Bowen et al. v. JC Clark Ltd., 2021 ONSC 2016

COURT FILE NO.: CV-16-556731

DATE: 20210323

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

JAMES BOWEN and JONATHAN WIESBLATT

Plaintiffs

– and –

JC CLARK LTD.

Defendant

S. Erskine and F. Dickson, for the Plaintiffs

J. Knight and L. Freitag, for the Defendant

HEARD: December 7-11 and 14-17, 2020 January 18-20 and 22, 2021

LEIPER J.

REASONS FOR JUDGMENT

INTRODUCTION AND OVERVIEW

[1] This case concerns the Plaintiffs’ claims against their former employer, the Defendant firm, JC Clark Ltd. (JCC or the Defendant), for $1.38M in performance fees earned by the JCC Adaly Investment fund, formerly the Adaly Opportunity fund, (“the Fund”) they managed at JCC.

The Fund

[2] The Fund was created by a senior investment professional, Martin Braun and managed under the auspices of his investment firm, Adaly Investment Management Corp. (“Adaly”). Braun had managed the Fund for many years. He had placed a significant amount of his own money in the Fund.

[3] In 2012, Braun negotiated the sale of the Fund with JCC.

The Plaintiffs

[4] Braun hired the Plaintiffs, James Bowen and Jonathan Wiesblatt, in 2003. They progressed from junior roles as research analysts to responsibility for managing money. By the spring of 2012, the Plaintiffs were managing the Fund under Braun’s supervision. Braun saw himself as their mentor as well as their employer.

The Sale of the Fund to JCC

[5] The sale of the Fund to JCC contemplated Braun joining JCC to manage the investor client relationships in the Fund. At Braun’s request, JCC agreed to hire the Plaintiffs to manage the day-to-day activities of the Fund. Braun and the Plaintiffs were to be the three portfolio managers (or “PMs”) of the Fund.

[6] Braun signed a “Combination Agreement with JCC to complete the Fund sale to JCC. JCC entered into employment agreements with the Plaintiffs. Braun agreed to share his remuneration from management and performance fees due to him under the Combination Agreement with the Plaintiffs.

The Move to JCC

[7] Braun and the Plaintiffs (the “Adaly Team”) moved to the JCC offices on December 3, 2012.

[8] The new arrangement went well financially for all concerned. By 2013, the Fund was performing well enough to earn performance fees. Performance fees are fees calculated on the performance of the Fund based on known criteria and calculated at year end.

[9] In January of 2014, Braun directed that the Plaintiffs receive his share of the Fund’s performance fees for 2013.

[10] The relationship between JCC and the Adaly Team did not fare as well as the Fund. Tensions emerged. The Plaintiffs were critical of the JCC way of doing things. They tended to keep to themselves. Braun assumed the role of go-between. At one point he chided the Plaintiffs for adopting a “siege mentality.” He also urged them to behave like team players.

[11] By 2014, the relationships had eroded further. Jen Doherty, JCC’s Chief Compliance Officer (“CCO”) and Chief Operating Officer (“COO”) had begun to monitor the Plaintiffs’ email exchanges. The Plaintiffs skipped team meetings and avoided off-site meetings where other JCC representatives planned to attend. Although the Fund was earning remarkable returns, described by Doherty in one email as “jaw-dropping,” this did not help the situation.

[12] In July 2014, JCC senior management terminated the Plaintiffs’ employment on a “without cause” basis. Braun was not involved in this decision. Braun remained at the firm and assumed management of the Fund for the balance of 2014. Braun provided reference letters to the Plaintiffs.

[13] Braun also directed his entire 40% share of the 2014 performance fees be paid to the Plaintiffs. This amounted to $358,000.00 in after-tax payments to each Plaintiff.

[14] The Plaintiffs were dissatisfied with the share of the 2014 performance fees they received at Braun’s direction from JCC. This dissatisfaction led to their claim against JCC.

THE CLAIMS

[15] In 2016, the Plaintiffs claimed that their employment agreements and the performance fee sharing practices at JCC entitled them to an additional 30% of the 2014 performance fees earned by the Fund, over and above the amounts they received because of Braun’s direction to JCC in 2014.

[16] At the start of the trial, although not explicitly pleaded, the Plaintiffs added the doctrine of contractual quantum meruit as an alternative rationale for their claims of additional performance fees. In the further alternative, if neither of those claims succeeded, the Plaintiffs sought a reduced amount of additional performance fees (10%), arising from an oral agreement they alleged was made on April 25, 2014 at a meeting with JCC executives.

[17] In their final submissions at trial, the Plaintiffs added claims for payment of discretionary bonuses at termination. JCC raised the preliminary issue of failure to plead or to identify this new ground for relief prior to trial and provided examples of evidence it would have called had it been aware of this basis for relief.

[18] For the reasons provided below, I dismiss the Plaintiffs’ claims.

THE ISSUES AT TRIAL

[19] The question of whether the Plaintiffs’ employment contracts entitled them to receive additional amount for the performance fees earned by the Fund in 2014 was the primary trial issue.

[20] As noted above, JCC submits that the Plaintiffs’ added claims for discretionary bonuses should not be considered because these claims were not pleaded and were not articulated at trial until final submissions. JCC submits that these are new claims which should not be “shoe-horned” into the general clause in the claim seeking “such further and other relief as counsel may advise.”

[21] I will separate the analysis into the performance fee issues and the bonus issues due to JCC’s preliminary objection to whether the bonus portions of the claim are justiciable at this trial.

[22] The performance fee issues are:

i. Did the Plaintiffs’ employment contracts entitle them to performance fees from JCC?

ii. Were the Plaintiffs’ employment contracts ambiguous such that the contracts should be interpreted to include an entitlement to performance fees payable to the Plaintiffs by JCC?

iii. If there was no agreement by JCC to pay performance fees to the Plaintiffs a under the terms of their employment agreements, is JCC liable to pay the Plaintiffs performance fees on a contractual quantum meruit basis?

iv. Did JCC breach a commitment made on April 25, 2014 to increase the Plaintiffs’ share of the Fund’s 2014 performance fees by 10%?

[23] The second set of issues flow from the Plaintiffs’ claims for discretionary bonuses:

i. Are the Plaintiffs entitled to make submissions and have the court consider ordering that JCC pay them additional amounts on account of discretionary bonuses, in addition to their claim for performance fees?

ii. If the Plaintiffs are entitled to claim discretionary bonuses in addition to their claims for performance fees, have the Plaintiffs established such an entitlement?

BACKGROUND FACTS

The 2012 Negotiations Between JCC and Adaly Investments to Purchase the Fund

[24] In 2012, Braun and the Plaintiffs were looking for an investment firm to take on the Fund and employ the Plaintiffs. Although the Plaintiffs were interested in purchasing the Fund from Braun themselves, Braun did not believe they were sufficiently experienced to do so. Braun looked at the sale as a “salvage job.” The Fund had lost significant assets and was not on track to earn any performance fees in 2012. Braun no longer wanted the responsibility and stress associated with the responsibilities involved in running and managing the Fund he had started.

[25] On September 11, 2012, the Plaintiffs met with Colin Stewart, the CEO of JCC. That meeting led to the negotiations between Stewart and Braun for the purchase of the Fund.

[26] Stewart sent draft term sheets to Braun on September 19, 2012. Braun shared the term sheets with the Plaintiffs.

[27] The first term sheets contemplated that:

(i) JCC would purchase the Fund from Adaly;

(ii) JCC would enter into employment agreements with the Plaintiffs;

(iii) Martin Braun and the Plaintiffs would act as co-portfolio managers of the Fund;

(iv) For four years after the sale of the Fund, Martin Braun would receive a 40% share of the management fees and a 40% share of the performance fees earned by the Fund, with the “total to be shared between 3 PM’s”;

(v) JCC would pay the Plaintiffs an annual salary of $100,000, RRSP matching of up to $5,000 each, and, for the first four years, a performance fee share of 40% with the “total to be shared between 3 PM’s”.

(vi) In year four and beyond, the Plaintiffs would participate in the “[s]tandard JCC performance fee allocation system”.

[28] JCC’s “standard performance fee allocation system” was a 40-30-30 split among the lead portfolio manager, the investment team and JCC. In their first meeting with Stewart, the Plaintiffs testified he told them about this split. Stewart testified he did not discuss compensation with them at this first meeting. Ultimately, this difference in recollection did need to be resolved given the events and “whole agreement” provisions in the employment agreements. The Plaintiffs did not rely on this conversation as a source of any entitlement to performance fees.

[29] The Plaintiffs proposed to Braun that he make a counteroffer to Stewart, that would give a performance fee split of 50% for the “JCC / Adaly Fee Split.” Braun disagreed with their suggestion because he felt it was too aggressive.

[30] On October 4, 2012 members of the JCC team, including CEO Stewart and Jenn Doherty, the Chief Operating Officer and Chief Compliance Officer for JCC met with Braun and the Plaintiffs at JCC’s offices. This was a “get to know you” meeting. There was no discussion of compensation or deal terms at this meeting.

The Combination Agreement

[31] The term sheets were replaced by the formal Combination Agreement. Braun shared drafts of the Combination Agreement with the Plaintiffs in November before it was finalized. The Plaintiffs did not receive a copy of the final signed version of the Combination Agreement.

[32] The Combination Agreement required JCC to offer employment to the Plaintiffs, who were named and identified in the Combination Agreement as “Designated Employees.”

[33] The Combination Agreement prescribed an employment offer to the Plaintiffs as follows:

2.6(e)(ii) [The Acquirer shall] offer employment, effective as of and following the Closing Date and conditioned on the completion of the transactions and other matters contemplated herein, to each of Jonathan D. Wiesblatt and James Bowen pursuant to an employment agreement (a “DE Employment Agreement”) to be entered into on the Closing Date in a form mutually acceptable to the parties thereto, acting reasonably, which DE Employment Agreement shall provide, among other things:

(i) for a base salary of $100,000 per annum;

(ii) for the potential (but not a guarantee) of such Designated Employee to be part of a discretionary bonus pool established by the Acquirer;

(iii)that the Acquirer will contribute up to $5,000 to the registered retirement savings plan of which such Designated Employee is the annuitant to match the first $5,000 of contributions made thereto by such Designated Employee;

(iv) for such Designated Employee to receive such portion of the Allocated Trailer Amounts and Allocated Fee Amounts as may be determined by Braun; and

(v) for a benefit package customarily provided to other employees and consultants of the Acquirer, and a gym membership up to $750 per annum. [spacing added for clarity]

[34] The Combination Agreement gave Braun the discretion to share his entitlement to 40% of any fees earned by the Fund with the Plaintiffs. Braun confirmed that he asked JCC for this mechanism because he wanted to provide an incentive to the Plaintiffs to work hard.

[35] Clause 2.6 (e)(ii) was in the drafts provided to the Plaintiffs and were included in the final version signed by JCC and Braun.

JCC Sends the Draft Employment Agreements to Braun

[36] JCC sent the draft employment agreements to Braun on October 26, 2012. Neither of the Plaintiffs sought independent legal advice on the employment agreements.

[37] Prior to finalizing the employment agreements for the Plaintiffs, Doherty and Stewart discussed whether to refer to the performance fee payout provisions in the Combination Agreement. Doherty suggested to Stewart that they not include reference to the performance fees in the Plaintiffs’ employment agreements given that Braun would control the payout of the 40% performance fee share in accordance with the Combination Agreement. Stewart noted that including reference to performance fees in these employment agreements would be inconsistent with the contracts for employees at JCC, which did not include provisions related to performance fee payouts.

[38] The Plaintiffs’ employment agreements included a base salary of $100,000, health and dental benefits, a fitness club membership reimbursement, and an RRSP match of $5,000. The agreements contained a bonus provision like that in the employment contracts for other JCC employees. This provision read:

5. Bonus

At the total discretion of the Company, you may be eligible for a bonus at the end of each fiscal year depending on factors that include your personal performance and the profitability of the Company.

The Wiesblatt-Stewart Telephone Call of November 21, 2012

[39] On November 21, 2012, Stewart emailed the Plaintiffs and inquired whether they had any questions or concerns about the employment agreements. On that same day, Wiesblatt received a copy of the Combination Agreement. Wiesblatt sent a list of questions to Stewart. In his email to Stewart, Wiesblatt described the employment agreements as “basic.” He said that the agreements “look[ed] fine” to him and to Bowen.

[40] Wiesblatt’s questions for Stewart concerned the language in the Combination Agreement, the relationship between the Plaintiffs and JCC if Braun was to be terminated or left, and changes to how performance fees would be earned with respect to the “high-water mark” (a determinant of entitlement to performance fees). Wiesblatt did not ask questions about the remuneration offered to him and to James Bowen.

[41] Stewart testified that during his call with Wiesblatt, he highlighted the aspects of the Combination Agreement with Braun which included the sharing of performance fees and management fees with Braun who intended to share these fees “generously” with the Plaintiffs. Wiesblatt did not agree this was discussed on their call.

[42] Braun confirmed that he told the Plaintiffs of his intentions to share fees with them before they signed their employment agreements with JCC. Braun testified that he told the Plaintiffs he would pay them 50% of his share of the management fees and agreed he would pay them 100% of the performance fees earned by the Fund.

[43] Wiesblatt testified at trial that he asked Stewart to include their entitlement to 40% of performance fees in their employment agreements. Wiesblatt testified that Stewart assured him that the Plaintiffs would receive 40% of the performance fees, but that Stewart was not willing to include it in the employment agreements. Wiesblatt testified that he believed he and Bowen would receive and were entitled to 40% of the performance fees earned by the Fund, over and above the 40% which JCC agreed to pay to Braun. This was based in part on the wording of the draft term sheets and on later events.

[44] Wiesblatt testified that he believed that the bonus provisions found in paragraph 5 of the employment agreement encompassed both a discretionary bonus and his entitlement to performance fees from JCC. Wiesblatt was cross-examined and adopted his previous answer given at examination for discovery that paragraph 5 of his employment agreement had “nothing to do with performance fees.”

[45] I accept Braun and Stewart’s evidence about what was said about the Plaintiffs’ entitlement to performance fees: this was provided for through the Combination Agreement and was a matter of Braun’s discretion. This mechanism was known to the Plaintiffs when they signed their employment agreements which provided for salary, bonus and benefits but were silent as to any entitlement to performance fees. The words “performance fees” do not appear in the employment agreements, nor is there any definition that could be said to describe the calculation or fact of performance fees as part of the remuneration offered to the Plaintiffs. This is consistent with Wiesblatt’s evidence in which he adopted his earlier answer that the bonus provisions in his employment agreement had nothing to do with performance fees.

[46] The Plaintiffs’ knowledge of the sources of remuneration is further supported by their request and receipt of two signed side agreements dated November 29, 2012 and December 1, 2012 with Braun in which he formalized his intention to share 50% of management fees and 100% of the Fund’s performance fees with them.

[47] According to the evidence from Stewart and Braun, the Plaintiffs knew of the decision responsibilities for their sources of remuneration: JCC for employment income, bonuses and benefits and Braun for management and performance fees. Delegating responsibility to Braun of a potentially significant source of income may have contributed to the deterioration of the Plaintiff’s relationships with JCC management. As can be seen, the relationships progressively worsened as the Fund’s performance, and the anticipated fees related to performance, increased.

[48] The Plaintiffs testified that Braun signed the December 2, 2012 side agreement in June of 2014 but backdated it to December 1, 2012. Braun denied backdating the agreement. There is some circumstantial evidence around the formatting of the agreements that suggests they were signed at different points in time but given the equivocal nature of the evidence on this point I am not able to make a finding in that regard. However, all the evidence supports Braun’s intention and actions in sharing both management and performance fees with the Plaintiffs while they were employed at JCC. The side agreements memorialized Braun’s intentions and he lived up to those stated intentions.

[49] The Plaintiffs’ expert, David Jarvis testified that an arrangement in which a senior portfolio manager, with discretion to direct the payout of performance fees while having such payment administered by the firm was consistent with industry practice. Braun was the senior portfolio manager of the Fund. The Plaintiffs were junior to Braun.

[50] Jarvis also testified that the industry standard range for sharing performance fees to portfolio managers was from 20% to 70%; on cross-examination Jarvis agreed that the range could vary anywhere from 0% to 100%. Counsel for the Defendant submitted that such a range might not reasonably amount to a standard. I infer from the expert evidence that the industry tolerates a broad range for allocating performance fees to portfolio managers.

[51] In cross-examination, Jarvis agreed that he would expect similarly situated portfolio managers to the Plaintiffs to be at the lower end of the range given the following factors:

i. the Plaintiffs were inexperienced and lacked a proven track record as portfolio managers;

ii. the Plaintiffs were not the source of assets in the Adaly Fund, nor did they have any demonstrated ability to raise new assets;

iii. the Plaintiffs were not responsible for the client relationships;

iv. Wiesblatt did not have a Chartered Financial Analyst designation.

The Sale Transaction and Overview of Performance Fees and Bonuses Paid to the Plaintiffs

[52] As part of the transition from Adaly to JCC, the Plaintiffs were terminated from their employment at Adaly. They received $100,000 in exchange for a full and final release in favour of Adaly. The Combination Agreement was executed by JCC and Adaly on November 26, 2012. The Plaintiffs executed their employment agreements with JCC on November 27, 2012.

[53] Braun, Bowen and Wiesblatt began working at JCC on December 3, 2012.

[54] The Fund did not earn performance fees in 2012, thus Braun did not have any performance fees to allocate.

[55] Bowen and Wiesblatt were terminated on July 6, 2014. At the time of this trial, Braun was still employed with JCC.

[56] In December of 2013, the Plaintiffs received a discretionary bonus of $15,000 each from JCC. The Plaintiffs rely on this December payment as evidence that they received approximately 40% of the performance fees from the Fund in 2013, in addition to Braun’s 40% which they received in January. I discuss findings of fact related to this evidence below.

[57] As of yearend 2013, the Fund earned performance fees of $121,873.25 which Braun directed JCC to pay to the Plaintiffs in January of 2014.

[58] In 2014, Braun again allocated 100% of his 40% share of the performance fees earned by the Fund to the Plaintiffs, which was paid to them in 2015, after they had been terminated by JCC.

ANALYSIS OF THE PERFORMANCE FEE ISSUES

i. Did the Plaintiffs’ employment contracts entitle them to performance fees?

[59] Employment agreements are contracts. They are interpreted by giving their words their ordinary and grammatical meaning, read as a whole and consistent with the circumstances known to the parties at the time the contract is formed: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para 47.

[60] The Plaintiffs argue that their employment contracts, specifically the bonus provisions, entitled them to a 30% share of performance fees earned by the Fund. They submit that this entitlement is over and above any allocation of performance fees from Braun.

[61] The Plaintiffs argue that in the investment fund industry, a low base salary plus fees and bonuses are well established models of remuneration. These elements are integral to the salary expectations of portfolio managers such that had JCC intended to exclude the Plaintiffs’ entitlement to a share of performance fees, it was incumbent on JCC to specifically state that in the employment agreements.

[62] The objective factors which the Plaintiffs rely upon for this proposition include the following:

(a) The Plaintiffs were being hired to work as Portfolio Managers at JCC;

(b) JCC was an asset manager offering alternative investment products such as hedge funds that earned and paid out performance fees;

(c) The industry standard is that Portfolio Managers of hedge funds work for a low base salary and the optionality of direct drive/performance fees;

(d) The Plaintiffs had been earning direct drive and performance fees since 2006, even before they were Portfolio Managers;

(e) The Plaintiffs had been working as Portfolio Managers since 2009;

(f) The Plaintiffs’ contract was an indefinite-term contract;

(g) The Plaintiffs’ employment contract offered a “base salary” of $100k;

(h) The Plaintiffs’ contract offered them a bonus based on their “personal performance and the profitability of the Company”;

(i) JCC had a 40/30/30 system for paying out performance fees;

(j) As a matter of company policy, none of JCC contracts mentioned performance fees in writing;

(k) The Plaintiffs received a $100k lump sum for termination from Adaly;

(l) JCC had no access to the Plaintiffs’ AIMC emails at the time it was negotiating the deal and no idea what their job search prospects were;

(m) JCC and Martin Braun were in the process of negotiating the acquisition of the Adaly Fund;

(n) The Plaintiffs had been exploring potential acquisition deals for the Adaly Fund with other firms;

(o) JCC had stopped this exploration process by requesting an exclusivity period during negotiations, which Braun agreed to;

(p) The Plaintiffs were not involved in the acquisition negotiations, except briefly and early in the process (September 2012);

(q) In an early term sheet, which the Plaintiffs had seen in September 2012, JCC and Mr. Braun had tentatively structured the deal as an earnout, by which Mr. Braun would be compensated with trailers on management and performance fees;

(r) In the same early term sheet, the Plaintiffs had seen two different boxes respectively named “Martin Braun Financial Terms” and “James Bowen and Jon Wiesblatt Financial Terms”, each of which contained a notation regarding performance fees that read “40% to be split between 3 PMs”; and

(s) Both the Plaintiffs and JCC viewed this transaction as a low risk deal whereby JCC could augment its assets under management and revenue streams with no up-front payment.

[63] This list of factors is largely supported by the evidence. I note that although the Plaintiffs were not directly involved in the acquisition negotiations, the list of objective factors should include the fact that the Plaintiffs were kept informed about the structure of the agreements and their future sources of income. Further, the Plaintiffs were not responsible for portfolio management of the Fund at Adaly for more than a matter of months, and they were supervised by Braun.

[64] Further, an important feature of the factual matrix and critical to the context for their employment agreements, the Plaintiffs knew or reasonably ought to have known the following:

i. The term sheet clearly set out that JCC expected that the Plaintiffs and Braun would act as “co-portfolio managers” of the Fund. The section of the term sheet described financial terms for the Plaintiffs that reads: “Perf Fee share(yrs. 1-4) (total to be shared between 3 PM’s) 40%” and “Perf Fee share (yr.4 and beyond) -- Standard JCC performance fee allocation system” (Emphasis added);

ii. The Plaintiffs were copied on emails discussing drafts of the Combination Agreement and allocations of fees to Braun prior to signing their agreements;

iii. The Plaintiffs received at least one draft of the Combination Agreement which provided for the allocation to Braun of 40% of the performance fees earned by the Fund, as well as allocations of management fees;

iv. Braun told the Plaintiffs that he would share management and performance fees with them, which he was to receive under the terms of the Combination Agreement: he reduced those commitments to writing in side agreements dated November 29, 2012 and December 2, 2012;

v. Braun’s side agreements told the Plaintiffs that these were intended to clarify the issue of fee amounts payable as between the Fund and JCC. The side agreements stated they should be “read alongside” the Combination Agreement “for complete clarity.”

[65] Given these additional factors, I conclude that the context is consistent with the wording of the employment agreements: there was no commitment to pay any performance fees under the plain wording of those contracts. Further, the Combination Agreement provisions were for JCC to pay Braun the fees and allow him to allocate those to the Plaintiffs. This discretion, along with Braun’s stated intention to share these generously with the Plaintiffs, is an objective set of facts that support a conclusion that this transaction and the agreements, operating together, were consistent with industry standards and practices for remuneration. With all of this in play, I conclude that JCC was not required to explicitly state that performance fees were excluded from the employment agreements. It was clear to all the parties that they were not provided for in the employment agreements.

[66] The discretionary bonus provisions within the Plaintiffs’ employment agreements were clear and unambiguous. These provisions describe the potential for each of the Plaintiffs to receive an annual bonus based on personal performance and overall profitability of JCC.

[67] The bonus provisions in the Plaintiffs’ employment agreements are silent on performance fees. Performance fees are known sources of income earned by an investment fund. All the parties were familiar with this aspect of remuneration and the Combination Agreement plus Braun’s commitment to share management and performance fees is an objective fact known to the parties that informs this compensation arrangement. The industry standards for how these fees are shared with portfolio managers are highly variable, they can range from 20-70% of performance fees and can even vary between 0-100%.”

[68] I conclude that a plain reading of the employment agreements, in the context of the circumstances known to the parties at the time they were signed support a finding that performance fees were not owed to the Plaintiffs from JCC under the terms of those agreements.

ii. Were the Plaintiffs’ employment contracts ambiguous such that the contracts should be interpreted to include an entitlement to performance fees from JCC to the Plaintiffs?

[69] In the alternative, the Plaintiffs submit that if their employment agreements are found to be ambiguous as to whether a bonus includes, in this industry, performance fees, that the employment agreements ought to be interpreted as including performance fees because this would resolve the ambiguity in a manner most favourable to them under the contra preferentum principle: Oudin v. Le Centre Francophone de Toronto, 2015 ONSC 6494, 27 C.C.E.L. (4th) 86; aff’d 2016 ONCA 514, 34 C.C.E.L. (4th) 271, leave to appeal 2018 ONCA 571 refused [2016] S.C.C.A No.391.

[70] The Plaintiffs submit that industry practices support implying a term into their employment agreements for performance fee entitlement in favour of the Plaintiffs. Absent the Combination Agreement and the commitment from Braun to share fees with the Plaintiffs, the other aspects of the employment relationship support a finding that it would be a legitimate “ask” by portfolio managers with a prospective employer to consider building in performance fee entitlements to their employment contracts. However, in the unique context of this transaction, I cannot conclude that these facts support a finding that there was an implied term entitling these Plaintiffs to additional performance fees in their employment agreements with JCC.

[71] The Plaintiffs submit that the Combination Agreement should not be considered because it is a subjective piece of evidence, the Plaintiffs were not parties to it, nor did they receive a copy of the final signed Combination Agreement. I disagree. While there is no privity of contract between the Plaintiffs and JCC in the Combination Agreement, it was known to all involved to be a source of income to the Plaintiffs from their mentor/former employer/fellow portfolio manager Braun. It was referenced in the side agreements in which Braun committed to sharing management and performance fees with the Plaintiffs. The Plaintiffs were given drafts to the Combination Agreement and were referred to in that agreement. Practically speaking, the only reason that the Plaintiffs had employment offered to them was because JCC and Braun came to the terms set out in the Combination Agreement. I find that it is an objective, highly material part of the factual matrix. Its provisions led to the Plaintiffs receiving significant payments because of the increased profitability of the Fund in 2013 and 2014.

[72] I find that the employment agreements are not ambiguous. While the evidence suggests that Wiesblatt requested an explicit provision about performance fees from Stewart during their call on November 21, 2012, that request was considered and rejected by Stewart after consultation with Doherty. Bowen testified that he raised this omission as a point of grievance with Stewart in April of 2014.

[73] Where a party unsuccessfully seeks a term or a benefit from a counterparty, this may be a source of disappointment or irritation, but it does not necessarily create ambiguity in the contract entered into by the parties.

[74] The factual matrix at the time the agreements were entered into reveals that Braun, the Plaintiffs and JCC were aware of the two mechanisms by which the Plaintiffs would receive remuneration: salary, discretionary bonus and benefits from JCC and a generous sharing of management and performance fees from Braun by virtue of his agreement with JCC as memorialized in the Combination Agreement. The performance fee stream of income became the subject of a side agreement between the Plaintiffs and Braun.

[75] The delegation of discretion to Braun for sharing the 40% performance fees with the junior members of the team was consistent with the industry standards, as was the share contracted for between Braun and JCC at the time these agreements were finalized.

The December 2013 “Bonus” Payments

[76] On the question of the disputed December 2013 bonus payments to the Plaintiffs, I conclude as a matter of fact that these were discretionary bonus payments, made by the Defendant to the Plaintiffs in accordance with JCC’s obligations under the employment agreements.

[77] The timing of the payments and the rationale are consistent with discretionary bonuses. Stewart and Doherty met to distribute the bonus pool as was the practice in December. It was a subjective, discretionary exercise. This was confirmed by evidence from Danny Richardson, the former CFO for JCC.

[78] After their meeting with Stewart about the amount of the bonus payment, Wiesblatt sent an email to Bowen to estimate their income for 2013 as $166,000. The email showed this total as arising from the following:

i. “100 base +

ii. 15 fees +

iii. 36 mgmt fee +

iv. 15 jcc bonus (emphasis added)

[79] Wiesblatt complained to Bowen that when he was a 24-year-old research associate at another firm he earned $175,000.

[80] Wiesblatt testified at trial that he sent this email early in the morning and the reference to “bonus” of $15,000 from JCC was an error.

[81] At trial, the Plaintiffs testified they believed the $15,000 bonuses they received in December were part of their performance fee entitlement, and they believed they had received approximately 40% based on the recent statistics of the Fund value, with the second payment from Braun being his 40% that he had agreed to share with them. This would have meant the Plaintiffs were entitled to a split, along with Braun, of 40-40-10.

[82] I do not accept the Plaintiffs’ evidence that at the time they believed they were receiving their entitlement to 40% of performance fees independent of the Fund, or that JCC intended to share an additional 40% of the Fund performance fees with them as part of the implied terms of the employment agreements. This was not the practice at JCC. It is directly contradicted by Wiesblatt’s email at the time which set out his understanding to Bowen that the $15,000 payment was a “bonus” payment as distinct from fees and management fees.

[83] Although the bonus amounts were in the “ballpark” of the calculated performance fees for 2013, all of the evidence, including the plain wording of the contracts, the firms practices, the structure of the purchase transaction with Braun, the evidence of Stewart, Doherty, Richardson and the contemporaneous Wiesblatt email all support a finding that the payments to the Plaintiffs in December of 2013 were their $15,000 discretionary bonus payments.

[84] I find that the December 2013 payment to each Plaintiff was a discretionary bonus, wholly unrelated to performance fees. I conclude that JCC fulfilled its obligations to the Plaintiffs under their employment agreements in 2013 to pay them a discretionary bonus. JCC fulfilled its obligations to pay Braun performance and management fees and administered his direction to share these fees with the Plaintiffs in January of 2014.

[85] I make these findings of fact given the submissions by the parties on this point. As a matter of law and given my findings that the employment agreements were not ambiguous, it would not be necessary or appropriate to consider the parties’ conduct after the fact to interpret the agreements for the reasons well articulated in Link v. Venture Steel Inc., 2010 ONCA 144.

[86] I find that the employment agreements were not ambiguous. The principle of contra preferentum does not apply here.

iii. If there was no agreement requiring JCC to pay performance fees to the Plaintiffs under the terms of the employment agreements, is JCC liable to pay the Plaintiffs performance fees on a contractual quantum meruit basis?

[87] In the further alternative, the Plaintiffs argue that if there was no term or ambiguity requiring JCC to pay them performance fees, that the principles of contractual quantum meruit apply to their circumstances.

[88] Contractual quantum meruit is a discretionary remedy that may be granted where the parties have failed to agree on all aspects of a contract, but nevertheless work is done or goods provided for the benefit of a party such that the plaintiff/contracting party should be compensated. Komorovski v. Van Weel (1993), 1993 CanLII 8470 (ON SC), 12 OR (3d) 444 (Ont. Court (Gen Div.)); Spriggs v. Macdonald, [1982] S.J. No. 529 (Sask. Queen’s Bench)

[89] The Defendant argues that the Plaintiffs cannot receive compensation based on quantum meruit because they were compensated for their work in accordance with the terms of their employment agreements in place throughout their employment at JCC.

[90] The Plaintiffs received salary and bonuses from their employer, JCC. A a result of their employment and under side agreements with Braun, they received 40% of the performance fees earned on the Fund for the entire year in their final year of employment, as well as a share of management fees. The total amount of performance fees paid to the Plaintiffs for 2014 was $1,421,291.68. This amount was not pro-rated to reflect that they worked a part of the year.

[91] The Defendant submits that the outcome of the Plaintiffs’ quantum meruit request to receive a further 30% of the performance fees earned by the Fund in 2014 would mean that they would receive an amount that no similarly situated portfolio manager would have received at JCC. The highest amount of performance fees paid at JCC was to the CEO, Stewart. Stewart was portfolio manager for multiple funds, with direct client relationships, 13 years of experience as a portfolio manager at the time and a track record. Stewart received approximately 36% in 2013 and 34% in 2014 of the performance fees earned. As a result, it could not be said that such a payment would be what JCC would “have to pay to any other person to perform the same services.”

[92] I find that the Plaintiffs’ employment contracts compensated them for the work they were hired to do. There was no gap in services or goods provided. They were compensated for the services provided. The context-specific features of their remuneration arose from a three-sided set of contracts between the parties: the employment contracts between the Plaintiffs and JCC, the Combination Agreement between JCC and Braun, and the side-agreements between Braun and the Plaintiffs. This structure meant that JCC paid the Plaintiffs compensation directly under the terms of their employment agreements and delegated to Braun the discretion to share performance and management fees with the Plaintiffs. I find that the Plaintiffs were well aware of this structure when they signed their agreements with JCC.

[93] Based on these findings, I conclude that the Plaintiffs were compensated for the work they did at JCC, through the structure of agreements. There was no benefit received for services provided by the Plaintiff that were not compensated. I decline to order relief based on the principles of contractual quantum meruit.

iv. Did JCC breach a commitment made on April 25, 2014 to increase the Plaintiffs’ share of the Fund’s 2014 performance fees by 10%?

[94] The Plaintiffs seek in the alternative, a payment amounting to 10% of performance fees earned by the Fund in 2014 based on a meeting they had with Stewart, Doherty and portfolio manager Alex Davidson on April 25, 2014.

[95] The Plaintiffs submit that an oral agreement was made at that meeting by which Stewart on behalf of JCC agreed to increase their salary and pay them an additional 10% share of the performance fees earned by the Fund. They acknowledged that they were asked to interact more with the JCC team members and share ideas but testified that they were not advised of any “behavioural issues.” After the meeting they complained to each other that Stewart had not set out the discussion with them in writing.

[96] A verbal agreement is enforceable where: (i) an objective person would think that the parties intended to create a contractual relationship, and (ii) the essential terms of the alleged contract are sufficiently clear to suggest that the parties came to an agreement: Fernandes v. Goveas, 2016 ONSC 1992 at paras 38 to 40.

[97] I am satisfied from the evidence of Stewart and Doherty that the April 25, 2014 meeting was held to address ongoing problems with the Plaintiffs’ attitudes and participation in the work of the firm. According to Doherty’s evidence, Stewart led the meeting and told the Plaintiffs that he wanted to preserve the relationship. He agreed to raise their salaries by $15,000 and offered the potential to receive 10% of JCC’s share in the performance fees at year end as an incentive to improving their teamwork and attitudes, for example by attending morning meetings. The raise was put into effect shortly after the meeting. This action, despite Stewarts misgivings about the Plaintiffs’ loyalty to the firm, is consistent with his stated efforts to deal fairly and in good faith with the Plaintiffs.

[98] Stewart testified that he consulted with Doherty prior to the meeting and prepared handwritten notes, which he referred to and read from during the meeting. Stewart testified that he offered to raise the Plaintiffs’ salary which took effect a week later. He also offered an additional 10% direct share of the Fund performance fees on top of the 40% they expected to receive from Braun because of his combination agreement with JCC. The performance fee increase was to be payable if the Plaintiffs showed an improved attitude, teamwork, attended meetings and communicated with JCC investment team members.

[99] Stewart’s notes which he made prior to the meeting with Plaintiffs and which he testified he used to read from at the meeting were tendered on consent at trial. They read as follows:

-We really want this to work and think that it can work

-We think you guys are smart and are doing an excellent job on the fund

Compensation

-we have stuck to deal we made going into this partnership – we had consulting firm do some work for us, have very good sense of “mkt”

-size of fund is limiting factor – must be realistic

-JC Clark Model – low base, upside thru PF, no written guarantees

-BUT, we have heard what you have said and we are willing to make some modest changes

-Base salary ↑ by $15k ($115k base salary)

-We will consider ↑ PF share from 40% to 50% @ YE

o Martin has told us he intends to direct entire amount to you

o When Martin’s deal ends, we would intend to keep you both on same system

o This will be predicated on how we feel you are performing as members of JCC team (i.e. extra 10%)

 Our Expectations

o you guys act like team players, like you want to be here

o attend Bus Dev meetings

o participate @ offsites

o attending morning meetings (whenever possible)

o understand that JC Clark owns client relationship and Romain and I will manage these in [sic] bring PM’s in as necessary

[100] The Plaintiffs testified that Stewart promised them an additional 10% of the performance fees earned in 2014 by the Fund, in addition to the increase in their base salary. They testified that these increases were unconditional on any changes in their attitudes or performance.

[101] Despite his stated belief that he had received a promise from Stewart in April to an additional 10% in performance fees, Mr. Bowen wrote to a friend in June of 2014: “they pay me like shit and take more performance fees.” Had Bowen received an unconditional offer of 10% of JCC’s performance fees plus the 40% that Braun was turning over to him and colleague Wiesblatt, they would have been sharing 50% of the earned fees with JCC.

[102] I do not accept the Plaintiffs’ evidence that the 10% was offered unconditionally. The contemporaneous evidence of the communications leading up to this meeting among Doherty and Stewart reveals ongoing concerns about the Plaintiffs. Braun had cautioned them to improve their attitude.

[103] The recollections of the offer at the meeting from Stewart was supported by Doherty’s evidence and by the contemporaneous notes made by Stewart to use at the meeting. The content of the offer is consistent with Stewart’s stated goals: to see an improvement to the relationship, to respond to some of the Plaintiffs’ grievances about feeling undervalued while providing an incentive to them improving their engagement with the JCC team members and attitudes in the workplace.

[104] The “olive branch” extended by Stewart in April did not have the desired effect. He testified that after the meeting, the Plaintiffs’ behaviour did not improve. They isolated themselves from the JCC team and were difficult. According to Stewart, the Fund was doing so well, but it seemed to make the situation worse. He testified that “to be honest [the Plaintiffs’] egos were exploding and made the situation more untenable.”

[105] I find that the Plaintiffs did not meet the expectations set out for them at the April 25, 2014 meeting. They were terminated without cause on July 6, 2014. They did not earn the additional 10% of performance fees which Stewart had made conditional on improvements in their attitude or behaviour at the firm. It was an incentive. It was not earned. The Plaintiffs did not fulfill their side of the oral agreement. I decline to grant any relief for this part of their claim.

ANALYSIS OF THE BONUS PAYMENT ISSUES

i. In the circumstances of this trial, are the Plaintiffs entitled to make a claim for payment of discretionary bonuses, in addition to the claim for performance fees?

[106] At the close of trial, the Plaintiffs made submissions on added claims for discretionary bonuses owing to them at the time of their termination in 2014 for their work in that year.

[107] The Defendant submits that the Plaintiffs’ claim for unpaid discretionary bonuses in 2014 was advanced for the first time, in their closing argument at trial. As such, it would be manifestly unfair to JCC for this Court to make any findings of liability and award damages against the Defendant on a claim and facts not pleaded in the Plaintiffs’ Amended Statement of Claim.

[108] The Amended Statement of Claim describes a “Bonus Structure,” which the Plaintiffs defined as “the standard JCC performance fee allocation system of 40% to the lead portfolio manager, 30% to the investment team and 30% to JCC.” The Amended Statement of Claim seeks a claim to a greater share of the performance fees earned by the Fund during the Plaintiffs’ employment at JCC, under the “Bonus Structure.” The Statement of Defence responded to the claim. The opening at trial from the Plaintiffs, and the Defendant’s opening, concerned themselves with the question of performance fees owed to the Plaintiffs.

[109] The Plaintiffs argue that the bonus provisions were in play at the time of the pleadings. They rely on the final paragraph in their Reply which reads “In any event, the false allegations raised by JCC are irrelevant to the Plaintiffs’ entitlement to bonus payments pursuant to their Employment Agreements” (emphasis added). They characterize the Defendant’s pleadings issue as being merely technical.

[110] The Plaintiffs also submit that the Defendant was not deprived of the ability to call evidence about its practices for awarding bonuses to them or to other employees at JCC. They submit that Stewart was questioned at length, in both direct and cross-examination, about the discretionary bonus process.

[111] The Defendant submits that the Statement of Claim referred to bonus payments only in the context of the Plaintiffs’ claim for performance fees earned by the Fund, in what the Plaintiffs’ chose to describe as a “Bonus Structure.”

[112] The Defendant further submits that had the Plaintiffs pleaded and claimed discretionary bonuses in their Amended Statement of Claim, this would have altered its response. The Defendant submits it would have adduced comprehensive evidence on the following:

i. That Stewart, Braun, Khatri, Davidson, and John Dynes (another portfolio manager at JCC) (Dynes) are not appropriate comparators in respect of the discretionary bonus entitlements in 2014.

ii. The basis for the Plaintiffs’ discretionary bonus in 2013 differed from Stewart,

Khatri, Davidson and Dynes.

iii. That JCC exercised its discretion fairly in paying a pro-rated bonus amount on termination of $577 to the Plaintiffs.

iv. That JCC acted in good faith in not awarding a discretionary bonus of a higher amount.

v. That the Plaintiffs mitigated their losses and were not entitled to damages in lieu of a bonus.

[113] It is unfair to adjudicate a claim other than that pleaded or identified in the opening of a trial. “[T]he parties to an action are entitled to have a resolution of their differences based on the pleadings”: Link v. Venture Steel Inc., 2010 ONCA 144, at para 35.

[114] The Amended Statement of Claim does not mention or describe a basis for a claim to an additional discretionary bonus payable to the Plaintiffs. The Plaintiffs could have amended their claim. Had they done so outside the two-year limitation period, the Defendant could have relied on the Limitations Act, 2002 as an alternative defence: Grand Financial Management Inc. v. Solemio Transportation Inc., 2016 ONCA 175, at paras 53 to 55, leave to appeal ref’d 2016 CanLII 58416.

[115] Although the Plaintiffs have highlighted certain words used on the Amended Statement of Claim (for example, “bonus” “employment contracts,” “breach of contract,”). The Amended Statement of Claim seeks a calculated amount of the performance fees: $690,000 based on a “Bonus Structure” defined as “the standard JCC performance fee allocation system of 40% to the lead portfolio manager, 30% to the investment team and 30% to JCC.” There is no reference in the Amended Statement of Claim to the discretionary bonus or in the facts pleaded concerning a claim to a “discretionary bonus.” Indeed, the words “discretionary bonus” are not in the Amended Statement of Claim.

[116] The employment agreements were relevant and material at trial to determine whether the alleged “Bonus Structure” and entitlement to the performance fees claimed, were either provided for in the bonus provisions of the employment agreements, ambiguous or missing and therefore subject to contractual quantum meruit. This is what made the evidence about the awarding of “discretionary bonuses” and the bonus term in the employment contracts relevant and material. It was not because this was the focus of the claim for relief, but to distinguish this portion of the agreements from the entitlement to performance fees, which as described above arose from other agreements.

[117] The fact that the claim made evidence of the discretionary bonuses relevant to this claim, does not automatically convert a claim for performance fees into an alternative claim for discretionary bonuses at the end of trial. The potential for prejudice is amplified where, as here, the Defendant has articulated additional areas of inquiry and evidence it would have pursued had the claim be pled and/or articulated at the beginning of the trial. To allow a new factual and legal basis for a claim in these circumstances would be tantamount to a litigation “bait and switch”: where the nature of claim #1 permits some evidence to be tendered relevant to an unarticulated claim #2, in the context of claim #1, followed by consideration of arguments after that evidence has been heard on the basis that the court will now contemplate under claim #2 cannot be said to be fair.

[118] Therefore, I decline to consider making a finding of liability and an award of damages against the Defendant for discretionary bonus entitlements separate and distinct from their claim for performance fees. To do so would deprive the Defendant of the opportunity to address that issue completely by way of evidence during trial. This is not a mere technicality but a matter of fundamental fairness.

COLLATERAL ISSUES

[119] The Plaintiffs raised three additional issues. including JCC’s adherence to best execution rules, which was brought to JCC’s attention early on during their employment. Following an exchange with Braun and JCC management, JCC made some changes to the calculation of trading commissions for the Fund. The Defendant submits that no finding is required on this question, although evidence was heard on the point, on the basis that it is collateral to the issues in dispute. I agree. The focus of the trial was not on the relative merits and fairness to investors of the calculation of trading fees charged by JCC.

[120] The Plaintiffs’ second issue related to alleged irregularities in the allocation of the 2013 performance fees for the Fund. The evidence did not establish an irregularity, and the evidence of tracing of this amount was incomplete. The financial statements were not the focus of the issues at trial. I accept the Defendant’s submission that this is a collateral issue and make no findings on this point.

[121] The Plaintiffs raised several times the monitoring of their emails by the CCO, Doherty. They seek no relief in that regard, but the implication of their submission is that this was an intrusive, unnecessary step taken by JCC. Doherty explained her decision to do so, including her obligations as the firm CCO and the heavily regulated environment in which investment funds operate. The content of the emails reviewed led JCC to develop other concerns, including Braun’s suggestions to the Plaintiffs that they might leave JCC. I make no findings that the monitoring of the emails by JCC, in a regulated investment firm such as this, was inappropriate or improper.

CONCLUSION

[122] I dismiss the Plaintiffs’ claims.

[123] If the parties are unable to agree as to costs, they may make brief written submissions (maximum 4 pages exclusive of attachments) on or before April 30, 2021 on a timetable for exchange to be agreed among counsel, or as set by me after hearing in-writing from the parties if they are unable to agree.

Leiper J.

Released: March 23, 2021

COURT FILE NO.: CV-16-556731

DATE: 20210323

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

JAMES BOWEN and JONATHAN WIESBLATT

Plaintiffs

– and –

JC CLARK LTD.

Defendant

REASONS FOR JUDGMENT

Leiper J.