Tom Jarmyn

Non-Competition Clauses

Hargraft Schofield v Schofield et al is a November 2007 decision from the Ontario Superior Court of Justice regarding non-competition clauses and an application for an interim injunction giving effect to a non-competition clause.  The Plaintiff, Hargraft Schofield (HS) was an insurance company that had purchased the business of John Schofield for a substantial sum of money.  The agreement of purchase and sale stipulated a three year non-compete for Mr. Schofield.  Mr. Schofield's employment was extended twice by agreement between the parties.  There was falling out and Mr. Schofield left HS in November 2006 and joined a competing insurance business owned by his wife (also a former employee of HS).

The Court adopted the reasoning in Singh v 3829537 Canada Inc (2005) which said that in an application to enforce a non-competition clause in an agreement of purchase and sale the court is simply enforcing a contractual term and therefore the moving party need only show a strong prima facie case and not irreparable harm and that the balance of convenience favours an injunction. 

(19)  The basis of upholding the negative covenants without inquiring as to the question of damages and the balance of convenience is that the court is merely upholding a contract entered into between two parties of equal bargaining power.

The Court then goes on to say that it is interested in whether the covenant is reasonable in the interests of the parties and the public and places the onus on the moving party of establishing this.  It also notes that the ambiguity in the clause is construed against the drafter of the clause.

Despite finding that irreparable harm is not a necessary consideration the Court did conclude that the moving party would suffer irreparable harm as a result of the actions of the defendant.  This was found even though the Court also concluded there was no risk that HS would go out of business if the injunction was refused.

The essence of the decision is that the injunction was merited because the language of the covenant was plain and obvious, the deal was honoured for a period of time by both sides, the plaintiff was suffering clear harm and the defendants had an alternate field of business they could pursue.  In order to bullet proof the decision the Court went further and concluded that the plaintiff would suffer irreparable harm if the injunction was not granted and that the balance of convenience also was in favour of granting the injunction. 

While the Court did note that there was a triable issue related to whether the non-compete was extended at the same time as the employment agreement one cannot help but be struck by the clear decision in favour of the injunction.  The inescapable conclusion is that the defendant came off very badly in the evidence that was before the Court.

Fiduciary Duty Persists

Skerpjen v Johnson is a decision from BC regarding fiduciary duties.  In this case the applicant had retained the law firm on a number of unrelated proceedings.  The last two (most recent) retainers were litigation around the breakdown of business relationships.  Both retainers seemed to be relatively complicated.  This action also related to the breakdown of the business relationship.

The Applicant said that the lawyers had gained detailed confidential information about him, the way that he conducted litigation, his tolerance for risk and his business interests.  His evidence related directly to the factors listed in Macdonald v Martin Estate.  The Court concluded that while the matters were unrelated they were sufficiently similar that "...the disclosure falls within a category of confidential information that might permit the law firm to take advantage of him in the current litigation" (para 25).  As a result the court found that the fiduciary duty of the firm to the lawyer was breached by their acting against him.

Fiduciary Duty

The decision of the BC Court of Appeal in Foreman v Chambers is interesting in that it endorses the commonly held, but not often articulated, view that acute vulnerability and dependence are not alone sufficient to give rise to a fiduciary relationship.  The relationship must be “in the context of a sufficiently valuable or necessary social or economic interaction of high trust and confidence” (quoting the monograph of Professor Rotman Fiduciary Law (2005)).

As noted by the Court individuals are in a whole series of relationships where they are absolutely dependent upon the other person and his/her failure would have dramatic consequences - the Court adopts the example of the mechanic - but if the relationship is going to be labelled as fiduciary it has to be something where trust and confidence are necessary.  I suggest that anything where a detailed opinion is going to be provided based upon technical or specialized expertise and then the recipient will make a decision of significant economic consequence will likely be fiduciary. 

Judicial Bias

Rando v Scott is a decision from the Ontario Court of Appeal on the issue of judicial bias.  In this case Justice Patterson had been a partner in a law firm that had initially acted for a party one the action was commenced some twelve years previously (Justice Patterson was appointed to the Bench two years after the action was commenced).  It was commonly accepted between the parties that Justice Patterson had not hand in the proceedings and no knowledge of the proceedings.  A motion for Justice Patterson's recusal was heard and dismissed by Justice Patterson - the applicant and her counsel subsequently left Court and, as a result, were deemed to have abandoned the proceedings.  After that Justice Patterson recollected and advised counsel that the party had done estate planning work for members of his firm when he was a lawyer.

The Court of Appeal noted that the rule in Martin Estate would have prohibited a lawyer who had been a partner in the firm who drafted pleadings to then act of another party.  The reason for this is that there was a presumption of disclosure of confidential information.  However for members of the judiciary there is a presumption of judicial impartiality that must be rebutted before recusal is necessary.

The decision cites the decision of the Supreme Court of Canada in Wewaykum Indian Band v. Canada, 2003 SCC 45 (CanLII), [2003] 2 S.C.R. 259 (dealing with Justice Binnie and his tenure at the Dept of Justice) as standing for the proposition that a judge can have some prior level of participation in a proceeding and still not be disqualified from participating in the hearing.

One cannot help but feel that this case is one where hard facts make bad law.  Wewaykum arises from a situation in which Justice Binnie, as an ADM, may have been involved in plotting strategy but probably was functioning more as a bureaucrat than counsel. Therefore it was quite reasonable to hinge the decision upon the fact that he was not counsel in this case.  To extend that proposition to the point that says a partner in a law firm that drafted pleadings can then proceed to hear the case is a little strange.  It seems bizarre to say that while a person is a lawyer the court will presume presume that s/he is privy to information regarding the file but on the day of appointment as a judge it will presume that s/he is totally unaware of the file.

The Court also noted that the Applicant took a big risk walking out of Court and I agree.  Nothing would have stopped them from carrying on with the Trial (particularly where the recusal application was only brought at the beginning of the Trial) and appealing the motion if the Trial was lost.

Legal Counsel and Corporate Clients

Jellema v. American Bullion Minerals Ltd. deals with the issue of representation of a corporation by counsel and whether a firm can represent the corporation and a number of shareholders at the same time.  The application to remove was brought by minority shareholders who were of the view that the corporate interest of an insolvent company was not coincident with the interests of the shareholders (one of whom wanted to purchase the assets of the company).  The Court agreed with the position concluding that there was a definite conflict of interest as the company would want to maximize the purchase price of the assets while the purchaser would naturally want to purchase at the lowest price possible.

Strother Applied

Greater Vancouver Regional District v. Melville is a decision of the BC Court of Appeal that reads down the duty of loyalty.  In this case counsel had represented the GVRD in a prior expropriation case and provided an opinion.  He was subsequently retained in a trespass action against the GVRD that was wholly unrelated.  The court found the retainers were unrelated and no relevant confidential information had passed to the counsel.

A reasonable decision that limits the impact of prior retainers.  One of the concerns flowing out of Martin and especially out of Neill is that large clients would retain a large number of firms for various matters and thereby ensure that potential claimants did not have access to skilled or conveniently accessible counsel.  This was particularly an issue in small towns.

Duty to Disclose

McMahon v TGC is a decision from the BC Supreme Court arising from a wrongful dismissal. One of the issues at play was whether the dismissed employee had a duty to disclose information relating to a competitor who became his subsequent employer to TGC.

The discussion starts at para 106 where the Court concludes that a failure to disclose may justify dismissal or discipline even where there is not a fiduciary relationship.  The Court found that while there may have been a failure to disclose there was no evidence that TGC suffered any harm as a result. 

This is interesting because if the goal of such policies is to require employees to be forthright how does one limit legal liability to situations where the employer can prove an actual loss.  Where is the 'prophylactic' effect referred to in Weise.  Does this mean that employees can withhold information and then take their chances as to whether their employer can prove loss?  This certainly seems to be a bit of a results driven decision where the employer appears to be the more odious of the two parties in terms of conduct and as a result the Court gives the employee a pass regarding failure to fulfill duties.

Fiduciaries and Opportunities

Canadian Metals Exploration v Wiese is a June decision of the BC Court of Appeal regarding the obligations of fiduciaries to beneficiaries.  Wiese was a shareholder and fiduciary of Canadian Metals Exploration (CME).  CME was in the business of mineral exploration and had discovered a major claim that it did not have the resources to exploit.  There was a running discussion between three directors and two managers of the company (of which Wiese was one) in which CME decided that it did not have the resources to stake the claim.  Wiese then proceeded to stake the claim through a new company.  CME underwent a change in management and then sued Wiese after her refused CME's demand that he transfer the claims.

At trial the Court concluded that Wiese had received the information in question solely as a result of his fiduciary relationship with CME.  In upholding the decision that Wiese had acted improperly the Court of Appeal said:

The essence of the fiduciary relationship is the right of the beneficiary (in this case the company) to the impartial and bona fide exercise of decision-making powers by the fiduciary, free of any suggestion of personal interests.  A fiduciary is therefore prohibited from using information he has obtained in the course of his or her duties, for personal benefit, even though the beneficiary is unable or unwiling to use the information...(para 19)

This 'bright line' "rule against conflicts of interest operates to obviate the necessity of the company's proving an improper motive."

The Court does note the possibility that there can be an exception to the strict prohibition on fiduciaries taking up an opportunity but is clear that if a fiduciary wishes to do this s/he must ensure that everyone at the meeting is aware of what is being discussed and that the decision in question is free of any consideration other than the best interests of the company.

This is a good news decision - a clear standard without qualifications.

Supreme Court looks primarily at duties

Strother v 3464920 Canada Inc is a June 2007 decision of the Supreme Court of Canada that deals with the issue of conflict of interest for lawyers.  This decision is the third in a line of decisions on conflict of interest issues (MacDonald v Martin Estate (1990) and R v Neil (2002)).

The basic facts of the case are:

• Strother was a partner in the firm Davis & Company

• 3464920 (‘Monarch’) was in the business of devising and marketing tax shelter investments

• Strother provided advise to Monarch with respect to the tax shelters and had an exclusive retainer to do this

• Strother’s retainer terminated at the end of 1997

• The Department of Finance terminated the tax shelter provisions in November of 1996 so that Monarch’s tax shelter business was winding down by October of 1997

• Monarch continued to retain Davis to provide general corporate advice but did not ask for further work on tax shelters

• January 1998 Strother was approached by Sentinel to seek a ruling with respect to possible tax shelters

• Strother entered into an agreement with Sentinel that provided him with a portion of profits if the ruling was successful

• A favourable tax ruling was issued in October 1998

• Strother did not advise Monarch of this ruling

• Management of Davis advised Strother that he could not have an ownership interest in Sentinel

• Strother resigned from Davis in March 1999 and became a 50% shareholder in Sentinel

They were unsuccessful at trial but successful on appeal and the Court of Appeal ordered Strother to disgorge to Monarch all of his profits and benefits.

A 5 to 4 majority found that Strother had an obligation to advise Monarch of the favourable tax ruling and that he failed to do so because of his personal economic interest in Sentinel. He was obliged to account for his earnings from Sentinel minus reasonable costs related to those earnings.

Davis was not found to have committed any wrong and therefore had no direct liability but had vicarious liability with respect to damages incurred while Strother was a partner.

The basis for the Court’s decision is in para 34:

When a lawyer is retained by a client, the scope of the retainer is governed by the contract. It is for the parties to determine how many, or how few, services the lawyer is to perform and other contractual terms of the engagement. The solicitor-client relationship thus crated is however overlaid with certain fiduciary responsibilities, which are imposed as a matter of law.

The majority and minority decision use the retainer as the starting point for the analysis but come to opposite conclusions. The majority says that the 1998 retainer entitled Monarch to be told that Strother’s previous negative advice (delivered in 1997 regarding the viability of tax shelters) was now subject to reconsideration.  They find this despite saying later on that “generally a lawyer does not have a duty to alter a past opinion in light of a subsequent change of circumstance.”  The decision then proceeds to find that the 1998 general retainer to deal with commercial matters had an implied obligation to explain to Monarch that Strother’s earlier advice had been overtaken by events and should be revisited.

The Chief Justice says that the retainer is a purely factual question and that “It is not a conflict of loyalties in the abstract that raises problems, but conflicting duties – duties that are determined by the retainer.”  She accepts the trial judge’s finding that the retainer regarding tax shelters had ended that that Strother then did not have a conflict (it is an interesting question as to whether she does this out of deference to the trier of fact’s conclusion or because of her own judgement).

On the issue of duties then both majority and minority look to Strother’s specific duties to his first client. The duties to the second client are reviewed to determine whether there is any conflict. In the case of the majority they then looked to Strother’s outside activities to determine whether those conflicted with the duties to the client.  I think that in this decision they have begun to back away from some of the wider interpretations of the duty of loyalty that were arising from their previous decision in Neill.

The issues of damages is a complex one but it may be summarised as saying that even though Monarch did not suffer a loss and led no evidence that they would have returned to the tax shelter business the majority concluded that in order to deter breaches of fiduciary duty is was appropriate that Strother should disgorge the profits (revenues minus reasonable expenses) related to the enterprise that gave rise to the conflict.  This begs the question if there had been no profit then would Monarch receive nothing.