1 Plaintiff CEMAR ELECTRO INC. (Cemar) Seeks Damages from Defendant GROB TEXTILE AG (Grob)

Cemar Electro inc. c. Grob Textile, a.g. 2014 QCCS 5814

SUPERIOR COURT

CANADA PROVINCE OF QUÉBEC DISTRICT OF MONTREAL

N° : 500-17-054880-094

DATE : DECEMBER 3, 2014 ______

PRESIDED BY : HONOURABLE RICHARD NADEAU, J.S.C ______

CEMAR ELECTRO INC.

PLAINTIFF vs.

GROB TEXTILE AG

DEFENDANT

______

JUDGMENT ______

[1] Plaintiff CEMAR ELECTRO INC. (Cemar) seeks damages from defendant GROB TEXTILE AG (Grob), for not having given sufficient efforts in executing an exclusive distribution contract entered into between the parties on October 1st 2003.

[2] The damages claimed are, for part, lost revenues on anticipated sales not made for the period between the signing of the contract up to August 28, 2008 where a demand letter was sent to defendant by plaintiff's attorney and which seems to have been considered by both parties as the formal termination of their contractual relationship. These lost sales damages and, consequently lost profits claimed, amount to 2,791,800 $, as amended during the trial (October 16, 2014). 500-17-054880-094 PAGE : 2

[3] The other amended damages claimed (2,690,000$) are for the lost market value of plaintiff's laser detection system, the object of the contract, from August 28, 2008 to an unknown date in the future…(infinity?).

[4] Defendant's position is that the contract was negociated and signed initially for a six months period, was renewed automatically to August 2008, but could or should have been terminated at any time by plaintiff if it was not satisfied with the sales results. It's lack of reaction was and should be construed as acquiescense of modest sales over the years, and allows no claim for damages, especially as the potential market for plaintiff's invention was and continues to be, to it's knowledge, very limited and very competitive.

[5] In order to determine who is right or wrong, a finding of the pertinent facts is in order at this point.

THE FACTS :

[6] Cemar is a Quebec corporation founded in 1983 by Walter Spirig (Walter), a Swiss citizen who had emigrated to Canada in 1965 and who had experience in electricity, electronics. He later developed and made sales of laser detection systems for the wood industry and in specialized medical fields.

[7] In the early eighties, and with the participation of an engineer, Walter eventually developed a break detection laser system (loom laser) for the textile industry which appeared to be a major breakthrough compared to more traditional break detection systems, the most important one of which is the Drop-Wire system (drop-wire), and it's many variations which have been and still are, today, the most utilised warp detection systems in use all over the world.

[8] For the uninitiated reader, a short version of the long exposé on weaving machines made by different witnesses to the undersigned at trial is in order.

[9] Few people other than those in the trade or close to it realize the importance of weaving and knitting in our modern world. While our ancestors of long ago covered themselves with tanned skins of the animals they killed to survive and this, for centuries, the later invention of primitive knitting and weaving apparels allowed them a giant step of progress in clothing, bedding and related uses.

[10] After a certain evolution over the centuries and stillness or small progresses in the Middle Ages, an industrial machine was invented in the 18th century which was to revolutionize the whole industry. Mills, small or enormous, were opened and started producing numerous products, in most countries in the world, to the point where, today, there are approximately 4 to 5 million weaving machines producing everything from textiles to rugs, automotive or commercial finishes, home and industry coverings, filters for paper making to filters for medical uses and so forth. 500-17-054880-094 PAGE : 3

[11] And because these weaved products are an assembly of multiple threads or strands, sometimes up to 55,000 on some wide machines, these threads coming simultaneously from individual bobbins through different channels and fed into the weaving machines must be controlled continuously as to tightness, regularity and breakage, for a broken strand means an imperfection and rejection or downgrading of part of the production.

[12] Hence, the necessity of a mechanism to monitor continuous flow and to stop the machine when there is such a breakage so that the broken ends can be retied and then, to allow continuation of the weaving process.

[13] The drop-wire monitoring system was probably invented in the 19th century. By passing every strand of fiber in an individual drop wire needle mounted on a weaving machine in action, the breakage of a thread makes the needle drop, which stops the machine nearly instantly so the operator can locate and re-tie or mend the broken thread immediately and restart the weaving process.

[14] It is said that this system, notwithstanding certain disadvantages, like having to pass every strand in an individual needle when the machine is loaded, is nearly 100 % trustworthy as every breakage is instantly discovered and repaired in minutes because the fallen needle can be found rapidly.

[15] But there are newer and less invasive systems around, including the one invented by Walter in the early 1980's when he discovered that a laser beam from an emitter to a receiver on the other side, placed in different strategic areas of a weaving mill could instantly « see » a broken thread and stop the machine to allow a repair. It is however known in the trade that the efficiency of this laser system is less than that of a drop-wire.

[16] It is therefore originally at the behest of one client that an experimental no- contact laser detection system was developed and eventually put on the North American market first by Walter. As to Europe, he eventually hired his younger brother Paul Spirig (Paul) who was still residing in Switzerland and who had a friend from school days working in a large weaving operation near his home that eventually would become a large client for plaintiff.

[17] This corporation, Sefar, was specialized in filter weaving for different uses, some of which were for medical purposes and needed reliability and as little contact as possible with the specialised monofilament or polyfilament threads it used.

[18] Through demonstrations given at his home or on the premises, Paul was able to convince the people at Sefar to replace old drop-wire systems on some of their numerous machines with the new Cemar lasers, especially for their large looms (over 5.4m. in width). They also eventually procured other clients in Europe, as shown on 500-17-054880-094 PAGE : 4 exhibit P-2, a list of clients serviced directly by Cemar prior and up to the signing of the distribution contract.

[19] The result of the combined sales efforts of Walter and Paul was such that, between 1986 and 1997, they were able to sell and install 371 laser systems, a yearly average of 35, units that evolved from the original model as improvements were incorporated on later and newer systems. (Schedule 6 of P-12, P-30 in part).

[20] But the number of sales dropped in the years 1996 and 1997 to a yearly average of 14 units which could be explained either by a constriction of the market, or a much too limited sales force that did not allow the Spirig brothers to find and develop other clients wherever they might be.

[21] This pattern of sales stayed approximately at the same level in the following years for a yearly average of 14 sales of units from 1998 to 2003 (Schedule 6 of P-12, P-30 in part), which caused Walter to start thinking about selling this line of Cemar's products to anyone he could find who would be interested and who would have a bigger client potential.

[22] And so, in May of 2002, Paul was referred by a contact at Grob, one of, in not, the largest manufacturer and international distributor of drop-wire systems, to one M. Schmidt who then was an engineer with the company, a member of it's board of directors and responsible for business development. As there was an interest at Grob, a demonstration was organized at Paul's home which was attended by a few persons from Grob, including it's president M. R. Karle and Schmidt, on July 1st, 2002. After the demo at Paul's, they all went to see lasers in operation at Sefar which was nearby and where Cemar lasers were used as well as similar units from Protechna, it's principal and biggest competitor in the field of laser detection systems.

[23] During the visit, Paul explained to them that the weaving laser was a small part of Cemar's operation, that their principal lines were in the wood and medical businesses and that they first and foremost wanted to sell that weaving loom laser line. No price was mentioned.

[24] On the way back to their offices, it was decided that Schmidt would look deeper into this product that they did not really know, and eventually draft a letter of intent to preserve confidentiality and to allow both sides to explore their interests further. The interest for Grob in this niche market, as Karle had advised Paul earlier, was that it would complement their world-wide drop-wire system sales even though the possibilities for development seemed to be solely in the large looms and mono-filament specialized clientele.

[25] A letter of intent was prepared and signed by Grob and sent to Paul on July 12, 2002 (P-31 and P-31a). 500-17-054880-094 PAGE : 5

[26] From then on, Schmidt made a study of the potential market for this product which he prepared and produced to his superiors in late November 2002 (D-17) and which concluded at potential world sales of from 100 to 150 units/year in a niche market where the competition was virtually unknown, other than Protechna, as was the eventual market. This study was not remitted to the Spirig brothers. He therefore recommended that Grob not purchase the system but rather that they get into an exclusive distribution agreement with Cemar on a trial basis to explore things further. He then sent an email to Walter and Paul outlining a proposal based on distribution rather than an outright purchase. (P-22).

[27] An internal Grob memo summarizing a February 26, 2003 visit to Paul's home (D-3) analyses and summarises the discussions on training, sales territories to be determined, after sales service to be organised etc. It also makes this mention, which might explain future hesitations and postponements on the part of Grob management :

« This estimate must consider our intention of using this collaboration to prevent a competitor from buying this technology and pursuing this (even if smaller) market …»

[28] And so the contract was prepared based on draft notes prepared by Schmidt but completed by Cemar's Quebec attorneys because Walter wanted the applicable law to be that of Quebec. (P-1). It reflects the prior discussions held on a few occasions where the parties' responsibilities had been discussed and determined (D-3, minutes of a meeting held on February 26, 2003, as well as p-22). It is dated October 1st 2003.

[29] After signing, Cemar's client list was supplied to Grob and sales were made subsequently to some of the same clients after the coming into force of the contract. However, the sales people reported rapidly that Protechna was selling aggressively, that it now occupied a larger and larger part of the small market for loom lasers and that Cemar's prices were preventing some sales. This brought on a meeting at Paul's home on April 21, 2004 to discuss prices and the necessary reductions that had to be made to compete (D-6).

[30] Notwithstanding these price reductions, sales continued to be rather low, much the same as before the contract, and would remain such for the remainder of it's duration. However, Cemar came back to Grob about selling it's loom laser line either to Grob or to any other interested purchaser it could find. At a meeting held at Paul's home on March 10, 2006, the situation was again discussed to try and determine why the sales were so low. Reasons included limited application of the loom laser, strong competition from Protechna, problems with sales representatives of Grob's…(D-7).

[31] There is also in the minutes of that meeting a reference to Cemar's intention to sell its line, to a right of first refusal by Grob and, should it not wish to exercise it, that Cemar was going to look for a new purchaser after cancellation of the contract. 500-17-054880-094 PAGE : 6

[32] This discussion was followed by a more formal approach. On April 6, 2006, Cemar's attorney, Me O'Connor, sent a letter to Grob to outline his client's intentions as to obtaining a formal offer to purchase from them, on certain conditions that would apply if such an offer was made, and in the negative, that it would start to solicit offers from other parties after May 15th, 2006.

[33] In his testimony at trial, Karle said Grob management had decided not to reply to Me O'Connor's letter out of a desire not to insult the Spirig brothers because the offer to purchase would have been very low, as the sales experience of Grob in the last 2 years had amounted to not much over 100,000$ in sales per year, and that notwithstanding his sales people's efforts, there was nothing new or no interesting financial perspectives in the offing.

[34] A November 9, 2006 meeting with the brothers at Paul's house went no further and no promising developments were recorded, other than that the brothers expected a response before the end of the year (D-9). It was also discussed that there should be a discussion with Protechna to see if there was an opening to collaborate.

[35] And so, a few e-mails were exchanged in the following weeks and months but nothing really transpired, such that life and low sales continued on until Me O'Connor sent a formal demand letter on behalf of Cemar to Grob, which, as seen before, seems to have been mutually considered as the official termination of the contract between them.

[36] Thus, the claim for lost profits for approximately five years in lost sales potential, as well as a claim for loss of market value of the loom laser thread detection system.

THE LAW :

[37] There is an old legal principle to the effect that « the contract is the law of the parties » and should normally contain each party's rights, obligations and duty to perform to give effect to the agreement.

[38] Our Civil Code has consecrated this principle and has added terms to ensure that the contract entered into is validly put into force and to complete same, should something important not have been incorporated in writing. This appears from the following articles of the Code :

« 1373. The object of an obligation is the prestation that the debtor is bound to render to the creditor and which consists in doing or not doing something.

The debtor is bound to render a prestation that is possible and determinate or determinable and that is neither forbidden by law nor contrary to public order. 500-17-054880-094 PAGE : 7

1375. The parties shall conduct themselves in good faith both at the time the obligation arises and at the time it is performed or extinguished.

SECTION II NATURE AND CERTAIN CLASSES OF CONTRACTS

1378. A contract is an agreement of wills by which one or several persons obligate themselves to one or several other persons to perform a prestation.

Contracts may be divided into contracts of adhesion and contracts by mutual agreement, synallagmatic and unilateral contracts, onerous and gratuitous contracts, commutative and aleatory contracts, and contracts of instantaneous performance or of successive performance; they may also be consumer contracts.

1380. A contract is synallagmatic, or bilateral, when the parties obligate themselves reciprocally, each to the other, so that the obligation of one party is correlative to the obligation of the other.

When one party obligates himself to the other without any obligation on the part of the latter, the contract is unilateral.

1385. A contract is formed by the sole exchange of consents between persons having capacity to contract, unless, in addition, the law requires a particular form to be respected as a necessary condition of its formation, or unless the parties subject the formation of the contract to a solemn form.

It is also of the essence of a contract that it have a cause and an object.

1386. The exchange of consents is accomplished by the express or tacit manifestation of the will of a person to accept an offer to contract made to him by another person.

1387. A contract is formed when and where acceptance is received by the offeror, regardless of the method of communication used, and even though the parties have agreed to reserve agreement as to secondary elements. 500-17-054880-094 PAGE : 8

1425. The common intention of the parties rather than adherence to the literal meaning of the words shall be sought in interpreting a contract.

1434. A contract validly formed binds the parties who have entered into it not only as to what they have expressed in it but also as to what is incident to it according to its nature and in conformity with usage, equity or law.

1439. A contract may not be resolved, resiliated, modified or revoked except on grounds recognized by law or by agreement of the parties.

1440. A contract has effect only between the contracting parties; it does not affect third persons, except where provided by law.

1458. Every person has a duty to honour his contractual undertakings.

Where he fails in this duty, he is liable for any bodily, moral or material injury he causes to the other contracting party and is bound to make reparation for the injury; neither he nor the other party may in such a case avoid the rules governing contractual liability by opting for rules that would be more favourable to them. […] 1594. A debtor may be in default by the terms of the contract itself, when it contains a stipulation that the mere lapse of time for performing it will have that effect.

A debtor may also be put in default by an extrajudicial demand addressed to him by his creditor to perform the obligation, a judicial demand filed against him or the sole operation of law. […] 1611. The damages due to the creditor compensate for the amount of the loss he has sustained and the profit of which he has been deprived.

Future injury which is certain and assessable is taken into account in awarding damages.

[…] 500-17-054880-094 PAGE : 9

1613. In contractual matters, the debtor is liable only for damages that were foreseen or foreseeable at the time the obligation was contracted, where the failure to perform the obligation does not proceed from intentional or gross fault on his part; even then, the damages include only what is an immediate and direct consequence of the nonperformance.

2892. The filing of a judicial demand before the expiry of the prescriptive period constitutes a civil interruption, provided the demand is served on the person to be prevented from prescribing not later than 60 days following the expiry of the prescriptive period.

Cross demands, interventions, seizures and oppositions are considered to be judicial demands. The notice expressing the intention by one party to submit a dispute to arbitration is also considered to be a judicial demand, provided it describes the object of the dispute to be submitted and is served in accordance with the rules and time limits applicable to judicial demands. […]

2925. An action to enforce a personal right or movable real right is prescribed by three years, if the prescriptive period is not otherwise determined. » [39] The following clauses of the contract between the parties are of importance :

« 1.1.4 Territory : means the world;

2.1 Appointment

Provided that the DISTRIBUTOR has not breached any of the provisions of this Agreement and provided further that the DISTRIBUTOR has diligently and faithfully carried out its duties and obligations imposed on it by this Agreement and in consideration of the Fee (hereinafter referred to) the COMPANY hereby grants to the DISTRIBUTOR the sole and exclusive right to distribute and sell the Products within the Territory and hereby appoints the DISTRIBUTOR as his sole distributor for this purpose.

3.1 Term

This Agreement shall become effective upon its execution by both parties hereto and, unless terminated earlier in accordance with the provisions of this Agreement, shall remain in effect for a period of six (6) months from the date of such execution (the «Term»). 500-17-054880-094 PAGE : 10

3.2 Renewal

This Agreement shall be subject to automatic renewal.

3.3 Option to Purchase and write a first refusal

For the duration of the term and provided that the DISTRIBUTOR is not in default hereunder, the DISTRIBUTOR shall have the option to purchase the Line of Business from the COMPANY (the « Option »).

Furthermore, without limiting the foregoing, should the COMPANY receive a valid offer of to purchase the products during the term of this agreement or any of its renewal thereafter, the COMPANY shall provide a written notice of the DISTRIBUTOR's right of first refusal; The DISTRIBUTOR shall either accept to purchase all but not part of the products within a period of TWENTY (20) days.

In order to exercise the Option, the DISTRIBUTOR shall be obliged to give the COMPANY a written notice of not less than Ninety (90) days prior to the expiry of the Term (the « Notice Period »).

During the Notice Period, the parties shall attempt to negotiate the terms and conditions of the sale of the Line of Business.

Failing agreement as to the terms and conditions of the sale of the Line of Business, this Agreement shall automatically terminate at the end of the Term without the necessity of any further notice from either party to the other.

ARTICLE 4

OBLIGATIONS OF THE DISTRIBUTOR

4.1 The parties agree that during the term of this Agreement, the DISTRIBUTOR shall :

4.1.1 use its best efforts to advertise and promote the sale of the Products in the Territory and to make regular and sufficient contact with the present and potential customers of the DISTRIBUTOR;

ARTICLE 7

TERMINATION

7.1 Each of the DISTRIBUTOR and the COMPANY shall have the right to terminate this Agreement (except for those provisions which by their nature survive termination), upon the occurrence of any one of the following events, 500-17-054880-094 PAGE : 11

such termination to be effective immediately upon the receipt or deemed receipt by the other party of a notice to that effect :

7.1.1 if a party is in default of any of the provisions, terms or conditions herein contained and shall fail to remedy such default within then (10) days of written notice therefrom from the other party;

ARTICLE 17

GENERAL CONTRACT PROVISIONS

17.1 Entire Agreement

This Agreement constitutes the entire agreement between the parties with respect to all matters herein contained, and its execution has not been induced by, nor do any of the parties hereto rely upon or regard as material, any representations or writings whatsoever not incorporated herein and made a part hereof. This Agreement shall not be amended, altered or qualified except by and instrument in writing, signed by all the parties hereto and any amendments, alterations or qualifications hereof shall not be binding upon or affect the rights of any party who has not given its consent in writing.

17.4 Governing Law

This Agreement shall be governed by and construed in accordance with the laws of Quebec and any court of competent jurisdiction in Quebec shall have jurisdiction to adjudicate any matter arising out of this Agreement. »

[40] Both parties have acknowledged that Grob's obligation under the contract was one of « means » as opposed to one of « result »!

[41] In the latter, the law is clear that a result is guaranteed in the contract such that failure to obtain the result envisaged entails compensation for damages, and those are usually agreed to and calculated in advance in the understanding1.

[42] The obligation of « means » entails, on the other hand, to use reasonable or best efforts to achieve the goal sought by both participants to a contract. Quebec law does not make a difference, as is done under Common Law2, between « reasonable » and

1 Didier LLUELLES et Benoît MOORE, Droit des obligations, 2e éd., Montréal, Éditions Thémis, 2012; J.-L. BAUDOUIN et P.-G. JOBIN, Les Obligations, 7e éd., Cowansville, Éditions Yvon Blais, 2013. 2 Atmospheric Diving Systems Inc. v. International Hard Suits Inc., [1994] 5 W.W.R. 719, 89 B.C.L.R. (2d) 356; Automaster Automotive Services Ltd v. Kenco Enterprises Ltd, 2009 BCSC 1594. 500-17-054880-094 PAGE : 12

« best » efforts3, although some decisions by judges here have ventured to consider the latter to be more onerous on the party having promised those best efforts to achieve the desired result than normally would be the case4.

[43] The undersigned is of the opinion that in this matter, Grob promised to do more than take reasonable means to make sales of cemar's loom lasers, but that these efforts were not the best Grob could and should have done and that they rapidly fell below what was expected. Karle's affirmation at trial that Cemar's laser system was considered as one of Grob's other and multiple products does not meet the standard that was and should be expected and the contractual promises made.

[44] If Grob did not want to make and continue making « best » efforts to sell Cemar lasers, it should have given a termination notice and not have waited till August 2008.

[45] The questions arising from this lawsuit are the following :

1- Did Grob use it's « best efforts » to advertise and promote sales of Cemar's product ?

2- Is Cemar's claims for past losses and future loss of value of it's product founded in law ?

3- If so, is Cemar's claim subject to prescription and if so, for what part ?

4- If valid in part, what is the value of Cemar's claim ?

DISCUSSION :

[46] 1- Did Grob use it's « best efforts » to advertise and promote sales of Cemar's product ?

[47] The evidence at trial was that, notwithstanding their continued efforts to sell the product to weavers in many parts of the world, the Spirig brothers had, after an initial period of success in the 80's and the early 90's, come to a point where sales had levelled off and were mostly made to the clients they had developed over the years and in a niche market.

[48] And so, after modest sales in the years 1996 to 2002, they decided to look for a company that would be interested in the purchase of the warp detection loom laser line 3 Didier LLUELLES et Benoît MOORE, préc., note 1; J.-L. BAUDOUIN et P.-G. JOBIN, préc., note 1; Hydro-Québec c. Construction Kiewit Cie, 2014 QCCA 947; Lestriez c. Desbiens, J.E. 2000-655; Banque de développement du Canada c. Belley, 2010 QCCQ 5677. 4 Galarneau c. Cie d'aviation Mexicana Airlines, 2002 CanLII 30345; Philippe Bernard Inc. c. Stéphane Bourgeois, 2003 CanLII 28943 (Qc C.Q.); Multipix Communications Inc. c. Midland Walwyn Capital Inc., 2008 QCCS 3245 (appel rejeté : Multipix Communications Inc. c. Midland Walwin Capital Inc., 2013 QCCA 2058; Cad Railway Industries Ltd. V. Margulies (Estate of), 2014 QCCS 2104. 500-17-054880-094 PAGE : 13 which, the evidence has clearly shown, and contrary to Walter's affirmation, generated only about 100,000$ per year for Cemar in the last few years. This was a very secondary line of lasers for them.

[49] This brought them to Grob, a company who had a world market in the weaving industry, a considerable sales force all over the world and which could perhaps pay a good price to cemar for it's recognised but highly specialized technology in a niche market, as the Spirig brothers well knew.

[50] After an initial demonstration of the product and a visit to a mill that had some lasers in use, the management of Grob did a first study of the market potential of lasers, concluded that it was indeed limited to special uses, and therefore represented a potential limited sales market, but would complement their other lines of products. They also realised that time and sales from hence would tell them how this line could produce and generate profits, if at all.

[51] This explains their decision to put aside the purchase of the Cemar laser system and to rather negociate an exclusive distribution contract with a short period of 6 months, so that either party could decide to terminate the agreement should it want, either to sell to someone else, for Cemar, or to cease representing for lack of interesting sales for Grob, who could always purchase on it's right of first refusal should a purchaser be found by Cemar.

[52] At the time of the contract, Grob had been sold and partially integrated into a larger company named Grotz-Beckert from Germany even though it's facilities and management were still in Switzerland and still functioning, albeit as a division.

[53] At the turn of the century in the year 2000, the worldwide loom market was rapidly moving to different countries in Asia, at the prejudice of mills in Europe and the Americas, and the trend there was to operate small looms on which no break detection systems were used. The prices were slashed all over because of the low salaries paid to workers in Asia. Many mills and loom manufacturers in Europe lost great amounts of money or closed.

[54] It became a problem of such magnitude that Grob itself had to reduce it's forces by approximately one third, from 670 employees to 470, more or less in June 2003.

[55] This information was covered in numerous newspapers in Switzerland and of which Paul could not be unaware.

[56] The sales force was also reduced, but by 3 people only, remaining at about 10 people for 2004. 500-17-054880-094 PAGE : 14

[57] In the weeks following the signing of the contract, Grog attended the I.T.M.A., the international knitting and weaving, must-go-to trade show, and installed a loom laser detection system from Cemar to give demonstrations to potential clients.

[58] Unfortunately, over the following years, sales to new clients, other than to Cemar clients needing new or upgraded lasers, never took off and were discussed many times between the Spirig brothers and Grob people, but not reprimanded.

[59] The poor sales situation brought about a letter from Cemar's lawyer in April 2006 (D-8) where no complaint is made for poor sales but in which, on the contrary, there is a formal offer to sell the loom laser line to Grob to be exercised before May 15 th 2006 or, should it not wish to buy, to other parties who might be interested. No price is suggested by Cemar.

[60] But Grob did not reply and cemar did not complain, other than to politely ask for an answer that never came…

[61] This brought about the August 28, 2008 demand letter by Me O'Connor, Cemar's lawyer. For the first time in the history of the contract, it raises lack of « best efforts » on the part of Grob, losses of potential sales, neglect of Grob to promote the product such that it's business has virtually crumbled…and offering to sell it all for the price of 1.5 mil. $, including the inventories and with a full legal release (P-4).

[62] The burden of establishing a lack of proper efforts of the other party in a contract lies on the shoulders of the party alleging it. Has Cemar succeeded in proving it's allegation? The court considers it has, but in part only!

[63] In fact, the evidence at trial shows, and at best, tepid efforts on the part of Grob, to actively promote the sales of loom lasers after the first show and demonstration at the 2003 I.T.M.A. fair in Birmingham, U.K. Except for a page on the back part of their annual catalog/sales manual after 2004 (D-4, D-5), there seems to have been little done to demonstrate or promote the Cemar lasers where they should or could have been shown in action to clients other than those already equipped with them.

[64] The evidence has shown that « new » clients sales over the period of the contract were limited to five over the contract period over renewals or sales to clients Cemar had already serviced in the past, and those, mostly in Europe.

[65] Why did Grob not try to penetrate the American or the rest of the World market, where it had many sales people or agents (P-5/P-16) over a period from 2003 to 2009 ? Because of the following reasons, among others, as appears from an internal memo of Grob dated march 2006 where it is said, about unsatisfactory sales (D-7) :

- « users not generally in our regular customer base and only reachable at great travel costs (USA, Scandinavia) ». 500-17-054880-094 PAGE : 15

- « Loss of sales representatives with appropriate know-how from Grob, making it even more difficult to provide on-going specialized advice ».

[66] And so, as they were cutting costs and expenses in downsizing their operations, in a very competitive market, which would eventually see the total integration of Grob into Grotz-beckert somewhere in 2009 and the closing of all their Swiss operations in 2010, Grob decided, on it's own volition and without properly advising the Spirig brothers of this situation, that it could or would not put in necessary efforts to promote or train sales people to promote the Cemar loom lasers, other than to cruise along and sell to old clients.

[67] Plaintiff, in an examination out of court prior to trial, asked Karle to provide documentation, sales reports, etc. of efforts by Grob's people to promote the Cemar lasers. None were found, other than what was produced at court…Karle would explain to the undersigned that, in closing all of it's operations in Switzerland in 2009 and 2010, many documents, which might have been useful, had been destroyed. He could not answer why they had been, all the while knowing the existence of the demand letter dated August 2008 and the Introductory Motion in December 2009.

[68] Was there something to hide? Or was it rather that there was nothing to show « best efforts » on behalf of the sales people at Grob, other than the company policy to contact every client at least on an annual basis?

[69] And even then : if no demonstrations of the loom lasers were offered or made, how could « new » users be convinced at least to try one?

[70] But that being said, what was the realistic market potential for the loom laser, and where should Grob have put in their « best efforts »?

[71] The expert evidence heard at trial, together with different written statistics produced as exhibits (P-7, P-8, P-9, D-12), have shown without serious contestation that the world market in weaving is of a 4 to 5 million machines or looms, 50 % of which weave cotton or fibers that generate dust or fluff making the use of lasers impossible, as is the case for another 40 % of the world potential where a water-jet system is in use, creating a watery mist.

[72] There is another percentage of mills who do not use detection systems (artisanal or small looms or in Asian countries).

[73] Another restriction explained at trial would limit the use of lasers to larger mills, of widths exceeding 5.4 meters, and using either mono or multi filament threads where no dust is generated.

[74] The original Schmidt report in 2002 (D-17), and with a large part of care and caution based on the many unknowns that only experience would justify or not in the 500-17-054880-094 PAGE : 16 future, concluded that the potential market for optical thread monitoring systems would be of about 100-150 systems a year based on 2002 prices and production costs.

[75] And there was also another unknown : the market share of Protechna, a European laser manufacturer and vendor locked in a very competitive battle between Cemar and it's own lasers. That would be established later, and is discussed in the Gherzi report by expert Hugentobler (D-12).

[76] The court has been largely shown and is satisfied that witness Hugentobler is extremely cognisant and a world expert in the weaving and knitting industry, of which his company, Gherzi, is a leading consultant in that market.

[77] His firm acts as a consultant and adviser to almost all of the market leaders, especially in Europe. To prepare his report, he has gotten information from loom manufacturers, from weavers in different fields of fabrication as well as from loom laser manufacturers and vendors, including Cemar's principal competitors, Protechna, and to a lesser degree, an Italian company, named Marelli Luciano, that limits it's laser sales to Italian clients, as well as other smaller competitors.

[78] And so, with considerable details and backup statistics, market information and analysis, he has concluded that the sales potential for loom lasers at the time of the contract between the parties was of approximately 200 units a year, of which Protechna then and now has a 60 % share, Luciano 25 % and the last 15 % to be divided between the other players, including the Cemar loom laser.

[79] These numbers apparently reflect the actual sales of loom lasers during those years, mostly if not entirely in Europe (see figure 15 on page 25 of D-12).

[80] But this is what the sales have been, more or less! Could those numbers or Cemar's market share of the actual total sales of more or less 200 units per year have increased if more or better « best efforts » had been put in by Grob and it's people?

[81] The answer by the undersigned is yes!

[82] As mentionned, the Grob sales people and management seem to have had many other preoccupations on their minds than to try seriously to demonstrate and sell the Cemar laser systems to their clients all over the world, or to others that could probably have been convinced at least to try loom lasers.

[83] And if they were not really interested in promoting the product, as seems to have been the case, they should have advised Cemar accordingly and repudiated the contract as early as possible. Instead, they profited from Cemar's five year indolence, silence or lack of real interest other than to sell their loom laser line as soon as possible. 500-17-054880-094 PAGE : 17

[84] The court concludes that both parties are responsible for the lack of acceptable sales of the product : Grob for not actively giving it's « best efforts » to promote and sell the product, and Cemar for standing by and not complaining or reacting in any measurable fashion, although it's responsibility is much less than that of Grob. For these purposes, the court attributes responsibility for damages 75 % to Grob and 25 % to Cemar.

[85] In essence, and because it is impossible to precisely determine how many more units could have been sold had the efforts been put in, the court will arbitrate that sales of the Cemar loom lasers should have averaged 75 units a year, fewer in the first years but numbers growing as renown of the product was made, and expertise grew at Grob.

[86] 2 - Is Cemar's claims for past losses and future loss of value of it's product founded in law ?

[87] In theory, any claim for contractual damages can be for direct losses and, depending on the other parties' attitude, good faith or lack thereof in performing or not performing it's contractual obligations, loss of profit or any foreseeable damage. (Articles 1375, 1458, 1611 and 1613 C.c.Q.).

[88] And even where there has been intentional or gross fault in the non performance of a contract, there still must be an immediate or direct consequence for damages, specially future damages, to be granted.

[89] Here, the direct losses of sales, and of profits for Cemar, for the duration of the contract, can be granted, unless totally or partially prescribed by law. We will be examining this aspect later.

[90] But Cemar has claimed, as well, the supposed loss of value of it's loom laser line in the future, starting at the termination of the contract, as of the August 28, 2008 letter of Me O'Connor to Grob. Is this part of the claim receivable? And to grant it, must there be intentional or gross fault established against Grob? And where these damages foreseeable at signing of the contract?

[91] The court is of the opinion that this part of Cemar's claim can be entertained, for the reasons set above in establishing joint responsibility of the parties as well as for the following reasons.

[92] If, in granting relief to Cemar for losses prior to termination, whatever that is, there is a direct relation to non-performance, there can be created valid argument that future losses of value of the product, as claimed, are a direct consequence of the poor sales. For example if, in fact, the efforts by Grob had generated sales of twice as many loom lasers, the potential value of that line should have doubled in value to another interested purchaser, although, as it is, no demonstration has been made to the court as to what has been done with the product since termination of the contract. 500-17-054880-094 PAGE : 18

[93] 3 - If so, is Cemar's claim subject to prescription and if so, for what part ?

[94] The evidence shows that the parties chose a 6 months renewable period for their distribution contract, available to either side, in case of no, or poor, sales, or a sale of the line to an interested buyer or for any other reason whatsoever that could be raised.

[95] The evidence shows as well that sales results were modest and steadily modest for the entire duration of the contract, up to the August 28, 2008 letter of demand by Cemar's lawyer. The numbers were equivalent to those of sales made directly by the Spirig brothers for 6 years before entering into the distribution contract. There was therefore no surprise and, as Cemar did not complain of poor sales except at the end, there can be no argument, as that made at trial, that it was justified in expecting things to improve and in not complaining before the end, of losses and damages.

[96] The court must conclude that prescription became acquired at the end of every 6 month period of the contract, even though the sales were tabulated on a yearly basis. In this way, any claim for losses for the year 2003 or part thereof became extinct by prescription 36 months later, and so on.

[97] To make things easier, however, let us assume that yearly results should be taken as a measure, after a period of training-in (rodage) which should be granted: a new product, necessity to train sales people and technicians, adjustment of prices etc. The court will therefore consider yearly periods starting January 1, 2005, fourteen months after signing of the contract.

[98] In his expert financial claim report (P-12), and revised later at trial, accountant Dorweiler established, allegedly from information obtained from Cemar, that sales of it's loom laser for the contract period had been of 64 units, of which 62 to former clients of Cemar and 2 to new clients (see schedule 6), for a yearly average of 13 units (this is contradicted by P-3 that states 59 sales of which 5 to « new » clients).

[99] The court finds that the number is and must be that as in P-3 and therefore that average sales by Grob were of 12 units a year (59 over 5 years).

[100] The expert witness also established initially that his evaluation of the contribution margin to profits of Cemar (sales less direct costs and part of the fixed costs) amounted to 31 %, later revised, at trial, to 26 % then to 24 %, which would give an average loss of profit before taxes of a bit less than 1000 $ per unit.

[101] At trial, defendant's expert, Mme Racette from K.P.M.G. after depositing the financial and profit history of Cemar (D-13 a from 1999 to 2011 incl.), came to the conclusion that it's profit and loss history justified no more than a gross contribution margin for the years 1999 to 2003, profitable years, of 20.7 %. However she estimated that for the purpose of these proceedings, the court should determine the contribution margin to 15 %. The undersigned agrees with her explanations, which seem more 500-17-054880-094 PAGE : 19 realistic than those of plaintiff's expert who changed his opinion twice when confronted with actual numbers.

[102] And so, for a period of 46 months, from the 1st January 2005 to August 28, 2008, there should have been sales, on average, of 75 units a year when only 12 were made, leaving a loss of profits on 63 units more a year at a contribution margin of 739.62$ each, for a yearly total of total 46,596$ and a monthly average of 3,883$

[103] But the action was instituted on December 8, 2009. This implies that any amount claimed over 3 years back from this date is prescribed (Article 2925 C.c.Q.), leaving only whatever happened and losses suffered after December 2006, a period of 21.5 months up to termination of the contract in August 2008.

[104] 4 - If valid in part, what is the value of Cemar's claim ?

[105] These 21.5 months at 3,883$ per month amount to 83,485$ in losses of profits to Cemar. This amount will be granted, subject to the percentage of responsibility of Grob, with interests and additional indemnity as of the date of institution of the proceedings, as there is no valid justification to modify the applicable ordinary rule (1618 C.c.Q).

[106] As to the loss of future value after termination of the contract, little has been proven except the plaintiff's suggestion of a potential multiple capitalization of 2,8 times annual profits as a potential value of the product. This would give, with the numbers the court has determined, a value of approximately 155,320$ (annual profits of 55,470$ (for 75 units yearly on average x 739.62$ before taxes and profit) x 2.8, rounded).

[107] This amount seems fair in the circumstances and will be granted, subject to the percentage of responsibility of Grob, as of the introduction of the motion to institute proceedings.

[108] Therefore, since the court has decided to apportion responsibility of defendant to 75 % of the damages suffered by plaintiff, the total owed by it will amount to the sum of 179,103$ (83,485$ + 155,320$ x 75 %).

[109] The plaintiff has produced a summary of expenses of it's so-called experts. The testimonies of Msrs Knircha and Keller were of no use in the determination of responsibility. At best, they should only be taxed as ordinary witnesses and none of their travel and attendance costs should be granted.

[110] As to plaintiff's financial expert, the court has found his report to be unfounded in many facts, a totally unsupported speculation apparently based on information, instructions and figures given to him by his client who, at first even refused to give his own expert his yearly « notice to reader » financial reports, which has seriously mislead and distorted his own expert's opinion on the health and profitability of Cemar. 500-17-054880-094 PAGE : 20

[111] Cemar will assume financial responsibility for it's expert's costs and disbursements.

[112] As to Grob's costs and expert fees, the court is of the opinion that none should be granted as it is found liable for certain damages to plaintiff.

[113] FOR THESE REASONS, THE COURT :

[114] GRANTS plaintiff's action in part;

[115] CONDEMNS defendant to pay to plaintiff the sum of 179,103 $ to plaintiff, with interests and additional indemnity as of the date of institution of the proceedings;

[116] The whole, with each party bearing their own costs.

______RICHARD NADEAU, J.S.C.

Me Daniel F. O'Connor Attorney for the Plaintiff

Me Marc-André Fabien Me Philippe Charest-Beaudry Fasken Martineau DuMoulin Attorneys for the Defendant

Dates of hearings : October 1, 2, 3, 7, 8, 9, 10 and 29, 2014