BUSINESS LAW REPORTS Fourth Series/Quatri`eme s´erie Recueil de jurisprudence en droit des affaires

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[Indexed as: Butterfield v. R.] John Sebastian Butterfield, Appellant and Her Majesty the Queen, Respondent of Appeal Sharlow, Johanne Trudel, Stratas JJ.A. Heard: December 2, 2010 Judgment: December 2, 2010 Docket: A-377-09, A-378-09, 2010 FCA 330 John Sebastian Butterfield, for himself Carl Januszczak, Laura Zumpano, for Respondent Tax –––– Goods and Services Tax — Administration and enforcement — Directors’ liability — Limitation period –––– B was sole director of printing company and believed that he lost all say in company’s affairs after it was assigned into bankruptcy in 2003 — In 2005, company was struck off register — Within two years, Minister assessed B as director pursuant to Income Tax Act (ITA) and Excise Tax Act (ETA), in relation to company’s $2,752 in unremitted source deductions and $21,403 GST liability — Tax Court judge dismissed B’s appeal of assessment on basis that B did not cease being direc- tor upon company’s assignment into bankruptcy and on basis that Minister brought direc- tor’s liability assessment within two-year period and met all requirements for application of s. 227.1 of ITA and s. 323 of ETA — Tax Court judge held that “director” in s. 1 of Company Act included every person by whatever name designated who performed func- tions of director, that definition of “director” was inclusionary provision, and that B held office as director since he was properly appointed as director and could only cease to be director by limited provisions set out in s. 130 of Company Act — As B admitted that he never resigned, Tax Court judge concluded, B remained director until company was struck in 2005 — B appealed — Appeal dismissed — Tax Court judge neither erred in finding that B last ceased to be director less than two years before date of assessments nor committed any other error warranting appellate intervention — B’s contention that s. 130 definition of “director” was inclusionary, non-exhaustive provision which should be in- terpreted as allowing person to cease being director whenever precluded from performing functions of director, was not accepted — In absence of statutory power by trustee to remove B as director, B could not simultaneously claim that bankruptcy did not result in him ceasing to be director, but that last visit at his office and what he perceived as his constructive dismissal, did — Excise Tax Act, R.S.C. 1985, c. E-15, s. 323(5). 2 BUSINESS LAW REPORTS 77 B.L.R. (4th)

Tax –––– Goods and Services Tax — Administration and enforcement — Directors’ liability — Miscellaneous –––– B was sole director of printing company and believed that he lost all say in company’s affairs after it was assigned into bankruptcy in 2003 — In 2005, company was struck off register — Within two years, Minister assessed B as director pursuant to Income Tax Act (ITA) and Excise Tax Act (ETA), in relation to company’s $2,752 in unremitted source deductions and $21,403 GST liability — Tax Court judge dismissed B’s appeal of assessment on basis that B did not cease being direc- tor upon company’s assignment into bankruptcy and on basis that Minister brought direc- tor’s liability assessment within two-year period and met all requirements for application of s. 227.1 of ITA and s. 323 of ETA — Tax Court judge held that “director” in s. 1 of Company Act included every person by whatever name designated who performed func- tions of director, that definition of “director” was inclusionary provision, and that B held office as director since he was properly appointed as director and could only cease to be director by limited provisions set out in s. 130 of Company Act — As B admitted that he never resigned, Tax Court judge concluded, B remained director until company was struck in 2005 — B appealed — Appeal dismissed — Tax Court judge neither erred in finding that B last ceased to be director less than two years before date of assessments nor committed any other error warranting appellate intervention — B’s contention that s. 130 definition of “director” was inclusionary, non-exhaustive provision which should be in- terpreted as allowing person to cease being director whenever precluded from performing functions of director, was not accepted — In absence of statutory power by trustee to remove B as director, B could not simultaneously claim that bankruptcy did not result in him ceasing to be director, but that last visit at his office and what he perceived as his constructive dismissal, did. Tax –––– Income tax — Administration and enforcement — Directors’ liability — Limitation period –––– B was sole director of printing company and believed that he lost all say in company’s affairs after it was assigned into bankruptcy in 2003 — In 2005, company was struck off register — Within two years, Minister assessed B as director pursuant to Income Tax Act (ITA) and Excise Tax Act (ETA), in relation to company’s $2,752 in unremitted source deductions and $21,403 GST liability — Tax Court judge dismissed B’s appeal of assessment on basis that B did not cease being director upon company’s assignment into bankruptcy and on basis that Minister brought director’s lia- bility assessment within two-year period and met all requirements for application of s. 227.1 of ITA and s. 323 of ETA — Tax Court judge held that “director” in s. 1 of Com- pany Act included every person by whatever name designated who performed functions of director, that definition of “director” was inclusionary provision, and that B held office as director since he was properly appointed as director and could only cease to be director by limited provisions set out in s. 130 of Company Act — As B admitted that he never resigned, Tax Court judge concluded, B remained director until company was struck in 2005 — B appealed — Appeal dismissed — Tax Court judge neither erred in finding that B last ceased to be director less than two years before date of assessments nor committed any other error warranting appellate intervention — B’s contention that s. 130 definition of “director” was inclusionary, non-exhaustive provision which should be interpreted as allowing person to cease being director whenever precluded from performing functions of director, was not accepted — In absence of statutory power by trustee to remove B as director, B could not simultaneously claim that bankruptcy did not result in him ceasing Butterfield v. R. 3 to be director, but that last visit at his office and what he perceived as his constructive dismissal, did. Tax –––– Income tax — Administration and enforcement — Directors’ liability — Miscellaneous –––– B was sole director of printing company and believed that he lost all say in company’s affairs after it was assigned into bankruptcy in 2003 — In 2005, com- pany was struck off register — Within two years, Minister assessed B as director pursu- ant to Income Tax Act (ITA) and Excise Tax Act (ETA), in relation to company’s $2,752 in unremitted source deductions and $21,403 GST liability — Tax Court judge dismissed B’s appeal of assessment on basis that B did not cease being director upon company’s assignment into bankruptcy and on basis that Minister brought director’s liability assess- ment within two-year period and met all requirements for application of s. 227.1 of ITA and s. 323 of ETA — Tax Court judge held that “director” in s. 1 of Company Act in- cluded every person by whatever name designated who performed functions of director, that definition of “director” was inclusionary provision, and that B held office as director since he was properly appointed as director and could only cease to be director by limited provisions set out in s. 130 of Company Act — As B admitted that he never resigned, Tax Court judge concluded, B remained director until company was struck in 2005 — B appealed — Appeal dismissed — Tax Court judge neither erred in finding that B last ceased to be director less than two years before date of assessments nor committed any other error warranting appellate intervention — B’s contention that s. 130 definition of “director” was inclusionary, non-exhaustive provision which should be interpreted as al- lowing person to cease being director whenever precluded from performing functions of director, was not accepted — In absence of statutory power by trustee to remove B as director, B could not simultaneously claim that bankruptcy did not result in him ceasing to be director, but that last visit at his office and what he perceived as his constructive dismissal, did. Cases considered by Johanne Trudel J.A.: Kalef v. R. (1996), 39 C.B.R. (3d) 1, [1996] 2 C.T.C. 1, (sub nom. R. v. Kalef) 96 D.T.C. 6132, (sub nom. Kalef v. Minister of National Revenue) 194 N.R. 39, 1996 Car- swellNat 188, [1996] F.C.J. No. 269 (Fed. C.A.) — referred to Lassonde v. Minister of National Revenue (2001), 2001 CFPI 726, 2001 CarswellNat 1408, [2001] 4 C.T.C. 204, (sub nom. Lassonde v. R.) 2001 D.T.C. 5442 (Fr.), 2001 CarswellNat 2277, 2001 FCT 726, (sub nom. Lassonde v. Ministre du Revenu Na- tional) 203 F.T.R. 82, [2001] F.C.J. No. 1080 (Fed. T.D.) — referred to Perri v. Minister of National Revenue (1995), (sub nom. R. v. Wellburn) 95 D.T.C. 5417, [1995] 2 C.T.C. 196, (sub nom. Minister of National Revenue v. Wellburn) 98 F.T.R. 161, 1995 CarswellNat 399 (Fed. T.D.) — referred to Worrell v. R. (2000), 2000 CarswellNat 2344, (sub nom. Attorney General of Canada v. McKinnon) 2000 G.T.C. 3415, [2000] G.S.T.C. 91, (sub nom. Attorney General of Canada v. McKinnon) 2000 D.T.C. 6593, [2001] 1 C.T.C. 79, 9 B.L.R. (3d) 1, (sub nom. Worrell v. Canada) 194 D.L.R. (4th) 164, (sub nom. Canada (Attorney General) v. McKinnon) 262 N.R. 242, 2000 CarswellNat 3491, (sub nom. Canada (Attorney General) v. McKinnon) [2001] 2 F.C. 203, [2000] F.C.J. No. 1730 (Fed. C.A.) — referred to 4 BUSINESS LAW REPORTS 77 B.L.R. (4th)

Statutes considered: Company Act, R.S.B.C. 1996, c. 62 Generally — referred to s. 130 — considered Excise Tax Act, R.S.C. 1985, c. E-15 Pt. IX [en. 1990, c. 45, s. 12(1)] — referred to s. 323(1) [en. 1990, c. 45, s. 12(1)] — considered s. 323(5) [en. 1990, c. 45, s. 12(1)] — considered Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) Generally — referred to s. 227.1(1) — considered s. 227.1(4) — considered

APPEAL from judgment reported at 2009 CarswellNat 5609, 2009 CarswellNat 3687, 2009 TCC 575, [2009] G.S.T.C. 163, 2010 G.T.C. 5 (Eng.), 2009 D.T.C. 2108 (Eng.) (T.C.C. [General Procedure]).

Johanne Trudel J.A. (orally):

1 These are two consolidated appeals from judgments of the dismissing Mr. Butterfield’s appeals from assessments made against him as the sole director of C. Davis Manufacturing Co. Ltd. (2009 TCC 575 (T.C.C. [General Procedure]), Miller J. (the Judge)). On December 1, 2003, the company was assigned into bankruptcy. The appellant was assessed pursuant to the In- come Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the ITA) and the Excise Tax Act, R.S.C., 1985, c. E-15 (the ETA) (together the Acts) for the balance of the com- pany’s unremitted source deductions and GST left owing after the discharge of the bankruptcy trustee. 2 For the purpose of these appeals, suffice it to mention that the Acts state that the directors of the corporation at the time the corporation failed to comply with its obligations to withhold and remit are jointly and severally liable, with the corporation, for the unpaid amounts and any interest or penalties relating to them (subsection 227.1(1) ITA and subsection 323(1) ETA). However, to re- cover any amount so payable from a director, the action must be commenced within two years after he or she “last ceased to be a director of that corporation” (subsection 227.1(4) ITA and subsection 323(5) ETA). 3 This statutory requirement has been the focus of the proceedings throughout. We need only answer the following question: Did the Judge err in finding that Mr. Butterfield last ceased to be a director less than two years before February 14, 2006, the date of the contested assessments? The answer is no. 4 Mr. Butterfield does not contest the well-established principle that an assign- ment in bankruptcy does not trigger a director ceasing to be a director (Kalef v. R., [1996] F.C.J. No. 269 (Fed. C.A.); Perri v. Minister of National Revenue Butterfield v. R. Johanne Trudel J.A. 5

(1995), 95 D.T.C. 5417 (Fed. T.D.), Worrell v. R., [2000] G.S.T.C. 91, [2000] F.C.J. No. 1730 (Fed. C.A.), Lassonde v. Minister of National Revenue, [2001] F.C.J. No. 1080 (Fed. T.D.)). 5 Rather, he argues, as he also did in the Court below, that “the circumstances of his rude removal from the affairs of the company by the trustees no longer allowed him to perform the functions of a director” (reasons for judgment, at paragraph 7) [Emphasis added]. That event occurred on December 12, 2003. In argument in this Court, the appellant submitted that as a result of this event, he was in effect constructively dismissed and, therefore, ceased being a director as of December 12, 2003. 6 In support of his argument, the appellant relies on the definition of director in the Company Act, R.S.B.C. 1996, c. 62 (repealed by the Business Corpora- tions Act, S.B.C. 2002, c. 57, s. 445(a) as of March 29, 2004 (B.C. Reg. 64/2004)), which states that a director: ... includes every person by whatever name designated who performs func- tions of a director [Emphasis added] 7 The Judge did not accept Mr. Butterfield’s argument. Firstly, the Judge found no need to rely on the definition stated above as the appellant had been properly appointed as the sole director of the company under the provincial leg- islation. Secondly, the evidence was that Mr. Butterfield never tendered his res- ignation and remained a director until the company was struck from the British Columbia Corporate and Personal Property Registries on July 4, 2005. This was then the date on which the appellant “last ceased to be a director.” It ensued that the assessments were not statute-barred. 8 In appeal, Mr Butterfield argues that the Judge erred in his interpretation of section 130 of the Company Act, when he held that a director can “only cease to be a director by the limited provision set out in section 130 of the Company Act.” 9 It reads as follows: 130 (1) A director ceases to hold office when his or her term expires in ac- cordance with the articles, or when he or she (a) dies or resigns, (b) is removed in accordance with subsection 3, (c) is not qualified under subsection 114; or (d) is removed in accordance with the memorandum or articles. (2) every resignation of a director becomes effective at the time a written resignation is delivered to the registered office of the company, or at the time specified in the resignation, whichever is later. 6 BUSINESS LAW REPORTS 77 B.L.R. (4th)

10 The appellant suggests that section 130, much like the definition of director, is an inclusionary and non-exhaustive provision such that it would allow a direc- tor to cease holding office in any and all circumstances, including those men- tioned in the statute, whenever a director is precluded from performing the func- tions of a director. 11 Despite Mr. Butterfield’s best efforts, we disagree with his interpretation and see no error of principle or any other error in the Judge’s reasoning, which would warrant the intervention of this Court. The appellant cannot simultane- ously claim that the December 1 bankruptcy did not result in him ceasing to be a director, but that his last visit at his office on December 12 and what he per- ceived as his constructive dismissal did, in the absence of any statutory power by the trustee to remove him as director. 12 Therefore, the appeals will be dismissed with one set of costs. A copy of these reasons will be filed in the Registry of this Court in relation to appeal A- 378-09. Appeal dismissed. Zesta Engineering Ltd. v. Cloutier 7

[Indexed as: Zesta Engineering Ltd. v. Cloutier] ZESTA ENGINEERING LTD. (Plaintiff) and DAVID CLOUTIER, MICHAEL JEFFERIES, HI-CAP TECHNOLOGIES, GUISEPPE (JOSEPH) DURANTE, KEITH SANGER, JAMES WHITE, KELVIN TECHNOLOGIES INC., DOUGLAS CHRISTIE, 798068 ONTARIO LIMITED AND DEREK PEATLING (Defendants) DAVID CLOUTIER, KELVIN TECHNOLOGIES INC. AND GUISEPPE (JOSEPH) DURANTE (Plaintiffs by counterclaim) and ZESTA ENGINEERING LTD. (Defendant to the counterclaim) ZESTA ENGINEERING LTD. (Plaintiff) and JOE DURANTE AND WENDY DURANTE (Defendants) Ontario Superior Court of Justice Stinson J. Heard: April 22-24, 27, 28, 2009; May 4-8, 11-15, 19-21, 25-27, 29, 2009; June 8-12, 15-17, 21-25, 29, 30, 2009; October 1, 2, 5-9, 27, 2009. Judgment: October 21, 2010 Docket: 00-CV-188172CM, 05-CV-302414PD2, 2010 ONSC 5810 Timothy Pinos, Jacqueline L. Wall for Plaintiff David Harris for Defendants, David Cloutier, Kelvin Technologies Inc., Derek Peatling Norman Grosman for Defendants, Guiseppe Durante, Keith Sanger, James White Morris Cooper for Defendants, Douglas Christie, 798068 Ontario Limited Arnie Herschorn for Defendants in action 05-CV-302414PD2 Business associations –––– Specific matters of corporate organization — Directors and officers — Fiduciary duties — Competing with corporation –––– Plaintiff em- ployer Z Ltd. employed defendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — C tried to use H-C to entrap his coworker J, but J told VE that C was competing with Z Ltd. — While employed, C induced Z Ltd.’s customer W to terminate commissions to and its relationship with Z Ltd. — C and D were fired and S resigned — After being fired, D incorporated K Inc., which competed with Z Ltd. — Z Ltd.’s customer H contacted C, who referred H to K Inc. — Z Ltd. brought action against defendants for injunctive relief and damages for breach of fiduciary duty, interference with economic relations and breach of contract, among other claims — Action allowed in part — C breached his fiduciary duties owed as vice president, assistant general manager and most senior employee — C took active steps to plan to set up business that competed with Z Inc., while still employed — C tried to get Z Ltd.’s top salesperson, J, fired — C 8 BUSINESS LAW REPORTS 77 B.L.R. (4th) was liable to Z Ltd. for $158,000 for termination of two arrangements with W — D did not breach his fiduciary duties in creating K Inc. — C breached his fiduciary obligations continuing post-dismissal when he assisted Z Ltd.’s competitor, K Inc. — K Inc. benefi- ted from C’s breaches of duty — K Inc. and C were jointly and severally liable to Z Ltd. for knowing breach of fiduciary duty in amount of $100,000. Torts –––– Conspiracy — Nature and elements of tort — General principles –––– Plaintiff employer Z Ltd. employed defendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — C tried to use H-C to entrap his coworker J, but J told VE that C was competing with Z Ltd. — While employed, C induced Z Ltd.’s customer W to terminate commissions to and its relationship with Z Ltd. — Defendant P, not employed by Z Ltd., knew of and assisted with C’s plans to compete with Z Ltd. — C and D were fired and S resigned — Z Ltd. brought action against defendants for injunc- tive relief and damages for breach of fiduciary duty and conspiracy, among other claims — Action allowed in part — C breached his fiduciary duties owed as vice presi- dent, assistant general manager and most senior employee — C took active steps to plan to set up business that competed with Z Inc., while still employed — C tried to get Z Ltd.’s top salesperson, J, fired — C and P acted in concert — C’s breach of fiduciary duty was unlawful and resulted in injury to Z Ltd. — C and P were liable for tort of civil conspiracy — C and P were jointly and severally liable to Z Ltd. for $158,000 for termi- nation of two arrangements with W. Torts –––– Conspiracy — Remedies — Damages –––– Plaintiff employer Z Ltd. em- ployed defendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — C tried to use H-C to entrap his coworker J, but J told VE that C was competing with Z Ltd. — While employed, C induced Z Ltd.’s customer W to terminate commis- sions to and its relationship with Z Ltd. — Defendant P, not employed by Z Ltd., knew of and assisted with C’s plans to compete with Z Ltd. — C was fired — Z Ltd. brought action against defendants for injunctive relief and damages for breach of fiduciary duty and conspiracy, among other claims — Action allowed in part — C breached his fiduci- ary duties owed as vice president, assistant general manager and most senior employee — C and P acted in concert — C’s breach of fiduciary duty was unlawful and resulted in injury to Z Ltd. — C and P were jointly and severally liable to Z Ltd. for tort of civil conspiracy in amount of $158,000 — Z Ltd. was entitled to compensation for losses from termination of two arrangements with W — C projected he would make $32,000 from W in commissions and $126,000 in relationship with W in one year — Arrangements be- tween Z Ltd. and W were unlikely to have lasted more than one year. Labour and employment law –––– Employment law — Elements of employment re- lationship — Duties of employee to employer — Use of confidential information –––– Plaintiff employer Z Ltd. employed defendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — C and D were fired and S resigned — After being fired, D incorporated K Inc., which competed with Z Ltd. — Z Ltd. brought action against defendants for injunctive relief and damages for breach of fiduciary duty, interfer- ence with economic relations and breach of contract, among other claims — Action al- Zesta Engineering Ltd. v. Cloutier 9 lowed in part — K Inc. breached Z Ltd.’s rights by misusing its confidential informa- tion — Z Ltd.’s product costing information and database was confidential information — W was involved with product costing with Z Ltd. — W made very similar product costing database for K Inc. by misusing confidential information he had retained from Z Ltd. — But for use of Z Ltd.’s information, K Inc. would have been at disadvan- tage when submitting competitive bids for customer’s requirements — It would have taken K Inc. six months to be able to forecast costs accurately — Proper award to Z Ltd. was value of benefit gained by K Inc. in wrongfully exploiting confidential informa- tion — Z Ltd. was awarded damages of $45,000 against K Inc. for misuse of confidential information. Business associations –––– Specific matters of corporate organization — Directors and officers — Fiduciary duties — Taking of corporate opportunity –––– Plaintiff employer Z Ltd. employed defendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — C and D were fired and S resigned — After being fired, D incorporated K Inc., which competed with Z Ltd. — Z Ltd. was developing prototype for customer — Customer approached K Inc. to develop prototype — Customer eventually terminated relationship with Z Ltd. — Z Ltd. brought action against defendants for in- junctive relief and damages for breach of fiduciary duty and conversion, among other claims — Action allowed in part — K Inc. did not improperly usurp Z Ltd.’s corporate opportunity — In industry, customers were able to approach other suppliers to develop prototypes — Customer approached K Inc. on its own initiative — Z Ltd. took some ac- tions that would have resulted in customer terminating relationship independent of K Inc.. Labour and employment law –––– Employment law — Elements of employment re- lationship — Duties of employee to employer — Miscellaneous –––– Taking of corpo- rate opportunity — Plaintiff employer Z Ltd. employed defendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — C and D were fired and S resigned — After being fired, D incorporated K Inc., which competed with Z Ltd. — Z Ltd. was developing prototype for customer — Customer approached K Inc. to develop prototype — Customer eventually terminated relationship with Z Ltd. — Z Ltd. brought action against defendants for injunctive relief and damages for breach of fiduciary duty and conversion, among other claims — Action allowed in part — K Inc. did not improp- erly usurp Z Ltd.’s corporate opportunity — In industry, customers were able to approach other suppliers to develop prototypes — Customer approached K Inc. on its own initia- tive — Z Ltd. took some actions that would have resulted in customer terminating rela- tionship independent of K Inc.. Torts –––– Conversion — Availability — Against particular party — Miscellane- ous –––– Former employee — Plaintiff employer Z Ltd. employed defendants C, D, S and W — C sold Z Ltd.’s heaters to H through C Inc. and converted proceeds — C distrib- uted proceeds partly to himself and partly to defendants 798 Ltd. and P — C was fired — C pleaded guilty to charge of theft over $5,000 — Z Ltd. brought action against defend- ants for damages for conversion, among other claims — Action allowed in part — Defen- dant lawyer and his company, 798 Ltd., knowingly participated in C’s conversion, but P did not — C converted full value of heaters — C had not paid any sum to Z Ltd. by way 10 BUSINESS LAW REPORTS 77 B.L.R. (4th) of restitution pursuant to his criminal sentence — C was liable for US$132,209.88, con- verted to Canadian dollars at rate as of November 30, 1999 — C, lawyer and 798 Inc. were jointly and severally liable to Z Ltd. for $44,619, being amount that C Inc. paid to 798 Inc. Remedies –––– Damages — Damages in tort — Other torts — Conversion –––– Plain- tiff employer Z Ltd. employed defendants C, D, S and W — C sold Z Ltd.’s heaters to H through C Inc. and converted proceeds — C distributed proceeds partly to himself and partly to defendants 798 Ltd. and P — C was fired — C pleaded guilty to charge of theft over $5,000 — Z Ltd. brought action against defendants for damages for conversion, among other claims — Action allowed in part — Defendant lawyer and his company, 798 Ltd., knowingly participated in C’s conversion, but P did not — C converted full value of heaters — C had not paid any sum to Z Ltd. by way of restitution pursuant to his criminal sentence — C was liable for US$132,209.88, converted to Canadian dollars at rate as of November 30, 1999 — C, lawyer and 798 Inc. were jointly and severally liable to Z Ltd. for $44,619, being amount that C Inc. paid to 798 Inc. Judges and courts –––– Contempt of court — Forms of contempt — Disobedience of court — Injunctions — Employment –––– Plaintiff employer Z Ltd. employed defend- ants C, D, S and W — C had falling out with Z Ltd.’s president, VE — C met with defen- dant lawyer to create business plan for new company H-C to compete with Z Ltd. — C tried to use H-C to entrap his coworker J, but J told VE that C was competing with Z Ltd. — While employed, C induced Z Ltd.’s customer W to terminate commissions to and its relationship with Z Ltd. — C and D were fired and S resigned — After being fired, D incorporated K Inc., which competed with Z Ltd. — Z Ltd.’s customer H con- tacted C, who referred H to K Inc. — C went on road trip with K Inc. to obtain contracts with suppliers — Z Ltd. obtained injunctions against C and K Inc. from directly or indi- rectly soliciting customers and suppliers of Z Ltd. — Z Ltd. brought action against de- fendants for injunctive relief and damages for breach of fiduciary duty, interference with economic relations, breach of contract, conversion and conspiracy, among other claims — Action allowed in part — C and K Inc. did not breach injunctions — C con- tacted representative from FG, customer of Z Ltd. — C did not solicit business from FG — Order did not prevent C from making any contact at all with customers — Con- tempt was not proven beyond reasonable doubt. Labour and employment law –––– Employment law — Elements of employment re- lationship — Duties of employee to employer — Fiduciary duties –––– Plaintiff em- ployer Z Ltd. employed defendants C, D, S and W — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — C tried to use H-C to entrap his coworker J, but J told owner of Z Ltd. that C was competing with Z Ltd. — While employed, C induced Z Ltd.’s customer W to terminate commissions to and its relationship with Z Ltd. — C and D were fired and S resigned — After being fired, D incorporated K Inc., which competed with Z Ltd. — C assisted K Inc. by referring Z Ltd.’s customer to K Inc. and helping obtain contracts with suppliers — Z Ltd. brought action against defendants for damages for breach of fiduciary duty, among other claims — Action allowed in part — C breached his fiduciary duties owed as vice presi- dent, assistant general manager and most senior employee — C took active steps to set up competing business, while still employed — C was liable to Z Ltd. for $158,000 for ter- Zesta Engineering Ltd. v. Cloutier 11 mination of two arrangements with W — D, S and W did not have advance knowledge of C’s plan to compete and did not breach duties — D did not breach his fiduciary duties in creating K Inc. — D was not not under obligation to refrain from competing after being wrongfully dismissed — C breached his fiduciary obligations continuing post-dismissal when he assisted Z Ltd.’s competitor, K Inc. — K Inc. benefited from C’s breaches of duty — K Inc. and C were jointly and severally liable to Z Ltd. for knowing breach of fiduciary duty in amount of $100,000. Labour and employment law –––– Employment law — Elements of employment re- lationship — Duties of employee to employer — Duty of good faith and fidelity –––– Plaintiff employer Z Ltd. employed defendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — Z Ltd.’s customer W approached C and offered to pay him personal commission based on sales of W’s products to H via Z Ltd. — In first trial of Z Ltd.’s action against defendants, trial judge held that C had to repay commissions, but did not characterize them as secret — Court of appeal set aside trial judge’s decision and ordered new trial — Z Ltd. brought action against defendants for injunctive relief and damages for breach of fiduciary duty, interference with economic relations, breach of contract, conversion and conspiracy — Action allowed in part — C did not appeal trial judge’s decision that he had to repay commissions — C was still liable to repay commis- sions to Z Ltd. — Payments C received were secret commissions — C’s explanation that payments were reimbursements of his expenses was not accepted — C was paid personal commission to do job he was paid to do by Z Ltd. — As result of C’s commissions, W reduced its commissions it paid to Z Ltd. — Z Ltd. was not aware of commissions paid to C. Labour and employment law –––– Employment law — Termination and dismissal — Termination of employment by employer — What constituting just cause — Mis- conduct — Dishonesty –––– Plaintiff employer Z Ltd. employed defendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — C tried to use H-C to entrap his coworker J, but J told owner of Z Ltd. that C was competing with Z Ltd. — While employed, C induced Z Ltd.’s customer W to terminate commissions to and its relationship with Z Ltd. — C received secret commissions from Z Ltd.’s customer W — C was fired — Z Ltd. brought action against defendants for injunctive relief and damages for breach of fiduciary duty, interference with economic relations, breach of contract, conversion and conspiracy — Action allowed in part — C brought counterclaim for wrongful dismissal — Counterclaim dismissed — Z Ltd. had cause to dismiss C — C’s conduct in trying to undermine Z Ltd.’s business amounted to serious misconduct incom- patible with his duties and prejudicial to Z Ltd.’s business — C tried to induce dismissal of leading salesman, terminated relationships with W, laid plans to compete and take senior management team with him — C’s conversion of proceeds of heater sales and receipt of secret commissions also provided grounds for cause. Labour and employment law –––– Employment law — Termination and dismissal — Notice — Considerations affecting length of notice — Length of service –––– Plaintiff employer Z Ltd. employed defendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — C tried to use H-C to entrap his coworker J, but J told 12 BUSINESS LAW REPORTS 77 B.L.R. (4th) owner of Z Ltd. that C was competing with Z Ltd. — While employed, C induced Z Ltd.’s customer W to terminate commissions to and its relationship with Z Ltd. — C re- ceived secret commissions from Z Ltd.’s customer W — C was fired — Z Ltd. brought action against defendants for injunctive relief and damages for breach of fiduciary duty, interference with economic relations, breach of contract, conversion and conspiracy — Action allowed in part — C brought counterclaim for wrongful dismissal — Counter- claim dismissed — Z Ltd. had cause to dismiss C — C’s damages were assessed in obiter — Based on C’s seniority, length of service of 21 years and level of responsibility, C would have been entitled to 24 months’ notice of termination — At time of termina- tion, C was paid salary of $225,000 plus bonus of $50,000 and benefits of $33,750 — C would have been entitled to damages of $617,500. Business associations –––– Specific matters of corporate organization — Sharehold- ers — General principles — Who are shareholders — Miscellaneous –––– Em- ployee — Plaintiff employer Z Ltd. employed defendants C, D, S and W — VE had pro- posed succession plan that would have given C majority ownership of business — Succession plan was never completed — C had falling out with Z Ltd.’s president, VE — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — While employed, C induced Z Ltd.’s customer W to terminate commis- sions to and its relationship with Z Ltd. — C received secret commissions from Z Ltd.’s customer W — C was fired — Z Ltd. brought action against defendants for injunctive relief and damages for breach of fiduciary duty, interference with economic relations, breach of contract, conversion and conspiracy — Action allowed in part — C brought counterclaim for wrongful dismissal and sought declaration that he had equity in Z Ltd. — Counterclaim dismissed — Z Ltd. had cause to dismiss C — C did not have eq- uity in Z Ltd. — There was no contractual basis for C to have equity in Z Ltd. — Succes- sion plan that would have given C equity in business was never concluded — There was no equitable ground for C to have equity in Z Ltd. because of C’s misfeasance. Labour and employment law –––– Employment law — Termination and dismissal — Termination of employment by employer — What constituting just cause — Mis- conduct — Miscellaneous –––– Plaintiff employer Z Ltd. employed defendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — C tried to use H- C to entrap his coworker J, but J told owner of Z Ltd. that C was competing with Z Ltd. — D did not have advance knowledge of C’s plan to compete — D was involved in sting of J on direction from his boss, C — D was fired — Z Ltd. brought action against defendants for damages for breach of fiduciary duty and conspiracy, among other claims — Action allowed in part — D brought counterclaim for wrongful dismissal — Counterclaim allowed — Z Ltd. did not have cause to dismiss D — D was wrongfully dismissed — D did not participate in conspiracy to compete with Z Ltd. — D was una- ware of C’s plans — D designed logo for H-C on orders from his boss, C — Any possi- ble transgressions D committed were very minor — Z Ltd. did not have cause because D swore truthful affidavit in favour of C — No employee should be forced to choose be- tween telling truth and keeping job — D was entitled to 20 months’ notice, equal to $212,520 in damages, and to $75,000 for moral damages. Zesta Engineering Ltd. v. Cloutier 13

Labour and employment law –––– Employment law — Termination and dismissal — Notice — Considerations affecting length of notice — Responsibility of position –––– Plaintiff employer Z Ltd. employed defendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — C tried to use H-C to entrap his coworker J, but J told owner of Z Ltd. that C was competing with Z Ltd. — D did not have advance knowledge of C’s plan to compete — D was involved in sting of J on direction from his boss, C — D was fired — Z Ltd. brought action against defendants for damages for breach of fiduciary duty and conspiracy, among other claims — Action allowed in part — D brought counterclaim for wrongful dismissal — Counterclaim allowed — Z Ltd. did not have cause to dismiss D — D was wrongfully dismissed — D was entitled to 20 months’ notice, equal to $212,520 in damages — D had no written contract of em- ployment — D was employed for 19 years — D was 40 years old at time of dismissal — D was national operations manager and had significant supervisory and managerial re- sponsibilities — Applicable period of reasonable notice was 20 months — D’s monthly salary was $9,240 and received benefits equal to 15 percent of his income — D was enti- tled to damages of $212,520. Labour and employment law –––– Employment law — Termination and dismissal — Notice — Mitigation by employee — Self-employment –––– Plaintiff employer Z Ltd. employed defendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — C tried to use H-C to entrap his coworker J, but J told owner of Z Ltd. that C was competing with Z Ltd. — D did not have advance knowledge of C’s plan to com- pete — D was involved in sting of J on direction from his boss, C — D was fired — Z Ltd. brought action against defendants for damages for breach of fiduciary duty and con- spiracy, among other claims — Action allowed in part — D brought counterclaim for wrongful dismissal — Counterclaim allowed — Z Ltd. did not have cause to dismiss D — D was wrongfully dismissed — Applicable period of reasonable notice was 20 months — D was entitled to damages of $212,520 — D did not fail to mitigate his dam- ages — There was no reduction of D’s award — D tried to set himself up as sales repre- sentative, resulting in creation of K Inc. — D acted reasonably in setting up his business, even though he did not receive income during start up period. Labour and employment law –––– Employment law — Termination and dismissal — Remedies — Damages for mental distress arising from dismissal (Wallace dam- ages) –––– Plaintiff employer Z Ltd. employed defendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — C tried to use H-C to entrap his co- worker J, but J told owner of Z Ltd. that C was competing with Z Ltd. — D did not have advance knowledge of C’s plan to compete — D was involved in sting of J on direction from his boss, C — D was fired — Z Ltd. brought action against defendants for damages for breach of fiduciary duty and conspiracy, among other claims — Action allowed in part — D brought counterclaim for wrongful dismissal — Counterclaim allowed — D was wrongfully dismissed — D was entitled to damages of $212,520 in lieu of 20 months’ notice — D was also entitled to moral damages in amount of $75,000 — Z Ltd.’s actions surrounding D’s dismissal demonstrated bad faith — D was dismissed over phone five days before Christmas — Z Ltd. fired D for telling truth and choosing wrong 14 BUSINESS LAW REPORTS 77 B.L.R. (4th) side in dispute between Z Ltd. and C — Z Ltd. fought D’s employment insurance appli- cation for two years — D had been very close family friend of VE — D was devastated, stressed, sad and angry. Remedies –––– Damages — Damages for breach of fiduciary duty — Employment relationship –––– Plaintiff employer Z Ltd. employed defendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — While employed, C in- duced Z Ltd.’s customer W to terminate commissions to and its relationship with Z Ltd. — C and D were fired and S resigned — After being fired, D incorporated K Inc., which competed with Z Ltd. — C assisted K Inc. by referring Z Ltd.’s customer to K Inc. — Z Ltd. brought action against defendants for damages for breach of fiduciary duty, among other claims — Action allowed in part — C breached his fiduciary duties owed as vice president, assistant general manager and most senior employee — D, S and W did not have advance knowledge of C’s plan to compete and did not breach duties — D did not breach his fiduciary duties in creating K Inc. — K Inc. benefited from C’s breaches of duty — K Inc. and C were jointly and severally liable to Z Ltd. for knowing breach of fiduciary duty in amount of $100,000 — $100,000 was value to K Inc. in being able to get up and running sooner than it might have been able to do without C’s breaches of duty — There was no basis for Z Ltd.’s claim for equitable ownership of K Inc. or ac- counting for seven years’ worth of sales — Seven year non-competition covenant was unreasonably long to protect Z Ltd.’s interests and customer lists were unreasonably broad. Remedies –––– Damages — Exemplary, punitive and aggravated damages — Effect of criminal conviction — General principles –––– Plaintiff employer Z Ltd. employed defendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — C tried to use H-C to entrap his coworker J, but J told VE that C was competing with Z Ltd. — While employed, C induced Z Ltd.’s customer W to terminate commis- sions to and its relationship with Z Ltd. — C sold Z Ltd.’s heaters to Z Ltd.’s customer, H, through C Inc. and converted proceeds — C was fired — C pleaded guilty to charge of theft over $5,000 — C assisted competitor K Inc. after his dismissal with cause — Z Ltd. brought action against defendants for damages, including punitive damages, for breach of fiduciary duty and conversion, among other claims — Action allowed in part — C was liable to pay punitive damages to Z Ltd. — Court disregarded C’s misconduct in relation to conversion when determining whether C was liable for punitive damages — C had been subjected to criminal sentence for his conversion of proceeds of heater sales. Remedies –––– Damages — Exemplary, punitive and aggravated damages — Grounds for awarding exemplary, punitive and aggravated damages — Breach of fiduciary duty –––– Plaintiff employer Z Ltd. employed defendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — C tried to use H-C to entrap his coworker J, but J told VE that C was competing with Z Ltd. — While em- ployed, C induced Z Ltd.’s customer W to terminate commissions to and its relationship with Z Ltd. — C assisted competitor K Inc. after his dismissal with cause — Z Ltd. brought action against defendants for damages, including punitive damages, for breach of Zesta Engineering Ltd. v. Cloutier 15 fiduciary duty, among other claims — Action allowed in part — C was liable to pay pu- nitive damages to Z Ltd. in amount of $75,000 — C breached his fiduciary duties owed as vice president, assistant general manager and most senior employee — C took active steps to plan to set up business that competed with Z Inc., while still employed — C tried to get Z Ltd.’s top salesperson, J, fired — C decided to sabotage Z Ltd. because of his falling-out with VE — C’s conduct was dishonest and breach of duty — C’s conduct warranted sanction by way of punitive damages — C’s position held him to highest stan- dards of fiduciary — C’s misconduct departed to marked degree from ordinary standards of decent behaviour — Seriousness of C’s conduct led to punitive damages award. Remedies –––– Damages — Exemplary, punitive and aggravated damages — Grounds for awarding exemplary, punitive and aggravated damages — Miscellane- ous –––– Supporting breach of fiduciary duty — Plaintiff employer Z Ltd. employed de- fendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — C met with defendant lawyer to create business plan for new company H-C to compete with Z Ltd. — While employed, C induced Z Ltd.’s customer W to terminate commissions to and its relationship with Z Ltd. — Defendant P, not employed by Z Ltd., knew of and assisted with C’s plans to compete with Z Ltd. — C and D were fired and S resigned — Z Ltd. brought action against defendants for damages, including punitive damages, for breach of fiduciary duty, interference with economic relations, breach of contract, and conspiracy, among other claims — Action allowed in part — C breached his fiduciary duties owed as vice president, assistant general manager and most senior employee — C and P acted in concert — C’s breach of fiduciary duty was unlawful and resulted in injury to Z Ltd. — C and P were liable for tort of civil conspiracy — P was liable to pay Z Ltd. punitive damages in amount of $10,000 — P was not employee or executive of Z Ltd. — P did not owe fiduciary duties — P knowingly and willingly conspired with C — P was aware of C’s misconduct and was willing to support him — Others needed to be discour- aged from facilitating breaches of duty by persons in senior corporate positions. Remedies –––– Injunctions — Availability of injunctions — Injunctions in specific contexts — Restrictive covenants — Employment contract –––– Plaintiff corporation Z Ltd. employed defendants C, D, S and W — C made plans to compete with Z Ltd. — C and D were fired and S resigned — After being fired, D incorporated K Inc., which com- peted with Z Ltd. — Z Ltd. obtained injunction against C and K Inc. from directly or indirectly soliciting customers and suppliers of Z Ltd. — Z Ltd. brought action against defendants for injunctive relief for breach of fiduciary duty, interference with economic relations, breach of contract, conversion and conspiracy, among other claims — Action allowed in part — K Inc. brought counterclaim for damages for interference with contrac- tual and economic relations — Counterclaim allowed in part — Injunctive relief should not have been granted as against K Inc. — Customer lists relating to order were too broad and significantly restricted K Inc.’s business activities — K Inc. did not significantly breach Z Ltd.’s rights — Z Ltd. was liable to K Inc. for compensation for injunctive or- ders — K Inc. tried to comply with orders to best of its ability — In first year of opera- tion, scope of K Inc.’s business was restricted considerably but it was in start up mode — Sales tripled from first year to second year when injunctions were lifted — Not all in- crease of sales was attributable to injunctions being lifted — Fair award of damages was $56,000. 16 BUSINESS LAW REPORTS 77 B.L.R. (4th)

Debtors and creditors –––– Fraudulent conveyances — What constituting –––– Plain- tiff employer Z Ltd. employed defendants C, D, S and W — C had falling out with Z Ltd.’s president, VE — D, S and W did not have advance knowledge of C’s plan to com- pete — C and D were fired and S resigned — D transferred his joint interest in his matri- monial home to his wife for no consideration after leaving Z Ltd. — Z Ltd. brought ac- tion against D for constructive trust based on fraudulent conveyance — Action dismissed — D was not liable to Z Ltd. — Z Ltd. had no contingent claim or any basis for advancing cause of action against D at time of conveyance — Transfer was not made with intent to hinder, default, delay or defraud creditor — D transferred his interest be- cause wife asked him repeatedly to do so in order to give her greater security in light of her past experience in first marriage — Prior to trial, wife reconveyed to D his half inter- est in now current matrimonial home but Z Ltd. continued to pursue claim. Cases considered by Stinson J.: Ansell Rubber Co. Pty v. Allied Rubber Industries Pty Ltd. (1967), [1972] R.P.C. 811, [1967] V.R. 37 (Australia Vic. Sup. Ct.) — considered Canada Cement LaFarge Ltd. v. British Columbia Lightweight Aggregate Ltd. (1983), [1983] 1 S.C.R. 452, 145 D.L.R. (3d) 385, 47 N.R. 191, [1983] 6 W.W.R. 385, 21 B.L.R. 254, 24 C.C.L.T. 111, 72 C.P.R. (2d) 1, 1983 CarswellBC 734, 1983 Car- swellBC 812, [1983] S.C.J. No. 33 (S.C.C.) — followed Canadian Aero Service Ltd. v. O’Malley (1973), [1974] S.C.R. 592, 40 D.L.R. (3d) 371, 11 C.P.R. (2d) 206, 1973 CarswellOnt 236, 1973 CarswellOnt 236F, [1973] S.C.J. No. 97 (S.C.C.) — followed Coco v. A.N. Clark (Engineers) Ltd. (1968), [1969] R.P.C. 41, [1968] F.S.R. 415 (Eng. Ch. Div.) — considered Danyluk v. Ainsworth Technologies Inc. (2001), 54 O.R. (3d) 214 (headnote only), 201 D.L.R. (4th) 193, 10 C.C.E.L. (3d) 1, 2001 C.L.L.C. 210-033, 272 N.R. 1, 149 O.A.C. 1, 7 C.P.C. (5th) 199, 34 Admin. L.R. (3d) 163, 2001 CarswellOnt 2434, 2001 CarswellOnt 2435, 2001 SCC 44, [2001] 2 S.C.R. 460, [2001] S.C.J. No. 46, REJB 2001-25003 (S.C.C.) — followed DiFlorio v. Con Structural Steel Ltd. (2000), 2000 CarswellOnt 316, 6 B.L.R. (3d) 253, [2000] O.J. No. 340 (Ont. S.C.J.) — considered Edac Inc. v. Tullo (1999), 1999 CarswellOnt 4106, 47 C.C.E.L. (2d) 264, [1999] O.J. No. 4837 (Ont. S.C.J.) — considered Faryna v. Chorny (1951), 1951 CarswellBC 133, 4 W.W.R. (N.S.) 171, [1952] 2 D.L.R. 354, [1952] 4 W.W.R. 171, [1951] B.C.J. No. 152 (B.C. C.A.) — followed General Billposting Co. v. Atkinson (1908), [1909] A.C. 118 (U.K. H.L.) — considered Gold v. Rosenberg (1995), 9 E.T.R. (2d) 93, 129 D.L.R. (4th) 152, 1995 CarswellOnt 823, 86 O.A.C. 116, 25 O.R. (3d) 601, [1995] O.J. No. 3156 (Ont. C.A.) — considered International Corona Resources Ltd. v. LAC Minerals Ltd. (1989), 44 B.L.R. 1, 35 E.T.R. 1, (sub nom. LAC Minerals Ltd. v. International Corona Resources Ltd.) 69 O.R. (2d) 287, (sub nom. LAC Minerals Ltd. v. International Corona Resources Ltd.) 61 D.L.R. (4th) 14, 101 N.R. 239, 36 O.A.C. 57, (sub nom. LAC Minerals Ltd. v. International Corona Resources Ltd.) [1989] 2 S.C.R. 574, 6 R.P.R. (2d) 1, (sub nom. LAC Minerals Ltd. v. International Corona Resources Ltd.) 26 C.P.R. (3d) 97, Zesta Engineering Ltd. v. Cloutier 17

1989 CarswellOnt 126, 1989 CarswellOnt 965, [1989] S.C.J. No. 83, EYB 1989- 67469 (S.C.C.) — considered Keays v. Honda Canada Inc. (2008), 2008 SCC 39, (sub nom. Honda Canada Inc. v. Keays) 2008 C.L.L.C. 230-025, 376 N.R. 196, 294 D.L.R. (4th) 577, (sub nom. Honda Canada Inc. v. Keays) [2008] 2 S.C.R. 362, 92 O.R. (3d) 479 (note), (sub nom. Honda Canada Inc. v. Keays) 63 C.H.R.R. D/247, 66 C.C.E.L. (3d) 159, 2008 CarswellOnt 3743, 2008 CarswellOnt 3744, 239 O.A.C. 299, [2008] S.C.J. No. 40, EYB 2008-135085 (S.C.C.) — considered MacMillan Bloedel Ltd. v. Binstead (1983), 22 B.L.R. 255, 1983 CarswellBC 540, 14 E.T.R. 269, [1983] B.C.J. No. 802 (B.C. S.C.) — considered Martin v. Goldfarb (1998), 112 O.A.C. 138, 163 D.L.R. (4th) 639, 44 B.L.R. (2d) 158, 1998 CarswellOnt 3319, 42 C.C.L.T. (2d) 271, 41 O.R. (3d) 161, [1998] O.J. No. 3403 (Ont. C.A.) — considered McKinley v. BC Tel (2001), 9 C.C.E.L. (3d) 167, 200 D.L.R. (4th) 385, 91 B.C.L.R. (3d) 1, 2001 C.L.L.C. 210-027, [2001] 8 W.W.R. 199, 153 B.C.A.C. 161, 251 W.A.C. 161, 271 N.R. 16, [2001] 2 S.C.R. 161, 2001 SCC 38, 2001 CarswellBC 1335, 2001 CarswellBC 1336, [2001] S.C.J. No. 40, REJB 2001-24834 (S.C.C.) — considered Mount Hamilton Christian Reformed Church v. Sikkema (1995), 1995 CarswellOnt 2782, [1995] O.J. No. 1568 (Ont. Gen. Div.) — considered R. v. Palmer (1979), 1979 CarswellBC 533, 1979 CarswellBC 541, [1980] 1 S.C.R. 759, 30 N.R. 181, 14 C.R. (3d) 22, 17 C.R. (3d) 34 (Fr.), 50 C.C.C. (2d) 193, 106 D.L.R. (3d) 212, [1979] S.C.J. No. 126 (S.C.C.) — followed Schauenburg Industries Ltd. v. Borowski (1979), 8 B.L.R. 164, 50 C.P.R. (2d) 69, 1979 CarswellOnt 166, 25 O.R. (2d) 737, 101 D.L.R. (3d) 701, [1979] O.J. No. 4349 (Ont. H.C.) — referred to Soulos v. Korkontzilas (1997), [1997] 2 S.C.R. 217, 212 N.R. 1, 1997 CarswellOnt 1490, 1997 CarswellOnt 1489, 9 R.P.R. (3d) 1, 46 C.B.R. (3d) 1, 17 E.T.R. (2d) 89, 32 O.R. (3d) 716 (headnote only), 146 D.L.R. (4th) 214, 100 O.A.C. 241, [1997] S.C.J. No. 52 (S.C.C.) — considered Sussex Group Ltd. v. Fangeat (2003), 2003 CarswellOnt 3246, 42 C.P.C. (5th) 274, [2003] O.J. No. 3348 (Ont. S.C.J.) — followed U.S.W.A. v. Port Arthur Shipbuilding Co. (1967), [1967] 2 O.R. 49, (sub nom. R. v. Arthurs) 62 D.L.R. (2d) 342, 67 C.L.L.C. 14,024, 1967 CarswellOnt 135, [1967] O.J. No. 972 (Ont. C.A.) — considered U.S.W.A. v. Port Arthur Shipbuilding Co. (1968), [1969] S.C.R. 85, (sub nom. R. v. Arthurs) 70 D.L.R. (2d) 693, 1968 CarswellOnt 90, (sub nom. R. v. Arthurs) 68 C.L.L.C. 14,136, (sub nom. Port Arthur Shipbuilding Co. v. Arthurs) [1968] S.C.J. No. 82 (S.C.C.) — considered Vetech Laboratories Ltd. v. 621870 Ontario Ltd. (1991), 2 C.P.C. (3d) 135, 1991 Cars- wellOnt 382 (Ont. Gen. Div.) — considered Whiten v. Pilot Insurance Co. (2002), 156 O.A.C. 201, 35 C.C.L.I. (3d) 1, [2002] 1 S.C.R. 595, 2002 SCC 18, 2002 CarswellOnt 537, 2002 CarswellOnt 538, 283 N.R. 1, 20 B.L.R. (3d) 165, [2002] I.L.R. I-4048, 209 D.L.R. (4th) 257, [2002] S.C.J. No. 19, REJB 2002-28036 (S.C.C.) — considered Zesta Engineering Ltd. v. Cloutier (2002), 164 O.A.C. 234, 2002 CarswellOnt 3221, 2003 C.L.L.C. 210-010, 21 C.C.E.L. (3d) 164, [2002] O.J. No. 3738 (Ont. C.A.) — considered 18 BUSINESS LAW REPORTS 77 B.L.R. (4th)

Statutes considered: Courts of Justice Act, R.S.O. 1990, c. C.43 s. 121 — considered s. 121(3) — considered Criminal Code, R.S.C. 1985, c. C-46 s. 380(1)(a) — referred to Employment Standards Act, 2000, S.O. 2000, c. 41 Generally — referred to Fraudulent Conveyances Act, R.S.O. 1990, c. F.29 Generally — referred to s. 2 — considered Rules considered: Rules of Civil Procedure, R.R.O. 1990, Reg. 194 R. 40.03 — considered R. 59.06 — considered

ACTION by employer against former employees, employee’s lawyer and corporations for injunctive relief and damages for breach of fiduciary duty, interference with economic relations, breach of contract, conversion and conspiracy; ACTION by employer against former employee for constructive trust arising from fraudulent conveyance; COUNTER- CLAIMS by employees for wrongful dismissal; COUNTERCLAIM by corporation for damages for interference with contractual relations, negligent misrepresentation, com- mercial slander and deceit.

Stinson J.:

1 This lawsuit is a case study of the risks and consequences of intertwining business, family, and marital relationships. On its face, this proceeding involves claims for breach of fiduciary duty and misappropriation of corporate assets by departing employees, coupled with counterclaims for wrongful dismissal. Be- neath the surface it is the unhappy story of the impact of a marriage breakdown on a successful business enterprise, and the decade of litigation that has ensued.

Overview The parties 2 The plaintiff Zesta Engineering Ltd. is an Ontario corporation based in Mis- sissauga, Ontario. Zesta carries on business as a distributor of electrical heaters, temperature controls, temperature sensors called thermocouples, power controls and similar equipment for industrial applications. Zesta also operates a manufac- turing facility that is involved in the production of similar types of products, including thermocouples. The shares of Zesta are owned by Vincent Eastman and his wife Ruth. Vincent Eastman is the founder, President and controlling mind of Zesta. Zesta Engineering Ltd. v. Cloutier Stinson J. 19

3 The defendant David Cloutier is the son-in-law of Vincent and Ruth East- man, being the husband of their daughter Mary. Cloutier and Mary are estranged and have lived separately since 1998; for her part, Mary is estranged from her parents and siblings, many of whom are Zesta employees. I mention these facts at the outset because they assumed some significance as the evidence unfolded at trial. Cloutier was the Vice-President and Assistant General Manager of Zesta at the time of the events in issue. 4 The defendant Guiseppe (Joe) Durante was employed by Zesta from 1980 until December 1999, and latterly held the post of National Operations Manager. The defendant Keith Sanger was employed by Zesta from 1995 until December 1999. At the time he left Zesta, Sanger was the Sales Manager for Direct Ac- counts known as “original equipment manufacturer” (“OEM”) accounts. The de- fendant James White was employed by Zesta from 1996 until February 2000. He latterly held the position of Production Manager at Zesta’s Mississauga facility. 5 The defendant Kelvin Technologies Inc. was incorporated in early 2000. It carries on a business similar to and in many ways competitive with that of Zesta. Kelvin was incorporated by Durante, who originally owned 70% of its shares, while the remaining 30% were owned by the defendant Derek Peatling. All of Cloutier, Durante, Sanger and White (the “ex-Zesta Defendants”) are associated in some capacity with the business of Kelvin. Peatling is a businessman and investor, as well as a long time acquaintance and friend of Cloutier and Sanger. He currently owns 100% of the shares of Kelvin. 6 The defendant Douglas Christie is a lawyer who specializes in commercial litigation and employment law. Christie represented the defendants Cloutier, Durante, Sanger, White and Kelvin when these proceedings were originally tried before Blenus Wright J. in early 2001. The defendant 798068 Ontario Ltd. (“798”) is a management company controlled by Christie that was created to assist the management of his law practice. 7 Although still named as a defendant in the title of proceedings, Michael Jef- feries settled with the plaintiff in early 2000. He was employed by Zesta from 1993 until 1999, latterly as National Sales Manager. His employment was termi- nated in November 1999, around the time this litigation commenced. Hi-Cap Technologies is also named as a defendant. It was a business name created in connection with an abortive scheme to solicit business from Zesta customers, that I will describe in detail in due course. Hi-Cap took no part in the proceedings. 8 Zesta is also the plaintiff in Action No. 05-CV-302414 (the “Fraudulent Conveyance Action”) in which the named defendants are Durante and his wife Wendy Durante. At issue in that proceeding is the propriety of certain inter- spousal transfers and mortgages of their matrimonial home, which took place subsequent to the termination of Durante’s employment with Zesta. 20 BUSINESS LAW REPORTS 77 B.L.R. (4th)

Factual background 9 Zesta was founded by Vincent Eastman in 1968. Initially, it was a distributor for electrical components including heaters and temperature measuring devices used in industrial applications such as plastic injection molding machines, and the like. Early in its history Zesta became an authorized manufacturer’s repre- sentative for the sale in Canada of parts manufactured by Watlow Electric Man- ufacturing Company, based in St. Louis, Missouri, USA. Over the years the Zesta-Watlow relationship increased in size and importance for both parties, such that at one stage Zesta was Watlow’s single largest distributor and Watlow represented a very significant portion of Zesta’s sales and income. 10 One of the key elements of the success of the Zesta-Watlow business rela- tionship was a customer known as Husky Injection Molding Systems Inc. Based in Bolton, Ontario, Husky is a large international-scale designer and manufac- turer of injection molding equipment that is used by a wide range of manufactur- ers for producing parts, products and other items out of molded plastic and other substances. The equipment manufactured by Husky utilizes small electrical heat- ers that attached to or wrapped around the barrel, nozzle and other parts of the injection moulding machine to keep the molten plastic at a specified tempera- ture. The Husky equipment also incorporates a series of temperature sensing de- vices known as thermocouples, that measure the temperature of the equipment at various locations in the machine. Zesta supplied both heaters and thermocouples to Husky; in addition, Zesta manufactured thermocouples for sale to Husky and elsewhere. 11 Under the original terms of its representation agreement with Watlow, Zesta was not permitted to sell Watlow products to OEMs such as Husky; rather, Zesta was restricted to sales of Watlow goods to end-users. Responsibility for Watlow sales to OEMs was originally assigned to Watlow’s Detroit sales office, oper- ated by one Dave Martignon. Despite his efforts over the years, Martignon was unable to persuade Husky to become a Watlow customer. Through Cloutier’s intervention, however, Zesta was permitted to approach Husky with a proposal to supply Watlow products. That approach was successful and, over time, Husky became a major consumer of Watlow goods. Because Zesta had developed the customer connection and because it served as intermediary and on-site customer service representative for Watlow at Husky’s premises, Watlow paid Zesta a commission on all Watlow goods purchased by Husky. 12 Cloutier was one of Zesta’s original employees, joining the company in 1978. In 1981, he married Vincent Eastman’s daughter Mary. Over the years, Vincent Eastman and Cloutier worked as a team, growing and expanding Zesta’s customer base, product line and sales force. By the mid-1980s, Zesta began manufacturing thermocouples in-house. Zesta expanded its manufacturing capa- bility to include such things as control panels, wiring harnesses and other tem- perature sensing devices in addition to thermocouples. Zesta Engineering Ltd. v. Cloutier Stinson J. 21

13 Zesta’s sales force also expanded. It opened offices in British Columbia, Al- berta and Quebec. By the end of the 1990s, it employed 50 and 60 individuals and it was a very successful enterprise, with annual sales in the order of $9 million. 14 A large measure of Zesta’s success was attributable to Cloutier. In addition to being Vincent Eastman’s son-in-law, he was his right-hand man and they worked very closely together. Over the years their responsibilities diverged, with Cloutier assuming responsibility for the sales and manufacturing aspects of the business, while Vincent Eastman oversaw the finance and administration as- pects. They consulted frequently and there was a free flow of information be- tween them that contributed to the success of the operation. 15 In 1990, Vincent Eastman turned 65 years old. Despite having attained nor- mal retirement age, he continued in his position as President of Zesta. More significantly, however, he had not put in place a succession plan in relation to the ownership and ongoing management of Zesta. The absence of a succession plan proved problematic for two reasons. First, because Zesta was one of its largest distributors, Watlow was anxious that a suitable succession plan be in place to ensure that the business relationship would continue to prosper after Vincent Eastman ceased to be actively involved with Zesta. Watlow made its concern known to Zesta. Its concern heightened after Vincent Eastman suffered heart problems in the early 1990s. Despite that concern, no formal succession plan was in place by the end of the 1990s. 16 The second reason why the absence of a formal succession plan proved problematic was the position in which it left Cloutier. Up until 1997 or so, he had a close working relationship with Vincent Eastman. He had spent his entire working life helping to build Zesta. While he earned a significant income (in excess of $200,000 per year), he was a mere employee and had no equity posi- tion in the company. 17 At one stage Cloutier and Vincent Eastman engaged in discussions with a third party, Roka Incorporated (a refurbisher of injection moulding equipment), concerning the possible acquisition of Roka and the integration of its operations into those of Zesta. Part of the proposed transaction would have contemplated a partial ownership interest for Cloutier in the new Roka. As well, at a family meeting in September 1997, Vincent Eastman outlined the proposed structure of a succession plan for Zesta, which would have given Cloutier and his wife, Mary, majority ownership of the business. 18 By the fall of 1999, however, neither the Roka acquisition nor the formal implementation of the succession plan had been completed. Meanwhile, Cloutier and his wife were encountering marital difficulties. They separated in mid-1997. They attempted to reconcile in 1998, unsuccessfully. They have lived separately ever since. In early 2000, Mary commenced divorce proceedings, but did not follow through with them. They remain married. 22 BUSINESS LAW REPORTS 77 B.L.R. (4th)

19 Part of the success of Zesta was due to the energetic, devoted and capable management team that Vincent Eastman and Cloutier put together. Durante started in a minor shipper-receiver position with the company and assumed in- creasing levels of responsibility over the years to the point of becoming National Operations Manager by the mid-1990s. By the latter part of the 90s, the manage- ment team had grown to include Jefferies, Sanger (a friend of Cloutier whom he recruited to join the team to service the Husky account) and White (who was recruited from another large customer). Together the group worked coopera- tively and energetically to advance the interests of Zesta. As business associates and friends, Cloutier, Durante, Jefferies and Sanger also participated as investors in an outside, private venture known as MultiVest Corporation, a business cre- ated to service and support the real estate sales industry. 20 Unfortunately, the deterioration in the marital relationship between Cloutier and his wife was accompanied by deterioration in the business relationship be- tween Cloutier and Vincent Eastman. Their former close working relationship declined. They communicated less and less frequently. What contact they did have become more and more strained. Cloutier’s attendances at the Zesta prem- ises became less and less frequent. Matters approached the level of animosity in the fall of 1999 as a result of an incident involving a Zesta salesman named Marcel Jones. The Jones incident triggered a series of events that ultimately re- sulted in litigation that commenced in November 1999 and has continued un- abated since then.

The events of fall 1999 21 Jones was one of Zesta’s most successful salesmen. He had key contacts at a number of significant customers, including Nortel Networks Limited, then a very large and successful Canadian-based international technology company. Despite Jones’ success as a salesman, he was not trusted by Cloutier or by the members of his senior management team. In their evidence before me they cited a variety of examples of incidents that caused them concern regarding Jones’ business ethics, loyalty to Zesta and potential plans to free himself from his con- tractual non-competition obligations to go into business for himself. Jones was also the subject of an ongoing controversy between Cloutier and Vincent East- man: Cloutier doubted Jones’ fidelity and wanted to terminate his employment, while Vincent Eastman (who had approved loans from Zesta to Jones, some of which were unpaid) did not agree with Cloutier’s concerns and was unprepared to fire a top producer. 22 The disagreement between Cloutier and Vincent Eastman regarding Jones came to a head in late August and early September of 1999. Despite Cloutier’s directive that he not do so, Jones went to France and made a solo sales call on Nortel France, a Zesta customer. Vincent Eastman approved of the trip. This managerial conflict added to the tensions between Cloutier and Vincent Eastman Zesta Engineering Ltd. v. Cloutier Stinson J. 23

and undoubtedly fuelled the events that followed. There is considerable contro- versy about the proper characterization of those events. 23 Cloutier testified that Jones’ trip to France motivated him to formulate a plan to demonstrate to Vincent Eastman that Jones was disloyal and should be fired. According to Cloutier, he decided to plan a “sting” whereby he would involve Jones in a false plan to solicit business from Zesta customers for a newly-created competing business. His idea was to entrap Jones in this improper conduct, and thus prove his point about Jones’ disloyalty towards Zesta to Vincent Eastman, once and for all, and accomplish Jones’s firing. 24 According to Cloutier, in furtherance of the sting, he met and spoke with Jones about his supposed plan to set up a business to compete against Zesta. Cloutier tried to persuade Jones to use his contacts at Nortel France to submit a false quotation from the new competitor for a significant order. In order to carry the sting forward, Cloutier instructed Sanger (who, in turn, enlisted Durante to assist him) to prepare a quotation in the name of a new enterprise. Sanger came up with the name “Hi-Cap Technologies” and Durante prepared a logo and let- terhead with that name. To give the false quotation more credibility with Jones, Cloutier secured Peatling’s consent to use the business address of Peatling’s company as Hi-Cap’s corporate address, as well some telephone and fax num- bers that Peatling was arranging to install. Cloutier also prepared, according to his evidence, other false documents, including spreadsheets showing revenue and expenses for the new business, with a view to showing these to Jones in order to persuade him of the seriousness of the intended venture. 25 When he become concerned that Jones needed even further persuasion to participate in the new venture, Cloutier arranged (on very short notice) to not only solicit, but to obtain an actual (on its face) order for Hi-Cap, from a U.S. customer of Zesta. As a result of Cloutier’s efforts, Jones supposedly agreed to use the Hi-Cap quotation to try and get Nortel France to place an order with Hi- Cap. 26 Neither side called Jones as a witness before me. Although he played a prominent role in the alleged sting, I am not sure that Jones could have provided any real insight into the motivations of Cloutier and the others; after all, Cloutier sought to create the impression with Jones that he was planning to leave Zesta and compete, something that Cloutier asserts was all a pretext to prove Jones’ disloyalty. In the final analysis, all that Jones could have described was his im- pression of events, something that Cloutier did not dispute. 27 As events unfolded, however, Jones did not procure a Nortel France order for Hi-Cap. Instead, he forwarded to the fax number given to him by Cloutier a Nortel France purchase order addressed to Zesta. On Wednesday, November 24, 1999, Jones reported Cloutier’s activities to Vincent Eastman’s sons, Peter and Greg Eastman, and his brother and legal advisor Bernard Eastman. As a result, they contacted Vincent Eastman who returned from his annual Florida vacation 24 BUSINESS LAW REPORTS 77 B.L.R. (4th)

that evening. Together with Bernard, Vincent Eastman assessed the situation, and the next day Zesta retained its current counsel, immediately commenced proceedings and sought ex parte injunctive and Anton Piller relief against Clou- tier and Jefferies. 28 From Zesta’s perspective, the revelations by Jones were the first indication (it claims) of any misconduct by Cloutier. Based on Jones’ information, Zesta not only initiated litigation, but undertook a detailed investigation – largely led by Bernard Eastman – to determine the extent of Cloutier’s alleged plan to com- pete, and the involvement of other Zesta employees. All of those interviewed, including Jefferies, Durante, Sanger and White (and Cloutier) denied there had been any plan to leave Zesta and compete. Uniformly, they described the entrap- ment of Jones as a sting, carried out under the direction of their boss, Cloutier. Despite their responses, Vincent and Bernard Eastman believed and Zesta con- tinues to maintain to the present day the solicitation of Jones was part of an elaborate plan by Cloutier and the others to take away the core of Zesta’s busi- ness and to compete unlawfully. 29 Zesta’s perspective (or perhaps more accurately, the Eastmans’ perspective) triggered a series of employee terminations and departures. The discovery of Cloutier’s solicitation of Jones and the Hi-Cap – Nortel France quotation was the match that set fire to the smoldering antagonism between Vincent Eastman and Cloutier. On Saturday, November 27, 1999, Cloutier was fired. On Decem- ber 1, Jefferies was fired. They were the two defendants initially named (along with Hi-Cap) in this litigation. 30 On the afternoon of Sunday, November 28, Cloutier and Jefferies met at a restaurant, together with Cloutier’s then-lawyer Christie, with two other mem- bers of the Zesta management team, Durante and Sanger; Peatling attended as well. They discussed what had happened. Christie warned that anyone who sided with Cloutier would likely be fired. He was right. After Durante and Sanger swore affidavits in support of Cloutier’s version of events (namely, that the solicitation of Jones was an abortive sting), on December 2, Durante was fired. Soon thereafter, Sanger resigned. Several months later, White left Zesta after refusing to concede that Cloutier and the others had acted improperly. 31 In the wake of the discovery of the Nortel France - Hi-Cap solicitation, Zesta was successful in obtaining injunctive relief as against Cloutier, Jefferies and Hi-Cap to restrain further solicitation of Zesta customers. Initially, Durante, Sanger and White were not parties to the litigation (nor were Peatling, Kelvin, Christie or 798). The litigation was expanded to include Durante, Sanger, White and Kelvin as co-defendants after Zesta discovered that Durante had incorpo- rated Kelvin and gone into the business of manufacturing thermocouples. Zesta Engineering Ltd. v. Cloutier Stinson J. 25

The incorporation of Kelvin and the events of 2000 32 There is a divergence of perspectives as to the genesis of Kelvin’s business and how the various ex-Zesta Defendants came to be associated with it. Accord- ing to Durante, once he found himself unexpectedly unemployed after having spent his entire working life with Zesta, he decided to try his hand at setting up his own small distribution business in the same sphere as Zesta, the only field of business he knew. At Sanger’s suggestion, Durante met with Peatling who agreed to invest in the new enterprise. Kelvin was incorporated at the end of January 2000, with Peatling as a 30% shareholder; Durante owned the rest of the shares. In October 2001, due to internal strife at Kelvin and in view of Peatling’s ongoing financial support of the business, at Peatling’s insistence Durante trans- ferred all his shares to Peatling, making Peatling Kelvin’s sole shareholder. 33 Although Durante’s claimed plan was to open a small distribution business, Kelvin evolved into a much more substantial operation with the financial back- ing of Peatling. In February 2000, Cloutier, Sanger, Jefferies, White and Durante went on a four day road trip to visit potential suppliers for Durante’s new busi- ness. Kelvin succeeded in obtaining a distribution agreement with one of them. Kelvin rented premises as of March 1, 2000. White, Sanger and Jefferies helped Durante refurbish the premises; Cloutier helped slightly. The new Kelvin prem- ises were outfitted with virtually the same equipment found in the Zesta manu- facturing plant, in order to enable Kelvin to go into the business of manufactur- ing thermocouples. 34 There is a controversy between the adversaries regarding the legitimacy of Kelvin’s new business. The position of Zesta is that the creation of Kelvin was a breach of fiduciary duty on the part of the ex-Zesta Defendants. Zesta further contends that Kelvin got its start in the thermocouple manufacturing business by misappropriating Zesta’s confidential information relating to suppliers, equip- ment and manufacturing know-how. 35 Additionally, beginning in February 2000 Kelvin had contacts with Husky, involving Durante and Sanger (the latter having been the principal day-to-day contact between Zesta and Husky). The meeting with Husky led to Kelvin sup- plying a quote to Husky in early March 2000 for the supply of thermocouples. In due course, also under controversial circumstances, Kelvin became involved in the development of prototype thermocouples for a division of Husky known as “Thixo”. Zesta argues that this conduct by Kelvin and Zesta’s former employees amounted to conversion of an emerging corporate opportunity that Zesta had developed and was pursuing prior to their departure. 36 In the meantime, having discovered Kelvin’s activities and the involvement of the other former Zesta employees, Zesta commenced a further action and ob- tained injunctive relief in that proceeding. The two lawsuits were ultimately con- solidated into the present proceeding. As well, Zesta brought contempt proceed- ings as against Kelvin and the other defendants, alleging noncompliance with 26 BUSINESS LAW REPORTS 77 B.L.R. (4th)

the various injunctive orders it had obtained. The contempt issue was referred to the trial judge.

The original trial decision 37 The consolidated action originally came on for trial before Blenus Wright J. in January and February 2001. Wright J. released his decision on February 22, 2001. His findings and conclusions are summarized in the decision of the Court of Appeal allowing Zesta’s appeal from the judgment of Wright J. and directing a new trial, as follows (at paras. 5 through 9 of [2002] O.J. No. 3738 (Ont. C.A.)): [5] On the whole, the trial was a resounding success for David Cloutier and his business associates. The trial judge found that Cloutier had a motive to leave Zesta and start a new business. However, he ac- cepted the defendants’ position that the evidence uncovered by Zesta relating to a new business, Hi-Cap Technologies, was merely a sham and part of a sting operation to trap a disloyal employee. He rejected Zesta’s contention that Hi-Cap Technologies was a precursor to Kelvin. Kelvin was incorporated by the defendants in the weeks fol- lowing their dismissal and was producing in the same line of busi- ness as Zesta within a few months thereafter. The trial judge held further that the individual defendants’ participation in the sting oper- ation, without Vincent Eastman’s knowledge, did not constitute cause for their dismissal. [6] As a result of these findings, the trial judge found that Durante was wrongfully dismissed and he awarded him damages in the sum of $198,452 plus interest. The defendant Keith Sanger was found to have resigned from his employment and his counterclaim for dam- ages for wrongful dismissal was dismissed. In so far as Cloutier’s dismissal was concerned, a further issue arose having regard to Zesta’s allegation that he had received secret commissions. [7] The trial judge found that, from March 1999 to September 1999, Cloutier had in fact received commissions from a major customer, and as a result Zesta’s own commissions were reduced. Since Clou- tier did not tell Eastman about these commissions, he was ordered to pay Zesta damages in the amount of $100,042 including interest. The trial judge held, however, that Cloutier’s receipt of secret com- missions did not constitute cause for his dismissal since he con- cluded, at para. 243 that “[w]ithout the marriage breakdown, ... [t]he indiscretion of the son-in-law would be considered an isolated oc- currence in a long and unblemished career”. Cloutier was therefore awarded damages for wrongful dismissal in the amount of $503,100 plus interest. [8] Finally, the trial judge rejected Zesta’s claims relating to the defend- ants’ use of confidential information. He found that the information which formed the basis for Kelvin’s production of thermocouples, Zesta Engineering Ltd. v. Cloutier Stinson J. 27

although acquired during the course of the defendants’ employment with Zesta, was not confidential. He also found that any continuing fiduciary obligation owed by the individual defendants as former employees of Zesta did not survive their wrongful dismissal. In his view, they should have been able to compete head to head with Zesta without any consequences. The trial judge therefore dissolved the interim injunctions and awarded resulting damages to Kelvin in the amount of $70,000 plus interest. [9] The counterclaim against the individual shareholders and employees of Zesta was dismissed without costs. A motion for contempt brought by Zesta against David Cloutier and Kelvin Technologies in relation to the interim injunctions also was dismissed. The judgment against Zesta was ordered to take priority over any monies owed to its shareholders, Vincent Eastman and Ruth Eastman. Finally, Zesta was ordered to pay costs, including one set of solicitor-client costs.

Events subsequent to the first trial 38 Zesta appealed the judgment of Wright J. No cross-appeal was brought by Sanger with respect to the dismissal of his counterclaim or by Cloutier with re- spect to the order requiring him to pay damages for having received the commissions. 39 As indicated previously, the Court of Appeal allowed Zesta’s appeal and di- rected a new trial. The court did so on the basis of fresh evidence received by it at the request of Zesta. It summarized the fresh evidence at paras. 19 through 25 of its reasons as follows: [19] On February 14, 2001, approximately one week after the conclusion of the trial, John Eastman, a sales representative with Zesta, attended a sales meeting with Alice Wilson, a buyer for one of Zesta’s cus- tomers “Husky Buffalo”. During the discussion, Wilson asked John Eastman: “What’s this Codlin thing about?” When John Eastman re- plied that he did not recognize the name, Wilson advised him that she had purchased heaters from Cloutier for Husky Buffalo through Codlin Graphics Inc., and not through Zesta. She then showed John Eastman a number of documents relating to the purchases in question. [20] John Eastman reported back on this discussion to Vincent Eastman and to Zesta’s counsel. Neither had ever heard of Codlin or of any connection between Cloutier and Codlin. A corporate search per- formed on Codlin Graphics Inc. on February 15, 2001 revealed that the corporation was incorporated on June 1, 1995 and that Brian Burtch was the president. On February 21, 2001, Zesta reviewed Cloutier’s cellular telephone bills, which were filed in evidence at trial, and noted that Cloutier had made eleven calls to Codlin Graph- ics between October 26, 1999 and November 16, 1999. 28 BUSINESS LAW REPORTS 77 B.L.R. (4th)

[21] On February 26, 2001, John Eastman telephoned Wilson and asked to meet with her to discuss the matter further and asked her to pro- vide him with copies of the documents she had shown him. Wilson declined his requests and advised John Eastman that she did not wish to be involved any further. [22] On March 14, 2001, a further search of Zesta’s computer files un- covered a letter from Cloutier to Burtch, president of Codlin Graph- ics. The letter did not refer to anything of relevance to the sale of heaters to Husky Buffalo but it seemed from its tone to indicate a personal and friendly relationship between Cloutier and Burtch. [23] On March 20, 2001, as a result of a search of Zesta’s records on an unrelated matter concerning Husky Buffalo, invoices relating to the purchase in 1998 and 1999 of heaters similar to those mentioned by Wilson were discovered. The heaters were to be stamped with Husky part number 534192. With the exception of three heaters re- ceived after the termination of Cloutier’s employment, Zesta was un- able to locate any of these heaters in its inventory. Further searches also failed to reveal any sale records for these heaters. [24] This information raised suspicions about Cloutier’s activities prior to his dismissal in November 1999. Consequently, Zesta reported the matter to the Peel Regional Police on April 18, 2001 and, on May 8, 2001, P.C. Barker was assigned to investigate Zesta’s allegations. [25] The police investigation revealed that Cloutier had caused Husky Buffalo to purchase some heaters through Codlin and that Husky Buffalo had paid $132,209 US to Codlin for some 1,806 heater units. Codlin was not in the business of selling heaters and acted at Clou- tier’s direction for no purpose related to Codlin’s business. Cloutier had then directed that the monies be disbursed partly to himself and partly to 798068 Ontario Ltd in payment for “fees”. In turn, 798068 Ontario Ltd disbursed the monies to Cloutier and to one Derek Peatling, who later became a shareholder of Kelvin Technologies Inc., the party to this litigation. 798068 Ontario Ltd, which is owned by Cloutier’s solicitor’s spouse, never performed services for Codlin in return for these fees. 40 As a result of the fresh evidence uncovered by Zesta and the police investi- gation that followed, Cloutier was charged with defrauding Zesta of a sum of money exceeding $5,000 contrary to s. 380(1)(a) of the Criminal Code, R.S.C. 1985, c. C-46. On November 29, 2004, Cloutier pleaded guilty to a charge of theft over $5,000. He received a suspended sentence, was placed on probation for twenty-four months and was ordered to pay restitution to Zesta in the amount of $26,778.55 U.S. funds. 41 As a further result of the fresh evidence, the order of the Court of Appeal directing a new trial, and the police investigation, Zesta amended its claim against Cloutier to include the so-called Codlin transactions. In addition, Zesta Zesta Engineering Ltd. v. Cloutier Stinson J. 29

added Peatling, Christie and 798 as co-defendants. A further consequence of these developments was that Christie ceased to act as counsel, and the defend- ants split into three groups, each represented by different counsel. 42 The other development of significance was the discovery by Zesta that Du- rante had transferred title to his matrimonial home, formerly held by himself and his wife as joint tenants, to his wife exclusively. That house had been sold and a substitute property purchased, also in the name of Wendy Durante. The replace- ment property was mortgaged. Zesta viewed these transactions as ones designed to defeat its claim for damages as against Durante, and it therefore commenced the Fraudulent Conveyance Action, in December 2005.

The claims advanced at the second trial 43 Against the foregoing factual backdrop, the parties come to court raising a number of issues and claiming a wide range of relief.

The relief sought 44 In the amended amended statement of claim, Zesta claims specific relief as against specific defendants, or groups of defendants, as follows: (1) As against Cloutier, Durante, Sanger, White, Kelvin and Peatling: (a) injunctive relief restraining these defendants from: (i) copying or duplicating any confidential information of the plaintiff; (ii) using confidential information; (iii) retaining confidential information; (iv) soliciting customers or suppliers; (v) entering into commercial relations with suppliers of the plaintiff; (vi) soliciting any of the plaintiff’s employees to take employ- ment with any of the defendants; (vii) usurping corporate opportunities available to the plaintiff; (viii) interfering with the contractual relations of the plaintiff with its suppliers; and (ix) engaging in any business activities competitive with those of the plaintiff. (b) damages for breach of fiduciary duty, interference with economic relations, conversion, breach of contract and conspiracy in the amount of ten million dollars; (c) an accounting of all income and profits made by the defendants as a consequence of their breach of fiduciary duty to the plaintiff 30 BUSINESS LAW REPORTS 77 B.L.R. (4th)

and their use of the plaintiff’s confidential information, and an order directing the defendants to disgorge and pay to the plaintiff all such income and profits; and (d) a declaration that the businesses of the defendants which were created as a consequence of the breach of fiduciary duty and their use of the plaintiff’s confidential information are the equitable property of the plaintiff. (2) As against Cloutier alone, Zesta claims: (a) An accounting by Cloutier of all secret commissions received from Zesta’s customers which were properly owed to Zesta and an order directing Cloutier to disgorge and pay to the plaintiff all such commissions; (b) Damages for fraud, conversion, breach of fiduciary duty and con- spiracy, as well as an accounting of all monies received by Clou- tier in relation to purchases of heaters by Husky from Cloutier through Codlin. (3) As against Christie, 798 and Peatling, Zesta claims damages for breach of constructive trust, conversion, and conspiracy and an accounting, all in relation to their participation in the Codlin transactions. (4) As against Durante and Wendy Durante, Zesta claims a declaration that the inter-spousal transfers of their matrimonial home are void as against the plaintiff pursuant to s. 2 of the Fraudulent Conveyances Act, R.S.O. 1990, c. F.29 and that Wendy holds the property in trust for Zesta by way of constructive trust. In addition, Zesta seeks punitive, exemplary and aggravated damages against all defendants. Zesta further seeks findings of contempt as against Kelvin and Clou- tier, arising from alleged breaches of several interlocutory injunction orders ob- tained by Zesta during the course of these proceedings. 45 Several of the defendants are advancing counterclaims against Zesta, as follows: (1) Cloutier claims damages for wrongful dismissal and a declaration that he is the legal and beneficial owner of twenty-four percent of the common shares of Zesta or in lieu thereof damages of $800,000. (2) Kelvin seeks damages for interference with contractual relations, negligent misrepresentation, commercial slander, compromise of competitive position and deceit. Cloutier joins in that claim. (3) Durante claims damages for wrongful dismissal. Zesta Engineering Ltd. v. Cloutier Stinson J. 31

The basis for the claims and the issues raised (1) Zesta’s Claims against Cloutier, Durante, Sanger, White, Kelvin and Peatling 46 Zesta asserts that Cloutier, Durante, Sanger, and White were fiduciaries and further asserts that they were privy to confidential information, including cus- tomer lists, pricing practices, production processes, product designs and manu- facturing specifications. Zesta asserts that Cloutier, Durante, Sanger, and White conspired with one another and with Peatling, in breach of their fiduciary duties, to set up a business entity in competition with Zesta, they solicited Zesta em- ployees to resign and join them, they solicited customers of Zesta to place orders with their new business venture, solicited suppliers of Zesta, and copied lists, and other proprietary and confidential information. Zesta further asserts that the post-departure conduct of the ex-Zesta Defendants in setting up the business of Kelvin and competing with Zesta amounted to a breach of their ongoing fiduci- ary duties, misuse of confidential information and a usurpation of corporate op- portunities that belong to Zesta. 47 Zesta further asserts that the involvement of Cloutier, Durante and Sanger in MultiVest caused Zesta to suffer losses for which they are accountable.

(2) Zesta’s Claims against Cloutier alone 48 Zesta asserts that Cloutier received secret commissions from Watlow, relat- ing to Husky. Zesta submits that, but for Cloutier’s wrongful conduct, Zesta would have been entitled to and ought to have received the commissions. 49 At the first trial before Wright J., Cloutier conceded liability for these com- missions, and judgment was awarded against him for those monies. Cloutier did not appeal that aspect of the judgment, and the Court of Appeal expressly di- rected that there be no new trial in respect of that award of damages. It remains a matter of dispute between the parties, however, whether those commissions con- stitute “secret” commissions and whether that issue is res judicata. At this trial, Zesta asserts that the issue of the characterization of the commissions as secret cannot be disputed by Cloutier and that it constitutes cause for dismissal. Clou- tier argues that there was no binding determination that the commissions were secret and that Wright J. properly concluded that these payments were not cause for dismissal. 50 Zesta further asserts that Cloutier covertly arranged for the heaters to be sold to Husky Buffalo via Codlin, and further, through the agency of Codlin, secretly recovered the funds for his own benefit. 51 Cloutier concedes that some heaters were sold to Husky Buffalo via Codlin. He disputes the quantity of heaters allegedly sold and further denies that the transactions were kept secret from Vincent Eastman. Cloutier’s explanation was that these were surplus Watlow heaters and his intention all along was to ac- count for the sale proceeds and divide them between Watlow and Zesta, some- 32 BUSINESS LAW REPORTS 77 B.L.R. (4th)

thing he never did. His purpose in involving Codlin as an intermediary was to remove any liability of Zesta to Husky Buffalo in respect of these heaters. Clou- tier further asserts that he was acting on legal advice from Christie when he retained the sale proceeds.

(3) Zesta’s Claims against Christie, 798 and Peatling 52 The documentary record associated with the payments by Husky Buffalo to Codlin for the heaters establishes that some portion of the funds passed through the bank accounts of 798 and Peatling. Zesta asserts that Christie, 798 and Peatling conspired with Cloutier to deprive Zesta of the proceeds of sale of the heaters and assisted in the conversion of that money. Zesta therefore claims this sum from those defendants, as well. 53 By way of defence, Peatling asserts that he knew nothing about the Cod- lin/Husky Buffalo transactions. 54 For their part, Christie and 798 assert that Christie merely agreed to arrange for 798 to act as a stakeholder for Cloutier’s funds from Codlin, due to a concern that Zesta and Cloutier’s wife Mary (with whom Cloutier was then engaged in matrimonial litigation) were sharing information about Cloutier’s financial af- fairs. Christie and 798 deny having received any benefit from the Codlin transactions.

(4) Claims against Durante and Wendy Durante 55 As mentioned previously, Durante transferred his interest in the matrimonial home he co-owned with Wendy Durante, to Wendy Durante absolutely. Zesta’s position is that in doing so, Durante was conscious of his exposure to Zesta by reason of his participation in the wrongful conduct in which he was involved with Cloutier et al, and thus the transfer of his interest in the property was car- ried out with intent to defeat Zesta’s claim against him. on this basis, Zesta as- serts that the transfer was fraudulent and subject to being set aside under the Fraudulent Conveyances Act. 56 For their part, the Durantes assert that the transfer had nothing to do with any concern regarding his exposure to Zesta. Rather, it was a matrimonial ar- rangement carried out to satisfy Wendy Durante’s long-standing concerns that the house would not be at risk as a result of any further business endeavours in which Durante might participate.

(5) Counterclaims of Cloutier, Durante and Kelvin 57 Both Cloutier and Durante assert that they were dismissed by Zesta without cause, since they had done nothing wrong at the time their employment was terminated. Each advances a substantial claim for damages for wrongful dismis- sal. As well, Cloutier advances a claim for an equity position in Zesta by reason of Vincent Eastman’s representations to him. Zesta Engineering Ltd. v. Cloutier Stinson J. 33

58 In response, Zesta asserts that it had cause to dismiss both of Cloutier and Durante, due to their improper conduct in conspiring to set up a competing busi- ness while still employed by Zesta. Zesta also relies on the secret commissions and the Codlin transactions as providing just cause for its dismissal of Cloutier. 59 For its part, Kelvin seeks damages against Zesta arising from the unfounded allegations made by Zesta against it and the limitations imposed on it by reason of the unjustified injunctive relief obtained by Zesta during the proceedings.

Issues and Analysis 60 Based upon the foregoing, I am called upon to decide the following issues: 1. Did Cloutier plan to compete with Zesta? 2. Who else was privy to Cloutier’s plan? 3. What was the genesis of Kelvin and did its creation breach any legal rights of Zesta? 4. Did the operations of Kelvin violate any legal rights of Zesta? 5. What legal results flow from the foregoing findings? 6. How should the commission payments from Watlow to Cloutier be characterized? 7. In relation to the heater sales involving Codlin and Husky Buf- falo, (a) what quantities of heaters were sold, what proceeds were realized and what became of them? (b) what was the involvement of Christie, 798 and Peatling in the Codlin-Husky Buffalo transactions? 8. Did Cloutier or Kelvin act in contempt of any court orders ob- tained by Zesta? 9. What remedies should be granted to Zesta? 10. In relation to the termination of Cloutier’s employment, (a) did Zesta have cause for dismissal of Cloutier? (b) what are Cloutier’s damages? (c) is Cloutier entitled to an equity position in Zesta? 11. In relation to the termination of Durante’s employment, (a) did Zesta have cause for dismissal of Durante? (b) what are Durante’s damages? 12. In relation to Kelvin’s counterclaim, (a) did Zesta breach any of Kelvin’s rights? (b) what are Kelvin’s damages? 34 BUSINESS LAW REPORTS 77 B.L.R. (4th)

13. In relation to the inter-spousal transfers of the Durantes’ matri- monial homes, (a) were the transactions a violation of the Fraudulent Con- veyances Act? (b) if so, what remedies should be granted to Zesta, if any? 61 I propose to deal with the factual and legal analysis applicable to each of these issues, in turn. Before doing so, however, I intend to deal with some basic issues relating to findings of fact and credibility.

Preliminary note re findings of fact and credibility 62 In any litigation in which there is a dispute over past events, the trier of fact is faced with the challenge of making findings of fact. Where the evidence con- sists, in whole or in part, of conflicting testimony from witnesses, that challenge includes making assessments of those witnesses’ credibility and the reliability of their evidence. Where, as in this case, the critical events in dispute occurred a decade or so ago, the challenge is increased exponentially. Simply stated, the ability to testify from memory in 2009 regarding a lengthy series of events that took place in 1999 and earlier pushes the limits of any individual’s power of recollection. 63 As a consequence of the length of time that it took this case to reach trial before me in 2009, the memories of most witnesses had, quite understandably, dimmed. Also, quite understandably, the testimony sometimes comprised a nar- rative explanation of events, meetings, communications and thoughts as re- corded or reflected in the various documents that were prepared at the time. Although the documentary record is extensive, it is by no means complete. Given the nature of some of the allegations, one would not expect to find a documentary record of certain events. (The Christie notes - discussed in detail below - are a significant exception to this rule.) 64 I recognize that the evidence of a witness must be assessed in the aggregate, not just with respect to the demeanour of the witness. I also recognize that I can accept all, some, or none of the evidence of any particular witness. As was said in Faryna v. Chorny (1951), [1952] 2 D.L.R. 354 (B.C. C.A.) (at 357): ... the real test of the truth of the story of a witness ... must be its harmony with the preponderance of the probabilities which a practical and informed person would readily recognize as reasonable in that place and in those conditions. 65 In certain instances it is simply not possible to reconcile some aspects of the evidence that was presented by the witnesses at this trial. In part, I liken the situation to attempting to assemble several old jig-saw puzzles whose various parts have sat, co-mingled, in the bottom of an actively-used desk drawer for a decade: some pieces are missing, some are undecipherable, some have changed Zesta Engineering Ltd. v. Cloutier Stinson J. 35

over time and no longer fit together, and some are not what they seem to be, all due to the passage of time and intervening events. In this case my task is to use the pieces of evidence to re-create as clear a picture of past events as I can given the foregoing limitations, applying the “real test of ... truth” as described above, drawing inferences where appropriate, and applying the rules of burden and standard of proof, as required. 66 There are three witnesses whose testimony is of particular significance, hav- ing regard to their involvement in various critical events. I therefore propose to analyze the credibility and reliability of their evidence, first.

Credibility and reliability of Cloutier’s evidence 67 The pivotal figure in this litigation is the defendant Cloutier. He was the senior-most employee at Zesta, and Vincent Eastman’s right-hand man. He was the leader of the management team. He was the one who had the falling out with Vincent Eastman, both on a personal and a professional basis. He was disaf- fected by Vincent Eastman’s foot-dragging in relation to the succession plan and by many of his business decisions, in particular those relating to Roka and Mar- cel Jones. 68 It was Cloutier who invited the others to become involved in MultiVest. It was Cloutier who had the closest connection with Peatling. It was Cloutier who initiated the so-called sting on Marcel Jones. It was Cloutier who initiated the relationship with Christie, with whom (according to Christie’s notes) he dis- cussed a detailed plan to go into competition with Zesta. 69 Additionally, it was Cloutier who had the key connections with Watlow and Husky. It was Cloutier who had the special payment arrangement with Watlow Detroit regarding sales to Husky. It was Cloutier who engineered and imple- mented the heater sales to Husky Buffalo and who involved Codlin and later Christie in the process of recouping the proceeds of those sales. It was Cloutier who kept the sale proceeds and who pleaded guilty to the criminal offence of theft for having done so. Cloutier also came to be involved in varying capacities with the operations of Kelvin. 70 It is thus apparent that the veracity and reliability of Cloutier’s testimony regarding all these matters are at the heart of this case, and I therefore propose to address his credibility at the outset. For the reasons that follow, I did not find him to be a credible witness. 71 I begin with Cloutier’s criminal conviction for theft, a crime of dishonesty, following a plea of guilty. Quite apart from being a crime of moral turpitude in general, this theft involved the admitted conversion of money that was the pro- perty of Zesta: his actions were centrally linked to his falling out with his ex- employer. Even on Cloutier’s explanation for his conduct, he did not follow through on his original intention to account for the proceeds of the heater sales, 36 BUSINESS LAW REPORTS 77 B.L.R. (4th)

after he was fired and became engaged in litigation with Zesta. This was not minor or unrelated conduct, but instead signaled an intention on his part to act dishonestly in relation to the duties owed to his employer, his adversary in the present proceeding. It reflects a willingness on his part to act in a dishonest and untruthful fashion vis-`a-vis Zesta. 72 In addition to that underlying flaw, Cloutier’s evidence before me contained numerous hallmarks of an untruthful witness. For example, early in the litigation and soon after the events in question, in June 2000 he was cross-examined on an affidavit and asked to list under oath all of the Zesta customers with whom he had contact subsequent to his termination. He falsely omitted two companies, material omissions in the circumstances. In an affidavit sworn by him on July 19, 2000 in response to Zesta’s contempt motion at the time, he falsely swore that he had heard that Marcel Jones had been saying derogatory things about him. He further falsely stated that the reason he contacted Keith Anderson at Fisher Gauge was because he had heard about Marcel Jones making derogatory comments about him. These examples illustrate a propensity on Cloutier’s part to omit facts that might be damaging to him and to invent information to explain his behavior. 73 Even before the litigation, Cloutier demonstrated a willingness to proffer false information when it suited him. For example, in relation to the initial sale of heaters to Husky Buffalo, Cloutier falsely advised Linda Moretuzzo of Husky that Codlin carried on business as a refurbisher and that Watlow had scrapped heaters with Codlin that could be made available to Husky. In truth, Codlin car- ries on business as print broker and is not a manufacturer or refurbisher of elec- tric heaters. The real purpose in identifying Codlin as the supplier of the heaters was to disguise the fact that the heaters were actually coming from Zesta, and to provide Cloutier with a mechanism to gain personal control over the sale proceeds. 74 Just as Cloutier hid from Husky Buffalo the true source of the heaters that he supplied via Codlin, so, too he hid from Watlow the disposition of the 300 heat- ers that he obtained from Watlow on a no charge basis. He did not want Watlow to see Zesta selling hundreds of heaters to an OEM purchaser and thus he hid that information from Watlow. This is a further example of covert and question- able business dealings by Cloutier. 75 Cloutier also demonstrated a willingness to create false documents in his pre-litigation conduct. In addition to creating Codlin invoices and packing slips to accompany the heaters that were being shipped to Husky Buffalo from Zesta, Cloutier subsequently created fictitious expense statements to Codlin in order to provide it with a paper trail for the payment of the Husky proceeds by Codlin to Cloutier. 76 Cloutier also changed his story in relation to material aspects of his conduct while a Zesta employee. A prime example of this is the payments made to Clou- Zesta Engineering Ltd. v. Cloutier Stinson J. 37

tier by Watlow Detroit (David Martignon & Associates) in relation to sales of Watlow products to Husky. In his initial affidavit sworn December 1, 1999, Cloutier stated: Dave Martignon, the fellow running Watlow operations in Detroit, indicated to me that out of Watlow’s share of the commission on these types of sales he would compensate me for my efforts in setting up the relationship and handling the business, over and above the commission earned by Zesta di- rectly. To this day, Mr. Martignon had kept his word and I have been com- pensated personally for the Watlow Direct Accounts directed towards Detroit by me. At the same time, Zesta obtained a great benefit because they gained access to important markets such as Husky and they earned a commission directly from Watlow for Watlow sales to Husky. There was no mention in the foregoing explanation of the Martignon pay- ments being reimbursement for expenses; rather, the concept of compensation for services rendered was mentioned twice. 77 When Cloutier was examined for discovery in advance of the first trial, back in 2000, he agreed with the characterization of the Martignon payments as “per- sonal commissions”. At no time prior to the present trial did Cloutier change those answers and purport to correct his prior evidence or otherwise suggest that the Martignon payments were reimbursement for expenses and not personal commission payments on sales effected to Husky. 78 At trial before me, Cloutier testified for the first time that these payments to him were made to reimburse him for expenses incurred in connection with the Watlow-Husky business, expenses that were originally reimbursed to him on the basis of expense reports submitted to Martignon. This explanation was never given at the first trial, an omission that is illogical and simply does not make sense, because it would have provided Cloutier with an answer to the allegation that he was wrongly in receipt of secret commissions from Martignon, a poten- tial cause for dismissal. It defies common sense that Cloutier would concede liability for the full quantum of those receipts (as he did at the first trial), without proferring the explanation he now gives. Cloutier’s suggestion that he did so on the advice of Christie to avoid damage to his credibility on this ground likewise makes no sense, for it would be contrary to Cloutier’s interests and strategy to concede such a significant point on an unqualified basis: his credibility would be damaged further, not enhanced, by a concession without an explanation. 79 What makes Cloutier’s revised explanation for the Martignon payments even more dubious is that it followed a Canada Revenue Agency (“CRA”) investiga- tion of his personal tax filings. Subsequent to the initial trial, someone reported to CRA that Cloutier had received a significant sum by way of commission pay- ments. In response to enquiries from CRA, Cloutier for the first time took the position that the Martignon payments were expense reimbursements. This had 38 BUSINESS LAW REPORTS 77 B.L.R. (4th)

the effect of reducing his exposure to CRA for any possible reassessment and resulting liability for unpaid taxes and penalties. 80 It is thus apparent that when it suited his convenience, Cloutier was prepared to tell a different story about the Martignon payments than the one he had given under oath on multiple previous occasions. In light of the fact that there was no logical reason for him to omit this significant information at the first trial, and he had motivation to offer a different story to CRA, I do not accept or believe Clou- tier’s new explanation for the Martignon payments. 81 On other occasions, Cloutier gave evidence that was simply wrong. In his affidavit filed in response to a Zesta motion for summary judgment, Cloutier stated under oath that he ceased making written reports to Vincent Eastman dur- ing the last 18 months of his tenure at Zesta. At trial, he was forced to acknowl- edge that this assertion was completely wrong, since he continued to submit written reports to Vincent Eastman as late as November 1999. At another point in his testimony, when pressed about the accuracy of his recollection, he stated “the last ten years, I am not certain of anything.” 82 On occasion, Cloutier’s testimony suggested a willingness to make up evi- dence as he went along. For example, a critical issue identified early on in the proceedings was whether Cloutier attended the meetings with Christie on No- vember 5 and 9, 1999 at Mississauga Steel Mart, as recorded in Christie’s notes bearing those dates. In his testimony in-chief, Cloutier denied attending these meetings, but offered no explanation as to what else he was doing at the time. Only in re-examination, without having disclosed this evidence in-chief, Clou- tier testified that the November 5 meeting with Christie could not have taken place, because Cloutier was engaged in bonus meetings with Jefferies and Zesta employees much of that day. 83 When Jefferies gave evidence (in advance of Cloutier) he said nothing about any such bonus meetings on November 5. There is no mention of any bonus meetings that day in Jefferies’ diary; to the contrary, Jefferies’ diary contains a notation that bonus day was two weeks earlier, on October 21. Indeed, Jefferies’ evidence was to the effect that he was rarely in the Zesta office between mid- October and November 23, which makes it even less likely that he was at Zesta’s premises meeting with Cloutier and other Zesta employees on November 5, 1999. 84 To the extent that Cloutier relies on the alleged bonus meetings involving Jefferies as an alibi for the time Christie says they were meeting at the office of Mississauga Steel Mart, Cloutier’s evidence is not supported by Jefferies, whose diary entry undermines Cloutier’s testimony on this point. The late disclosure of this information by Cloutier, the lack of any mention of it in his examination in- chief or any questions at all concerning the subject during Jefferies’ testimony, all combine to suggest that this was a last minute attempt by Cloutier to come up with some further explanation for why he could not have been at Mississauga Zesta Engineering Ltd. v. Cloutier Stinson J. 39

Steel Mart that day. Cloutier’s evidence on this point is unsupported, contra- dicted by Jefferies’ diary entry, self serving, and not credible. 85 This brings me to the topic of Christie’s handwritten notes. According to Christie, he met with Cloutier on October 22, November 5 and November 9, 1999. On each occasion, he says, he made notes during the meetings. Cloutier concedes that the first meeting, held at the MultiVest premises, took place, but he denies that he met with Christie on November 5 and 9 at Mississauga Steel Mart or elsewhere. 86 Dealing first with the meeting of October 22 (erroneously recorded in Chris- tie’s notes as October 21) the notes reflect that Cloutier reported to Christie that Vincent Eastman had not done the succession plan. At trial, Cloutier denied hav- ing said this, because it was not so. One is left to wonder why Christie would make this note (at a meeting that Cloutier concedes he attended) if Cloutier had not provided the information. As a professional note taker, Christie would have been motivated to get the facts straight and to record them accurately for future reference. Cloutier conceded that the balance of the contents of the October 21 notes are accurate. In the current trial, however, Cloutier is advancing the notion that he believed the succession plan was in place, in order to try and discount his motive to leave and compete with Zesta. In the face of Christie’s contemporane- ous October 1999 note on the subject, Cloutier’s September 2009 trial testimony on the point is not credible. 87 I turn now to Christie’s notes of November 5 and 9, 1999. Christie testified that he met with Cloutier on those dates at the premises of Peatling’s business, Mississauga Steel Mart, with Peatling in attendance intermittently. Cloutier and Peatling deny these meetings occurred. Apart from their own testimony (which in this respect was plainly self-serving) neither Cloutier nor Peatling was able to proffer any significant corroborative evidence to support their assertions that the meetings did not take place. I have previously mentioned Cloutier’s last-minute recollection of his bonus day meetings with Jefferies and others at Zesta on No- vember 5, a point I did not find credible. Another point made on Cloutier’s be- half was that his cell phone records note a very brief call to Peatling’s residence number on a day he was supposedly meeting with Christie and Peatling at Peatling’s office. The mere fact such a call was placed does not negate the fact that Peatling and Cloutier were at the Mississauga Steel Mart office at the time. 88 The 7 pages of handwritten notes prepared by Christie dated 5 November 1999 and 9 November 1999 are consistent with Christie’s statements that the meetings did occur. These notes contain considerable detailed information con- cerning the affairs of Zesta, including details of various employees’ employment and contractual arrangements. It is logical, as Cloutier conceded, that Cloutier would have been the source of this information. 89 Significantly, the notes dated 5 November 1999 contain information regard- ing share ownership of and investment in a proposed new corporation. That in- 40 BUSINESS LAW REPORTS 77 B.L.R. (4th)

formation is more or less consistent with comparable information contained in a separate, unsigned document prepared by Cloutier. That document is a draft agreement in principle between Cloutier and Peatling concerning a total invest- ment by Peatling of some $410,000. The investment was to be in a corporation comprised of Class A (voting) and Class B (non-voting) shares in which Peatling was to own 25% of the Class B shares (the same amount, share struc- ture and percentage ownership mentioned in Christie’s notes). 90 Cloutier and Peatling attempted to explain the draft document as a proposed agreement in principle concerning the restructuring of MultiVest. That explana- tion is not credible, for a number of reasons. First of all, none of the documents in question makes any reference to MultiVest. Secondly, at the time, MultiVest was in decline, and the prospect of Peatling receiving $410,000 in shareholder bonuses (as suggested by the final item in the draft document) bears no connec- tion with reality. The draft document also makes reference to Cloutier continu- ing in a rental relationship with Peatling. At the time, MultiVest was housed in premises unconnected with Peatling; by contrast, other documents prepared under the direction of Cloutier (such as the Hi Cap quotation to Nortel) suggest a landlord-tenant relationship between Peatling and Hi Cap. 91 Very significantly, when Peatling was examined in the year 2000 as a wit- ness on a pending motion (prior to being added as a party defendant) he testified that the draft agreement in principle between him and Cloutier was a document that he first discussed with Cloutier in connection with starting a business in competition with Zesta, and that Sanger and Durante were included in the dis- cussions. That evidence is consistent with the conclusion (based on a compari- son of the document and Christie’s notes) that the draft agreement did not relate to MultiVest or Heritage Park, a real estate brokerage arm of MultiVest. Four years later, after being added as a co-defendant, Peatling purported to correct the answer he gave in 2000, to assert that the agreement in principle related to Heri- tage Park and not to a new company that would compete with Zesta. The prob- lem with this purported correction, however, is that Heritage Park was already a business that was in existence and not a new company with a new share struc- ture by the time Peatling was given the draft agreement in principle in the fall of 1999. Thus Peatling’s 2000 evidence (before he was personally sued) contra- dicts Cloutier’s (and Peatling’s) trial testimony concerning the purpose of the draft agreement in principle. 92 All these circumstances make Cloutier’s and Peatling’s explanation that the draft agreement in principle concerned the restructuring of MultiVest highly sus- pect, and I do not accept it. I will have further to say about Peatling’s credibility in due course. 93 The Christie notes are powerful evidence that the meetings described by him occurred as he testified they did. The notes do not stand by themselves: they are backed up by and consistent with several handwritten time dockets, and calendar Zesta Engineering Ltd. v. Cloutier Stinson J. 41

entries, also prepared by Christie. If the notes are not authentic, the logical infer- ence is that Christie fabricated and backdated them, and his dockets, and made erroneous entries in his appointment calendar for the same period. I acknowl- edge that Christie did not process the docket entries in the normal course. I do not attach any significance to that omission, however, particularly in light of the fact that, prior to the end of November, Christie came to be engaged by Cloutier on a far more intensive (and lucrative) basis, as his counsel in the Zesta litigation. 94 Cloutier and Peatling submit that Christie fabricated the notes of the Novem- ber 5 and November 9 meetings, in order to try and place Cloutier in a bad light. Christie’s reason for doing so, the argument continues, is to support an argument that Cloutier is not believable, in anticipation of Christie’s need to explain his actions in relation to the Codlin transactions. They submit that his intent in fabricating the notes was to lay a trap to attack Cloutier’s credibility. 95 In my view, that submission does not explain why Christie would fabricate this evidence. To begin with, Christie could not have known that the notes (which were initially the subject of a claim for privilege) would ever form part of the record at a trial. If Christie’s intention was to lay a trap to support an attack on Cloutier’s credibility, this trap was remote, and one which would likely have been wholly ineffective, because in all probability it would never have been sprung. 96 More importantly, the disclosure of the (fabricated) notes would expose Christie to the accusation that he had participated in leading a false case at the first trial, likely leading to allegations of professional misconduct and potentially serious disciplinary sanctions. It seems unlikely that Christie would create evi- dence that could possibly be used against him. Moreover, if indeed he did create and falsify the November 5 and November 9 notes after the fact, he would be creating an even more serious risk of exposing himself to a criminal prosecution for perjury and obstruction of justice. It seems highly unlikely that Christie would dig himself a potentially far deeper hole in order to obscure or fend off allegations concerning his complicity in the Codlin events, which itself was al- ready largely reflected in the documentary record. 97 There is no logical reason for Christie creating false records of meetings that did not occur. Rather, the level of detailed information contained in the notes suggests to me that they were created during the meetings in question. I find as a fact that the meetings occurred as described in Christie’s notes, and that Cloutier was present throughout. It follows that Cloutier’s denial that he met with Chris- tie on November 5 and November 9, 1999, was untrue. 98 I would be remiss if I did not also observe that Cloutier has a very signifi- cant stake in the outcome of these proceedings. He is advancing a substantial claim for damages for wrongful dismissal, in which he was successful before the first trial judge. He is accused of participating in a variety of improper conduct 42 BUSINESS LAW REPORTS 77 B.L.R. (4th)

vis-`a-vis Zesta, including breach of his fiduciary and other obligations. He stands exposed to substantial claims for damages and costs. His personal finan- cial stake in the outcome is readily apparent. He also has (or at one time had) close ties with the other defendants (with the exception of Christie and Christie’s company). Cloutier is by no means an impartial or disinterested witness. 99 Finally, Cloutier’s demeanour during both his examination in-chief and cross-examination was not that of a candid and honest witness. He frequently failed to answer the question put to him, even when the question was asked repeatedly. He was sometimes argumentative and belligerent with counsel and in many cases answered a question with a question. Overall, Cloutier was not an impressive witness. I therefore conclude that I cannot rely very much upon his testimony with respect to any material points adverse to the plaintiff or support- ive of the defendants.

Credibility and reliability of Peatling’s evidence 100 Although he was not associated with Zesta and he did not play a leading role in any of the events of the fall of 1999, Peatling was involved with a variety of matters that were discussed in evidence before me. For example, he was said to be the source of derogatory information about Marcel Jones that he coinciden- tally shared with Cloutier at a Thanksgiving Day dinner in October 1999. He was named as a party in the draft agreement in principle in which reference was made to an investment by him of $410,000 in a company to be comprised of both Class A and Class B shares. It is alleged that he attended (for part of the time, at least) meetings with Cloutier and Christie on November 5 and Novem- ber 9, 1999 and he is mentioned in Christie’s notes as being a participant in the new company, with an investment of $410,000. Christie’s notes also record that Peatling will finance the new company and rent space to it. Peatling’s business address was used for the address of Hi-Cap Technologies. Peatling attended the afternoon-long meeting with the other defendants on the Sunday after Cloutier was fired. He subsequently became involved as the financier for, and a partial shareholder of, Kelvin, the new business operated by Durante beginning in early 2000. Peatling later became the 100% owner of Kelvin. Additionally, Peatling was involved with the processing of some of the funds arising from the Codlin transactions. For a non-Zesta person, therefore, Peatling had a hand in a wide range of the events in question. 101 With respect to Peatling’s credibility, I observe at the outset that he is the sole shareholder of Kelvin, which is exposed to a significant adverse outcome should the lawsuit go against it. As well, it would appear that he has underwrit- ten a substantial amount of legal fees, for which he would undoubtedly be enti- tled to significant reimbursement, were the action to go in favour of the defend- ants, and against Zesta. He is also named as a personal defendant who is alleged Zesta Engineering Ltd. v. Cloutier Stinson J. 43

to have participated in an unlawful conspiracy. He therefore has a significant personal stake in the outcome of the proceedings. 102 For the most part, Peatling gave answers that were responsive to questions and he was not argumentative with the questioners. His memory failed him on several occasions, however. For example, in connection with his interview with the police about the Codlin transactions, he insisted that he had gone to the po- lice station in the afternoon. His police statement indicates, however, that he was there at 10:30 a.m. Peatling repeatedly denied taking any documents with him to the police station, until confronted with the fact that he had printed out a copy of his personal financial information to refresh his memory about the transactions with Christie, before attending at the police station, which document was ap- pended to his police statement. 103 In his statement to the police in November 2001, Peatling stated: Dave Cloutier and Kelvin [T]echnologies became enmeshed in a court battle with Zesta Engineering. As a result numerous lawyers [sic] fees had to be paid. I received a cheque of $26,400 from a numbered company 798068 On- tario Limited [Christie’s company]. I don’t recall how I received the cheque, however I know it was for reimbursement of legal fees incurred by Dave Cloutier. Kelvin Technologies had paid the legal fees and as such I deposited $25,000 back into Kelvin’s accounts. It is reasonable to infer and expect that Peatling had reviewed his own docu- mentation before he went to the police station, including his bank statement. His bank statement shows the deposit of $26,400 on June 2, 2000 and the payment of $25,000 to Kelvin 10 days later on June 12, 2000. The statement Peatling gave to the police is consistent with his bank statement and added the additional information that he knew the cheque came from 798 and that it was for reim- bursement of legal fees. 104 During his examination for discovery, which took place nearly three years after his police statement (and after he was named as a personal defendant), Peatling changed his evidence, stating that he did not recall receiving the cheque and that he did not know that it was on account of legal fees for Cloutier. He further denied that there was any relation between his receipt of the cheque for $26,400 from Christie’s company and his subsequent deposit of $25,000 into Kelvin’s account. Peatling went so far as to say that he was unaware of having received the cheque from Christie’s company at the time and that it was depos- ited into his account by his wife (who was not called to testify). 105 Peatling’s attempts to resile from his earlier, more damaging statement to the police raise serious concerns in my mind regarding his credibility. His explana- tion for the contents of his police statement – that the investigating officer “basi- cally threw that idea at me” which he accepted “because I wasn’t going to sign a blank piece of paper” – does not ring true, especially for someone who is a successful, seasoned and sophisticated business person. 44 BUSINESS LAW REPORTS 77 B.L.R. (4th)

106 Another significant issue regarding Peatling’s credibility arises from his de- nial that he attended at any of the meetings with Christie on November 5 and 9, 1999. Christie testified (as his notes record) that these meetings took place at 925 Meyerside, Mississauga (the address of Peatling’s place of business, Missis- sauga Steel Mart), and that Peatling was there at the outset and intermittently during the course of each meeting. Peatling denied any such meetings took place, and maintained that it was his practice not to go into the office on Mon- days and Fridays, the dates when the meetings allegedly took place. 107 For the reasons already indicated, I do not accept the submission by Cloutier and Peatling that Christie made up the notes of the meetings. As stated, there is no logical reason for Christie to have done so. Nor would there be any logical reason for him to have included mention of Peatling as being present, had he not been. I therefore disbelieve Peatling’s denial that he was present for part of the meetings; instead, I find that he was, and that he was aware of their purpose. 108 In relation to Peatling’s 2004 purported withdrawal of his year 2000 admis- sion that the draft agreement in principle related to a business competitive with Zesta, once again I note that his change of recollection did not occur until he was personally named as a defendant. One possible explanation is that he was careless about his evidence the first time. Another explanation is that he became concerned in 2004 that his prior testimony exposed him to potential liability and he therefore needed to resile from it. Astoundingly, Peatling denied that his rec- ollection in 2000 (when the first examination took place) would be better than it was in either 2004 or at the present time. I do not accept his revised recollection. 109 In my view, Peatling’s testimony reflects a concerted effort by him to dis- tance himself from involvement in any of the misconduct alleged by Zesta and specifically Cloutier’s plans to go into competition and the alleged laundering of the funds from the Codlin transactions. Overall, I did not find Peatling to be a credible witness.

Credibility and reliability of Christie’s evidence 110 Christie is in an unusual position in this litigation, having acted as counsel for the defendants in the original proceeding from the outset, through the trial before Blenus Wright J. and through Zesta’s successful appeal to the Court of Appeal. By reason of Zesta having uncovered the trail of funds emanating from the Codlin transactions, Christie and his management company 798 were joined as co-defendants. 111 The allegations as against Christie and 798 in the Amended Amended State- ment of Claim are relatively narrow. Specifically, the allegations concern partic- ipation by Christie and 798 in the transfer of $44,619 of the funds paid by Husky to Codlin: it is alleged that portions of those funds were paid by 798 to Peatling, to the Receiver General (for G.S.T.) and to Cloutier; Christie and 798 are al- leged to have participated in the conspiracy by which Zesta was deprived of the Zesta Engineering Ltd. v. Cloutier Stinson J. 45

proceeds of sale of all of the heaters sold by Codlin to Husky; and they are also the subject of a claim for punitive damages. 112 On several occasions during the course of the trial before me, Zesta’s coun- sel alluded to alleged misconduct by Christie in knowingly leading false evi- dence during the first trial. Specifically, reference was made to Christie’s notes of the meetings of November 5 and November 9, 1999 and the discussions with Cloutier at that time regarding his plans to set up a competitive business, as contrasted to Cloutier’s (and others’) testimony at the first trial that there had been no such pre-planning. Although Zesta’s counsel made those comments, Christie’s counsel properly pointed out that the Amended Amended Statement of Claim contained no such allegations and that was not the case that he had come to court to meet. I agree. Whether Christie did or did not lead false evi- dence before the court during the course of the first trial is not an issue I am called upon to decide. My responsibility is to decide the issues raised in the pleadings before me, and nothing more. 113 Although the issues between Zesta on the one hand and Christie and 798 on the other are formally restricted to the latter’s involvement in the Codlin transac- tions, Christie’s trial testimony had broader relevance. Most significantly, Chris- tie gave evidence about his meetings with Cloutier during October and Novem- ber 1999. As previously discussed, Cloutier and Peatling denied that the meetings of November 5 and 9, 1999 took place at all, despite Christie’s hand- written notes, calendar entries and dockets. The contents of the November 5 and 9 meetings have considerable significance in assessing the substantive allega- tions of breach of fiduciary duty as against Cloutier and the allegations of con- spiracy as against Peatling. Zesta’s reliance on those meetings and Christie’s notes of them, as contrasted to Cloutier’s and Peatling’s denial that the meetings took place, coupled with Zesta’s allegations against Christie and 798 regarding their involvement in the Codlin transactions, created an unusual dynamic among the parties. More particularly, Zesta argued that Christie’s notes about the meet- ings and the fact that the meetings took place should be accepted, while the remainder of his evidence should be discounted. The position of Cloutier and Peatling was that the meetings never took place and the notes were fabricated and Christie’s evidence should be disregarded insofar as it related to those mat- ters. Cloutier also asserted that he relied on Christie’s advice when he failed to disclose and disgorge the proceeds of the heater sales from Codlin to Husky Buffalo, something Christie denied. 114 Against the backdrop of that dynamic, I am called upon to assess Christie’s credibility. For the reasons previously discussed, I do not accept the proposition advanced by Cloutier et al that Christie’s notes were an after-the-fact fabrication. In my view, there would be no logical reason for Christie to falsify these records, at considerable peril – both personal and professional– to himself for doing so. Given the context in which the notes were prepared – by a lawyer 46 BUSINESS LAW REPORTS 77 B.L.R. (4th)

who was receiving information for purposes of analyzing that information and providing professional advice – it is reasonable to assume that the notes are an accurate record of what Christie was told and what else transpired on the occa- sions in question. A further factor that motivates me to that conclusion is the fact that the notes were prepared and the information recorded before there was any dispute or controversy among the parties: thus there was no motivation to record information in a false, biased or non-objective fashion. 115 The same cannot be said of Christie’s oral testimony. Christie finds himself before the court in a most unenviable position. His former client, Cloutier, has pleaded guilty and been convicted of a criminal offence arising from his theft of the proceeds from the sale of heaters to Husky. Those proceeds were funneled back to Cloutier via Codlin. Christie facilitated at least some of those transac- tions, a fact confirmed by the paper record. Cloutier claims Christie told him to stay quiet about the Codlin funds. Christie concedes he made an error in judg- ment, but nothing more. 116 Zesta alleges that Christie was more complicit in the Codlin transactions than he admits, thus giving him added motivation to colour the facts. Indeed, the testimony of Cloutier and Jefferies suggested that Christie knew early on about the heater sales to Husky Buffalo, and that Christie advised Cloutier to say noth- ing about it. Zesta also contends that Christie has a motive to colour the facts surrounding the meetings of November 5 and 9, 1999 because, on the face of it, Christie’s notes of those meetings suggest that he knowingly filed false affida- vits and led false evidence during the course of the proceedings through to the end of the trial before Wright J. As I have noted, the latter issue is not raised on the pleadings before me; nevertheless, it is a factor that, in my view, I can and should properly take into account when assessing Christie’s credibility. 117 During his evidence in-chief Christie testified in a confident, calm and straightforward fashion and made reference to various documents such as his dockets, calendar, and handwritten notes, all of which appear to have been pre- pared contemporaneously with the events they reflect. During cross-examina- tion, however, Christie was frequently prone to giving lengthy and expansive answers to questions, answers that were often not responsive to the question posed. As well, from time to time he stepped out of the role of witness and assumed the role of counsel, for example, by insisting that some of his answers were not inconsistent. 118 On at least one occasion, he misstated events and was reluctant to concede the inaccuracy of his recollection until forced to do so. During cross-examina- tion he insisted that the information attached to Mary Cloutier’s affidavit in the divorce proceeding came from the Anton Pillar order search of Mr. Cloutier’s home. He was then taken to the affidavit of the Zesta computer examiner and the judgment of Nordheimer J. dated March 30, 2000, which established that his recollection was wrong. Zesta Engineering Ltd. v. Cloutier Stinson J. 47

119 Most troubling to me was Christie’s testimony regarding the Codlin transac- tions. The most significant documents that connect Christie and 798 to the Cod- lin money trail are the invoices dated April 3 and May 4, 2000 from 798 to Codlin, seeking payment of $28,248 and $16,371 respectively. Each invoice reads: TO ALL SERVICES RENDERED in connection with consultation and man- agement respecting special projects assignments, product procurement and delivery to Buffalo, New York, USA .... specifying a timeframe, number of hours and hourly rate. It is beyond argument that these invoices were false and were created by Christie to trigger the pay- ment of the funds still held by Codlin. The false invoices were intended to and did facilitate payment to Christie’s law firm on account of its outstanding fees. 120 Christie’s trial evidence was that the narrative descriptions in the invoices he sent to Codlin were coincidental and that he inserted them in order to provide a reminder in the event in later years he was questioned for some reason about why the invoices were generated. Put bluntly, that answer does not ring true. It is beyond the realm of coincidence that Christie would by chance insert in the invoices he created a description that directly related to the underlying source of the funds he was seeking to free up from Codlin. When questioned further on this point he gave a series of argumentative, non-responsive and obfuscatory answers. I conclude that Christie knew more about the Codlin transactions than he was willing to admit. His explanation that Codlin was somehow paying money to Cloutier because of business steered by Cloutier to Codlin on behalf of Zesta is also highly suspect, because it suggests that Cloutier had somehow been involved in taking kickbacks from Codlin, something Christie denied. 121 Overall, I conclude that where Christie’s testimony is consistent with or con- firmed by the documentary record it is largely credible. Where his evidence is not so supported, however, I have concerns regarding its veracity. Christie’s in- volvement and conduct in the events in question, his motivation to explain his role in the least damaging fashion, and his conduct in the witness stand, all raise doubts regarding the truthfulness of his unsupported evidence.

Issue 1. Did Cloutier plan to compete with Zesta? 122 A central issue in this case is whether Cloutier took active steps while he was employed at Zesta to plan and implement a scheme to compete unfairly, and thereby breached his fiduciary duties. Cloutier denies that he did. Zesta asserts that Christie’s meetings with Cloutier as reflected in Christie’s handwritten notes prove Cloutier’s plans. Zesta further asserts that Cloutier’s solicitation of Marcel Jones to pursue an order for Hi-Cap from Nortel France, proves that Cloutier had begun to implement his plan. 123 Dealing first with the plan to compete, I have previously concluded that the meetings summarized in Christie’s notes occurred as he says they did, that Clou- 48 BUSINESS LAW REPORTS 77 B.L.R. (4th)

tier was present throughout them all and that Peatling was in attendance inter- mittently during the meetings on 5 and 9 November 1999. 124 The Christie notes dated 5 November 1999 contain a detailed description of “Dave’s plan”. Christie described this meeting as one in which Cloutier paced around the room, almost dictating information to him. Although Christie testi- fied that he considered the meeting to be one in which Cloutier was outlining a contingency plan that Cloutier might pursue in the event that he was unable to patch things up with Vincent Eastman, I do not find that explanation credible. 125 To begin with, I do not believe Cloutier’s testimony that he had no such meetings with Christie. Further, there is no reference in any of the notes to the proposal being a contingency plan; the advice given on 9 November is similarly unqualified. Christie left the 5 November meeting with the understanding that he was to consider Cloutier’s plan and come back to him with legal advice about how Cloutier could compete with Zesta without violating his legal obligations. The fact that he gave this advice to Cloutier and subsequently defended this litigation by relying on Cloutier’s denials that he had no such plans – not even contingent ones –reflects poorly on Christie, and gave him cause to testify as he did. I do not believe Christie’s evidence that Cloutier was describing a contin- gency plan. I find as a fact that Christie’s notes dated 5 November and 9 No- vember 1999 reflect the information provided to him and the advice he gave on those occasions, and that Cloutier did not qualify his plans as outlined to Chris- tie as a contingency he might pursue if he could not reconcile with Vincent Eastman. 126 The above findings of fact lead me to conclude that on 5 November 1999 Cloutier met with Christie and presented a detailed outline of a plan to leave Zesta, create a new business with financing from Peatling, and involve Durante and Sanger in an enterprise that would compete with Zesta and take over its relationships with Watlow and Husky. Peatling was present for at least part of the meeting and was aware of its purpose and the topics discussed. I further find that Cloutier’s purpose in attending the 5 November meeting was to obtain Christie’s legal advice concerning the plan. That advice was provided at the 9 November, 1999 meeting. Again, Peatling was present for at least some of this meeting and understood its purpose and the topics discussed. Peatling’s presence on both occasions confirms that he was aware of Cloutier’s plan, and was pre- pared to facilitate it (whether by providing meeting space for Cloutier’s meet- ings with Christie or supplying a false address for Hi-Cap) and finance it. 127 It would be one thing for Cloutier to seek legal advice regarding how he might lawfully compete with Zesta in the event he later left. Taking active steps against Zesta’s interest while he remained in its employ, however, is something quite different. I find that Cloutier did take such steps before he was fired, as described below in relation to Zesta’s relationship with Watlow. Zesta Engineering Ltd. v. Cloutier Stinson J. 49

128 There are other indicia of a plan by Cloutier to set up a business to compete with Zesta. These include the spreadsheet documents found on his computer that indicate forecasts for revenue and expenses on a month-by-month basis during 2000, 2001 and 2002. These documents reflect projected sales to, among others, Zesta customers Husky, Husky Thixo, Nortel France and Cameron & Barkley. Cloutier’s explanation was that he prepared them to show to Marcel Jones in order to convince him of the advanced state of preparation of commencing the new business, in order to persuade Jones to come on board. Apart from Clou- tier’s explanation for the existence of these documents, there is no direct evi- dence to prove or disprove that they were part of an actual plan to compete. I do not accept Cloutier’s self-serving evidence on this point. 129 Of considerable significance and relevance to this issue are the two letters from Watlow to Zesta, dated November 11 and 12, 1999, terminating the ongo- ing Watlow-Gordon commission payments and the Watlow-Zesta-Husky ar- rangements. Since 1987 Zesta had been a sales representative for a Watlow busi- ness division known as “Watlow-Gordon”. Zesta was paid a commission on all its direct sales of Watlow-Gordon products. Zesta was also a distributor for Watlow-Gordon, and was paid a commission on all its distribution purchases. By letter dated 11 November 1999, Watlow informed Zesta that Watlow was going to cease paying Zesta so-called “holdover commissions” on Watlow- Gordon accounts as of December 31, 1999. By letter dated 12 November 1999, Watlow informed Zesta that it was removing Zesta from the Husky accounts, also effective December 31, 1999. 130 Cloutier denies that he instigated either step by Watlow. Despite that testi- mony, Christie’s 5 November 1999 note mentions (as item 2 of “Dave’s plan”) that “Watlow has now written Zesta a letter ending the holdover commissions on Gordon.” [Emphasis added.] The actual letter from Watlow was dated 11 No- vember 1999, six days after Christie’s note, which describes this as a past event. Although Cloutier strongly denied that he had advance knowledge of the Watlow-Gordon decision, he must have been the source of Christie’s informa- tion on this topic; there is no other logical explanation for this note by Christie. This suggests ongoing back-channel communications between Cloutier and Watlow, contrary to Cloutier’s evidence that he was unaware of Watlow’s deci- sion in advance. I am conscious of Mary Cloutier’s testimony that Cloutier was allegedly angry at her for not telling him that Watlow had pulled Zesta from the Husky account. It is completely conceivable that his outburst was contrived, in order to detract attention from what was actually occurring. The same can be said of Cloutier’s confrontation with Vincent Eastman on the same subject. By contrast, Christie’s note about what he was told by Cloutier on 5 November about an event that did not occur until 11 November cannot otherwise be explained. 50 BUSINESS LAW REPORTS 77 B.L.R. (4th)

131 The Christie 5 November 1999 notes also mentions (as step 3 of “Dave’s plan”) that “Watlow would pull Husky as a representative account on 30 days’ notice (again, at Dave’s instigation).” The reference to “again at Dave’s instiga- tion” can be read as a reference to the prior step of Watlow having ended the Watlow-Gordon commissions, further suggesting that Cloutier told Christie that Watlow had done so at the urging of Cloutier. Step 3 itself came to pass when, on November 12, 1999 (just one week later), Watlow wrote to Vincent Eastman informing him of its decision to terminate the Watlow-Zesta-Husky relationship. It is difficult to conceive of how Cloutier could have been so prescient when he spoke to Christie on 5 November, unless he had inside knowledge of the Watlow’s plans. 132 While Cloutier denies the meetings with Christie took place (a denial I do not believe), the reference in Christie’s notes to the two letters from Watlow terminating the two relationships, make the actual occurrence of those very events too coincidental to be unrelated. A more logical inference is that there was a direct connection between what Cloutier outlined to Christie as his plan, and what transpired with Watlow – namely, that Cloutier persuaded Watlow to act as it did, anticipating that he would proceed in due course with his plan to set up a new business to compete with Zesta, and take over those relationships. It may well be that Cloutier did not expect that Watlow would move as swiftly as it did in terminating the Husky arrangement, but it is entirely consistent with Cloutier’s plan as described to Christie, that Watlow did so at Cloutier’s instigation. 133 Cloutier, Kelvin and Peatling submit that I should draw an inference adverse to Zesta concerning its allegations regarding the Cloutier-Watlow relationship, by reason of the failure of Zesta to call a Watlow representative as a witness at trial. Prior to the first trial, Christie (then counsel for the defendants) tried with- out success to secure the attendance of Watlow witnesses. Watlow is a US-based company, and there is no evidence that its employees (or ex-employees) are within the jurisdiction of the Ontario courts. Given these facts, I am not prepared to draw any inferences for or against either side due to the absence of witnesses from Watlow. 134 Zesta also points to Cloutier’s approach to Jones and his attempts to per- suade Jones to submit the Hi-Cap quotation to Nortel France as evidence of ad- ditional active steps by Cloutier to implement his plan to go into competition. Specifically, Zesta argues, Cloutier intended to hire Jones as a salesman for the new enterprise, in order to exploit his contacts and customer base for the benefit of Hi-Cap. 135 Significantly, there is no mention of Jones in any of Christie’s notes of his meetings with Cloutier on November 5 and November 9, 1999. If Cloutier actu- ally considered Jones to be an important recruit to his new team, given Jones’ contractual non-competition obligations, one would have expected Cloutier to Zesta Engineering Ltd. v. Cloutier Stinson J. 51

seek advice concerning how Jones could make a so-called “clean exit” from Zesta and be freed to work for the new enterprise. The fact that the Christie notes do not mention Jones is consistent with and supports the ex-Zesta Defend- ants’ contention that they had no true intention of having Jones joined them in a competing business. The antipathy felt by Cloutier and the other senior manag- ers at Zesta towards Jones was such that I do not believe that there was any true intention to take Jones on as part of his new enterprise. Rather, I infer that the “Jones sting” was a course of action pursued by Cloutier with a view to driving a wedge between Vincent Eastman and Jones, resulting in the termination of Jones’ employment at Zesta, such that when Cloutier came to the point of “jumping ship” (assuming he could persuade Durante, Sanger, Jefferies and White to join him) they would find themselves competing against a Zesta that was lacking its top salesman; this would make it far easier for the new enterprise to pick up major accounts, such as Nortel. 136 As events unfolded, however, Cloutier’s plan to accomplish Jones’ firing by Zesta failed when Jones reported Cloutier’s approach to him to the Eastmans, instead of going along with it. That development, coupled with the initiation of litigation and the injunctive relief obtained by Zesta early on, put an end to Cloutier’s plan to complete. 137 I therefore conclude that, in advance of the termination of his employment by Zesta, Cloutier took active steps to plan to set up a competing business. Clou- tier prepared a plan, as outlined in Christie’s notes. I infer and find that Peatling was aware of, and agreed to assist in the execution of Cloutier’s plan, and this was complicit in it. Cloutier sought legal advice from Christie. He sought fi- nancing from Peatling. He prepared financial projections. He also arranged for Watlow to terminate specific ongoing arrangements with Zesta, in anticipation that he would pick up that business in his new enterprise. He carried out a plan designed to have Vincent Eastman fire Zesta’s top salesman. 138 It was conceded by the defendants that Cloutier, as Vice President, Assistant General Manager and the most senior employee at Zesta, had and owed fiduci- ary duties to the company. By planning as he did to leave Zesta and set up a competing enterprise (as reflected in Christie’s notes), by communicating with Watlow to arrange for the termination of the Watlow-Gordon holdover commis- sions and the Watlow-Zesta-Husky relationship (as I further find he did), by further taking steps to attempt to cause the termination of Jones’ employment by Zesta (on fabricated grounds with the likely result that Zesta would have lost an important sales representative and his key contacts) Cloutier breached his fiduci- ary duties. A more challenging question is whether, in light of the fact that Clou- tier’s plans were halted in mid-execution, Zesta suffered any damage as a result. I will return to this subject when I discuss the assessment of damages later in these reasons. 52 BUSINESS LAW REPORTS 77 B.L.R. (4th)

139 An important additional question arises for consideration: who else (apart from Peatling and Christie) was privy to Cloutier’s improper plan? This requires me to address the involvement of Durante, Sanger and White, not only in rela- tion to the approach by Cloutier to Marcel Jones, but various other allegations as well.

Issue 2. Who else was privy to Cloutier’s plan? 140 Although I have found as a fact that Cloutier both laid plans to compete with Zesta and began to implement those plans prior to the termination of his em- ployment on November 27, 1999, and that Peatling was privy to those plans, it is another question entirely whether the remaining ex-Zesta Defendants (Durante, Sanger and White) were knowing participants in that scheme. Each of them de- nied that he was, from their first interviews with Vincent and Bernard Eastman, through to their testimony before me. In relation to Cloutier and Peatling, the evidence I have previously summarized, including the notes and testimony of Christie, the draft agreement in principle regarding Peatling’s proposed invest- ment in the new business, and Peatling’s prior admission as to the purpose of that document, all establish the complicity of Cloutier and Peatling. In relation to these other three defendants, however, similar direct evidence is lacking. To prove its case, Zesta relies on various pieces of circumstantial evidence which, it argues, confirm that Durante, Sanger and White were knowing participants in Cloutier’s pre-departure plans. 141 Before examining the evidence relied upon by Zesta, it is worth noting that each of Durante, Sanger and White was a subordinate to Cloutier: Durante had worked under Cloutier’s direction virtually his entire working life, while Sanger and White were hired by Cloutier. As subordinates, they were expected to fol- low Cloutier’s instructions in relation to Zesta’s business. Unlike Cloutier, how- ever, none of these other three individuals had any demonstrated antipathy to- wards either Zesta or Vincent Eastman. To the contrary, they appear to have been loyal, hardworking and dedicated Zesta employees. In the case of Durante in particular, I was impressed by his earnestness and sincerity when he testified that he never contemplated leaving the company and loved it. It was evident that he was very close to Vincent Eastman, whom he considered to be a second fa- ther, and to other members of the Eastman family. That relationship was con- firmed by several witnesses called by Zesta. The evidence and allegations against Durante and against Sanger and White must be examined against that backdrop. 142 In relation to the credibility and reliability of the evidence of these three witnesses, Durante was the most controversial perhaps because he was the long- est-serving Zesta employee and was viewed as a turncoat by the Eastmans. As I have noted, Durante was virtually a member of the Eastman family and he was devoted to Zesta and Vincent Eastman. I have difficulty accepting that, in the Zesta Engineering Ltd. v. Cloutier Stinson J. 53

face of those deep connections, he would knowingly participate in a plot that would have severed those connections. 143 The long-standing connection between Durante and the Eastmans, the im- pact of being accused of disloyalty and caught up in this long-running litigation, and the financial and personal toll it has had on him, were all apparent during Durante’s testimony. Durante was deeply wounded by the lengths to which Ber- nard Eastman and Zesta went to prevent him from collecting employment insur- ance benefits, including pursuing an appeal process that it abandoned at the last minute. There were various lapses and contradictions in Durante’s testimony, but in my view they were the unintentional by-product of the emotional impact this dispute has had on him and his family. I accept that Durante did his best to recall and recount events, although I acknowledge that he was not always able to do so with complete accuracy. I do not consider that any of his evidence was intentionally misleading; rather, I accept that he did his best to tell the truth as he recalled it. 144 In relation to Sanger, for the most part his answers were responsive to the questions asked. He was calm and relaxed as he attempted to recall events of almost 10 years ago. On a few minor occasions, he gave answers that were at variance with either his 2000 examination for discovery or his 2001 trial testi- mony, but he acknowledged that he had a better recollection at that time than now of these past events. I accept that explanation. Overall, Sanger’s testimony was not seriously challenged on cross-examination, and I found it largely credi- ble and reliable. 145 With respect to White, on several occasions he gave evidence that was at variance with what he had said during his early 2000 interview with the Eastmans, or during his examination for discovery or during the first trial. Some of these variances he could explain, but others he could not. I was left with the impression that he was not intentionally misleading the court, but he was having difficulty recalling certain facts, which is understandable given the passage of time. 146 For each of these witnesses, then, for the most part I found that their testi- mony to be largely credible and reliable in most matters. This is not to say that I accept all of their evidence: I will refer in due course to specific aspects of their testimony that, when evaluated against other information, I am unable to accept. 147 I turn now to specific allegations relied upon by Zesta as constituting evi- dence of improper conduct by these three defendants.

A. MultiVest 148 As mentioned previously, Cloutier, Durante, Jefferies and Sanger were in- vestors in MultiVest, a business created to service and support the real estate sales industry. Zesta relies upon the existence of MultiVest and certain specific 54 BUSINESS LAW REPORTS 77 B.L.R. (4th)

events involving it, as evidence to suggest a willingness among Cloutier, Du- rante and Sanger to engage in covert business activities together in breach of their duties to Zesta. I do not agree with that characterization of this evidence. 149 To begin with, it is plain that none of the activities carried on by MultiVest in its various incarnations was in the least bit competitive with Zesta. Rather, MultiVest was intended as an outside, more or less passive investment, which the participants hoped would yield a monetary return. Zesta points to Cloutier having concealed his business activities outside of Zesta in connection with MultiVest from both Vincent Eastman and Mary Cloutier. While Cloutier may not have told either of them about MultiVest, I see no impropriety with him having done so. 150 Zesta also argues that Durante concealed his involvement in MultiVest, cit- ing three different examples. The first was an alleged lie to Steve Lock of Zesta when asked by Lock about some computer aided drawing work carried out by a Zesta employee in relation to a MultiVest business call “Tradesman Renova- tions”. Durante merely replied that Lock would have to ask Cloutier. I find noth- ing inaccurate or misleading about that answer, since there was no proof that Durante was aware that the Zesta employee had been instructed to do work for Tradesman Renovations. 151 The second alleged concealment by Durante related to a photocopying job done for Zesta through one of the MultiVest companies. In reality, this was an initiative of Bernard Eastman through Cloutier, to solve a problem arising dur- ing previous litigation involving Zesta that required a large volume of photo- copying to be done in short order. Cloutier in turn instructed Durante to carry out the copying work at MultiVest’s premises and to prepare an invoice and give it to Jefferies. Durante was merely following the chain of command at Zesta. This work was for the benefit of Zesta and there is no evidence the price charged was excessive. Once again, there is no evidence to suggest that Durante acted improperly or that he was untruthful in relation to this incident. 152 The third occasion relied upon by Zesta concerns work performed by Du- rante in November 1999 to prepare GST returns for two MultiVest companies. It is true that he did not ask permission to do so during his working day at Zesta. Durante’s evidence was that this was the single instance where he did MultiVest work at Zesta. When viewed in the context of all of the other unpaid overtime and on-call time put in by Durante over the course of his career with Zesta, I would characterize this as an extremely minor transgression. Once again, I see no basis to characterize it as an act of deception, disloyalty, or concealment by Durante. 153 I further observe that there is no significant evidence to support the sugges- tion that, by reason of his involvement in helping to manage the affairs of Mul- tiVest, Cloutier failed to perform his duties at Zesta. While it is true that Cloutier was absent from the Zesta office frequently during the fall of 1999, and that he Zesta Engineering Ltd. v. Cloutier Stinson J. 55

met with Christie at the MultiVest office during the business day on one occa- sion, Cloutier’s Zesta duties included paying visits to customers. He remained in touch with the Zesta office by telephone and Zesta could not point to any detri- ment to Zesta arising from Cloutier’s activities with MultiVest. 154 Finally, I note the reference in Christie’s testimony that Durante, Sanger and Jefferies “were co-investors and co-venturers in other enterprises and they had basically cast their lot with Mr. Cloutier.” The fact is, that by swearing affidavits in support of Cloutier, Jefferies, Durante and Sanger had, in the eyes of the Eastmans, “cast their lot” with Cloutier; the mere fact they had done so, how- ever, does not equate to them having lied about their own knowledge of or in- volvement in Cloutier’s plans to compete. In any event, Christie’s characteriza- tion of these defendants’ conduct does not amount to evidence. 155 I therefore do not consider the involvement of Cloutier, Durante and Sanger in MultiVest to have any significance for purposes of the present dispute.

B. White’s offer to Jason Go of a job in a new endeavour 156 Jason Go, a long time Zesta employee, testified about a discussion with White in the fall of 1999 in which White asked him if he was interested in join- ing a group of people who had an endeavour similar to Zesta’s manufacturing operation, but outside Zesta. Go testified that he understood White was offering him a job in a non-Zesta business. Go further testified that a few days later, he spoke to White about the offer and was told, “No rush, think about it. By the way, money is not an issue and also you can pick your own guys.” 157 White testified that his approach to Go was in the context of the possible Roka transaction and followed discussions with Cloutier concerning possible staffing of that entity. Roka, it will be recalled, was a refurbisher of injection moulding equipment, with which Zesta had been in discussions concerning a possible acquisition. According to White, Cloutier had asked him if there were people at Zesta who could move to such a facility and get a thermocouple manu- facturing cell underway. White further testified that it was his idea to approach Go, as the most logical person, and that he asked Go if he would be interested in doing what he was doing at Zesta at another location. White was clear that there was no discussion about location, title, position or money. 158 With respect to the competing versions of this exchange, I am troubled by several changes in Go’s evidence between the first trial and the second trial. At the first trial, Go testified that White pointed to the glass window of his office, but that Go did not know what he meant. At the second trial, Go claimed that he knew it meant another manufacturing place. At the first trial, Go made no men- tion of the suggestion that money was not an issue or that he could choose his own people; he recalled both these specifics at the second trial. At the first trial, Go testified that he went home, talked about his discussion with White with his 56 BUSINESS LAW REPORTS 77 B.L.R. (4th)

wife, and became concerned it might be a competing company. At the second trial, he denied this and confirmed that his previous answers were not accurate. 159 In my view, Go’s evidence falls short of establishing that White was offering him a job with a competing enterprise. Moreover, it seems to me illogical that, if Cloutier had secretly planned to go into competition with Zesta, he would dele- gate White or anyone else with the knowing task of recruiting employees for the planned new enterprise. At best, I accept that any conversation between White and Go regarding the possibility of Go working elsewhere was, indeed, in the context of White having been instructed by his superior (Cloutier) to consider possible employees to assign to the new Roka venture. It is illogical for White, in these circumstances, to have told Go that “money was no issue”; that is an aspect of the business concerning which White would have had no control or understanding at that stage. This leads me to further doubt the accuracy of Go’s recollection. 160 I therefore conclude that the evidence fails to persuade me that White know- ingly offered Go a position in the enterprise that Cloutier was planning to set up to compete with Zesta. It may well be that Cloutier was “testing the water” re- garding potential personnel at Zesta whom he might later invite to join his new business, without disclosing to White his underlying purpose, but that does not make White knowingly complicit in Cloutier’s secret plan.

C. Cloutier’s solicitation of Marcel Jones 161 In is undisputed that, in the weeks leading up to his firing in November 1999, Cloutier sought to interest Jones in participating in a competing business venture that he, Cloutier, claimed he was setting up. It was the disclosure by Jones to the Eastmans of Cloutier’s overture, and in particular his request that Jones solicit Nortel France on behalf of the new enterprise, that sparked the ter- mination of Cloutier’s employment and the initiation of this litigation. Two ma- jor points of contention in relation to the solicitation of Jones are: (1) whether it was an actual attempt to recruit Jones for Cloutier’s new business, and (2) whether anyone other than Cloutier was engaged in an improper attempt to re- cruit Jones for a competing enterprise. 162 In relation to the former point, as I have previously mentioned, Jones did not testify. The evidence concerning Cloutier’s approaches to Jones came largely from his own mouth or through documents that he either produced voluntarily or that were found on his office or home computer (such as financial projections and the like). Cloutier’s explanation for all these documents was that it was a fictional exercise, designed to entrap Jones and expose him as a disloyal em- ployee, with a view to persuading Vincent Eastman to terminate Jones’ employ- ment. The evidence of the other Zesta employees who were privy to or partici- pants in this exercise was that it was, as far as they were aware, a “sting” against Zesta Engineering Ltd. v. Cloutier Stinson J. 57

Jones. Mary Cloutier testified that Cloutier told her of the sting, in advance of Jones’ disclosure. 163 Zesta points to a variety of pieces of evidence to support its contention that the approach to Jones was an actual effort by Cloutier, Jefferies, Durante and Sanger to involve Jones in their new business. Much of the evidence is equivo- cal, however, and is capable of supporting either the plaintiff’s or the defend- ants’ position. 164 A prime example is the Hi-Cap quotation for Nortel France. Zesta points to this document and its creation as damning evidence against Cloutier and the cre- ators of the document, Sanger and Durante, arguing it establishes their complic- ity in the efforts to create a new company. The latter defendants assert it was a document that was created at the direction of Cloutier, as part of a plan to ex- pose Jones’ disloyalty. On its face, the Hi-Cap quotation to Nortel France is capable of supporting either side’s contentions. The same may be said of the financial projections (which Cloutier explains as further material created to rein- force to Jones the state of planning for the new enterprise) or the Sanger purchase of a cell phone in the name of Hi-Cap (again, from the defendants’ perspective, to create a scenario that would persuade Jones that Hi-Cap was a real entity). 165 Stepping back from the various potential explanations for the specific items of evidence, it is useful to ask whether it makes sense that Jefferies, Durante, Sanger and White would agree with Cloutier to recruit Jones as part of their new operation. It is true that Jones was a top salesman at Zesta. There was, however, considerable animosity between Cloutier and his fellow managers, and Jones. Jefferies’ diary reflects a number of entries regarding occasions upon which Jef- feries learned information that gave him concerns about Jones. Vincent Eastman agreed that Jefferies brought to him concerns about Jones on more than one oc- casion. Vincent Eastman conceded that Jones had asked him about becoming an independent contractor; he further agreed that Jones violated Cloutier’s order that he should not go to France. Jones told another Zesta employee (Barbara Lomax) he was going to take the trip to France in any event, no matter who told him not to go. He further told Lomax that he was not going to put customer information into the Zesta database because he did not want others having infor- mation regarding his clients. All this evidence bolsters the contention of the ex- Zesta Defendants that they did not trust Jones. 166 In all the circumstances, I consider it unlikely that Jefferies, Durante, Sanger and White (or Cloutier) would want to have Jones join them in a new enterprise, given their prior distrust and disdain for him. It simply does not make sense that they would want as part of their new team someone whom they disliked and who they considered disloyal and untrustworthy. 167 Other aspects of the evidence relied upon by Zesta to support its contention that the ex-Zesta Defendants conspired together to lure Jones to join their new 58 BUSINESS LAW REPORTS 77 B.L.R. (4th)

enterprise, include Durante’s conduct in relation to the Nortel France order that was finally faxed to a Zesta fax machine late in the day, as Durante was locking up the premises. Durante’s explanation was that he took the fax home with him in his briefcase because he was running late. In my view, this is entirely believa- ble and makes sense. The so-called “panic” among Cloutier et al. when Jones failed to obtain a Nortel France order for Hi-Cap and the efforts undertaken by Cloutier through Jefferies to locate Jones, are merely one adversary’s (Zesta’s) characterization of events and actions of a senior manager and his staff to deal with a missing salesman. Once again, these events are equivocal. 168 A further question raised in connection with the solicitation of Jones con- cerns the complicity, if any, of Durante and Sanger arising from their prepara- tion of the Hi-Cap quotation. Their explanation for their involvement in the Jones’ solicitation has been consistent and unwavering from their first interview with Vincent and Bernard Eastman: it was a sting in which they were involved pursuant to the directions of their boss, Cloutier. Apart from their admitted in- volvement in the preparation of the false quotation and the purchase of the cell phone, there is no evidence that Durante or Sanger had any other involvement in setting up the solicitation of Jones. For example, there is no evidence that they were even aware that their names were included in the financial projections pre- pared by Cloutier. 169 Only Cloutier and Peatling participated in the meetings with Christie, prior to the termination of Cloutier’s employment. It may well be that Cloutier had planned a scenario by which he would disable Zesta by (among other steps) persuading Vincent Eastman to fire Jones and then go into competition, luring Jefferies, Durante, Sanger, White and others to join him, all as he mapped out to Christie. 170 It is entirely plausible that Cloutier did not inform or involve any other Zesta employees in his plan to compete because he wanted to have it in place as a more or less “fait accompli” so that they would all follow him there. They had loyalties (especially Durante) and reasons not to leave Zesta (e.g. Durante had spent most of his savings on a new car and Jefferies had two children in univer- sity) so they might have been wary of walking away from Zesta without good prospects and an incentive to leave. The Jones sting thus served two purposes: one, to get the new enterprise up and running without attracting suspicion from the others; and two, to set up Jones to be fired by Zesta, leaving Nortel up for grabs and Zesta vulnerable to competition from the new company. 171 The evidence fails to persuade me, however, that any of Durante, Sanger or White had advance knowledge of Cloutier’s plan to compete. I find as a fact they were not privy to those plans. Instead, although Sanger and Durante were aware of the approach by Cloutier to Jones (for what they believed was the bona fide purpose of exposing him as a disloyal Zesta employee), they were unaware Zesta Engineering Ltd. v. Cloutier Stinson J. 59

in advance of Cloutier’s firing of any plan or steps taken by Cloutier to compete with Zesta. 172 I should add that I am conscious of the letter sent by Christie to Watlow dated December 8, 1999, in which he refers to “Mr. Cloutier’s group.” At that stage none of the ex-Zesta Defendants except Cloutier had retained Christie, as they were not parties to the litigation. There is no evidence that Christie had authority to speak on anyone else’s belief, and Christie himself conceded that, by using that phrase, he was “taking some literary licence.” I therefore do not accept this letter as reflecting any collective effort by Durante, Sanger and White to participate in Cloutier’s plan to compete with Zesta.

Issue 3. What was the genesis of Kelvin and did its creation breach any legal rights of Zesta? 173 Zesta’s theory is that Kelvin was the formal incarnation of the business en- terprise that Cloutier and other defendants had been planning in the fall of 1999 to set up in competition with Zesta. Following Zesta’s discovery of Cloutier’s abortive attempt to recruit Jones and to solicit an order from Nortel France on behalf of Hi-Cap, and the departures from Zesta of Cloutier, Jefferies, Sanger and Durante, these defendants changed their strategy, the theory continues. In- stead, Zesta submits, they agreed to set Durante up in a competing business which came to be known as Kelvin, and which was bankrolled by Peatling, just as Peatling had been the intended financier of Hi-Cap. Zesta argues that these various defendants came to play varying roles in the new enterprise. Zesta fur- ther argues that, because Kelvin was the continuation of Cloutier’s initial plan (which itself actionable since it was tainted by Cloutier’s breach of fiduciary duty), the new enterprise was tainted as well. 174 The defendants advance a radically different explanation for the creation of Kelvin. Durante testified that he developed the idea himself (with support from family members) of opening up a sales distributorship, representing various manufacturers of electrical components, initially to be run out of his house. Only after he was put in contact with Peatling as a potential financier for the opera- tion, did Durante expand the scope of his idea to include leased premises and a thermocouple manufacturing operation. Based upon the personal expertise that he had developed over more than two decades in the business and his knowledge of the industry and manufacturing processes, Durante was able to locate prem- ises, acquire equipment and set up shop for Kelvin by March 2000. Durante and the other ex-Zesta Defendants deny any impropriety in doing so. 175 The first question to address is whether Kelvin was the re-incarnation of Hi- Cap. For reasons already articulated, I have concluded that only Cloutier and Peatling were involved in the November 1999 attempt to set up a competing business. It is true that Sanger proceeded to submit a letter of resignation (an event that was contemplated under Cloutier’s plan) but in my view, he was not 60 BUSINESS LAW REPORTS 77 B.L.R. (4th)

acting in concert with anyone when he did so. The decision by Watlow to termi- nate Zesta as its agent on direct accounts such as Husky (even if it was orches- trated by Cloutier), had the effect of eliminating Sanger’s position at Zesta. The Watlow decision was announced on November 17 and Sanger submitted his let- ter on November 24, prior to Cloutier’s firing. Cloutier and Sanger testified that an alternate role was being sought for Sanger at Zesta and that Cloutier had asked Sanger to hold off his resignation. John Clark, a long time Zesta salesman and current employee, confirmed that there were discussions at the time about Sanger possibly remaining in Zesta in an expanded or modified role. I therefore attribute no impropriety to Sanger arising from his decision to resign. 176 Sanger also drafted a letter to Martignon of Watlow Detroit dated November 29, 1999 in which he sought to get work directly from Watlow. The letter was never sent, but in any event, it was prepared subsequent to Cloutier’s termina- tion by Zesta on November 27. It is not surprising (nor is it blameworthy) that in the face of these two significant events (the Watlow termination of the Husky arrangement and Cloutier’s firing), Sanger contemplated seeking some arrange- ment with Watlow on his own behalf. I expressly do not find that these steps by Sanger were in furtherance of a plan conceived by Cloutier to set up a business in competition with Zesta. 177 I further acknowledge that Sanger was approached by Ted Stanley on behalf of Watlow concerning his potential employment by Watlow to act as a represen- tative looking after the Husky accounts, and other direct accounts. This may well have been a step initiated as a result of Cloutier’s previous discussions with Watlow, but this does not establish complicity on the part of Sanger. If anything, it indicates a concern on the part of Watlow to secure the services of someone whom it perceived would be a competent agent on its behalf. 178 I further note that Cloutier’s plan as reflected in Christie’s notes contem- plated that Sanger would be a significant shareholder in the new enterprise. Sanger denied any knowledge of such a plan and, as events unfolded, Sanger never became a shareholder of Kelvin. 179 Another event relied upon by Zesta to support its argument that the creation of Kelvin was tainted, is a meeting that took place at Christie’s law firm on January 7, 2000, attended by Cloutier, Sanger, Durante, Jefferies (accompanied by his litigation counsel), Christie and a corporate lawyer from Christie’s firm. Given the previous close association among these four by now ex-Zesta employ- ees, the firing of three of them by Zesta, the litigation initiated by Zesta against Cloutier and Jefferies, and the injunctive relief already granted, it is not surpris- ing that caution (including consultation with involved legal counsel) would ac- company any plan by Durante to go into a business that might compete with Zesta. The mere fact of the incorporation of Kelvin as the vehicle through which Durante would carry on his business, does not necessarily mean that there was anything nefarious about the meeting. To the contrary, it is difficult to be critical Zesta Engineering Ltd. v. Cloutier Stinson J. 61

of Durante and others for seeking appropriate legal advice as to what would or would not be permissible conduct, given the existing state of the litigation and the climate of antagonism that accompanied it. I draw no inference adverse to the defendants arising from this meeting. 180 As noted, in due course Peatling and Durante agreed that Durante would incorporate and operate Kelvin, with Peatling as a passive investor and minority shareholder. This was clearly not the type of business arrangement that was con- templated by Cloutier’s plan, since none of the other ex-Zesta employees were shareholders. While Peatling may have been a party to Cloutier’s fall 1999 plan to compete, that plan did not proceed after Cloutier was fired. The evidence presented by Zesta fails to persuade me that the creation of Kelvin was a by- product of Cloutier’s fall 1999 plan or that Cloutier played any material role in the creation of the business. 181 That leaves the question whether the admitted creator of Kelvin – Durante – breached any legal obligations when he chose to start a business to compete with his former employer – Zesta. Zesta argues that, as a senior and long-standing employee, Durante had and owed fiduciary duties and obligations to it. As a fiduciary, the argument continues, Durante had an obligation that continued after his departure from Zesta’s employ, to refrain from activities that would conflict with the interests of his former employer. 182 Assuming, without deciding, that Durante was a fiduciary and that ordinarily he would have been subject to the limitations and restrictions for which Zesta contends, I do not accept that Durante’s involvement as incorporator of Kelvin breached any such obligations. In my view, for the reasons set out below in my analysis of Durante’s counterclaim for wrongful dismissal, Durante’s employ- ment with Zesta was terminated without notice or cause on December 20, 1999. As Laskin J. commented in Canadian Aero Service Ltd. v. O’Malley (1973), 40 D.L.R. (3d) 371 (S.C.C.) (“Canaero”) at 391, the factors to be considered in determining whether a fiduciary has broken his duty include, among others, “the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge.” It is, to a degree, counterintuitive that an employer who breaches its duty to a long-serving employee by wrongfully ter- minating the worker’s employment, should nevertheless be at liberty to restrict the ex-employee’s efforts at rejoining the workforce by asserting a claim of breach of ongoing fiduciary duty. 183 An analogous situation was considered in General Billposting Co. v. Atkin- son, [1909] A.C. 118 (U.K. H.L.) where it was held that an employer was pre- cluded from enforcing a restrictive covenant against competition, where the em- ployer had dismissed the employee without cause and without notice. This makes sense, because to allow employer to enforce the restrictive covenant would be to allow it to benefit from its own breach of contract. This analysis 62 BUSINESS LAW REPORTS 77 B.L.R. (4th)

applies equally to a general fiduciary obligation not to compete with one’s for- mer employer. 184 This principle applies in the case of Durante. Once he was wrongfully dis- missed by Zesta he was thereafter under no obligation to refrain from competing with Zesta, and his involvement with Kelvin cannot be characterized as a breach of fiduciary duty on his part. 185 I therefore conclude that the creation of Kelvin did not breach any legal rights of Zesta.

Issue 4. Did the operations of Kelvin violate any legal rights of Zesta? 186 Although I have found on the facts that Cloutier (with Peatling’s involve- ment as financier) planned to set up a business in competition with Zesta, and took the initial steps to implement that plan before he was fired, I have also found as a fact that no other former Zesta employees were privy to Cloutier’s plan to compete. I have further concluded that, once Cloutier was fired by Zesta and the litigation was commenced, he did not pursue the plan that he discussed with Christie. Rather, I have concluded that the concept for Kelvin was Du- rante’s, and that only after Durante was introduced to Peatling did the scope of the intended operation expand from a mere sales representative one to a more comprehensive business, including the design and manufacture of thermocou- ples. Zesta, however, asserts that in various ways the activities undertaken by the newly-incorporated Kelvin violated its rights, thereby entitling Zesta to pur- sue recourse against Kelvin and its participants. I therefore turn now to a review of Zesta’s submissions in this regard. 187 Zesta argues that several aspects of the conduct of Kelvin’s business were a violation of its legal rights, as follows: A. Contact with Husky in January 2000 B. February 2000 “road trip” C. Misuse of confidential information D. Conversion of corporate opportunity with Husky-Thixo I will address each in turn.

A. Contact with Husky in January 2000 188 During the course of his employment with Zesta during the 1990s, one of Cloutier’s most significant responsibilities was maintaining the relationship with Husky. Although he brought in Sanger to be the Husky-specific Zesta sales rep- resentative, from Husky’s perspective Cloutier remained the most important contact at Zesta. He worked with Sanger to address any Husky problems and maintained an ongoing presence and contact with Husky. Zesta Engineering Ltd. v. Cloutier Stinson J. 63

189 In late January 2000 (almost two months after he had left Zesta), Cloutier was contacted by Rod Nicol, an engineer at Husky. At the time, and for many months thereafter, Cloutier had no active role with Kelvin. Nicol had somehow learned about the plans for the new business that ultimately became Kelvin. Ac- cording to Nicol, the purpose of his contact with Cloutier was because Nicol was interested on behalf of Husky to continue the type of work with Cloutier and Sanger that he had done with them before they both left Zesta. Cloutier referred Nicol to Sanger, but asked Nicol to send him (Cloutier) a fax letter which stated as follows: This letter is to confirm that we have initiated commercial relations with you as a result of receiving excellent service from you over the past several years. I would like to confirm that you have not solicited our business, but rather we have approached you to continue a commercial relationship through your new business. A copy of the fax was also sent to Sanger, who had been identified by Cloutier to Nicol as someone associated with the new business. 190 What is significant about the contact between Nicol and Cloutier is not who initiated it, but rather Cloutier’s response. As Nicol himself put it, “I knew there was a possibility to continue a commercial relationship if they started a new business” and that was plainly the intention of his contact with Cloutier. Clou- tier’s response was to refer Nicol to Sanger so as to facilitate the ongoing busi- ness relationship and to have Nicol document for the record that he, Nicol, had initiated the contact. 191 There is no dispute but that Cloutier had and owed fiduciary duties to Zesta while he served as its Vice-President and Assistant General Manager. As Canaero, supra, makes clear the fiduciary obligations of a senior executive such as Cloutier do not automatically cease upon the termination of his/her employ- ment, rather, one must consider the circumstances under which the relationship was terminated. In my view, where an employee is terminated for cause, his or her fiduciary obligations would ordinarily continue. To hold otherwise would be illogical, because it would permit a former employee who was guilty of miscon- duct sufficient to justify dismissal, to benefit by his/her misconduct by thereby obtaining a release from his/her fiduciary obligations. The employer would be doubly wronged, first by the employee’s initial misconduct, and then by the ex- employee’s post-termination breach of fiduciary duty. 192 In the present case, for the reasons articulated below in relation to Cloutier’s claim for wrongful dismissal, I conclude that Zesta had cause to terminate Clou- tier’s employment at the time it did. Accordingly, Cloutier’s fiduciary obliga- tions to Zesta survived after his employment was terminated at the end of No- vember 1999 and, in my view, remained in place at the time of his dealings with Nicol in January 2000. 64 BUSINESS LAW REPORTS 77 B.L.R. (4th)

193 The question thus becomes whether, in responding as he did to Nicol’s en- quiry, Cloutier complied with his ongoing obligations to Zesta. In my opinion, he did not. As a fiduciary with a high level of responsibility and the correspond- ing high level of loyalty to Zesta, and with a long-standing connection with a key Zesta customer (Husky), Cloutier should have declined completely to re- spond to the enquiry he received from Nicol. As a fiduciary, Cloutier owed an undivided duty of loyalty to Zesta. There can be no dispute that, while he was the Vice-President and Assistant General Manager of Zesta, Cloutier would have breached his duties to Zesta by referring a Zesta customer to a competitor instead of encouraging the customer to continue to do business with Zesta. Al- though he asserts that he had no participation in the creation of Kelvin’s new business, plainly Cloutier steered Nicol and Husky towards Sanger and Kelvin, thus advancing and preferring the interests of the latter over the interests of Zesta: in so doing, Cloutier knowingly facilitated contact between Husky and a new business that he knew would be competing with Zesta. Given his ongoing obligations to his former employer, Cloutier should have either attempted to dis- suade Husky from diverting its business away from Zesta to Kelvin or, at the very least, refrained from providing any information or facilitating the contact that he did. 194 I therefore hold that, regardless of whether Nicol was solicited or ap- proached Cloutier on his own, Cloutier breached his fiduciary duties to Zesta by reason of the fashion in which he responded to Nicol’s approach. In turn, Clou- tier’s referral of Husky to Sanger resulted in contacts between Husky and Sanger and an exploratory meeting in February 2000 that led to a quote from Kelvin to Husky. Although there is no evidence that Cloutier directly participated in the February 2000 discussions with Husky, the response of Cloutier to the January 2000 enquiry from Husky paved the way for that business opportunity for Kelvin. Thus, Kelvin benefited from Cloutier’s breach of duty. Given the fact that Sanger was copied on the fax from Nicol to Cloutier in January 2000 and further given Sanger’s involvement with Durante and Kelvin in February relat- ing to the exploratory meetings with Husky, Kelvin must be fixed with knowl- edge of Cloutier’s breach of duty.

B. The February 2000 “Road Trip” 195 In mid-February 2000, Cloutier, Durante, Sanger, White and Jefferies went on a 4-day “road trip” to the United States to visit potential suppliers for Kelvin. As a result of these meetings, Kelvin got a distribution contract for Heatron, thus enabling it to sell products that were competitive with some offered by Zesta. 196 The actual extent of Cloutier’s participation in the meetings with these po- tential suppliers is unclear on the evidence. What is clear, however, is that Clou- tier participated in the trip, together with his fellow ex-Zesta employees, know- ing that its business purpose was to facilitate Kelvin going into direct Zesta Engineering Ltd. v. Cloutier Stinson J. 65

competition with Zesta. Indeed, in advance of the trip, he had been contacted by White (who had just ceased his employment with Zesta) and in turn he arranged for Durante to get in touch with White to discuss the new business. 197 For the reasons previously discussed, Cloutier had ongoing fiduciary obliga- tions to Zesta. Had he still been employed by Zesta it would have been imper- missible for him to go on a road trip having as one of its purposes the solicita- tion of suppliers for a Zesta competitor. Cloutier’s participation in the “road trip” with other ex-Zesta employees, designed to secure suppliers for a business competitive with that of Zesta, and his assistance in facilitating recruitment by Durante of other former Zesta employees, was contrary to the interests of Zesta and a breach of Cloutier’s obligations. Kelvin was able to secure a source of supply (from Heatron) and hired White as a key employee. Once again, Kelvin knowingly benefited from Cloutier’s breach of duty.

C. Zesta’s complaint regarding misuse of confidential information 198 The basic thrust of Zesta’s confidential information claim is that “know- how”, information and documents regarding the design and manufacture of ther- mocouples that it had developed through trial and error over many years, were valuable information that Kelvin unlawfully used to springboard its new busi- ness into competition with Zesta. Zesta points to the fact that, within two to three months of setting up business, Kelvin was manufacturing thermocouples that were identical to those produced by Zesta. In doing so, Kelvin utilized a production system that was modeled on the one created at Zesta over the course of many years, utilizing equipment, supplies, suppliers and techniques devel- oped and refined by Zesta through years of effort, experimentation, trial and error. The Zesta production process, the argument continues, is a body of confi- dential information that was unlawfully misappropriated by the ex-Zesta De- fendants after they left Zesta and set up their competing business. 199 The position of the ex-Zesta Defendants is that there was nothing confiden- tial or proprietary about Zesta’s manufacturing process. Nor, they submit, was there anything confidential or proprietary about Zesta’s suppliers or the designs of the thermocouples that it manufactured. Finally, these defendants deny having misappropriated any confidential Zesta documents or information relating to its thermocouple business. 200 I acknowledge that the concept of confidential information is not limited to trade secrets and that information may be confidential if the whole result is not known, though its separate features or ingredients are capable of being ascer- tained by actual inspection by any member of the public: see Ansell Rubber Co. Pty v. Allied Rubber Industries Pty Ltd., [1967] V.R. 37 (Australia Vic. Sup. Ct.), at 49 as cited in Schauenburg Industries Ltd. v. Borowski (1979), 101 D.L.R. (3d) 701 (Ont. H.C.) at para. 19. Further, I acknowledge that “it is enough that the information represents in some considerable degree the indepen- 66 BUSINESS LAW REPORTS 77 B.L.R. (4th)

dent efforts of the claimant”: see Coco v. A.N. Clark (Engineers) Ltd. (1968), [1969] R.P.C. 41 (Eng. Ch. Div.), at 47 as cited in Schauenburg, supra, at para. 20. I further acknowledge the reliance by Zesta on the decision in International Corona Resources Ltd. v. LAC Minerals Ltd., [1989] 2 S.C.R. 574 (S.C.C.) in support of its argument that the Zesta defendants are lia- ble due to breach of confidence. Insofar as Zesta’s production processes, equip- ment, supplies and suppliers are concerned, however, subject to one exception, I am unable to find that this information was confidential or communicated in confidential circumstances entitling it to the protection Zesta claims. 201 A thermocouple is a solid state device that is comprised of two wires com- posed of different metals that are joined or welded together at a point; when that connected point is applied to a surface and the temperature of the surface changes, a small but measurable electrical current is generated through the con- nected wires. When the wires are attached to a voltage measuring device that is properly calibrated, the electrical current can serve to indicate the temperature of the surface to which the point of the thermocouple has been applied. The theory behind thermocouples has been known for approximately 150 years. They are broadly available from a number of sources and the principal considerations driving customer purchase decisions are price, product reliability and reliability of supply. 202 Based upon the evidence I heard, I conclude that there is not very much magic or ingenuity in the design and manufacture of a thermocouple. Variations in fit or application dictate specific aspects of design or size, but they are all relatively basic devices, manufactured out of similar, widely available materials, to suit customers’ requirements. Those customer requirements will dictate the type of thermocouple (i.e. tube and wire; mineral insulated; shim stock; etc) as well as the specific design requirements that will allow the device to be attached by the customer to the location at which the temperature measurement is re- quired. Depending on the customer’s specific needs, the manufacturer may sup- ply in-stock thermocouples or may adapt a basic design to allow the device to be attached in a certain way or location. Once again, in my view, there is no magic in those adaptations to suit customer requirements. 203 Numerous examples of thermocouples manufactured by Zesta and by Kelvin were placed in evidence. On their face, they appear almost identical. I do not find that surprising, however, simply because they were manufactured to be sold to customers for use in specific applications. In other words, if a customer were to approach each of Zesta and Kelvin to request, for example, a shim stock ther- mocouple having a certain dimension for purposes of being affixed to a particu- lar machine in a specified fashion, each of Zesta and Kelvin (or, for that matter, any other thermocouple manufacturer) would likely produce an end product that looked virtually the same. These are not high technology devices; copying, re- producing or reverse engineering the products of other thermocouple manufac- Zesta Engineering Ltd. v. Cloutier Stinson J. 67

turers is a common practice in the industry, and one which Zesta itself has prac- tised in the past. 204 With respect to specific design improvements or advancements, there was no evidence that any of these attained by Zesta were protected by patents or other industrial design rights. Rather, Zesta (and other manufacturers) kept pace with one another by adopting design refinements to meet customer requirements. A classic example of this is the so-called “molded transition” in which a ceramic- like substance is applied through use of a pressure mold to encapsulate the area on the thermocouple at the “transition” i.e. the location at which the lead or connecting wires are connected with the solid portion of the device. Zesta did not, and could not claim to be the inventor or originator of this feature; rather, Zesta learned about it from Husky, who showed Zesta what other thermocouple manufacturers were producing. I therefore reject the suggestion that there was anything unique, original or confidential about this or any of the other products that Zesta was manufacturing. 205 Zesta further complains that the production line and equipment installed at Kelvin were a mirror image of the Zesta production line, utilizing the identical equipment and manufacturing techniques that Zesta has sourced and refined for the years. The Kelvin production line was largely identical to that of Zesta and it utilized much of the same equipment. The real question is whether there was anything improper about Kelvin proceeding as it did. 206 The reality is that, as I have noted, a thermocouple is an inherently “low tech” device. It does not involve any secret formula or complex manufacturing process. There are very few steps in the manufacturing process, none of which is inherently complex or difficult. Once the type and design of thermocouple is designated, the manufacturing processes involves the procurement of the materi- als, the stripping of the wires, their insertion into the prescribed format, the welding of the connection, the application of the necessary transition, plug and attachment hardware, and testing. There is a limit to the number of ways in which these various steps can be carried out; likewise, there is a limit to the number of different machines or pieces of equipment that can be used to per- form these steps. As two independent witnesses (Rod Nicol and Martin Kestle of Husky) put it, having visited the manufacturing facilities of various thermocou- ple makers, they did not observe any substantial differences between the various manufacturers in terms of how they made thermocouples: the materials used were the same, the equipment was largely the same, there were slight differences in how their factories were set up, but the basic order of operations and manu- facturing techniques were virtually identical. Indeed, the sample products pro- duced by the various manufacturers had no significant differences. 207 In relation to suppliers of equipment and materials, it may well be that, over the years, Zesta spent time and undertook research to determine which sources of supply of which equipment were best suited to its operations. There is no 68 BUSINESS LAW REPORTS 77 B.L.R. (4th)

evidence that Zesta had contractual rights of exclusivity with any of these sup- pliers or that it alone came up with the idea of dealing with specific equipment manufacturers. For example, Zesta learned about TIG welding from another manufacturer; it copied the use of a flash pressure stripper from that same manu- facturer; it learned about the mini encapsulating press from a customer. None of these concepts was unique or confidential to Zesta and I do not accept the argu- ment that, by setting up a manufacturing or production line that mirrored the one at Zesta, Kelvin violated any legal rights of Zesta. In a nutshell, I am unable to find that the Zesta production line and the equipment used in it can properly be characterized as confidential information. 208 Zesta further complains that the Zesta defendants and Kelvin wrongfully ex- ploited the manufacturing techniques and procedures that it developed and re- fined internally over the years. Among other things, Zesta points to its practice of maintaining information relating to manufacturers of specific parts on instruc- tion sheets that were labeled confidential and the confidentiality associated with TIG welder settings. The evidence fails to establish, however, that any of these materials or this information was removed or improperly used by the defendants, subject to the one point discussed below. 209 Zesta argues that the fact that Kelvin was able to start manufacturing ther- mocouples within a matter of months establishes that Kelvin wrongfully misap- propriated confidential information relating to Zesta’s manufacturing tech- niques. The evidence indicates, however, that Kelvin’s initial attempts to manufacture thermocouples were not very successful. It was only after an exper- ienced welder was hired that Kelvin was able to produce satisfactory products. This would indicate that there was no improper use of confidential manufactur- ing information by Zesta’s former employees, but rather quite proper reliance upon the welder’s skill, expertise and knowledge that he brought with him. Once again, the evidence fails to persuade me that Kelvin improperly exploited any confidential information regarding Zesta’s manufacturing techniques. 210 I do have concerns in one particular area, however, relating to product cost- ing. When Zesta began to manufacture thermocouples, it initiated a database program and compiled data to keep track of its manufacturing costs. In turn, this allowed Zesta to not only keep track of its manufacturing expenses, but also to forecast the cost of meeting specific customer orders, in order to factor in markup and to bid competitively. By the end of 1999, the defendant White had assumed responsibility for most of the costing exercise, utilizing costing spread- sheets that included such information as the costs and number of individual components used for a particular model, the reject cost, the labour cost, the total cost, and markup factors. White was actively involved in costing products, in- cluding thermocouples that Zesta sold to its large, high volume customers, such as Husky. The significance of this information was that it went to the heart of the pricing of Zesta’s products in a competitive market where price was one of Zesta Engineering Ltd. v. Cloutier Stinson J. 69

the most important factors in a purchaser’s decision when choosing a thermo- couple supplier. I have no difficulty finding that Zesta’s costing information was and was treated as confidential information. 211 While White was employed by Zesta, he had a copy of Zesta’s costing spreadsheet on his home computer, where he worked at it from time to time. During his testimony at trial, White testified that at the time he left his employ- ment at Zesta in February 2000, he made and returned copies of all files on his home computer. Soon after he began to work at Kelvin, White prepared a cost- ing spreadsheet for molded transition thermocouples to be manufactured by Kelvin to meet Husky requirements. It included detailed labour costing informa- tion that was identical in many respects to the costing information contained in Zesta’s costing spreadsheets for the same products. White’s explanation was as follows: Well, this information I had been using daily for four years. The information was in my head and I still use this information today. 212 There was a dispute concerning the date upon which White prepared the Kelvin costing spreadsheet in question. At the first trial, White testified that by the end of February or the beginning of March 2000 he was doing work for Kelvin on the costing of a quote to Husky and he prepared the Kelvin costing spreadsheet as part of the preparation for the Husky quote. The Kelvin quote is found in a letter dated 6th March 2000 from Durante to Husky (Exhibit 6, Tab 253) which contains prices that are consistent with the pricing spreadsheet (found at Exhibit 6, Tab 252). The latter document bears a date in the upper left- hand corner of “07/03/2000, which could correspond to either 7 March 2000 or July 3, 2000. At the first trial, White confirmed that the document was prepared by him as part of the preparation for a quotation for Husky and that it was dated March 7, 2000. At the trial before me, White changed his evidence to state that he prepared the costing spreadsheet on July 3, 2000. I do not accept his revised evidence, principally because the close correlation between the information con- tained on the Kelvin costing spreadsheet and the March 6, 2000 quote negates the suggestion that the costing spreadsheet was prepared four months after the fact. Rather, I find as a fact that the document at Tab 252 was prepared in early March 2000. 213 The significance of the foregoing is that, as of March 7, 2000, Kelvin did not have any thermocouple manufacturing equipment on its premises and had not yet manufactured any thermocouples. Therefore, by that date, White could not have done any studies to determine Kelvin’s labour cost for making these items. Indeed, by the beginning of July 2000 Kelvin had only a limited manufacturing history, insufficient to develop the refined level of information found in the Kelvin costing spreadsheet. This is further confirmation that the document was likely prepared in early March 2000. 70 BUSINESS LAW REPORTS 77 B.L.R. (4th)

214 I find it unnecessary to address Zesta’s submission that White could not have retained in his memory (as he admitted he did) all of the data which he input on Kelvin’s costing spreadsheet which was identical to the corresponding data on Zesta’s costing spreadsheet and that he must have (contrary to his testimony) improperly retained copies of Zesta’s costing records. Rather, I hold that even if White merely retained the information in his memory (and not on paper or in electronic form), it was Zesta’s confidential information regarding the time and expense required to manufacture the specified thermocouples. By incorporating it into Kelvin’s costing spreadsheet, White was misusing Zesta’s confidential information for the benefit of Kelvin. In turn, Kelvin used the information sup- plied by White using the Zesta confidential information for purposes of submit- ting a thermocouple pricing quote to Husky. In so doing, they breached Zesta’s rights.

D. Zesta’s complaint regarding conversion of corporate opportunity with Husky-Thixo 215 Husky Injection Molding Systems Inc. carries on business through a number of corporate divisions, each devoted to specific aspects of the injection molding business. In the late 1990s, as part of its research and development efforts, Husky created the Thixo Division, which had as its goal the adaptation and de- velopment of injection molding technology utilizing molten metals (such as magnesium) in the place of plastic as the substance to be molded. The use of molten metal in lieu of plastic required the modification of Husky’s injection molding equipment to operate at much higher temperatures. In turn, this led to the requirement for heaters, thermocouples and other peripheral equipment to be modified and adapted for use in much more demanding conditions. 216 In the course of its development work on the new metal injection molding technology, Thixo required new designs and configurations of thermocouples. Beginning in or about 1998, Thixo began to work with Zesta on the design and development of prototype thermocouples for this new application. It was an iter- ative process: Thixo would order a handful of thermocouples with certain speci- fications and features; Zesta would manufacture them, sometimes making sug- gestions or initiating modifications; Thixo would put the prototypes into service in its machines and determine through use whether they required further changes; and so forth. Throughout, as the customer, Thixo specified, ordered and paid for the prototype thermocouples that Zesta manufactured for it. It is an accepted practice in the industry that a customer may go to a competitor and either ask for a similar thermocouple or even reverse engineer an existing one for which it has already paid. 217 While he was still with Zesta, Sanger had primary responsibility for the Thixo project. Following Sanger’s departure, Vincent Eastman asked a Zesta sales representative, John Clark, to assume responsibility for dealing with Husky Zesta Engineering Ltd. v. Cloutier Stinson J. 71

Bolton campus with respect to Zesta products, including the Thixo Division. Stephen Lock of Zesta and the defendant White (who remained with Zesta until the beginning of February 2000) continued their involvement with the develop- ment and manufacture of prototype thermocouples for Thixo. 218 Thixo was not entirely happy with the products produced by Zesta, due to the level of failure. In May 2000, Thixo asked Kelvin to manufacture some pro- totype thermocouples, as an alternate supplier. Ultimately, for reasons I will dis- cuss presently, Thixo discontinued doing business with both Zesta and Kelvin. For its part, Husky ultimately decided to abandon the Thixo project at the end of 2000. 219 The position of Zesta is that the circumstances under which Kelvin came to deal with Thixo in relation to the development of prototype thermocouples was a usurpation by Kelvin of a corporate opportunity that was available to Kelvin only because of the prior involvement of Sanger, White and Cloutier with the Husky-Thixo project. But for the customer connection, detailed knowledge and technical know-how that these individuals developed while employed by Zesta and took with them to Kelvin, Thixo would not have transferred its business, to the benefit of Kelvin and the detriment of Zesta. 220 For its part, Kelvin denies any wrongdoing associated with the decision by Thixo to seek out other sources for the advancement of the development of pro- totype thermocouples for the metal injection molding equipment. Specifically, Kelvin and the individual defendants deny that they wrongfully exploited any prior connection with or know-how concerning the Thixo project. Rather, the decision by Thixo to approach and continue to deal with Kelvin was driven by Thixo’s lack of confidence in Zesta’s ability to satisfy its requirements, as well as a series of significant missteps by Zesta personnel that had the effect of alien- ating key decision makers at Thixo. 221 Three former Thixo engineers who dealt with both Zesta and Kelvin testified at trial: Derek Mackie, Martin Kestle and Lisa McKinstry. Mackie was the lead Zesta contact at Thixo until he left at the end of March 2000. McKinstry over- lapped with and then succeeded Mackie in relation to the development of heater bands and thermocouples for Thixo machines. Kestle was an engineering team leader at Thixo who worked with both Mackie and McKinstry. The evidence of these three independent witnesses concerning the fashion in which the Zesta- Thixo and Kelvin-Thixo relationships progressed was largely consistent, and was supported in several respects by contemporaneous documents. In my view, none of these witnesses was seriously challenged on cross-examination (despite a concerted effort by counsel for Zesta to discredit McKinstry) and I found their testimony to be largely logical and reasonable. Most importantly, as insiders at Thixo, they were in a position to understand and explain how and why Thixo took the steps that it did in its dealings with Zesta and Kelvin. 72 BUSINESS LAW REPORTS 77 B.L.R. (4th)

222 The gist of the evidence of these three Thixo witnesses, which I accept, is that Thixo was engaged in a development project that required thermocouples that could withstand the high temperature conditions associated with the injec- tion of molten metals. Initially, Thixo sent drawings to Zesta to have it manufac- ture prototypes. To begin with, Zesta brought in existing technologies and used off the shelf products, although in due course it revised and customized its de- signs, and used substitute materials to try to meet Thixo’s needs. Due to the failure rate experienced with Zesta thermocouples, and being aware of the exis- tence of Kelvin, Mackie decided to contact Kelvin to see if it could assist Thixo in solving the problems. After Mackie left in March 2000, McKinstry followed through with Kelvin. Kelvin did not solicit business from Thixo, but merely re- sponded to the contact from Thixo. 223 In the course of involving Kelvin in its efforts to achieve a satisfactory level of performance and design for the thermocouples it required, Thixo provided to Kelvin both samples and drawings of some of the prototypes manufactured by Zesta. Although Zesta argued before me that Husky acted improperly in doing so, I do not agree, in light of the fact that (1) Thixo had paid Zesta to develop the prototypes and had purchased them, as well as participating in the iterative pro- cess leading to the successive designs; (2) the practice of reverse engineering was an accepted one in the industry; and (3) this information was provided to Kelvin at Thixo’s instance and not the other way around. In any event, my con- cern is whether Kelvin’s action in dealing with Thixo amounted to a usurpation of a corporate opportunity that was the property of Zesta, not whether Thixo’s conduct violated some agreement or understanding between Thixo and Zesta. 224 At trial, Zesta made much of McKinstry’s efforts to determine the metallic composition of a spring incorporated by Zesta in the attachment mechanism for one of the prototype thermocouples. From her perspective, McKinstry legiti- mately wanted to know that information so that it could be taken into account when evaluating the performance of any future prototypes that Thixo might test, be they from Zesta or Kelvin. She also wanted to know that information in order to relay it to Kelvin, to factor into any design modifications that it might con- template. As the customer who had commissioned and paid for the Zesta proto- type, McKinstry believed she was entitled to this information. Her enquiries about this topic led Lock to become concerned that MacKinstry was somehow “leaking” information in an improper fashion, prompting Lock to provide false information about the composition of heat spring to McKinstry by way of a “sting”. Lock subsequently admitted to McKinstry that he had provided her with false information in order to “test the confidentiality of communications”. Mc- Kinstry was understandably angered because a supplier had lied to her, and she complained loudly to others at Thixo and Zesta about this conduct. There is no question but that Lock’s actions in this regarding caused serious damage to the Thixo-Zesta relationship. Zesta Engineering Ltd. v. Cloutier Stinson J. 73

225 A further blunder on the part of Zesta guaranteed that it would do no further business with Thixo. In light of the issues (raised by Lock and Zesta) surround- ing confidentiality of information and proprietary rights regarding technical de- velopments, Thixo decided to ask Zesta to sign a technology development agree- ment, consistent with those used by it with numerous other suppliers. Husky also required Kelvin to sign such a document, which Kelvin did. Zesta refused to sign the technology development agreement, without giving a reason. As a re- sult, McKinstry and Thixo did not do any further development work with Zesta. Thixo did, however, continue to deal with Kelvin. 226 The principles relating to improper usurpation of corporate opportunities were outlined in the Supreme Court of Canada decision in Canaero, supra. Over the past several decades, numerous cases have considered those principles and their applicability to various fact situations. In each case, the court must decide whether the ex-employee in question falls within the category of “top manage- ment” such that a fiduciary duty arises and then, if so, what activities will amount to a breach of that fiduciary duty. For purposes of the present discus- sion, I am prepared to assume that Durante (who was actively involved with Kelvin throughout) was a fiduciary of Zesta and thus Kelvin was subject to the same limitations. The question remains, however, whether Kelvin’s activities amounted to a breach of that fiduciary duty. 227 In Edac Inc. v. Tullo, [1999] CanLII 14868, [1999] O.J. No. 4837 (Ont. S.C.J.), Nordheimer J. reviewed a series of cases subsequent to Canaero in seek- ing to define the scope of activities in which a former senior employee is pre- cluded from engaging. He concluded as follows (at para. 40): I conclude, therefore, that the prohibition that is placed on a senior em- ployee, who owes a fiduciary duty to his former employer, precludes the individual from using any special knowledge he or she obtained during the course of their employment to directly solicit the customers of their former employer. It does not, however, preclude the solicitation of those customers as part of the general solicitation of potential customers nor does it preclude the individual from using his or her general body of knowledge and expertise from competing, either for themselves or for someone who might employ them, for the business of such customers. To hold otherwise would, it seems to me, result in a situation where the individual could be effectively pre- vented from engaging in gainful employment in the industry or area with which they are familiar and for which they have an established background of experience. I respectfully agree with that analysis. 228 I am satisfied that the contact between Thixo and Kelvin that ultimately led to Thixo’s request to Kelvin to assist in the manufacture of prototype thermo- couples, was initiated by Thixo when it was seeking help to resolve the problems that it was experiencing with the Zesta prototypes. I also find that there was no solicitation, no misuse of special knowledge and no improper usur- 74 BUSINESS LAW REPORTS 77 B.L.R. (4th)

pation of a corporate opportunity by Kelvin or any of the other defendants in relation to the Kelvin-Thixo dealing. I further find that the Thixo-Zesta proto- type development arrangement was not a budding corporate opportunity, but rather a situation in which Thixo was seeking to solve a problem and went look- ing for assistance wherever it believed that assistance could be found. In any event, I further conclude that Zesta itself was responsible for bringing its rela- tionship with Thixo to an end, having lied to the customer and subsequently having refused to sign a technology development agreement for no good reason. 229 I therefore conclude that Kelvin violated none of Zesta’s legal rights by en- gaging in the relationship with Thixo that it did.

Issue 5. What legal results flow from the foregoing findings? 230 In relation to each of Issues 1 through 4, I have examined the evidence relat- ing to the allegations of Zesta that Cloutier and the other ex-Zesta Defendants planned and began to execute a scheme to set up a competitive business, prior to their departure from Zesta, and thereby breached their duties to Zesta. I have also examined the allegations surrounding the genesis of Kelvin and whether any of its operations violated Zesta’s rights. In the course of that analysis, I have made certain factual and legal findings. I turn now to the legal results that flow from those findings. 231 With respect to Issue 1, I have found as a fact that Cloutier made detailed plans to leave Zesta and to set up a competing enterprise, and that Peatling was aware of, complicit with, and agreed to finance Cloutier’s plans. I have further concluded that, prior to his dismissal by Zesta, Cloutier arranged for the cessa- tion of the Watlow-Gordon holdover commissions and Watlow-Husky-Zesta re- lationship and that he further attempted to engineer the dismissal of Jones through the so-called “sting”. While Cloutier accomplished the cessation of the Watlow-Gordon holdover commissions and the Watlow-Husky-Zesta deal, his attempt to get Jones fired failed. I have further concluded that, once Jones re- ported to the Eastmans about Cloutier’s efforts to lure him away, and Cloutier was fired as a result, the plans of Cloutier and Peatling to set up a competing enterprise advanced no further. I have further found that Cloutier’s conduct amount to a breach of his fiduciary duties to Zesta. 232 In Canada Cement LaFarge Ltd. v. British Columbia Lightweight Aggregate Ltd., [1983] 1 S.C.R. 452 (S.C.C.) (at p. 472), the Supreme Court of Canada recognized the tort of civil conspiracy where: the conduct of the defendants is unlawful, the conduct is directed towards the plaintiff ... and the defendants should know in the circumstances that injury to the plaintiff is likely to and does result. In the present case, I have found that Cloutier and Peatling acted in concert, their conduct was unlawful (since it amounted to a breach of fiduciary duty by Clou- Zesta Engineering Ltd. v. Cloutier Stinson J. 75

tier), the conduct was directed towards Zesta, injury to Zesta’s business was likely to and did result (the termination of the two Watlow arrangements). I therefore find that the elements of tort of civil conspiracy are made out in the present case, and that Cloutier and Peatling are liable to compensate Zesta for the damages that flowed from that wrong. 233 With respect to Issue 2, I have concluded that none of the other defendants was involved with Cloutier’s fall 1999 plan to go into competition with Zesta. To the extent the other ex-Zesta Defendants may have been involved in activi- ties that advanced Cloutier’s plans, they did so pursuant to instructions received from him as their superior in the Zesta organization and unaware of Cloutier’s overall strategy. I therefore conclude that they were not complicit in the civil conspiracy and therefore have no liability arising from it. 234 With respect to Issue 3, the genesis of Kelvin, I have concluded that this was a legitimate and bona fide undertaking on the part of Durante to establish him- self in his own business following his wrongful dismissal by Zesta. The mere fact that he sought and obtained financing from Peatling does not make Durante or Kelvin a party to the Cloutier-Peatling conspiracy, an effort that came to an end following Cloutier’s dismissal by Zesta. I have further found that the cir- cumstances of Durante’s dismissal by Zesta relieved him of any duty he might otherwise have had to refrain from competing with his former employer. I there- fore conclude that no liability arises from Durante’s incorporation of Kelvin. 235 With respect to Issue 4, the actual operations of Kelvin, however, I have found that several activities from which Kelvin benefited amounted to breaches of Zesta’s legal rights. Two of these involved breaches by Cloutier of his fiduci- ary duties in: (1) referring enquiries from Husky to Sanger, in furtherance of Kelvin’s business competitive with that of Zesta, and (2) participating in the road trip that had as its goal securing supplier contracts that would enable Kelvin to compete with Zesta. 236 In each of these situations, Kelvin knowingly benefited from Cloutier’s breach of fiduciary duty. A party who knowingly participates in a breach of fiduciary duty of another is liable to compensate the wrong party to the same extent as the fiduciary who committed the wrong: see MacMillan Bloedel Ltd. v. Binstead (1983), 22 B.L.R. 255 (B.C. S.C.) at para. 51 as approved in Soulos v. Korkontzilas, [1997] 2 S.C.R. 217 (S.C.C.), at 219. See also Gold v. Rosenberg (1995), 25 O.R. (3d) 601 (Ont. C.A.). I hold that Kelvin and Cloutier are jointly and severally liable to Zesta to compensate it in this regard. 237 In relation to the complaint by Zesta regarding misuse of confidential infor- mation by Kelvin and the ex-Zesta Defendants, I have found this allegation to be largely unfounded, save in relation to improper use of confidential production costing information. This is information that was utilized by Kelvin for purposes of estimating its production costs in relation to thermocouple manufacturing, before it had begun producing its own products. But for the use of the Zesta 76 BUSINESS LAW REPORTS 77 B.L.R. (4th)

information, Kelvin would have been at a disadvantage when submitting com- petitive bids for customers’ thermocouple requirements, since it would have been unable to forecast costs accurately until it developed its own base of expe- rience. I estimate that the time frame involved for Kelvin to develop its own track record of production costs for various products would have been approxi- mately six months. This is a factor that might properly be taken into account when calculating the period over which a damage award might be appropriate. 238 In relation to Zesta’s complaint regarding the conversion of the supposed Husky-Thixo corporate opportunity, my conclusion based on the facts is that there was no wrong doing on the part of Kelvin and the ex-Zesta Defendants. As a result, Zesta is entitled to no remedy arising from this complaint. 239 I will address the matter of damages suffered by Zesta and their quantifica- tion in due course.

Issue 6. How should the commission payments from Watlow to Cloutier be characterized? 240 Soon after Cloutier’s dismissal, Vincent Eastman discovered that Dave Mar- tignon (Watlow’s Detroit representative who oversaw the Husky business) had been paying commissions directly to Cloutier. This practice began in March 1999 (supposedly at Martignon’s instance), due to concerns by Martignon that Cloutier might leave Zesta and become directly involved with the Husky ac- count. Vincent Eastman was unaware of these payments prior to Cloutier’s dismissal. 241 At the same time as Martignon initiated the payments to Cloutier, he reduced the commission paid to Zesta by Watlow by a like amount: in effect, Martignon transferred to Cloutier funds he would otherwise have paid to Zesta. Cloutier admitted this fact at his examination for discovery in 2000, and never amended his answer. At trial before me, Cloutier disagreed with his prior evidence, and asserted that it was no longer correct, by reason of certain additional (but undis- closed) information that he had received from Martignon in connection with his Canada Revenue Agency appeal. Martignon did not testify and, for the reasons already expressed, I do not accept Cloutier’s revised evidence on this point. 242 At the first trial, Zesta claimed repayment of the sums paid by Watlow to Cloutier, which it characterized as secret commissions. Further, Zesta defended Cloutier’s counterclaim for wrongful dismissal, on the ground that the payment of secret commissions constituted cause for his dismissal. Cloutier conceded lia- bility for the amounts paid to him, but denied they were secret payments to him. Wright J. ordered Cloutier to repay the sums, but he declined to characterize the payment as “secret commissions” or grounds for dismissal. 243 Zesta’s supplementary notice of appeal to the Court of Appeal challenged this aspect of the trial decision and asserted that the receipt by Cloutier of secret Zesta Engineering Ltd. v. Cloutier Stinson J. 77

commissions was cause for his dismissal. The Court of Appeal allowed Zesta’s appeal and ordered a new trial, due to fresh evidence with respect to Cloutier’s involvement with the Codlin transactions. The Court of Appeal did not deal with the merits of the appeal on the other grounds advanced. In the course of its rul- ing, the Court of Appeal referenced the allegation of “secret commissions” sev- eral times, although the argument before that court focused on and was decided upon the fresh evidence. Since Cloutier did not appeal his liability to pay the commission money to Zesta, that portion of Wright J.’s decision stood. 244 The first question for me to address is whether the characterization of the commission payments from Watlow to Cloutier as “secret” for “not secret” is res judicata. Surprisingly, both sides contend the issue has previously been de- cided authoritatively, each contending for an opposite conclusion. Zesta says it was decided affirmatively by the Court of Appeal; Cloutier says it was decided negatively by Wright J., since his ruling on this point was not overturned by the Court of Appeal. 245 In my view, neither party is right. As to Wright J.’s decision, his judgment was set aside by the Court of Appeal, save in relation to Cloutier’s admitted liability for payment of the quantum of the commissions received by him. Once an appellate court sets aside a judgment below, the first decision “disappears altogether”: see Spencer-Bower and Turner, The Doctrine of res judicata, 2nd ed. (London: Butterworths, 1969) at p. 59; see also Mount Hamilton Christian Reformed Church v. Sikkema, [1995] O.J. No. 1568 (Ont. Gen. Div.) at para. 20. 246 With respect to the Court of Appeal decision, at no time did that court ap- proach and analyze the question whether the commissions were secret. It is true that that terminology was used (and incorporated in the formal order of the Court of Appeal) but in my view, that was merely a shorthand phrase used to reference the sums paid to Cloutier. In my view, the Court of Appeal did not rule one way or the other on the issue whether the amounts paid by Martignon to Cloutier were or were not properly characterized as “secret”. 247 Given that the question was not decided authoritatively or finally by the Court of Appeal and given further that the judgment of Wright J. has “disap- peared”, it falls to me to make the requisite determination as to whether the payments properly fall to be characterized as secret commissions paid to a Zesta employee. 248 The evidence before me confirms that Martignon privately approached Clou- tier, with a proposal that he would pay Cloutier a personal commission, based on sales of Watlow products to Husky via Zesta. At trial before me, Cloutier at- tempted (for the first time) to explain these payments as a new method of reim- bursing Cloutier for expenses incurred in relation to the Husky account. For rea- sons previously expressed, I do not accept that explanation. The fact remains that Cloutier was paid a personal commission by Watlow for performing the job he was paid to do by Zesta. The sums paid to Cloutier by Martignon resulted in 78 BUSINESS LAW REPORTS 77 B.L.R. (4th)

a corresponding decrease in the sums paid to Zesta for the same work. Zesta’s President and controlling shareholder, Vincent Eastman, was neither aware of nor approved these payments, which plainly came at a cost to Zesta. In my view, it is no answer for Cloutier to say that he openly instructed his secretary to pre- pare the commission claim forms: that cannot amount to disclosure to or ap- proval by the company of what Cloutier was doing. 249 I therefore hold that it is proper to characterize the Martignon payments to Cloutier as secret commissions paid to an employee. I need not deal with the matter of Cloutier’s liability to pay those sums to Zesta, since that aspect of Wright J.’s judgment remains undisturbed. I will, however, have more to say on the subject of secret commissions when I deal with Cloutier’s counterclaim for wrongful dismissal.

Issue 7. In relation to the heater sales involving Codlin and Husky Buffalo, A. What quantities of heaters were sold, what proceeds were realized and what became of them? 250 Considerable time was spent at trial before me exploring the question of when Zesta first became aware of the transactions by which Cloutier sold heat- ers to Husky Buffalo through Codlin, and retained the proceeds. Zesta’s position before me (and before the Court of Appeal) was that it only learned of these matters after the conclusion of the trial before Wright J., beginning in February 2001. Cloutier argues that Vincent Eastman was aware of the Codlin transac- tions prior to the first trial, that Zesta failed to advance those arguments on that occasion and that Zesta presented misleading evidence to the Court of Appeal on the application to admit fresh evidence. 251 The last Codlin-Husky Buffalo transaction was completed in the fall of 1999. The trial before Wright J. took place in January and February 2001. The litigation was hard fought, to say the least. It seems to me illogical that, had Zesta actually been aware that Cloutier had sold more than $100,000 worth of heaters to Husky Buffalo through Codlin and had failed to account for the sale proceeds, Zesta would have intentionally refrained from advancing that allega- tion in the initial trial. I am conscious of the evidence regarding a Husky Buffalo purchase order mentioning Codlin that supposedly was received at Zesta and shown to Vincent Eastman, but I do not consider that conclusive of knowledge by Vincent Eastman or Zesta of the now-established wrongdoing by Cloutier. 252 Quite apart from the foregoing, as a matter of law it is not open to Cloutier to contest the issue of when Zesta became aware of the Codlin transactions. That issue was squarely raised before the Court of Appeal on the fresh evidence mo- tion, which was the centerpiece of the appeal. As the Court of Appeal noted, to be admitted, the proposed evidence had to meet the four criteria set out in R. v. Palmer (1979), [1980] 1 S.C.R. 759 (S.C.C.), at 775. The first such criterion is Zesta Engineering Ltd. v. Cloutier Stinson J. 79

that “[t]he evidence should generally not be admitted if, by due diligence, it could have been adduced at trial” In relation to this issue, the Court of Appeal said as follows (at para. 16) : Although the respondents [Cloutier et al] state in their factum that this evi- dence was discoverable even before trial, they advance no persuasive argu- ment in support of this proposition. The Court of Appeal went on to admit the fresh evidence, holding that the due diligence criterion has been satisfied. It follows that Cloutier is attempting to re- litigate an issue that has already been decided against him. The principles of res judicata and issue estoppel preclude a party from raising in a subsequent pro- ceeding a question that has been definitively determined against him. In my view, the decision of the Court of Appeal respecting the fresh evidence applica- tion falls into this category. 253 The test for the preclusive effect of a court order under the doctrine of issue estoppel was set out by the Supreme Court of Canada in Danyluk v. Ainsworth Technologies Inc., [2001] 2 S.C.R. 460 (S.C.C.). In that case, Binnie J. summa- rized the preconditions to the operation of issue estoppel as being: (1) that the same issue had been decided; (2) that the judicial decision which was set to create the estoppel was final; and (3) that the parties to the judicial decision or their privies were the same persons as the parties to the proceedings in which the estoppel is raised for their privies. As Binnie J. succinctly put it (at para. 18): A litigant is entitled to only one bite of the cherry. 254 In my view, all three of the Danyluk criteria are satisfied in the present case. Cloutier had full warning that the Court of Appeal was being asked to decide whether the Codlin transactions met the test for admissibility of fresh evidence. He had ample opportunity to assemble the evidence to support his contention that Zesta had known all along about the Codlin transactions. The Court of Ap- peal decision reveals no evidence relied upon by him to support the position that he now seeks to advance. In my view, to allow Cloutier to revisit this issue in this trial on the basis of evidence he failed to adduce previously, would be con- trary to the basic concept underlying issue estoppel, namely finality in judicial proceedings. 255 I am therefore not prepared to accede to Cloutier’s argument that Zesta knew and should have raised this issue previously: the Court of Appeal decided that it had not and therefore could have done so. 256 It is common ground that, through Codlin, Husky Buffalo purchased a total of 1,806 heaters between June 1997 and October 1999, at a total price of US$132,209.88. Zesta’s evidence was that it had not been able to locate in its 80 BUSINESS LAW REPORTS 77 B.L.R. (4th)

inventory some 2,316 heaters of the type sold by Codlin. On this basis Zesta seeks a finding that all 2,316 heaters were sold by Cloutier to Husky Buffalo via Codlin. There are gaps, however, in Zesta’s records, particularly in relation to credits received from Watlow for goods returned. In light of that missing evi- dence and in the absence of any further positive evidence that additional heaters were sold through Codlin to Husky Buffalo (such as would, presumably, have been available in Codlin’s records) I am not prepared to find that there were any such additional sales. 257 Considerable time was also spent at trial in relation to the question whether the heaters sold by Codlin were heaters that Zesta had purchased, or were re- turns from Husky Bolton, or otherwise came from Zesta’s stock of so-called “obsolete inventory”. In my view, there is no need to resolve that question, since it has no bearing on the outcome, in light of Cloutier’s concession that 1,806 heaters were sold in this fashion. There can be no doubt that Cloutier had the opportunity to effect the Codlin sales by reason of his position as a senior Zesta executive: that is how he had access to the goods and that is why he had access to a purchaser. Even if one were to accept Cloutier’s explanation for why he involved Codlin in the transactions (i.e. to disguise their true nature from Husky and Watlow) according to him, the proceeds of sale were to come back to Zesta, to be divided between Zesta and Watlow in due course. Thus, regardless of the origins of the heaters, the proceeds of sale should have come to Zesta. By con- ducting the sales through Codlin and diverting the proceeds via Codlin, 798 and Peatling, and ultimately back to his own investment account, Cloutier improp- erly diverted funds that were the property of Zesta. It is therefore a matter of no moment whether Zesta had purchased the heaters itself or had them in its obso- lete inventory stock. 258 There is also not much controversy about what became of the sale proceeds. Between June 1997 and December 1999, Husky paid to Codlin four separate cheques, totalling US$132,209.88. Between June 1997 and February 1999, Cod- lin paid Cloutier a total of C$105,464.36 by way of five separate cheques. In addition, the President of Codlin testified that he signed over to Cloutier a Husky cheque in the amount of US$41,999. This evidence was not challenged. Cloutier testified that he placed the funds received by him from these transac- tions in an investment account jointly held in his name and that of his father. Cloutier never informed Zesta about the heater sales or the funds received, nor did he pay the money over. In due course, as mentioned previously, he was charged with fraud and ultimately pleaded guilty to a charge of theft over $5,000. Although a restitution order in favour of Zesta for US$26,788.55 was part of Cloutier’s sentence, there was no evidence that he paid anything to Zesta pursuant to that term. No other proceeds of sale came to Zesta. Zesta Engineering Ltd. v. Cloutier Stinson J. 81

B. What was the involvement of Christie, 798 and Peatling in the Codlin-Husky Buffalo transactions? 259 Following the payments to Cloutier described above, Codlin still retained some funds that had been paid to it by Husky. On Cloutier’s instructions, Codlin paid the remaining funds to 798, in response to two invoices prepared and sub- mitted by Christie, as follows: (a) 798 Invoice No. 00-001 dated April 3, 2000 requested payment for “... all services rendered in connection with consultation and man- agement respecting special projects assignments, product procure- ment and delivery to Buffalo, New York, USA between February 12, 2000 and April 16, 2000 inclusive at CAD125 per hour [211.2 hours total]”. The total amount billed on Invoice No. 00-001 was $28,248. 798 did not actually perform any of the services for Codlin referenced in Invoice No. 00-001. (b) 798 Invoice No. 00-002 dated May 4, 2000 requested payment for “... all services rendered in connection with consultation and man- agement respecting special projects assignments, product procure- ment and delivery to Buffalo, New York, USA between April 17, 2000 and April 30, 2000 inclusive at CAD125 per hour [122.4 hours total]”. The total amount billed on Invoice No. 00-002 was $16,371. Once again, 798 did not actually perform any of the services for Codlin referenced in this invoice. Codlin used monies received from Husky to pay the total amount of these in- voices, being C$44,619. 260 The records of 798 reflect the following payments out: Date Amount of the Cheque Payee May 29, 2000 $26,400 Derek Peatling August 22, 2000 $9,300 Cash October 3, 2000 $1,848 Receiver General June 14, 2001 $6,371 Debit memo for cash

The foregoing payments, according to Christie, were made on Cloutier’s instruc- tions. The August 22, 2000 cheque payable to cash was, according to Christie, either given to Cloutier, or cashed and the proceeds given to him. There was no evidence as to the recipient of the proceeds of the June 14, 2001 debit memo in the amount of $6,371. 261 According to Peatling’s witness statement to the police in 2001, the $26,400 payment to him represented a reimbursement for legal fees that Kelvin had paid to Christie on behalf of Cloutier. Although in his testimony before me Peatling resiled from his statement to the police, I did not find him a credible witness. I therefore do not accept his testimony on that point. Rather, I find that he was aware that funds were coming from the Christie’s management company, on the 82 BUSINESS LAW REPORTS 77 B.L.R. (4th)

instructions of Cloutier, and that he used them to fund Kelvin in order to pay legal expenses. 262 That said, I am unable to find that Peatling was aware that the original source of the funds that passed through his hands was the sale of heaters by Cloutier to Husky Buffalo. While there is good reason to suspect that he knew, in the absence of clear evidence upon which to base such a finding, I am unable to reach that conclusion. 263 The same cannot be said of Christie. Cloutier testified that he told Christie as early as November 1999 about the heater sales and that at the meeting at the restaurant on Sunday, November 28, 1999, Christie told them “don’t do any- thing” about the heaters. Jefferies supported Cloutier’s evidence in this regard. Whether that discussion actually took place is a matter of no moment, because it is plain that by May 2000, Christie was aware that Codlin owed money to Clou- tier. The invoices drafted by Christie at that time to send to Codlin to trigger the payments to 798 contain sufficient detail that I am satisfied on a balance of probabilities that by that point Cloutier had told Christie about his dealings with the heaters, Husky Buffalo and Codlin. There is no other logical explanation for the descriptions contained in the invoices. 264 I therefore find as a fact that when Christie prepared the invoices to Codlin on behalf of 798 and, therefore, when Codlin paid funds to 798, Christie was aware that those funds represented some of the proceeds of the heater sales. I therefore conclude that Christie and 798 knowingly participated in the conver- sion of $44,619 that properly belonged to Zesta. In view of the conclusion I have reached concerning Peatling’s knowledge, I do not find him liable on this count.

Issue 8. Did Cloutier or Kelvin act in contempt of any court orders obtained by Zesta? 265 The only specific act relied upon by Zesta as constituting contempt was the allegation that, in breach of the injunctions granted up to that time, in May 2000 Cloutier on behalf of Kelvin solicited business from Fisher Gauge Ltd., a long standing client of Zesta. While Zesta brought a contempt motion in August 2000, that issue was adjourned to be determined by the trial judge. At the first trial, Wright J. dismissed Zesta’s contempt motion. The Court of Appeal set aside the dismissal and ordered a new trial of the contempt motion. 266 The original order of Langdon J. dated November 26, 1999 restrained Clou- tier from “directly or indirectly soliciting any suppliers ... or clients of Zesta”. By order dated April 11, 2000, Chapnik J. extended that order to include Kelvin. Zesta’s contempt complaint is based on the allegation that on May 4, 2000, Cloutier telephoned Keith Anderson of Fisher Gauge and solicited business from him. Although Cloutier admitted having had a conversation with Anderson on that date, he denied any solicitation. Zesta Engineering Ltd. v. Cloutier Stinson J. 83

267 It is well recognized that proceedings for a finding and sanction of contempt are quasi criminal in nature. As such, the moving party has the burden of prov- ing the contempt beyond a reasonable doubt. As Cumming J. said in Sussex Group Ltd. v. Fangeat, [2003] O.J. No. 3348 (Ont. S.C.J.) (at para. 53): To prove a person in contempt of a court order requiring that the person do an act, or abstain from doing any act, it must be established that (1) the per- son had knowledge of the nature of the terms of the Order; (2) the Order is directive and not simply permissive: and (3) the person’s conduct is in con- travention of the Order. Each one of these elements must be proven by the moving party beyond a reasonable doubt. 268 In the present case, it is not disputed that Cloutier had knowledge of the nature in terms of the order that enjoined him and Kelvin from soliciting cus- tomers of Zesta. Further, it is not disputed that the order was directive in that it prohibited any such solicitation. Finally, it is not disputed that Fisher Gauge was, to Cloutier’s knowledge, a long standing customer of Zesta and thus was a party that fell within the scope of the solicitation prohibition contained in the order. The dispute between the parties on this issue is focused on whether the contact between Cloutier and Anderson on May 4, 2000 amounted to the prohib- ited act of solicitation. 269 I note at the outset that the order of Langdon J., although it prohibited solici- tation, did not prohibit contact in any form or for any purpose. Thus, in my view, this issue turns on the question whether I am satisfied beyond a reasonable doubt that Cloutier solicited business from Fisher Gauge when he spoke with Anderson on the date in question. Cloutier denies that he did. 270 Zesta relies on the testimony of Anderson to prove its allegation of con- tempt. Some of Anderson’s evidence supports that conclusion. During his testi- mony in chief, however, Anderson testified that he had told Marcel Jones back in 2000 that while he had been in contact with Cloutier, Cloutier did not solicit any business. Anderson confirmed this testimony on cross-examination. He fur- ther testified that, when he was visited by Greg Eastman and Bernie Eastman and asked to swear an affidavit, he also told them that Cloutier had not solicited any business. 271 I am therefore confronted by conflicting evidence on the very issue in ques- tion from the sole witness relied upon by Zesta to support its allegation of con- tempt. Faced with that contradictory evidence, and in the face of Cloutier’s de- nial, I am unable to say that I am persuaded beyond a reasonable doubt that he acted in violation of the court order. 272 I therefore decline to make any finding of contempt against Cloutier or Kelvin. 84 BUSINESS LAW REPORTS 77 B.L.R. (4th)

Issue 9 - What remedies should be granted to Zesta? A. Main claim for relief 273 In its claim for relief in the Amended Amended Statement of Claim, Zesta sought (as against Cloutier, Durante Sanger, White, Kelvin and Peatling) injunc- tive relief, damages, an accounting and a declaration that the defendants’ busi- ness was the equitable property of the plaintiff. The underlying premise for these claims was that these defendants were co-conspirators whose activities breached fiduciary duties owed to Zesta and violated other rights including conversion of confidential information and corporate opportunities. Zesta’s position was that the pre-and post-termination conduct of all these defendants was tainted by ille- gality, thus rendering them all liable for losses. 274 Zesta presented a detailed damage calculation prepared by a forensic ac- countant who quantified its losses from these activities of the defendants at $2,397,738. This sum was said to represent Zesta’s lost profits arising from sales by Kelvin to Zesta customers for the 7 year period from 2000 through 2006. For several reasons, I do not consider that calculation to be a proper assessment of the plaintiff’s damages. 275 To begin with (and most importantly) I do not accept the underlying premise upon which the calculation is based, namely, that Kelvin’s entire business was the illegitimate product of unlawful conduct by these defendants. Subject to some exceptions (noted below) Kelvin’s creation and operations breached no rights of Zesta – and certainly none that would warrant or entitle Zesta to claim lost profits on all Kelvin sales to Zesta customers for a 7 year period. I have expressly found that the defendants did not misappropriate Zesta’s business, customers or (subject to one exception) intellectual property. There is thus no basis for the claim for equitable ownership of Kelvin’s business, nor an account- ing for 7 years’ worth of sales. 276 Secondly, the so-called “customer lists” upon which Zesta premised its claim for improper Kelvin sales, were of very questionable reliability. Zesta adopted a very loose definition of what amounted to a claimed customer, includ- ing names of parties with whom it had not had a sales transaction for many years prior to the creation of Kelvin; the Zesta lists also included names of parties with whom it had not done business at all prior to the departure of the ex-Zesta Defendants. 277 A customer is defined in Black’s Law Dictionary as “one who regularly or repeatedly makes purchases or has business dealings with a tradesman or busi- ness ... Ordinarily, one who has repeated dealings with another. A buyer, pur- chaser, consumer or patron”. See DiFlorio v. Con Structural Steel Ltd. [2000 CarswellOnt 316 (Ont. S.C.J.)], 2000 CanLII 22765 at para. 192. Parties with whom Zesta had no commercial dealings for many years prior to Kelvin’s incor- poration, and parties with whom Zesta had no contact at all prior to the defend- Zesta Engineering Ltd. v. Cloutier Stinson J. 85

ants’ departures from Zesta cannot properly be protected from solicitation or competition by Kelvin, since Zesta had no existing relationship with these parties. 278 In any event, even if the creation of Kelvin had breached some fiduciary or other duties owed to Zesta, a 7 year non-competition covenant (which is, in ef- fect, what Zesta claims) is unreasonably long to protect the plaintiff’s interests. In my view, it represents over reaching by Zesta, and cannot be justified.

B. Damages for the Cloutier-Peatling conspiracy 279 Based on my findings of fact I conclude that Cloutier and Peatling were par- ticipants in a civil conspiracy designed to create a competing enterprise. That effort was stillborn because Jones disclosed the Hi-Cap – Nortel quotation to the Eastmans, resulting in Cloutier’s dismissal and the injunctive relief obtained in November 1999. Prior to his dismissal, however, Cloutier communicated with Watlow, resulting in the termination of (a) payment of the Watlow-Gordon hold- over commissions, and (b) the Watlow-Husky-Zesta relationship. Zesta is enti- tled to compensation for the losses it suffered arising from the termination of those two arrangements. 280 In relation to Watlow-Gordon, these were commission payments that Watlow made to Zesta on account of sales of this particular line of products, to accounts turned over to Zesta in 1998. The letter terminating this arrangement mentioned Watlow’s belief that Zesta had not fulfilled expectations that under- pinned Watlow’s willingness to make these payments. It would thus appear that there was no formal contract that required those payments to be made, or any termination clause requiring a defined notice period. It seems reasonable, there- fore, to infer that these payments would not have continued indefinitely; but for Cloutier’s intervention, they might have continued for another year. 281 In his “Newbiz” revenue calculations, Cloutier projected revenue from the Watlow-Gordon line of $29,250 for the first 11 months. This equates to $32,000 per year. I accept that these calculations were an actual projection by Cloutier of the revenues he expected his new enterprise would earn once it diverted this line of business from Zesta. I also accept that these sums are equal to the revenue Zesta would have earned on this account. I therefore calculate Zesta’s damages on this count at $32,000. 282 In relation to the termination of the Watlow-Zesta-Husky relationship, Watlow gave one month’s notice of termination. Once again, however, there was no guarantee that this relationship would continue indefinitely. It was par- ticularly dependent upon Cloutier’s continued involvement with Zesta, some- thing that was similarly not guaranteed, especially in light of the deteriorating relationship between Vincent Eastman and Cloutier, and Vincent Eastman’s fail- ure to implement a succession plan that would give Cloutier incentive to stay. In 86 BUSINESS LAW REPORTS 77 B.L.R. (4th)

the circumstances, had Cloutier simply left, it is reasonable to infer that the for- mer arrangement would have remained in place for no more than a year. 283 In his “Newbiz” projections, Cloutier calculated the monthly revenue as the Husky representative at $10,500 or $126,000 per year. I therefore calculate Zesta’s damages on this count at $126,000. 284 Zesta proved no other damages that flowed from the Cloutier-Peatling con- spiracy. I therefore award it damages against these two defendants, jointly and severally, of $158,000.

C. Cloutier’s further breaches of fiduciary duty 285 With respect to quantifying the damage award in favour of Zesta arising from Cloutier’s breaches of fiduciary duty in referring the Husky enquiries to Sanger and in participating in the road trip, Zesta did not present its damage claim by reference to specific activities of the defendants and losses flowing from them. Rather, Zesta pointed to its overall financial performance, as well as the financial results for Kelvin. I do not discern nor am I prepared to find any readily quantifiable loss to Zesta arising from or attributable to this specific con- duct by Cloutier. As it had in the past, Zesta’s financial performance continued to experience ups and downs such as one would expect in the ordinary turns of the business cycle. 286 More significant, however, are the specific factors that, quite apart from Cloutier’s misdeeds, undoubtedly played a role in Zesta’s performance. Topping the list is the failure of Vincent Eastman to put in place a formal plan of succes- sion to ensure continuity of management and business relationships for Zesta. There can be no question but that this was a significant issue for Watlow for a number of years, yet Vincent Eastman, as the controlling mind of Zesta, failed to address it satisfactorily. Viewed from this perspective, it is not surprising that Watlow was prepared to end the Watlow-Gordon holdover commissions and the Watlow-Zesta-Husky special arrangements. In other words, even if Cloutier had merely resigned, Zesta’s relationships with Watlow and Husky would have been imperiled in any event. Zesta had no guarantee or long term commitment from Watlow in relation to either of these special arrangements; in my view, there- fore, it would be wrong to assume that Zesta would continue to enjoy the reve- nues generated by them for an indefinite period. 287 Another major factor in Zesta’s post-1999 financial performance was the move by Husky to implement a world-wide purchasing policy. Zesta was an unsuccessful competitor in the selection process. The inevitable result of Husky’s independent decision was an adverse impact on Zesta’s revenues, a de- velopment that had no connection to the activities of the defendants. 288 It is therefore difficult to find any link or cause and effect relationship be- tween the activities of the defendants and the financial performance of Zesta Zesta Engineering Ltd. v. Cloutier Stinson J. 87

following their departure. That said, it is likely that Kelvin did achieve some benefit from the breaches by Cloutier: it procured a US supplier to represent at the commencement of its operations, and it developed a contact at Husky. While it is difficult to quantify those benefits in precise monetary terms, both contrib- uted to Kelvin’s ability to “get up and running” as a distributor/manufacturer sooner than it otherwise might have. Although the fashion in which the evidence was presented makes this calculation a challenge, I am required to do the best I can in the circumstances: see Martin v. Goldfarb (1998), 41 O.R. (3d) 161 (Ont. C.A.) at para. 75. I would quantify that benefit as having a value of $100,000, and would order Cloutier and Kelvin to pay that sum, jointly and severally, as damages to Zesta.

D. Kelvin’s misuse of costing information 289 I have further found that Kelvin breached Zesta’s rights by exploiting its production costing information, when White used the information he had ac- quired while working for Zesta to cost out products for Kelvin. Once again, Zesta did not quantify its damage claim by reference to this specific wrong. I have estimated, however, that it would have taken Kelvin approximately six months to develop this body of knowledge on its own. In other words, instead of being able to cost its thermocouple products accurately at the commencement of its operations in March 2000, on its own Kelvin would have taken until Septem- ber 2000 to be able to do so. 290 In assessing damages for this wrong, once again it is difficult to correlate any specific loss or damage to Zesta. I am nevertheless required to do the best I can. In my view, the proper award is the value of the benefit gained by Kelvin in wrongfully exploiting this confidential information. I am prepared to assume that Zesta would have been able to make the thermocouple sales that Kelvin did during this period. 291 According to Kelvin’s operating statements, in its first year of operation Kelvin had $496,135 in sales, and a contribution margin of $271,513. As with Zesta, not all of Kelvin’s business was comprised of thermocouple manufactur- ing and sales, however, so not all of that revenue is connected to the misuse of the production costing information. At Zesta, manufacturing represented approx- imately 25 to 35% of annual revenues. If one assumes the same ratio at Kelvin, the manufacturing portion of the contribution margin of $271,513 is reduced to between $68,000 and $95,000 approximately. Allowing for six months of im- proper use of the information would reduce that sum to between $34,000 and $47,500. Erring on the side of the innocent party, I award Zesta damages of $45,000 against Kelvin on this count. 88 BUSINESS LAW REPORTS 77 B.L.R. (4th)

E. The Codlin transactions 292 I have previously found that Cloutier arranged to sell 1,806 heaters Husky Buffalo via Codlin, and that he converted all of the proceeds by diverting them to Codlin. Some, but not all of those funds came back to Cloutier; other amounts were used by 798 to pay GST, or paid to Peatling and then to Kelvin. Despite the fact he did not receive the full proceeds himself, as the individual who mas- terminded the Codlin scheme, Cloutier effectively converted the full value of the heaters, and he is answerable for that full amount. 293 Zesta submits that Cloutier should be required to pay an amount even greater than the total price paid by Husky Buffalo. While the initial Codlin sales to Husky Buffalo were at a unit price of US$83.98, Cloutier agreed to sell the final batch of heaters at a unit price of US$44.90. Had this last batch been sold at the higher price, an additional US$19,540 would have been realized, and Zesta seeks that further sum. 294 The reason for the lower price for the final shipment is that the purchaser, Husky Buffalo, had found another supplier willing to supply the product at the lower price. Thus, in order to effect the sale at all, Cloutier agreed to the lower price. Zesta did not tender any evidence to establish that these heaters could have been sold to another customer at a higher price. Given that, based on some evidence, these heaters were considered superseded models or “scrap”, I find that the price paid by Husky Buffalo was the prevailing market price, and Clou- tier is not responsible for absorbing the discount. 295 The evidence thus establishes that Cloutier is responsible for converting the full amount paid by Husky Buffalo, or US$132,209.88. I am unaware that Clou- tier paid any sum to Zesta by way of restitution pursuant to his criminal sen- tence; to the extent he has done so, his liability on this count should be reduced. Failing any such payment, he remains liable to Zesta for the full amount converted. 296 Since the sales to Husky Buffalo were in US dollars, it is necessary to con- vert that currency to Canadian dollars for purposes of valuing the loss suffered by Zesta. Although s. 121 of the Courts of Justice Act, R.S.O. 1990, c. C.43 provides a mechanism for converting a foreign money obligation for purposes of an Ontario judgment, s. 121(3) also permits the court to depart from that stan- dard approach where the court considers it equitable. In the present case, there has been a dramatic shift in the respective values of the Canadian and US dollars over the past decade. To place the innocent party, Zesta, in the position it would have been in but for the wrong committed by Cloutier, I direct that the conver- sion of the US$132,209.88 (or the lesser sum, if the restitution order has been compiled with) to Canadian dollars be made at the Bank of Canada closing rate as at November 30, 1999. This will more properly reflect the loss to Zesta at the time the wrong was committed. Zesta Engineering Ltd. v. Cloutier Stinson J. 89

297 No claim was made by Zesta as against Codlin, but I have found that Chris- tie and 798 were knowing participants in the conversion of some of the sale proceeds. Specifically, Codlin paid a total of C$44,619 to 798. While 798 may not have retained any of the funds, that does not negate the fact that it assisted in their disbursement, rather than their payment to their proper owner. Christie was responsible for these transactions. 298 I therefore find 798 and Christie jointly and severally liable to Zesta (to- gether with Cloutier) for damages in the amount of C$44,619. That liability overlaps with Cloutier’s liability for the full value of the Codlin transactions. This means that any recovery from Christie and 798 should be credited against Cloutier’s liability for the full amount of the Codlin transactions. The liability of Christie and 798 shall be extinguished only when (1) they pay the full amount awarded against them or (2) Cloutier satisfies the full Codlin award against him.

F. Punitive Damages 299 Zesta seeks punitive damages in the amount of $2 million as against Clou- tier, Durante, Sanger, Peatling and White. Zesta’s claim is premised on the alle- gation that the defendants’ engaged “in high-handed, malicious, arbitrary and highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behaviour.”: see Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 595 (S.C.C.). In light of the conclusions I have already reached regarding the non-involvement of Durante, Sanger and White in any of Cloutier’s plans to compete with Zesta, I do not consider that any award of punitive damages is warranted as against those defendants. 300 The position of Cloutier is different, in light of my findings about his con- duct. He was the senior-most employee at Zesta. Due to his falling-out with Vincent Eastman, Cloutier determined, in effect, to “sabotage” certain aspects of Zesta’s business by, for example, inducing Marcel Jones to solicit Nortel, and by inducing Watlow to terminate the Watlow-Gordon holdover commissions and the Watlow-Zesta-Husky arrangements. He also took steps to set up a proposed corporate structure and to arrange financing with Peatling. But for the decision by Jones to reveal Cloutier’s overtures to the Eastman family, his plan might well have succeeded. As events unfolded, Cloutier’s plans went no further than the termination of the two Watlow arrangements. 301 Cloutier also agreed to receive secret commissions from Watlow, to the det- riment of Zesta. The mere fact that he agreed to repay them in the first trial (thus making Zesta whole) does not detract from the fact that his conduct was dishon- est and a breach of duty. 302 In relation to the Codlin transactions, I note that Cloutier has already been subject to a criminal sanction. Therefore, for purposes of determining whether an award of punitive damages is warranted in the present case, I disregard that aspect of his behaviour. 90 BUSINESS LAW REPORTS 77 B.L.R. (4th)

303 I have previously awarded compensation to Zesta for these various wrongs. The question remains, however, whether Cloutier’s conduct warrants the sanc- tion of an award of punitive damages. In my view, it does. There can be no doubt that Cloutier’s position and authority at Zesta were such as to hold him to the highest standards of a fiduciary. Given his key position and long service with the company, Zesta was particularly vulnerable to Cloutier’s misdeeds. I agree with Zesta’s characterization of his misconduct as having departed to a marked degree from ordinary standards of decent behaviour. 304 Having regarding to the seriousness of his conduct in attempting to under- mine the business of Zesta, to create a competing enterprise, his actual disrup- tion of certain business relationships and his receipt of secret commissions at Zesta’s expense, I conclude that this is an appropriate case for an award of puni- tive damages. The mere requirement to make the innocent party whole is, in my view, not sufficient deterrent to discourage others from emulating Cloutier’s conduct. 305 I therefore order Cloutier to pay punitive damages to Zesta in the amount of $75,000. 306 In relation to Peatling, he knowingly and willingly conspired with Cloutier to undermine Zesta’s business and set up a competing enterprise. That said, he was an outsider and not a Zesta executive. He lacked the same fiduciary duties to Zesta that were owed by Cloutier. As well, he had no involvement in the secret commissions. 307 Still, Peatling was aware of a significant portion of Cloutier’s misconduct and was willing to support him. Others who might be similarly minded should be discouraged from facilitating breaches of duty by persons in senior corporate positions, such as that held by Cloutier. 308 I conclude that an award of punitive damages against Peatling in the amount of $10,000 is warranted in the circumstances.

Issue 10. in relation to the termination of Cloutier’s employment, A. Did Zesta have cause for dismissal of Cloutier? 309 The seminal and off-quoted delineation of “just cause” is found in U.S.W.A. v. Port Arthur Shipbuilding Co., [1967] O.J. No. 972 (Ont. C.A.), reversed (1968), 70 D.L.R. (2d) 693 (S.C.C.) sub nom Port Arthur Shipbuilding Co. v. Arthurs per Schroeder J.A. (dissenting) at p. 5, para. 11: If an employee has been guilty of serious misconduct, habitual neglect of duty, incompetence, or conduct incompatible with his duties, or prejudicial to the employer’s business, or if he has been guilty of wilful disobedience to the employer’s orders in a matter of substance, the law recognizes the em- ployer’s right summarily to dismiss the delinquent employee. Zesta Engineering Ltd. v. Cloutier Stinson J. 91

More recently in McKinley v. BC Tel, [2001] 2 S.C.R. 161 (S.C.C.), the Su- preme Court of Canada has directed a review and consideration of any miscon- duct on the part of the employee in the context of the total employment relation- ship – in other words, does the punishment fit the crime? 310 In the present case, I have no hesitation whatsoever in concluding that Zesta had cause to dismiss Cloutier. His conduct in relation to attempting to under- mine Zesta’s business by trying to induce the dismissal of Zesta’s leading sales- man, by terminating the two Watlow relationships and by laying plans to com- pete by taking the senior management team with him, amounted to serious misconduct incompatible with his duties and prejudicial to Zesta’s business. Ad- ditionally, his covert sale of inventory to Husky Buffalo and his conversion of the proceeds, together with his receipt of secret commissions at Zesta’s expense, also provided ample grounds for terminating his employment. 311 It follows that Cloutier’s counterclaim against Zesta for wrongful dismissal fails.

B. What are Cloutier’s damages? 312 Despite my finding that Zesta had cause to dismiss Cloutier, I am required to assess his damages. Given his seniority, length of service, level of responsibility and age, I find that Cloutier was entitled to twenty-four months notice of termi- nation. At the time of his dismissal, he was paid a salary of $225,000, plus a bonus that ranged between $25,000 and $75,000. He also enjoyed benefits equal to 15% of salary. Assuming a bonus in the mid-range for the twenty-four months notice period ($50,000 per year), I would calculate his damages as follows: Annual Income: Salary $225,000 benefits $33,750 bonus $50,000 subtotal $308,750 x 2 years = $617,500

C. Is Cloutier entitled to an equity position in Zesta? 313 Although this relief was requested in Cloutier’s counterclaim as pleaded, it was not advanced in the closing submission filed on his behalf. I therefore as- sume he has abandoned it. 314 If I am wrong in that assumption, I would grant no relief on this head. While it is true that, from time to time, Vincent Eastman described succession plans that would provide for an equity position for Cloutier, I am satisfied on the evi- dence that none of those plans was concluded. To the extent, therefore, that Cloutier might advance a contract-based claim to an equity position, I reject it. 92 BUSINESS LAW REPORTS 77 B.L.R. (4th)

315 To the extent that Cloutier might advance a claim for a share of the owner- ship of Zesta, based on equitable grounds, I would also reject that request. The level of misfeasance demonstrated by Cloutier in multiple respects (all as de- tailed above) is such as to disentitle him from obtaining relief in a court of eq- uity. Had he stayed on with Zesta or “exited gracefully” without breaching his duties to the company, the result might have been otherwise. 316 For these reasons, I conclude that Cloutier has no entitlement to an interest in Zesta.

Issue 11. In relation to the termination of Durante’s employment, A. Did Zesta have cause for dismissal of Durante? 317 Durante was dismissed by Vincent Eastman over the telephone on December 20, 1999. He had worked for Zesta for over 19 years, rising from the position of shipping clerk to National Operations Manager. Zesta asserts that it had cause for dismissal. As the party asserting cause, Zesta has the burden of proof: see Justice Randall Scott Echlin and Matthew Certosimo, Just Cause: The Law of Summary Dismissal in Canada (Aurora: Canada Law Book, looseleaf August 2008) at p. 6-2. 318 In its written argument, Zesta relies on its assertion that Durante participated in a Cloutier-led conspiracy to compete with Zesta using misappropriated confi- dential information. For the reasons articulated above, I find that Durante had no participation in such a conspiracy and was unaware of Cloutier’s plans or activi- ties. I therefore conclude that Zesta cannot succeed on this argument. 319 Zesta goes on to assert six factors as justification for its dismissal of Du- rante. It argues that, at the very least, Durante knowingly participated in a scheme to mislead two major Zesta customers into believing that they were do- ing business with a new entity. As I have previously noted, however, Durante’s involvement in these activities was minimal: he designed a logo for Hi-Cap. More importantly, he acted, along with Sanger, on the directions of Cloutier, their direct superior and boss. As Vice President and Assistant General Manager of Zesta, Cloutier had actual and apparent authority to give instructions, and Durante was obliged to follow them. Durante was not the author of the scheme and cannot be held responsible, if, in the view of others, it was misguided. He acted throughout as the loyal employee he was. I therefore conclude that his activities in connection with the Jones sting cannot amount to cause for dismissal. 320 Zesta asserts that Durante was aware that he was involved in a “frolic” that Cloutier conceived, which expressly defied the instructions of Vincent Eastman. The evidence does not support this allegation: no one testified that Vincent East- man gave conflicting instructions to Durante that should have taken precedence over those of Cloutier. Zesta’s argument for cause on this ground fails. Zesta Engineering Ltd. v. Cloutier Stinson J. 93

321 Zesta asserts that Durante removed documents from Zesta for his own pur- poses and falsely made continuing denials that any documents or property had been removed. The only evidence with respect to documents taken by Durante upon his departure from Zesta was that he took a “plastics program” document, given to him by Sandra Babin, in order to protect himself against possible retri- bution. Plainly, that document had no bearing on potential competition with Zesta; if anything, it provided Durante with something in hand to refute some suggestions of impropriety on his part, an understandable course of action hav- ing regard to the atmosphere that prevailed at Zesta at the time of Durante’s firing. To the extent his taking and not disclosing he had this document might be classified as misconduct, it was an extremely minor transgression which, com- pared to his lengthy history of loyal service, could not possibly warrant the ter- mination of his employment. Such a sanction would be completely out of pro- portion to the offence committed. Zesta’s defence of cause on this front fails. 322 Zesta asserts that Durante and others were involved in other business activi- ties which were conducted at Zesta without disclosure to or approval of Zesta, and in Durante’s case was accompanied by specific misstatements relating to his knowledge of Tradesman Renovations to “cover up” the use of Zesta’s facilities and employees. This allegation relates to Durante’s involvement with MultiVest. I have previously discussed this topic, noting that none of the activities carried on by MultiVest was in the least bit competitive with Zesta. Durante admitted that on one occasion he prepared GST returns for two MultiVest companies dur- ing his working day at Zesta. Once again, I would characterize this as an ex- tremely minor transgression which, when viewed against the backdrop of Du- rante’s otherwise flawless record of service to Zesta cannot suffice to justify his dismissal. 323 With respect to the alleged misstatement about his knowledge of Tradesman Renovations, there was nothing inaccurate or misleading about his answer, since there was no proof that Durante was aware that a Zesta employee had been in- structed to do work for Tradesman. Zesta’s defence of cause on this front fails. 324 Zesta asserts that Durante was engaged in a conflict of interest arising from the performance of a copy job for Zesta through one of MultiVest’s businesses, Real Copy Inc. I have already noted that this was an initiative of Bernard East- man through Cloutier, to solve a problem that required a large volume of photo- copying to be done quickly. Durante acted on Cloutier’s instructions. Once again, he followed the chain of command at Zesta. This does not amount to misconduct warranting dismissal. Zesta’s defence on this count fails. 325 Finally, Zesta argues that Durante swore an insulting and contentious affida- vit which took the side of Cloutier and failed to exhibit due loyalty to Zesta as a continuing employee. On the facts that I have found, the affidavit sworn by Du- rante was truthful as to his knowledge. I accept Durante’s testimony and his statement to Bernard Eastman during one of his early interviews that his loyalty 94 BUSINESS LAW REPORTS 77 B.L.R. (4th)

was to Zesta, not to Cloutier and not to the Eastmans. He believed –with com- plete justification – that Zesta’s best interests would be served by telling the truth, and that is what he did. 326 Zesta cited no authority for the proposition that an employer has cause for dismissal where an employee swears a truthful affidavit that supports the posi- tion of a litigant adverse to the employer. If such an argument were accepted, employees would be dissuaded from being truthful witnesses, out of fear for the potential impact for their own employment. No employee should be forced to choose between telling the truth and keeping their job. Zesta’s defence on this front fails. 327 I therefore conclude that Zesta has failed to establish that it had cause to terminate Durante’s employment. Given that he was fired summarily, it follows that Durante was wrongfully dismissed.

B. What are Durante’s damages? 328 Durante had no written contract of employment. In the absence of just cause, his employer was obliged to provide him with reasonable advance notice of ter- mination or payment in lieu. 329 Durante had been employed at Zesta for more than nineteen years. At the time of his termination he was 40 years of age. As National Operations Man- ager, he had significant supervisory and management responsibilities. He had a high school education and an employment history limited to one, long term em- ployer. The heater and thermocouple business was the only business he knew. His 1999 compensation was more than $110,000. 330 Having regarding to his age, length of service, seniority, level of responsibil- ity, income level and limited prospects for comparable re-employment, I assess Durante’s applicable period of reasonable notice as twenty months’ notice. 331 Durante’s 1999 T4 reveals his actual income in that year was $110,888.88, which is equivalent to $9,240 per month. He was therefore entitled to a payment equivalent to twenty months times $9,240 or $184,800. To this must be added the loss of benefits, which according to Vincent Eastman, had a value equal to 15% of income. This brings the total amount due to Durante as compensatory damages to $212,520. 332 With respect to the subject of mitigation, I am satisfied on the evidence that, prior to his summary dismissal, Durante had given no thought to alternative em- ployment. When he suddenly found himself without a job at Christmas 1999, he decided to try to establish himself as a sales representative in the only field of business in which he had any background. The end result was Kelvin. In my view, he acted reasonably in doing so and cannot be faulted for not seeking employment elsewhere. Zesta Engineering Ltd. v. Cloutier Stinson J. 95

333 Given the challenges that Kelvin face during the start up phase, Durante did not receive any income from employment there until mid-2002, well after the expiration of the twenty months notice period. I therefore conclude that Durante did not fail to mitigate his damages and that his award is not subject to any reduction of this account. 334 In addition, Durante seeks an incremental award of damages for the bad faith manner of his termination. In effect, Durante seeks moral damages consistent with the decision of the Supreme Court of Canada in Keays v. Honda Canada Inc., [2008] 2 S.C.R. 362 (S.C.C.). As succinctly summarized by Natalie C. MacDonald in Extraordinary Damages in Canadian Employment Law, (To- ronto: Carswell, 2010) at p. 55: Since Wallace [Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701 (S.C.C.)] good faith conduct by the employer throughout the course of dis- missal is always deemed to be contemplated during the contract formation. Therefore, damages may be available when an employer has breached its obligation to act in good faith and have fair dealings in the manner of dismis- sal, and where it was reasonably foreseeable that it would lead to mental distress for the employee. As Bastarache J. himself said in Honda (at para. 59): ... if the employee can prove that the manner of dismissal caused mental distress that was in the contemplation of the parties, those damages will be awarded not through an arbitrary extension of the notice period, but through an award that reflects the actual damages. 335 In my view, Zesta’s actions surrounding the termination of Durante’s em- ployment amply demonstrate bad faith on its part. Its conduct included the following: (a) Durante was subjected to a series of intimidating interrogations by Bernard Eastman, who on several occasions essentially threatened Durante’s livelihood. (b) Durante was dismissed over the telephone, on his first day of va- cation, five days before Christmas, for confirming the “sting” on Marcel Jones. In effect, he was fired for telling the truth or, to put in another way, for choosing the wrong side in a vicious dispute rooted in family issues. (c) Durante was provided with no severance (not even his Employ- ment Standards Act minimums) and his benefits were immedi- ately discontinued. (d) Zesta pursued an extended, cavalier and single-minded approach in fighting Durante’s employment insurance application for two years, and then failed to attend the ultimate hearing. 96 BUSINESS LAW REPORTS 77 B.L.R. (4th)

(e) Zesta commenced a companion action for fraudulent conveyance against Durante and his wife, many years after having knowledge of the conveyance, and maintained it despite the reconveyance to Durante of his interest in the matrimonial home. This was a source of additional stress, worry and expense for both him and his wife. (f) Zesta and the Eastmans pursued the foregoing course of conduct, notwithstanding Durante had been a highly loyal career employee with an otherwise unblemished work record, who had been treated and considered as an extended family member, while fully aware of the significant impact such conduct would have on Du- rante and his family. 336 The evidence of Durante and his wife was that Durante was devastated, stressed and sad. His upset and angst at this treatment was evident while he testified before me, almost a decade after his dismissal. The toll on him and his family has been significant, and long lasting, and is ongoing. In the circum- stances, I award Durante $75,000 in moral damages in keeping with the princi- ples described by Bastarache J. in Honda, supra (at para. 59).

Issue 12. In relation to Kelvin’s counterclaim, A. Did Zesta breach any of Kelvin’s rights? 337 Kelvin’s counterclaim against Zesta is founded on two theories, (1) the ab- sence of a basis for the injunctive orders as granted by Justices Langdon, Ground, Chapnik and Wilson; and (2) the use by Zesta of dirty tricks to interfere with Kelvin’s ability to sell. 338 The injunctive relief granted as against Kelvin can be traced back to the ini- tial ex parte order of Langdon J. dated November 26, 1999, as amended by the order of Ground J. dated December 6, 1999 and as supplemented by the order of Nordheimer J. dated March 24, 2000, all in Action No. 99-CV-180818. After the second proceeding was commenced naming Durante, Sanger, White and Kelvin as co-defendants, Chapnik J. granted an order on April 11, 2000 extending the earlier orders to include the new defendants. Ultimately, those orders were va- ried by Janet Wilson J. by order dated August 1, 2000. The net result of the foregoing orders was that Kelvin was prohibited from directly or indirectly soliciting any suppliers or clients of Zesta and prohibited from entering into any new commercial activities with such clients. The order of Wilson J. also pro- vided that, notwithstanding that prohibition, Kelvin was permitted to continue to provide supplies and expertise to Husky, subject to the condition that Kelvin paid into court all monies received from Husky. 339 The net result of the foregoing orders was that Kelvin was precluded from soliciting business from customers identified as such by Zesta on a series of lists Zesta Engineering Ltd. v. Cloutier Stinson J. 97

produced by Zesta. Those lists, as I have noted previously, were overly broad and of questionable reliability, given the Zesta’s very loose definition of what amounted to a claimed customer. As a result, the business activities of Kelvin were significantly restricted by the orders. 340 In view of the conclusions that I have reached following this trial, injunctive relief ought not to have been granted as against Kelvin. To the extent any party considers those orders to still have effect, I direct they be treated as dissolved. Zesta is entitled to no injunctive relief on the facts that I have found. 341 For some reason, despite the mandatory language of rule 40.03, no formal undertaking as to damages was given by Zesta when it obtained any of the in- junctive relief described above. There is no evidence before me to suggest that Zesta was relieved by the court of its obligation to give an undertaking. The omission of the mandatory undertaking as to damages is an irregularity that is curable under rule 59.06: see Vetech Laboratories Ltd. v. 621870 Ontario Ltd. (1991), 2 C.P.C. (3d) 135 (Ont. Gen. Div.). In my view, Zesta cannot avoid this obligation by relying on the omission to include a standard form undertaking in the orders that were drafted by its own counsel. To the extent necessary, I grant relief to insert the undertaking in all of the injunction orders on a “now for then” basis. 342 I therefore hold that Kelvin is entitled to look to Zesta to compensate it for any damage caused to Kelvin as a consequence of the granting of these orders. 343 The second branch of Kelvin’s counterclaim is founded on the submission that Zesta and the Eastmans engaged in a campaign of “dirty tricks” to discour- age others from doing business with Kelvin. Among other things, Greg Eastman called a newspaper to inform it about the fraud charge against Cloutier. Once an article appeared in the newspaper, he sent it to three or four customers. On cross-examination, he conceded that he wanted to do everything he could to de- feat Kelvin’s business. 344 John Eastman told Fisher Gauge about the criminal charge and may have said this to Top Grade Molds. He denied, however, that he did so in an attempt to put Cloutier in a negative light or to influence Top Grade not to buy from Kelvin. I do not believe that evidence. 345 That said, while these activities demonstrate questionable business ethics on the part of the Eastman brothers, the fact remains that they were communicating true information about Cloutier. I am therefore unable to find anything actiona- ble about their conduct.

B. What are Kelvin’s damages? 346 I will confine my assessment of Kelvin’s damages to the period ending Feb- ruary 22, 2001, since that is the date Wright J. released his reasons for decision in the first trial, confirming the discharge of the injunctions. Thereafter (and not- 98 BUSINESS LAW REPORTS 77 B.L.R. (4th)

withstanding the subsequent order of the Court of Appeal setting aside Wright J.’s judgment), Kelvin did not consider itself bound by the injunction orders. 347 While Zesta asserts that Kelvin et al did not fully comply with the injunction orders, the evidence satisfies me that they went to considerable lengths trying to do so. Among other things, they tried to satisfy themselves as to the legitimacy of any customer orders they took by reference to the Zesta-supplied lists. As a consequence, the scope of business they were able to conduct in the first year of their operation was considerably restricted. 348 It is thus apparent that between April 2000 and February 2001 (i.e. subse- quent to the order of Chapnik J. and up until the judgment of Wright J.) Kelvin’s business activities were restricted; what is not so apparent is the monetary im- pact of that restriction. Unlike Zesta, Kelvin tendered no expert accounting evi- dence in support of its counterclaim for damages. It is therefore difficult to mea- sure with precision the extent of the financial impact caused by the injunction orders. It is worth noting, however, that Kelvin was in a startup mode and thus it was not in a position to compare its 2000-2001 sales results against a previous sales history to demonstrate the extent of the losses attributable to the restric- tions imposed by the injunctions. 349 Despite the foregoing limitations, I am satisfied that Kelvin did suffer dam- ages. In addition to the restrictions on soliciting business from Zesta “custom- ers”, the limitations imposed by the order of Wilson J. on the manner in which Kelvin could do business with Husky effectively put an end to any relationship with that company. As with Zesta, I am required to do the best I can to fairly compensate Kelvin for the loss it suffered: see Martin v. Goldfarb, supra. 350 The evidence germane to this issue includes the testimony of the defendants concerning the restrictions under which they attempted to make sales during the first year of Kelvin’s operation. It also includes the financial statements of Kelvin. Those statements reveal that in its first year (Fiscal 2001 – ending Janu- ary 31, 2001) Kelvin had sales of $288,000. In Fiscal 2002 (after the injunctions were lifted), Kelvin had sales of $864,000. In 2003, sales ballooned to $2.6 mil- lion. In 2004, they settled back to $1.4 million. In 2005, sales were $1.5 million. In 2006 they were $1.6 million. While recognizing that 2001 was a startup year, I am prepared to accept that some of the revenue limitations in Kelvin’s 2001 fiscal year were attributable to the court orders obtained by Zesta. 351 Between 2002 and 2006, Kelvin’s gross profit ranged between a high of 38 percent and a low of 23 percent of sales. Eliminating the high and low numbers, the median profit margin was approximately 28 percent. 352 Given that 2001 was a startup year, I am not prepared to attribute the tripling of sales for Fiscal 2002 solely to the removal of the injunction restrictions. I do, however, consider it reasonable to project that, but for those restrictions, Kelvin would have been able to achieve additional sales in 2001 of approximately Zesta Engineering Ltd. v. Cloutier Stinson J. 99

$200,000. Applying the 28 percent gross profit margin, I calculate that a fair award of damages in Kelvin’s favour on this head of damage is $56,000.

Issue 13. In relation to the inter-spousal transfers of the Durantes’ matrimonial homes, A. Were the transactions a violation of the Fraudulent Conveyances Act? 353 Zesta argues that the January 2000 transfer from Durante to Wendy Durante of his joint interest in their matrimonial home for no consideration was a fraudu- lent conveyance. Zesta’s argument is based on the premise that it had a contin- gent, pending, claim against Durante at the time, arising from his participation in the initial Cloutier conspiracy. 354 In light of the conclusions I have reached regarding Durante’s liability to Zesta, I further conclude that Zesta had no contingent claim or any other basis for advancing a cause of action against Durante at the time this conveyance was registered. Rather, it was Durante who had a claim against Zesta for wrongful dismissal. 355 It therefore follows that Zesta cannot bring itself within the scope of the Fraudulent Conveyances Act. Simply put, I find as a fact that none of the trans- fers by Durante was made with intent to defeat, hinder, delay or defraud his creditors. To the contrary, I accept the evidence of Durante and Wendy Durante that he conveyed his half interest in their home to her because she had asked him repeatedly to do so in order to give her greater security in light of her past un- happy experience in her first marriage. I further accept Mrs. Durante’s evidence that she renewed her request shortly after Durante lost his job with Zesta. 356 Zesta’s fraudulent conveyance action must therefore fail. 357 I hasten to observe, however, that prior to the trial before me Wendy Du- rante reconveyed to her husband his half interest in their now-current matrimo- nial home. Despite that reconveyance (carrying with it the result that Durante’s half interest again became available to his creditors), Zesta persisted in advanc- ing its fraudulent conveyance claim. As a result, the Durantes were forced to retain separate counsel to deal with this further action. It will thus appear that Zesta’s purpose in taking the fraudulent conveyance action to trial was not for purposes of setting aside any conveyance – this had been done voluntarily by the Durantes – but rather for the purpose of applying additional pressure against its former employee.

B. If so, what remedies should be granted to Zesta, if any? 358 For the foregoing reasons, Zesta is entitled to no relief in the Fraudulent Conveyances Action. 100 BUSINESS LAW REPORTS 77 B.L.R. (4th)

Conclusion and Disposition 359 For these reasons, I dispose of the parties’ claims as follows: a) I award Zesta damages for conspiracy against Cloutier and Peatling, jointly and severally, of $158,000; b) I dismiss Zesta’s claim for injunctive relief; c) I dismiss Zesta’s claims for an accounting of all income and prof- its made by the defendants and for a declaration that the busi- nesses of the defendants are the equitable property of the plaintiff; d) Zesta has already (before Wright J.) been awarded judgment against Cloutier for the secret commissions received by him from Zesta’s customers; e) in relation to Cloutier’s further breaches of fiduciary duty and the resulting losses to Zesta and benefits to Kelvin, I award Zesta damages against Cloutier and Kelvin, jointly and severally, of $100,000; f) in relation to Kelvin’s misuse of Zesta’s costing information, I award Zesta damages against Kelvin of $45,000; g) in relation to the purchases of heaters by Husky from Cloutier through Codlin, I award Zesta damages against Cloutier of US$132,209.88, less any amount he has paid to Zesta by way of restitution pursuant to his criminal sentence; to the extent he has done so, his liability for this award shall be reduced accordingly. I direct that the conversion of the US$132,209.88 (or the lesser sum, if restitution has been paid) to Canadian dollars be made at the Bank of Canada closing rate as at November 30, 1999; h) in relation to the participation of Christie and 798 in the Codlin transactions, I award Zesta damages against them, payable jointly and severally, of $44,619. That sum is included in the award against Cloutier in item g) above, such that any recovery against Christie or 798 shall be credited against Cloutier’s liability there- under. The liability of Christie and 798 pursuant to this item h) shall not be considered extinguished until either (1) they pay the full amount awarded against them, or (2) Cloutier pays the full amount awarded against him under item h) above. i) I dismiss Zesta’s claim against Peatling in relation to the Codlin transactions; j) I award Zesta punitive damages against Cloutier of $75,000; k) I award Zesta punitive damages against Peatling of $10,000; Zesta Engineering Ltd. v. Cloutier Stinson J. 101

l) I dismiss Zesta’s motion for a finding of contempt as against Cloutier and Kelvin; m) I dismiss Cloutier’s counterclaim against Zesta; n) in relation to Durante’s counterclaim for wrongful dismissal I award him compensatory damages against Zesta of $212,520 and moral damages of $75,000; o) in relation to Kelvin’s counterclaim against Zesta, I award Kelvin damages of $56,000; p) all other claims and counterclaims by the parties are dismissed; and q) the Fraudulent Conveyance Action is dismissed. 360 If one is required, I direct the parties to arrange a further appearance before me to discuss appropriate arrangements to make submissions concerning interest and costs. 361 Finally, I would be remiss if I did not express my thanks to all counsel for the able and professional manner in which they presented this case and repre- sented their clients. Their civility in the conduct of the trial was admirable and commendable. Their thorough preparation throughout and their extensive writ- ten submissions were of considerable assistance to me and greatly appreciated. Order accordingly. 102 BUSINESS LAW REPORTS 77 B.L.R. (4th)

[Indexed as: Giffin v. Soontiens] GORDON GIFFIN (Plaintiff) v. NICOLE SOONTIENS, ILONA MACALPINE, XL ELECTRIC LIMITED, a body corporate, HUNTEC LIMITED, a body corporate, and CNCA HOLDINGS LIMITED, a body corporate (Defendants) Nova Scotia Supreme Court Deborah K. Smith A.C.J.S.C. Heard: July 7-8, 2010 Judgment: December 3, 2010 Docket: Hfx 292594, 2010 NSSC 438 John A. Keith for Plaintiff George W. MacDonald, Q.C. for Defendants Business associations –––– Legal proceedings involving business associations — Practice and procedure in proceedings involving corporations — Costs — Interim costs –––– Plaintiff brought oppression action against defendants — Trial commenced but was subsequently adjourned at plaintiff’s request due to late documentary disclosure by defendants — Trial was scheduled to reconvene at later date — Plaintiff brought motion for order awarding interim costs — Motion granted — Without deciding merits of action itself, plaintiff established case of sufficient merit to warrant pursuit — Plaintiff also es- tablished that he was genuinely in financial circumstances which, but for order, would preclude claim from being pursued — Plaintiff’s statement of net worth indicated that he had net assets of $19,807 — Since time of his first motion for interim costs plaintiff had applied to two banks for additional financing and was declined by both — Plaintiff al- leged that his only available recourse to raise more funds would be to sell family home or further surrender his RRSP’s — Applicant for interim costs is expected to make all rea- sonable efforts to fund litigation themselves, but it is not necessary for applicant to sell their home or deregister their RRSP’s. Cases considered by Deborah K. Smith A.C.J.S.C.: Alles v. Maurice (1992), 5 B.L.R. (2d) 146, 9 C.P.C. (3d) 42, 1992 CarswellOnt 132, [1992] O.J. No. 297 (Ont. Gen. Div.) — followed British Columbia (Minister of Forests) v. Okanagan Indian Band (2003), 43 C.P.C. (5th) 1, 114 C.R.R. (2d) 108, [2004] 2 W.W.R. 252, 313 N.R. 84, [2003] 3 S.C.R. 371, 2003 SCC 71, 2003 CarswellBC 3040, 2003 CarswellBC 3041, 233 D.L.R. (4th) 577, [2004] 1 C.N.L.R. 7, 189 B.C.A.C. 161, 309 W.A.C. 161, 21 B.C.L.R. (4th) 209, [2003] S.C.J. No. 76 (S.C.C.) — referred to Browne v. Dunn (1893), 6 R. 67 (U.K. H.L.) — followed Burnside v. 2936501 Manitoba Ltd. (1998), 1998 CarswellMan 461, 23 C.P.C. (4th) 181, 130 Man. R. (2d) 263, [1998] M.J. No. 450 (Man. Q.B.) — referred to Giffin v. Soontiens Deborah K. Smith A.C.J.S.C. 103

Burnside v. 2936501 Manitoba Ltd. (1999), 1999 CarswellMan 137, 134 Man. R. (2d) 276, 193 W.A.C. 276, 31 C.P.C. (4th) 142, [1999] M.J. No. 141 (Man. C.A.) — re- ferred to Gainers Inc. v. Pocklington Holdings Inc. (2000), 81 Alta. L.R. (3d) 17, 255 A.R. 373, 220 W.A.C. 373, 2000 ABCA 151, 2000 CarswellAlta 508, [2000] A.J. No. 626 (Alta. C.A.) — referred to Gates v. Croft (2009), 2009 CarswellNS 334, 279 N.S.R. (2d) 175, 887 A.P.R. 175, 2009 NSSC 184, [2009] N.S.J. No. 263 (N.S. S.C.) — referred to Matthews Investments Ltd. v. Assiniboine Medical Holdings Ltd. (2007), 2007 MBQB 245, 2007 CarswellMan 387, [2008] 2 W.W.R. 292, 221 Man. R. (2d) 55, [2007] M.J. No. 353 (Man. Q.B.) — referred to McKay v. Munro (1992), 12 C.P.C. (3d) 335, 119 N.S.R. (2d) 195, 330 A.P.R. 195, 1992 CarswellNS 95, [1992] N.S.J. No. 519 (N.S. T.D.) — followed Perretta v. Telecaribe Inc. (1999), 1999 CarswellOnt 3849, [1999] O.J. No. 4487 (Ont. S.C.J.) — considered Wilson v. Conley (1990), 46 C.P.C. (2d) 85, 1 B.L.R. (2d) 220, 1990 CarswellOnt 121, [1990] O.J. No. 2283 (Ont. Gen. Div.) — considered 416892 Alberta Ltd. v. Rocky Mountain Springs Water Inc. (1996), 182 A.R. 294, 1996 CarswellAlta 242, [1996] A.J. No. 301 (Alta. Q.B.) — considered Statutes considered: Business Corporations Act, R.S.O. 1990, c. B.16 Generally — referred to Companies Act, R.S.N.S. 1989, c. 81 Sched. 3 — referred to Sched. 3, s. 5 — referred to Sched. 3, s. 7(4) — considered

MOTION by plaintiff for order awarding interim costs.

Deborah K. Smith A.C.J.S.C.:

1 This case involves what is commonly known as an oppression remedy claim brought by Gordon Giffin against two of his cousins, Nicole Soontiens and Ilona MacAlpine, as well as a number of companies that they hold an interest in. The specific matter before me involves a motion by Mr. Giffin against XL Electric Limited for interim costs pursuant to s. 7(4) of the Third Schedule of the Nova Scotia Companies Act. 2 The facts of the case are quite detailed and are set out in the pleadings and the materials that have been filed. At the heart of the matter lies a dispute be- tween Mr. Giffin, his two cousins and Mr. Giffin’s uncle, Tibor Berta. Mr. Berta is Ms. Soontiens and Ms. MacAlpine’s father. While he is not a party to the action he is involved in the matters that give rise to this lawsuit. 3 Tibor Berta owned and controlled a company known as Western Electrics (2004) Incorporated (hereinafter referred to as “Western Electrics”). Mr. Giffin, 104 BUSINESS LAW REPORTS 77 B.L.R. (4th)

Ms. Soontiens and Ms. MacAlpine were, at one time, all employed with Western Electrics. According to Ms. Soontiens’ evidence this company is no longer in active operation.

Mr. Giffin’s Version of Events 4 According to Mr. Giffin, in early 1998, Mr. Berta approached Mr. Giffin, Ms. Soontiens and Ms. MacAlpine (who were then working for Western Elec- trics) with the idea of starting a new electrical contracting business (hereinafter referred to as “XL Electric Limited”). Mr. Giffin says that it was anticipated that this new company could operate free of the union obligations associated with Western Electrics and could eventually replace Western Electrics in the market. Mr. Giffin, Ms. Soontiens and Ms. MacAlpine agreed to pursue this new venture and, on October 2nd, 1998, XL Electric Limited was incorporated and registered. According to Mr. Giffin, he was appointed one of the company’s three directors at the time of incorporation. 5 Mr. Giffin says that he and his two cousins agreed that they would be treated as equals in the new business. Despite this, on October 4th, 1999, Mr. Giffin, Ms. Soontiens, Ms. MacAlpine and XL Electric Limited entered into a written Shareholder Agreement which provided Ms. Soontiens and Ms. MacAlpine each with 51 Class A Special Voting Common Shares, 10 Class B Common Shares and 34 Class C Common Shares in XL Electric Limited. Mr. Giffin was only allotted 10 Class B Common Shares in the company. All of the parties were represented by the same law firm at the time that the Shareholder Agreement was entered into. 6 Mr. Giffin provides an explanation for this unequal share structure. He says that Mr. Berta offered to loan XL Electric Limited startup capital of approxi- mately $85,000.00. As security for this loan, it was agreed that Mr. Berta would have a form of equity in the new company. Mr. Giffin says that Mr. Berta’s equity interest had to be taken through his daughters (Ms. Soontiens and Ms. MacAlpine) in order to maintain a degree of separation between Mr. Berta (who owned the unionized Western Electrics) and XL Electric Limited (which was non-unionized). Mr. Giffin says it was for this reason that Ms. Soontiens and Ms. MacAlpine were given greater shareholdings than himself. Mr. Giffin also states that Mr. Berta’s loan was to be repaid once the new company was able to do so and that immediately upon repayment of the loan the additional shares that were held by Ms. Soontiens and Ms. MacAlpine would be “cancelled” or “equalized”. Mr. Giffin further deposed that despite the terms of the written Shareholder Agreement he was assured by both Ms. Soontiens and Ms. Ma- cAlpine that their “underlying commitment to equality” would be honoured. 7 According to Mr. Giffin’s evidence, XL Electric Limited developed success- fully as a company and Western Electrics became less and less active in the market. Mr. Giffin states that for years he, Ms. Soontiens and Ms. MacAlpine Giffin v. Soontiens Deborah K. Smith A.C.J.S.C. 105

were treated as equals in the company including the sharing of the company’s profits. According to Mr. Giffin, in 2004, Mr. Berta told Ms. Soontiens and Ms. MacAlpine to sell to Mr. Giffin (at a nominal price) sufficient Class C Common Shares to equalize the ownership of these shares. Mr. Giffin says that he saw this as the beginning of the process whereby Mr. Berta’s loan would be repaid and Mr. Giffin’s equal interest in the company would be formally recognized. 8 According to Mr. Giffin, XL Electric Limited was becoming increasingly profitable. He suggests that as XL’s prospects and profits improved Ms. Soon- tiens, Ms. MacAlpine and Mr. Berta began to take steps which were unfairly prejudicial to his interests and which were contrary to the agreements that Mr. Giffin says the parties entered into when the company was formed. In particular, Mr. Giffin alleges that Ms. Soontiens and Ms. MacAlpine began to exploit their majority on the Board of Directors to declare unequal dividends for themselves. Further, according to Mr. Giffin – Mr. Berta, Ms. Soontiens and Ms. MacAlpine eventually indicated that they had no intention of altering the Class A share structure to equalize ownership between Mr. Giffin and his two cousins. Mr. Giffin alleges that Ms. Soontiens and Ms. MacAlpine appropriated to them- selves a disproportionate share of the company which he had helped to establish and grow for over eight years. Mr. Giffin says that ultimately he felt that he had no option but to resign from XL Electric Limited which he did effective March 30th, 2007. Shortly thereafter, Ms. Soontiens and Ms. MacAlpine voted to re- move Mr. Giffin as a Director of XL Electric Limited and a related holding company, Huntec Limited. Mr. Giffin says that since that time he has been de- nied access to various corporate and financial records. 9 On February 27th, 2008, Mr. Giffin filed an Originating Notice (Application Inter Partes) alleging, inter alia, oppression and seeking relief including relief under the Third Schedule of the Nova Scotia Companies Act. This application was subsequently converted to an action. 10 In addition to XL Electric Limited, Mr. Griffin has sued in relation to two other companies known as Huntec Limited and CNCA Holdings Limited. 11 According to Mr. Giffin’s evidence, in 2000, Mr. Giffin, Ms. Soontiens and Ms. MacAlpine bought from Mr. Berta all the shares in a shell company called Huntec Limited. This company was used as a corporate vehicle to purchase a property located at 4 Waddell Drive in Dartmouth, Nova Scotia. XL Electric Limited eventually operated from this property for a period of time. Mr. Giffin says that as Huntec was only going to be used as a holding company, no finan- cial support was required from Mr. Berta in relation to this second company and accordingly there was no need to repeat the share structure that had been used for XL Electric Limited. Accordingly, Huntec shares were divided equally be- tween Mr. Giffin, Ms. Soontiens and Ms. MacAlpine. Mr. Giffin says that this share arrangement “confirmed the reality that existed throughout our business arrangements including XL Electric.” 106 BUSINESS LAW REPORTS 77 B.L.R. (4th)

12 Mr. Giffin says that by 2005, XL Electric Limited had outgrown 4 Waddell Drive and they eventually moved from this property. In 2009, with the consent of all shareholders, 4 Waddell Drive was sold. The net proceeds of that sale are presently held in an interest bearing trust account as the parties have been unable to agree on how these funds should be dispersed. 13 According to Mr. Giffin, after he resigned from XL Electric Limited and was removed from the Board of Directors, Ms. Soontiens and Ms. MacAlpine incor- porated a new company called CNCA Holdings Limited. This company eventu- ally purchased a property located at 36 Topple Drive in Dartmouth, Nova Scotia. Mr. Giffin alleges that a portion of the purchase price of this property was paid using XL Electric Limited funds and that use of this cash and the transaction “generally” occurred without his knowledge or consent. In addition, he alleges that CNCA Holdings Limited used XL Electric Limited’s credit to complete this transaction – again without his knowledge or consent. 14 The Statement of Claim filed in support of Mr. Giffin’s action has been amended a number of times. In the most recent amended Statement of Claim filed with the Court the Plaintiff seeks the following relief: An Order: (a) Requiring XL Electric to repay to MacAlpine and Soontiens or, al- ternatively, Berta, any and all amounts necessary to equalize XL Electric’s indebtedness to each of MacAlpine, Soontiens and Giffin; (b) Requiring MacAlpine and Soontiens to repay and/or reverse any and all unequal dividends declared and/or paid under XL Electric’s Class A Shares from 2004 forward; (c) Requiring Soontiens and MacAlpine to repay to XL Electric any and all monies paid to Kevin Soontiens between 2004 and March, 2007; (d) An order setting aside the Shareholders Agreement dated October 4, 1998; (e) An order requiring MacAlpine and Soontiens to surrender for can- cellation all of their Class A Special Voting shares so as to perma- nently enshrine and preserve the principle of equality as between the Plaintiff Giffin and the Defendants Soontiens and MacAlpine; (f) An order requiring MacAlpine and Soontiens to purchase the Plain- tiff’s shares in Huntec for fair value together with an order, if neces- sary, directing that a certified business valuator be appointed to de- termine the fair value of said shares; (g) An order requiring MacAlpine and Soontiens to purchase the Plain- tiff’s shares in XL Electric for fair value together with an order, if necessary, directing that a certified business valuator be appointed to determine the fair value of said shares according to such instructions as the Court may provide with respect to how fair value is determined; Giffin v. Soontiens Deborah K. Smith A.C.J.S.C. 107

(h) Damages for the misappropriation of corporate opportunities by CNCA and including an order requiring CNCA to return all monies transferred by XL Electric to CNCA related to the purchase of the lands and buildings at 36 Topple Drive; (i) Damages for the misappropriation of company monies to finance MacAlpine’s and Soontiens’ response to these complaints and an or- der requiring MacAlpine and Soontiens to immediately repay to XL Electric any and all monies taken from the company in respect of this matter; (j) Alternatively, damages for misrepresentation or breach of contract; (k) Pre-judgment interest; (l) Costs; and (m) Such further relief as this Honourable Court deems just.

Ms. Soontiens’ Version of Events 15 The Defendants deny Mr. Giffin’s allegations. Ms. Soontiens has filed two affidavits in response to this motion. In her affidavits she denies, inter alia, that her father (Tibor Berta) loaned money to XL Electric Limited, she denies that there was any agreement between the shareholders of XL Electric Limited other than the Shareholder Agreement dated October 4th, 1999 and she denies that either she or Ms. MacAlpine ever intended or agreed to be equal partners with Mr. Giffin in XL Electric Limited. 16 Ms. Soontiens states that in or about 1998, her father (Mr. Berta) inquired as to whether she and her sister (Ms. MacAlpine) were interested in inheriting Western Electric[s]. She says that she and her sister declined this offer. She says that in lieu of inheriting this business her father gifted $47,500.00 to both she and her sister to start their own business. Ms. Soontiens says that she and her sister chose to invest these gifted funds to start XL Electric Limited. She says that she and her sister informed Mr. Giffin of their plans to start this new com- pany and invited him to participate in the business as a minority shareholder and employee. 17 Ms. Soontiens says that the shares in XL Electric Limited were structured to reflect the significant difference between the investments made by the three shareholders. She further says that the Shareholder Agreement signed on Octo- ber 4th, 1999, is the entire agreement between the shareholders regarding the share structure of XL Electric Limited and says that there was never any agree- ment, express, implied or otherwise, that the parties would ever equalize the share structure of this company. 18 Ms. Soontiens says that Mr. Giffin was provided with a copy of the Share- holder Agreement prior to signing it and that he was encouraged to obtain inde- pendent legal advice in relation to this document but he declined to do so. 108 BUSINESS LAW REPORTS 77 B.L.R. (4th)

19 In relation to Huntec, Ms. Soontiens states that in or around 1997 she pur- chased this company from her father and became the sole shareholder, Director and Officer of Huntec. She says that in or around 2000 (when it was decided that Huntec would be used to purchase the property from which XL Electric Limited would operate) she sold one-third of the shares in Huntec Limited to both her sister and Mr. Giffin so that they would each own an equal interest in this company.

History of the Proceedings 20 In the fall of 2009, Mr. Giffin filed a Notice of Motion seeking an Order for disclosure of financial information pertaining to the payment of the Defendants’ legal costs, the winding up of Huntec Limited and interim payment of the Plain- tiff’s legal costs in the amount of $139,000.00. The motion was heard before me on November 19th, December 9th and 18th, 2009. At the time of the motion, I ordered Ms. Soontiens to answer questions concerning the payment of the De- fendants’ legal costs. In an oral decision rendered on December 31st, 2009, I declined to order the winding up of Huntec Limited and I dismissed the Plain- tiff’s motion for interim costs in the amount of $139,000.00. At the time of that decision I stated: As indicated previously, the ability of the Court to order the payment of in- terim costs is unique and is designed to insure that a claimant with a case of sufficient merit to warrant pursuit is not denied the opportunity to present the claim. Mr. Giffin has not provided me with sufficient information concerning his ability to borrow funds in order for me to be satisfied, on a balance of probabilities, that he will be precluded from pursuing this claim without re- ceiving the interim costs that have been requested. Accordingly, his motion for interim costs will be dismissed. As is clear from the above, Mr. Giffin’s financial situation is not static. Some of the evidence that I have relied on in coming to this decision was only available within the last few weeks and it is possible that his financial situa- tion may change...... Nothing in this decision prevents the Plaintiff from bringing a further motion pursuant to s. 7(4) of the Third Schedule of the Company’s Act upon filing further and updated financial information, includ- ing additional information concerning his ability to borrow and service a loan to finance this litigation. In my view, such a motion could be made during or after the trial. I will remain seized of the matter for the purpose of such a hearing should the Plaintiff choose to proceed with a further motion. 21 The trial of Mr. Giffin’s action commenced on January 11th, 2010 but was subsequently adjourned at the request of the Plaintiff due to late documentary disclosure by the Defendants. The trial judge ordered further disclosure and ad- ditional discovery examinations. The trial is now scheduled to reconvene on Monday, January 17th, 2011. Giffin v. Soontiens Deborah K. Smith A.C.J.S.C. 109

22 The Plaintiff has now filed a further motion for interim costs. In this motion, the Plaintiff is seeking an interim payment of $275,000.00 which represents $145,000.00 owing to the Plaintiff’s solicitor (as of the date of the motion), $30,000.00 in unbilled work in progress (as of the date of the motion) and the sum of $100,000.00 which is the estimate that the Plaintiff has received from his solicitors for bringing this matter to trial.

Analysis and Conclusions 23 As indicated previously, this motion is brought pursuant to s. 7(4) of the Third Schedule of the Nova Scotia Companies Act which provides: In an application made or an action brought or intervened in under Section 4, 5 or 6 hereof, the court may at any time order the company or its subsidiary to pay to the complainant interim costs, including legal fees and disburse- ments, but the complainant may be held accountable for such interim costs upon final disposition of the application or action. 24 In the action that Mr. Giffin has filed, he is seeking, inter alia, relief pursu- ant to s. 5 of the Third Schedule of the Companies Act. 25 Section 7(4) of the Third Schedule of the Companies Act does not provide any guidance as to when an interim Order for costs should be granted. Case law has developed, however, in various provinces interpreting provisions similar to the one before me. 26 The first case that counsel have referred me to is Wilson v. Conley, [1990] O.J. No. 2283 (Ont. Gen. Div.)) where Rosenberg, J. (as he then was) noted that there were no precedents or literature to assist him regarding the criteria to be used in exercising his discretion under a similar provision of the Ontario Busi- ness Corporations Act. He concluded that the considerations applicable on the motion before him were (1) that the Applicant was in financial difficulty; (2) that the financial difficulty arose out of the alleged oppressive actions of the Respondents; and (3) that the Applicant had made out a strong prima facie case. In the circumstances of that case, the Court was prepared to grant the Appli- cant’s requested relief. The Respondent corporation was ordered to pay interim costs to the Applicant in the amount of $20,000.00, reserving the right of the Applicant to return to Court at a later date to seek a further payment. 27 I note that in Wilson v. Conley, supra, Rosenberg, J. did not indicate that these three criteria were necessary in order to grant interim costs under the On- tario Business Corporations Act. He simply said that these three considerations were “applicable” on the motion before him. 28 Approximately one year later the Ontario Court of Justice dealt with this issue again in the case of Alles v. Maurice (1992), 5 B.L.R. (2d) 146 (Ont. Gen. Div.)). Blair, J. (as he then was) reviewed Justice Rosenberg’s decision in Wilson v. Conley, supra, and, in particular, the suggestion by Justice Rosenberg that he was satisfied that the Applicant’s financial difficulties arose out of the 110 BUSINESS LAW REPORTS 77 B.L.R. (4th)

alleged oppressive actions of the Respondents and, as well, that the Applicant had made out a strong prima facie case. Justice Blair in Alles, supra, held that there was nothing in the Ontario Business Corporations Act that required an ap- plicant to demonstrate a cause and effect relationship between the conduct of the respondents and the need for funding — nor was there anything in the language of the statute which required an applicant to show a strong prima facie case. Justice Blair concluded at ¶19: In the end, I would prefer to say simply that an applicant for relief under s. 248(4) need establish that there is a case of sufficient merit to warrant pursuit and that the applicant is genuinely in financial circumstances which but for an order under s. 284(4) [sic] would preclude the claim from being pursued. 29 In Alles v. Maurice, supra, the Respondents were ordered to pay interim costs to the Applicant in the amount of $55,000.00 reserving to the Applicant the right to return to court at a later date to apply for a further Order if necessary. 30 The provision of the Ontario Business Corporations Act that Blair, J. was considering in Alles v. Maurice, supra, is, in substance, the same as s. 7(4) of the Nova Scotia Companies Act. 31 Alles v. Maurice, supra, was referred to with apparent approval by this Court in McKay v. Munro, [1992] N.S.J. No. 519 (N.S. T.D.), where Goodfellow, J. was dealing with an application for interim costs in the amount of $392,000.00 pursuant to s. 7(4) of the Third Schedule of the Nova Scotia Companies Act. In that case Goodfellow, J. laid out a number of principles which are applicable to this type of motion. They include, inter alia; (1) An applicant who seeks interim costs must establish, on a bal- ance of probabilities, that such should be awarded; (2) The costs received must be for the purpose of prosecuting the action and not for other purposes; (3) An application for interim costs should not be determined on the imbalance or apparent inequity of available family resources be- tween the parties; (4) Interim costs is an unusual remedy available to make certain that no litigant with a claim of some apparent merit is denied the op- portunity to present such claim; (5) An applicant should not be called upon to deregister RRSP’s, sell her home or unreasonably reduce her standard of living in order to pursue an action; and (6) Before seeking an Order for interim costs an applicant should look to her own resources first to see the extent to which she can meet the financial costs of the litigation. This includes a consider- ation of the applicant’s ability to reasonably borrow funds to fi- nance the litigation. Giffin v. Soontiens Deborah K. Smith A.C.J.S.C. 111

32 In McKay v. Munro, supra, the Court found that the applicant had resources available to her to fund the litigation and also noted that no evidence had been produced concerning the applicant’s ability to borrow funds to finance the litiga- tion. Accordingly, the application was dismissed. 33 The two part test set out in Alles v. Maurice, supra, has also been accepted in other jurisdictions in Canada (see for example: the Alberta Court of Queen’s Bench decision in 416892 Alberta Ltd. v. Rocky Mountain Springs Water Inc., [1996] A.J. No. 301 (Alta. Q.B.), and the Manitoba Court of Queen’s Bench decision in Burnside v. 2936501 Manitoba Ltd., [1998] M.J. No. 450 (Man. Q.B.), affirmed at [1999] M.J. No. 141 (Man. C.A.)) 34 In Perretta v. Telecaribe Inc., [1999] O.J. No. 4487 (Ont. S.C.J.), Lamek, J. seemed to introduce a third part to the test when he held that there were three conditions that had to be satisfied before an Order can be granted for interim costs pursuant to the Ontario Business Corporations Act. He found that first, the Plaintiff has to be impecunious and unable to sustain the cost of prosecuting the litigation. Further, he held that the impecuniosity has to be related to the alleged oppression. Lamek, J. stated at ¶10: “It is enough, for example (as was the case in Alles) if the alleged oppression has affected the plaintiff’s ability to finance an otherwise meritorious lawsuit. But there must be some connection between the conduct complained of and the plaintiff’s financial inability.” Finally, the impe- cuniosity has to be related to allegations of oppression upon which the plaintiff has a reasonable prospect of success. 35 In the case at bar, the Defendants argue that the three part test set out in Perretta v. Telecaribe Inc., supra, is the test that has to be met by the Plaintiff in the present motion. 36 I have difficulty with the test as set out in Perretta v. Telecaribe Inc., supra. First, Lamek, J. says that the plaintiff has to be impecunious and unable to sus- tain the cost of prosecuting the litigation. If, by using the term “impecunious”, he means that without such an Order the party would be deprived of the opportu- nity to proceed with the litigation, I would have no difficulty applying that rea- soning (see the decision of LeBel, J. in British Columbia (Minister of Forests) v. Okanagan Indian Band, [2003] 3 S.C.R. 371 (S.C.C.) at ¶36.) If, however, he means that a plaintiff must be truly impecunious in order to bring such a motion then, with respect, I cannot agree. The Canadian Oxford Dictionary (Katherine Barber, ed., The Canadian Oxford Dictionary (Don Mills, Ont.: Oxford Univer- sity Press, 1998) s.v. “impecunious”) defines the term “impecunious” as “having little or no money”. While an applicant for interim costs must look first to his own resources (including his ability to reasonably borrow funds) in order to fi- nance the litigation– as noted by Goodfellow, J. in McKay v. Munro, supra, he is not required to sell his home, deregister RRSP’s or unreasonably reduce his standard of living to pursue an action. Accordingly, there will be situations where an applicant is not truly impecunious but he will qualify for interim costs 112 BUSINESS LAW REPORTS 77 B.L.R. (4th)

if his financial circumstances are such that, without an interim Order, he will be unable to reasonably fund a lawsuit. 37 Further, an applicant may be unable to fund a lawsuit as his financial re- sources are tied up in the company that is subject of the litigation (as was the case in Wilson v. Conley, supra.) In those circumstances, a plaintiff may not qualify as truly impecunious but he is, in my view, able to advance a claim pursuant to s. 7(4) of the Third Schedule of the Companies Act. The issue is whether his financial circumstances will prevent him from advancing a meritori- ous claim if an interim order for costs is not granted. 38 In addition, Lamek, J. held that an applicant’s impecuniosity must be related to the alleged oppression. While ordinarily there will be a nexus between the plaintiff’s financial circumstances and the conduct complained of, I am not satis- fied that such is necessary in order to obtain an Order for interim costs. In my view, not all oppressive conduct necessarily results in negative financial conse- quences to the complainant. For example, an impecunious shareholder may be improperly denied access to a company’s financial information or notice of shareholders’ meetings. Such conduct may not result in negative financial con- sequences to that shareholder but, in my view, he would be entitled, neverthe- less, to claim oppression and request relief pursuant to s. 7(4) of the Third Schedule of the Companies Act. As noted by Blair, J. in Alles v. Maurice, supra, at ¶ 17: ...it is this inability to fund an otherwise meritorious lawsuit and the advan- tage which such a situation gives to an ‘oppressive’ majority that the power given under s. 248(4) to order costs is directed. There is nothing in the lan- guage of the statute or in its purpose which, to my mind, requires that the applicant demonstrate a cause and effect relationship between the conduct of the respondents and the need for funding. 39 I have concluded that the two part test set out in Alles v. Maurice, supra, is the appropriate test to be applied to this motion. The burden is on Mr. Giffin to satisfy the Court that he has a case of sufficient merit to warrant pursuit and that he is genuinely in financial circumstances which, but for an Order under s. 7(4), would preclude his claim from being pursued. 40 Without in any way deciding the merits of the action itself, I am satisfied that Mr. Giffin has established a case of sufficient merit to warrant pursuit. 41 During the hearing of the motion, and in the written submissions filed there- after, the Defendants raised the parol evidence rule together with clause 11.08 of the Shareholder Agreement. Clause 11.08 of the said Agreement reads as follows: 11.08 This Agreement expresses the entire agreement between the parties hereto with respect to all matters herein and its execution has not been induced by, nor do any of the parties hereto rely upon or regard as material any representations, promises or writings whatsoever not Giffin v. Soontiens Deborah K. Smith A.C.J.S.C. 113

incorporated herein or made a part hereof and this Agreement shall not be amended, altered or qualified, except by a memorandum in writing signed by the parties hereto and any amendment, alteration or qualification hereof shall be null and void and shall not be binding upon such parties unless made and recorded as aforesaid. 42 The Defendants submit that at trial the Plaintiff will be precluded from intro- ducing parol evidence and therefore suggest that he cannot possibly succeed in this action. In support of this argument they rely on the decisions in Gainers Inc. v. Pocklington Holdings Inc., [2000] A.J. No. 626 (Alta. C.A.) and Gates v. Croft, [2009] N.S.J. No. 263 (N.S. S.C.) They therefore suggest that the Plaintiff does not have a case of sufficient merit to warrant pursuit. 43 In response, Plaintiff’s counsel notes that his client is not suing for breach of the Shareholder Agreement, but rather, is suing, inter alia, for oppression. He submits that parol evidence can be introduced to establish the reasonable expec- tations of the parties when dealing with an oppression remedy claim and, in support of this argument, relies on the decision in Matthews Investments Ltd. v. Assiniboine Medical Holdings Ltd., [2007] M.J. No. 353 (Man. Q.B.) 44 In my view, it is not necessary, nor would it be appropriate for me to decide this evidentiary issue in advance of the trial. This is not a summary judgement motion – it is a motion for interim costs. Whether the Plaintiff will be permitted to advance certain evidence at the time of trial will be the decision of the Trial Judge hearing the action. 45 In addition, during summation, Mr. Keith reviewed in detail the evidence that had been advanced in relation to the motion and invited the Court to analyze the credibility of some of the parties when coming to a decision on whether Mr. Giffin has a case of sufficient merit to warrant pursuit. In my view, it is not necessary or, in the circumstances of this motion, appropriate for me to do so. I will simply state that Mr. Giffin has satisfied me that he has established a case of sufficient merit to warrant pursuit. 46 That takes me to the second part of the test – whether Mr. Giffin has satis- fied me that he is genuinely in financial circumstances which, but for an Order under s. 7(4), would preclude the claim from being pursued. 47 Mr. Giffin is now a member of the Royal Canadian Mounted Police. Accord- ing to his most recent affidavit filed in support of this motion he has an approxi- mate annual base salary (for 2010) of $74,682.00. Last year, he earned a base salary of $63,229.86 plus an additional $25,590.65 in overtime. Mr. Giffin’s wife is a nurse who earns between $72,876.35 and $79,243.87 per annum. While in 2009 she earned overtime of $3,320.00 she no longer receives overtime as she is now a salaried employee. Mr. Giffin’s wife also receives $725.00 a month in child support. 48 According to Mr. Giffin’s evidence, since the beginning of this dispute he and his wife have incurred a considerable amount of debt and their standard of 114 BUSINESS LAW REPORTS 77 B.L.R. (4th)

living has been severely reduced. He says that to date he has paid approximately $155,000.00 in legal fees, disbursements and taxes in relation to this litigation. He says that he has paid this sum by borrowing against a line of credit registered against the matrimonial home, through the sale of another property and by cash- ing in some of his RRSP’s. 49 In relation to his standard of living, Mr. Giffin says that he and his family are no longer able to eat out with friends at restaurants, they no longer take family vacations (as had been their practice) and they no longer contribute to their children’s RESP’s or to their personal RRSP’s. 50 Mr. Giffin has provided the Court with a Statement of Net Worth (as of March 31st, 2010) which indicates that he has net assets of $19,807.00 (taking into account his outstanding legal fees). This Statement does not include the interest that he has in XL Electric Limited or in Huntec Limited. It is clear (when one takes his interest in these two companies into account) that his actual net worth is much greater than this $19,807.00 figure. Having said that, I am satisfied that his interest in these two companies is not available to him at the present time and does not provide him with any practical assistance in funding this litigation. 51 Since the time of Mr. Giffin’s first motion for interim costs he has applied to two banks for additional financing. He has been declined by both institutions. His regular bank has indicated that they will not loan the Giffins any further money unless their present debt load is reduced. Mr. Giffin says that his only available recourse to raise more funds would be to sell the family home or fur- ther surrender his RRSP’s. 52 During the course of Mr. MacDonald’s argument he raised a number of is- sues which called into question the reliability of the information that Mr. Giffin gave to the banks when applying for additional financing. For example, Mr. Gif- fin provided the banks with a figure for his gross annual income but did not include his wife’s gross annual income despite the fact that all family debts and assets were listed. In addition, he did not refer to his interest in XL Electric Limited or Huntec Limited when listing his assets. 53 In response, Mr. Keith noted that Ms. Giffin is not a plaintiff to this action (she was not a shareholder in any of the Defendant companies) and says that she has no obligation to apply for, co-sign or guarantee any loans that Mr. Giffin may apply for to fund this litigation. Accordingly, he submits that there was no reason for Ms. Giffin’s income to be included on the loan documents. 54 Mr. Keith further noted that Mr. Giffin was obliged to list the full amount of the joint debts that Mr. Giffin has with his wife as, at law, he can be held liable for the full amount of these debts. 55 In relation to the argument that Mr. Giffin did not refer to his interest in XL Electric Limited or Huntec Limited when listing his assets, Mr. Keith referred to Giffin v. Soontiens Deborah K. Smith A.C.J.S.C. 115

clause 3.01 of the Shareholder Agreement which he says precludes Mr. Giffin from encumbrancing these shares. In addition, he notes that these shares do not generate any cash flow to service any loan that Mr. Giffin may be applying for and he submitted, inter alia, that the shares cannot effectively be liquidated. He noted that the shareholders of XL Electric Limited and Huntec Limited are em- broiled in a protracted and costly legal battle and suggests that the banks that Mr. Giffin applied to would not have been interested in these shares or in Mr. Giffin’s view of their value. 56 Unfortunately, Mr. Giffin was not cross examined on any of these issues at the time of the hearing despite the fact that the Defendants had the opportunity to do so. In Browne v. Dunn (1893), 6 R. 67 (U.K. H.L.), Lord Halsbury stated at pp. 76-77: ...... To my mind nothing would be more absolutely unjust than not to cross-examine witnesses upon evidence which they have given, so as to give them notice, and to give them an opportunity of explanation, and an opportu- nity very often to defend their own character, and, not having given them such an opportunity, to ask the jury afterwards to disbelieve what they have said, although not one question has been directed either to their credit or to the accuracy of the facts they have deposed to...... 57 While the rule in Browne v. Dunn, supra, is not absolute, in my view it should be applied in the circumstances of this case. The Defendants should not be permitted to call into question the veracity of Mr. Giffin’s loan applications without having asked him about these issues and giving him an opportunity to explain why he completed the application forms in the manner in which he did. 58 An applicant for interim costs is expected to make all reasonable efforts to fund the litigation themself. As indicated, however, by Goodfellow, J. in McKay v. Munro, supra, it is not necessary for an applicant to sell their home or dere- gister their RRSP’s before an order for interim costs can be awarded. The De- fendants’ solicitor questions why the Plaintiff should be permitted to hold onto his remaining RRSP’s and suggests that Mr. Giffin should have to dispose of this asset before seeking an Order for interim costs. He notes that both Mr. and Ms. Giffin hold pension plans through their employment and suggests that, in these circumstances, it would be appropriate to find that Mr. Giffin has to dis- pose of his remaining RRSP’s before looking to XL Electric Limited to help fund the litigation. 59 As indicated previously, Justice Goodfellow in McKay v. Munro, supra, held that an applicant for interim costs is not required to deregister RRSP’s in order to pursue an action. Generally, a judge of this Court is bound by a decision of another judge of this Court unless the decision is clearly wrong or there exists a strong reason to find otherwise. This policy allows for predictability and consistency. 116 BUSINESS LAW REPORTS 77 B.L.R. (4th)

60 In the case at bar, I am not convinced that Justice Goodfellow’s statement relating to RRSP’s is incorrect, nor am I satisfied that there exists a strong rea- son to find to the contrary. 61 Mr. Giffin only started working with the RCMP after leaving XL Electric Limited in 2007. While he was not questioned about the value of his pension through his employer – it is unlikely that it would be significant due to the lim- ited time that he has held this employment. 62 In my view, Ms. Giffin’s pension is irrelevant for the purpose of this motion as she is not a party to this action and we have no information on the value of this asset. 63 Mr. Giffin has already used a line of credit and cashed in some of his RRSP’s to help fund the $155,000.00 that he has paid to date in legal fees, dis- bursements and taxes. I am satisfied that he does not have the financial means to pay for this litigation himself. I am also satisfied that at the present time he is unable to reasonably borrow further funds to finance the litigation. In keeping with the comments of Goodfellow, J. in McKay v. Munro, supra, in my view, it is not necessary for Mr. Giffin to sell the family home or further deregister his RRSP’s in order to pay his legal bills. 64 Mr. Giffin has satisfied me that, but for an Order under s. 7(4) of the Compa- nies Act, he will effectively be precluded from pursuing this action. 65 That takes me to the issue of the amount of interim costs that should be awarded. 66 As indicated previously, Mr. Giffin is seeking interim costs in the amount of $275,000.00 which represents $145,000.00 owing to the Plaintiff’s solicitor (as of the date of the motion), $30,000.00 in unbilled work in progress (as of the date of the motion) and $100,000.00 which is the estimate that the Plaintiff has received from his solicitors for bringing this matter to trial. 67 The Plaintiff has provided the Court with a basic (undetailed) Statement of Account showing the amount of money that Mr. Giffin has paid to his solicitors to date as well as the $145,114.52 which has been billed and is unpaid. He has also provided a basic Statement of Account showing unbilled time, disburse- ments and taxes in the approximate amount of $30,000.00. The Defendants’ so- licitor argues that this is insufficient and that the Plaintiff should have filed more detailed evidence of the legal fees incurred. Further, he argues that the amount sought by the Plaintiff is “completely excessive and entirely unreasonable in the circumstances”. 68 In response, the Plaintiff’s solicitor argues that requiring more detailed ac- counts at this stage of the proceeding would be improper and would force him to disclose privileged information. In addition, he argues that the Defendants’ con- duct in this proceeding has driven up the cost of litigation significantly and notes that as of the date of the hearing of this motion there had been over half a dozen Giffin v. Soontiens Deborah K. Smith A.C.J.S.C. 117

motions, eleven days of discovery (including several Court ordered discoveries, rediscoveries and further rediscovery of the Defendants) and many days of trial which subsequently had to be adjourned. 69 As is often the case in family disputes, this appears to be a very acrimonious proceeding. Numerous motions have been required to date and there is a great deal of financial information and corporate history that must be reviewed in or- der to bring the matter to trial. Having heard two motions relating to this action, I am not surprised by the amount of fees that the Plaintiff has incurred to date. 70 While there may be situations where the Court requires detailed statements of account in order to deal with an Order for interim costs, I am not satisfied that such is necessary in the circumstances of this case. 71 In the pre-hearing brief filed on behalf the Defendants reference was made to 416892 Alberta Ltd. v. Rocky Mountain Springs Water Inc., supra, where Jones, J. stated at ¶ 31: I am satisfied, in the circumstances, that an order for interim costs should be made requiring the Respondent Rocky Mountain to pay completely for the cost of the certified business valuator who will value the shares of the Appli- cant, including any possible minority discount factor, and report in due course with regards to his valuation. I make such an order. In doing so, I take comfort in the fact that in the circumstances of this case, should the Applicant at the end of the day, be found wanting in respect of his alle- gations of oppression against the Respondents, there would appear to be enough value in the shares which the Applicant owns to the extent of 30 percent, that the Respondents can easily be recompensated by reversing the order for costs when the main action is finally determined...... [Emphasis added by the Defendants’ solicitor] 72 Section 7(4) of the Third Schedule of the Companies Act provides that upon final disposition of the action the Plaintiff may be held accountable for any in- terim costs that have been awarded. In the case at bar, there is a significant dispute over the value of Mr. Giffin’s interest in XL Electric Limited and Huntec Limited, however, there does not appear to be any dispute that his inter- est exceeds the amount of interim costs that he is seeking. This is a factor that I have taken into account when analyzing the sufficiency of the Plaintiff’s evi- dence concerning the costs that he has incurred to date. 73 I have concluded that an Order should issue awarding the Plaintiff interim costs in the amount of $175,000.00. This Order will cover the $145,000.00 that has been billed by the Plaintiff’s solicitors and is unpaid as well as the $30,000.00 of unbilled time and disbursements. 74 The remaining $100,000.00 requested by the Plaintiff is an estimate of the legal fees that will be incurred in bringing the matter to trial. While the Court has the ability to grant an Order for anticipated costs, in my view, the discretion to do so should be exercised carefully. As a preliminary matter, the figure of 118 BUSINESS LAW REPORTS 77 B.L.R. (4th)

$100,000.00 is an estimate only. Additionally, the Plaintiff’s financial circum- stances (including the need for an Order for interim costs) can change. For ex- ample, during the course of the first motion that the Plaintiff brought for interim costs, his financial circumstances changed significantly when he found a buyer for a property that he had previously been unable to sell. 75 I am prepared to issue an Order requiring XL Electric Limited to pay to the Plaintiff interim costs in the amount of $175,000.00 reserving the right to the Plaintiff to bring a further motion pursuant to s. 7(4) to request an additional payment. This $175,000.00 shall be forwarded to the Plaintiff’s solicitor no later than December 30th, 2010. I will remain seized of the matter for the purpose of a further hearing should the Plaintiff elect to proceed with a further motion for interim costs. 76 I anticipate that counsel will be able to agree to the costs of this motion. If not, I will accept written submissions on the matter. Motion granted. Klein, Re 119

[Indexed as: Klein, Re] IN THE MATTER OF THE LONDON HUMANE SOCIETY And an Application brought by Peter Klein, a Director of the London Humane Society, pursuant to Rule 14.05(3)(d) of the Rules of Civil Procedure And Section 297 of the Ontario Corporations Act, R.S.O. 1990, c. C.38 Ontario Superior Court of Justice B.T. Granger J. Heard: September 1, 2010 Judgment: November 12, 2010 Docket: 1363/10, 2010 ONSC 5775 David B. Williams, Sarah Graham for London Humane Society Norman A. Pizzale for Respondents, Joris Van Daele, Marie Blosh, Helen Van Gassen Business associations –––– Creation and organization of business associations — As- sociations — Membership — Miscellaneous –––– Rejecting membership application — Membership policies of charitable organization (Association) was created and changed by its board of directors pursuant to its bylaws — Resolution was passed to remove any automatic membership grant to donors — Membership committee decided that it would require completed application forms for new or renewing membership applications — Association notified its members of new requirement in Fall 2009 quarterly newsletter in 6 by 6.7 cm box — Second notification was given in early 2010 when tax receipts were mailed out — Of 117 applications received, 8 were declined without reason — Associa- tion brought application for determination of who should properly be considered to be current members, specifically, was decision to reject applications valid — Eight appli- cants whose application was rejected deemed to be members of Association for voting and all other purposes — There was lack of evidence regarding any breach of fiduciary duty by directors — Since directors did not have any contractual relationship with per- sons seeking membership in Association, they did not owe them any substantial duties to follow rules of natural justice; therefore, directors did not breach any contractual duties or rules of natural justice — However, it appeared that rejected applicants were refused be- cause of possible ideological differences, which was breach of good faith. Business associations –––– Creation and organization of business associations — As- sociations — Conduct of affairs — Change in rules of association –––– Sufficient no- tice — Membership policies of charitable organization (Association) was created and changed by its board of directors pursuant to its bylaws — Resolution was passed to re- move any automatic membership grant to donors — Membership committee decided that it would require completed application forms for new or renewing membership applica- tions — Association notified its members of new requirement in Fall 2009 quarterly newsletter in 6 by 6.7 cm box — Second notification was given in early 2010 when tax 120 BUSINESS LAW REPORTS 77 B.L.R. (4th) receipts were mailed out — Of 117 applications received, 8 were declined without rea- son — Association brought application for determination of who should properly be con- sidered to be current members, specifically, was there sufficient notice of new application form — Notice was sufficient; directors did not breach any common law principles in their alteration of membership policies — Moving from open membership policy to more closed one was within board of directors’ scope of authority; as long as change was car- ried out with best interests of Association in mind, directors should not be faulted for this decision — Directors chose methods of notice for their cost effectiveness; cost effective- ness is important interest for corporation that exists solely on private donations — How- ever, notices were small and not highly conspicuous — As directors’ only owed fiduciary duty to Association, notice was sufficient despite its weakness. Business associations –––– Specific matters of corporate organization — Directors and officers — Fiduciary duties — Miscellaneous –––– Membership policies of charita- ble organization (Association) was created and changed by its board of directors pursuant to its bylaws — Resolution was passed to remove any automatic membership grant to donors — Membership committee decided that it would require completed application forms for new or renewing membership applications — Association notified its members of new requirement in Fall 2009 quarterly newsletter in 6 by 6.7 cm box — Second noti- fication was given in early 2010 when tax receipts were mailed out — Of 117 applica- tions received, 8 were declined without reason — Association brought application for de- termination of who should properly be considered to be current members, specifically, was there sufficient notice of new application form — Notice was sufficient; directors did not breach any common law principles in their alteration of membership policies — Moving from open membership policy to more closed one was within board of directors’ scope of authority; as long as change was carried out with best interests of Association in mind, directors should not be faulted for this decision — Directors chose methods of no- tice for their cost effectiveness; cost effectiveness is important interest for corporation that exists solely on private donations — However, notices were small and not highly conspicuous — As directors’ only owed fiduciary duty to Association, notice was suffi- cient despite its weakness. Cases considered by B.T. Granger J.: BCE Inc., Re (2008), (sub nom. Aegon Capital Management Inc. v. BCE Inc.) 383 N.R. 119, 71 C.P.R. (4th) 303, 52 B.L.R. (4th) 1, (sub nom. Aegon Capital Management Inc. v. BCE Inc.) 301 D.L.R. (4th) 80, 2008 SCC 69, (sub nom. BCE Inc. v. 1976 Debentureholders) [2008] 3 S.C.R. 560, 2008 CarswellQue 12595, 2008 Carswell- Que 12596, [2008] S.C.J. No. 37 (S.C.C.) — referred to Chu v. Scarborough Hospital Corp. (2007), 228 O.A.C. 131, 35 B.L.R. (4th) 254, 2007 CarswellOnt 5228 (Ont. Div. Ct.) — considered Pathak v. Hindu Sabha (July 8, 2002), Wilkins, J. (Ont. S.C.J.) — followed Pathak v. Hindu Sabha (2004), 2004 CarswellOnt 3284, 48 B.L.R. (3d) 207 (Ont. S.C.J.) — considered Roncarelli v. Duplessis (1959), 1959 CarswellQue 37, [1959] S.C.R. 121, 16 D.L.R. (2d) 689, [1959] S.C.J. No. 1 (S.C.C.) — considered Toronto Humane Society v. Milne (2001), 2001 CarswellOnt 3435, [2001] O.J. No. 3890 (Ont. S.C.J.) — considered Klein, Re B.T. Granger J. 121

Trow v. Toronto Humane Society (2001), 2001 CarswellOnt 3206, 16 B.L.R. (3d) 298, [2001] O.J. No. 3640 (Ont. S.C.J.) — distinguished Statutes considered: Corporations Act, R.S.O. 1990, c. C.38 Generally — referred to Pt. III — referred to Pt. VII — referred to s. 129(1)(a) — considered s. 332 — considered Ontario Society for the Prevention of Cruelty to Animals Act, R.S.O. 1990, c. O.36 Generally — referred to

APPLICATION by association for direction regarding who should properly be consid- ered to be current members.

B.T. Granger J.:

1 The applicant seeks the opinion, advice or direction of this court upon the following question: (a) How should the upcoming special meeting of members be held and con- ducted with respect to who should properly be considered to be the cur- rent members of the London Humane Society (“LHS”) for voting and all other purposes? 2 The LHS is a charitable organization, incorporated pursuant to the laws of Ontario in 1899. The LHS receives no government support and depends solely on donations. 3 Throughout the history of the LHS, the organization’s membership policies have been created and changed by the Board of Directors pursuant to its bylaws. While Ms. Van Gassen was chair of the Board of Directors of the LHS in the late 1980’s to the mid-1990’s there was no automatic right to membership nor was there any right to an automatic renewal of memberships. During the first part of Mr. Van Daele’s tenure as chair of the LHS’s Board of Directors in the late 1990’s and early 2000’s, any individual interested in being a member of the LHS was required to fill out a membership application.. Sometime in or around 2003, the LHS’s Board of Directors, based on the recommendation of Mr. Van Daele, passed a resolution which granted automatic membership to any indivi- dual who donated $30 or more, the yearly membership fee, to the LHS. In or around the same time, the LHS began granting an automatic right of renewal to any individual who was an existing member and then made a donation in the following year of an amount equal or greater than the yearly membership fee. In or around 2007, the LHS’s bylaws were amended to give the Board the discre- 122 BUSINESS LAW REPORTS 77 B.L.R. (4th)

tion to approve the members of the corporation. Specifically, Article XXVII (a) states: The members of the Corporation shall be those persons who are approved by the Board of Directors and who pay to the Corporation the dues or fees deter- mined by the Board of Directors. 4 On November 27, 2008, the Board of Directors, chaired by Mr. Van Daele, passed a resolution to remove any “automatic membership grant to donors who have donated $30 or more to the LHS.” 5 In his cross-examination, Mr. Van Daele admitted that this resolution “was a statement of intent of future actions that the Board would or it would empower the administration and the Board could do this at some time.” 6 In September 2009, the Membership Committee of the LHS re-examined the membership application process. The Membership Committee decided that it would be prudent to require an application form to be completed by any indivi- dual who wished to be a member of the LHS, whether they were a new applicant or a renewing member. The Membership Committee’s recommendation to re- quire a membership application was presented at the October 1, 2009 Board of Directors meeting. At that meeting, the Board of Directors carried a motion to accept the report of the Membership Committee as presented. 7 The Board of Directors derives its legal authority to make decisions regard- ing membership of the LHS from Article XXVII of the 2003 LHS bylaws. Arti- cle XXVII (a) states: The members of the Corporation shall be those persons who are approved by the Board of Directors and who pay to the Corporation the dues or fees de- termined by the Board of Directors. [Emphasis added] 8 Although nothing in this provision explicitly authorizes application forms, the power to approve members of LHS necessarily implies an ability to create an approval process. As this power is necessarily implied, and does not require a change to the corporation’s bylaws, there was no explicit requirement that the members of the corporation receive notice of the change, or that the Board ob- tain approval by the membership at a special meeting. 9 Despite this, the general LHS membership was notified on one occasion of the application form requirement. The notification was contained in the Fall 2009 edition of the LHS’s quarterly newsletter, “Pawsitive News.” The notifica- tion was in a 6 × 6.7 cm box in the upper right hand corner of page four and read: Important Notice to Our Valued Members Annual Membership Fees have changed to: Regular Member $30.00 Senior Member $15.00 Klein, Re B.T. Granger J. 123

Voting Member $60.00 Membership applications need to be completed. Renewal forms will be available online and at the office. Thank you for your continued support! 10 A second notification was given in early 2010, when tax receipts were mailed out to LHS’s 800 monthly donors. These monthly donors constituted less than half of the total membership of the LHS. The tax receipts contained a slip thanking the donors and stating “[j]ust a friendly reminder that the membership application is on our website. You may call the office to have one mailed.” 11 By the time the second notification was given, all of the 800 monthly do- nors’ memberships had expired, as Article XXVII (b) and XXIX (a) of the LHS bylaws required that all memberships expire on December 31 of each year. Ac- cording to the new rules, any member wishing to “renew” their membership was also required to fill out an application form. This requirement virtually nullified the difference between new and renewed memberships. Unfortunately, the mem- bership application form was not available to members prior to December 31, 2009. It was only published online on January 14, 2010 at 5:11 p.m. The result was that in 2009, no one had the ability to renew their membership as every membership expired on December 31, 2009 and no member was able to apply for membership or renewal until the application form was released on January 14, 2010. 12 By the end of January, 2009 LHS had received less than 20 applications but through recruitment eventually 117 applications were received. Of this number, 109 were approved and eight were declined. No reasons were given for declin- ing eight applications. For example, Ms. Judy Foster, Executive Director of the LHS at the relevant time, was unable to articulate a clear reason for declining the application of Ms. Marie Blosh, one of the respondents; stating only that the LHS felt that Ms. Blosh would not support the objects of the corporation. 13 The LHS plans to significantly alter the voting privileges of members in the coming months, pending resolution of this matter. A large portion of the respon- dents’ submissions relate to the practice of proxy voting with regards to this upcoming decision. However, since the proposed bylaw has not yet been ap- proved by the membership of the LHS, the court cannot preemptively address the validity of this vote. It appears the bylaw altering voting privileges was val- idly created and passed by the Board of Directors, and accordingly, there do not appear to be any grounds for overturning that specific decision. 14 In providing the LHS with an opinion, advice or direction on how the up- coming special meeting of members should be held and conducted with respect to who should properly be considered to be the current members of the LHS for voting and all other purposes, the issues are: 124 BUSINESS LAW REPORTS 77 B.L.R. (4th)

1) Was there sufficient notice of the new application form requirement to the members of the LHS? 2) Is the Board of Directors’ decision to reject eight applications for mem- bership valid?

Was there sufficient notice? 15 The respondents raise concerns regarding the sufficiency of the notice pro- vided. If I should find that the notice of the application form requirement was insufficient, I may determine that the application process was invalid and those donors who believe they should have received automatic memberships in the LHS may be restored to membership. The respondents rely on Trow v. Toronto Humane Society (2001), 16 B.L.R. (3d) 298 (Ont. S.C.J.) [“Trow”] and ask me to declare the notice insufficient and the membership policy change invalid. In Trow, the Board of Directors sent notices of a bylaw change to members of the Toronto Humane Society but did not mention that the membership of the Soci- ety was changing so that most members of the Society would no longer have a vote. The Court in Trow found that the notice was insufficient to fulfill the statu- tory requirements and that the bylaw was invalid. However, Trow is distinguish- able from this matter. The membership policy change by the LHS Board of Di- rectors was not a bylaw change and there were no statutory notification or confirmation requirements for such policy decisions. In addition, the policy change here was not removing the votes of any members. Rather, it was simply instituting an application process for membership. As such, Trow is inapplicable to the case at hand. 16 The relationship between members of charitable and non-profit organiza- tions and the directors of those organizations is considered to be contractual in nature (See Bourgeois, infra, at 289). The contract is governed by statute, the creational documents of the corporation, its bylaws and fiduciary obligations and duties of good faith. 17 The LHS is governed by Parts III and VII of the Corporations Act, R.S.O. 1990, c. C.38. It is also affiliated with the Ontario Society for the Prevention of Cruelty to Animals [“OSPCA”], which is governed by the Ontario Society for the Prevention of Cruelty to Animals Act, R.S.O. 1990, c. O.36. There are no provisions regarding notification of policy changes in these acts, or their regula- tions. Additionally, there is nothing in the LHS’s bylaws regarding notification of policy changes that are not bylaw changes. As such, any duty of the LHS’s Board of Directors to provide the members with notice regarding the new appli- cation form requirement must be implicit or based on common law. 18 According to Donald J. Bourgeois, author of Charities and Not-for-Profit Administration and Governance Handbook, 2nd ed. (Markham: LexisNexis Can- ada, 2002) [“Handbook”] and The Law of Charitable and Not-for-Profit Organi- zations, 3rd ed. (Markham: LexisNexis Canada, 2002) [“Bourgeois”], directors Klein, Re B.T. Granger J. 125

are required to act in good faith at all times (See Handbook at 21). This duty requires directors to honestly believe their actions to be proper and appropriate. Based on the material before me, the notice to LHS members regarding the new application program was provided by the directors of LHS with an honest belief that the notice was proper and appropriate and, as such, the directors acted in good faith at all times. 19 Directors of not-for-profit and charitable organizations are subject to fiduci- ary duties at common law. The Supreme Court of Canada has held that directo- rial fiduciary duties are owed primarily to the corporation, not to the corpora- tion’s shareholders or other stakeholders (See BCE Inc., Re, 2008 SCC 69 (S.C.C.) at paras. 36-38). While most litigation in this area focuses on for-profit corporations, various academic texts apply the same concept to the directors of not-for-profit corporations (See McCarthy T´etrault, Directors’ and Officers’ Du- ties and Liabilities in Canada, M.P. Richardson, Ed. (Toronto: Butterworths, 1997)). Consequently, the Board of Directors at the LHS owed a fiduciary duty to the LHS as a corporation, but not separately to its members. 20 As fiduciaries, directors of corporations are required to uphold strict stan- dards of honesty and loyalty to the corporation. They are required to avoid con- flicts between their personal interests and the interests of the corporation. Direc- tors of charitable trusts are held to a higher standard, which requires them to avoid situations where there is a potential for their personal interests and the corporation’s interests to be in conflict. 21 Although this matter may be founded in a personality clash or ideological dispute, there is no direct evidence that the directors have placed their personal interests in conflict with the interests of the corporation. Moving from an “open” membership policy to a more “closed” membership policy was within the Board of Directors’ scope of authority, and as long as this change was carried out with the best interests of the LHS in mind, the directors should not be faulted for this decision. Directorial fiduciary duties may also require that the administrative tasks associated with the change, for example, the provision of notice, be carried out in a manner that focuses exclusively on the interests of the corporation. In this case, the LHS directors apparently chose the two methods of notice for their cost effectiveness. Cost effectiveness is certainly an important interest for a cor- poration that exists solely on private donations. 22 However, I think the notice provided, while cost effective, was not highly conspicuous. The notice in “Pawsitive News” did not specify that the member- ship process had changed. It was small (covering less area than a standard busi- ness card) and located in a middle page of the newsletter. The notice in the tax receipt sent to 800 monthly donors was also underwhelming. It consisted of two sentences on a slip that appears at first glance to be a simple thank you message. It also did not note that the membership process had changed. In addition, this second notice was not provided to all members. 126 BUSINESS LAW REPORTS 77 B.L.R. (4th)

23 As the directors of the LHS only owe a fiduciary duty to the corporation, and not to its membership, the notice provided was sufficient to fulfill the interests of the corporation, despite its weaknesses and, as such, the directors of the LHS did not breach any common law principles in their alteration of membership policies. 24 It is important to note that in Trow, the Court stated at para. 21: [t]his Court does have the inherent jurisdiction to direct and control the ad- ministration of charities. Such power ought to be exercised where charitable trusts are not being properly administered, where funds are being misman- aged or where the trustees of the funds are breaching their fiduciary obligations. 25 As noted in Toronto Humane Society v. Milne, [2001] O.J. No. 3890 (Ont. S.C.J.) at para. 9, a board’s technical compliance with the corporation’s bylaw does not prevent the Court from exercising its inherent jurisdiction. 26 Although there are no allegations of mismanagement of funds, the respon- dents rely on this Court’s inherent jurisdiction to ground their allegation of in- sufficient notice due to a breach of fiduciary obligations or improper administra- tion. In my view, based on the facts of this case, this is not an appropriate situation to invoke this court’s inherent jurisdiction as there is no plausible ground for declaring the notice insufficient and providing memberships to those donors who have not applied for membership, as requested by the respondents.

Rejected membership applications 27 Section 129(1)(a) of the Corporations Act allows directors to pass bylaws relating to the admission of persons as members. This is the only relevant statu- tory provision governing the admission of members. The language of this provi- sion is permissive rather than mandatory. The LHS bylaws contain only a very broad bylaw permitting the board to approve members. There are no statutory or regulatory provisions guiding the exercise of the directors’ discretion in the ex- ercise of this power. Thus, any such governing principles are grounded in the common law. 28 As noted above, the directors of the LHS owe a fiduciary duty to the corpo- ration and are required by the common law to consistently act in good faith. The issue is whether there was a breach of a fiduciary duty by the Board of Directors in the rejection of eight applicants for membership. In refusing the application of the eight proposed members, the Board chose not to accept eight membership dues, despite the fact that the LHS runs solely on donations. However, there is no evidence that the Board placed their personal interests above the interests of the corporation in so doing. There was a lack of evidence that there was any breach of a fiduciary duty by the directors of the LHS in rejecting these eight membership applications. Klein, Re B.T. Granger J. 127

29 In Chu v. Scarborough Hospital Corp. (2007), 35 B.L.R. (4th) 254 (Ont. Div. Ct.) at para. 22 the Divisional Court affirmed that the Court will intervene in decisions made by non-share capital corporations in accordance with their bylaws when the corporation has demonstrated bad faith or acts contrary to the rules of natural justice. In his Handbook, Bourgeois expands upon the applica- tion of the rules of natural justice to the relationship between members and orga- nizations at page 183: Natural justice is a common law development that is intended to protect the procedural rights of persons. Although it is more usually considered in the context of administrative law, the basic premises of natural justice have been applied by the courts to domestic forums and the relationship between mem- bers and organizations. Natural justice includes several elements. First, the person whose rights are to be affected should receive notice of the hearing, if any. Second, the notice should set out the grounds or reasons for the pro- posed change, termination or suspension. Third, the person whose rights are to be affected should have the opportunity to make submissions. Fourth, the decision-maker or tribunal should, if not unbiased, have an open mind. 30 However, these principles apply specifically only to those persons who are classified as “members” of an organization. In the present matter, the respon- dents acted on behalf of persons who applied for membership in the LHS and were rejected by the Board of Directors. As such, the rules of natural justice do not apply to them, or at the most, only apply very minimally to them. As noted in the Handbook at p. 184, “[a] refusal to admit somebody as a member will not normally be reviewable by a court,” unless membership was declined contrary to human rights legislation. Since the directors of the LHS do not have any con- tractual relationship with persons seeking membership in the LHS, they do not owe them any substantial duties to follow the rules of natural justice. Therefore, in their decision to reject eight applicants for membership, the Board did not breach any contractual duties or rules of natural justice. 31 Any order requiring the Board to admit the eight applicants previously re- fused must be based in a failure of the Board to act in good faith, as required by the common law. “Good faith” is defined in Black’s Law Dictionary, 9th ed. (St. Paul: Thomson Reuters, 2009) as [a] state of mind consisting in (1) honesty in belief or purpose, (2) faith- fulness to one’s duty or obligation, (3) observance of reasonable commercial standards of fair dealing in a given trade or business, or (4) absence of intent to defraud or to seek unconscionable advantage. 32 Bad faith is defined as “[d]ishonesty of belief or purpose.” The evidence in the present matter is that the Board is unable to articulate a specific reason for refusing to admit the eight refused applicants as members to the LHS, other than that Ms. Blosh would not support the objects of the corporation. However, there was nothing in Ms. Blosh’s application that indicated that she opposed the ob- 128 BUSINESS LAW REPORTS 77 B.L.R. (4th)

jects of the LHS. She was involved in other community activities related to animal welfare and had been a member of the LHS the previous year. At a mini- mum, the Board’s decision regarding Ms. Blosh was arbitrary. 33 While arbitrariness is not part of the above definition of bad faith, the arbi- trary exercise of discretion has been associated with bad faith in a number of cases. In Roncarelli v. Duplessis, [1959] S.C.R. 121 (S.C.C.), the Supreme Court of Canada stated at para. 140: In public regulation of this sort there is no such thing as absolute and untram- melled “discretion”, that is that action can be taken on any ground or for any reason that can be suggested to the mind of the administrator, no legislative Act can, without express language, be taken to contemplate an unlimited ar- bitrary power exercisable for any purpose, however capricious or irrelevant, regardless of the nature or purpose of the statute. [Emphasis added] 34 While the LHS Board is not a public body, it does derive its authority to act from its bylaws, which are enacted under discretion granted by the Corporations Act. As such, arbitrariness alone may ground a decision that the LHS Board acted in bad faith. 35 There is some suggestion in the evidence that the decision regarding Ms. Blosh’s application was founded in political or ideological divisions. It is im- proper for a Board of Directors to reject members on the basis of ideological differences. In Pathak v. Hindu Sabha (2004), 48 B.L.R. (3d) 207 (Ont. S.C.J.) at para. 9, Fragomeni J. quoted Wilkins J. [(July 8, 2002), Wilkins, J. (Ont. S.C.J.)] (in an unreported related decision): The purpose for the refusal to renew appears to be that Inderjit and likely Ashok have expressed public disagreement with the Board. There is no evi- dence before me to show Inderjit or Ashok has engaged in activities which are adversarial to the charity. No legitimate reason is present for the refusal to renew their membership. The Court has ample jurisdiction under s. 332 of the Corporations Act, sec- tion 10 of the Charities Accounting Act, and the common-law jurisdiction [Public Trustee v. Humane Society] to direct the Board of the respondent to admit the two Applicants to membership. 36 In my view, it appears likely that the eight rejected applicants, if not rejected arbitrarily, were refused because of possible ideological differences. As noted by Wilkins J., this was an inappropriate exercise of the Board’s power. Klein, Re B.T. Granger J. 129

Jurisdiction 37 As summarized by Wilkins J., the Court has the power to admit the eight rejected applicants to membership in the LHS as per s. 332 of the Corporations Act. Section 332 states: Where a shareholder or member or creditor of a corporation is aggrieved by the failure of the corporation or a director, officer or employee of the corpo- ration to perform any duty imposed by this Act, the shareholder, member or creditor, despite the imposition of any penalty and in addition to any other rights that he, she or it may have, may apply to the court for an order di- recting the corporation, director, officer or employee, as the case may be, to perform such duty, and upon such application the court may make such order or such other order as the court thinks fit. 38 In this case, notwithstanding that the eight applicants who were rejected for membership have not applied to this Court to have their applications for mem- berships accepted by the Board of Directors, I am satisfied that their applications were rejected for improper purposes and they should be deemed to be members. 39 In answer to the question put to the Court by the applicant, the current mem- bers of the London Humane Society for voting and all other purposes shall be those who have applied for membership and been approved by the Board of Directors. The eight applicants who applied for membership and had their appli- cations refused shall be deemed to be members of the London Humane Society for voting and all other purposes. 40 The LHS shall be relieved of any obligation to hold its Annual General Meeting until practical to do so following this decision and the holding of the Special Meeting of Members to approve the bylaws. 41 Counsel may make brief written submissions on costs within 15 days. Order accordingly. 130 BUSINESS LAW REPORTS 77 B.L.R. (4th)

[Indexed as: Fairweather Ltd. v. RioCan YEC Holdings Inc.] FAIRWEATHER LTD. (Applicant) and RIOCAN YEC HOLDINGS INC. (Respondent) Ontario Superior Court of Justice Stinson J. Heard: November 18, 2010 Judgment: November 23, 2010 Docket: CV-10-408928, 2010 ONSC 6445 L. David Roebuck, Melissa J. MacKewn, Samuel M. Robinson for Applicant Krysta R. Chaytor for Respondent Real property –––– Landlord and tenant — Nature and elements of lease — Inter- pretation –––– Tenant operated retail store in shopping centre — Both landlord and ten- ant were highly sophisticated participants in retail leasing marketplace — Tenant exer- cised its option under lease to renew for further five years, and parties agreed to rental rate of $40 per square foot — Landlord provided tenant with extension agreement to doc- ument extension and new rental rate — Extension agreement included redevelopment ter- mination clause — Tenant was aware of clause and signed extension agreement — At time they signed agreement, both parties were aware that landlord was intending to reno- vate, at some time — Landlord began pursuing intention to redevelop shopping centre, and sent tenant termination notice, purportedly exercising rights under termination clause — Tenant brought application to interpret lease, taking position that landlord could not terminate unless it actually required tenant’s space — Application dismissed — Landlord was entitled to issue notice of termination and it validly did so — Language used by parties expressly contradicted any connection between requirement for tenant’s space and exercise of right to terminate — Termination clause expressly referred to land- lord’s right arising where there was intention to renovate “all or any part” of shopping centre — Thus, parties contemplated right would arise where renovation related to any part, not necessarily including renovations to tenant’s premises — Interpretation did not result in commercial absurdity or harsh result — Argument that landlord was required to demonstrate bona fide need for tenant’s premises to be vacated in order to carry out de- velopment was rejected. Real property –––– Landlord and tenant — Term of lease — Termination — By agreement –––– Tenant operated retail store in shopping centre — Both landlord and ten- ant were highly sophisticated participants in retail leasing marketplace — Tenant exer- cised its option under lease to renew for further five years, and parties agreed to rental rate of $40 per square foot — Landlord provided tenant with extension agreement to doc- ument extension and new rental rate — Extension agreement included redevelopment ter- mination clause — Tenant was aware of clause and signed extension agreement — At time they signed agreement, both parties were aware that landlord was intending to reno- vate, at some time — Landlord began pursuing intention to redevelop shopping centre, and sent tenant termination notice, purportedly exercising rights under termination Fairweather Ltd. v. RioCan YEC Holdings Inc. Stinson J. 131

clause — Tenant brought application to interpret lease, taking position that landlord could not terminate unless it actually required tenant’s space — Application dismissed — Landlord was entitled to issue notice of termination and it validly did so — Language used by parties expressly contradicted any connection between requirement for tenant’s space and exercise of right to terminate — Termination clause expressly referred to land- lord’s right arising where there was intention to renovate “all or any part” of shopping centre — Thus, parties contemplated right would arise where renovation related to any part, not necessarily including renovations to tenant’s premises — Interpretation did not result in commercial absurdity or harsh result — Argument that landlord was required to demonstrate bona fide need for tenant’s premises to be vacated in order to carry out de- velopment was rejected. Cases considered by Stinson J.: Elliott v. Billings (Township) Board of Education (1960), [1960] O.R. 583, 25 D.L.R. (2d) 737, 1960 CarswellOnt 124 (Ont. C.A.) — referred to Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust (2007), 2007 Carswell- Ont 1705, 222 O.A.C. 102, 2007 ONCA 205, 29 B.L.R. (4th) 312, 85 O.R. (3d) 254, 56 R.P.R. (4th) 163, [2007] O.J. No. 1083 (Ont. C.A.) — considered 3869130 Canada Inc. v. I.C.B. Distribution Inc. (2008), 45 B.L.R. (4th) 1, 2008 Cars- wellOnt 2802, 2008 ONCA 396, 66 C.C.E.L. (3d) 89, 239 O.A.C. 137, [2008] O.J. No. 1947 (Ont. C.A.) — referred to

APPLICATION by tenant to interpret commercial lease for retail store located in shop- ping centre.

Stinson J.:

1 This is an application to interpret a commercial lease for a retail store lo- cated at the Yonge-Eglinton Shopping Centre (“Shopping Centre”) in Toronto. The Shopping Centre is part of a mixed commercial/retail development com- prised of two high-rise office towers and a multilevel indoor shopping mall that houses several dozen tenants who operate retail stores, shops, caf´es and the like. 2 The applicant, Fairweather, is one such tenant, occupying approximately 5,400 sq. ft. in which it operates a clothing store. Fairweather has its own exte- rior entrance fronting on Yonge Street and its premises are also accessible through an interior entrance inside the mall. The respondent RioCan is the owner of the development, and Fairweather’s landlord. Fairweather operates over 100 retail stores across Canada and is part of a group of companies that operate over 300 retail stores under various names. RioCan is part of a real es- tate investment trust that owns and operates commercial and retail space across the country. The real estate investment trust controls dozens of shopping centers and millions of square feet of retail space. Fairweather and its associated compa- nies are tenants of RioCan’s parent in dozens of other locations and they have regular and ongoing dealings. Both parties are highly sophisticated participants in the retail leasing marketplace. 132 BUSINESS LAW REPORTS 77 B.L.R. (4th)

3 The lease for the store in question (“Lease”) dates back more than 30 years, involving predecessors of both Fairweather and RioCan. By 2008, after several extension agreements, the Lease was reaching the end of its term. It included an option to renew for a further five years, exercisable by the tenant, at a market rental rate to be agreed or determined by arbitration. On February 1, 2008, Fair- weather exercised its option. Thereafter the parties proceeded to discuss an ap- propriate rent. RioCan suggested and Fairweather agreed to $40 per square foot. 4 In July 2008, RioCan provided Fairweather with a draft Lease Amending and Extending Agreement (“Extension Agreement”) to document the extension and the new rental rate. That agreement included a redevelopment termination clause, which is at the center of the present dispute. It reads as follows (“Termi- nation Clause”): If there is an intention to demolish, redevelop or renovate all or any part of the Shopping Centre, then notwithstanding any other provision of this Agree- ment, the Landlord’s rights in the event of Tenant default, and the exercise by the Tenant of any option to extend or renew, the Landlord, or its succes- sors and assigns, may terminate the Lease at any time upon giving the Tenant at least three (3) months’ notice of such termination (the “Notice”), without any compensation or contribution by the Landlord whatsoever. On the termi- nation date set out in the Notice (the “Termination Date”), the Tenant shall deliver vacant possession of the Leased Premises to the Landlord in the same condition in which it was required to keep the Leased Premises in accor- dance with the provisions of the Lease. Rent and any other payments hereun- der shall be apportioned to the Termination Date. The Tenant covenants and agrees to execute all documentation requested by the Landlord to carry out the intent of this section. 5 There is some dispute between the parties whether RioCan was prepared to accept a lower than market rent for the premises in exchange for the inclusion of the Termination Clause; indeed, there is a dispute between the parties concern- ing what the actual market rent for the premises might actually be commencing with the start of the renewal term on February 1, 2009. What is not disputed, however, is that Fairweather was aware of the Termination Clause and willingly signed the Extension Agreement. 6 It is also common ground that, well before the point at which the Extension Agreement was signed, RioCan had already formed the intention to redevelop the Shopping Centre. Indeed, the redevelopment of the Shopping Centre had been contemplated for many years, back to a time before RioCan had become the owner. Thus, at the time they signed the Extension Agreement, both parties were aware that RioCan was intending to renovate, at some time. 7 The RioCan renovation plan involved a complex process, including design, an application for rezoning, a site plan by-law, and associated formal and infor- mal steps in order to carry the plan to realization. The basic concept of the reno- vation involves the construction of a five to seven storey addition on the existing Fairweather Ltd. v. RioCan YEC Holdings Inc. Stinson J. 133

outdoor plaza adjoining the fa¸cade on the south side of one of the high rise buildings. In order to carry out the construction, it will be necessary to displace two existing tenants who currently occupy premises that front on and have out- door access to that south facing plaza. 8 It is beyond dispute that RioCan is now pursuing its intention to redevelop the Shopping Centre. Following a lengthy process that involved a review by the city Planning Department and public input, Toronto City Council approved the required rezoning in February or March 2010. On April 7, 2010, RioCan sent Fairweather a termination notice, purportedly in the exercise of its rights under the Termination Clause, effective July 6, 2010. In response, Fairweather wrote to RioCan requiring it to provide detailed information as to the demolition, rede- velopment and renovations. Fairweather asserted that the intention of the parties at the time of execution of the extension agreement, was to ensure that the land- lord would not be restrained in its redevelopment efforts to such an extent that Fairweather’s continued occupancy of its premises would interfere with the ren- ovation. RioCan responded that it disagreed that the right to terminate the Lease was dependent on whether there would be actual physical interference with Fair- weather’s continued occupancy. 9 At the same time, during the spring of 2010, the parent enterprises to Fair- weather and RioCan were engaged in a series of negotiations regarding the po- tential termination or surrender of various other leases in locations across the country. At one stage the parties reached a tentative “omnibus agreement” that would have provided for an extension of the Fairweather Lease at the Shopping Centre. As events unfolded, the omnibus agreement was never finalized. In the face of Fairweather’s assertion that RioCan could not terminate unless it actually required the Fairweather space, and Fairweather’s announced intention to seek a court interpretation of the parties’ rights, RioCan served a fresh notice of termi- nation. This application followed.

The parties’ positions 10 Fairweather submits that the notice of termination is invalid. It argues that on a correct interpretation of the Termination Clause, RioCan’s right to termi- nate the Lease is limited to circumstances in which RioCan truly needs the Fair- weather premises in order to carry out the redevelopment. In the alternative, Fairweather submits that there is an implied term in the Termination Clause that limits RioCan’s right to terminate the Lease. Fairweather further argues that Ri- oCan has failed to demonstrate that it requires the Fairweather premises, and thus the precondition to terminating the Lease has not been established. 11 For its part, RioCan submits that its rights under the Termination Clause are not conditional on its ability to demonstrate any of Fairweather’s additional re- quirements. RioCan argues that the clause is clear and unambiguous and that there is no legal principle that would allow the court to rewrite the contract be- 134 BUSINESS LAW REPORTS 77 B.L.R. (4th)

tween the parties in the manner requested by Fairweather. RioCan further sub- mits that, even if the contract is rewritten to include one of the various additional requirements requested by Fairweather, the termination notice is not invalid as RioCan can clearly demonstrate that the termination of the Lease is in fact nec- essary for the redevelopment, to allow it the flexibility it requires to relocate other tenants as required to permit the process to unfold.

Analysis 12 In Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust (2007), 85 O.R. (3d) 254 (Ont. C.A.) the Court of Appeal summarized the principles applicable to the interpretation of commercial contracts as follows (at para. 24): Broadly stated ... a commercial contract is to be interpreted, (a) as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective; (b) by determining the intention of the parties in accordance with the language they have used in the written document and based upon the “cardinal presumption” that they have intended what they have said; (c) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjec- tive intention of the parties; and (to the extent there is any ambiguity in the contract), (d) in a fashion that accords with sound commercial principles and good business sense, and that avoids a commercial absurdity.” [Citations omitted] 13 The starting point for interpreting a contract is to look at the plain and ordi- nary meaning of its words. Where the language is unambiguous, extrinsic evi- dence it is not admissible to alter, vary, interpret or contradict the words used in the contract. Regardless of any ambiguity, the courts may always have regard to the context and to the objective evidence of the surrounding circumstances un- derlying the negotiations: 3869130 Canada Inc. v. I.C.B. Distribution Inc., 2008 ONCA 396 (Ont. C.A.) at para. 32. Additionally, a contract ought to be con- strued so that no clause, sentence or word is superfluous, void or insignificant: Elliott v. Billings (Township) Board of Education, [1960] O.R. 583 (Ont. C.A.), at 587. 14 The essence of Fairweather’s position is that, because the intention to rede- velop the Shopping Centre was known to both parties before the Extension Agreement was signed, and thus the supposed precondition to service of the no- tice of termination was already fulfilled, on a true construction of the Termina- tion Clause, more is necessary before RioCan can act on it. Otherwise, all that Fairweather obtained was a lease terminable at any time on 90 days notice. To Fairweather Ltd. v. RioCan YEC Holdings Inc. Stinson J. 135

avoid that commercial “absurdity” there must be some demonstrated connection between RioCan’s redevelopment plans and the need for Fairweather’s space. 15 I am unable to accept that argument. To begin with, as I noted at the outset of these reasons, both tenant and landlord are highly sophisticated participants in the retail leasing marketplace. Each has negotiated literally hundreds of leases, for all manner of premises, incorporating innumerable terms. It was open to the parties to make express provision for a direct connection between RioCan’s need for the Fairweather space and it’s right to terminate. They did not do so. 16 To the contrary, the very language used by the parties expressly contradicts any connection between the requirement for the Fairweather space and the exer- cise of the right to terminate. The Termination Clause expressly refers to Rio- Can’s right arising where “there is an intention to... renovate all or any part of the Shopping Centre”. Thus, the parties contemplated that the right would arise where the renovation related to any part - not necessarily including renovations to the Fairweather premises. In construing the clause, I cannot overlook those words but must instead give them proper meaning. 17 The reality is that, as both parties anticipated it would when they signed the Extension Agreement, RioCan is now engaged in implementing its intention to renovate. In anticipation of that eventuality, RioCan required and Fairweather agreed that a 90 day notice from RioCan was all that was necessary to terminate the Lease. To engraft upon that arrangement, expressed clearly in the language of the parties’ contract, additional obligations that would require RioCan to demonstrate to some level of certainty that it requires the Fairweather premises at a specified time, for a specified purpose, by reason of a specified legal or practical obligation or need, would be to rewrite the contract. 18 The result of the interpretation that I accept by no means results in a com- mercial absurdity or a harsh result. To the contrary, this interpretation accords with commercial efficacy, providing some – albeit modest – security of tenure for the tenant, while reserving to the landlord the right to conduct its affairs and redevelop its premises as required. The renovation and redevelopment of a large retail complex such as the Shopping Centre that already houses existing tenants with varying leases, requirements and terms, necessitates the landlord having sufficient flexibility to achieve the object of renovation while at the same time meeting or renegotiating its legal obligations to its various tenants. I conclude that the interpretation for which RioCan contends is an interpretation of the con- tract that reflects this commercial reality. 19 In view of the conclusion that I have reached regarding the interpretation of the contract language as drafted, I find it unnecessary to consider the submis- sions of the applicant regarding insertion of implied terms. Further, I reject the argument that RioCan must demonstrate a bona fide need for the Fairweather premises to be vacated in order to carry out the redevelopment. 136 BUSINESS LAW REPORTS 77 B.L.R. (4th)

20 For these reasons, I conclude that RioCan was entitled to issue the notice of termination and it validly did so. The application is therefore dismissed. 21 The parties agreed that costs should follow the event. Fairweather shall pay RioCan costs of $43,000 all inclusive, the amount agreed by the parties. Application dismissed.

[Indexed as: 331399 Alberta Ltd. v. Worthington Properties Inc.] 331399 Alberta Ltd. (Plaintiffs) and Worthington Properties Inc. and Granite Man Ltd. (Defendants) Alberta Master Master J.B. Hanebury Heard: July 12, 2010 Judgment: August 24, 2010 Docket: Calgary 0901-05436, 2010 ABQB 543 Christopher D.C. Ruttkay for Plaintiffs James H. Odishaw for Defendants Guarantee and indemnity –––– Practice and procedure — Guarantee — General principles –––– Summary judgment — Guarantor bought property which it assigned to WP Inc. — Guarantor claimed that it believed that guarantee documents merely related to assignment — Principal of guarantor claimed it did not know it was signing guarantee and that principle of non est factum applied — WP Inc. defaulted on payment — Creditor brought proceedings on guarantee — Creditor brought application for summary judg- ment — Application dismissed — Genuine issue for trial existed — Whether creditor had basis to require guarantee for completion of transaction was matter for trial — Guarantor was literate businessperson and was capable of appreciating nature of documents — Guarantor was clearly careless in signing guarantee — No mutual mistake — Pleadings to be altered to plead non est factum. Cases considered by Master J.B. Hanebury: Ayotte v. Demery (2007), 2007 MBQB 66, 2007 CarswellMan 91, 54 R.P.R. (4th) 87, 213 Man. R. (2d) 159, [2007] 5 W.W.R. 287 (Man. Q.B.) — considered Canadian Imperial Bank of Commerce v. Godziuk (1996), 182 A.R. 145, 1996 Carswell- Alta 152 (Alta. Master) — considered Canadian Imperial Bank of Commerce v. Kanadian Kiddee Photo Ltd. (1979), [1979] 3 W.W.R. 256, 1979 CarswellBC 672 (B.C. S.C.) — referred to Causeway Shopping Centre Ltd. v. Muise (1968), 70 D.L.R. (2d) 720n, [1969] S.C.R. 274, 1968 CarswellNS 12 (S.C.C.) — considered 331399 Alberta Ltd. v. Worthington Properties Inc. Master J.B. Hanebury 137

Dechant v. Law Society (Alberta) (2006), 2006 ABQB 908, 2006 CarswellAlta 1802, 406 A.R. 4, 70 Alta. L.R. (4th) 284 (Alta. Q.B.) — followed First National Financial GP Corp. v. Akhtari (2010), 2010 ABQB 320, 2010 Carswell- Alta 1250 (Alta. Master) — referred to King v. Urban & Country Transport Ltd. (1973), 1 O.R. (2d) 449, 40 D.L.R. (3d) 641, 1973 CarswellOnt 896, [1973] O.J. No. 2181 (Ont. C.A.) — considered Marvco Color Research Ltd. v. Harris (1982), [1982] 2 S.C.R. 774, 141 D.L.R. (3d) 577, 45 N.R. 302, 20 B.L.R. 143, 26 R.P.R. 48, 1982 CarswellOnt 142, 1982 CarswellOnt 744, [1982] S.C.J. No. 98 (S.C.C.) — followed McDiarmid Lumber Ltd. v. Jerrold Custom Homes Ltd. (2004), 2004 MBQB 117, 2004 CarswellMan 208, 185 Man. R. (2d) 89, 33 C.L.R. (3d) 133, [2005] 1 W.W.R. 183 (Man. Q.B.) — referred to 207069 Alberta Ltd. v. Ayukawa (1984), 1984 CarswellBC 1098 (B.C. S.C.) — considered Statutes considered: Law of Property Act, R.S.A. 2000, c. L-7 Generally — referred to

APPLICATION by creditor for summary judgment in action on guarantee.

Master J.B. Hanebury:

1 This is an application for summary judgment on a guarantee. The corporate guarantor, Granite Man Ltd., contests the application on a number of grounds, including non est factum, arguing that its principal had no idea that he was sign- ing a guarantee.

Facts 2 Granite Man Ltd. entered into a commercial real estate contract with 331399 Alberta Ltd. It provided for the purchaser to be Granite Man Ltd. “or nominee.” Prior to the closing Granite Man Ltd. assigned the contract to the co-defendant, Worthington Properties Inc., previously known as 946222 Alberta Ltd. 3 Worthington purchased the property and, as part of the closing documenta- tion, signed a mortgage to the vendor in the sum of $1,784,000.00. At the same time, Granite Man executed a corporate guarantee of the indebtedness of Worth- ington to 331399 Alberta Ltd. 4 Worthington defaulted on the payments under the mortgage and this action was commenced. 5 Granite Man defends the claim against it on its guarantee on a number of grounds, arguing primarily that the principal of Granite Man had no idea that he was signing a guarantee. He was never advised a guarantee was required and the document was not brought to his attention at the time of execution. 138 BUSINESS LAW REPORTS 77 B.L.R. (4th)

6 In his cross-examination on affidavit the principal of Granite Man testified that he went to the office of the lawyer for Worthington where he signed docu- ments found in four to five hundred pages of paper, all relating to a number of transactions he was undertaking with Worthington. 7 He says that the guarantee was presented to him as a single page for signa- ture and he signed it in front of an officer of Worthington, thinking he was sign- ing a document assigning to Worthington the contract he had with 331399 Al- berta Ltd. It is his evidence that he believes the guarantee was not attached to the signature page at the time he signed it. 8 He says at page 27 lines 23 - 27: Q So if I understand your evidence correctly, you were handed only page 5 and the affidavit page? A Yes Q You weren’t handed pages 1 through 4? A Absolutely not. 9 At page 34 the evidence continues at lines 22 - 27: Q [You signed] page 5 of the guarantee at Dan’s [White] office? A Yes. Q And you didn’t ask him about that affidavit or page 5 of the guaran- tee at that time? A I did not know there was a guarantee at any time. 10 The affidavit verifying corporate signing authority was executed at the same time as the guarantee. 11 A review of the pages signed by Granite Man indicates that while the affida- vit verifying corporate signing authority does not mention the word “guarantee”, the signing page of the guarantee says the word “guarantee” or “guarantor” nu- merous times. The principal signed under a statement that said “[I]n witness whereof the Guarantor has executed these presents this 20 day of October, 2006.” 12 However, credibility cannot be determined by this court on affidavit evi- dence. For the purposes of this application it is accepted that neither Granite Man nor its principal had any idea that it would be required by 331399 Alberta Ltd. to execute a guarantee. 13 The evidence of the officer of 331399 Alberta Ltd. indicates that as the com- pany had no knowledge of the assignee, Worthington, it required the guarantee of Granite Man. In support of this statement, various correspondence is attached to the officer’s affidavit. 14 First, there is a letter from the lawyer for Worthington to 331399 Alberta Ltd.’s lawyer including the balance of the deposit and asking for confirmation of his understanding that the vendor has consented to the assignment. 331399 Alberta Ltd. v. Worthington Properties Inc. Master J.B. Hanebury 139

15 The letter of the vendor’s lawyer in response advises that the vendor is not concerned as to the nominee for the purposes of the transfer, but only for the purpose of the vendor take-back mortgage. The letter asks for details of Worthington. 16 The next letter is from the vendor’s lawyer and provides the transfer and mortgage documentation to be executed by Worthington and the guarantee to be executed by Granite Man. 17 These documents were executed and the vendor now says it is entitled to judgment on the guarantee.

Analysis 18 The test in a summary judgment application has been described in many cases. In Dechant v. Law Society (Alberta), 2006 ABQB 908 (Alta. Q.B.), para. 56, the court noted that the question to be determined is whether there is a triable issue. The onus remains at all times on the applicant, who must put forward a set of undisputed facts which lead to the legal conclusion that the respondent’s case will fail. As long as there are some legally relevant facts in dispute or a legal issue that requires a trial to determine, the application cannot succeed. 19 The plaintiff has established that the guarantee was signed and there are funds outstanding. It has met the initial burden upon it. 20 Do the facts and arguments of Granite Man Ltd. raise a triable issue? 21 The pivotal argument raised by Granite Man is non est factum, based on Granite Man’s evidence that its principal did not know that he was signing a guarantee. 22 The leading case on the facts necessary to successfully argue non est factum is Marvco Color Research Ltd. v. Harris, [1982] 2 S.C.R. 774 (S.C.C.). At para- graph 27 of that case the court held that while carelessness does not generally give rise to a defence of non est factum, the “magnitude and extent of the care- lessness, the circumstances which may have contributed to such carelessness and other circumstances must be taken into account in each case” before a court may determine that the defendant is estopped from raising this defence. 23 The Court noted that there are two conflicting policy objectives that require consideration: relief to the signer whose consent is genuinely lacking and the protection of innocent third parties who have acted upon an apparently regular and properly executed document. 24 In many subsequent cases banks and other lenders have successfully over- come non est factum defences as the courts have refused to relieve a literate signor from his or her own carelessness. 25 Granite Man relies on three cases where carelessness vitiated the contract. One, Canadian Imperial Bank of Commerce v. Kanadian Kiddee Photo Ltd., 140 BUSINESS LAW REPORTS 77 B.L.R. (4th)

[1979] 3 W.W.R. 256 (B.C. S.C.), predates Marvco Color, and is not of assistance. 26 In Ayotte v. Demery, 2007 MBQB 66 (Man. Q.B.), a purchaser hired a home inspector who completed the inspection and was paid. Later he asked the pur- chaser to sign the authorization for the inspection, which she did without reading it. It contained a number of new terms. The court held that the underlying con- tract had already been agreed to and fully performed. Moreover, while the pur- chaser was careless, the inspector was not totally lacking in fault as it was repre- sented that the document was merely an authorization, not an introduction of new terms. In these unusual circumstances, the court determined that the de- fence of non est factum was not precluded, and refused to grant summary judgment. 27 In Canadian Imperial Bank of Commerce v. Godziuk (1996), 182 A.R. 145 (Alta. Master), a father was asked by his son to co-sign a $3000.00 loan at the Bank. The Bank believed the father was signing a consolidation loan for $17,000.00. The father attended at the Bank and no one explained what he was signing. He did not read the document before signing it. 28 The Master would not grant summary judgment, holding that while the fa- ther was careless, that did not vitiate any improper conduct such as fraud, mis- representation, coercion, undue influence or similar conduct. As the facts led the Master to conclude that there may have been improper conduct by the Bank, the matter was sent to trial. 29 This and other case law indicates that generally, as a result of the need to balance the policy objectives outlined in Marvco Color, the defendant must proffer some evidence of improper conduct by the other party to successfully forestall summary judgment on an executed document. The literate defendant’s own carelessness, with nothing more, is insufficient. 30 Granite Man’s principal was a literate business man. This is not a situation where the signor was incapable of appreciating the nature of the documents he was signing: First National Financial GP Corp. v. Akhtari, 2010 ABQB 320 (Alta. Master). He was clearly careless in signing the guarantee. 31 This is not a question of mutual mistake, as both Worthington and 331399 Alberta Ltd. knew that Granite Man was executing a guarantee: McDiarmid Lumber Ltd. v. Jerrold Custom Homes Ltd., 2004 MBQB 117 (Man. Q.B.). 32 The mistake was that of Granite Man. Unlike in Godziuk, the principal of Granite Man did not sign the documents in front of a representative of 331399 Alberta Ltd. There was no direct misrepresentation by a representative of that company to him. 331399 Alberta Ltd. alleges it was an innocent third party. 33 Granite Man was clearly careless. However, there is an obligation on this court to examine the facts carefully. Is there any evidence of improper conduct by 331399 Alberta? 331399 Alberta Ltd. v. Worthington Properties Inc. Master J.B. Hanebury 141

34 The contract named the purchaser as Granite Man “or nominee.” 35 Had Granite Man completed the transaction itself, it would have been liable to 331399 Alberta on the covenant to pay contained in the mortgage. The protec- tions of the Law of Property Act R.S.A. 2000, c. L-7, do not apply in the case of a mortgage granted by a corporation. 36 Was 331399 within its rights to require a guarantee by Granite Man, the original contracting party, before permitting the contract to be assigned, or was it bound by the contract to accept Worthington as the purchaser and mortgagor on the vendor take back mortgage? 37 Counsel were asked to provide argument on this question and found no case on point with this fact situation. 38 In King v. Urban & Country Transport Ltd., [1973] O.J. No. 2181 (Ont. C.A.), the court held that where there is a vendor take back mortgage, a pur- chaser cannot assign the benefit of a contract for the purchase of land to a stran- ger to the transaction, without the acceptance by the vendor of the new mortga- gor. However, in that case, the contract did not provide for a “nominee”. 39 In Causeway Shopping Centre Ltd. v. Muise (1968), [1969] S.C.R. 274 (S.C.C.) and 207069 Alberta Ltd. v. Ayukawa, 1984 CarswellBC 1098 (B.C. S.C.) the offer to lease provided for the named lessee “or nominee” to be the lessee. In both cases a nominee went into possession and paid rent and the court held that the party who was named as the original lessee was not liable. 40 Granite Man relies on this case law, and the use of the disjunctive “or” in the description of the purchaser as “Granite Man Ltd. or nominee,” to argue that it had the right to substitute a nominee and thereby be relieved of its potential liability under the vendor take back mortgage. It argues that 331399 Alberta could not refuse Worthington as the nominee and therefore had no basis to re- quire the execution of a guarantee by Granite Man, for the completion of the transaction. If it wished to alter the terms of the transaction and add additional security it had an obligation to request the guarantee of Granite Man or at least notify it of its presence in the documentation to be executed. 41 As a result, sending the guarantee to Worthington’s counsel for Granite Man’s execution, it argues, was inappropriate conduct and allows it to argue non est factum. 42 I agree. The case law indicates that an argument can be made that the con- tract between 331399 Alberta and Granite Man permitted Granite Man to substi- tute Worthington as the purchaser and mortgagor and, ultimately, release Gran- ite Man from liability. If that is the case, 331399 Alberta had no entitlement to Granite Man’s guarantee. It changed the terms of the contract and sent the guar- antee, without notice to Granite Man, to the new purchaser, Worthington, for execution by Granite Man. Worthington allegedly also gave no notice to Granite Man. This conduct is sufficient to permit Granite Man to argue non est factum. 142 BUSINESS LAW REPORTS 77 B.L.R. (4th)

43 There is a genuine triable issue and the evidence and arguments of the par- ties will need to be considered by the trial judge to determine if the defence should succeed. 44 In light of this finding there is no need to consider the other arguments of Granite Man. 45 However, Granite Man has not raised the defence of non est factum in its statement of defence. 46 It has thirty days from today’s date to either amend its statement of defence to include that defence by consent, or, if no agreement can be reached to allow the amendments by consent, to file an application to amend its statement of de- fence. Should its defence not be amended, this matter is to be returned to me for further consideration. 47 Normally Granite Man would be entitled to its costs of this application. However, as it raised a defence not included in its statement of defence, thereby giving the plaintiff no notice, the costs of this application will be in the cause. Application dismissed. Baffinland Iron Mines Corp., Re 143

[Indexed as: Baffinland Iron Mines Corp., Re] In the Matter of the Securities Act, R.S.O. 1990, c. S.5, as Amended In the Matter of Baffinland Iron Mines Corporation, Iron Ore Holdings, LP and Its Wholly-Owned Subsidiary Nunavut Iron Ore Acquisition Inc. Ontario Securities Commission James E.A. Turner Chair, Mary G. Condon, Paulette L. Kennedy Commrs. Heard: November 18, 2010 Judgment: December 3, 2010 Docket: None given. Katherine L. Kay, Alexander D. Rose, Jonathan Levy, for Baffinland Iron Mines Corporation Kent Thomson, William N. Gula, Steven Harris, Andrea Burke, for Iron Ore Holdings, LP and Nunavut Iron Ore Acquisition Inc. Alan Mark, Dawn Whittaker, Steve Tenai, for ArcelorMittal S.A. James Sasha Angus, Naisam Kanji, for Staff of the Ontario Securities Commission Securities –––– Commissions and exchanges — Orders — Cease trading orders –––– N Inc. made unsolicited all-cash offer to purchase all outstanding common shares of B Corp. for $0.80 per common share (“N Offer”) — A entered into support agreement with B Corp. under which, among other things, A agreed to make all-cash offer to acquire all outstanding B Corp. common shares for $1.10 per common share — N Inc. indicated shareholder rights plan established by B Corp. was only impediment to increasing price offered, although it made no commitment to do so — N Inc. brought application to On- tario Securities Commission under s. 127(1) of Securities Act to cease trade rights plan — Application granted — No real and substantial possibility B Corp. would be able to increase shareholder choice by keeping rights plan in place — Cease trading rights plan now would allow current offers to proceed in fair and even-handed manner as con- templated by relevant policy — There was obvious potential benefit to B Corp. share- holders if order cease trading rights plan was immediately issued as they might receive higher offer from N Inc. — N Offer not currently coercive of or abusive to B Corp. share- holders — Decision of B Corp. board in having agreed to leave rights plan in place until expiry of A’s offer would not be deferred to — Whether board of directors of target is- suer was complying with fiduciary duties did not determine outcome of poison pill hear- ing — There was reasonable argument that rights plan was not denying B Corp. share- holders ability to respond to N Offer — On balance, it was preferable to allow events with respect to two competing offers to unfold without hindrance by rights plan — It was in public interest to cease trade rights plan immediately. 144 BUSINESS LAW REPORTS 77 B.L.R. (4th)

Securities –––– Commissions and exchanges — Orders — Public interest orders –––– N Inc. made unsolicited all-cash offer to purchase all outstanding common shares of B Corp. for $0.80 per common share (“N Offer”) — A entered into support agreement with B Corp. under which, among other things, A agreed to make all-cash offer to acquire all outstanding B Corp. common shares for $1.10 per common share — N Inc. indicated shareholder rights plan established by B Corp. was only impediment to increasing price offered, although it made no commitment to do so — N Inc. brought application to On- tario Securities Commission under s. 127(1) of Securities Act to cease trade rights plan — Application granted — No real and substantial possibility B Corp. would be able to increase shareholder choice by keeping rights plan in place — Cease trading rights plan now would allow current offers to proceed in fair and even-handed manner as con- templated by relevant policy — There was obvious potential benefit to B Corp. share- holders if order cease trading rights plan was immediately issued as they might receive higher offer from N Inc. — N Offer not currently coercive of or abusive to B Corp. share- holders — Decision of B Corp. board in having agreed to leave rights plan in place until expiry of A’s offer would not be deferred to — Whether board of directors of target is- suer was complying with fiduciary duties did not determine outcome of poison pill hear- ing — There was reasonable argument that rights plan was not denying B Corp. share- holders ability to respond to N Offer — On balance, it was preferable to allow events with respect to two competing offers to unfold without hindrance by rights plan — It was in public interest to cease trade rights plan immediately. Securities –––– Trading in securities — Miscellaneous –––– N Inc. made unsolicited all-cash offer to purchase all outstanding common shares of B Corp. for $0.80 per com- mon share (“N Offer”) — A entered into support agreement with B Corp. under which, among other things, A agreed to make all-cash offer to acquire all outstanding B Corp. common shares for $1.10 per common share — N Inc. indicated shareholder rights plan established by B Corp. was only impediment to increasing price offered, although it made no commitment to do so — N Inc. brought application to Ontario Securities Commission under s. 127(1) of Securities Act to cease trade rights plan — Application granted — No real and substantial possibility B Corp. would be able to increase shareholder choice by keeping rights plan in place — Cease trading rights plan now would allow current offers to proceed in fair and even-handed manner as contemplated by relevant policy — There was obvious potential benefit to B Corp. shareholders if order cease trading rights plan was immediately issued as they might receive higher offer from N Inc. — N Offer not currently coercive of or abusive to B Corp. shareholders — Decision of B Corp. board in having agreed to leave rights plan in place until expiry of A’s offer would not be deferred to — Whether board of directors of target issuer was complying with fiduciary duties did not determine outcome of poison pill hearing — There was reasonable argument that rights plan was not denying B Corp. shareholders ability to respond to N Offer — On balance, it was preferable to allow events with respect to two competing offers to unfold without hindrance by rights plan — It was in public interest to cease trade rights plan immediately. Statutes considered: Securities Act, R.S.O. 1990, c. S.5 s. 127 — referred to Baffinland Iron Mines Corp., Re The Board 145

s. 127(1) — pursuant to

APPLICATION to Ontario Securities Commission pursuant to s. 127(1) of Securities Act to cease trade shareholder rights plan.

The Board: I. Background 1. Introduction 1 Nunavut Iron Ore Acquisition Inc. (“Nunavut”) made an application to the Ontario Securities Commission (the “Commission”) pursuant to subsection 127(1) of the Securities Act, R.S.O.1990, c. S.5, as amended (the “Act”) to cease trade a shareholder rights plan originally established by Baffinland Iron Mines Corporation (“Baffinland”) on January 13, 2006. 2 This application arises out of an unsolicited all-cash offer made by Nunavut to purchase all of the outstanding common shares of Baffinland for $0.80 per common share (the “Nunavut Offer”). That offer was made on September 22, 2010, extended on October 28, 2010 and further extended on November 8, 2010. The Nunavut Offer expires on November 22, 2010 unless further extended.

2. The Parties Nunavut 3 Nunavut is a corporation existing under the laws of Canada with its principal and head office located in Toronto, Ontario. Nunavut was incorporated on Au- gust 27, 2010 and has not carried on any material business other than in connec- tion with matters directly related to the Nunavut Offer. Nunavut is wholly- owned by Iron Ore Holdings, LP, a limited partnership formed under the laws of Delaware. Iron Ore Holdings, LP was formed solely for the purpose of making the Nunavut Offer.

Baffinland 4 Baffinland is a corporation existing under the laws of the Province of On- tario with its principal and head office located in Toronto, Ontario. Baffinland is a publicly-traded junior mining company currently engaged in the exploration of one mineral property, the Mary River Property, located on Baffin Island in Nunavut Territory, Canada. The Mary River Property is in the exploration and development stage and to date Baffinland has not established an operating mine on that property. 5 The largest shareholder of Baffinland is Resource Capital Funds, which owns approximately 23% of the outstanding common shares. Resource Capital Funds has entered into a lock-up agreement with ArcelorMittal (referred to in paragraph 10 of these reasons). 146 BUSINESS LAW REPORTS 77 B.L.R. (4th)

6 The authorized capital of Baffinland consists of an unlimited number of common shares. As of October 6, 2010, the outstanding share capital of Baffin- land consisted of 343,097,949 common shares. As of October 6, 2010, Baffin- land also had outstanding options and warrants to purchase an aggregate of up to 59,869,322 common shares. 7 Baffinland’s common shares are listed on the Toronto Stock Exchange under the symbol “BIM”.

3. The Shareholder Rights Plan 8 Baffinland entered into a shareholder rights plan agreement (the “Rights Plan”) on January 27, 2009, as an amendment to, and restatement of, the rights plan agreement originally entered into on January 13, 2006. The Rights Plan was approved by Baffinland shareholders on March 24, 2009. The Rights Plan was adopted for the stated purpose of providing: ... the Board of Directors with sufficient time to explore and develop alterna- tives for maximizing Shareholder value if a take-over bid is made for the Company, and to provide every shareholder with an equal opportunity to par- ticipate in such bid. The Amended Rights Plan encourages a potential ac- quirer to proceed by a Permitted Bid (as defined in the Amended Rights Plan), which requires the take-over bid to satisfy certain minimum standards designed to promote fairness ... (Baffinland Management Information Circular dated February 2, 2009)

4. The ArcelorMittal Offer and Support Agreement 9 On November 8, 2010, ArcelorMittal S.A. (“ArcelorMittal”) announced that it had entered into a support agreement with Baffinland (the “Support Agree- ment”) pursuant to which ArcelorMittal agreed to make an all-cash offer to ac- quire all of the outstanding Baffinland common shares for $1.10 per common share, and all of the outstanding warrants of Baffinland issued on January 31, 2007 for $0.10 per warrant (the “ArcelorMittal Offer”). 10 Shareholders holding approximately 26% of the outstanding Baffinland common shares have entered into lock-up agreements with ArcelorMittal under which they have agreed to tender their shares to the ArcelorMittal Offer. 11 ArcelorMittal cannot take up and pay for shares deposited under the ArcelorMittal Offer until at least December 20, 2010. 12 The Support Agreement includes terms to the following effect: (a) ArcelorMittal has the right to terminate the ArcelorMittal Offer unless at least 66 2/3% of the outstanding Baffinland common shares (on a fully- diluted basis) are tendered to its offer, which minimum tender condition cannot be waived or modified to less than 50% of the outstanding com- mon shares; Baffinland Iron Mines Corp., Re The Board 147

(b) Baffinland is not permitted to directly or indirectly solicit competing of- fers or proposals but it is permitted to engage in discussions or negotia- tions with or furnish information to any person that has made a bona fide acquisition proposal that the board of directors of Baffinland (the “Baf- finland Board”) has determined is, or could reasonably be expected to lead to, a “Superior Proposal”, as defined in the Support Agreement; (c) ArcelorMittal has the right for a period of five business days to at least match the price offered under any competing offer or proposal and thereby keep the Support Agreement in place; (d) Baffinland has agreed to waive the Rights Plan immediately prior to the expiry of the ArcelorMittal Offer, or earlier if requested by ArcelorMit- tal; and (e) Baffinland will pay ArcelorMittal a “break fee” of $11 million if, amongst other events, the Support Agreement is terminated in order for Baffinland to accept, approve or enter into a definitive agreement relat- ing to a Superior Proposal.

II. Relief Sought by Nunavut 13 By letter dated November 1, 2010, Nunavut made an application (the “Appli- cation”) to the Commission pursuant to section 127 of the Act seeking: (a) a permanent order that trading cease in respect of any securities issued, or to be issued, under or in connection with the Rights Plan, including without limitation, in respect of the rights issued under the Rights Plan (the “Rights”) and any common shares to be issued upon the exercise of the Rights; (b) a permanent order removing prospectus exemptions in respect of the dis- tribution of Rights on the occurrence of the Separation Time (as defined in the Rights Plan) and in respect of the exercise of the Rights; and (c) such further and other relief as the Commission deems appropriate. 14 The Nunavut Offer is expressly conditional upon the termination or discon- tinuance of the Rights Plan. Nunavut says that the Rights Plan is the only imped- iment to increasing the price offered under the Nunavut Offer, although it has made no commitment to do so.

III. The Commission’s Decision 15 On November 18, 2010, we held a hearing on the Application and heard evidence and received submissions from Nunavut, Baffinland, ArcelorMittal and Staff. 16 At the outset of the hearing, we were advised that Baffinland, Nunavut and Staff consented to ArcelorMittal being granted standing to make submissions. 148 BUSINESS LAW REPORTS 77 B.L.R. (4th)

We granted standing to ArcelorMittal on the grounds that ArcelorMittal could be affected by the outcome of the Application. 17 On November 19, 2010, we issued an order cease trading the Rights Plan, with full reasons to follow. We took that action quickly because the Nunavut Offer was set to expire on November 22, 2010. Our order provides: (a) pursuant to subsection 127(1)2 of the Act, that trading in any securities issued or to be issued under or in connection with the Rights Plan shall cease permanently; and (b) pursuant to subsection 127(1)3 of the Act, that any exemptions contained in Ontario securities law do not apply permanently to any securities is- sued or to be issued under or in connection with the Rights Plan. A copy of our order is attached as Schedule “A” to these reasons. 18 These are our reasons for issuing the cease trade order in respect of the Rights Plan.

IV. Key Facts 19 The facts that we consider most relevant to our decision are that: (i) the Rights Plan has in fact provided sufficient time for the Baffinland Board to obtain a competing offer: the ArcelorMittal Offer. Accordingly, the Rights Plan has accomplished the objective of stimulating an auction by obtaining a competing offer for the benefit of Baffinland shareholders; (ii) the Nunavut Offer is an unsolicited offer that has been outstanding for 57 days as of the date of this hearing; if that offer is amended to increase the price offered, it will remain open for an additional period of ten days from such variation; (iii) the ArcelorMittal Offer is at a cash price of $1.10 per common share, which is approximately 38% higher than the cash price of $0.80 per common share under the Nunavut Offer. As a result, there is currently no realistic possibility that Baffinland shareholders will tender to the Nunavut Offer or that such offer will be successful at the current price; (iv) at the date of the hearing, the Baffinland common shares were trading in the market at a price higher than the $1.10 offered under the ArcelorMit- tal Offer; (v) as noted above, Baffinland has entered into the Support Agreement which provides, among other things, that: (a) Baffinland will not solicit any competing offers but may termi- nate the Support Agreement if a financially superior offer or pro- posal is made that ArcelorMittal does not at least match; Baffinland Iron Mines Corp., Re The Board 149

(b) the Baffinland Board will waive the rights plan immediately prior to the expiry of the ArcelorMittal Offer (or earlier if requested by ArcelorMittal). As a result, the Rights Plan will remain outstand- ing against all offers until that time; (vi) The Nunavut Offer has a significant timing advantage over the ArcelorMittal Offer because the Nunavut Offer was made first. Absent the Rights Plan, Baffinland common shares can be taken up under the Nunavut Offer on November 25, 2010, although Nunavut would have to extend the offer for at least ten days if it increases the price offered; ArcelorMittal cannot take up shares under its offer until at least Decem- ber 20, 2010 and that take-up could be further delayed by the need for regulatory approvals; (vii) Nunavut says that the Rights Plan is the only impediment to Nunavut increasing the price offered under the Nunavut Offer; Nunavut has not disclosed whether it intends to increase the price under its offer or on what terms it might do so; (viii) No Baffinland shareholders have expressed any views in this hearing as to whether or not issuing an order cease trading the Rights Plan would be to their benefit or disadvantage; shareholder approval of the Rights Plan occurred prior to the making of either the Nunavut Offer or the ArcelorMittal Offer; and (ix) Nunavut currently owns approximately 6% of the common shares of Baffinland. Nunavut entered into lock-up agreements with certain Baf- finland shareholders under which those shareholders agreed to tender ap- proximately 9.3% of the outstanding common shares to the Nunavut Of- fer. It appears that those agreements have now terminated as a result of the making of the ArcelorMittal Offer. 20 As a practical matter, Nunavut cannot take up any Baffinland common shares under its offer until the Rights Plan is terminated. The Support Agree- ment prevents Baffinland from terminating the Rights Plan until the expiry of the ArcelorMittal Offer (or earlier if requested by ArcelorMittal).

V. Legal Framework 21 The Application is made by Nunavut pursuant to subsection 127(1) of the Act to cease trade the Rights Plan. In order to issue such a cease trade order, we must conclude that it is in the public interest to do so. That necessarily requires us to give careful consideration to all of the relevant facts and circumstances in this matter. 150 BUSINESS LAW REPORTS 77 B.L.R. (4th)

1. National Policy 62-202 22 National Policy 62-202 Defensive Tactics (“NP 62-202”) provides guidance to market participants as to the principles the Commission will apply in exercis- ing its public interest discretion in respect of defensive tactics implemented by an issuer in response to a take-over bid. NP 62-202 is a policy and not a rule, and should be interpreted and applied as such. 23 NP 62-202 sets forth the objectives of our take-over bid regime as follows: The primary objective of the take-over bid provisions of Canadian securities legislation is the protection of the bona fide interests of the shareholders of the target company. A secondary objective is to provide a regulatory frame- work within which take-over bids may proceed in an open and even-handed environment. The take-over bid provisions should favour neither the offeror nor the management of the target company, and should leave the sharehold- ers of the target company free to make a fully informed decision. 24 NP 62-202 goes on to state that: The Canadian securities regulatory authorities consider that unrestricted auc- tions produce the most desirable results in take-over bids and they are reluc- tant to intervene in contested bids. However, they will take appropriate ac- tion if they become aware of defensive tactics that will likely result in shareholders being deprived of the ability to respond to a take-over bid or to a competing bid. [emphasis added] 25 Accordingly, our focus in deciding the Application is to protect the interests of Baffinland shareholders and one of the issues we must consider is whether the Rights Plan will likely result in Baffinland shareholders being deprived of the ability to respond to the Nunavut Offer.

2. Principles Derived From Previous Decisions 26 The decision in Re Canadian Jorex Ltd. (1992) 15 OSCB 257 (“Canadian Jorex”) was the first decision in which Canadian securities commissions consid- ered the circumstances in which they would cease trade a shareholder rights plan or “poison pill”. The Commission held in Canadian Jorex that there comes a time when a shareholder rights plan “has got to go”. In our view, it is generally time for a shareholder rights plan “to go” when the rights plan has served its purpose by facilitating an auction, encouraging competing bids or otherwise maximizing shareholder value. A rights plan will be cease traded where it is unlikely to achieve any further benefits for shareholders. 27 The Commission stated in Canadian Jorex that: For us, the public interest lies in allowing shareholders of a target company to exercise one of the fundamental rights of share ownership — the ability to dispose of shares as one wishes — without undue hindrance from, among other things, defensive tactics that may have been adopted by the target Baffinland Iron Mines Corp., Re The Board 151

board with the best of intentions, but that are either misguided from the out- set or, as here, have outlived their usefulness. (Canadian Jorex, supra, at p. 5) 28 At the same time, the Commission has recognized the principle that: ... The rules of the game should be clear and consistently applied to en- courage bidders to come forward and the game must be played in an accept- able timeframe. (Re Cara Operations Ltd. and The Second Cup Limited (2002) 25 OSCB 7997 at para. 58) 29 Notwithstanding the principles referred to above, at the end of the day, there is no one test or consideration that constitutes the “holy grail” when deciding whether a rights plan should remain in place or be cease traded. The outcome of a poison pill hearing depends on the specific facts and circumstances involved. Ultimately, the Commission must decide in the particular circumstances whether cease trading a shareholder rights plan is in the public interest. 30 The Commission has identified the following factors as generally being rele- vant in considering whether it is time for a rights plan “to go”: (i) whether shareholder approval of the rights plan was obtained; (ii) when the plan was adopted; (iii) whether there is broad shareholder support for the continued opera- tion of the plan; (iv) the size and complexity of the target company; (v) the other defensive tactics, if any, implemented by the target company; (vi) the number of potential, viable offerors; (vii) the steps taken by the target company to find an alternative bid or transaction that would be better for the shareholders; (viii) the likelihood that, if given further time, the target company will be able to find a better bid or transaction; (ix) the nature of the bid, including whether it is coercive or unfair to the shareholders of the target company; (x) the length of time since the bid was announced and made; and (xi) the likelihood that the bid will not be extended if the rights plan is not terminated. (Re Royal Host Real Estate Investment Trust, 1999 LNONOSC 594 at p. 19) (“Royal Host”) Almost all of those considerations are relevant, to one extent or another, in the circumstances before us. 152 BUSINESS LAW REPORTS 77 B.L.R. (4th)

VI. Analysis 1. The Auction is Coming to an End 31 In this case, the Nunavut Offer has been outstanding for 57 days and has resulted in a higher priced competing offer being made by ArcelorMittal. Baffin- land has entered into the Support Agreement with ArcelorMittal and has agreed not to solicit competing offers. The auction is not yet over although, as a practi- cal matter, it is unlikely that a third bidder will be prepared to make an offer. Clearly, Nunavut is considering its response to the ArcelorMittal Offer and may increase that offer. 32 Accordingly, in our view, it is not necessary for the Rights Plan to remain in place in order to facilitate an auction; there are now two competing bids on the table. To us, the most important consideration in these circumstances is that Baf- finland has agreed in the Support Agreement not to solicit further offers and, accordingly, it needs no further time to do so. That suggests that the auction process is coming to an end. It seems unlikely that the Rights Plan will achieve more for shareholders in terms of inducing a further offer from a new bidder. 33 Based on the evidence before us, we have concluded that there is no real and substantial possibility that Baffinland will be able to increase shareholder choice by keeping the Rights Plan in place (see Re MDC Corp., 1994 LNONOSC 211).

2. Nunavut’s Timing Advantage 34 The Commission has concluded in the past that it will not permit a rights plan to be used for the purpose only of eliminating the timing advantage availa- ble to a first bidder. The Commission has stated that: The Act sets out minimum time periods during which a bid must remain open. That time period is not related to the existence of any other bid. Both Lac Minerals Ltd. and Tarxien supra, have considered timing issues and in both cases the pill was ceased traded immediately. It was our opinion the Commission should not interfere with the timing issues as between the bid- ders. To do so would require the Commission to attempt to equalize the ex- piry dates for all existing and potential bids. Such an equalization, however, would result in a situation where the last bidder would dictate the timing for all previous bidders. Not only would this have a detrimental effect on the bidding process, but such an approach was not contemplated under the Act. (Re Chapters Inc. and Trilogy Retail Enterprises L.P. (2001) 24 OSCB 1657 at para. 37) (“Chapters”) 35 We note that the Rights Plan does not by its terms expressly contemplate that it would be used to eliminate the timing difference between multiple bids. 36 It is clear that one of the effects of the Support Agreement is to eliminate the timing advantage of the Nunavut Offer by maintaining the Rights Plan in the face of that offer. In effect, Nunavut cannot take up common shares under its Baffinland Iron Mines Corp., Re The Board 153

offer until the expiry of the ArcelorMittal Offer. In our view, Nunavut is entitled as the first bidder to the timing advantage its offer has under our take-over bid regime. In our view, cease trading the Rights Plan now will allow the current offers to proceed in a fair and even-handed manner as contemplated by NP 62- 202.

3. Forced Extension of the Nunavut Offer 37 The effect of leaving the Rights Plan in place would be to force Nunavut to extend its offer for a substantial period of time if Nunavut wishes to compete with the ArcelorMittal Offer. That would expose Nunavut to potential costs and market risks in doing so. By making the Application, Nunavut has indicated that it may not be prepared to accept those costs and risks. In considering the same issue in Chapters, the Commission made the following comment: We do not consider it unreasonable that Trilogy might have withdrawn its offer. Mr. Wright testified as to the costs and risks associated with keeping an offer outstanding for a longer period of time. As a result, it was unlikely that an extension of the pill would lead to an increase in either the Future Shop Proposed Offer, or the Trilogy bid. In fact, the evidence demonstrated that the maintenance of the pill was precisely the obstacle preventing Trilogy from increasing its offer. Consequently, Trilogy chose not to amend its offer unless the pill was removed. Instead, Trilogy announced its intention to en- hance its offer if and when the Commission cease traded the shareholders rights plan. (Chapters, supra, at para. 28) 38 Accordingly, there is an obvious potential benefit to Baffinland shareholders if the Commission immediately issues an order cease trading the Rights Plan: Baffinland shareholders may potentially receive a higher offer from Nunavut. In our view, the fact that Nunavut has not disclosed whether and on what terms it would be prepared to increase its offer does not change that analysis.

4. Coercion 39 Baffinland made a number of submissions with respect to the coercive na- ture of the Nunavut Offer, focused primarily on the reservation by Nunavut of the right to waive at any time the minimum tender condition in its offer and take up whatever Baffinland common shares are tendered at the time. The vast ma- jority of take-over bids in this jurisdiction are made with a minimum tender con- dition that may be unilaterally waived by the offeror. A take-over bid is not inherently coercive for that reason. Baffinland shareholders are not being co- erced or forced in any way to tender to the Nunavut Offer. To the contrary, it is unlikely that any shareholders are going to be enticed to tender to the Nunavut Offer given the current price per share under that offer. Baffinland shareholders who do not wish to take the risk that the ArcelorMittal Offer will not be com- pleted can sell their shares in the market (as of the date of the hearing, the mar- 154 BUSINESS LAW REPORTS 77 B.L.R. (4th)

ket price of the Baffinland common shares was higher than the price offered under the ArcelorMittal Offer). Accordingly, there is nothing to suggest that the Nunavut Offer is fundamentally unfair to or abusive of shareholders. 40 Baffinland says, however, that Nunavut has not indicated its intentions with respect to varying its offer and that it is possible that future acts by Nunavut could be coercive of Baffinland shareholders. There is no doubt that currently there is uncertainty as to what Nunavut will do. But that uncertainty is inherent in a competitive bidding process. We are not prepared to speculate or assume that Nunavut will take actions in the future that would be coercive of or abusive to Baffinland shareholders. If Nunavut did so, we would intervene to protect the interests of shareholders. 41 Baffinland has also argued that Nunavut could acquire a number of shares sufficient to block the ArcelorMittal bid and that could result in the premature end to the auction, to the disadvantage of Baffinland shareholders. Presumably, Nunavut would do that by taking up shares under its offer (having waived its minimum tender condition) and/or by purchasing shares in the market. Baffin- land submits that the facts in this respect are similar to the facts in Re Falcon- bridge Ltd. (2006) 29 OSCB 6783 (“Falconbridge”), where the Commission al- lowed a rights plan to remain in place in order to prevent an offeror from acquiring shares (under the bid or in the market) that could have put an early end to an auction. In Falconbridge, the competing bidder owned 19.9% of the out- standing shares of the target. As a result, the acquisition of a relatively small number of shares by that bidder could have ended the auction. 42 The important difference in this case is that Nunavut owns only 6% of the outstanding common shares of Baffinland. Given the current price offered under the Nunavut offer, we have to assume that there are virtually no shares tendered to that offer. Accordingly, waiving the minimum tender condition and taking up shares tendered is not a viable strategy for Nunavut at this time. In respect of the possibility of market purchases, there is a 5% limit on the number of shares that Nunavut may purchase and, in any event, the fact that those shares are trading at a market price substantially higher than its offer may be an impediment to Nunavut acquiring shares in the market. As a result, given its current ownership of Baffinland common shares, it seems unlikely that Nunavut would be able to acquire sufficient common shares to frustrate the ArcelorMittal Offer and put an end to the auction. We note, in this respect, that Nunavut’s stated objective is to acquire all of the outstanding common shares of Baffinland. Accordingly, we do not view these circumstances as falling within the principle adopted by the Com- mission in Falconbridge. 43 We also note in this respect that the lock-up agreements originally entered into by Nunavut have now terminated. It is ArcelorMittal that currently has the benefit of lock-up agreements relating to approximately 26% of the outstanding common shares. Baffinland Iron Mines Corp., Re The Board 155

44 Accordingly, we reject any suggestion that the Nunavut Offer is currently coercive of or abusive to Baffinland shareholders.

5. Deference to the Terms of the Support Agreement 45 Baffinland and ArcelorMittal entered into the Support Agreement under which ArcelorMittal agreed to make the ArcelorMittal Offer. The terms of that agreement were the price Baffinland had to pay for obtaining the ArcelorMittal Offer for the benefit of Baffinland shareholders. Baffinland’s agreement to the delayed termination of the Rights Plan, in effect, modifies the rules of the game as they relate to the timing of competing offers. We are not suggesting that there is anything inappropriate in Baffinland having agreed to that. We recognise that all of the parties to this hearing are advancing positions that are to their own strategic advantage. 46 We do not agree, however, that we should defer to the decision of the Baf- finland Board in having agreed to leave the Rights Plan in place until the expiry of the ArcelorMittal Offer. The primary objective of the Baffinland Board was to induce ArcelorMittal to make a higher priced competing offer and they achieved that objective by negotiating and entering into the Support Agreement. It is clear that the Support Agreement provides a number of strategic advantages to ArcelorMittal, including control over when the Rights Plan will be termi- nated. In any event, in our view, the terms of the Support Agreement cannot restrict our ability to act in the public interest.

6. Deference to the Business Judgment of the Baffinland Board 47 Baffinland has also submitted that we should consider the factors discussed in Royal Host (see paragraph 30 of these reasons) “through the lens of deference to the reasonable business judgment of the target company’s directors” as con- templated in Re Neo Material Technologies Inc. (2009), 63 BLR (4th) 123 (OSC) (“Neo”). We do not agree. 48 In Neo, the Commission concluded that it would defer to the wishes of shareholders who had overwhelmingly voted to keep the relevant rights plan in place in the face of the specific bid that was before shareholders at the time of the vote. The vote was held only two weeks before the hearing. NP 62-202 states that “prior shareholder approval of corporate action would, in appropriate cases, allay” concerns with respect to a defensive tactic. In Neo, the Commission con- cluded that it should defer to the wishes of shareholders as expressed by the recent shareholder vote. 49 Having concluded that it should do so, the Commission then asked whether there were any circumstances that would lead it to a different conclusion. One such consideration was whether or not the board of directors of Neo was acting in accordance with its fiduciary duties in having decided not to solicit competing bids. If the board was not complying with its fiduciary duties that might have led 156 BUSINESS LAW REPORTS 77 B.L.R. (4th)

the Commission to cease trade the Neo rights plan regardless of the shareholder vote (although whether the Commission would have done so is an open question). 50 One can perhaps do no better in this respect than quote from the Commis- sion’s summary of its conclusions in Neo. The Commission stated that, in all of the circumstances, it was not satisfied that it was in the public interest to cease trade the Neo rights plan at the particular time. It stated that: While we will expand on these points below, we are influenced by the fol- lowing considerations, as we noted in our decision of May 11, 2009: (a) the Second Shareholder Rights Plan was adopted by the Neo Board in the context of, and in response to the Pala Offer; (b) there is no evidence that the process undertaken by the Neo Board to evaluate and respond to the Pala Offer, including the decision to im- plement the Second Shareholder Rights Plan, was not carried out in what the Neo Board determined to be the best interests of the corpo- ration and of Neo’s shareholders, as a whole; (c) an overwhelming majority of Neo’s shareholders (excluding Pala) approved the Second Shareholder Rights Plan while the Pala Offer remained outstanding; (d) the evidence supports a finding that Neo’s shareholders were, or were provided with a reasonable opportunity to be, sufficiently in- formed about the Second Shareholder Rights Plan prior to casting their votes, and there is no evidence that Neo’s shareholders were insufficiently informed; and (e) there is no evidence to suggest that management or the Neo Board coerced or unduly pressured Neo’s shareholders to approve the Sec- ond Shareholder Rights Plan. (Neo, supra, at para. 31) 51 Accordingly, in our view, Neo does not stand for the proposition that the Commission will defer to the business judgment of a board of directors in con- sidering whether to cease trade a rights plan, or that a board of directors in the exercise of its fiduciary duties may “just say no” to a take-over bid. Such a conclusion would have been inconsistent with the provisions of NP 62-202 and the relatively long line of regulatory decisions that began with Canadian Jorex. To the contrary, the Commission in Neo deferred to the wishes of shareholders as contemplated by NP 62-202. Neo suggests only that whether or not the board of directors of a target issuer is acting in the best interests of that issuer and its shareholders, and is complying with its fiduciary duties, is a relevant, although secondary, consideration for the Commission in deciding whether to cease trade a rights plan. Whether a board of directors is complying with its fiduciary duties does not determine the outcome of a poison pill hearing. Baffinland Iron Mines Corp., Re The Board 157

7. Does the Rights Plan Deny Shareholders the Ability to Tender to the Nunavut Offer? 52 As noted above, one of the principal questions we must address is whether the Rights Plan is currently denying Baffinland shareholders the ability to re- spond to the Nunavut Offer. In our view, there is a reasonable argument that the Rights Plan is not denying Baffinland shareholders that ability. There is no doubt that Nunavut has a current offer outstanding. However, as a result of the ArcelorMittal Offer, that offer is not viable in practical terms unless Nunavut increases the price under that offer. Accordingly, no Baffinland shareholders would have any current interest in tendering to the Nunavut Offer. The Rights Plan is not, in any real sense, preventing the Baffinland shareholders from ac- cepting the Nunavut Offer. Put another way, in the circumstances, the Applica- tion by Nunavut is premature. 53 It would have been an easier decision for us if Nunavut had indicated that it was prepared to increase its offer to some specified amount if we cease traded the Rights Plan. That would have blunted a number of the submissions made to us by Baffinland and ArcelorMittal. Obviously, Nunavut does not have any obli- gation to do that. 54 While Baffinland’s submission in this respect has some resonance with us, we concluded, on balance, in weighing the various considerations discussed above, that it is preferable to allow events with respect to the two competing offers to unfold without hindrance by the Rights Plan. Had we left the Rights Plan in place, we would likely have had the Application back before us in the event that Nunavut increased its offer. That could have put the Commission in the position of having to assess the viability of an amended Nunavut offer and whether Baffinland shareholders might wish to tender to it. The Commission has clearly stated in the past that it is not its role to assess the financial terms or desirability of a particular offer or transaction. That is the role of shareholders. While there is no assurance that there will ultimately be a clear winner between the ArcelorMittal Offer and the Nunavut Offer, Baffinland shareholders are ca- pable of making the relevant choices. As stated by the Commission in Canadian Jorex: ... we have every confidence that the shareholders of a target company will ultimately be quite able to decide for themselves, with the benefit of the ad- vice they receive from the target board and others, including their own advis- ers, whether or not to dispose of their shares and, if so, at what price and on what terms. And to us the public interest lies in allowing them to do just that. (Canadian Jorex, supra, at p. 6) 55 It is the Baffinland shareholders who should determine the outcome of the two competing bids for their shares. It is our role to ensure that the two offers proceed in an open, fair and even-handed environment in accordance with appli- 158 BUSINESS LAW REPORTS 77 B.L.R. (4th)

cable securities law. In doing that, we have considered and applied the principles reflected in NP 62-202.

VII. Conclusion 56 For these reasons, we concluded that it was in the public interest to cease trade the Rights Plan immediately. Accordingly, we issued the order attached as Schedule “A” to these reasons. 57 We appreciated the very helpful materials provided, and submissions made, by all of the counsel in this matter. Application granted.

Schedule “A”

IN THE MATTER OF THE SECURITIES ACT, R.S.O. 1990, c. S.5, AS AMENDED AND IN THE MATTER OF BAFFINLAND IRON MINES CORPORATION, IRON ORE HOLDINGS, LP AND ITS WHOLLY-OWNED SUBSIDIARY NUNAVUT IRON ORE ACQUISITION INC.

Order (Section 127) WHEREAS Nunavut Iron Ore Acquisition Inc. (“Nunavut Iron” or the “Appli- cant”) applied to the Ontario Securities Commission (the “Commission”) by way of an application dated November 1, 2010 (the “Application”) for a permanent order pursuant to section 127 of the Securities Act, R.S.O. 1990, c. S.5, as amended (the “Act”) that trading cease in respect of any securities to be issued under or in connection with a Baffinland Iron Mines Corporation (“Baffinland”) shareholder rights plan approved by shareholders on March 24, 2009; AND WHEREAS on September 22, 2010, an unsolicited offer was made by Nunavut Iron to purchase all of the outstanding common shares of Baffinland (the “Baffinland Shares”) for $0.80 in cash per share and such offer was ex- tended on October 28, 2010 and further extended on November 8, 2010 (the “Nunavut Offer); AND WHEREAS on November 8, 2010, ArcelorMittal S.A. (“ArcelorMittal”) announced that it had entered into a support agreement with Baffinland (the “Support Agreement”) pursuant to which it agreed to make an offer to acquire all of the outstanding Baffinland Shares for $1.10 cash per share, and all of the Baffinland Iron Mines Corp., Re The Board 159 outstanding warrants of Baffinland issued on January 31, 2007 (the “2007 War- rants”) for $0.10 cash per 2007 Warrant (the “ArcelorMittal Offer”); AND WHEREAS following the announcement of the ArcelorMittal Offer on No- vember 8, 2010, Nunavut extended its offer to November 22, 2010; AND WHEREAS on November 9, 2010, a Notice of Hearing was issued by the Office of the Secretary setting down the hearing of the Application on Novem- ber 18, 2010; AND WHEREAS the Application was heard on November 18, 2010 and Nunavut Iron, Baffinland, ArcelorMittal and Staff appeared at such hearing; AND WHEREAS at the outset of the hearing, ArcelorMittal was granted standing to make oral submissions, on consent of the parties, and on the grounds that ArcelorMittal could be directly affected by the outcome of the Application; AND WHEREAS Baffinland implemented a shareholder rights plan (the “Rights Plan”) that was adopted by its board of directors (the “Baffinland Board”) on January 27, 2009 and was subsequently approved by Baffinland shareholders on March 24, 2009; AND WHEREAS the Applicant submits that it is in the public interest for the Commission to cease trade the Rights Plan in order to allow Baffinland share- holders to decide for themselves whether to accept the Nunavut Offer or the ArcelorMittal Offer; AND WHEREAS Baffinland submits, among other things, that maintaining the Rights Plan would protect the interests of Baffinland shareholders and would facilitate the auction for the Baffinland Shares; AND WHEREAS the Commission considered the evidence, relevant case law and the submissions of Nunavut Iron, Baffinland, ArcelorMittal and Staff at the hearing; AND WHEREAS the Commission is of the opinion that it is in the public interest to make this order and the Commission will issue reasons for this order in due course; IT IS HEREBY ORDERED: 1. pursuant to subsection 127(1)2 of the Act, that trading in any securities issued or to be issued under or in connection with the Rights Plan shall cease permanently; and 2. pursuant to subsection 127(1)3 of the Act, that any exemptions contained in Ontario securities law do not apply permanently to any securities is- sued or to be issued under or in connection with the Rights Plan. DATED at Toronto this 19th day of November, 2010. “James E.A. Turner” “Mary G. Condon” 160 BUSINESS LAW REPORTS 77 B.L.R. (4th)

“Paulette L. Kennedy”