COURT FILE NO.: CV-17-00579640-00CL

DATE: 20200106

ONTARIO

SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST)

BETWEEN:

ALLIANCE H. INC. and MICHEL HART

Plaintiffs

– and –

GARDINER ROBERTS LLP and ASH BAKER

Defendants

Geoff R. Hall, Anu Koshal and Caroline H. Humphrey, for the Plaintiffs

J. Thomas Curry, Rebecca Jones, Brendan F. Morrison and Sarah Bittman, for the Defendants

HEARD: October 15-17, 28-31, November 1, 12-15, 18-19 and 28-29, 2019

reasons for judgment

Conway J.

INTRODUCTION

[1] Michel Hart entered the dental distribution business in the early 1980s. He acquired a controlling interest in a Canadian dental distribution company named Ash Temple Limited (“Ash Temple”) and operated as its Chairman and Chief Executive Officer for the next 22 years. Over time, he added three manufacturing lines to Ash Temple’s distribution business.

[2] In 2005, Mr. Hart entered into a transaction with Henry Schein, Inc. (“Schein U.S.”) and its Canadian subsidiary Henry Schein Arcona Inc. (“Schein Canada”) (collectively, “Henry Schein”).[^1] Henry Schein was the largest dental distributor in the world. It wanted to purchase the Ash Temple distribution business but not the manufacturing business. The transaction was structured to first spin out the Ash Temple manufacturing business to Alliance H. Inc. (“Alliance”), Mr. Hart’s family holding company. Schein Canada then acquired the shares of Ash Temple. Schein Canada and Alliance entered into a supply agreement in which Schein Canada agreed to purchase Alliance’s products over a four-year term.

[3] Disputes between Schein Canada and Alliance over the supply agreement arose early on. Alliance initiated arbitration, which was scheduled to proceed in October 2006. The parties settled their disputes at a mediation in September 2006. They signed minutes of settlement in which they agreed to enter into a new supply agreement. They finalized and signed the new supply agreement a few months later.

[4] Over the next four years, Alliance’s business struggled. Once the new supply agreement expired in 2011, Alliance wound up its operations. Mr. Hart and Alliance sued Henry Schein, claiming that Henry Schein’s conduct was responsible for their business losses. The action against Henry Schein has now settled.[^2]

[5] Mr. Hart and Alliance also sued their counsel Gardiner Roberts LLP (“Gardiner Roberts”) and Ash Temple’s former in-house counsel, Ash Baker. The plaintiffs allege that the defendants breached their fiduciary and professional duties towards them, and are responsible for their business losses. Those claims were the subject matter of the trial that proceeded before me.

BACKGROUND

[6] In order to understand the plaintiffs’ claims against Gardiner Roberts and Mr. Baker, it is necessary to provide some background on Mr. Hart, his business history, and his dealings with Henry Schein and the defendants.

Ash Temple Business

[7] In 1983, Mr. Hart acquired a controlling interest in Ash Temple. Over the next two decades, he built Ash Temple into a highly successful business and one of Canada’s largest distributors of dental equipment and office-related products. Annual revenues of Ash Temple’s distribution business grew from $27 million[^3] in 1983 to $130 million in 2005.

[8] Mr. Hart expanded Ash Temple into the manufacturing business by adding three product lines: (i) Microbex (dental infection control products), formed in 1987; (ii) Dentech (dental controls, chairs and stools), acquired in 1995; and (iii) Conex (dental cabinets), acquired in 1998. Dentech was the largest of the three manufacturing lines. All three product lines were distributed through Ash Temple in Canada and through independent distributors in the U.S. One of those U.S. distributors was Henry Schein, which signed an authorized dealer agreement for the sale of the Dentech product line in 1996 and a renewal agreement in 1999.

[9] While the Ash Temple distribution business was successful, the manufacturing business was not. In particular, Dentech had been consistently losing money each year since Mr. Hart acquired the company in 1995. In the fall of 2003, Mr. Hart had been trying to sell the Dentech business without success.

Ash Baker is Hired as In-House Counsel to Ash Temple

[10] In 2003, Mr. Hart was looking for in-house counsel for Ash Temple. Paul Stoyan, a partner at Gardiner Roberts, recommended Ash Baker, who had articled at the firm and was called to the Ontario bar in fall 2002. Mr. Hart decided to hire Mr. Baker. Ash Temple entered into an employment agreement with Mr. Baker and he started his position as in-house counsel in March 2003.

Sale of the Ash Temple Business

[11] In October 2003, Mr. Hart met with Mark Mlotek, Executive Vice-President and Chief Strategic Officer of Schein U.S. Mr. Mlotek testified that Henry Schein had been interested in acquiring Ash Temple for several years as it was seeking to expand its presence in the Canadian distribution market. As noted, Henry Schein was not interested in acquiring the Ash Temple manufacturing business.

[12] Mr. Hart decided to do the deal. He agreed to sell the distribution business to Henry Schein and transfer the manufacturing business to Alliance. He testified that he planned to build the manufacturing business with his adult children Patrick and Danièle and eventually pass it down to them. He testified that he saw the opportunity to grow the business through Henry Schein’s large distribution network in the United States. However, he said that it was critical for Alliance to have a supply agreement to sell its products to Henry Schein. Dentech was operating at under capacity and required more volume to make it profitable. Mr. Hart testified that a supply agreement with minimum purchase obligations would help the company, which was a high fixed-costs business, cover its operating costs, increase its productivity, and help it become profitable during and beyond the term of the supply agreement.

[13] Mr. Hart and Mr. Mlotek (and later Joe Robertson, President of Schein Canada) negotiated the transaction over the course of several months. In July 2004, Mr. Hart, Alliance and Henry Schein signed two letters of intent, one for the acquisition of the Ash Temple distribution business, and the other for a supply agreement between the companies (the “Supply LOI”). Mr. Hart did not seek legal advice from Gardiner Roberts or Mr. Baker prior to signing the letters of intent.

[14] The Supply LOI was detailed and specific. It provided that Schein Canada would make minimum annual purchases of Alliance’s products, starting with US$5.5 million in year one and increasing to US$8.1 million in year four, for a total of US$27.6 million over the four-year term. The Supply LOI provided Schein Canada with certain exclusive rights to Alliance’s products; discounts and rebates in favour of Schein Canada; and specific sales support obligations on Alliance to support Schein Canada’s marketing efforts. The Supply LOI contained no obligations on Schein Canada with respect to the sale or distribution of Alliance’s products.

[15] Mr. Hart sent the signed letters of intent to Edgar Hielema, his corporate lawyer at Gardiner Roberts, and asked him to prepare the necessary agreements to implement the transaction. Henry Schein retained Stikeman Elliott LLP (“Stikeman Elliott”) on its side of the deal. The transaction was given the name Project Iridium.

[16] In August 2004, Mr. Hart told Mr. Baker about the transaction and asked him to work on it with Gardiner Roberts. Mr. Baker was one of only a few Ash Temple employees who were told about the deal and Mr. Hart testified that he trusted Mr. Baker. As described below, over the course of the next few months, Mr. Baker worked with Gardiner Roberts on the closing. He testified that his role was to facilitate the transaction, mostly to assist with providing information for the schedules to the agreements.

[17] The transaction closed in January 2005. The parties entered into three agreements, all dated January 10, 2005: (a) an asset purchase agreement pursuant to which Alliance acquired the assets of the three manufacturing businesses from Ash Temple for $13.3 million;[^4] (b) a share purchase agreement pursuant to which Schein Canada acquired all of the shares of Ash Temple for $48 million (the “Share Purchase Agreement” or “SPA”); and (c) a supply agreement (the “Original Supply Agreement” or “OSA”) pursuant to which Schein Canada agreed to purchase Alliance’s products. The OSA was a schedule to the Share Purchase Agreement and a condition of closing the transaction.

[18] The terms of the OSA were those set out in the Supply LOI negotiated by Mr. Mlotek and Mr. Hart. The term was for four years. Schein Canada was given certain exclusivity rights to sell Alliance’s products in Canada and the U.S. Schein Canada agreed to purchase minimum quantities of each product line for a total of US$27.6 million over the term (“Minimum Purchase Obligations”). If Schein Canada did not meet the Minimum Purchase Obligations in any year, it had the option, within 30 days of the year end, to order products to make up the shortfall or to make a cash payment equal to 20% of the shortfall without taking the products (the “Shortfall Option”). Schein U.S. was not a party to the OSA but guaranteed the obligations of Schein Canada under that agreement.[^5] Mr. Mlotek testified that prior to signing the OSA, he consulted with Henry Schein’s field team to confirm that it could meet the Minimum Purchase Obligations and was satisfied that they were achievable.

[19] Following closing, Mr. Baker continued in his role as in-house counsel for Ash Temple under Henry Schein ownership. Pursuant to the Share Purchase Agreement, Mr. Hart also stayed on as the non-executive Chair of Ash Temple for one year after closing. The operations of Ash Temple were integrated with those of Schein Canada and in May 2005, the two companies amalgamated and continued under the name Henry Schein Ash Arcona Inc.

Problems Arise Under the Original Supply Agreement

[20] Problems arose between Alliance and Schein Canada under the OSA early on. While the Minimum Purchase Obligations were calculated on an annual basis, Mr. Hart tracked the monthly purchases. He advised Mr. Mlotek in March 2005 that Schein Canada was purchasing only 41% of its obligations. By October 2005, the cumulative shortfalls were $1,995,000. Mr. Hart sent emails to Mr. Mlotek in the U.S. and to Mr. Robertson in Canada complaining about the shortfalls. He also complained that Henry Schein was not putting Alliance products in its showrooms and that this was impeding sales in the U.S.

[21] By February 2006, 13 months after the OSA was entered into, Schein Canada was still behind in meeting the Minimum Purchase Obligations, with a cumulative shortfall of over US$2.6 million. Mr. Hart testified that he was funding Alliance’s operations and had put in $2.6 million of his own monies. On February 10, 2006, Alliance issued a formal notice of default to Schein Canada stating that it had failed to meet its Minimum Purchase Obligations under the OSA. Mr. Hart demanded that Schein Canada either take delivery of products to make up the shortfall or issue a cheque equal to 20% of the shortfall without taking delivery of products, in accordance with the terms of the OSA.[^6]

[22] Two weeks later, Schein Canada responded and said that it was terminating the OSA, alleging numerous breaches by Alliance under the agreement with respect to the supply and quality of Alliance’s products and the lack of sales support.

[23] Mr. Hart discussed litigation strategy with Evert Van Woudenberg, a senior litigation partner at Gardiner Roberts. They discussed the quantum of damages that Alliance could claim for breach of the OSA. Mr. Hart wrote to Mr. Van Wouldenberg and told him he wanted to recover more than the contractual amounts owed to Alliance under the OSA. He wanted to claim bad faith on the part of Henry Schein and recover the entire purchase price that Alliance had paid for the Ash Temple manufacturing assets. Mr. Van Woudenberg emailed Mr. Hart that this would be difficult and that Alliance would likely be limited to its contractual entitlements for Schein Canada’s default under the OSA. Mr. Hart did his own calculation of those amounts to be approximately US$4.8 million. Mr. Van Woudenberg testified that his consistent advice to Mr. Hart was that he would likely only be entitled to recover the amount owed to Alliance under the OSA, taking the Shortfall Option into account.

[24] On March 10, 2006, Mr. Van Woudenberg served a notice of dispute on Schein Canada under the OSA. It described the dispute as Schein Canada’s failure to comply with the Minimum Purchase Obligations. The notice claimed US$10 million in damages comprised primarily of the contractual entitlements under the OSA and the loss of the entire value of the Dentech business, plus punitive damages.[^7] Mr. Van Woudenberg testified that while he did not think that Mr. Hart had a good case to claim the loss of Dentech, he included it to create risk for Henry Schein. On June 5, 2006, Henry Schein delivered its response and counterclaim, alleging breaches by Alliance under the OSA and the Share Purchase Agreement,[^8] and claiming $4.2 million in damages. The parties appointed The Honourable Coulter A. Osborne, Q.C. as the arbitrator for their disputes and scheduled the arbitration for October 2006.

[25] During the late spring and summer of 2006, the parties had settlement discussions and exchanged offers. Mr. Hart offered to settle for either: (a) an immediate payment of US$2.5 million and a new supply agreement for four years with Minimum Purchase Obligations of US$500,000 a month and no Shortfall Option; or (b) an immediate payment of US$3 million and a new supply agreement for five years, with Minimum Purchase Obligations of US$400,000 a month and no Shortfall Option. Henry Schein offered to settle for an immediate payment of US$1.125 million and a new supply agreement for four years with Minimum Purchase Obligations of US$200,000 a month and no Shortfall Option.

The Mediation on September 11, 2006

[26] The parties did not settle during the summer. They proceeded to mediation before David Stockwood, Q.C. on September 11, 2006. Mr. Van Woudenberg represented Mr. Hart and Alliance at the mediation. Adrian Lang of Stikeman Elliott represented Schein Canada. Mr. Mlotek and two in-house counsel attended from Schein U.S. At the request of Schein U.S. executives, Mr. Baker attended for Schein Canada.

[27] Mr. Hart testified that he did not have any concern with Mr. Baker, Ash Temple’s former in-house counsel, being at the mediation. Rather, he testified that he was pleased to see Mr. Baker there and took it as a sign of good faith on the part of Henry Schein, that it was an indication of its intention to settle the dispute. Neither Mr. Van Woudenberg nor Mr. Baker raised any issues to Mr. Hart about Mr. Baker’s attendance at the mediation.

[28] The parties resolved their disputes at the mediation and signed handwritten Minutes of Settlement that day (the “Minutes of Settlement”), which included the following terms:

(a) an immediate payment to Alliance of US$1.2 million. According to Mr. Hart, this represented payment in respect of Henry Schein’s default under the OSA;[^9]

(b) an immediate payment to Alliance of US$2.4 million, representing prepayment of the last six months of purchases under the new supply agreement;

(c) a new supply agreement (“New Supply Agreement” or “NSA”) to be entered into between Alliance and Schein Canada, with revised Minimum Purchase Obligations that were calculated monthly instead of annually as under the OSA. The total amount of the Minimum Purchase Obligations over the term was US$16.35 million. The Shortfall Option was amended to ensure that Alliance received a minimum of US$250,000 per month. Henry Schein agreed to pay Alliance a marketing allowance of US$100,000 per year;

(d) the parties agreed to execute full and final mutual releases.

[29] Mr. Hart testified that he entered into the settlement because he thought it was best for the long-term interests of Alliance and was a better alternative than going to arbitration. Mr. Van Woudenberg testified that he was thrilled, as he did not think Mr. Hart would have been able to achieve that result at the mediation. Mr. Van Woudenberg sent a memo to his colleagues at Gardiner Roberts right after the mediation stating that Henry Schein had basically folded. He told them that the value of the settlement was just under $5 million and that the cash value of the deal exceeded what Henry Schein would have had to pay in penalties to date, plus the penalties assuming they made no purchases in the last two years under the OSA. He said that Henry Schein got no value for “all their weak defences” under the OSA and “their equally weak claims” under the Share Purchase Agreement.

[30] In the memo, Mr. Van Woudenberg included the statement “Ash Baker attended today for Schein, along with a crew from New York, and Toronto counsel. It looks like his potential conflict here will have no repercussions for him, and his job is safe.” Mr. Van Woudenberg testified that he was not referring to a legal conflict but rather a “social or political conflict” that might arise because Mr. Baker was a former Ash Temple employee now working for Henry Schein.

Negotiation and Signing of the New Supply Agreement

[31] Mr. Van Woudenberg sent an email to Mr. Hielema the day after the mediation enclosing the Minutes of Settlement. Mr. Hielema was the corporate lawyer who had worked on the OSA and would be working on the New Supply Agreement with Stikeman Elliott. Mr. Van Woudenberg told Mr. Hielema that he had had some additional discussions with Mr. Hart about terms that were not included in the Minutes of Settlement but would have to be included in the NSA, the most important of which was an express acknowledgment by Henry Schein that the current status of Alliance’s product line and marketing material was satisfactory, to preclude Henry Schein from raising the same issues complained of at the mediation.

[32] The negotiations over the NSA took several months. The first draft was prepared by Stikeman Elliott and was sent to Mr. Hielema on October 18, 2006. It incorporated the changes set out in the Minutes of Settlement and was blacklined to the Original Supply Agreement. Mr. Baker, as in-house counsel of Schein Canada, was copied on all correspondence with respect to the negotiation and drafting of the New Supply Agreement.

[33] The draft circulated by Stikeman Elliott contained a term requiring Alliance to put up a property it owned in Toronto as security for the US$2.4 million prepayment that Schein Canada was providing for the last six months of purchases under the NSA. This was not a term contemplated in the Minutes of Settlement. Mr. Hart refused to give it. Mr. Hielema testified that Mr. Hart instructed him to adhere closely to the Minutes of Settlement.

[34] There were changes made in the drafts going back and forth between counsel incorporating the terms of the Minutes of Settlement, matters related to those terms and consequential drafting changes. In addition, the exclusivity term was removed as Mr. Hart had entered into dealer agreements with other distributors after Schein Canada terminated the OSA in February 2006.

[35] Mr. Hielema did not include, or suggest to Mr. Hart that he include, any term in the NSA that would require Schein Canada to actively promote, display and resell Alliance products in the U.S. He explained that Mr. Hart’s primary focus was on restoring the guaranteed revenue stream from Henry Schein and addressing the defaults in payment under the OSA. Mr. Hielema also testified that he operated under the theory that the Minimum Purchase Obligations were sufficient to incentivize Henry Schein to acquire and resell the product.

[36] The security issue was a huge point of contention. By the end of October, Mr. Hart wrote to Mr. Hielema and Mr. Van Woudenberg and questioned whether he would be better off seeking to enforce the Minutes of Settlement or to reactivate the main claim before the arbitrator. Mr. Hart was also frustrated with the length of time it was taking to conclude the NSA as it was delaying the immediate cash payments that he was to receive under the Minutes of Settlement. On November 13, 2006, Mr. Hart again told his lawyers that he did not trust Henry Schein and was considering walking away from the settlement and proceeding to arbitration. Mr. Van Woudenberg encouraged him to finalize the deal.

[37] Despite the lengthy and intense negotiations, the parties ultimately reached a satisfactory solution to the security issue.[^10] They signed the NSA, entitled the Amended and Restated Supply Agreement, on January 10, 2007 with an effective date of December 1, 2006.

Ash Baker is Hired by Gardiner Roberts

[38] On January 2, 2007, Mr. Baker approached Gardiner Roberts about returning to the firm. He wanted to go back into private practice and had first spoken to Stikeman Elliott, which did not have a position for him. Mr. Baker met with the partners of Gardiner Roberts in late January 2007 and they agreed to hire him. Mr. Baker started as an associate at Gardiner Roberts on March 5, 2007.

[39] Mr. Hielema called Mr. Hart at the end of February and said that the firm had hired Mr. Baker, who would be bringing Henry Schein as a client to the firm. Mr. Hielema told Mr. Hart that the firm would be setting up an ethical wall to permit the firm to do work for both Alliance and Mr. Hart, on the one hand, and Henry Schein, on the other, and that he would be sending Mr. Hart a waiver to sign. Mr. Hielema sent Mr. Hart the waiver two days after the phone call. Henry Schein had already signed the waiver. Mr. Hart signed and returned the waiver to Mr. Hielema on March 1, 2007 and the ethical wall was set up within the firm.

Problems Arise Under the New Supply Agreement

[40] Again, problems arose between the parties very early on under the New Supply Agreement. On April 12, 2007, Mr. Hart wrote to Mr. Hielema to advise that Schein Canada was in default of its purchasing obligations under the NSA. On April 27, 2007, Mr. Hart gave written notice of default to Schein Canada. While Mr. Hart considered going to arbitration at the time, ultimately he did not do so. By December 2008, Schein Canada caught up on its obligations and paid the $700,000 shortfall to Alliance. Mr. Hart conceded at trial that Schein Canada had paid all of its contractual commitments to Alliance under the NSA until its expiry in 2011.

[41] However, there were problems within the Henry Schein organization in purchasing and distributing the Alliance product. Shortly after the NSA was finalized, Jim Huether, a senior Schein U.S. executive, emailed the Henry Schein team responsible for the performance of the NSA. He said that Henry Schein had committed to the purchase obligations under the NSA based on an internal analysis which required 56.9% of the products purchased to be distributed in Canada and 43.1% to be distributed in the U.S. He set those numbers as targets for purchases by the business units in the two countries.

[42] The internal targets were never achieved. Cy Elborne, President of Schein Canada, and Patrick Hart (Mr. Hart’s son) (“Patrick”) both testified that Schein Canada complied with its purchasing obligations and made reasonable efforts to promote and sell the product in Canada but Schein U.S. did not. Mr. Elborne testified that the two business units were run separately from one another, with separate profit and loss statements, such that any profits or losses under the NSA showed up only on Schein Canada’s books. He also testified that Henry Schein’s sales representatives in the U.S. were paid almost exclusively on commission and had no incentive to switch from their existing product lines and try to sell a new product that they were less familiar with. Mr. Elborne testified that Schein U.S. did not have any skin in the game and that support from the U.S. was minimal at best.

[43] Mr. Hart and Patrick repeatedly raised concerns with Schein Canada about the lack of effort to resell the product in the U.S. They testified that they were pleased with the efforts made by Schein Canada in Canada but had major concerns over the U.S. The executives at Schein Canada were responsive to the Harts’ concerns and tried to get help from their counterparts to distribute Alliance products in the U.S.

[44] By 2009, Schein Canada was selling more Dentech than Schein U.S. Sales in the U.S. were down 40% from what they had been in 2005. Henry Schein’s internal plan to distribute 43.1% of the product in the U.S. was never achieved. According to Mr. Elborne, by the end of the term of the NSA, the split ended up being approximately 90% of sales in Canada and only 10% in the U.S.

[45] Mr. Elborne testified that without support from its U.S. counterpart, Schein Canada purchased far more product than it could resell in the Canadian market. He testified that as Schein Canada’s inventories increased, it had no choice but to resell the product at heavily discounted and even below-cost prices. According to Patrick, this below-cost pricing made it impossible for Alliance to sell directly to end-users or through other distributors and destroyed the viability of the brand in Canada. Patrick testified that Alliance tried to establish relationships with other distributors in the U.S. but had difficulty because Alliance had previously committed to Henry Schein and given it preferential terms.

Alliance Ceases Operations; Litigation Ensues

[46] Mr. Hart testified that by the time the NSA was over in 2011, Alliance was forced to wind up operations. The business absorbed a loss of $19.6 million that Mr. Hart and his family had invested in the manufacturing business between 2005 and 2011.

[47] In September 2011, after the expiry of the NSA, Schein Canada initiated another arbitration before Mr. Osborne with respect to orders it sought to have applied against the US$2.4 million deposit. In December 2012, Mr. Osborne awarded $75,000 payable by Alliance to Schein Canada.

[48] Alliance had counterclaimed against Henry Schein under the NSA. That claim was severed and transferred to this court. It became the action against Henry Schein that has now settled. On September 28, 2011, Alliance and Mr. Hart issued their Statement of Claim in this action against Gardiner Roberts and Mr. Baker.

THE PLAINTIFFS’ CLAIMS

[49] The plaintiffs assert one claim against Mr. Baker and three claims against Gardiner Roberts.

Breach of Fiduciary Duty by Mr. Baker

[50] The plaintiffs claim that Mr. Baker breached his fiduciary duty to the plaintiffs as he was in a conflict of interest when he acted for Henry Schein at the mediation and was involved in finalizing the NSA in the following months.

[51] Mr. Hart claims that had he known that Mr. Baker was in a conflict of interest, he probably would have walked away and would not have settled at mediation or signed the NSA. He says he would have proceeded to arbitration before Mr. Osborne. He claims that at the arbitration, he would have been successful in recovering the loss of value of Dentech, based on the $10.1 million that Alliance paid for the Dentech assets in the 2005 transaction plus an additional $2.6 million that Mr. Hart invested in Alliance up to the end of March 2006. The plaintiffs claim $12.7 million in damages in respect of Mr. Baker’s breach of fiduciary duty.

Negligence by Gardiner Roberts in Failing to Warn about Mr. Baker’s Conflict of Interest

[52] The plaintiffs claim that Gardiner Roberts fell below the standard of care by failing to warn Mr. Hart about Mr. Baker’s conflict of interest in acting for Henry Schein at the mediation and in finalizing the NSA.

[53] The plaintiffs claim that as a result of Gardiner Roberts’ breach, they lost the chance to pursue arbitration instead of settling at mediation. They claim that if they had gone to arbitration, they would have had an 85% to 90% chance of recovering the entire loss of value of Dentech. They claim damages for this lost chance equal to 85% to 90% of $12.7 million.

Negligence by Gardiner Roberts in Failing to Properly Draft the New Supply Agreement

[54] The plaintiffs claim that Gardiner Roberts fell below the standard of care in drafting and advising Mr. Hart on the NSA. They claim that Mr. Hielema, the corporate solicitor, was aware of Mr. Hart’s complaints about Henry Schein’s sales efforts with respect to Alliance’s products. They allege that Mr. Hielema failed to include in the NSA (or suggest to Mr. Hart that he include) positive obligations requiring Henry Schein to use its best efforts to distribute Alliance’s products, particularly in the U.S.

[55] The plaintiffs claim that as a result of Gardiner Roberts’ breach, they lost the chance to distribute Alliance’s products in the U.S. market through Henry Schein and to fairly compete in that market. They claim that if the NSA had included these positive sales obligations, Alliance would have made $6.9 million in profits. They claim damages for this lost chance equal to 75% to 85% of $6.9 million.

Breach of Fiduciary Duty by Gardiner Roberts

[56] The plaintiffs claim that Gardiner Roberts breached its fiduciary duty by acting in a conflict of interest when Mr. Baker returned to the firm and brought Henry Schein as a client. They claim that the waiver of conflict that Mr. Hielema asked Mr. Hart to sign was obtained without Mr. Hart’s informed consent and without the benefit of independent legal advice and was therefore ineffective.

[57] The plaintiffs make no claim with respect to the implementation of the ethical wall set up by Gardiner Roberts in March 2007 or the compliance by the lawyers at Gardiner Roberts with that ethical wall. The plaintiffs concede that they do not allege that any losses flowed from Gardiner Roberts’ breach of fiduciary duty.

LIABILITY

Ash Baker – Conflict of Interest

[58] The plaintiffs claim that Mr. Baker breached his fiduciary duty to the plaintiffs by acting in a conflict of interest when he represented Henry Schein at the mediation and was involved in preparing the NSA.

Expert Evidence

[59] Each side tendered expert evidence on the standard of care related to the duty of a solicitor to avoid conflicts of interest in Ontario.

[60] The plaintiffs tendered the evidence of Gavin MacKenzie, senior counsel who specializes in professional conflict matters. Mr. MacKenzie testified about the conflict concerns that arise where a lawyer acts against a former client. As he explained, the concern is that confidential information obtained from the former client can be misused if the lawyer acts against that client in the same or a related matter. He referred to Rule 2.04(1) of the Law Society’s Rules of Professional Conduct, which provided (at the time) that a lawyer who acted for a client in a matter shall not thereafter, without consent, act against the client or persons who were involved in or associated with the client in the same or any related matter. I note that the Rules of Professional Conduct are not binding on the courts in a professional negligence case. They are important statements of public policy with respect to the conduct of a lawyer and of importance in determining the nature and extent of duties flowing from a professional relationship. They do not, however, necessarily describe the applicable duty or standard of care in negligence: Perez v. Galambos, 2009 SCC 48, at para. 29.

[61] Mr. MacKenzie testified that Mr. Baker was in a conflict when he acted for Henry Schein at the mediation because it involved a dispute over the OSA, which was one of the agreements negotiated in the 2005 transaction when Mr. Baker was on the Hart side. He testified that Mr. Hart and Alliance were either Mr. Baker’s former clients or “persons who were involved in or associated with the client.” In either case, Mr. Baker should not have acted for Henry Schein on these matters without obtaining Mr. Hart’s informed consent.

[62] Mr. MacKenzie testified that the fact that Mr. Hart was happy to see Mr. Baker at the mediation and took it as a sign of good faith showed that Mr. Hart did not understand that Mr. Baker was in a position of conflict. He said that although Mr. Hart may have been sophisticated from a business point of view, the duty was on the lawyer, not the client, to raise any legal conflict issues.

[63] The defendants tendered the evidence of Terrence O’Sullivan, a senior litigator with expertise in conflict of interest matters. Mr. O’Sullivan focused on the role played by Mr. Baker in the transaction. His opinion was that Mr. Baker participated only as in-house counsel for Ash Temple and that this did not create a solicitor-client relationship between Mr. Baker and Mr. Hart and Alliance. Specifically, Mr. O’Sullivan testified that any interaction between Mr. Baker as in-house counsel and Mr. Hart (as an officer of Ash Temple) or Alliance (as a shareholder of Ash Temple) did not create a solicitor-client relationship.

[64] Mr. O’Sullivan testified that even if Alliance and Mr. Hart were considered former clients of Mr. Baker, the dispute between the plaintiffs and Henry Schein at the mediation was not closely related to the work Mr. Baker had done on the 2005 transaction. He testified that the dispute was over the performance of obligations under the OSA, not the interpretation or drafting of that agreement.

[65] Mr. O’Sullivan observed that Mr. Hart did not object to Mr. Baker being at the mediation. He testified that in his experience, clients have no difficulty expressing concern if they feel that their confidential information is in peril by a lawyer acting for the other side.

Analysis

[66] The issue in this case is whether Mr. Baker was in conflict of interest when he acted for Henry Schein at the mediation and was involved in finalizing the NSA in the following months.

[67] Lawyers owe a fiduciary duty towards current and former clients: Korz v. St. Pierre (1987), 1987 CanLII 4109 (ON CA), 61 O.R. (2d) 609, at para. 40 (Ont. C.A.). This duty includes a duty of confidentiality and a duty of loyalty, which includes an obligation to avoid acting in a position of conflict: R. v. Neil, 2002 SCC 70, [2002] 3 S.C.R. 631, at para. 17; Canadian National Railway Co. v. McKercher LLP, 2013 SCC 39, at paras. 14 and 24; Waxman v. Waxman, 2004 CanLII 39040 (ON CA), [2004] O.J. No 1765, at para. 646 (Ont. C.A.).

[68] In the case of former clients, the lawyer’s main duty is to refrain from misusing confidential information: McKercher, at para. 23. The focus on confidential information can be seen in the two-part test established by the Supreme Court of Canada in MacDonald Estate v. Martin, 1990 CanLII 32 (SCC), [1990] 3 S.C.R. 1235 for determining whether a lawyer is acting in a conflict against a former client. The Court articulated the test at para. 48:

(i) Did the lawyer receive confidential information attributable to a solicitor and client relationship relevant to the matter at hand? (ii) Is there a risk that it will be used to the prejudice of the client?

[69] With respect to the first part of the test, once it is shown by the client that there existed a previous relationship that is sufficiently related to the retainer from which it is sought to remove the solicitor, the court should infer that confidential information was imparted unless the solicitor satisfies the court that no information was imparted which could be relevant. This will be a difficult burden to discharge: MacDonald, at para. 49.

[70] The second part of the test is whether the confidential information will be misused. As stated in MacDonald, at para. 50: “A lawyer who has relevant confidential information cannot act against his client or a former client. In such a case the disqualification is automatic. No assurances or undertakings not to use the information will avail. The lawyer cannot compartmentalize his or her mind so as to screen out what has been gleaned from the client and what was acquired elsewhere.”

[71] The defendants argue that the MacDonald two-part test is not met in this case, for three reasons. First, they submit that the plaintiffs were not former clients of Mr. Baker. The defendants submit that Mr. Baker was only acting as in-house counsel for Ash Temple in the 2005 transaction, not for the plaintiffs. They say that because Mr. Baker was not in a solicitor-client relationship with the plaintiffs, he did not owe them a fiduciary duty and therefore had no duty to avoid a conflict of interest.

[72] Second, they submit that when Mr. Baker attended for Henry Schein at the mediation, he was not acting against Alliance and Mr. Hart in the same or a related matter to the one he had acted on in the 2005 transaction. Third, they submit that the plaintiffs have not proved that Mr. Baker had confidential information about the OSA that he could have used against the plaintiffs in the mediation.

[73] I reject these arguments. My conclusion is anchored in my factual findings. I find that although Mr. Baker was in-house counsel for Ash Temple, his role on the 2005 transaction was not as circumscribed or limited as the defendants suggest.

[74] Gardiner Roberts acted for Mr. Hart, Alliance and Ash Temple on the transaction, all of which had different interests at stake in the deal. Mr. Hart was both a selling shareholder of Ash Temple and a shareholder of Alliance, the purchaser of the manufacturing assets; Alliance was both a selling shareholder of Ash Temple and the purchaser of assets from Ash Temple; and Ash Temple was the company whose shares were being sold to Henry Schein.[^11] There was no separate representation of Mr. Hart and Alliance, on the one hand, and Ash Temple, on the other hand. It was a combined representation. On the other side of the transaction was Stikeman Elliott, acting for Henry Schein. There were only two sides on the transaction – the Hart side and the Henry Schein side.

[75] Mr. Hart brought Mr. Baker into the transaction in August 2004 and asked him to work on it with Gardiner Roberts. Very few of the Ash Temple employees knew about the transaction at that time. It was given a secret code name and kept confidential until the closing in January 2005. Mr. Baker became part of the Hart legal team from the outset.

[76] Mr. Baker and Mr. Hielema testified that Mr. Baker’s role was restricted to that of in-house counsel for Ash Temple in facilitating the transaction. The documentary evidence reveals no such restriction. Mr. Baker, as a member of the Hart legal team, was copied on all correspondence between Mr. Hart and Gardiner Roberts on the three agreements – the Share Purchase Agreement, the asset purchase agreement and the OSA. There is nothing in that correspondence to suggest that Mr. Baker was receiving comments only to the extent that they applied to Ash Temple.

[77] Significantly, Ash Temple was not even a party to two of the agreements – it was only a party to the asset purchase agreement, not the Share Purchase Agreement or the OSA. However, Mr. Baker was privy to communications on all three of the agreements. He was copied on emails from Mr. Hart providing his concerns and comments to Mr. Hielema; emails from Mr. Hielema responding to those comments; and correspondence between Gardiner Roberts and Stikeman Elliott exchanging drafts of the documents.

[78] Mr. Hart testified that Mr. Baker reviewed all of the agreements and would point out some areas that Mr. Hart should be aware of. Mr. Baker testified that he talked to Mr. Hart up to six times a day about the transaction.[^12] He attended the closing on Mr. Hart’s side of the transaction.[^13] He acknowledged that he played a significant role in Project Iridium. In my view, it is artificial to suggest that Mr. Baker was anything less than a full member of the legal team acting for Mr. Hart, Alliance and Ash Temple on the transaction. I find that Mr. Baker was in a solicitor-client relationship with Mr. Hart and Alliance for the purposes of the MacDonald test.

[79] The issues at the mediation related to disputes over the OSA and alleged misrepresentations in schedules to the Share Purchase Agreement, two of the three interrelated agreements that formed part of one transaction.[^14] I find that the issues at mediation were directly and closely related to the matters Mr. Baker had previously been involved in as a member of the Hart legal team. Indeed, Mr. Baker testified that while he was working on the 2005 transaction he recalled someone at Gardiner Roberts telling him that he might be in a conflict if he were to later advise Henry Schein on the OSA.

[80] At trial, Mr. Baker was forthright in saying that he was privy to confidential information about each of the three agreements. He testified that he had plentiful access to information about all aspects of the deal and that no one else at Ash Temple was involved in preparing the legal agreements. While Mr. Baker testified that he only received confidential information in his role as corporate counsel for Ash Temple, I find that the lines were not so strictly drawn. There were no steps taken to distinguish confidential information of Ash Temple from that of Alliance and Mr. Hart. I find that Mr. Baker received confidential information generally in his role as a member of the Hart legal team.

[81] On the issue of whether Mr. Baker was in a conflict, I prefer the approach taken by the plaintiffs’ expert, Mr. MacKenzie. It is more holistic and in keeping with the reality of the relationships among the parties, the role played by Mr. Baker as a member of the Hart legal team, and the confidential information that he received.

[82] I now apply the two-part MacDonald test to the facts of this case. On the first part of the test, I am satisfied that the plaintiffs have met their burden of establishing that Mr. Baker received confidential information attributable to a solicitor and client relationship relevant to the matter at hand. Mr. Baker was part of the Hart legal team on the 2005 transaction. The issues at the mediation were sufficiently related to those that he had worked on as a member of the Hart legal team. Mr. Baker said that he had confidential, privileged information about the two agreements that were the subject matter of the mediation.[^15]

[83] Turning to the second part of the test, when Mr. Baker appeared at the mediation and worked on the NSA for Henry Schein, there was clearly a risk that any confidential information he had previously obtained when he was on the Hart side could have been used to advantage Henry Schein in the negotiations to the prejudice of Alliance and Mr. Hart.[^16]

[84] Finally, I do not accept that Mr. Hart gave his informed consent to Mr. Baker acting at the mediation, as the conflict issue was never raised or explained to him, either by Gardiner Roberts or Mr. Baker. I accept Mr. MacKenzie’s evidence that it was the lawyer’s duty, not the client’s responsibility, to raise these issues.

[85] In my view, Mr. Baker was in a conflict of interest when he acted for Henry Schein at the mediation and on the NSA. However, as discussed below, I find that there was no causal link between Mr. Baker’s presence at the mediation or his involvement in finalizing the NSA and the plaintiffs’ claimed losses.

Gardiner Roberts – Breach of Standard of Care in Failing to Warn Mr. Hart of Ash Baker’s Conflict of Interest

[86] The standard of care for a lawyer practicing in Ontario demands that the lawyer bring to the exercise of his or her judgment the effort, knowledge and insight of the reasonably competent lawyer: Folland v. Reardon (2005), 2005 CanLII 1403 (ON CA), 74 O.R. (3d) 688 (C.A.), at para. 44.

[87] A central feature of the lawyer’s duty to his or her client is the duty to advise or warn the client of the risks and benefits of pursuing a given course of conduct: see Glivar v. Noble, [1985] O.J. No. 80 (C.A.), at para. 25, citing Major v. Buchanan et al. (1975), 1975 CanLII 467 (ON SC), 9 O.R. (2d) 491 (S.C.J.), at para. 58.

[88] According to Mr. MacKenzie, Gardiner Roberts had a duty to advise Mr. Hart and Alliance about Mr. Baker’s conflict. He testified that it should have been apparent to Gardiner Roberts that Mr. Baker had a conflict of interest and ought not to have been acting for Henry Schein, who was the adverse party to Mr. Hart and Alliance in disputes arising from the OSA. He stated that Gardiner Roberts should have been concerned about the potential for Mr. Baker to have relevant confidential information belonging to Mr. Hart and Alliance that could be used to their prejudice. He testified that Gardiner Roberts fell below the standard of care by failing to advise Mr. Hart about Mr. Baker’s conflict of interest.

[89] Mr. O’Sullivan testified that Gardiner Roberts met the standard of care in relation to Mr. Baker’s attendance at the mediation and assistance thereafter in implementing the settlement. He testified that lawyers would need a reasonable basis to allege a conflict against a counterparty (which he did not think existed in this case) and doing so without a reasonable basis would be spurious.

[90] I prefer Mr. MacKenzie’s evidence. Mr. Van Woudenberg and Mr. Hielema testified that they knew Mr. Baker had been on the legal team that prepared the OSA and the Share Purchase Agreement in the 2005 transaction. Those were the subject matters of the dispute with Henry Schein. In addition, Mr. Van Woudenberg reported to Mr. Hielema after the mediation that Mr. Baker had a “potential conflict” in acting for Henry Schein. While Mr. Van Woudenberg explained that he considered this a social or political conflict, he did not raise the issue of any type of conflict with Mr. Hart at the time.

[91] I accept Mr. MacKenzie’s evidence that Mr. Van Woudenberg and Mr. Hielema should have identified the risk that Mr. Baker had access to confidential information about Mr. Hart and Alliance. Neither of them raised the issue with Mr. Hart, either during the mediation or during the finalization of the NSA. In my view, Gardiner Roberts fell below the standard of care by failing to warn Mr. Hart and Alliance about Mr. Baker’s conflict of interest.

Gardiner Roberts – Breach of the Standard of Care in Drafting the New Supply Agreement

[92] The plaintiffs claim that Gardiner Roberts was negligent in drafting the New Supply Agreement by failing to advise Mr. Hart that terms should be included in the NSA requiring Henry Schein to actively promote and resell the Alliance products, particularly in the U.S. (“Positive Sales Obligations”).

[93] The standard of care for a professional in Ontario was described by John A. Campion and Dianna W. Dimmer, Professional Liability in Canada (Toronto: Thomson Reuters, 2019), s. 1.4 (Proview) as follows:

[I]n general the standard of care and skill is that possessed by a person of ordinary competence exercising the same calling, in the same locality. The professional will be measured by the professional standard at the time that the service or work is being performed. Provided that a professional has exercised reasonable judgment, competence and diligence in doing the work, the fact that the work proves unsatisfactory in some way will not necessarily render the professional subject to civil liability in negligence.

[94] A professional will not be held negligent unless the judgment he or she made was outside the range of reasonable choices that could have been made by a competent member of the profession: Di Martino v. Delisio, 2008 CanLII 36157 (ON SC), 2008 CarswellOnt 4275 (Ont. S.C.J.), at para. 54.

[95] As a general rule, expert evidence is required to establish a breach of the standard of care: Settle v. Punnet, 2010 CarswellOnt 11256 (Ont. S.C.J.) at para. 37; Zink v. Adrian, 2005 BCCA 93, at para. 43.

Expert Evidence

[96] The plaintiffs tendered the evidence of Luke Woolford, a partner at Cassels Brock & Blackwell LLP, with expertise in drafting and negotiating supply and distribution agreements. Mr. Woolford testified that in an agreement between a manufacturer and a distributor, it is standard to include Positive Sales Obligations. He testified that he has never seen a distribution agreement that did not include a clause requiring the distributor, at minimum, to use its “best efforts” or “commercially reasonably efforts” to sell the manufacturer’s products. Mr. Woolford testified that assuming Mr. Hart’s objective was to grow the market for Alliance products, Alliance needed a distribution agreement, not a supply agreement.

[97] According to Mr. Woolford, manufacturers typically want to build a market for their products in certain areas, and they often enter into agreements with distributors who have strengths reselling in those areas. Unless the distributor has an obligation to promote and resell the product in a specific area, the distributor could promote and resell the product wherever it wants, defeating the manufacturer’s commercial objectives.

[98] Mr. Woolford testified that the presence of minimum purchasing commitments, which are not uncommon, does not obviate the need for these standard distribution terms. These purchase obligations are not intended to exhaust the distributor’s obligation since they do not provide any reassurance to the manufacturer about where or how the distributor may resell the product. Therefore, minimum purchase obligations are no replacement for standard distribution terms.

[99] Mr. Woolford testified that Mr. Hielema, after receiving the Minutes of Settlement, should have advised Mr. Hart of the need to include Positive Sales Obligations in the NSA. His opinion was that Mr. Hielema breached the standard of care when he failed to do so.

[100] The defendants tendered the evidence of Barbara Doherty, a partner and corporate commercial lawyer at Miller Thomson LLP. Ms. Doherty testified that there is no bright line between supply and distribution agreements, that it is more of a continuum, and that she has seen a range of agreements. She testified that the Supply LOI set out the parameters of the deal that Mr. Hart had struck with respect to the OSA. She also noted that the OSA was not a stand-alone agreement and was part of a larger transaction.

[101] Ms. Doherty testified that best efforts clauses do not always effectively ensure performance and that it may be reasonable to prefer a stronger minimum purchase commitment, backed by a guarantee, as Alliance had negotiated. She explained that it was not clear that a best efforts clause would have added anything in the circumstances, as the Minimum Purchase Obligations themselves created an economic incentive for Henry Schein to sell the Alliance product.

[102] Ms. Doherty testified that if the client’s objective in the short term was to move into the black, the provisions of the OSA, which provided for a guaranteed cash flow to Alliance, were designed to accomplish that objective. She testified that if Mr. Hart’s objective was to grow the market for Alliance products, her opinion would not change. As she explained:

[Y]ou can’t take a company that’s not profitable and make it into a dream company through a period of three or four years. You have got to work at it step by step. So here we have guaranteed supply that allows the company to keep its employees, to keep the manufacturing facility going at least to get them to the profitability stage. So I would hate to see those provisions watered down with, I don’t know, best efforts maybe, you know, best efforts is a kind of squishy term, and typically when I see a best efforts clause, I also see a kind of squishy minimum purchase obligation. This is a very strong purchase obligation and a guarantee from a deep pocket, so I don’t think so.

[103] Ms. Doherty testified that when Mr. Hielema was drafting the NSA, the Minutes of Settlement were important as they set out the terms on which the parties were prepared to go forward with a new arrangement and deal with the defaults in the OSA. She stated that typically one would use a prior agreement as a starting point, so as not to start from square zero. She testified that attempts to introduce new substantive terms and obligations may jeopardize a deal and that in her experience, a lawyer should try to adhere closely to the minutes of settlement.

[104] Ms. Doherty’s opinion was that the lawyers at Gardiner Roberts met the standard of care in negotiating and drafting the NSA. She testified that if she had been the commercial solicitor presented with the Minutes of Settlement, she would not have drafted the NSA in a materially different way.

Analysis

[105] I prefer the evidence of Ms. Doherty. Her approach is more contextual and takes into account the commercial reality of how and why the parties structured and entered into the OSA and subsequently, the Minutes of Settlement and the NSA.

[106] There is no question that the OSA was negotiated as part of an overall transaction with Henry Schein. It was never a stand-alone distribution agreement. It was an integral component of the transaction in which Mr. Hart agreed to sell the distribution business to Henry Schein.

[107] I find that the OSA was designed as a supply agreement from the outset, as set out in the Supply LOI negotiated by Mr. Mlotek and Mr. Hart. It was never structured as a distribution agreement and it contained no Positive Sales Obligations on the part of Schein Canada. I note that the 1996 and 1999 authorized dealer agreements for Dentech imposed numerous, specific dealer sales obligations on Henry Schein as a distributor of Dentech products in the U.S. In contrast, when Mr. Mlotek and Mr. Hart negotiated the Supply LOI, they structured the agreement differently. They designed it as a supply agreement and imposed no such obligations on Schein Canada. The only obligation of Schein Canada was to meet the Minimum Purchase Obligations. The remaining obligations were on Alliance. This is consistent with Mr. Mlotek’s evidence that he and Mr. Hart specifically turned their minds to the marketing and sales obligations and imposed them on Alliance.

[108] I find that the reason for this supply agreement structure was to address Mr. Hart’s primary and immediate commercial objective, which was to secure a steady cash flow stream for Alliance. The manufacturing and distribution businesses were being separated and the losses of the former would no longer be offset by the profits of the latter. While Mr. Hart may have had a long-term objective of growing the manufacturing business, his immediate concern was to keep the business going until it could reach breakeven and become profitable. The key was to secure a steady cash flow, which is what the parties agreed to in the Supply LOI and the OSA. Alliance’s mediation brief dated September 6, 2006 explained the origin of the OSA stating, “It was an essential component of the Ash Temple distribution acquisition, that the manufacturing entities carried on by Ash Temple now, to be owned by Alliance, were to have a guaranteed Purchase arrangement in place. That was the genesis of the Supply Agreement.” I note that this guaranteed cash stream is consistent with the terms that Mr. Hart offered to prospective purchasers of the Dentech business when he was trying to sell it in the fall of 2003.

[109] My view that the focus of the OSA was on cash flow is reinforced by the terms of the OSA itself. Specifically, the OSA included the Shortfall Option, which entitled Schein Canada to make a payment equal to 20% of a shortfall without taking any products at all. This evidences the emphasis on ensuring, above all else, that Alliance receive a consistent revenue stream.

[110] Mr. Hielema acknowledged Mr. Hart’s long-term plans for Alliance but testified that his understanding of Mr. Hart’s objective in entering into the OSA was for the manufacturing business to have a steady and guaranteed revenue flow that would ensure that it could carry on at least for some period of time. The plaintiffs concede that they make no claim with respect to Mr. Hielema’s preparation of the OSA or that it failed to achieve Mr. Hart’s commercial objectives at that time.

[111] I find that the subsequent disputes under the OSA were focused (from Mr. Hart’s perspective) on Henry Schein’s failure to meet the Minimum Purchase Obligations. That was Mr. Hart’s overwhelming concern. It also had real implications for him, as he was funding the company’s operating costs out of his own monies. His settlement offer in the summer of 2006 reflected his objective of restoring cash flow to the business.

[112] I find that the settlement achieved at the mediation was designed to compensate Alliance for Henry Schein’s default in meeting the Minimum Purchase Obligations and to restore that cash flow from Henry Schein to Alliance. The terms of the Minutes of Settlement provided for immediate cash payments to Alliance, conversion of the annual Minimum Purchase Obligations to monthly commitments, and adjustments to the Shortfall Option to ensure that Alliance received a guaranteed minimum payment of US$250,000 per month. Mr. Van Woudenberg testified that Mr. Hart was pleased with the settlement as it gave him free working capital and guaranteed purchases for a long period of time, and would enable his manufacturing business to become successful. I note that whatever concerns Mr. Hart may have had with respect to Henry Schein’s sales efforts prior to the mediation, he did not require that any additional sales obligations on Henry Schein be included as a term of the settlement.

[113] The plaintiffs concede that they make no claim that Mr. Van Woudenberg fell below the standard of care in advising Mr. Hart at the mediation or in negotiating the Minutes of Settlement. They do not allege that the Minutes of Settlement failed to reflect Mr. Hart’s commercial objectives in settling the dispute. Their claim relates only to Mr. Hielema’s preparation of the New Supply Agreement in the months after the Minutes of Settlement were signed.

[114] Once the Minutes of Settlement were signed, the lawyers prepared the NSA based on an existing agreement (the Original Supply Agreement), amended and blacklined to incorporate the changes set out in the minutes. The changes proposed by counsel related primarily to the new commercial terms in the Minutes of Settlement.[^17] I accept Ms. Doherty’s evidence that this was not an opportunity to fundamentally restructure the OSA or to introduce new substantive terms or obligations that were not contemplated by the Minutes of Settlement, as it would risk derailing the settlement.[^18] Indeed, Mr. Hart contemplated walking away from the settlement when Henry Schein tried to obtain security for the US$2.4 million prepayment, which he said was outside the terms of the minutes.

[115] I accept Ms. Doherty’s evidence that Mr. Hielema was required to draft the NSA to implement the Minutes of Settlement and to incorporate the terms set out in the minutes and any consequential revisions that had to be made. I accept her evidence that he was not required to turn it into a standard distribution agreement or to include new distribution obligations on Henry Schein that were not contemplated in the Minutes.[^19]

[116] I note that after the NSA was signed, the only performance complaints that Mr. Hart raised with Gardiner Roberts under the NSA related to Henry Schein’s purchasing shortfalls. He did not raise any issues about Henry Schein’s sales or marketing efforts. This is consistent with Mr. Hart’s focus on the cash flow issues throughout the relevant period of time, as reflected in the OSA, the Minutes of Settlement, and the NSA.

[117] In his submissions in the 2011 arbitration, Mr. Hart stated “it was the fundamental purpose of the Settlement Agreement and the New Supply Agreement, to efficiently mesh minimum ordering requirements with manufacturing and delivery activity, and payment, in order to provide [Alliance] with a reasonably predictable stream of revenue and to provide [Henry Schein] with a reasonably predictable minimum supply of products during the term of the agreement.” This underscores my finding that Mr. Hart’s commercial objective in entering into the NSA (and the OSA before that) was to secure a guaranteed revenue stream to bring Alliance up to a profitable state, all of which is consistent with what he communicated to Gardiner Roberts at the time.

[118] In my view, based on my findings and the expert evidence of Ms. Doherty, I conclude that Gardiner Roberts did not fall below the standard of care in drafting the NSA.

Gardiner Roberts – Breach of Fiduciary Duty re Waiver of Conflict

[119] The plaintiffs claim that Gardiner Roberts breached its fiduciary duty to Alliance and Mr. Hart by acting in a conflict of interest. They allege that the conflict arose when Gardiner Roberts hired Ash Baker and began representing Alliance, Mr. Hart and Henry Schein at the same time, without securing Mr. Hart’s informed consent. They allege that when Mr. Hart signed the waiver of conflict form that Mr. Hielema sent to him (the “Waiver”), Mr. Hart did not give his informed consent.

[120] In Neil, at para. 29, the Supreme Court of Canada established a “bright line rule” preventing lawyers from simultaneously acting for two clients that are adverse in interest, even if the two mandates are unrelated:

The bright line is provided by the general rule that a lawyer may not represent one client whose interests are directly adverse to the immediate interests of another current client — even if the two mandates are unrelated — unless both clients consent after receiving full disclosure (and preferably independent legal advice), and the lawyer reasonably believes that he or she is able to represent each client without adversely affecting the other.

[121] The rationale for this rule is to ensure that lawyers do not compromise the duty of loyalty that they owe to their clients. A solicitor must be able to provide his client with complete and undivided loyalty, dedication, full disclosure, and good faith, all of which may be jeopardized if more than one interest is represented: Neil, at para. 25, citing Ramrakhla v. Zinner, 1994 ABCA 341, at para. 103.

[122] I find that in February 2007 when Mr. Hielema asked Mr. Hart to sign the Waiver, Alliance and Henry Schein had just come out of a lengthy dispute over the OSA and protracted negotiations over the NSA. Although they had settled their dispute, I find that given their long and adversarial history over the OSA and their recent signing of the NSA, the interests of Alliance and Henry Schein continued to be directly adverse to the other’s immediate interests.

[123] Mr. Hielema testified that when he called Mr. Hart to ask him to consent to the firm acting for Henry Schein, he did not provide any advice in writing to Mr. Hart or prepare any document recording what he told Mr. Hart about the Waiver. He did not recall what he had told Mr. Hart about the conflict or the risks associated with the firm acting for both Mr. Hart and Henry Schein. Mr. Hart’s uncontradicted evidence is that Mr. Hielema just asked him to sign the Waiver and said that Henry Schein was doing the same.

[124] I accept Mr. MacKenzie’s evidence that Mr. Hart’s sophistication in business matters did not equate to legal sophistication.[^20] I also accept his evidence that it is the lawyer that has to make full disclosure of what the problem is and any material facts the client should be familiar with in order to decide whether to grant a waiver.

[125] In this case, I find that Gardiner Roberts did not provide Mr. Hart with full disclosure of the risks to him of the firm acting for Alliance, Mr. Hart and Henry Schein before he signed the Waiver. The fact that Mr. Hart chose to sign it did not relieve Gardiner Roberts from the obligation to provide that full disclosure. The Waiver was ineffective as Mr. Hart did not provide his informed consent. Gardiner Roberts therefore breached its fiduciary duty by acting for two clients that were adverse in interest without obtaining the plaintiffs’ informed consent.[^21]

CAUSATION

[126] I must now decide the issue of causation. In this case, I have found that Mr. Baker breached his fiduciary duty by acting in a conflict of interest and Gardiner Roberts breached the standard of care by failing to warn Mr. Hart about Mr. Baker’s conflict. There are different causation tests for these breaches, as set out below.

[127] I have found that Gardiner Roberts did not fall below the standard of care in drafting the NSA. However, if I am incorrect in that conclusion, I will consider whether any breach of the standard of care caused the plaintiffs’ losses. Finally, I have found that Gardiner Roberts breached its fiduciary duty in obtaining an ineffective Waiver from Mr. Hart in March 2007. However, in light of the plaintiffs’ concession that they are not claiming that any losses flowed from the ineffective Waiver, I do not propose to conduct a causation analysis for that breach.

Mr. Baker – Conflict of Interest

[128] Once a breach of fiduciary duty is found, the burden shifts to the fiduciary to disprove the losses that the plaintiff claims flow from the breach. This reverse onus has been applied in cases of breach of solicitors’ fiduciary duty.[^22] Mere speculation on the part of the defendant will not suffice; a defendant must introduce concrete evidence to satisfy his onus in this regard.[^23] In order to avoid a finding of damages, the fiduciary will have to show that there “is no link between the breach of fiduciary duty and the loss.”[^24]

[129] The defendants have met their onus. I find that there was no causal link between Mr. Baker’s attendance at the mediation or his involvement in finalizing the NSA and the plaintiffs’ losses. Further, as set out in the Damages section below, I find that the plaintiffs suffered no losses by settling and not proceeding to arbitration.

[130] Mr. Hart’s evidence is that if he had known that Mr. Baker was in a conflict of interest, he probably would have walked away, would not have settled the dispute, and would have proceeded to arbitration. I do not accept Mr. Hart’s evidence. It is an after-the-fact, self-serving statement that is inconsistent with the evidence of the circumstances as they existed at the time.

[131] First, Mr. Hart was prepared to settle the dispute over the OSA well before he knew that Mr. Baker was going to be at the mediation. His offer going into the mediation was consistent with the offer he had made in the summer of 2006 (upfront cash payments, a new supply agreement, monthly Minimum Purchase Obligations). The terms Mr. Hart settled on at the mediation were consistent with the earlier offer he made before he knew of Mr. Baker’s involvement.

[132] Second, while I accept Mr. Hart’s evidence that he saw Mr. Baker’s attendance at the mediation as a sign of good faith on the part of Henry Schein, I find that he overstates the significance of Mr. Baker’s presence. There is no evidence that Mr. Baker played any role in the negotiations. Mr. Hart testified that he did not speak to Mr. Baker at the mediation – Mr. Mlotek (with whom Mr. Hart had negotiated the terms of the OSA) was the only person who spoke in Mr. Hart’s presence from the Henry Schein side. He testified that Mr. Mlotek carried more weight than Mr. Baker and that Mr. Mlotek, not Mr. Baker, was the decision-maker at the mediation.

[133] Third, Mr. Van Woudenberg’s evidence at trial was that the breakthrough at the mediation was Henry Schein’s offer of US$2.4 million to be held as a deposit for the last six months’ purchases under the NSA. This is consistent with Mr. Hart’s email of November 12, 2006 to Mr. Hielema and Mr. Van Woudenberg stating “[t]he perspective of holding an unsecured 2.4 million dollar deposit from them for the last six months of the new 51 month supply agreement gave me the confidence to agree to the minutes of settlement.” That breakthrough had nothing to do with Mr. Baker’s presence at the mediation.

[134] Fourth, there were significant and compelling reasons for Mr. Hart to avoid arbitration and settle at mediation that were completely unrelated to Mr. Baker’s involvement. Without the cash flow from Henry Schein, Mr. Hart was funding Dentech’s operational costs out of his own monies. He testified that he was unwilling to continue that funding. He also testified that if he decided to go to arbitration, he would have had to close down Dentech, crystallize an immediate $10 million loss and sue for damages. That would have been contrary to his stated plan of keeping the business for his family. Indeed, Mr. Hart testified that he accepted the settlement because it was best for the long-term interests of Alliance.

[135] Fifth, prior to the mediation Mr. Van Woudenberg had advised Mr. Hart that Alliance had a good claim against Henry Schein for contractual damages based on the Shortfall Option but that his claim to recover the entire value of Dentech would be more a difficult one. It was not clear at the time that proceeding to arbitration would have achieved a better result for Mr. Hart than the one he achieved by settling at mediation. In fact, Mr. Hart testified that he was pleased with the result he achieved at the mediation.

[136] The plaintiffs further submit that following the mediation in October and November 2006, Mr. Hart was emailing Mr. Hielema about his frustrations over the length of time it was taking to finalize the NSA. He said he was distrustful of Henry Schein and was prepared to walk away from the settlement and proceed to arbitration. The plaintiffs submit that Gardiner Roberts encouraged Mr. Hart to complete the settlement and enter into the NSA. They submit that if Gardiner Roberts had properly advised Mr. Hart that Mr. Baker’s involvement potentially gave Henry Schein an advantage in the negotiations, Mr. Hart would likely not have continued with the NSA and would instead have pushed forward with arbitration.

[137] I reject the plaintiffs’ submission. I do not accept that Mr. Hart would have called off the negotiations over the NSA if Gardiner Roberts had told him that Mr. Baker was in a conflict. Mr. Hart had signed Minutes of Settlement with Henry Schein. He was frustrated because Henry Schein was insisting on security for the US$2.4 million prepayment, which he said was outside the terms agreed to in the settlement. Henry Schein’s position was delaying the finalization of the NSA and the US$3.6 million in cash payments that Mr. Hart was supposed to receive on signing. Indeed, in an email to Mr. Hielema and Mr. Van Woudenberg dated November 29, 2006, Mr. Hart advised that he was prepared to go ahead with the settlement “as long as everything gets done quickly and [Alliance] receives the funds outstanding.” While Mr. Hart was frustrated, he was also highly motivated to get the NSA in place and resume the cash flow from Henry Schein.

[138] In fact, once the security issue was resolved, Mr. Hart was prepared to – and did – sign the NSA. As noted above, he had many business and financial reasons to settle his disputes with Henry Schein and enter into the NSA.

[139] In sum, I conclude that even if Mr. Hart had known that Mr. Baker was in a conflict at the mediation or in finalizing the NSA, Mr. Hart would not have terminated settlement discussions and proceeded to arbitration. Further, as described below, I find that Mr. Hart did not suffer any loss by settling and not proceeding to arbitration.

Gardiner Roberts – Failure to Warn

[140] The plaintiffs rely on the “loss of chance” causation test in respect of Gardiner Roberts’ failure to warn Mr. Hart that Mr. Baker was in a conflict of interest. Where a plaintiff can establish that but for the solicitor’s negligence he or she lost a chance to avoid a loss, the plaintiff can seek recovery for the value of that chance: Jarbeau v. McLean, 2017 ONCA 115, at para. 28. In this case, the plaintiffs submit that if Gardiner Roberts had told Mr. Hart about Mr. Baker’s conflict, Mr. Hart would likely have pursued arbitration and would have had a very good chance of recovering damages for Henry Schein’s breach of the OSA. They value that chance at 85% to 90% of recovering the $12.7 million that the plaintiffs invested in Dentech.

[141] There are two parts of the loss of chance analysis, causation and quantum. At the first stage, the plaintiff must prove on a balance of probabilities that the defendant’s breach or negligence caused the plaintiff to lose a substantially real and significant chance to avoid a loss or obtain a benefit. At the second stage, a court will evaluate the reasonable probability of the real and significant chance and award damages based on the assessed probability: see Trillium Motor World Ltd. v. Cassels Brock & Blackwell LLP, 2015 ONSC 3824, aff’d 2017 ONCA 545; see also Folland, at para. 73.

[142] In this case, the plaintiffs fail at the first stage of the test. For the reasons set out above, I find that Mr. Hart was motivated to settle and enter into the NSA. I do not accept that if Gardiner Roberts had warned Mr. Hart about Mr. Baker’s conflict, Mr. Hart would have discontinued settlement negotiations and proceeded to arbitration. Further, as discussed below, I find that the plaintiffs would not have achieved a better result by going to arbitration than by settling at mediation. I therefore find that the plaintiffs did not lose a real and significant chance to obtain a benefit by not going to arbitration.

Gardiner Roberts – Failure to Properly Draft the NSA

[143] I have concluded that Gardiner Roberts did not breach the standard of care by failing to negotiate Positive Sales Obligations for Henry Schein in the New Supply Agreement. However, if I am incorrect in my conclusion, I will consider the plaintiffs’ submission that because Gardiner Roberts did not advise Alliance of the need to include Positive Sales Obligations, Alliance lost the chance to distribute its products in the U.S. through Henry Schein and fairly compete in the U.S. market.

[144] Again, the plaintiffs fail at the first stage of the loss of chance test. As the Court of Appeal held in Folland, at para. 73, “the plaintiff must show the lost chance was sufficiently real and significant to rise above mere speculation.”

[145] There are two problems with the plaintiffs’ position. First, the evidence from Mr. Elborne and the documentary record make it clear that Schein Canada was using its best efforts to distribute Alliance’s products in Canada. According to Mr. Elborne, Schein Canada made significant efforts to sell the products in Canada, including displaying products in its showrooms, executing sales and marketing plans, and maintaining an appropriate sales organization to develop the market for Alliance’s products. I am not persuaded that the addition of Positive Sales Obligations in the NSA would have made any difference to the sales efforts in Canada.

[146] Second, with respect to sales efforts of Henry Schein in the U.S., the evidence is scant. Mr. Mlotek testified that Schein U.S. was committed to making the arrangements with Alliance work and tried many things to sell Dentech products in the U.S. However, he testified that he was not directly involved in the implementation of the supply agreements with Alliance.

[147] Mr. Elborne testified that Schein Canada was seeking help from Schein U.S. to purchase the amount of product allocated to Schein U.S. in the companies’ internal targets. However, he acknowledged that he did not have knowledge about the sales and marketing efforts made by his counterparts in the U.S.

[148] The person with that knowledge was Don Hobbs, Vice-President of Sales of Henry Schein’s U.S. Dental division. Both Mr. Elborne and Mr. Mlotek testified that Mr. Hobbs was the person with the most knowledge about Henry Schein’s efforts to market and sell Alliance’s products in the U.S.

[149] The plaintiffs were originally planning to call Mr. Hobbs as a witness at trial but decided not to do so. While I am not prepared to draw an adverse inference as the defendants request, Mr. Hobbs’ absence leaves me with virtually no evidence on what efforts Henry Schein was making to sell Alliance products in the U.S., what the extent of those efforts was, what the market for Alliance’s products was, and what issues or problems Henry Schein encountered in distributing Alliance products in the U.S.

[150] Without that material evidence, I cannot determine whether Henry Schein was or was not using its best efforts to distribute Alliance’s products in the U.S. and whether the addition of Positive Sales Obligations in the NSA would have made any difference. Consequently, I cannot find that the failure to advise the plaintiffs to include Positive Sales Obligations in the NSA caused the plaintiffs to lose a real and significant chance to distribute Alliance’s products in the U.S.

LIMITATIONS DEFENCE

[151] The defendants submit that the plaintiffs’ claim is statute-barred under the Limitations Act 2002, S.O. 2002. c. 24, Sched. B (the “Act”). The defendants argue that the plaintiffs discovered or ought to have discovered all of the material facts on which the claim was based more than two years before the claim was issued: Lawless v. Anderson, 2011 ONCA 102, at para. 22. They argue that the mediation and negotiation of the NSA occurred in the fall of 2006, and the Waiver was signed on Mr. Baker’s return in March 2007, both over two years before the claim was issued.

[152] I reject the defendants’ limitation defence. I find that the claim against the defendants was not discoverable until 2011. The NSA was in effect until 2011. The plaintiffs’ business operated until it was wound up in 2011. Gardiner Roberts continued to represent the plaintiffs during this time. Ash Baker was a lawyer at the firm. The plaintiffs switched to another firm (Aird & Berlis LLP) in 2011 and issued the claim shortly thereafter.

[153] Under s. 5(1)(b) of the Act, a claim is discovered on “the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).”[^25] In my view, the day on which a reasonable person ought to have known that they had a professional liability claim against Gardiner Roberts and Ash Baker did not occur while they were still clients of the firm: Sheeraz v. Kayani, 2009 CanLII 47571 (ON SC), [2009] O.J. No. 3751 (ON SC). I find that the claim was not discoverable until they received advice in 2011 from Aird & Berlis LLP that they had a claim against their former lawyers. The claim was issued well within the limitation period.

DAMAGES

[154] I have either found no liability on the part of the defendants or no causation between any of the defendants’ conduct and the plaintiffs’ losses. However, in case I am wrong in my conclusions, I will conduct a damages analysis. The parties’ experts calculated damages in two scenarios.

[155] Scenario #1 contemplates a “but for” world in which the plaintiffs, on learning of Mr. Baker’s conflict, would not have settled their dispute with Henry Schein at mediation or entered into the NSA, and instead would have proceeded to arbitration to recover damages for Henry Schein’s breach of the OSA.

[156] Scenario #2 contemplates a “but for” world in which Gardiner Roberts drafted the NSA to include Positive Sales Obligations. The plaintiffs’ theory of damages is that the addition of Positive Sales Obligations would have resulted in increased distribution efforts by Henry Schein, greater brand awareness for Alliance’s products, and higher sales by both Henry Schein and non-Schein distributors during the term of the NSA and thereafter.

Scenario #1

[157] The plaintiffs’ expert Andrew Cochran originally calculated damages for Scenario #1 using a “loss of profits” methodology, in which he calculated Alliance’s lost profits under the OSA, less Alliance’s actual profits under the NSA. His damage calculation was based on Henry Schein meeting its Minimum Purchase Obligations under the OSA. He was instructed not to take the Shortfall Option into account. Mr. Cochran’s damage assessment for Scenario #1 was $2.7 million.[^26]

[158] The defendants’ expert Enzo Carlucci responded with his damages analysis, using the same loss of profits methodology. He did two calculations, one in which Henry Schein met the Minimum Purchase Obligations (Scenario 1A) and the other in which Henry Schein exercised the Shortfall Option (Scenario 1B). His damages calculation for Scenario 1A was a loss of $68,353 and for Scenario 1B was a negative loss of ($1,018,361). In other words, in Scenario 1B, Alliance had a gain, not a loss, and was better off having entered into the NSA than if it had gone to arbitration.

[159] Mr. Cochran delivered a reply report. He testified that he changed his damages methodology for Scenario #1 from a “loss of profits” to a “loss of value” analysis. He calculated damages on the basis that Henry Schein’s default under the OSA led to the failure of the Dentech business, relying on what Mr. Hart had claimed in the notice of dispute filed for the arbitration. Mr. Cochran assessed the loss of value damages at $12.7 million, based on the $10.1 million that Alliance paid for the Dentech assets in the 2005 transaction and the additional $2.6 million that Mr. Hart invested in Alliance up to the end of March 2006.

[160] Mr. Carlucci responded with a sur-reply report. He refuted Mr. Cochran’s loss of value methodology. He maintained that damages should be calculated based on the lost profits that Alliance would have earned if Henry Schein had not defaulted under the OSA. He revised his calculations to take into account some of the comments made by Mr. Cochran. Mr. Carlucci’s revised calculation for Scenario 1A was $456,491 and for Scenario 1B was a negative loss of ($1,245,338).

[161] I accept Mr. Carlucci’s loss of profits methodology. I am not persuaded that an arbitrator would have awarded the plaintiffs the entire value of the Dentech business for Henry Schein’s default under the OSA rather than the profits Alliance would have earned if Henry Schein had complied with its contractual obligations. The plaintiffs would have had to satisfy the arbitrator that these consequential damages were not too remote: Saramia Crescent General Partner Inc. v. Delco Wire and Cable Limited, 2018 ONCA 519, at paras. 35-48, applying Hadley v. Baxendale (1854), 156 E.R. 145 (U.K. Ex. Ct.). In particular, the plaintiffs would have had to establish that the damages for the loss of the Dentech business arose: (i) in the usual course of things, that is fairly, reasonably, and naturally as a result of the breach of the OSA; or (ii) that they were within the reasonable contemplation of Henry Schein and Alliance at the time they entered into the OSA. In my view, the plaintiffs would have had difficulty establishing either of those elements on the facts of this case. The plaintiffs would have had to overcome the fact that Dentech had been consistently unprofitable for 10 years before the 2005 transaction. They would have had to satisfy the arbitrator that Henry Schein’s default under the OSA was the reason for Dentech’s failure. I am not satisfied, based on the evidence before me, that an arbitrator would have awarded Alliance more than its contractual entitlements under the OSA.

[162] I also consider it appropriate to calculate damages under Mr. Calucci’s Scenario 1B, which entitles Henry Schein to the benefit of the Shortfall Option. The principle in Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, is that where a contract has alternative modes of performance, the mode is adopted which is the least profitable to the plaintiff and least burdensome to the defendant. In this case, Henry Schein had the right to exercise the Shortfall Option, which was the least burdensome mode of performing the contract. Whether or not Henry Schein actually exercised its right to the Shortfall Option, it was entitled under the contract to do so.

[163] The plaintiffs submit that Mr. Carlucci understated Alliance’s losses in Scenario 1B by $1.2 million. In his calculations, Mr. Carlucci noted that Alliance was subject to exclusivity restrictions under the OSA. When Henry Schein terminated the OSA in February 2006, Alliance was relieved of those exclusivity restrictions and was able to make sales to non-Schein distributors, which it would not have been able to do under the OSA. Those sales to non-Schein distributors totaling $1,704,889 were therefore a gain that Mr. Carlucci excluded from Alliance’s lost sales during the term of the OSA. Mr. Cochran agreed with this approach but only excluded $476,321 in sales to non-Schein distributors, which increased his damage calculation by $1.2 million.

[164] The plaintiffs argue that s. 2.6 of the OSA did not preclude Alliance from selling to existing distributors in the U.S. and that Alliance in fact had relationships with a number of distributors at the time of the 2005 transaction.[^27] They submit that post-OSA sales to those distributors should not have been excluded from the calculation. In my view, there is insufficient evidence to support the plaintiffs’ submission. While there is evidence of who the non-Schein distributors were prior to the 2005 transaction, there was no evidence at trial as to whether the post-OSA non-Schein sales were to those same distributors.[^28] Alliance was permitted to sell to new distributors but it had to give 30 days’ notice to Henry Schein and establish that the distributors had reasonable sales support in their area. There is no evidence that this was done. In any event, even if the $1.2 million is added back to Mr. Carlucci’s calculation in Scenario 1B, it still results in a negative loss of ($45,338).

[165] The plaintiffs further submit that Mr. Carlucci incorrectly deducted actual profits under the full term of the NSA, which extended beyond the four-year term of the OSA. Mr. Carlucci’s evidence was that if the plaintiffs had not settled and had gone to arbitration, they never would have entered into the NSA and would not have earned the profits under that agreement. The profits under the NSA should therefore be deducted. I accept Mr. Carlucci’s evidence.

[166] I accept Mr. Carlucci’s damage calculation for Scenario 1B of a negative loss of ($1,245,338). Even if I had accepted the plaintiffs’ submissions on exclusivity, the damages in Scenario 1B would have been a negative loss of ($45,338). I find that the plaintiffs did not suffer any losses by settling at mediation, entering into the NSA, and not proceeding to arbitration.

Scenario #2

[167] Scenario #2 contemplates a but for world in which Gardiner Roberts drafted the NSA to include Positive Sales Obligations. As noted, the plaintiffs’ theory is that the addition of Positive Sales Obligations would have resulted in increased distribution efforts by Henry Schein, greater brand awareness for Alliance’s products, and higher sales by both Henry Schein and non-Schein distributors during the term of the NSA and thereafter.

[168] Mr. Cochran originally calculated Scenario #2 damages as between $7,296,269 and $7,200,187 (depending on whether Henry Schein exercised the Shortfall Option). This consisted of (i) contractual losses from Henry Schein during the term of the NSA; (ii) non-contractual losses from Henry Schein for five years after the expiry of the NSA; and (iii) non-contractual losses from non-Schein distributors both during the term of the NSA and for five years thereafter.

[169] At trial, Mr. Hart conceded that Henry Schein met all of its purchase obligations under the NSA so there were no contractual losses from Henry Schein in category (i) above. This reduced Mr. Cochran’s damage calculation for Scenario #2 to $6,920,524.

[170] I find that the Scenario #2 damages are based on assumptions for which there is an insufficient evidentiary foundation. With respect to the assumption that increased distribution efforts by Henry Schein would have resulted in higher sales to non-Schein distributors, there was no evidence from any non-Schein distributors at trial. There is no evidence from non-Schein distributors as to the impact that Henry Schein’s distribution activities had on their purchases of Alliance products. There was no evidence from any industry experts as to the effect of Henry Schein’s activities on the dental distribution market generally.

[171] Mr. Cochran points to a drop in sales to non-Schein distributors in 2006-2007 after increases in the previous two years. Mr. Cochran testified that Mr. Hart told him that this was due to Henry Schein’s pricing practices. However, the only evidence at trial about pricing is that Schein Canada started reducing its prices in Canada when its inventory was building up around 2009, two years later. Schein Canada’s pricing practices in 2009 could not have affected sales to non-Schein distributors two years before.

[172] The other main assumption underlying Mr. Cochran’s analysis in the but for world is that following the expiry of the NSA, Alliance would have continued to operate its business profitably for another five years. He testified that this would have generated an additional $4.8 million in profits from Henry Schein and non-Schein distributors. Mr. Cochran’s analysis assumed that Henry Schein would have continued purchasing Alliance’s products for five years after the NSA expired and that this would also have generated increased sales to non-Schein distributors. He testified that it would be unreasonable to assume, in a but for world in which Henry Schein had properly distributed the Alliance products, that Alliance would have wound up its business once the NSA expired.

[173] Mr. Carlucci, on the other hand, testified that Alliance’s losses would have continued for at least two years after the expiry of the NSA. He testified that even if he accounted for the post-NSA profits projected by Mr. Cochran, Alliance would not have been profitable until 2014 at the earliest – and that is without taking into account additional fixed-cost expenditures. Mr. Carlucci also testified that Mr. Cochran’s projected post-NSA sales figures were aggressive. He noted that once the NSA expired, Henry Schein’s orders from Alliance dropped dramatically.

[174] I prefer Mr. Carlucci’s approach. Dentech had never been a profitable business since Mr. Hart acquired it in 1995. On the record before me, there is insufficient evidence to support the plaintiffs’ submission that in a but for world Dentech would have operated profitably for another five years after the NSA expired. The plaintiffs rely on the fact that Mr. Hart invested millions to acquire the manufacturing business and that he planned to build it into a long-term business for his family. They submit that this is evidence that if the NSA had been properly drafted, Mr. Hart would not have shut down Alliance after the NSA expired in 2011.

[175] In my view, Mr. Hart’s plans are not evidence that Alliance would have continued to operate profitably for five years after the NSA expired. In particular, there is no evidence to support the assumption that Henry Schein would have continued to purchase Alliance’s products at substantial levels following the expiry of that agreement. At that point, Henry Schein was no longer under a contractual obligation to purchase Alliance’s products. It may or may not have chosen to continue purchasing products from Alliance depending on a host of factors including the state of the market, the availability of competitive products and its assessment of Alliance’s products at the time. Likewise, there is insufficient evidence to find that non-Schein distributors would have continued to purchase Alliance products for five years after the NSA expired.

[176] The plaintiffs have failed to prove that they suffered any losses under Scenario #2.

CONCLUSION

[177] For the above reasons, I have concluded that:

(a) Mr. Baker breached his fiduciary duty by acting in a conflict of interest. However, I find that there is no link between his conduct and the plaintiffs’ claimed losses and, in any event, I find that the plaintiffs did not suffer any losses by settling at mediation and not proceeding to arbitration. I therefore award nominal damages to the plaintiffs for Mr. Baker’s breach in the amount of $1000.

(b) Gardiner Roberts fell below the standard of care in failing to warn the plaintiffs of Mr. Baker’s conflict. However, the plaintiffs have failed to prove that this breach caused any damages. The plaintiffs’ negligence claim for failure to warn is dismissed.

(c) Gardiner Roberts did not fall below the standard of care in drafting the NSA. The plaintiffs’ negligence claim with respect to the NSA is dismissed.

(d) Gardiner Roberts breached its fiduciary duty by acting for both the plaintiffs and Henry Schein without obtaining Mr. Hart’s informed consent. However, the plaintiffs concede that no damages flow from this breach. I therefore award nominal damages to the plaintiffs for Gardiner Roberts’ breach in the amount of $1000.

[178] If the parties are unable to agree on costs, I will receive written submissions (no longer than ten pages double spaced, exclusive of bill of costs). The plaintiffs’ costs submissions shall be delivered within 21 days and the defendants’ costs submissions within 21 days thereafter. The plaintiffs may file reply submissions of not more than five pages within seven days thereafter.

Conway J.

Released: January 6, 2020

COURT FILE NO.: CV-17-00579640-00CL

DATE: 20200106

ONTARIO

SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST)

BETWEEN:

ALLIANCE H. INC. and MICHEL HART

Plaintiffs

– and –

GARDINER ROBERTS LLP and ASH BAKER

Defendants

REASONS FOR JUDGMENT

Conway J.

Released: January 6, 2020

[^1]: In these Reasons, references are made to Henry Schein as an organization from time to time. Specific references to the corporate entity in question, Schein Canada or Schein U.S., are made as necessary.

[^2]: The settlement agreement with Henry Schein was filed as an exhibit at trial. The parties consented to a dismissal of the action against Henry Schein without costs and a full and final release from the plaintiffs. Henry Schein made no payment but agreed to make Mark Mlotek, Cy Elborne and Don Hobbs available as witnesses in the plaintiffs’ action against Gardiner Roberts and Mr. Baker.

[^3]: All dollar references in these Reasons are to Canadian dollars, unless expressly noted to be in U.S. dollars.

[^4]: The asset purchase transaction occurred immediately prior to the closing of the share purchase transaction. Alliance paid $13.3 million for the assets of the manufacturing business after $13.4 million of debts and liabilities were transferred out of Dentech. KPMG valued the assets of the manufacturing business at net book value, with no goodwill.

[^5]: In a separate guarantee document dated January 10, 2005, Schein U.S. guaranteed all of the debts and obligations of Schein Canada under the Share Purchase Agreement, any Ancillary Documents(s) as defined therein, and the Supply Agreement.

[^6]: On February 28, 2006, a copy of this notice of default was sent to Schein U.S. pursuant to its guarantee of the obligations of Schein Canada under the Supply Agreement.

[^7]: The notice of dispute also included the loss in value to the Conex and Microbex businesses from the loss of sales in years 2, 3 and 4 of the OSA. The claim for punitive damages was supported by various allegations including that Henry Schein had failed to make any showroom orders, place equipment in convention booths, or provide access to the non-Ash Temple sales force of Henry Schein for five months after closing.

[^8]: Henry Schein alleged misrepresentations in the Share Purchase Agreement, some of which related to schedules that Mr. Baker had prepared.

[^9]: Henry Schein had previously placed US$533,000 into an escrow account. Under the Minutes of Settlement, that amount was to be released to Alliance forthwith and deducted from the US$1.2 million.

[^10]: Mr. Hart did not agree to provide security on Alliance’s real property but did agree to a postponement of his advances to Alliance in favour of Henry Schein.

[^11]: The other selling shareholders of Ash Temple received independent legal advice (not from Gardiner Roberts) on their sale of Ash Temple shares.

[^12]: There is no basis to find that Mr. Baker interacted with Mr. Hart and Alliance only as an officer or shareholder, respectively, of Ash Temple. Alliance was not simply a selling shareholder – it was also the purchaser of the manufacturing business and the counterparty to the OSA. Mr. Hart was a shareholder of the corporate purchaser.

[^13]: In his reporting letter on the transaction dated October 7, 2005, Mr. Hielema stated: “Present at the Closing, on behalf of the Corporation [Ash Temple] and Alliance, were Michel, Chairman of the Corporation and Ash Baker, Corporate Counsel and Secretary of the Corporation…”. The defendants argue that this language shows that Mr. Baker was only attending the closing in his capacity as in-house counsel for Ash Temple. I do not read this so restrictively. It supports my view that Mr. Baker attended the closing on the Hart side of the transaction.

[^14]: See Salah v. Timothy's Coffees of the World Inc., 2010 ONCA 673, at para 16.

[^15]: The defendants distinguish this case, in which the conflict issue is being looked at after the fact, from solicitor removal cases in which one party is seeking to remove a solicitor of record to prevent the use of confidential information going forward. The defendants argue that the presumption in MacDonald is only required in a solicitor removal motion to avoid the client having to disclose the confidential information to the court while the litigation is ongoing. In the case at bar, however, there is no need to rely on the presumption because Mr. Baker testified that he had confidential information about all three agreements. See also Chapters Inc. v. Davies, Ward & Beck LLP, 2001 CanLII 24189 (ON CA), 52 O.R. (3d) 566, at para. 30, in which the court will infer the possible misuse of confidential information where, as here, the two matters are found to be sufficiently related.

[^16]: There is no evidence at trial of what, if anything, Mr. Baker disclosed to Henry Schein about the agreements as Henry Schein did not waive privilege. There is no suggestion that Mr. Baker did anything improper with the confidential information he possessed.

[^17]: The acknowledgment by Henry Schein that the current status of Alliance’s product line and marketing material was satisfactory was related to the full and final release agreed to by the parties. It was incorporated into the release that they signed.

[^18]: The plaintiffs note that a new s. 3.9 was included in the NSA, stating that nothing would prevent Schein Canada from reselling Alliance’s products to any of its customers. Mr. Hielema explained that this was added to make it clear that Schein Canada could sell to any customers, not just dental customers. It does not appear to have been a controversial point. It did not impose any obligations on either party.

[^19]: The plaintiffs rely on Mr. Hielema’s references to the NSA as a general distributor agreement. I accept Mr. Hielema’s answer that he was only referring to the fact that the agreement was to be a non-exclusive agreement going forward. I do not view it as a reference to a change in the fundamental nature of the agreement from a supply agreement to a distribution agreement.

[^20]: See also Aird & Berlis LLP v. Oravital Inc., 2018 ONCA 164, at para. 6.

[^21]: The Waiver provided that in the event of a dispute between Alliance and Henry Schein, Gardiner Roberts would only act for Alliance and Mr. Hart, not for Henry Schein. Even if I had found the Waiver to be effective, I find that Gardiner Roberts did not comply with the terms of the Waiver as it continued to act for Henry Schein after a dispute arose between the parties in April 2007.

[^22]: Strother v. 3464920 Canada Inc., 2007 SCC 24, at para. 61; Canson Enterprises Ltd. v. Boughton & Co. 1991 CanLII 52 (SCC), [1991] 3 S.C.R. 534, at paras. 77-79; Canada Trustco Mortgage Co. v. Barlet & Richardes, 1996 CanLII 526 (ON CA), [1996] O.J. No. 1551 (Ont. C.A.), at para. 25.

[^23]: Hodgkinson v Simms, 1994 CanLII 70 (SCC), [1994] 3 SCR 377, at para. 76.

[^24]: Canson, at para. 86 per McLachlin J.

[^25]: The matters in s. 5(1)(a) are (i) that the injury, loss or damage had occurred, (ii) that the injury, loss or damage was caused by or contributed to by an act or omission, (iii) that the act or omission was that of the person against whom the claim is made, and (iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it.

[^26]: Mr. Cochran combined damages under Scenario #1 and Scenario #2 for a total of $13.42 million plus pre-judgment interest. He subsequently acknowledged that the two scenarios were mutually exclusive and that combining the damages for both scenarios was conceptually flawed.

[^27]: Under s. 2.6 of the OSA, Alliance was prevented from selling Dentech or Conex products to other distributors in Canada (2.6(1)), to end-users in Canada or the U.S. (2.6(3)) and, after 120 days from the date of the agreement, to Patterson Dental Company or its affiliates (2.6(3)). Alliance was permitted to sell to any new distributors in the U.S. on 30 days’ prior notice to Henry Schein and only if the distributors have reasonable sales representatives, service technicians and showrooms in the areas in which the distributorship will apply (2.6(4)).

[^28]: The KPMG valuation report on Dentech for the 2005 transaction listed Benco, Crutcher, Island, Barton-Cyker, JB Dental, Accubite and others. Mr. Carlucci’s sur-reply report attaches Appendix D (AHI Sales Distribution Summary) that shows a breakdown of sales to non-Schein distributors by name between 2005 and 2010, including Benco, Island, Burkhart Dental and others. Mr. Carlucci testified that someone in Alliance management created this document for purposes of litigation. He received no source documents to verify any of the information in the Summary and did not consider it reliable. The plaintiffs did not introduce this Summary or any of the data contained therein at trial. I also note that Mr. Hart gave evidence that doing the 2005 deal with Henry Schein alienated some of the distributors with whom Alliance had previously done business. This undermines the submission that Alliance was selling to existing (as opposed to new) distributors within the terms of the OSA.