or about June 30, 2013. The evidence indicated that by July or August 2013, Honey Bee filled purchase from Vita Sound for 3,600 PAE-300 units in partial satisfaction of that requirement.
2. I have already found that VitaSound was not acting in accordance with the Investment Agreement when it declined to accept delivery of further PAE-300 units from Honey Bee on the timetable set out in the Investment Agreement in satisfaction of Honey Bee’s agreed investment. I have also found that there was no oral agreement to amend the Investment Agreement under which Honey Bee agreed to fill VitaSound’s orders other N/C audio devices models in satisfaction of the agreed investment.
3. There is nothing in the Investment Agreement that requires Honey Bee to supply N/C audio devices other than PAE-300 units to VitaSound. In that regard, I considered the other terms of the Investment Agreement, which also provides that Honey Bee will be the exclusive manufacturer and supplier of all hardware associated with VitaSound’s products. I did so in the context of the entire factual matrix, including the parties’ obligations under other agreements between them and the parties’ conduct relating to those obligations. As previously noted, after July 2013 until November 2015, Honey Bee had been filling VitaSound’s purchase orders for other N/C audio device models, without requiring immediate payment on delivery. I have accepted Honey Bee’s explanation that it did so to support VitaSound’s sales efforts, in the hope that VitaSound would in due course be able to repay the amount it owed to Honey Bee under the Loan Agreement. I also accept the plaintiff’s explanation for declining to fill further purchase orders, that is, by November 2015, they understandably no longer had confidence in VitaSound’s capacity to meet its obligations.

[69] Based on the foregoing, I have concluded that the defendants’ obligation to pay default interest under the Loan Agreement and the personal guarantees did not terminate in November 2015 by reason of Honey Bee’s failure to accept further purchase orders for N/C audio devices. Accordingly, interest under the Loan agreement and the personal guarantees will continue to accrue at the default rate until the date of payment.

[70] As well, I have concluded that Honey Bee did not breach its obligations under the Investment Agreement by failing to supply N/C audio devices to VitaSound after November 2015. Therefore, Honey Bee is not responsible for the amount of any alleged shortfall in delivery of N/C audio devices to VitaSound.

[71] Accordingly, judgment will issue in Honey Bee’s favour (i) for recovery of the Canadian dollar equivalent of US$600,000 plus interest thereon at the rate of 20 percent per annum from May 2, 2014 to the date of payment, and (ii) dismissing the defendants’ counterclaim.

VI. Equitable set-off

[72] Are the defendants entitled to equitable set-off with respect to any delivery shortfall by Honey Bee of N/C audio devices required to be delivered to VitaSound?

[73] Since I have found that the defendants have not established an actionable breach of contract by Honey Bee, it may be considered unnecessary to consider (i) whether the defendants would be entitled to equitable set-off with respect to any delivery shortfall, or (ii) the amount of any shortfall. However, since counsel addressed these issues during their submissions, I am providing my conclusions, to the extent they may be of assistance.

[74] To recap, by way of the Fresh as Amended Statement of Defence and Counterclaim, the defendants have claimed against Honey Bee for any shortfall in the delivery of N/C audio devices to VitaSound required under the Investment Agreement, as amended by the alleged oral amending agreement. Had I found that an actionable breach of contract by Honey Bee, I agree with defence counsel that Honey Bee clearly would have been liable to VitaSound for any delivery shortfall.

[75] It is less than clear, however, whether there is any viable basis for concluding that Honey Bee would be liable to the two individual defendants, Mark Chamberlain and Gora Ganguli. The individual defendants were not themselves parties to the Investment Agreement. Therefore, in the normal course, they would not be expected to benefit directly from any damages awarded for breach of that agreement. In the counterclaim portion of the Fresh as Amended Statement of Defence and Counterclaim, the defendants plead that the individual defendants are VitaSound shareholders, which in that context may be taken as an implicit invitation for the court to “pierce the corporate veil” and find Honey Bee directly liable to the individual defendants for Honey Bee’s alleged breach of the Investment Agreement. However, in his closing submissions, defence counsel did not advocate (nor did I see the case for) any marked departure from well-entrenched legal principles relating to a corporation as a legal entity separate from its shareholders. Under those principles, shareholders are generally precluded from bringing their own action in respect of a wrong done to the corporation: see Meditrust Healthcare Inc. v. Shoppers Drug Mart (2002), 61 O.R. (3d) 786 (C.A.), at paras. 12-14; Hercules Management Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165, at para. 59.

[76] The defendants argue, however, that they are entitled rely on the defence of equitable set-off, allowing them to apply the amount of any delivery shortfall against the amount due to Honey Bee under the Loan Agreement and the personal guarantees. That argument is advanced as part of the defendants’ defence to Honey Bee’s action, as well as pursuant to the defendants’ counterclaim. In support of that position, the individual defendants rely on the terms of the personal guarantees, which provide, among other things, that the “liability of the Guarantor … shall be joint and several with that of the Borrower [VitaSound] …, and the Guarantor shall, for all purposes of the guarantee herein, be regarded as in the same position as the Borrower under the Loan Agreement …. (emphasis added): see paragraph 1.3 of the personal guarantees.

[77] In paragraph 17 of the Fresh as Amended Statement of Defence and Counterclaim, the defendants plead reliance on the doctrines of legal and equitable set-off. As indicated by the Supreme Court of Canada in Telford v. Holt, [1987] 2 S.C.R. 193, at para. 24, legal set-off requires that claims be liquidated and mutual. Equitable set-off does not. Legal set-off clearly does not apply in the context of the current action and is not being pursued by the defendants.

[78] In Telford at para. 33, the Supreme Court set out the following test for equitable set-off (adopted from Coba Industries Ltd. v. Millie's Holdings (Canada) Ltd. (1985), 20 D.L.R. (4th) 689 (B.C.C.A.), at pp. 696-97):

1. The party relying on a set-off must show some equitable ground for being protected against his adversary's demands ….
2. The equitable ground must go to the very root of the plaintiff's claim before a set-off will be allowed ….
3. A cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross claim ….
4. The plaintiff's claim and the cross-claim need not arise out of the same contract ….
5. Unliquidated claims are on the same footing as liquidated claims …. (Citations omitted.)

[79] In Telford (at para. 36) and Coba Industries (at paras. 21-22), both courts also cite the following passage from the decision of the English Court of Appeal (Lord Denning) in Federal Commerce & Navigation Ltd. v. Molena Alpha Inc., [1978] Q.B. 927, [1978] 3 All E.R. 1066 (C.A.), [4] at p. 1078 All E.R., elaborating on the “clearly connected” requirement in the third element of the equitable set-off test:

We have to ask ourselves: what should we do now so as to ensure fair dealing between the parties? ... This question must be asked in each case as it arises for decision …. But one thing is quite clear: it is not every cross-claim which can be deducted. It is only cross-claims that arise out of the same transaction or are closely connected with it. And it is only cross-claims which go directly to impeach the plaintiff's demands, that is, so closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim. [Emphasis added.]

[80] The defence argues that the test for equitable set-off is met in this case, on the following basis. The amount of the delivery shortfall would be due to VitaSound as damages arising from Honey Bee’s breach of the Investment Agreement. VitaSound should be able to set off that amount against the amount the defendants owe to Honey Bee under the Loan Agreement and the personal guarantees. The amounts due under those agreements are clearly connected, in particular since VitaSound’s ability to repay the amount due to Honey Bee under the Loan Agreement is dependent on VitaSound’s access to N/C audio devices supplied by HoneyBee, as required under the Investment Agreement. Honey Bee’s failure to fulfill its obligations to supply N/C audio devices to VitaSound goes to the very root of VitaSound’s claim. It would be manifestly unjust if set-off is not permitted in these circumstances. For the individual defendants, it does not matter that they are not parties to the Investment Agreement since in the personal guarantees, Honey Bee agreed that the individual defendants as guarantors would be in the same position as VitaSound, the borrower under the Loan Agreement.

[81] In response to the defence submissions, Honey Bee’s counsel argues that the parties’ claims are not so clearly connected that the test for equitable set-off has been satisfied. He also argues that the defendants’ failure to repay the loan from Honey Bee disqualifies them from relying on equitable set-off because of the doctrine of “clean hands”. In support of that position, he relies on Grand Financial Management Inc. v. Solemio Transportation Inc., 2016 ONCA 175, 395 D.L.R. (4th) 529, in which the Court of Appeal indicated (at paras. 98-99) that “the application of equitable set-off is subject to the doctrine of ‘clean hands’ ”, precluding set-off where the parties’ rights are “not equitably mutual”.

[82] Addressing the plaintiff’s latter point first, I do not agree with Honey Bee’s counsel that the defendants’ failure to repay the loan from Honey Bee in itself would mean that equitable set-off would be unavailable to them under the “clean hands” doctrine. Indeed, had the loan been repaid, the availability of equitable set-off would not arise at all, since the only amount outstanding would be the amount of Honey Bee’s delivery shortfall.

[83] In the circumstances of this case, however, I agree with Honey Bee’s counsel that the parties’ obligations giving rise to the respective amounts due are not so clearly connected that the test for equitable set-off is satisfied. In reaching that conclusion, I took into account the fact that Honey Bee and VitaSound are the parties to both the Investment Agreement and the Loan Agreement, and that the individual defendants (being parties to the personal guarantees along with Honey Bee) are closely related to VitaSound. However, as indicated by the terms of those agreements (including the entire agreement provisions), the parties’ obligations under the Investment Agreement and the Loan Agreement arose under separate and distinct agreements.

[84] More significantly, the evidence does not support the view that there was any material connection between Honey Bee’s alleged breach of the Investment Agreement (as amended by the alleged oral amending agreement) and VitaSound’s inability to repay the amount due under the Loan Agreement. VitaSound’s default under the Loan Agreement occurred in May 2014, when the loan became due and payable. Honey Bee’s “breach” of the Investment Agreement by ceasing to provide supply further N/C audio devices occurred over 18 months later. In the interim, Honey Bee continued to fill VitaSound’s purchase orders without requiring immediate payment on delivery. In the same period, the defendants made no payments on the amount outstanding under the Loan Agreement and the personal guarantees. The absence of a causal connection between Honey Bee’s “breach” and VitaSound’s default supports the conclusion that the “clearly connected” aspect of the equitable set-off test has not been satisfied. The fact that the individual defendants are not parties to either the Investment Agreement or the Loan Agreement puts them a further step away from being “clearly connected”.

[85] Accordingly, had I found an actionable breach of contract by Honey Bee, I would have concluded that the defendants were not entitled to equitable set-off with respect to any delivery shortfall by Honey Bee of N/C audio devices required to be delivered to VitaSound.

VII. Calculation of delivery shortfall

[86] If there is a delivery shortfall, what is its value?

[87] As previously noted, the defendants claimed against Honey Bee for the shortfall between (i) the value of the N/C audio devices Honey Bee was required to deliver to VitaSound pursuant to the Investment Agreement (as amended by the disputed oral agreement), and (ii) the value of the N/C audio devices Honey Bee actually delivered to VitaSound.

[88] Had I found that there was an actionable breach of contract by Honey Bee and that equitable set-off was available to the defendants, then the defendants would have been able to offset (i) the amount of the delivery shortfall, against (ii) the amount due to Honey Bee under the Loan Agreement and the personal guarantees.

[89] Premised on the defendants’ success in their set-off claim against Honey Bee, the defendants and Honey Bee have provided competing calculations of the delivery shortfall, as set out in the following table (expressed in U.S. dollars):

	VitaSound	Honey Bee
Delivery requirement	$1,400,000	$1,400,000
Less: Value delivered	674,800	743,305
Delivery shortfall	$ 725,200	$ 656,695

[90] In order to calculate the delivery shortfall, the key element in dispute is the value of the N/C audio devices that Honey Bee delivered pursuant to purchase orders from VitaSound. VitaSound’s calculation of that amount (being US$674,800) is set out an economic report prepared by Michael R. Carnegie, CPA, whom the defendants called as an expert witness. On consent, Mr. Carnegie’s report was made a trial exhibit (exhibit 47). That report includes as a schedule a table setting out the N/C audio devices delivered to VitaSound in the period March 2013 to November 2015 pursuant to VitaSound purchase orders. For each order, the table sets out the order date, product numbers, number of units, unit value and delivery date. In his testimony, Mr. Carnegie explained that those figures were derived from information provided to him by VitaSound. In his testimony, Gora Gangula explained how that information was compiled, referring among other things, to a similar VitaSound table (exhibit 9), supported by copies of purchase orders, invoices, packing slips and other documents, to the extent that they were available to VitaSound. Those supporting documents were also made trial exhibits.

[91] In support of Honey Bee’s calculation of the value of N/C audio devices delivered to VitaSound (being US$743,305), Honey Bee’s counsel relied principally on a chart filed as exhibit 7 during the testimony of Alan Chang. Mr. Chang testified that the chart was compiled from Honey Bee accounting and other documentation available to Honey Bee. However, Honey Bee did not produce further back-up documentation, beyond that which VitaSound relied on in making its calculation.

[92] Based on the evidence before the court, it was difficult to reconcile the differences between the parties’ respective calculations of the value of the N/C audio devices delivered to VitaSound. Comparing the summary charts produced by each side, there is a significant degree of commonality with respect to quantities ordered and delivered, models and pricing. The principal discrepancies relate to devices that are shown in the Honey Bee chart as having been delivered to VitaSound that are not shown in the VitaSound charts as having been received from Honey Bee.

[93] In all the circumstances, I have decided to accept the defence position relating to the calculation of the value of the N/C audio devices delivered to VitaSound, in preference that of Honey Bee. In that regard, I found persuasive the more comprehensive explanation that the defence provided, relying on the back-up documents that were made trial exhibits.

[94] Accordingly, I find that the value of the N/C audio devices delivered to VitaSound in the period from March 2013 to November 2015 was US$674,800, with the result that the amount of the delivery shortfall was US$725,200. Had I found that there was an actionable breach of contract by Honey Bee and that equitable set-off was available to the defendants, then the defendants would have been able to offset (i) the amount of US$725,200, against (ii) the amount due to Honey Bee under the Loan Agreement and the personal guarantees.

VIII. Conclusion

[95] For the foregoing reasons, judgment in Honey Bee’s favour will issue as follows:

1. The defendants shall pay to the plaintiff the sum of US$600,000 plus interest thereon at the rate of 20 percent per annum from May 2, 2014, to the date of payment. Pursuant to section 121 of the Courts of Justice Act, R.S.O. 1990, c. C.43, payment shall be made in Canadian dollars sufficient to purchase the U.S. dollar amount of the obligation at a bank in Ontario listed in Schedule I to the Bank Act, S.C. 1991, c 46, at the close of business on the first day on which the bank quotes a Canadian dollar rate for purchase of U.S. dollars before the day payment is received by the plaintiff.
2. The defendants’ counterclaim is dismissed.
3. The issue of costs shall be determined by way of written submissions.

[96] If the parties cannot agree on costs, the plaintiff may serve and file brief written submissions (not to exceed three pages) together with a bill of costs and any pertinent offers within 21 days. The defendants will have 14 days after receipt of the plaintiff’s submissions to respond by brief written submissions. The plaintiff may reply by brief written submissions within seven days. All such submissions are to be forwarded to the Trial Coordinator in Hamilton, with a copy to me at my chambers at 59 Church Street, 4th Floor, St. Catharines ON L2R 7N8. If no submissions are received within the specified timeframe, the parties will be deemed to have settled the costs issue.

The Honourable Mr. Justice R.A. Lococo

Released: October 9, 2018

Footnotes

[1] The numbers of PAE-300 units delivered (as set out in this paragraph and in the next paragraph) are taken from a chart provided during the testimony of Michael R. Carnegie, CPA, as part of the defendants’ case (exhibit 48, Schedule 2). There are discrepancies between those numbers and the numbers in a chart provided during the testimony of Alan Cheng on behalf of the plaintiff (exhibit 7), which indicated 2,062 units (rather than 2,000) delivered under purchase orders prior to April 2013, and a further 2,000 units (rather than 1,600) delivered in July or August 2013. As explained later in these Reasons, I have accepted the numbers provided by the defence.

[2] See footnote 1.

[3] See S.M. Waddams, The Law of Contracts, 7th ed. (Toronto: Thomson Reuters, 2017), at para.487.

[4] Rev. in part [1979] A.C. 757 (H.L.), without disturbing Lord Denning’s view of the basis for equitable set-off.