Court File and Parties

COURT FILE NO.: 19-80545 DATE: 20210615

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

AOD CORPORATION Applicant

– and –

MIRAMARE INVESTMENT INCORPORATED and ALAIN MERCIER Respondents

COUNSEL: Jeffrey Langevin, for the Applicant Pierre Champagne, for the Respondent, Miramare Investment Incorporated Alain Mercier, self-represented

HEARD: June 10, 2021

REASONS FOR decision

Roger J.

Background

[1] This Application relates to the validity of a patent agreement dated January 30, 2012. The Applicant, AOD Corporation, (“AOD”) argues that the patent agreement is unenforceable because its president at the time, the Respondent, Mr. Alain Mercier (“Mercier”), did not have authority to bind the corporation to this agreement without the required majority of 67% of its shareholders. Following this agreement, a patent was obtained by the Respondent, Miramare Investment Incorporated (“Miramare”). The parties have since been unable to agree on the effect of the patent agreement, on how to monetize the patent, and, importantly, on how to share in its monetization (if any). As a result, despite the patent issuing in January 2018 and having a limited duration of up to 2025, the parties are at a standstill.

[2] AOD brought this Application seeking three declarations:

• that Mercier, had no authority to bind AOD and its shareholders to any agreement that would lien, transfer, or sell any asset belonging to AOD without the approval of two-third of the shareholders (in other words, that the patent agreement referenced above is unenforceable); and

• that it is the sole owner of the patent that is the subject of this litigation; and

• that it has the sole authority to control and monetize the patent.

[3] Miramare opposes the above and has brought a counter application seeking the dismissal of AOD’s Application and orders that:

• AOD reinstitute Miramare’s authority to instruct legal counsel while providing the necessary power of attorney for that counsel, as chosen by Miramare, to deal with the american patent office (USPO), so that Miramare, at its own expense, can ensure proper maintenance of and enhancement to the patent until it is sold; and

• Miramare may proceed to the sale of the patent through an arms-length international patent broker to an arms-length third party, the net proceeds of which, after marketing, brokerage and legal costs, will be held in escrow until any matters of financial warranty to a buyer, outstanding damages or liabilities between the parties or disputes as to the sales terms of the agreement are agreed upon or, in the alternative, adjudicated.

AOD’s Application and Arguments

[4] AOD filed one affidavit in support of its application; an affidavit signed by its current director, Mr. Lino Mastromonaco (“Mastromonaco”) on May 13, 2019.

[5] AOD says that it has one tangible asset, a US patent granted in January 2018 as patent number 9, 876, 731 (apparently aimed at controlling web platforms to support multi-user access to online software applications). The application for this patent was filed much earlier by AOD’s predecessor, Wrapped Apps Corporation (“WAC”). WAC failed in about 2008 because of a lack of funding and its intellectual property was transferred to its secured creditors. The operating mind, director and shareholder of both WAC and AOD was Mercier. After WAC was wound up, Mercier acted as trustee for the secured creditors, who maintained an interest in the pending patent applications. The secured creditors were given an option to expire in 2019 to convert their interest into shares of AOD; most apparently did.

[6] AOD alleges that in 2012, Mercier, without the authority of the shareholders of AOD and without any ability to bind AOD, entered into an agreement with Miramare to assist in the financing of the advocacy required to have any of the pending patents granted. AOD alleges that Miramare entered into this agreement with Mercier for a financing agreement. AOD also alleges that Mercier did not execute the agreement with Miramare on behalf of AOD, but rather, on behalf of the secured creditors of the intellectual property. AOD alleges that these are not one and the same as the shareholders of AOD and, in any case, that Mercier acted without any corporate authority from AOD. AOD alleges that Miramare went about financing the legal fees and disbursements needed to advance the patent pending applications and that, ultimately, Miramare was a financier for the advancement of the patent pending applications, one of which ultimately came to fruition.

[7] AOD argues that it is not bound by any agreement entered into by Mercier, without its consent and without a two-third majority of the shareholders of AOD. AOD also argues that regardless, Miramare did not fulfil the terms of its agreement with Mercier for the purpose of being permitted to further negotiate with AOD for payment of its expenses in advancing the pending patent applications. Notwithstanding, AOD takes the position that Miramare should be paid, as Miramar sets out in its pleading in the alternative, its entire fee for expenses in advance of patent pending applications. AOD argues that Miramar has no title to the patent, that it is solely owned by AOD, and that Miramare has no ability to negotiate the monetization of the patent.

[8] The parties have been unable to reach an agreement on how to market the patent. AOD seeks to pay Miramare for its out-of-pocket expenses and professional services and to go about marketing the patent as it sees fit. AOD seeks a declaration that the respondent, Mercier, had no authority to bind AOD and its shareholders to any agreement that would lien, transfer, or sell any assets belonging to it. AOD “relies on the principle of privity of contract and asserts that it has no duty of care to Miramare”.

[9] The parties are also involved in a legal action brought by Miramare, seeking damages of $968,000 for the alleged breaches of contract against Mastromonaco, the current directing mind of AOD, Mercier and AOD.

Mercier’s Arguments

[10] Mercier filed three affidavits on this Application. Although he signed the patent agreement at issue, and although he is named as a respondent, it is apparent from his affidavits and from his presentation at the hearing of this Application that his interests are aligned with those of AOD.

[11] Mercier was a director and shareholder of WAC and is currently a shareholder of AOD. He started WAC with Mr. Johnson (“Johnson”), now a principal of Miramare, in 2001. In his affidavits, he states that a shareholders’ agreement required a two-third majority of shareholders to sell or transfer assets of the corporation. In 2008, the intellectual property of WAC included six trademarks and nine patent applications (three in Canada, three in the US and three international). In 2008, the financing of WAC became more difficult and it became necessary to transfer to the secured creditors the intellectual property of WAC. Secured creditors were also given a 10-year option in the new corporation, AOD. In March 2009, WAC defaulted on loans and the secured creditors of WAC became the owners of the intellectual property of WAC. The secured creditors chose Mercier as their trustee. The remaining assets of WAC were rolled into AOD and Mercier was the president of AOD until May 2019. Once a secured creditor of AOD exercised his or her option, he or she became a shareholder of AOD and was no longer represented by Mercier as trustee of the secured creditors.

[12] In his affidavit, Mercier states that as a trustee of the secured creditors, he had no authority to act in the name of the shareholders of AOD as it relates to the sale or transfer of the assets of AOD. He states, as well, that in March 2009, he recruited the services of Mastromonaco to assist with the financing and maintenance of the intellectual property of the secured creditors. He swears that, in the context of required financing to maintain the intellectual property of the secured creditors, on January 30, 2012, he signed, as trustee for the secured creditors, a financing agreement drafted by Johnson and his Miramare partners for the purpose of financing legal costs associated with the pending patent applications. He states that, in January 2018, a patent was issued in the US and Miramare made an offer to the shareholders of AOD to commercialize that patent without paying the amount provided in the agreement. He states that the parties have since been unable to negotiate an agreement for the commercialization of the patent.

[13] He alleges that Johnson knew or ought to have known that a special resolution of 67% of the shareholders of AOD was required in order to transfer or sell an asset of AOD.

Miramare Counter Application and Arguments

[14] Miramare argues that on July 13, 2011, following negotiations and joint drafting under the temporary designation “New Investors” (NI), Miramare signed a licensing contract with AOD, as well as with the WAC debenture holders who held options in AOD, entitled “Patent Agreement”.

[15] It states that this contract provided NI (which subsequently became Miramare) with the authority to take over the processing of AOD’s patent applications, assuming all attendant risks and costs, in return for: i) an exclusive license in perpetuity to exploit any AOD patent that Miramare was successful in having approved by the relevant patent authority, subject to not competing with AOD itself if it ever became operational, and paying to AOD 2.5% of its gross revenues therefrom, and ii) an option to buy any approved patent for up to $107,000 and 2.5% of any subsequent sale of the patent to a third party, if that party was not interested in continuing payment of 2.5% of its revenues therefrom. Under the patent agreement, NI/Miramare would then undertake all of the risks and provide all of the professional expertise and financing needed to attempt to monetize the patents in exchange for this consideration. It argues that the agreement was clearly more than just a simple financing arrangement.

[16] Miramare decided that it would be the corporate vehicle to assume the 2011 contract with AOD and a revised patent agreement (the patent agreement) was executed on January 30, 2012, on the same terms as previously agreed to in 2011.

[17] Miramare states that, in late 2017, after six years of work, it appeared that Miramare was going to be successful in having one of the five remaining patent applications granted. Miramare informed AOD that it wished to exercise its option to sell the patent. Miramare states that AOD agreed and that Miramare paid for the requisite due diligence and legal drafting of a revised and restated agreement. Miramare argues that this revision was needed to reflect the due diligence results of both AOD’s inadequate title documentation and its lack of resources to provide the necessary financial warranties to a purchaser at sale, resulting in the need for the sales proceeds (net of brokerage and legal fees) to be held in escrow before distribution.

[18] Miramare states that the revised and restated patent agreement, which had been jointly drafted between AOD and Miramare, was ready for ratification in June 2018, at which point Miramare was informed that the Board of AOD, specifically Mastromonaco, had refused to put the agreement to AOD shareholders and that AOD was breaching the agreement by revoking Miramare’s power of attorney authority over the patent. It says that AOD suddenly ceased to comply with the agreement, refused to recognize its validity, replaced its president, Mercier, and filed this application seeking a declaration that the agreement is invalid.

[19] Miramare disputes AOD’s allegations that the patent agreement was never valid and that Miramare was just a financier. It disputes AOD’s allegations that it had a unanimous shareholder agreement which required a special resolution of the shareholders prior to the sale, assignment, transfer or encumbrance of all or substantially all of the intellectual property of the company. It argues that AOD has failed to bring any evidence to show that there was indeed a unanimous shareholder agreement in place at the time the patent agreement was executed in 2011.

[20] In any event, Miramare argues that it is not responsible for the internal affairs of AOD, including an alleged unanimous shareholder agreement, by reason of the common law rule of indoor management and/or s. 18(1)(a) of the Canada Business Corporations Act, R.S.C., 1985, c. C-44 (“CBCA”).

Issue

[21] This Application concerns the validity of the patent agreement.

Analysis

[22] I have concluded that the patent agreement is valid. Here are my reasons.

[23] Despite the many allegations of AOD, Mastromonaco, and Mercier to that effect, there is no unanimous shareholder agreement to be found in the evidence filed on this Application.

[24] This Application was started in 2019 and AOD, Mastromonaco and Mercier have to date been unable to locate and produce a unanimous shareholder agreement. Only one agreement referencing a 67% majority of shareholders was produced and it is signed by Mastromonaco on November 1, 2011. Mercier alleged during the argument of this Application that shareholders’ agreements referencing a 67% majority had been signed by other shareholders of AOD but admitted that none other were in the evidence filed on this Application. He also admitted that there is no evidence before the Court whether such an agreement was adopted unanimously by the shareholders of AOD. There is a resolution of WAC in the evidence but that is not relevant to the disposition of this Application as WAC was not the owner of the patents and was no longer in existence in 2011 and 2012. On the other hand, a document found at Exhibit E of Miramare’s Application Record from a Quebec governmental authority contradicts the allegations of AOD and of Mercier as it indicates that there is no unanimous shareholder agreement for AOD.

[25] During the hearing of this Application, I asked AOD and Mercier to identify in the evidence any valid and relevant unanimous shareholder agreement – they could not. As well, both were unable to convincingly articulate why Johnson, who executed the agreement on behalf of Miramare, or Miramare, allegedly knew or should have known that Mercier lacked authority to sign the patent agreement.

[26] As a director and president of AOD, Mercier had apparent authority to legally bind AOD to the patent agreement.

[27] Miramare by its principal, Johnson, has filed a number of affidavits on this Application. In his affidavits, Johnson swears that he had no prior knowledge of any limitation on Mercier’s authority as president of AOD when it entered into the July 13, 2011 patent agreement and the January 30, 2012 patent agreement. Other than bare allegations, no evidence contradicts this and when asked during the hearing of this Application, Mercier could not explain how Johnson or Miramare could have known that Mercier lacked authority as Mercier and AOD could not point to any document or evidence that limited the authority of Mercier to sign those patent agreements.

[28] The common law rule of indoor management is applicable. Its object is to protect third parties transacting with a company in good faith, unaware of the complex internal management of the company. The principle was expressed in McAteer v. Devoncroft Developments Ltd., 2001 ABQB 917, 99 Alta. L.R.(3d) 6; aff’d on other grounds 2007 ABCA 137, 75 Alta. L.R. (4th) 129, as follows:

... The intent and operation of the “indoor management rule”, discussed infra, is, in the simplest of terms, that parties without knowledge of irregularity regarding the management of a corporation, need not make inquiries as to whether all necessary internal approvals within the corporation for a transaction are in place and in order: K.P. McGuinness, The Law and Practice of Canadian Business Corporations (Toronto: Butterworths, 1999) at 241-243, 257-258; J.H. McKnight Construction Co. v. Vansickler (1915), 24 D.L.R. 298 (SCC); Bank of Nova Scotia v. Leblanc, [1954] 2 D.L.R. 579 (NBSCA.D.); and Gray v. Yellowknife Gold Mines Limited and Bear Exploration and Radium Limited (No.1), [1945] O.R. 688 (Ont. H.C.J.), varied [1947] O.R. 928 (C.A.).

[29] In Canadian Western Bank v. Shieldings Inc, [1994] B.C.J. No. 2760 (S.C.), the Court states:

166 Where an agent puts him or herself out as having the authority to bind the principal, and such is the natural inference from the conduct of the parties and the surrounding circumstances, a third party is generally entitled to transact with the agent on the terms of such agent's usual authority: if he does so, the company will be bound by what the agent has done. This is generally referred to as the “indoor management rule” otherwise known as the rule in Turquand’s case. [Royal British Bank v. Turquand (1856) 6 E & B 327.]

167 The following definition of this rule was adopted by Mr. Justice Owen-Flood, in Cavell Developments v. Royal Bank of Canada (S.C.), aff'd (1991), 54 B.C.L.R. (2d) 1 (C.A.):

... if the articles of association give a power, persons dealing with the company, though they are deemed to have notice of the extent of the power, are not bound to inquire into what is called the “indoor management” of the company to see whether the power has been properly and regularly exercised with all the prescribed formalities, and if they find an officer of the company openly exercising an authority which the directors have power to confer upon him, they are relieved from the duty of further inquiry and are entitled to assume that the power has been regularly and duly conferred.

[30] Consequently, and in accordance with the common law rule of indoor management, Miramare never had any obligation or duty to investigate the internal affairs of AOD to ensure that Mercier had the actual authority to bind AOD. It was appropriate for Miramare to assume that Mercier, as director and president of AOD, had authority to bind the corporation.

[31] Section 18 of the CBCA is also applicable. It provides:

18(1) Authority of directors, officers and agents

No corporation and no guarantor of an obligation of a corporation may assert against a person dealing with the corporation or against a person who acquired rights from the corporation that

(a) the articles, by-laws and any unanimous shareholder agreement have not been complied with;

18(2) Exception

Subsection (1) does not apply in respect of a person who has, or ought to have, knowledge of a situation described in that subsection by virtue of their relationship to the corporation.

[32] Mercier was president of AOD at the time of the execution of the patent agreement, and s. 18 of the CBCA also applies to prevent AOD from avoiding the application of the patent agreement executed by Mercier, as a representative of AOD.

[33] Regarding AOD’s and Mercier’s allegations that there was a unanimous shareholder agreement which prevented AOD from being bound by the patent agreement, s. 18(1)(a) of the CBCA provides that a corporation may not assert against any person who has acquired rights against it that a unanimous shareholder agreement has not been complied with to remove itself from the application of an otherwise binding agreement. Moreover, and in any event, a valid and applicable unanimous shareholder agreement is not in the evidence and I conclude that none is applicable.

[34] Section 18(2) of the CBCA and the indoor management rule provide that this rule will not apply if Miramare had knowledge or should have known of the existence of a unanimous shareholder agreement for AOD or of other restrictions on its president. Here, despite the many bare allegations of AOD and Mercier, the evidence does not reveal any applicable restriction and does not support a finding that Miramare and/or Johnson had or ought to have had knowledge that such a document or any other restriction existed. As stated above, despite their allegations, AOD and Mercier have failed to bring forward any such evidence.

[35] The common law indoor management rule will not apply where circumstances surrounding the contract are suspicious. In this case, there was nothing suspicious about this arrangement in 2011 and 2012. The factual matrix indicates that, at that time, AOD had very little activity and almost no income. It had been unsuccessfully looking for additional financing for some time and had no means to prosecute (or push forward) its pending patent applications. In a November 2010 report to its stakeholders, which included Mastromonaco, Mercier reported that AOD could hardly continue. It made sense that AOD would be willing to license another company, who appeared prepared to raise the money required to develop and implement a new strategy for the approval of the patents, in order for AOD to obtain some form of revenue from the WAC patent applications, rather than abandoning those that had yet to lapse.

[36] To have Mercier contract this arrangement with Miramare is what one would expect in the circumstances. Indeed, Mercier reported positively about the patent agreement to the stakeholders of AOD in November 2011. In his November 30, 2011 report to AOD’s stakeholders, Mercier reported that, to protect their intellectual property, AOD had concluded a licensing agreement in July 2011. All of the shareholders of AOD, including Mastromonaco should then have been aware of the July 2011 agreement concluded by Mercier, yet there is no evidence before this Court of any complaint about this made at the time or prior to 2018 after Miramare succeeded in obtaining a patent and wished to proceed as per the patent agreement.

[37] I find that there was nothing suspicious or anything that could raise a suspicion that something was not done properly within AOD in the circumstances, especially after Mercier signed in both his capacity of trustee and as president, and then publicly announced the initial arrangement to AOD shareholders and debenture holders and invited their enquiries.

[38] I have reviewed the evidence and find that a trial is not required to fairly dispose of this Application and Counter Application. Although the parties have made numerous allegations, and although some facts are in dispute, there are no material facts or any genuine issues in dispute that require a trial as the evidence presented allows me to fairly and justly decide the dispute and is a more timely, affordable and proportionate procedure.

[39] There has been no cross-examinations and I have not been made aware of any such requests being made and/or refused. The parties have filed numerous affidavits and documents and have had ample time to ensure that I be presented with a complete record. Indeed, I adjourned the application in March in part to allow Mercier time to file an additional affidavit, which he did. The evidence presented allows me to fairly conclude that there was no unanimous shareholder agreement or other restriction on Mercier when he signed either of the patent agreement, and that Miramare could not have been aware of any. Moreover, the evidence allows me to interpret the patent agreement and give required directions to the parties.

[40] The primary objective of contract interpretation is to give effect to the intention of the parties at the time of contract formation. The Court must read a contract as a whole, with the words used given their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of the contract - the factual matrix. The subjective intentions of the parties are not relevant. However, while the court considers the circumstances of a written contract, those circumstances cannot overwhelm the words of the agreement. The interpretation of a written contractual provision must always be grounded in the text and read considering the entire contract. If there is doubt or ambiguity about the meaning of a contractual provision, the principle of contra proferentem requires that it be interpreted against the party who drafted the agreement. As well, if a contract remains ambiguous after considering its text and its factual matrix, the court may consider the subsequent conduct of the parties. There is also a general organizing principle of good faith underlying many facets of contract law, and a general duty of honesty in contractual performance. Considerations of good faith inform the process of giving effect to the intention of the parties during contractual interpretation. (See: Sattva Capital v. Creston Moly, 2014 SCC 53, [2014] 2 S.C.R. 633, at p. 656 – 658; Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, at paras, 45, 63 – 65, 73, 93; Shewchuk v. Blackmont Capital Inc., 2016 ONCA 912, 404 D.L.R. (4th) 512, at paras. 39 – 46; RBC Dominion Securities Inc. v. Crew Gold Corporation, 2017 ONCA 648, 73 B.L.R. (5th) 173, at para. 45; Consolidated Bathurst v. Mutual Boiler, [1980] 1 S.C.R. 888, at p. 899 – 900; and Clarke v. Alaska Canopy Adventures LLC, 2014 ONSC 6816, at paras. 34 – 37.)

[41] Here, as indicated above, the evidence and factual matrix contradict the allegations of AOD and of Mercier. As well, AOD’s affidavit significantly relies on hearsay, even on contentious issues, and despite being contradicted by Miramare and by some of the documentation (or absence of alleged documentation) was never corrected. An important example is paragraph 12 of the affidavit of Mastromonaco which is clearly contradicted by the obvious absence from the evidence of the alleged shareholder agreement. There is no evidence of relevant restrictions on Mercier’s ability to bind AOD and no evidence of how any restriction could have been known to Miramar. On the other hand, the evidence of Miramare is generally supported by the documentation. Indeed, considering the evidence and factual matrix, it made sense for the parties to enter into the patent agreement.

[42] Read as a whole, with the words used given their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time, I find it impossible to interpret the patent agreement as is argued by AOD and Mercier. For example, it would leave Miramare with no compensation for its successful prosecution of a patent as the compensation provided in the agreement flows towards AOD. By opposition, the interpretation suggested by Miramare accords with the language of the agreement read as a whole.

[43] The patent agreement, like the 2011 agreement, was signed by Mercier warranting that he was doing so as the nominee for the secured creditors as a director and as the Chief Executive Officer of AOD, with authority to bind these parties. It provides clearly that Miramare acquires an exclusive right to exploit the patent free and unfettered, except as provided by the patent agreement. That is the equivalent of a licensing right or licensing agreement in favour of Miramare. In return, the patent agreement provides that AOD is to receive, amongst others, a stipulated percentage of Miramare’s gross revenues generated from the patent. In addition, the patent agreement provides to Miramare an exclusive option to purchase the patent at any time by paying to AOD its legal fees then incurred in order to advance the patent, up to $107,000. It is not a complicated agreement and its language is clear and unambiguous.

Conclusion

[44] The Application is therefore dismissed.

[45] The patent agreement of January 30, 2012 is valid and enforceable against AOD.

[46] The Counter Application is allowed, and the following is ordered:

a) Miramare is the only entity that may deal with the patent, as per the patent agreement.

b) As provided at paragraph one of the patent agreement, Miramare has the exclusive right to exploit the patent free and unfettered, except by the terms of the patent agreement, in return for the payments provided in the patent agreement.

c) As provided at paragraph nine of the patent agreement, Miramare has the exclusive option to purchase the patent at any time by paying to AOD its legal fees, then incurred to advance the patent, up to $107,000.

d) Miramare has full authority to instruct legal counsel while providing the necessary power of attorney for that counsel, as chosen by Miramare, to deal with the United States Patent Office (USPO), so that Miramare, at its own expense, can ensure proper maintenance of and enhancement to the patent until it is sold or licensed.

e) Miramare may proceed to the sale or licensing of the patent through an arms-length international patent broker to an arms-length third party, for its fair market value, the net proceeds of which, after marketing, brokerage and legal costs, will be held in escrow with Gowlings until any matters of financial warranty to a buyer, outstanding damages or liabilities between the parties or disputes as to the sales terms of the agreement are agreed upon or, in the alternative, adjudicated.

f) Upon the sale or licensing of the patent, Miramare shall pay to AOD all amounts owing to AOD under the patent agreement.

g) The parties may return before me for any issues relating to the finalization and implementation of this order, by contacting the trial coordinator.

[47] If the parties are unable to agree on the costs of this Application and Counter Application within the next 10 days, brief written submissions not exceeding five pages and five enclosures, together with a costs outline, shall be sent to my assistant by Miramare by 4:00 p.m. on July 5, 2021, by AOD and Mercier by 4:00 p.m. on July 12, 2021, and any brief reply by Miramare by 4:00 p.m. on July 16, 2021. I ask the parties to kindly advise me if they resolve the issue of costs but I will nonetheless assume that the issue of costs has been resolved if I do not receive any written submissions, or hear differently, by July 16, 2021.

Mr. Justice P.E. Roger

Released: June 15, 2021