Court File and Parties
Court File No.: CV-18-603102 Date: 2019-07-23 Ontario Superior Court of Justice
Between: Raghid Bunni, Plaintiff – and – Muhib Khalaf, Defendant
Counsel: Matthew Urback, for the Plaintiff Arman Hoque, for the Defendant
Heard: July 16, 2019
Reasons for Decision (Motion for Summary Judgment pursuant to Rule 20.01)
Leiper J.
Introduction
1The plaintiff brought a motion for summary judgment to determine how the profits from a joint venture selling automotive parts should be divided.
2The plaintiff and the defendant are related to each other. They agreed that the plaintiff, who lived in Canada would purchase auto parts and ship them to the defendant who lived in Iraq. The defendant in turn would sell the parts for a profit. At the time of this motion, the parties agreed that any outstanding profits would be shared with 70% to the plaintiff and 30% to the defendant.
3The parties agree that there are outstanding funds owed to the plaintiff from the defendant. The issue on the motion is the amount and how that amount should be determined.
Availability of Summary Judgment
4The parties agreed that this is an appropriate case for summary judgment. The amounts claimed are less than $60,000. The available records and affidavits from the parties address the matters in issue. There are brief expert reports to assist with the calculation of net profit. Neither party wishes to bear the expense of a trial. There is substantial agreement on certain of the figures and facts.
5Rule 20 of the Rules of Civil Procedure provides:
(2) The court shall grant summary judgment if,
(a) the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence; or
(b) the parties agree to have all or part of the claim determined by a summary judgment and the court is satisfied that it is appropriate to grant summary judgment.
(2.1) In determining under clause (2)(a) whether there is a genuine issue requiring a trial, the court shall consider the evidence submitted by the parties and, if the determination is being made by a judge, the judge may exercise any of the following powers for the purpose, unless it is in the interest of justice for such powers to be exercised only at a trial:
Weighing the evidence.
Evaluating the credibility of a deponent.
Drawing any reasonable inference from the evidence.
(2.2) A judge may, for the purposes of exercising any of the powers set out in subrule (2.1), order that oral evidence be presented by one or more parties, with or without time limits on its presentation.
6As noted in Hryniak v. Mauldin, 2014 SCC 7 at paras 57 and 94, a motions judge must conclude that sufficient evidence has been presented on the relevant points to draw the inferences necessary to deal with the matter.
7I am satisfied that this is such a case. The parties are largely in agreement as to the volume of sales, the cost of goods sold and the quantities of unsold product. Each has provided an expert report addressing the issue of how to account for unsold/consignment product. The documentation as to sales calculations in conjunction with these reports enable the necessary inferences to be drawn to resolve the dispute in an expeditious way. Finally, the parties agree that the claim should be determined by summary judgment. These factors all support a determination by summary judgment.
The Issues
Issue 1: Accounting for Profits: Are the value of unsold goods and/or consigned goods included in the Sales Figures?
8The defendant accounted to the plaintiff for his sales of the auto parts. The plaintiff disagreed with the defendant’s methodology and seeks an accounting for profits that calculates profit by deducting cost of goods from actual sales. This approach is supported by his expert. The defendant submits the sales figures includes the cost of unsold/consigned goods in the sales figures and that these should be deducted from the profits. This approach is supported by the defendant’s expert.
9The first issue is whether unsold and consigned goods should be considered part of the gross sales numbers, and thus be deducted from sales before determining profit. The plaintiff seeks $15,691.90 for his 70% share from profits calculated using his methodology. He also seeks $15,839.60, for his 70% share from profits calculated by omitting the value of product left on consignment from any deductions from profit.
10The defendant argues that the sales figures include unsold merchandise and consignment product, which he treated as uncollected accounts receivable. By including these figures in the cost of sales, the defendant argues that no funds are payable to the plaintiff, because there are no profits left over to divide, or at most, a nominal amount of profit to share.
Issue 2: Is the plaintiff entitled to the costs of shocks purportedly sold at a discount?
11The plaintiff seeks also additional payment for shocks sent in Shipment 4, that were reportedly sold at a 70% discount by the defendant. A subsequent delivery of other shocks was successfully sold for profit. There was no explanation, evidence or argument from the defendant on the discrepancy. All other parts during the venture appear to have attracted profits and not required any discount. The plaintiff asks that I draw an inference that these sales were not made at such a discount. He seeks his cost of the discounted shocks in the amount of $9,163.00.
Background Facts and Figures
12The joint venture began in 2004. The plaintiff purchased auto parts in North America with his own funds and supplied the upfront costs for the business. The defendant sold the parts in Iraq, where he lived. All sales and costs were accounted for in US dollars. The arrangements for the joint venture were made orally. This reflected the mutual level of trust that accompanied the joint venture.
13The parties agreed to split the profits with 75% for the plaintiff and 25% for the defendant. Later, they changed this to a 65%-35% split. The parties have agreed on a 70-30% division of any profit determined in these proceedings.
14At the beginning of their venture, the business operated as intended. Parts were shipped by the plaintiff, sold by the defendant and profits were remitted to the plaintiff by the defendant.
15The joint venture began to unravel during a time of political unrest in Iraq. The defendant and his family left the country in 2007, eventually making their way to Canada via Syria as refugees. The defendant arranged for another individual to handle the sales of parts which remained in Iraq. Transfers of funds to the plaintiff continued into 2013.
16Before leaving Iraq, the defendant moved the merchandise several times at his expense, to avoid confiscation. He said that the Islamic State of Iraq and Syria (ISIS) eventually looted the business’s unsold merchandise. He said that was difficult to access his business records because he and his family were living in a war zone. These conditions appear to have contributed to the risks of the business and to a breakdown in the trust between the parties.
17Between 2014-2017 communications were cut off to Iraq. The occupying forces of the ISIS was defeated. Mosul was liberated in 2017. The defendant advised the plaintiff that he could not retrieve the unsold parts. The parties agreed to terminate their joint venture in 2017 and to finalize their accounts in 2018. They agree that the records are incomplete, and each has questioned some of the explanations and credibility of the other. Nevertheless, despite the imperfections in the record, they ask the court to do its best to resolve the dispute based on what has been provided.
Cost of Goods Sold and Sales Figures
18There were 10 shipments made to the defendant in Mosul, Iraq between 2004 and 2007 (Shipments 1-10). The parties agreed through their experts that the cost of the goods purchased for the joint venture was approximately $350,000.
19The plaintiff says the cost of goods sold was $349,710.52. The defendant’s figure is $350,553.93. The material filed did not allow for independent verification of the precise figure. Accordingly, given that the parties are close in their figures and have sought judgment in a summary fashion on the available material, I assumed a cost of goods at a midpoint between these two figures. For the calculations of profit, I have taken the difference in the two figures ($843.41), divided that number in half ($421.70) and subtracted that from the defendant’s figure for a net sales figure of $350,132.23.
20The parties agree on the total sales figures, although not on what is included in that figure. The “total sales” number they arrived at is $431,144.95. This figure was deducted from the cost of goods sold to arrive at a gross profit figure. The shipping costs paid by the plaintiff was deducted from the gross profits to arrive at a net profit figure. These expenses are close to the subject of agreement, and as with the cost of goods figure, I took the midpoint between the two figures for the analysis. 1 The net figure is $32,445.07.
21Using these figures to assess net profits, the calculation operates in this fashion:
Total Sales: $431,144.93 Less Cost of Goods: $350,132.23 Gross Profit: $ 81,012.70 Less Expenses: $ 32,445.07 Net Profit: $ 48,567.63
The Accounting for Unsold Goods
22The source of the dispute and the first issue to be determined is whether the value of the unsold goods (purchased by the plaintiff) should be deducted from net profit. The defendant says he included the cost of unsold goods in the sales figure and it is on that basis that it should be deducted from net profit. The amount sought to be deducted from net profit to account for unsold merchandise is $22,417.00.
23The defendant’s accounting expert supports making this deduction. That report relies on the statement of the defendant, repeated in his affidavit, that he had included the value of unsold merchandise in his total sales, along with account receivables for items provided on credit. The expert, Mr. Hany Fayez, prefaced his letter with the note that he compiled the partnership income based on information provided by the defendant on the amounts reported, and without review or audit. He deducted both unsold inventory value from profit and uncollected accounts receivable.
24In a follow up report, Mr. Fayez explained that he deducted the unsold merchandise from profits because that number was also reported in the sales figures. He reasoned that this meant it was a write-off because that merchandise was ultimately not sold. Mr. Fayez did not opine as to whether this conforms to generally accepted accounting standards.
25The plaintiff’s accounting expert performed a similar analysis, prepared using information provided by the plaintiff. In the calculations done by the plaintiff’s expert, Ms. Barrie, the value of unsold inventory of $22,416.60 was not included in the original cost of goods because it was included in the cost of goods. Ms. Barrie noted that “total sales would be greater if the figure of the accounts receivable” was added to the sales figure.
26Ms. Barrie provided an expert opinion on the question of how to account for stolen, abandoned or discarded merchandise that is unsold in a profit/loss calculation. Ms. Barrie reported as follows:
Based on generally accepted financial reporting standard and accepted accounting standards, the total cost of discarded, abandoned and stolen merchandise (and any bad debts) should be included in the total cost of purchases to calculate the profit or loss. The following example will clarify this.
If a business purchases $1000 worth of merchandise and 10% of the merchandise is discarded or stolen (or is bad debts), and the remaining is sold for $1500, then the net profit from this transaction will still be $500 (1500-900-100=500)
Not only is the above calculation according to internationally accepted financial reporting standards and generally accepted accounting standards, but it is logically and mathematically correct. There is no alternative to calculating the net profit for the above transaction.
27Available business records that were filed on the motion confirmed that the sales figures were made based on sold merchandise. Counsel for the plaintiff used the example of struts that were shipped in Shipment 2: the defendant calculated sales by the number of struts sold, and the unsold struts were broken out from that figure. A similar analysis of the figures reveals similar treatment for product shipped in Shipment 3. This is contrary to the assumption made by the defendant’s expert that unsold merchandise was included in the sales figures.
28Given that the plaintiff paid for the goods up front, it is not logical to deduct these costs again from the profits. These amounts were not included in the sales figures on the evidence provided. The plaintiff’s expert opinion is that this is contrary to generally accepted accounting standards.
29I accept the plaintiff’s evidence and expert opinion in this regard, that a further deduction for unsold goods should not be made from the net profit figure. It is consistent with the available records, with logic and with accounting principles. Accordingly, I would not deduct the cost of unsold goods from the net profit figure above.
Accounting for Goods on Consignment/Accounts Receivable
30The defendant’s accounting expert provided an opinion that any accounts receivable for goods left with others, unpaid, should also be deducted from profit. This amount was calculated as $22,628.40. Mr. Fayez opined that “accounts receivables are reported in sales when goods were physically transferred to the customer. If there are no sales, then there will be no accounts receivables. Therefore, we had to deducted (write off) accounts receivables when they became uncollected to reduce partnership profit.”
31Mr. Fayez accepted that the accounts receivables were included in the sales figures provided by the defendant.
32The plaintiff’s expert opinion did not specifically address whether accounts receivable for goods given to others could or should be included in sales. The background details do not split out consignment or goods on credit as clearly as can be seen for unsold goods. Counsel for the plaintiff argues that these were consignment relationships with the title staying with the joint venture pending payment. He also points to credibility issues with the defendant’s dates, business transactions and seeks a finding that these outstanding accounts receivable should not be treated as included in the sales figure and not deducted from profits applying the same logic and principles as in the unsold goods analysis.
33I am not prepared to draw that inference. The records are admittedly incomplete and do not support the proposition as they did for the unsold goods. There is no direct expert opinion on the treatment of accounts receivable in gross sales figures. Accordingly, I will deduct the uncollected accounts receivable in the amount of $22,628.40 from the net profits which to this point have been calculated as $48,567.63, for a net adjusted profit for account receivable of $25,939.23.
The Discounted Shocks
34Part of Shipment 4 included shocks that were purchased for $5.00 each, for a total cost of goods of $13,940.00 US. The defendant recorded these sales at a 70% discount: sold for $1.50 each. Shipment 5 also included shocks which were sold at a higher price (15.00-20.00 each), although they were a different brand of shock. The plaintiff seeks the difference between the discounted reported price and his cost of the shocks, for a total claim $9,163.00.
35The defendant provided no explanation for the discount applied to the shocks in Shipment 4. There was no argument on this point in the factum. The defendant gave a general explanation about the problems with the joint venture, arising from the unstable political environment in Iraq including the challenges in accessing business records.
36A failure to provide explanations or evidence on a motion for summary judgment allows for inferences to be drawn: each party is expected to put their best foot forward on a summary judgment motion.
37The business enterprise was created with an expectation of profit and the discounted shocks appear to be an exception, without any explanation. I draw the inference on this basis that the shocks were sold at some amount higher than the discounted amount, and at the very least, for cost value to realize the mutual and established purpose of this business, to make a profit.
38I find that the defendant owes the plaintiff $9,163.00 representing the product of the difference between sales at $1.50 and the original cost of $5.00 calculated as $3.50 x 2,788 shocks for a total of $9,163.00 US.
The Outstanding Payment Owing on Account of Profits
39The defendant’s expert report of May 2, 2019 accepted that funds are owing to the plaintiff because of unremitted sales to cover the cost of goods and a small amount of profit based on the deductions made by Mr. Fayez. To ensure consistency and using the same numbers to calculate the total amount owing, I have taken the figure agreed upon by the parties for remittances from the defendant to the plaintiff to date and calculated the final amount owed from the defendant to the plaintiff based on the findings made above as follows:
Sales (not assumed to include unsold goods): $431,144.93 Less Cost of Goods: $350,132.23 Less Expenses: $ 32,445.07 Less Accounts Receivable/Consignment: $ 22,628.40 Net Profit to Share: $ 25,939.23 Plaintiff (70%) Share of Profit: $18,157.46
40The plaintiff is entitled to his cost of goods, plus 70% of the profits or $18,157.46, plus reimbursement for the cost of the discounted shocks, less amounts already paid by the defendant. This is calculated as follows:
Cost of Goods: $350,132.23 Profit Share: $ 18,157.46 Shocks: $ 9,163.00 Total Owing: $377,153.69 Less Remittances to Date: $336,900.00 Amount Owing: $40,552.69 US
41The total amount due from the defendant to the plaintiff from the profits earned by the joint venture and considering these findings is $40,552.69 USD.
The Appropriate Exchange Rate
42The parties were asked for brief written submissions on the appropriate exchange rate and a rationale for choosing the rate that should apply. The defendant submitted that the rate should either be the rate in 2011 when his client sought asylum in Canada, or alternatively, in 2007 as this was the year that the final shipment of goods was sent to Iraq for sale.
43The plaintiff referred the court to s. 121 of the Courts of Justice Act, which describes the general rule. The applicable rate is the rate on the day on which payment of the obligation is made, subject to the court’s discretion to fix another rate, pursuant to s. 121(3), where it would be inequitable to any other party to use the date on which payment of the obligation is made.
44The plaintiff submits that the joint venture was in existence for many years. During the period that the plaintiff received payment transfers from the defendant (mid-2004 to mid-2013), the USD to CAD exchange rate varied from a high of approximately 1.3 to a low of par or slightly below. The plaintiff submits that this variation makes the current exercise challenging.
45The plaintiff submits that the defendant ought to have paid the appropriate sums when the joint venture was wound up and the parties recognized that amounts were owing. In this regard, it was not clear to either party that there were any monies owing until the joint venture came to an end.
46The plaintiff submits that two logical times for applying the exchange rate is either at the date of the plaintiff’s accounting: March 18, 2018. Alternatively, plaintiff submits that the court should use the date of judgment, as this will be when the plaintiff will "became obliged to pay various judgment sums."
47Courts have used their discretion to fix an exchange rate to put the claimant "in the position it would have been in, but for the wrong committed" and applied an exchange rate "when the defendants became obliged to pay various judgment sums to the plaintiff'. For example, in Cooper v. Nu Life Corp, 2016 ONSC 3682, McDonald J. considered this question and noted as follows:
In Stott v. Merit Investment Corp. (1988), 63 0.R. (2d) 545 (C.A), Finlayson, J.A., for the majority of the court held that, in relation to a counterclaim by Merit against a former salesperson for losses sustained as a result of the salesperson's wrongdoing in the administration of an unpaid customer account, the proper method was to convert the debt to Canadian dollars as of the date the commitment was made, not the date of payment. Leave to appeal to the Supreme of Court of Canada was refused. In Zesta Engineering Ltd. v. Cloutier, 2010 ONSC 5810, [2010] 86 CCEL (3d) 1, Stinson J. noted a dramatic shift in the respective values of Canadian and US dollars in the time as between when the debt was incurred in US dollars and when it likely would be paid, in Canadian dollars. Stinson J. selected the exchange rate which would put the creditor in the position it would have been in, but for the wrong committed. That was the rate at the time the debt was incurred.
48Specific dates for the payments owed by the defendant to the plaintiff are not possible. According to the way they structured their business, payments were due and owing as collected and on an ongoing basis. It is not possible to take a granular approach to assessing exchange rate here. The defendant had obligations to make payments during the life of the business and accordingly I will apply an exchange rate which is the average of the rate between 2004 and 2013.
49The highest average USD to CDN exchange rate for the period between 2004-2013 is reported as 1.3, for 2004. The lowest average USD to CDN rate during this period is .99 in 2011. 2 The average of these two averages is 1.145. I will apply that exchange rate to the amounts found to be owing from the defendant to the plaintiff during the period of their active joint venture. I have chosen this method to apply the logic used by Stinson, J. in Zesta Engineering and to strive to put the plaintiff in the position he would have been but for the failure to make the payments in full during the active years of the business venture.
Conclusion
50An order shall follow requiring the defendant to pay $46,432.83 CDN to the plaintiff based on the award of $40,552.69 USD, calculated at an exchange rate of 1.145.
Costs
51If the parties are unable to agree on costs, brief written submissions may be made on or before August 9, 2019.
Leiper J. Released: July 23, 2019
Footnotes
Footnotes
- The shipping expense figures were: $32,348.63 or $32,341.52 with a difference of $7.11. The same midpoint calculation was applied to arrive at the shipping expense figure of $32,445.07.
- Source: www.ofx.com, accessed July 23, 2019