COURT FILE NO.: CV-14-10635-CL DATE: 20181015 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Extreme Venture Partners Fund I LP, EVP GP Inc., Ravinder Kumar Sharma, Imran Bashir and Kenneth Teslia, Plaintiffs AND: Amar Varma, Sundeep Madra, Varma Holdco Inc., Madra Holdco Inc., Chamath Palihapitiya, EL Investco 1 Inc., Extreme Venture Partners Annex Fund I LP, EVP GP Annex Fund I Inc., Cassels Brock & Blackwell LLP and Seven Hills Group LLC, Defendants
BEFORE: Penny J.
COUNSEL: Won J. Kim, Megan B. McPhee and Aris Gyanfi for the Plaintiffs Nicholas Kluge and Haddon Murray for the Defendant Seven Hills Group LLC
HEARD: September 20, 2018
ENDORSEMENT
Overview
[1] There are two motions before me in this proceeding. The first motion is by the plaintiffs to enforce what they say was a concluded settlement agreement with one defendant, Seven Hills Group LLC. Depending on the outcome of that motion, the second motion is a motion by the defendant, Seven Hills, for summary judgment dismissing the plaintiffs’ claim against it in its entirety.
Background
[2] In August 2012, the defendants Palihapitiya, Madras and Varma concluded a management buyout of a company called Xtreme Labs, a mobile product development company, for $18 million. Earlier, in April, 2012, after negotiations for the management buyout were under way, the board of Xtreme Labs retained Seven Hills to conduct a valuation. Seven Hills valued the company at $11 to $14 million.
[3] A year or so later, Xtreme Labs spun off some of its investments for $55 million and a few months after that, in October 2012, announced that what remained of the company had been sold for an additional $65 million.
[4] The plaintiffs, who were, in various capacities, the “vendors” in the management buyout of Xtreme Labs, have sued Palihapitiya, Madras and Varma (and entities associated with them) for breach of fiduciary duty and conspiracy, alleging that, as senior management of Xtreme Labs, these defendants mislead the other shareholders and the board of Xtreme Labs as to its business, prospects and value in order to acquire the company at less than its fair value. This action was commenced in 2014.
[5] In the same action, these plaintiffs have also sued Seven Hills for alleged negligence in the preparation of the valuation at $11 to $14 million. The plaintiffs do not claim that Seven Hills was in any way involved in management’s alleged misrepresentations or conspiracy to under-value Xtreme Labs. The claim is based on the theory that Seven Hills owed a duty to the plaintiffs and failed to discharge that duty by failing to exercise reasonable care in the performance of its retainer, i.e., the preparation of the valuation. The trial of the entire action is scheduled to proceed in January 2019.
The Motion to Enforce the Settlement
[6] In the latter part of 2017, the plaintiffs and Seven Hills began discussing the possibility of a settlement of the claim against Seven Hills. Seven Hills also served the plaintiffs with a motion for summary judgment to have the claim against it dismissed in its entirety. Preparations for and the scheduling of the summary judgment motion and the settlement discussions proceeded in tandem.
[7] The evidence is not controversial that on April 6, 2018, counsel for Seven Hills left a telephone message for plaintiffs’ counsel in which she offered to settle the action against Seven Hills in exchange for the payment of $70,000 and Seven Hills’ “cooperation” with the plaintiffs at the trial. This was a one-time offer open for acceptance only until the end of that day.
[8] Later that day, counsel for the plaintiffs returned the call, advising that the plaintiffs had accepted Seven Hills’ offer. Plaintiffs’ counsel followed up that telephone call with an email confirming acceptance of the offer in writing. The parties agree that the email accurately reflects the calls:
We are agreed in principle to resolve the action against Seven Hills for $70,000 and cooperation from your client in the prosecution of the action against the remaining defendants. We can sort out minutes, etc. next week.
[9] Two weeks later, Seven Hills provided draft minutes of settlement and a draft release. The draft release included a “claims bar” provision requiring the plaintiffs not to initiate or continue any proceedings against persons who might claim contribution or indemnity from Seven Hills and to indemnify Seven Hills against any liability resulting from any claims over.
[10] This was not acceptable to the plaintiffs, who wished to exempt existing claims against the other defendants (the other defendants had not, and still have not, made any claims over against Seven Hills).
[11] Seven Hills was prepared to drop the claims bar language but continued to insist upon the indemnity against liability for any claims over. The plaintiffs were not prepared to grant any indemnity.
[12] It is over this issue that the parties have parted company on the putative settlement. The plaintiffs argue that all material terms were settled and that, while they concede Seven Hills is entitled to a release, it is only a “standard” release which, they argue, does not include a claims bar or an indemnity.
[13] Seven Hills argues that the scope and terms of the release are a vitally important term of the settlement. Accordingly, Seven Hills argues that the parties were not ad idem on this essential term, such that there is no agreement to enforce.
[14] It is trite law that a settlement is a contract and subject to the general law of contract regarding offer, acceptance and consideration. As such, the parties:
(a) must have had a mutual intention to create a legally binding settlement; and
(b) must have reached agreement on all of the essential terms of the settlement.
[15] If the parties have reached agreement on all of the essential terms with a mutual intention to create a legally binding settlement, the fact that a formal written document to this effect is still to be prepared and signed does not alter the binding validity of the original contract.
[16] The plaintiffs argue that neither a claims bar nor an indemnity was ever discussed before the draft documents were exchanged following the plaintiffs’ confirmation of acceptance of Seven Hills’ offer to settle. The plaintiff says they were entitled to assume that Seven Hills would be seeking a “standard” release as part of the settlement. But they argue, while conceding that a settlement does imply an obligation to furnish a release, no party is “bound to execute a complex or unusual form of release.”
[17] Neither party tendered any evidence about what is “standard” in the preparation and execution of releases in the context of a settlement of complex commercial litigation.
[18] I am unable to agree with the plaintiffs’ argument.
[19] While not dispositive of the issue, each side maintains it never would have settled if they had known that the claims bar/indemnity provisions were either (as the case may be) included or not included in the release.
[20] It is clear the parties contemplated additional issues having to be resolved. Why else would the plaintiffs have said they had only “agreed in principle”? Courts have repeatedly used the expression “agreement in principle” to refer to something less than a contract, Hunt River Camps/Air Northland Ltd. v. Canamera Geological Ltd., 1998 CarswellNfld 297 at para. 132; Capital Gains Income Streams Corp. v. Merrill Lynch Canada Inc., 2006 CarswellOnt 3126 at para. 32.
[21] This understanding is further confirmed by the April 6 email from plaintiffs’ counsel (which the plaintiffs say is the contract), which goes on to say, “We can sort out minutes etc. next week.” There were things yet to sorted out, including but not limited to minutes of settlement. The use of the expression “etc.” in the plaintiffs’ email speaks volumes.
[22] One of those things never discussed was a release. But both parties agree that the obligation to provide a release must be implied. This, in fact, is the law as well. The question is, what form of release? The plaintiff argues that Seven Hills was only entitled to a “standard” release but has advanced no evidence of what a “standard” release includes. The terms of a release may very well be fundamental to the contract of settlement, Martin v. St. Thomas – Elgin General Hospital, [2018 ONSC 799](https://www.canlii.org/en/on/onsc/doc/2018/2018onsc799/2018onsc799.html) at paras. 10, 27 and 55-56; Roberts v. Canada Trustco Mortgage Co., [](https://www.canlii.org/en/on/onsc/doc/1997/1997canlii12282/1997canlii12282.html), 1997 CarswellOnt 3486 at paras. 3-4, 7 and 12. I find, as a fact, that the terms of the release in this case were an essential term of the contract.
[23] Indeed, I share the view of Warkentin R.S.J. in Brager v. Ontario (Natural Resources), [2017 ONSC 1759](https://www.canlii.org/en/on/onsc/doc/2017/2017onsc1759/2017onsc1759.html) at para. 22 that a “standard” release does include a claims bar/indemnity regarding claims over:
The inclusion of a contribution and indemnity clause in a Release is standard in virtually every release entered into by parties engaged in litigation. Without such a clause, the Release would not be a full and final release.
The plaintiffs’ motion does not however, contemplate settlement on the basis of a release containing a claims bar/indemnity provision. The plaintiffs say they would never have agreed to settle on that basis. And, unlike the responding party in the Brager case, here Seven Hills does not ask the Court to declare there was a settlement on the basis of its form of release including the claims bar/indemnity clause.
[24] Thus, in my view, the evidence clearly establishes that there was no agreement on an essential term of the settlement - being the scope and terms of the release. Therefore, there was no settlement agreement and the plaintiffs’ motion must be dismissed.
Motion for Summary Judgment
Overview and Background
[25] The essence of Seven Hills’ motion is that the plaintiffs were never clients of Seven Hills and that Seven Hills owed no duties to them. By contract with Xtreme Labs, Seven Hills limited its liability. Further, with the trial only four months away, the plaintiffs have produced no evidence that Seven Hills breached any standard of care or that any breach caused compensable loss to the plaintiffs. There is no genuine issue requiring a trial with respect to the plaintiffs’ claim against Seven Hills such that the motion for summary judgment should be granted and the claim against Seven Hills dismissed.
[26] The plaintiffs allege in the statement of claim that:
(a) Seven Hills knew it was retained by Xtreme Labs to value Xtreme Labs for the purpose of evaluating the management buyout;
(b) the plaintiffs were among the intended recipients and beneficiaries of the Seven Hills valuation;
(c) it was foreseeable to Seven Hills that the plaintiffs would rely on the valuation in deciding whether to proceed with the management buyout;
(d) the plaintiffs did rely on the valuation in proceeding with the management buyout;
(e) Seven Hills owed a duty of care to the plaintiffs performing its valuation;
(f) Seven Hills breached the standard of care in failing to detect and accurately value the assets of Xtreme Labs; and
(g) if Seven Hills had not breached its standard of care, the plaintiffs would not have agreed to the management buyout or would have realized a much higher price reflecting the true value of Xtreme Labs.
[27] Important additional context for this motion requires a clear articulation of the parties’ and their relationship to one another.
[28] Seven Hills is a boutique investment bank providing mergers and acquisitions advisory, capital raising and corporate finance services to emerging technology and life science companies. In March 2012, Seven Hills was asked to perform valuation services for Xtreme Labs in respect of a possible sale transaction. An engagement letter of April 4, 2012 was executed between Xtreme Labs (Attn: Mr. Imram Bashir Director) and Seven Hills.
[29] Notably, Xtreme Labs is not a party to this litigation. The individual plaintiffs, while shareholders and directors of Xtreme Labs, do not sue in their capacity as Xtreme Labs directors. The plaintiffs sue as former shareholders of Xtreme Labs and shareholders of EVP GP Inc. (a plaintiff) which was the general partner of Extreme Venture Partners Fund I LP (also a plaintiff). Extreme Venture Partners Fund I LP is in the business of acquiring equity interests in technology companies and was also a shareholder of Xtreme Labs.
The Engagement Letter
[30] The engagement letter between Seven Hills and Xtreme Labs provides that Seven Hills is not being asked to render a fairness opinion on the terms of any transaction contemplated by Xtreme Labs. The fee for the valuation is $75,000. Seven Hills’ valuation analysis is to be directed to Xtreme Labs’ board of directors but may not be discussed with or distributed to any other party or be used in connection with any transaction undertaken by Xtreme Labs. Seven Hills’ analysis cannot be furnished to any other party without Seven Hills’ prior written consent. No such consent was ever sought or given.
[31] The engagement letter also provides that Seven Hills is an independent contractor whose duties are owed solely to Xtreme Labs, as set out above. Since Seven Hills was only providing advice to Xtreme Labs, Xtreme Labs agreed to indemnify Seven Hills.
[32] The engagement letter further provides that Seven Hills’ obligations are determined solely by the engagement letter. Seven Hills does not owe Xtreme Labs, or any other party, any non-contractual (including fiduciary) duties as a result of the engagement. Seven Hills was to provide services only to Xtreme Labs. All final decisions with respect to matters about which Seven Hills provided services were to be solely those of Xtreme Labs. Seven Hills had no liability to Xtreme Labs or any third party relating thereto or arising therefrom.
[33] Finally, the engagement letter also provides that any advice or analysis provided by Seven Hills may not be disclosed to any third party or referred to publicly, nor may it be used for any purpose not related to Xtreme Labs’ board of directors’ review, except in accordance with Seven Hills’ prior written consent. Again, no such consent was ever sought or given.
[34] Seven Hills’ evidence, filed in support of the motion, is that the majority of the information about Xtreme Labs received to complete the valuation was provided by Mr. Madras and Mr. Varma, although Mr. Bashir was also included on most of the correspondence between Seven Hills and Xtreme Labs. There were various calls to discuss questions or seek clarifications on information provided. Mr. Madras, Mr. Varma and Mr. Bashir were involved in many of those calls.
[35] Seven Hills’ evidence also establishes that:
(a) Mr. Markelll, who led the Seven Hills team, had a lengthy discussion with Mr. Bashir in which he explained the difference between a valuation and a fairness opinion, including the fact that a fairness opinion could be relied upon to evaluate the fairness of a transaction whereas a valuation could not;
(b) Mr. Bashir indicated that he sought a valuation only to get a general sense of Xtreme Labs’ worth; and
(c) Seven Hills was provided with no specifics of any potential transaction, including the management buyout.
The plaintiffs filed no evidence on the motion for summary judgment.
[36] Seven Hills presented its complete report to Xtreme Labs on April 16, 2012. The presentation was attended by Mr. Madras, Mr. Varma, Mr. Bashir and Mr. Sharma. A copy of Seven Hills’ presentation was provided to each of the attendees.
[37] The presentation states that in preparing the report, Seven Hills relied on the accuracy and completeness of the information provided by management and did not conduct independent verification of the information. The presentation clearly states that Seven Hills does not address whether a transaction should or should not be entered into. Specifically, the report states that Seven Hills’ analysis does not address an underlying business decision to pursue any transaction or the relative merits of a transaction as compared to any alternative business transaction that might be available.
Duty of Care
[38] The central issue on this motion is whether there is a genuine issue requiring a trial about whether Seven Hills owed a duty of care to any of the plaintiffs.
[39] Establishing a duty of care in the context of negligent misrepresentation or performance of a professional service is a two-part test. In the first part of the test, the plaintiff bears the burden of establishing that there is sufficient foreseeability and proximity between the plaintiff and defendant to establish a duty of care. If the plaintiff is successful, a prima facie duty of care is established and the burden shifts to the defendant in the second part of the test to articulate a policy reason why the court should negate the duty of care, Deloitte & Touche v. Livent, [2017 SCC 63](https://www.canlii.org/en/ca/scc/doc/2017/2017scc63/2017scc63.html).
Proximity
[40] Proximity should be considered before foreseeability because what the defendant reasonably foresees as flowing from its negligence depends upon the characteristics of its relationship with the plaintiff and, specifically, the purpose of the defendant’s undertaking.
[41] In cases of pure economic loss arising from negligent misrepresentation or performance of a service, two factors are determinative in the proximity analysis: the defendant’s undertaking and the plaintiff’s reliance. Where the defendant undertakes to provide a representation or service in circumstances that invite the plaintiff’s reasonable reliance, the defendant becomes obligated to take reasonable care. Rights, like duties, are, however, not limitless. Any reliance on the part of the plaintiff which falls outside the scope of the defendant’s undertaking of responsibility – that is, of the purpose for which the representation was made or the service was undertaken – necessarily falls outside the scope of the proximate relationship and, therefore, of the defendant’s duty of care. This principle limits liability on the basis that the defendant cannot be liable for risk of injury against which he did not undertake to protect, Livent at paras 30-31.
[42] In this case, what is alleged against Seven Hills in the statement of claim are the very things Seven Hills contracted not to provide and disclaimed liability for:
(a) Seven Hills was not retained by individual members of the board personally, it was retained by Xtreme Labs;
(b) Seven Hills was providing a valuation not a fairness opinion;
(c) Seven Hills was to provide the valuation to the board qua board members of Xtreme Labs;
(d) the valuation was only to be provided to the board and not to any third party, including shareholders;
(e) Seven Hills was not performing an independent valuation, but rather was relying on information provided by management of Xtreme Labs;
(f) Seven Hills did not undertake any non-contractual obligations;
(g) Seven Hills did not undertake to provide any opinion with respect to the fairness of any proposed transaction;
(h) the plaintiffs were not intended beneficiaries of the valuation and, to the extent they were recipients, only received the valuation in their capacity as members of the Xtreme Labs board; and
(i) Seven Hills owed no duties to any third party, including the plaintiffs, in performing the valuation.
[43] With respect to the second branch of proximity, there is simply no evidence before the court that the plaintiffs actually relied on the valuation in deciding to conclude the management buyout of Xtreme Labs.
Foreseeability
[44] An injury to the plaintiff will be reasonably foreseeable if (1) the defendant should have reasonably foreseen that the plaintiff would rely on his or her representation; and (2) such reliance would, in the particular circumstances of the case, be reasonable. Both the reasonableness and the reasonable foreseeability of the plaintiff’s reliance will be determined by the relationship of proximity between parties. A plaintiff has a right to rely on a defendant to act with reasonable care for the particular purpose of the defendant’s undertaking and his or her reliance on the defendant for that purpose is both reasonable and reasonably foreseeable. But a plaintiff has no right to rely on a defendant for any other purpose, because such reliance would fall outside the scope of the defendant’s undertaking. As such, any consequent injury could not have been reasonably foreseeable, Livent at paras 34 and 35.
[45] Here, on the evidence, Seven Hills could not reasonably have foreseen the reliance of the plaintiffs on the valuation to enter into the management buyout because Seven Hills expressly prohibited such use of its valuation and disclaimed any responsibility for reliance of this kind. In any event, the plaintiff’s reliance, even if there was evidence of such reliance (which there is not), was not reasonable – again, because of Seven Hills’ express and repeated prohibition against such reliance and disclaimer of any responsibility in the event of such reliance.
The Plaintiffs’ Response
[46] The plaintiffs have filed no affidavit in support of their claim against Seven Hills in this action. Indeed, they rely on alleged deficient production and argue that Seven Hills has not met its obligation of providing a sufficient evidentiary record to resolve this case on a summary basis. The plaintiff’s also say that Mr. Markell’s affidavit was not properly sworn, such that none of his evidence, or the supporting exhibits, are properly before the court.
Analysis
[47] I am unable to agree with the plaintiffs’ argument.
[48] The fact that the plaintiffs allege in the claim that Seven Hills knew there was a pending transaction or that Madra and Varma may have had an interest in that transaction, or that the plaintiffs Bashir and Sharma received a copy of the valuation and the Seven Hills report (as directors of Xtreme Labs) misses the point. The engagement letter specifies what Seven Hills was doing and not doing, who could rely on it and for what. There is simply no evidence to contradict or undermine Seven Hills’ right to rely on the language of its agreement with Xtreme Labs.
[49] From a policy perspective, one of the purposes of commercial contracts is the allocation of risk. Here, for a relatively modest five figure fee, Seven Hills performed a service which, on the plaintiffs’ theory, has exposed Seven Hills to a claim for damages in excess of $100 million. It is hardly surprising or unusual that Seven Hills would constrain its exposure to this kind of claim by means of the limitations agreed to when the contract for service was made and which were reinforced during Seven Hills’ performance of that contract.
[50] It is certainly true that Mr. Markell did not personally perform all valuation tasks or participate in all communications with Xtreme Labs personnel. This, however, is entirely to be expected in the context of corporate commercial and professional assignments, where it is rare that one person does everything. It may also be true that notes of meetings or emails may not have been produced and that they may or may not have been lost or damaged by a flood. Again, the fact that every scrap of paper or byte of electronic data is no longer available is not a sufficient response to the defendant’s motion in this case.
[51] These arguments, it seems to me, also miss the point. Seven Hills’ argument is a simple one and does not depend upon the details of particular communications in the course of the two week period during which the valuation was performed. Rather, Seven Hills’ argument is founded almost entirely on the language of the engagement letter and its report to the board of Xtreme Labs. If the plaintiffs have evidence that these documents do not mean what they say, or that representations were made by Seven Hills’ personnel during the retainer that contradict or undermine Seven Hills’ reliance on the plain words of these documents, it was incumbent upon the plaintiffs, in a motion for summary judgment, to put that evidence before the court. The law is clear that reliance on the allegations in the statement of claim is not a sufficient response in the context of a motion for summary judgment.
[52] On the technical point about the swearing of the affidavit, regardless of what Mr. Markell recalls or does not recall of the circumstances of his swearing of his affidavit, it is clear from the notarizing of his affidavit in California that the notary was present with the affidavit and the exhibits and witnessed Mr. Markell put his oath to the affidavit with attendant exhibits attached.
Conclusion
[53] Whether a duty owed is an essential element to any claim in negligence. For the reasons set out above, I conclude there is no duty owed by Seven Hills to the plaintiffs. Since no negligence claim can succeed in the absence of a duty being owed, this finding is sufficient to grant summary judgment in favour of Seven Hills.
[54] There were also arguments around the lack of any evidence proving a breach of the standard of care or any causal connection between the alleged breach and the claimed loss. Having found there is no genuine issue requiring a trial on the issue of duty of care, it is not necessary for me to make any determination of the relative obligations of the parties, in the context of a motion for summary judgment in a professional negligence case, to put forward evidence of a breach of the standard of care or the causal relationship of the breach to claimed damages.
[55] The motion for summary judgment is granted and the action against Seven Hills is dismissed.
Costs
[56] Both sides submitted bills of costs on the two motions. Seven Hills also submitted a bill of costs for the action (exclusive of the costs on the motions) in the event it was successful in the motion for summary judgment.
[57] The costs claimed by the parties on the motions are almost identical. These bills were reasonable and are insightful on the important question of what the losing party might reasonably expect to pay. I therefore award Seven Hills $29,000 partial indemnity costs (inclusive of fees, disbursements and taxes) for the settlement motion and $30,000 (inclusive of fees, disbursements and taxes) for the summary judgment motion.
[58] Seven Hills’ success on the motion for summary judgment means it has extricated itself from the entire action. It therefore seeks additional partial indemnity costs of the action (net of the costs of these motions) of $134,000. This includes initial consultations, pleadings, other motions, document production, examinations for discovery, “scheduling” and settlement negotiations (apart from the settlement motion). It is difficult to assess some of the amounts involved without more details, such as the number of documents produced, what the other motions were about, the number of days of discovery attended (and whose discovery it was). There was evidence that Seven Hills produced relatively few documents. It was also clear from the motions that Seven Hills was in no way implicated in the main claim involving misrepresentations and conspiracy which the plaintiffs allege against the other defendants. I was provided no information about the other motions, what they were about or who prevailed and what, if any, cost awards were made on those motion. I also find that $11,00 in fees for “scheduling” is unreasonable without a clear explanation of how that figure arose. In all the circumstances, I find that a further $90,000 in fees for the action is warranted and that sum (based on partial indemnity and inclusive of fees, disbursements and taxes) is awarded for this category of costs.