COURT FILE NO.: C-457-12
DATE: 2019-02-01
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Al Way, Kingsley Financial Inc. and Triumph Financial Holdings Inc.
Plaintiffs
– and –
Gordon Schembri, Schembri Financial Limited, 1765998 Ontario Inc., 41 Columbia Inc., King & Columbia Inc., 69 Columbia St. Inc., 5 Rittenhouse Inc., The Block Inc., The Block I Inc., and The Block II Inc.
Defendants
Heath P. L. Whiteley, Laughlin J. Campbell & T. Moum - Counsel for the Plaintiffs
James M. Wortzman - Counsel for the Defendants
HEARD: October 18 & 19, 2018 and January 8 & 9, 2019
The Honourable Justice James W. Sloan
reasons for decision
Corrected decision: The corrections were made on February 13, 2019.
The reference to COURT FILE NO.: “C – 437 - 12” in the Citation on page 1 and
On the back page have now been corrected to read COURT FILE NO.: “C-457-12:”.
[1] Gordon Schembri (Schembri) and Al Way (Way) have essentially been at war since at least 2010. There are two actions between these parties commonly referred to as the “Main Action” and the right of first refusal or “ROFR Action”. This motion deals with the ROFR Action where Schembri and one or more of his companies are defendants and Way and one or more of his companies are plaintiffs.
[2] Both parties carry on the business of land development.
[3] Between 2005 and 2007 Schembri was a small time land developer in the City of Waterloo. He wanted to develop larger properties and knew that he needed someone with experience in building superstructures. This led him to discussing the possibility of joining forces with Way in 2007.
[4] The parties entered into a Joint Venture Agreement (JVA) dated April 26, 2007. Pursuant to the JVA the parties undertook developments of student residences in London, Waterloo and Oshawa.
[5] The parties to the JVA were 1725030 Ontario Inc., a company controlled by Way and Schembri in trust for a company to be incorporated. The company that was to be incorporated is 1784652 Ontario Inc.
[6] To put it mildly the parties had an acrimonious falling out sometime after the sale of their Waterloo development at 345 King St. N. closed on March 19, 2009.
[7] Since that time, both parties on their own, appear to have flourished in the real estate development field.
[8] The Main Action (C-42-11) was commenced by statement of claim dated December 1, 2010, and consists of a claim by Schembri and companies controlled by Schembri, against Way and numerous entities controlled by Way. The Main Action alleges that Way defrauded Schembri and breached contractual and fiduciary duties owed to him and his companies. In short, the Main Action alleges that millions of dollars of improper development/construction charges were funneled to corporations controlled by Way, thereby decreasing the profit for the development.
[9] The Way plaintiffs in this ROFR Action (commenced May 25, 2012), allege that Schembri and the other defendants have breached their fiduciary duties as well as Clause 13 (non-competition clause) of the Shareholders Agreement. Based on these allegations the Way plaintiffs take the position that all developments done by the defendants since the falling out are held in trust for the plaintiffs. They claim damages of $30,000,000 for breach of contract, conversion, misappropriation and breach of fiduciary duty. In addition, they seek $500,000 for punitive aggravated and exemplary damages.
[10] The project, envisioned at the time the JVA was entered into, is known as the “345 King Street Lands.” Paragraph 2 of the JVA sets out some background points such as:
(a) the JVA does not create a partnership (3);
(b) except as provided in this agreement each joint venture may independently engage in any business endeavour whether or not competitive with the objects of the joint venture, without consulting the other joint venture and without in any way being accountable to the joint venture (4);
(c) the purpose of the joint venture is to develop and sell the project (6).
[11] The Shareholders Agreement was entered into on April 2, 2008, prior to the completion of the joint venture and while the parties were still on good terms. The agreement was between Kingsley Financial Inc. (Kingsley Financial), Schembri Financial Limited (Schembri Financial), Triumph Financial Holdings Inc., (Corporation), Al Way and Gordon Schembri.
[12] Kingsley Financial (Way) was given 55 shares, while Schembri Financial (Schembri) was given 45 shares of the corporation Triumph Financial Holdings Inc.
[13] Unanimous shareholder approval was required for Triumph Financial to do most moderate to major business transactions, including making loans, guaranteeing debts, enter into any partnership or other profit sharing vehicles, mortgaging or encumbering assets, committing to any financing arrangements with third parties or undertaking any project without initiating project feasibility studies and construction budget approvals.
[14] Clause 13 of the Shareholders Agreement under the heading of NON-COMPETITION, which Way claims Schembri has breached, reads as follows:
During the period which Schembri Financial is a shareholder of the Corporation, it shall have an ongoing obligation to present to Kingsley Financial and the Corporation all real estate development opportunities (the “Project”) which it may have acquired within the Regional Municipality of Waterloo. This obligation to Kingsley Financial and the Corporation shall also extend to Gordon Schembri personally, and any other legal entity in which he has an interest, either directly or indirectly, financially or otherwise. Kingsley Financial and the Corporation shall have FIFTEEN (15) days following the presentation of the Project to them to determine if it is economically feasible using the typical budget model consistently utilized by them in such circumstances and, if at the expiry of the FIFTEEN (15) day period neither of them have indicated to Schembri Financial in writing that it is taking on the project, then Schembri Financial (or its designate) shall be free to pursue the Project without the involvement of Kingsley Financial or the Corporation.
[15] Schembri brings this summary judgment motion, seeking to strike out the plaintiffs’ claim in its entirety, or in part, and in the further alternative to bifurcate the issues of liability and damages.
The Schembri Defendants’ (Moving Parties’) Position
[16] The defendants submit that the plaintiffs’ claim rises or falls on whether or not Clause 13 of the Shareholders Agreement is enforceable. The defendants submit there are several alternate reasons why Clause 13 is not enforceable.
[17] With respect to Way personally, they submit he does not have a claim because he is personally not a beneficiary of the non-competition clause.
[18] The defendants further that the non-competition clause (also referred to as the restrictive covenant) is not enforceable because it is:
(a) merely an agreement to agree;
(b) ambiguous;
(c) unreasonable;
(d) practically unworkable; and
(e) unnecessary to protect any of the plaintiff’s legitimate business interests.
[19] The defendants submit that the plaintiffs’ factum does not address the above issues.
[20] The defendants submit that the non-competition clause is a restrictive covenant and is therefore presumably unenforceable unless it is reasonable. The party seeking to enforce a restrictive covenant has the onus of demonstrating that the covenants are reasonable as between the parties while the party seeking to avoid enforcement bears the onus of demonstrating that is not reasonable with respect to the public interest.
Is the Restrictive Covenant Ambiguous?
[21] The defendants submit that Clause 13 is ambiguous for many reasons.
[22] Firstly, it does not refer to a definitive or finite spatial area because the phrase Regional Municipality of Waterloo refers to a Regional Corporation not an area of land. The phrase is therefore ambiguous and the non-competition clause ought to be found unenforceable.
[23] For this proposition, the defendants rely in part on the case of Saffron v. KRG Insurance Brokers, 2009 SCC 6, [2009] 1 S.C.R. 157. Although the BC Court of Appeal was satisfied that there was no doubt the parties intended to mean the City of Vancouver and areas beyond the city, the Supreme Court found that the term “Metropolitan City of Vancouver” in the restrictive covenant had no legally defined meaning and was therefore ambiguous. The court stated the following:
[43] Normally, the reasonableness of a restrictive covenant is determined by considering the extent of the activity thought to be prohibited and the extent of the temporal and spatial scope of the prohibition. This case is different because of the added issue of ambiguity. As indicated, a restrictive covenant is prima facie unenforceable unless it is shown to be reasonable. However, if the covenant is ambiguous, in the sense that what is prohibited is not clear as to the activity, time or geography, it is not possible to demonstrate that it is reasonable. Thus, an ambiguous restrictive covenant is, by definition, prima facie unreasonable and unenforceable. Only if the ambiguity can be resolved is it then possible to determine whether the unambiguous restrictive covenant is reasonable.
[44] The trial judge found that there was no legal or judicial definition of the term “Metropolitan City of Vancouver”. In finding that the spatial area covered by the restrictive covenant was not clear and certain, the trial judge referred to the evidence of the principal of KRG Western … On the basis of this and other evidence, the trial judge found that the language of the restrictive covenant was neither clear nor certain and for this and other reasons dismissed the claim of KRG Western against Saffron.
[47] That is not what the Court of Appeal purported to do in this case. It was in fact trying to resolve the ambiguity in the term “Metropolitan City of Vancouver” by reading down covenant according to its notion of reasonableness and what it thought the parties might have intended … As stated earlier, notional severance does not permit a court to rewrite a restrictive covenant in an employment contract in order to reflect its own view of what the parties consensus ad idem might have been or what the court thinks is reasonable in the circumstances.
[24] Secondly, the non-competition clause sets out that Schembri is to “present” to Kingsley Financial and Triumph Financial “all real estate development opportunities”, which “it may have acquired.”
[25] It is clear from Way’s examination for discovery transcript, contained at Tab D in the Compendium of the Defendants/Moving Parties and marked as Volume 14 for purposes of this summary judgment motion, that he does not understand or cannot explain what Clause 13 purports to govern.
[26] Schembri acknowledges in his affidavit that he cannot understand the clause except to say it was his understanding that he and Way would have to agree to any future deals on terms to be negotiated. He was never challenged on this in cross-examination.
[27] Counsel for Schembri read in numerous questions and answers from Way’s discovery transcript in support of this proposition.
[28] With respect to the word “acquire”, with respect to the examples given to him, Way could not tell counsel for the defendant when Schembri’s obligation would kick in. In particular counsel read in pages 332 through 337 from the Compendium.
[29] Based on examples such as Schembri putting in a conditional offer, waiving conditions in an offer, firming up an offer, closing a transaction, completing his due diligence, completing a feasibility study and/or preparing a budget, Way indicated he could not say if any of those situations would obligate Schembri to present the opportunity to him.
[30] With respect to the phrase “to present all real estate development opportunities”, Way’s understanding, demonstrated by his answers at pages 343 and 344 of his transcript, was that Schembri would be obligated to present to Way for his consideration, real estate matters such as, buying a cottage in the Region of Waterloo, purchasing and renovating a house for his children or adding a second floor to a bungalow and selling it.
[31] In addition, it was Way’s evidence at page 351 and 352 of his transcript that Schembri would be obligated “to present” if he was a shareholder in another company, even if he was a shareholder in a real estate investment trust (REIT).
[32] The defendants therefore submit that the scope of the proposed restriction which includes “all real estate opportunities” is ambiguous, commercially absurd and not necessary to protect Triumph Financial or Kingsley Financial’s legitimate interests.
[33] The defendants rely in part on the case of Mason v. Chem-Trend Limited Partnership, 2011 ONCA 334, where the Ontario Court of Appeal stated:
[18] In determining whether the restrictive covenant is enforceable, the application judge, following Shafron, looked first at the meaning of the clause and whether it is ambiguous…
[19] Although the appellant sought to characterize the practical unworkability of the covenant as ambiguity in implementation, I prefer to consider it as part of the reasonableness inquiry.
[27] Fourth in practice. It is not possible for the appellant to know with which potential customers he is prohibited from doing business. The scope of the category of customers that the appellant is prohibited from dealing with during the one-year operation of the restriction is [at para.8] “any business entity which was a customer of the company during the period in which [he] was an employee of the company”.
[28] The appellant was an employee for 17 years. The company has worldwide operations with customers, many of which also operate in many countries. The restriction is not limited to the appellant’s own customers over that period, but includes all customers of the company during that period. As the application judge found, the appellant neither knows nor has he access to a list of all companies customers, a list which is very large. Therefore, the appellant has no way to know whether any particular potential contact he may wish to make either is or was, during the last 17 years, a customer of the company.
[30] Effectively, because the appellant cannot know which potential customers are off-limits to him, he is prohibited for one year from dealing with any business that may have been a customer of the company. The restriction is therefore not only ambiguous in its practical implementation, but effectively prohibits the appellant from competing with the respondent for one year.
[31] After conducting a balancing process between the rights of the respondent to protect its trade secrets and customer [page 80] information, and the public interest in free and open competition, in the context of the agreement as a whole and the role of the appellant in the company as a salesman, I conclude that the complete prohibition on competition for one year is overly broad as well as unworkable in practice and makes a restrictive covenant unreasonable and unenforceable.
[34] The defendants submit that in this case, it cannot be argued that not enforcing the restrictive covenant would interfere with the interests of either plaintiff corporation. Kingsley Financial is not and has never been a developer. Its sole purpose is the movement of money between Way’s various business interests. Triumph Financial is no longer in business since all of its assets were placed in receivership and sold, therefore it has no legitimate business interests to protect.
[35] In addition, the defendants submit the plaintiffs have no damages, based on productions in the Main Action that show Way’s companies generated revenues of $24,773,000 between June 1, 2013, and May 31, 2016.
[36] Way has acknowledged that he has continued to carry on business as a developer, has the resources to do so, continues to build apartment building for students, and has not been restricted from looking for properties in the Waterloo Region. Further, Way acknowledges that nothing that Schembri did or did not do in breach of the non-competition clause prevented him from proceeding with further developments.
[37] The defendants rely in part on the case of Payette v. Guay Inc., 2013 SCC 45, [2013] 3 S.C.R. 95, where the Supreme Court stated at para. 61:
[61] In a commercial context, a non-competition covenant will be found to be reasonable and lawful provided that it is limited, as to which term and to the territory and activities to which it applies, to whatever is necessary for the protection of the legitimate interests of the party in whose favour it was granted… Whether the non-competition clause is valid in such a context depends on the circumstances in which the contract containing it was entered into. The factors that can be taken into consideration include the sale price, the nature of the business activities, the parties experience and expertise and the fact that the parties had access to the services of legal counsel and other professionals. Each case must be considered in light of its specific circumstances.
[38] The next ambiguity raised by the defendants is what was/is meant by “the typical budget model”?
[39] The defendants submit there is no such thing. At the time of the JVA, the only budget in existence was for 345 King. Triumph Financial did not exist at that point in time and Kingsley Financial is not a party to the JVA.
[40] When asked whether Kingsley Financial had a typical budget model, Way answered at page 366 of the Compendium, “We use anything… well, I don’t know… actually the answer is, I do not know.”
[41] When asked what would happen if Kingsley Financial and Triumph Financial had different typical budget models, he replied “I do not know.”
An Agreement to Agree
[42] The defendants submit that on a plain reading of Clause 13 it is nothing more than an agreement to agree.
[43] They rely in part on the case of Bitton v. Checroune et al, 2017 ONSC 2434, where the court outlined the parties agreement as follows;
[20] The first indication of some kind of agreement between the parties is a letter agreement dated March 24, 2010, sent from Mr. Pollock to Mr. Deeth, and signed by both parties. This letter agreement more or less mirrors the terms Mr. Britton claims were agreed to by the parties. In summary, it provides that: (i) Mr. Checroune will pay out the CMLS mortgage; (ii) Mr. Britton will convey a 50% interest in fee simple of the land to Mr. Checroune or a company controlled by him; (iii) Mr. Checroune and Mr. Bitton will register mortgages against the property in the amount of the CMLS mortgage (approximately 4.3 million) with Mr. Checroune’s mortgage in first position; (iv) the two new mortgages will bear interest at 5% per annum and have two year terms. The terms can be extended for an additional two years at the option of either party, but the extension of one mortgage extends the other. No interest is payable on the mortgages until maturity; (v) “[p]rovided, however, that [Mr. Bitton] may elect to have his share of the Project Costs paid by [Mr. Checroune]”, in which case those costs “bear interest at 7% per annum and shall be repaid by [Mr. Bitton] to [Mr. Checroune] as a first charge against the net proceeds of sale of the individual condominium units” and prior to Mr. Bitton taking any profits; and (vi) the parties will negotiate a co-tenancy agreement.
[44] The defendants submit the potential agreement in Britton is far more detailed than Clause 13.
[45] The court in Bitton went on to state:
[57] Determining the nature of the agreement between the parties requires me to evaluate the facts that I have found within the relevant legal framework to decide what constitutes a binding agreement, as opposed to a nonbinding agreement to agree.
[58] A document that omits essential terms, or that contains vague or incomplete material terms, will not constitute an enforceable contract… While the court will give reasonable commercial effect to the contractual arrangements made between the parties the court will not make their contract for them …
[60] I also find that although the parties’ intention was to develop the property together, they reached no enforceable agreement as to how to do that. Nor did they reach any enforceable agreement as to how to fund the development costs.
[72] I have found that the intention of the parties was to develop the land. Mr. Bitton argues that the parties reached a binding agreement on the funding of the development in the March 24 letter. I disagree.
[73] While I accept that the parties intended to work together to develop the land, they did not reach agreement on the essential terms of how that development would be funded. The clause on which Mr. Bitton relies in the March 24 letter agreement is missing key terms, including the amount Mr. Checroune would advance to fund the construction, how and when that money would be advanced, the manner in which Mr. Bitton could exercise his option to have Mr. Checroune fund the construction, and what would happen in the event of default or disagreement as to the scope of the construction.
[74] Given the enormity of the commitment to fund the construction – estimated at somewhere between 50 million and 100 million – I do not accept that the term regarding construction funding is specific enough to be an enforceable agreement. Moreover it would not have been commercially reasonable for the construction funding, if advanced entirely by Mr. Checroune, to be lower in priority than the parties’ mortgages on the land, as Mr. Bitton claims was the case.
[75] In addition, while I find there was a common intention between the parties to partner together to develop the land, there was no legally enforceable agreement to do so. The parties did not agree to any terms as to how to manage (as distinct from fund) the development. Although they took certain actions consistent with this common intention, the evidence establishes no legally enforceable terms related to how the parties would proceed to develop the land. For example, there is no agreement with respect to different tasks each would take on, or what they would do in the event of disagreement.
[46] The defendants submit the ambiguity of Clause 13 is illustrated by the fact that it does not address what would happen if a development opportunity was presented and:
(a) Both Kingsley Financial and Triumph Financial determined the real estate opportunity was economically feasible, what type of ownership interest each would have, or the roles they would each play including the role of any new incorporated entity, which may take title to the development opportunity?
(b) Triumph Financial wanted to proceed and Kingsley Financial did not?
(c) The parties could not agree on a budget or if they had different budgets, yet both wanted to proceed?
(d) The parties could not agree on the structure of any new incorporation including its bylaws etc. and who would be officers, directors and shareholders?
(e) The parties could not agree on a method of funding and who would provide the guarantees and financing?
(f) The parties could not agree on the source and infusion of required equity into the development?
(g) If Schembri asked for a large fee for “sweat equity” for ferreting out and presenting the real estate opportunity, since the type that type of fee is not prevented by the agreement?
[47] The defendants submit that Way’s attempt to answer the ambiguities and lack of details in Clause 13, relies solely upon the arbitration clause contained in Clause 15 of the Shareholder Agreement. In answer to question 863 at page 377 of the Compendium which reads:
Well if I understand your position, in the absence of an agreement an arbitrator would decide all aspects of the development that you and Mr. Schembri could not agree upon?
[48] Way replied: “I believe that would be the purpose of the arbitrator.”
[49] In answer to question 568 on page 372 of the Compendium, with respect to what would happen if Schembri asked for sweat equity and they could not agree on a number, Way’s answer was:
If it is not reasonable then we would go to arbitration because the arbitration clause, and discus… or any dispute in the shareholders’ agreement goes to arbitration.
[50] In addition, on the issue of whether or not the subject matter of the bylaws of a new company would be negotiated, Way stated; “I do not know the answer to that.” (Compendium page 373 question 852)
[51] The defendants submit it has always been Schembri’s position that he could bring a potential project to Way and then they would have to agree on a myriad of issues. Based on the above answers from Way, the defendants submit Way’s position is the same and therefore Clause 13 is nothing more than an agreement to agree. In fact, in Bitton the letter contained more specific terms than Clause 13, and that clause was still not held to be an enforceable contract.
[52] The examination of Mr. Volpini, was entered as Exhibit 1. Volpini was Way’s lawyer at the time the shareholders agreement was signed. He was asked at question 43:
All right. Do you recall any discussion that if Mr. Way did not agree to a 50/50 shareholder split in the event that corporation was self financing, then Mr. Schembri could just say no more developments?
[53] He answered, “Yes. The two of them could say that at any time.”
[54] In answer to question 48 with respect to financing he stated:
“That would be done on a project basis, of course, because as the scheme was that the project would be brought to the table, the two of them, as you may have noticed, both had to – both were required to prove feasibility of any project that was brought to the table. Part of that assessment, of course, would involve the financing, where would it come from, what would it cost, does it makes sense, the shortfall, where is it going to come from and what were the terms associated with that end of it. So it was going to be decided on a case-by-case basis.”
Unreasonableness
[55] The defendants submit that Clause 13 is unreasonable because, in theory, Schembri (or his estate) will remain a shareholder of Triumph Financial in perpetuity because he cannot divest himself of his shares without Way’s consent. Although the company has been inactive for years, Way files the appropriate government papers annually so that the corporation continues to technically exists.
[56] In answers to questions (see Compendium pages 383 – 385) it was Way’s understanding, that there is no end date to the non-competition provision and that the parties’ children are bound by the agreement.
[57] With respect to the issue of a term, the Supreme Court in Payette stated at para. 63:
[63] A non-competition clause in a commercial contract must of course be limited as to time, or it will be found to be contrary to public order and the court will refuse to give effect to it …
[58] The defendants also rely on the case of Martin v. ConCrete USL Limited Partnership, 2013 ONCA 72, where the Ontario Court of Appeal stated at paras. 50-63:
[50] The party that seeks to enforce a restrictive covenant has the onus of demonstrating that the covenants are reasonable as between the parties. The party seeking to avoid enforcement of the covenant bears the onus of demonstrating that it is not reasonable with respect to the public interest…
[51] If the covenant is ambiguous, in the sense that what is prohibited is not clear as to activity, time, or geography, it is not possible to demonstrate that it is reasonable; see Shafron v KRG Insurance Brokers (Western) Inc.,…2009 SCC 6, [2009] 1 S.C.R. 157, at paras. 27, 43: Mason, at paragraph 14. It is therefore unreasonable and unenforceable.
[58] I part company with the application judge on the key issue of this appeal – the reasonableness of the duration of the restrictions.
[59] In my view, the duration is unreasonable because it depends on any required consents of third parties, is therefore for an indeterminate period and there is no fixed, outside limit. Notably, the required consents are not limited to third parties whose consent was required at the time that the covenants were entered into …
[62] Martin did agree to this provision in the context of the sale of a business and acknowledged its reasonableness in signing the agreements. He was also represented by counsel. However, while these are important factors, they do not entirely immunize the clause from scrutiny. Safeguarding the public interest in free and open competition, in my view, requires that the court conduct a greater level of independent analysis.
[63] While not determinative, unlike the application judge, I am also troubled by the fact that the duration is tied to the period during which Martin has an indirect interest in the Units. Unlike the usual non-competition covenant contained in a sales transaction, the duration is not calculated from the time of the sale transaction. Nor does it run until a specified time. After Martin ceases to be an officer or director, as is common in an employment contract.
Is Clause 13 Meant to Protect Legitimate Reasonable Business Interests?
[59] It is unlikely in the extreme, that Schembri and Way would ever enter into a business relationship again, however there is nothing prohibiting them from doing so in the future.
[60] With respect to the party Triumph Financial, Way was asked several questions set forth at pages 387 to 389 of the Compendium. He confirmed, that without Schembri’s consent, Triumph Financial could not proceed with any development projects, because the parties would not agree on financing, feasibility studies, construction budgets approvals etc.
[61] In addition, all of Triumph Financial’s assets were placed in receivership and sold through a court process and it has not carried on any business since that time.
[62] The defendants therefore submit that Triumph Financial simply cannot have a claim against the defendants, because Schembri will not consent and has no obligation to consent to anything.
[63] The defendants state that the only other party who could possibly have a claim would be Kingsley Financial. However, they submit that Kingsley Financial has never carried on business as a real estate developer at any time, including the time during the course of the parties’ relationship and court actions.
[64] Way and his business empire (approximately 36 related and associated corporations - the Way Group) have continued to carry on their various businesses without Schembri’s involvement.
[65] In the Main Action, the Way Group produced financial information for the period June 1, 2013 to May 31, 2016, which showed business assets of $172,000,000, capital of $88,169,000 and revenues of $24,773,000 some of which was generated through real estate development.
[66] Since only Triumph Financial and Kingsley Financial have the benefit of the non-competition clause, the court did not need to look at any other businesses involved in the Way Group.
[67] Prior to the parties meeting, Way had never, “as an investment, went out, acquired land, assembled it, resounded, and developed it as a student housing business.” Except in the joint venture, Way had also never carried on a business of student housing in the Waterloo region.
[68] Since the development of 345 King St., Way (1) continues to carry on business as a developer, (2) has resources necessary to do so, (3) continues to build apartment buildings, some of them for students, (4) has not been restricted from looking for development property in the Waterloo Region and (5) nothing Schembri did or did not do in breach of the non-competition clause prevented him from further development.
[69] Records from the Waterloo Region show that between 2008 in 2017 the value of building permits was between 10 and 11 billion dollars. Notwithstanding this information, Way refused to answer whether there was a “lack of opportunities for [him] to develop real estate in the Region of Waterloo” and refused to agree that there are “plenty of development opportunities in the Region of Waterloo.”
[70] Way acknowledged that he has developed at least eight properties since 2009, and has stated that he is capable of developing one or two properties per year.
[71] At pages 411 and 412 of the Compendium, Way was unable to tell defence counsel what legitimate business interests he was trying to protect through Clause 13.
Partial Summary Judgment
[72] In the event the defendants are not successful in striking out the entire claim of the plaintiffs, they seek summary judgment dismissing the claim against the defendant King & Columbia Inc. which owns the property at 359 King St. North. This property was the Waterloo student residence developed pursuant to the JVA.
[73] It was formally owned by a Triumph Financial subsidiary, and the initial possible development was brought to Way before the Shareholders Agreement existed.
[74] All three student residence developments owned by subsidiaries of Triumph Financial were placed in receivership. 359 King St. N. was the Waterloo property. Through the receivership/court process, both parties had an opportunity to purchase all three properties.
[75] The three properties were sold by way of a complicated and convoluted sales process, through the receivership, which included numerous court appearances including at the Court of Appeal. Through the court process and vesting orders from the court, Schembri became owner of the Waterloo and London properties and Way became owner of the Oshawa property.
[76] At no point in this court/receivership process, did Way raise the issue of the non-competition clause. When asked why he never raised the non-competition clause before the courts, Way refused to answer. In addition Way consented to Justice Campbell signing the Vesting Order which reads:
- THIS COURT ORDERS AND DECLARES that upon the delivery of a Receiver’s certificate to the Purchaser substantially in the form attached as Schedule A hereto (the “Receiver’s Certificate”), all of the Receiver’s or 359 King Ontario Inc.’s right, title and interest in and to the property described in the Sale Agreement and listed on Schedule B hereto (the “purchased property”) hereto shall vest absolutely in the Purchaser, free and clear of and from any and all security interests (whether contractual, statutory, or otherwise), hypothecs, mortgages, levies, charges, or other financial or monetary claims, whether or not they have attached her been perfected, registered or filed and whether secured, unsecured or otherwise (collectively, the “Claims”)
[77] The defendants also seek to have the plaintiffs’ claim against the property known as 61 Columbia St. dismissed, because Way chose not to participate in the development and in any event the claim is statute barred.
[78] 61 Columbia St. is owned by 1765998 Ontario Inc., one of Schembri’s companies. Through a clerical error, 61 Columbia St. does not show up in the title of proceedings and it has not been noted in default.
[79] Way was advised of the potential development but had no interest. Initially Schembri asked Way to use Triumph Financial to purchase the property to keep his identity a secret while he assembled lands. Way later assigned the agreement of purchase and sale from Triumph Financial to 1765998 Ontario Inc. This assignment is confirmed by Way, on page 441 of the Compendium at question 597.
[80] In addition, the defendants submit that the agreement of purchase and sale with respect to 61 Columbia St. was entered into more than two years before this action was commenced.
Bifurcation
[81] In the event that the defendants have been unsuccessful in their other requests before the court, they ask that the action be bifurcated and request that the court deal with the issue of liability before the parties go through the expense of gearing up and going through the issue of damages.
[82] On the issue of damages both parties would be seeking significant production.
[83] On the issue of bifurcation the defendants rely on a report of the Honourable Coulter A. Osborne, part of which was reproduced in the case of Duggan v. Durham Regional Non-Profit Housing Corporation, 2018 ONSC 1811. In para. 3 the court reproduced part of the report stating:
While I view bifurcation to be the exception, cost considerations militate in favour of bifurcation in some cases. In commercial litigation, for example, when dealing with damages which will expose a party and sometimes all parties to significant costs, it may make sense to separate the issues of liability and damages and deal with liability first …
[84] In addition Rule 1.04 provides that the Rules of Civil Procedure are to be “liberally construed to secure the just, most expeditious and least expensive determination of every civil proceeding on its merits.”
Way - The Plaintiffs’ (Responding Parties’) Position
[85] It is Way’s position that this case is about the fiduciary duties an officer and director of a corporation owes to that corporation. Therefore the plaintiffs take the position that even if the court were to hold that Clause 13 is unenforceable, that finding alone would not be sufficient grounds to dismiss the action.
[86] At Tab E of Way’s factum is a flowchart showing the relationship of the persons and corporations involved in the Shareholders Agreement. As an officer and director of Triumph Financial, Schembri owed/owes a fiduciary duty to Triumph Financial.
[87] Throughout the eight years of litigation, Schembri concealed numerous ROFR breaches and never sought to be relieved of his obligation under the ROFR clause.
[88] As set forth at Tab B of their factum, Way relies on several sections of the Ontario Business Corporations Act, R.S.O. 1990, c. B. 16, including the following:
108(2) A written agreement among all the shareholders of a corporation or among all the shareholders of a corporation and one or more persons who are not shareholders may restrict in whole or in power the powers of the directors to manage or supervise the management of the business and affairs of the Corporation.
115(1) Subject to any unanimous shareholders agreement, the directors shall manage or supervise the management of the business and affairs of the Corporation.
134(1) Every director and officer of a corporation in exercising his or her powers and discharging his or her duties shall,
a) act honestly and in good faith with a view to the best interests of the corporation; and
b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
134(2) Every director and officer of the corporation shall comply with this Act, and regulations, articles, bylaws and any unanimous shareholder agreement.
[89] The JVA was signed in late April 2007 and the Shareholders Agreement approximately one year later.
[90] Way started his submissions by addressing what he argued were five errors in Schembri submissions and indicated there were others that he would address during later submissions. The five errors he initially referred to were:
(1) Although Schembri at paragraph 17(d) of his factum, stated that there could be no increase in the agreed-upon budget without unanimous written agreement, Way indicated that the word “written” does not appear on page 2 paragraph 9(d) of the JVA.
(2) The profit for the 345 King St. property was thought to be $6,000,000 and not $10,000,000 as submitted by Schembri.
(3) The accounting with respect to $6,000,000 in Joint Venture funds being deposited into an account operated by one of Way’s companies, was done by a Way employee Greta Crozier not by his accountant Lund.
(4) There was a “typical budget model” which was used for the three projects.
(5) Clause 12 of the Shareholders Agreement (the Contribution Provision) does not obligate Way to pay for everything, but rather all liabilities are to be shared on a pro rata basis. It is therefore incorrect when Schembri submits that Way was trying to get his shares by certain legal manoeuvres, because Way was only trying to get Schembri to contribute his fair share.
[91] Although Schembri submits at paragraph 20(g) of his factum that Way was to provide/acquire all financing for any projects undertaken by Triumph Financial, Schembri concedes that, that is not in writing.
[92] Although Schembri was involved throughout the joint venture at 345 King St. there were no written complaints until after the sale of the building and subsequent accounting.
[93] Although there is a counterclaim in the Main Action, Way commenced this action after he discovered Schembri had developed several properties in Waterloo in breach of his fiduciary duty.
[94] In the January 2008 meeting with Mr. Volpini, Volpini’s notes reference Schembri’s obligation to present Waterloo properties for the parties’ consideration. At that time Schembri had tied up properties in Waterloo and London. This obligation then made its way into the Shareholders Agreement.
[95] Because of the Entire Agreement Clause in the Shareholders Agreement (Clause 23), Way is not obligated to do anything unless it is set out in the Shareholders Agreement.
[96] At this point on the second day we broke for lunch, after which Whitely commenced his reply to Schembri’s allegations of Way’s misconduct. It quickly became evident that Mr. Whitely intended to take the court through most of the volumes 1 through 10 in his effort to show that Way had not been fraudulent nor acted badly.
[97] It was evident that it was going to take more than a day or two for Mr. Whitely’s reply on the allegations of fraud and/or acting badly. After the afternoon break Mr. Wortzman rose to advise the court that in an effort to shorten the motion he was prepared to withdraw his allegations of bad conduct against Way, except for the general purpose of saying that Schembri did not want to proceed with any business arrangements with Mr. Way.
[98] At that point there was a discussion between the parties and the court to see if there could be an agreement on exactly what was being withdrawn and to see if an agreement could be reached on proceeding. At the end of the discussion it was late in the day and the court arranged for two more days, to continue the motion.
[99] After correspondence between the court and counsel, four more volumes of documents were filed before the re-commencement of the motion on January 8, 2019. These documents are:
Volume 18 - is dated October 31, 2018 and is a Supplementary Factum of Way, comprised of 20 pages and 51 paragraphs along with some text of statutes and regulations.
Volume 19 - is dated October 31, 2018 and is a supplementary book of authorities of Way containing seven cases
Volume 20 - is dated December 17, 2018 and is a Reply Factum of Schembri to the supplementary factum of Way (V-18)
Volume 21 - is a supplementary book of authorities of Schembri containing five cases.
[100] The above documentation is in addition to:
Volumes 1 – 10 – are dated March 16, 2018 and contain a lengthy affidavit of Way and 154 exhibits which he refers to in his affidavit. It fills an entire banker’s box.
Volume 11 - is dated October 17, 2018 and is a 43 pages 135 paragraph Factum of Way.
Volume 12 - is dated October 16, 2018 and is a book of authority of Way’s containing 13 cases.
Volume 13 - is dated October 9, 2018 and is a 48 page 150 paragraph Factum of Schembri.
Volume 14 - is a compendium prepared by Schembri which appears to contain the main documents in issue.
Volume 15 - is the ROFR summary judgment record motion of Schembri
Volume 16 - is Schembri’s reply motion record
Volume 17 - is Schembri’s book of authorities.
[101] All parties agreed that the main issue currently before the court is Schembri’s motion to dismiss Way’s action in the ROFR Action (C-457-12) which to a great extent boils down to the contractual interpretation of Clause 13 of the Shareholders Agreement and/or an officer’s and director’s fiduciary obligations to a corporation.
[102] There is also an outstanding motion by Way for undertakings by Schembri and a request for a continued examinations of Schembri in the Main Action (C-42-11). Although documents have been filed for this motion, the court understands Schembri has recently delivered answers to more undertakings which Way has not had the opportunity of setting. In any event, that motion is not currently before the court and time will have to be scheduled for it.
[103] As officer and director of Triumph, Schembri owes Triumph a fiduciary duty both at common law and by statute. Section 134 of the Ontario Business Corporations Act reads as follows:
134(1) Every director and officer of a corporation in exercising his or her powers and discharging his or her duties shall,
a) act honestly and in good faith with a view to the best interests of the corporation; and
b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
134(2) Every director and officer of the corporation shall comply with this act, the regulations, articles, bylaws and by any unanimous shareholder agreement.
[104] Although Schembri argues that all of Triumph’s subsidiaries (359 King, Oxford in First and Simcoe & Eastwood) were in receivership at all material times and not carrying on business, Way submits that Triumph was not in receivership and at all material times Schembri remained one of its officers and directors.
[105] In any event, the OBCA does not make a distinction between a corporation that is not in receivership and one that is in receivership.
[106] Way also relies on the case of People’s Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68, [2004] 3 S.C.R. 461, where the court at paras. 34 and 35 stated:
[34] Considerable power over the deployment and management of financial, human, and material resources is vested in the directors and officers or corporations. For the directors of CBCA corporations, this power originates in s. 102 of the Act. For officers, this power comes from the powers delegated to them by the directors. In deciding to invest in, lend to or otherwise deal with the corporation, shareholders and creditors transfer control over their assets to the corporation, and hence to the directors and officers, in the expectation that the directors and officers will use the corporation’s resources to make reasonable business decisions that are to the corporations advantage. [Me none of that really applies here at least in practice]
[35] The statutory fiduciary duty requires directors and officers to act honestly and in good faith vis-à-vis the corporation. They must respect the trust and confidence that had been reposed in them to manage the assets of the corporation in pursuit of the realization of the object of the Corp. They must avoid conflicts of interest with the corporation. They must avoid abusing their position to gain personal benefit. They must maintain the confidentiality of information they acquire by virtue of their position. Directors and officers must serve the corporation selflessly, honestly and loyally…
[107] In People’s, two well-established stores tried a somewhat complicated amalgamation which went poorly. Bankruptcy proceedings were initiated against both Peoples and Wise. An action was brought against the Wise brothers who ran Wise, by the bankruptcy trustee. The case came before the court on whether or not directors owe a duty to creditors pursuant to sections of the Canadian Business Corporations Act which are similar to s. 134 of the OBCA.
[108] Way also relies on the case of Canadian Aero Service Ltd. v. O’Malley, 1973 CanLII 23 (SCC), [1974] S.C.R. 592, for the proposition that a director’s statutory duty must be applied strictly.
[109] The facts in Canadian Aero are quite different from the current case. In that case, the defendants were directors and officers of the plaintiff corporation. The defendants, who had devoted effort in planning in respect of a particular corporate opportunity while being representatives of the plaintiff, wrongfully took the opportunity thereof in breach of their fiduciary duty owed to the plaintiff.
[110] Alternatively Way submits, that since Schembri has not asserted in his material that he has complied with his fiduciary duty of loyalty and selflessness etc., Schembri cannot argue that he has complied with his statutory duty under s. 134 of the OBCA. Therefore at best this is a triable issue that must proceed to trial.
[111] Way further submits that pursuant to s. 134(2) of the OBCA, officers and directors in addition to complying with the act, “shall comply” with any unanimous shareholder agreement. He submits that the court should view Schembri’s conduct through this lens.
[112] He further submits that Schembri’s cases with respect to employment situations simply do not apply to the facts of this case. Here we have a shareholders agreement that was negotiated by both parties and their legal representatives in late January 2008.
[113] Clause 2(c) of the Shareholders Agreement states:
“… The parties agree that without the consent of the shareholders representing not less than ONE HUNDRED (100%) percent of the voting shares of the capital stock of the Corporation:
i. no party shall transfer, assign, sell, gift, mortgage, hypothecate, pledge or otherwise dispose of or charge any shares in the capital stock of the corporation at any time held or owned by him except as provided herein …
[114] Schembri relies on case law that deals with sales of a business and/or employees leaving their employment, not of officers and directors breaching their fiduciary duties. Neither of those scenarios are close to the facts of this case.
[115] With respect to 61 Columbia St. in Waterloo, and while acknowledging that Schembri told him about the property, Way submits Schembri did not disclose to him that he had an interest in the adjoining property of 59 Columbia St. Way submits that Schembri assembled the two properties and proceeded with the development in breach of his fiduciary duties as an officer and director and in breach of the unanimous Shareholders Agreement.
[116] Way alleges as set forth in Volume 11 Tab C, that Schembri purchased approximately 20 properties for a total value of approximately $15,000,000. Way submits there is no dispute that Schembri developed these properties and that he has not disclosed all relevant documents with respect to these acquisitions and developments. Therefore while Way’s claim in CV-457-12 is for $30,000,000 he does not know exactly how much profit Schembri has diverted from Triumph Financial through these projects.
[117] Schembri’s unfairness argument with respect to Clause 13, can only relate to properties in the Waterloo Region, because he has always been free to develop properties elsewhere and he has done so.
[118] Way relies upon the case of Norbar Insurance Agencies Inc. v. Freeman (2005), 2005 CanLII 31300 (ON SC), 10 B.L.R. (4th) 306 (Ont. S.C.). The brief facts of this case are, that pursuant to a shotgun provision in the shareholders agreement one brother bought the other brother out of an insurance business. The purchase agreement obligated Freeman to restrict permissible business activities following the closing. At paras. 23, 24 and 25 the court stated:
[23] The Plaintiffs further claimed that the Defendants owe fiduciary duties to them by virtue of the fact that Freeman was President and a director of Norbar as well as a 50% shareholder in the company and had been of such instrumental importance to Norbar. Further, Freeman and Katzenberg had essentially functioned for many years at Norbar as partners. Freeman’s departure left Norbar commercially vulnerable.
[24] In my opinion, there is little doubt that Freeman and Freemike were fiduciaries of the Plaintiff company and old duties of honesty and good faith to it as a result…However, I am also of the view that the parties elected in large part to address and define the obligations that would operate on the departure of either as a result of the sale by incorporating the restrictions that were to apply to any competitive behaviour and use of confidential information into the terms of the purchase agreement they negotiated and signed
[25] This conclusion has a number of implications for the claims made in this action. I consider the Plaintiff’s claims against the Defendants should be restricted to those that result from a breach by the Defendants of the provisions of the Purchase Agreement. I also am of the view that the terms of the Purchase Agreement, including the prohibition contained therein against solicitation of clients and interpretation of “rewriting” of life and group insurance plans should receive a very broad interpretation in light of the fiduciary obligations owed by the defendants to the Plaintiff’s which they reflect.
[119] Way submits the court does not have to look at any of Schembri’s cases, and that the court should look at the facts of this case through the lens of section 134 of the OBCA and the unanimous Shareholders Agreement which Schembri breached and made money by so breaching.
[120] Way submits Schembri’s position that the only deals he could not deal with were ripe or maturing potential real estate developments is incorrect. Schembri was obligated by Clause 13 to present all potential developments. Even after this court action was started Schembri continued to refuse to present real estate opportunities.
[121] In any event Schembri’s obligation pursuant to his fiduciary duty is a triable issue.
[122] Way further submits that it is improper for Schembri to bring this summary judgment motion five years after the ROFR Action was commenced and three years after Justice Broad’s order to bring the motion. Schembri as an officer and director did not act in good faith because he was in non-compliance with Justice Broad’s order.
[123] Way submits that both actions are intertwined and referred the court to his fresh as Amended Statement of Defence and Counterclaim in particular pages 6 and 8 which are contained at Volume 10 Tab 132. This is Way’s pleading in the Main Action (C-42-11).
[124] It is true, based on Way’s pleading that the actions appear to be intertwined, however that appears to be the case because Way has introduced facts which are pleaded in the ROFR claim.
[125] In Justice Broad’s order dated September 4, 2014, he specifically allows either party to seek further directions with respect to how both actions should be tried. In addition, he essentially ordered that examinations were to be concluded by January 2015. Unfortunately because of the wrangling that went on in this matter, those examinations were not completed until more than three years later and in fact they may not be completed yet, since there is still an outstanding motion with respect to examinations.
[126] Way relies in part on the case of Audience Communication Inc. v. Sguassero (2008), 2008 CanLII 17306 (ON SC), 45 B.L.R. (4th) 218, (Ont. S.C.), for the proposition that the court must look at the agreement and all the surrounding circumstances. The court stated the following at paras. 30 and 31:
[30] The validity of non-competition clauses was extensively discussed in JG Collins Insurance Agencies v. Elesley, 1978 CanLII 7 (SCC), [1978] 2 S.C.R. 916 (S.C.C.). A non-competition clause is in restraint of trade and is presumptively invalid at common law. The onus of proving the clauses validity rests on the party seeking to rely on it. The general test is one of reasonableness, which must take account of the particular circumstances of the conduct. Justice Dixon discusses the test at pp. 923-4:
The test of reasonableness can be applied, however, only in the peculiar circumstances of the particular case. Circumstances are of an infinite variety. Other cases may help in enunciating broad general principles but otherwise are of little assistance.
The validity, or otherwise, of a restrictive covenant can be determined only upon an overall assessment of the clause, the agreement within which it is found and all the surrounding circumstances.
[31] The scrutiny that the common law applies to non-competition clauses depends in large measure on the nature of the contract in which the clause is found. The law has distinguished between non-competition clauses found in employment contracts and those found in contracts for purchase and sale of business. Employment non-competition clauses must meet three requirements set out in Elsley at 925-6. This stricter scrutiny is motivated by a concern about the inequality in bargaining power that is typically present… By contrast, courts will generally give effect to non-competition clauses in vendor-purchaser agreements, provided the definition of the time and area of operation are reasonable (Elsley at 924)
[127] Way submits that Clause 13 is not a restrictive covenant because it does not preclude Schembri from doing real estate transactions within Waterloo Region, it only requires him to present such potential deals to Way first. Therefore the case law presented by Schembri is inapplicable to the facts of this case.
[128] In essence, Schembri can still acquire real estate developments with the proviso that he must present them to Way. If Way and Schembri decide to go ahead with the deal, Schembri get 45% of the profit. If Way and Schembri decide to not go ahead with the deal, Schembri is free to proceed on his own.
[129] Way submits it would be improper and inappropriate for Schembri not to consent to a deal if his only reason is to subvert Clause 13. Because of his contractual and fiduciary duties he must present the deal and assist to get the deal done.
[130] Way submits that even if Clause 13 is found to be in restraint of trade, it is not against public policy, and therefore continues to be valid and enforceable.
[131] Alternatively, even if Clause 13 is found to be a restrictive covenant that is void against public policy, the court would have to assess whether Clause 13 is justified as reasonable in the interests of Way, Schembri and the companies and public policy.
[132] Way submits that the court would have to consider the geographic area, duration and extent of activity covered by the restrictive covenant.
[133] Way submits that the term “Regional Municipality of Waterloo”, clearly defines geographic limits that are set out in the Regional Municipality of Waterloo Act. There is no ambiguity that the properties referred to in the ROFR Action are in this geographic area.
[134] With respect to duration, Way argues that a distinction must be made between Schembri and Schembri Financial. It is Schembri Financial not Schembri that is obligated to present real estate development opportunities to Triumph.
[135] Although there is no evidence that Schembri Financial has acquired any real estate development opportunities in Waterloo Region, it has also not taken any steps to relieve itself of its obligation by ceasing to be a shareholder of Triumph.
[136] Schembri on the other hand, has acquired many real estate developments in Waterloo Region through companies he controls. If Schembri wishes to be relieved of his fiduciary obligations to Triumph he should resign as an officer and director. Since Schembri has elected not to resign he continues to owe a fiduciary duty to Triumph.
[137] Way submits there are also other triable issues. These relate to real estate deals consummated by Schembri in the Waterloo Region which are unknown to Way because Schembri has failed to produce documents and failed to answer questions about other real estate deals.
[138] In addition summary judgment should not be granted because:
Many of the parties are the same in both actions.
There is unanimous Shareholders Agreement.
The actions were ordered tried together and Schembri completed a common discovery in both actions.
This motion is akin to a partial summary judgment motion since it will not dispose of all the litigation between the parties.
[139] Way submits that because of Schembri’s late withdrawal of his fraud/bad behaviour allegations in this motion, any cost sanctions are inadequate and the court should dismiss the motion.
[140] I believe I made it clear during the motion that I would deal with the late withdrawal of the fraud allegations when dealing with the issue of costs. This case does not rise to the level of a lawyer being publicly accused of fraud, only to have the allegations later withdrawn which essentially denied him an opportunity to clear his name. In this case no matter what the ruling on this motion, Way will still have his day in court and will be able to give evidence about his alleged behaviour.
[141] In the end Way requests that the summary judgment motion be dismissed and that the court make a declaration that Schembri breached his fiduciary obligations under s. 134 of the OBCA. There was no request in Way’s material for such a declaration.
Response Submissions by Schembri
[142] Mr. Wortzman’s first response submission was that in October of 2018, Way initially submitted that Schembri’s request for summary judgment would rise or fall on the interpretation of Clause 13.
[143] Now in January 2019, Way has tried to change his position midstream by suggesting that Schembri as an officer and director is in breach of s. 134 of the OBCA. This new position has not only not been pleaded, but in any event there is no evidence to support the allegation of non-compliance with s. 134.
[144] Way, in his Fresh as Amended Statement of Claim (The Claim) dated June 6, 2014, (V15, T2J) claims for damages in paragraph 1(a), for among other things, breach of fiduciary duty. However in paragraph 7, it is pleaded as non-competition and the Shareholders Agreement uses the heading of “NON-COMPETITION”. Paragraph 7 is essentially a restatement of Clause 13 and within paragraph 7 the phrase “as expressly stipulated in Article (Clause) 13 of the Shareholders Agreement” is used.
[145] Paragraph 8 of The Claim refers to breaches of the Shareholders Agreement.
[146] Although paragraph 9 of The Claim refers to fiduciary duties, all of the duties referred to in the paragraph 9 refer to Clause 13 of the Shareholders Agreement. Schembri submits that these are contractual duties, however even if the court finds them to be fiduciary duties, if Clause 13 is unenforceable it does not matter whether they are contractual or fiduciary duties.
[147] Nowhere in The Claim is the OBCA or any of its sections pleaded. In addition there are no allegations that Schembri breached s. 134.
[148] The Claim then goes through property by property, making the same/similar allegations against Schembri with respect to each property that is set forth in paragraph 15 of The Claim. Schembri submits that nowhere in The Claim does it plead that these were “ripe development opportunities” for Triumph.
[149] Schembri submits there is no rule that a director cannot pursue business opportunities outside his corporate office and that for a director to be held liable you would need something akin to tortious behaviour. Not presenting a potential development is not tortious behaviour.
[150] Notwithstanding that Clause 22 of the Partnership Agreement under the heading “NO PARTNERSHIP” states;
Nothing in this Agreement shall be deemed in any way or for any purpose to constitute any party a partner of any other party to this Agreement in the conduct of any business or otherwise or a member of a joint venture or joint enterprise with any other party to this Agreement.
Way, in total disregard of this Clause, pleads at paragraph 31 of The Claim, that “King and Columbia Inc. and Schembri hold title and beneficial interest in 359 King, in trust for the plaintiffs.”
[151] Way also pursued other real estate developments on his own.
[152] Clause 13 obligates Schembri, or more properly Schembri Financial, as a shareholder and not as an officer and director.
[153] If Clause 13 is unenforceable the court is left with a non-pleaded s. 134 allegation. Since a breach of s. 134 of the OBCA was never pleaded, there was absolutely no reason for Schembri to state that he complied with s. 134.
[154] The first time Schembri became aware of any allegation concerning section 134 was at 2 p.m. on October 17, 2018, the day before the commencement of this motion when he received Way’s factum, which is essentially silent on Clause 13 enforceability issues.
[155] The numerous alleged breaches set out at paragraph 117 of Way’s factum (V11) are not pleaded in The Claim. In any event, the alleged breaches are essentially contractual and tied to Clause 13.
[156] There is no allegation that Schembri was exercising any corporate powers of Triumph or discharging any Triumph corporate duties when he purchased other properties.
[157] Although Way in his factum (V11, para 45) claims that he and Schembri had a typical budget model, Way has never produced such a document, nor has he set out in his affidavit or in his examination exactly what the typical budget model was. He essentially appears to rely on a template which would have to be extensively worked on and agreed to before it become any type of a meaningful budget.
[158] Nowhere in Way’s material does he speak to the reasonableness and/or ambiguity of Clause 13. A party cannot demonstrate that a clause is reasonable if it is unreasonable.
[159] Since the Shareholders Agreement calls for two directors and since 100% of the shareholders have to consent to change a director, the parties are essentially bound at the hip.
[160] It is clearly unreasonable for a restrictive covenant to have no temporal limits. Further, to suggest that it would bind the children of the parties is not only unreasonable, it is simply ludicrous.
[161] Nothing in the Shareholders Agreement speaks of a 45/55 profit split with respect to Clause 13. The parties agreed on this split only for the first three properties and in fact there were no other properties developed between them.
[162] In addition to Way reading into evidence questions 44, 45, 46 and 47 of Volpini’s transcript, Schembri read in questions 43 and 48 which reads as follows:
[43] Q. – Alright do you recall any discussion that if Mr. Way did not agree to a 50/50 shareholder split in the event that corporation was self- financing, then Mr. Schembri could just say no more developments?
A. - Yes. The two of them could say that at any time.
[48] Q. - And Mr. Way’s function would be more on the financing end to locate access and guarantee financing?
A. - That would be done on a project by project basis, of course, because as the scheme was that the project would be brought to the table, the two of them, as you may have noticed, both had to – both were required to approve feasibility of any project that was brought to the table. Part of that assessment, of course, would involve the financing, where would it come from, what would it cost, does it makes sense, the shortfall, where is it going to come from and what were the terms associated with that end of it. So it was going to be decided on a case-by-case basis.
[163] Schembri submits the test is one of reasonableness and relies on paragraphs 40 to 46 of Audience Communication which state as follows:
[40] In the Tank Lining Corp. v. Dunlop Industries Ltd. (1982), 1982 CanLII 2023 (ON CA), 40 O.R. (2nd) 219 (Ont. C.A.), the Ontario Court of Appeal discussed the application of “reasonableness between the parties” at 225:
The test of reasonableness in the interest of the party upholding a restrictive covenant is that it is not more than adequate to protect to that party’s interest. When two completely advised parties with equal bargaining power enter into business agreement, it is only in exceptional cases where courts are justified in overruling their own judgment of what is reasonable in their respective interests.
[41] The Court went on to note the imperatives suggesting enforcement of the clause at 226:
The courts also have always looked askance at parties who seek to escape the burden of contracts into which they have freely entered. Both practicality and morality require that solemn obligations be upheld and that parties be discouraged from repudiating them.
[42] As a starting point, I find that the parties engaged were sophisticated and that the non-competition clause was not complex. It was flagged parties at the Shareholders’ Meeting. The parties were likely the best judges of what was reasonable between them and I would not likely interfere with their conclusion. While I acknowledge that this was not a true negotiation and that Marshall directed the preparation of the shareholders agreement, I am satisfied that the shareholders had a genuine opportunity to raise any concern.
[43] The applicants have demonstrated a strong rationale for a clause a restraining Sguassero’s future business activities in this manner. Sguassero, as Director of client services, was a primary contact of key clients. A non-solicitation clause would not have been effective: Sguassero was in a position to cultivate loyalty with the firm’s clients and there was a real risk that he would take important business with him if he left the firm. His departure would be a significant blow for Audience and it would require time to recover and rebuild.
[44] It bears repeating that the clause bound all four shareholders. Sguassero was not the only shareholder with significant client contacts. Teplitsky stood in a similar position. Had Teplitsky left and Sguassero stayed, the clause would have protected Sguassero’s investment. It acted as an incentive for all parties to keep a successful business together. There is good reason to think that such conditions would be mutually beneficial for the four shareholders.
[45] The respondents submit that the Shareholders Agreement as a whole, and the non-competition clause in particular, affects Marshall differently than it does the other shareholders. I fail to see how this fact lend support to the respondents’ position. While Marshall was Audience’s controlling shareholder, Teplitsky and Sguassero were the faces of the firm to whom client loyalties would likely attach. It seems entirely proper that Marshall would be motivated to protect his investment when a significant portion of its value was entrusted to others. The question is whether it was a reasonable restriction for Sguassero to undertake.
[46] The clause is limited to the province of Ontario and lasts for only one year after the share sale. Furthermore, Audience’s business is specific. Audience provides a particular form of marketing and communications assistance directed at internal corporate messages. I note the clause restrained participation in a business “similar to or in competition with” that of Audience. It would appear that Sguassero would have been free to pursue employment in other areas of the marketing and communication industry while the clause was operative. He was prohibited from offering competing services in internal corporate communications and similar ventures.
[164] The three properties that the parties did agree to develop unfortunately were placed in receivership. Without going into the sordid details surrounding the receivership, both parties were given an opportunity to purchase the properties from the receiver. In the end the parties consented to the property at 1 Columbia St. in Waterloo being invested in Schembri free and clear of all claims.
[165] Notwithstanding the court order and a vesting order with respect to 1 Columbia St., it is Way’s position that Schembri was still obligated to bring this property to the table under Clause 13. Schembri submits that at no time did Way ever raise his alleged Clause 13 rights during the receivership process.
[166] Although Way referred to the first line of paragraph 175 of the D’Elia Estate v. D’Elia, [2008] O.J. No. 5772 for the proposition that “Top or high echelon management as well as directors, owe fiduciary duty of loyalty, good faith honesty and avoidance of conflict and self-interest to the corporate employer”, the remainder of the paragraph bears no resemblance to the facts of this case.
[167] Furthermore, neither Way nor Kingsley Financial could have a claim pursuant to section 134 of the OBCA. If such a claim exists, only Triumph would have such a claim grounded on the theory that s. 134 prohibited Schembri from conducting business independent of Triumph.
[168] In summary, as set out in paragraph 16 of Schembri’s reply factum (V20), Clause 13 is not valid for seven reasons:
(1) it is contrary to public policy;
(2) it is ambiguous on its face and Way cannot satisfy his onus of demonstrating the reasonableness of the clause in the face of such ambiguity;
(3) it is ambiguous in relation to geographical location, development opportunities acquired and the absence of a typical budget;
(4) it is unenforceable because it is simply an agreement to agree;
(5) the clause is unreasonable on its face with respect to geographic scope, temporal limits and activities prohibited;
(6) the clause is not necessary to protect any legitimate business interests of Triumph Financial and Kingsley Financial; and
(7) from a practical point of view given the animosity between the parties the clause is totally unworkable and of no force and effect.
Findings
[169] Triumph Financial was set up by the parties as a holding company. It did not carry on any active business, essentially had no employees except perhaps for administrative/accounting assistance when necessary and essentially had no assets except for shares in companies which were set up for each project.
[170] Way and Schembri are the only officers and directors of Triumph and their corporations Kingsley Financial (Way) and Schembri Financial (Schembri) are the only shareholders.
[171] As is common in the development industry, each time a new development is undertaken, a new corporation is created specifically for that new development.
[172] In this case three developments were undertaken and a new company was incorporated for each development. Those developments have long since been completed.
[173] Triumph Financial has not carried on any development or other business since at least 2009.
[174] Based on the animosity between Way and Schembri since at least 2009, there is absolutely no way that they could or would enter into any new mutual real estate developments.
[175] Triumph is a corporation that can only carry on business through its shareholders. Pursuant to Triumph’s Shareholders Agreement, Triumph can do virtually nothing without 100% of the shareholders agreeing to do it.
[176] Therefore, for approximately 10 years, Triumph has existed only as a shell company.
[177] The current action (C-457-12) was commenced by Way, Kingsley Financial and Triumph Financial. Although not raised in argument it is difficult to see how Triumph Financial could have commenced this lawsuit without 100% of its shareholders agreeing to do so. No resolution of Triumph authorizing it to commence this lawsuit was brought to the court’s attention.
Section 134 of the OBCA
[178] Way’s main position in defence of this motion appears to be that Schembri, as an officer and director of Triumph, breached s. 134 of the OBCA.
[179] The facts of the People’s Department Stores and Canadian Aero Service cases referred to by Way are spectacularly different from the facts with respect to Triumph. As opposed to being a large ongoing corporate business enterprise, Triumph is a shell company which does nothing. To analogize that the obligations of the officers and directors set out in presented case law somehow apply to the officers and directors of a shell company almost defies logic, except on some esoteric intellectual basis.
[180] Way’s s. 134 argument appears to be an afterthought. It is simply not pleaded in The Claim and therefore should not and cannot be taken into account on this motion for summary judgment.
Clause 13 of the Shareholders Agreement
[181] Clause 13 is a restrictive covenant notwithstanding Way’s position that the restrictions are not significant.
[182] Way does not personally have a claim against Schembri for Schembri’s alleged breach of Clause 13.
Is Clause 13 Ambiguous?
[183] There are several ambiguities within Clause 13. The clause is technically ambiguous because its spatial parameters refer to a Regional Corporation and not an area of land.
[184] There is ambiguity in the use of the words/phrases “acquire”, “to present,” “all real estate development opportunities” and “typical budget model.”
[185] Way was unable to articulate with respect to the word “acquire”, when Schembri’s obligation to present would kick in.
[186] With respect to the phrase “to present all real estate development opportunities”, Way’s position that Schembri would be obligated to present to Way for his consideration real estate transactions such as buying a cottage in the Waterloo Region and purchasing and renovating a house for his children simply makes no sense in the context of the Shareholders Agreement. Given the fact that the parties entered into three developments each worth several tens of millions of dollars, the scope of the clause as articulated by Way is far too wide to protect any legitimate business interest that Triumph may have had.
[187] Likewise, Way’s position that Schembri would be obligated “to present” if he was a shareholder in another company including a REIT, makes no sense in the context of the Shareholders Agreement.
[188] Therefore on the facts of this case I find the phrase “all real estate opportunities” to be ambiguous, commercially absurd and not necessary to protect Triumph’s or Kingsley’s legitimate interests. Triumph has not carried on any business for approximately 10 years and Kingsley is not and never has been a land developer. Its sole purpose is to assist in the movement of money between Way’s various business interests.
[189] No “typical budget model” was presented to the court in argument of this motion. Without an existing “typical budget model”, the phrase is of course ambiguous.
[190] Way’s suggestion that the answer to the ambiguities and lack of details in Clause 13 would be resolved by an arbitrator is commercially unreasonable and something that no businessperson would agree to.
[191] Based on the above I find that there is significant ambiguity in Clause 13.
[192] In any event, it is difficult to see how Way’s interests have been damaged by the breaches of Clause 13 that he alleges. Since the parties falling out, Way and companies under his control have continued in the land development business and have generated tens of millions of dollars in revenues.
Is Clause 13 Essentially an Agreement to Agree?
[193] Based on Mr. Way’s answers, particularly with respect to the powers of an arbitrator, and also based on Mr. Volpini’s answers, the court can come to no other conclusion than that Clause 13 was/is nothing more than an agreement to agree. This agreement to agree would arise anew each and every time the parties discussed the new project.
Is the Time Limit of Clause 13 Necessary to Protect the Legitimate Business Interest of Triumph?
[194] Clause 13 does not specify any time limit. Way’s position is that Clause 13 may very well bind the parties’ respective children. To put it mildly the proposition of Clause 13 creating binding obligations for the parties’ children is ludicrous.
[195] To not have a time limit on a restrictive covenant is extremely unusual and no cases were cited during argument where a restrictive covenant was upheld that had no time limit.
[196] Way has the onus of proving that the limitless time limit is reasonable. He has not done so.
[197] For this reason alone I find Clause 13 is unenforceable.
[198] Overall, under the facts of this case, Clause 13 does not pass the test of reasonableness as being necessary to protect Triumph’s interests.
Ongoing Court Supervision
[199] An analogy can be drawn between this case and cases involving personal service contracts. Personal service contracts are difficult if not impossible to specifically enforce when the relationship between the parties has deteriorated to a certain point. The relationship between Way and Schembri deteriorated to the point of no return by 2009.
[200] Given the state of affairs between Way and Schembri as of 2009, it would be impossible for them to work together and therefore it would be absolutely commercially unfeasible.
[201] Based on the foregoing analysis I dismiss the plaintiffs’ action in its entirety.
Costs
[202] If the parties are unable to agree on costs, Mr. Wortzman shall forward his brief submissions on costs (limited to 5 pages using 12 pitch and 1.5 spacing, not including dockets) to me by February 15, 2019. Mr. Whiteley shall forward his brief response (limited to 5 pages using 12 pitch and 1.5 spacing, not including dockets) to me by February 28, 2019. Mr. Worzman shall then forward his brief reply, if any, to me by March 7, 2019. Cost submissions may be sent to my attention by email, care of Kitchener.Superior.Court@ontario.ca
James W. Sloan J.
Released: February 1, 2019
COURT FILE NO.: C-457-12
DATE: 2019-02-01
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Al Way, Kingsley Financial Inc. and Triumph Financial Holdings Inc.
Plaintiffs
– and –
Gordon Schembri, Schembri Financial Limited, 1765998 Ontario Inc., 41 Columbia Inc., King & Columbia Inc., 69 Columbia St. Inc., 5 Rittenhouse Inc., The Block Inc., The Block I Inc., and The Block II Inc.
Defendants
REASONS FOR JUDGMENT
J.W. Sloan J.
Released: February 1, 2019