Pacific West Systems Supply Ltd. v. Vossenaar

2011 BCSC 1670 Pacific West Systems Supply Ltd. v. Vossenaar IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Pacific West Systems Supply Ltd. v. Vossenaar, 2011 BCSC 1670 Date: 20111206 Docket: S111712 Registry: Vancouver Between: Pacific West Systems Supply Ltd. and PWSS Management Services Corp. Plaintiffs And Britt Vossenaar and Voss Investments Inc. Defendants Before: Master Scarth Reasons for Judgment Counsel for the Plaintiffs: G.C. Crickmore Counsel for the Defendants: A.N. Epstein Place and Date of Hearing: Vancouver, B.C. September 30, 2011 Place and Date of Judgment: Vancouver, B.C. December 6, 2011 [1] The parties were involved in a business relationship for many years. Their relationship ended abruptly on February 7, 2011.The plaintiffs now seek repayment of a loan made to the defendant Britt Vossenaar during the business relationship. Vossenaar says that the enforceability of the loan agreement is at issue given the way in which the relationship ended, and, in any event, some adjustment of the amount owing is appropriate given his years of service with the plaintiffs. [2] At issue on this summary judgment application is whether there is a genuine issue to be tried in relation to the plaintiffs' action in debt. [3] While a notice of civil claim has been filed (and amended), the style of proceedings refers to the parties as "plaintiffs" and "defendants" - terms which I will also use in these reasons. Background [4] Pacific West Systems Supply Ltd. ("Pacific West") is a building supply company with eight locations in British Columbia and Alberta. PWSS Management Services Corp. ("PWSS") is a company used by Pacific West for certain management, operations and investment purposes. [5] Vossenaar was engaged in a senior executive capacity as a sales manager for Pacific West, providing executive services to both plaintiffs. Pacific West and PWSS contracted with the defendant Voss Investments Inc. for the provision of Vossenaar's services. One of the issues in this action is whether Vossenaar was an independent contractor or an employee of the plaintiffs. [6] In 2007, Pacific West and Vossenaar discussed the possibility of Vossenaar obtaining an equity interest in Pacific West. The parties prepared and executed a Term Sheet, dated 12th July 2007, setting out the principal terms for the proposed acquisition by Vossenaar of a 3% shareholding interest in Pacific West, as well as the terms of a loan to Vossenaar of $318,000.00, intended to permit Vossenaar to purchase a 50% interest in another building supply company. [7] The Term Sheet states as follows: This Term Sheet summarizes the principal terms of the proposed acquisition by Britt Vossenaar ("Britt") of a 3% shareholding in Pacific West Systems Supply Ltd. ("PWSS"). This Term Sheet is intended solely as a basis for further discussion and is not intended to be and does not constitute a legally binding obligation of any party, except as provided in paragraphs 6 (loan), 9 (costs), 10 (confidentiality), and 12 (counterparts). No binding commitment with respect to any transaction (other that as set forth in paragraphs 6, 9, 10 and 12) will arise unless and until the parties sign definitive agreements, if any. No oral modifications to this Term Sheet will be valid. 1. Britt will buy 3% of PWSS for $1,200,000. Britt may acquire and retain his 3% interest through a company solely owned by Britt. 2. Britt will pay for that 3% interest by paying annual instalments equal to one half of Britt's after-tax share of the annual dividends and bonuses paid by PWSS. The balance if any of the purchase price is due in ten years. Interest is not payable on the purchase price, and the other shareholder will not be compensated if they leave an equivalent amount of their annual dividends and bonuses in PWSS. 3. Britt agrees to stay with PWSS full-time for ten years (as an employee or independent contractor). 4. During business days Britt will devote at least 90% of his time between 7 a.m. and 5 p.m. to PWSS's business, and will travel on PWSS's business when required. 5. If Britt's "employment" with PWSS is terminated before ten years, his 3% shareholding will be bought back at the lesser of (i) fair market value (such value being determined without taking into account a minority discount or restrictions on transfer), and (ii) the price in paragraph 1 above. That amount will be payable within 12 months. However, if his "employment" is terminated by PWSS without just cause, his shareholding will be bought back at fair market value, payable within 4 months. Any amount owing by Britt for the purchase of his 3% shareholding will be deducted for any payment under this paragraph 5. 6. A corporation affiliated with PWSS will lend Britt $318,000 on or about July 11, 2007 to enable Britt to acquire a 50% interest in the Prince George company. Unless and until the parties sign definitive agreements, if any, regarding the acquisition by Britt of a 3% shareholding in PWSS, this loan of $318,000 will be payable on demand. If the parties sign such definitive agreements, this loan will be repayable in ten years or when Britt is no longer "employed" by PWSS. However, if Britt remains "employed" full-time by PWSS for ten years, this loan will be forgiven. Britt may take out profits from the Prince George company while this loan is outstanding. No interest is payable on this loan. 7. Britt's shares in PWSS and in the Prince George company will be in escrow and pledged, for his obligations in the above paragraphs 2, 3, 4 and 6. Britt's agreement with the other shareholders of the Prince George company will not prevent Britt from pledging his shares in the Prince George company of performing his duties for PWSS. PWSS will have a right of first refusal to purchase Britt's shares in the Prince George company, if the other shareholder of the Prince George company is not the proposed buyer. 8. Britt will enter into a shareholder agreement with 1701 Holdings Ltd., the parent company of PWSS, and will have written employment or independent contractor agreement with PWSS or an affiliated corporation. The agreement will be effective as of June 1, 2007 and will have non-compete and non-solicitation provisions, to be in effect while Britt is "employed" by PWSS and for five years thereafter. 9. Each party will bear its own expenses in connection with the transactions contemplated by this Term Sheet. 10. Britt and his legal counsel and accountant will not disclose or allow disclosure to any person of this Term Sheet or the previous Basic Terms document, the transactions contemplated by this Term Sheet or the previous Basic Terms document, or the fact that any discussions are taking place between the parties. Further, Britt and his legal counsel and accountant will at all times not disclose and keep strictly confidential any information or data, or both, communicated by or on behalf of PWSS or 1701 Holdings Ltd. to Britt or his advisers, including, but not limited to, any kind of business, commercial, corporate, or technical information and data in connection with PWSS or 1701 Holdings Ltd., except for information that is demonstrably non-confidential in nature. 11. This Term Sheet is an outline only and does not summarize all the provisions that would be contained in the definitive agreements. This Term Sheet is subject to the provisions of the definitive agreements, if any, that may be signed. 12. This Term Sheet may be signed in one or more counterparts. [8] A number of facts are not in dispute. [9] No definitive agreement was ever reached with respect to the acquisition by Vossenaar of a 3% shareholding interest, or any shareholding interest, in Pacific West. The loan agreement set out in paragraph 6 was entered into and the $318,000 was paid to Vossenaar. The plaintiffs' chief financial officer, Ronald Roller, attaches as an exhibit to his affidavit, a cheque dated November 7, 2007, in the amount of $318,000 payable by PWSS to Voss Investments Ltd. The correct name of the company is Voss Investments Inc. but there is no dispute that Vossenaar received the $318,000. [10] On February 7, 2011 Vossenaar met with Jack Sentla, the president of Pacific West, and with Mr. Roller. Mr. Roller's affidavit evidence as to what occurred at the meetings is uncontroverted. That same day Pacific West issued a notice to "valued friends and customers" informing them that Vossenaar had resigned from Pacific West with immediate effect. The legal effect of what occurred on November 7, 2011 is in dispute. The plaintiffs say that Vossenaar was offered a 10% interest in Pacific West, that he declined that offer and ended his relationship with the plaintiffs. Vossenaar says that he was terminated, without cause or notice, by Pacific West. [11] On March 1, 2011, plaintiffs' counsel sent a formal demand for payment of the loan to Vossenaar's counsel. [12] The defendants have not made any payments towards the loan amount. [13] This proceeding was commenced on March 16, 2011. The plaintiffs make two claims against the defendants: a) a claim for overpayment by Pacific West to the corporate defendant for the period March 1, 2010 to February 7, 2011, in the amount of $207,598.91; and b) a claim in debt for the $318,000 loaned to Vossenaar by Pacific West. [14] In their response, the defendants allege that the plaintiffs are estopped from enforcing the loan agreement as a result of bad faith and breaches of the agreement by the plaintiffs, specifically the unilateral termination of Vossenaar without notice or cause; alternatively, they seek a set-off, on a quantum meruit basis, as a result of Vossenaar's years of service to Pacific West. Vossenaar has also filed a counterclaim for damages for wrongful dismissal. [15] Examinations for discovery were conducted in August, 2011. The trial of this action is set for March 12, 2012. [16] The summary judgment application is seeks judgment in the amount of $318,000 against both defendants. Position of the plaintiffs [17] The plaintiffs submit that, pursuant to Rule 9-6, the court must pronounce judgment, if satisfied that there is no genuine issue for trial with respect to a claim. The plaintiffs submit that there is no dispute as to the terms of paragraph 6 which provides for the loan of $318,000 to Vossenaar. They submit that it is appropriate to grant judgment in their favour, given that there is no dispute that Vossenaar received the money, that they have demanded payment of the loan, and that no payment has been made. [18] It is the plaintiffs' position that, in the circumstances, it is for the defendants to establish, by way of affidavit, that there is a genuine issue for trial on the claim that is the subject of the summary judgment application: Rule 9-6(3). They submit that Vossenaar has not met this onus and has failed to provide any facts or particulars to raise a fair probability of a triable issue. They say that, rather, Vossenaar makes bald assertions, and gives statements of opinion in relation to his termination by Pacific West. It is the plaintiffs' submission that such affidavit material is insufficient to defeat their application for judgment. [19] The plaintiffs submit that it is not necessary to make a determination on this application as to whether Vossenaar was terminated or resigned. Paragraph 6 sets out the terms relating to the loan, and provides that it is payable on demand unless a definitive agreement is reached regarding acquisition of an interest in Pacific West, a contingency which did not occur. [20] The plaintiffs submit that, there being no triable issue raised in the circumstances here, Rule 9-6 requires that the court grant judgment on the claim in debt. Position of the defendants [21] The defendants submit that the plaintiffs' claim in debt is not appropriate for determination by summary judgment as there is a triable issue as to whether all or part of the $318,000 loan should be forgiven. In their application response, they state that "Vossenaar claims in quantum meruit for a set-off of the loan as a result of the years of service to Pacific West, prior to his termination." They rely on the principles relating to equitable set-off, as set out in Old Mac's Pty Ltd. v. Cavallo Horse & Rider Inc., 2007 BCSC 726. [22] From the defendants' written submissions: In effect, the Defendants see the forgiveness of the loan as a bonus for staying with the company for ten more years. If terminated without cause, a claim in equity (if not in law as well) would exist for an employee to seek damages in the amount of some or all of that bonus, on the basis of estoppel or quantum meruit, respectively. [23] The defendants' submit that, given that the status of the contractual relationship between the parties, as well as the circumstances surrounding Vossenaar's departure, are at issue, as are the consequences of wrongful termination on the amount owing on the loan, the application for summary judgment on the loan should be dismissed. [24] The defendants further submit that to grant judgment on the loan in advance of trial amounts to "litigating in slices", an approach which may be a hindrance to the "just, speedy and inexpensive determination of the dispute on its merits": Bacchus Agents (1981) Ltd. v. Philippe Dandurand Wines Ltd., [2002] BCJ 377 (CA). They submit that, with the trial set for March 12, 2012, any prejudice to the plaintiffs caused by delay is minimal. Discussion and Decision [25] Rule 9-6, formerly Rule 18, allows a party to obtain judgment in a summary way, without trial, where there is no genuine issue to be tried. The onus is on the applicant to prove beyond a reasonable doubt that no such issues exist. [26] Here the defendants plead an equitable set-off to the plaintiffs' debt claim. The principles relating to such a pleading, in the context of a summary judgment application, were addressed by the court in Old Mac as follows: [38] In some circumstances, summary judgment can and should be granted in favour of a plaintiff despite the existence of a related, arguable cross-claim. When a cross-claim is proffered as a defence, the Chambers judge should decline to grant summary judgment only if the defendant's allegations represent a "true" defence to the plaintiff's claim: First City Development Corp.; Clearly Canadian Beverage Corp. v. Remic Marketing & Distribution Inc. (1992), 22 C.P.C. (3d) 387 (B.C.S.C.); NEC Corp. v. Steintron International Electronics Ltd., [1985] B.C.J. No. 245 (S.C.); Robertson v. John N. Babcock Insurance Agencies (1983), 44 C.P.C. 288 (B.C.C.A.). [39] Equitable set-off is sometimes pleaded in defence to an action in debt. Where obligations are closely connected or interrelated it may be unfair to treat them separately, and, in such circumstances, one claim may be set off against another. Set-off will not necessarily follow, however, simply because competing claims arise from the same contract or related dealings. Rather, for a defendant's claim to be viewed as a true equitable set-off defence, as opposed to a separable cross-claim, it must be so intimately connected with the plaintiff's claim that it goes to the claim's very root: Cam-Net Communications v. Vancouver Telephone Co., 1999 BCCA 751; Coba Industries Ltd. v. Millie's Holdings (Canada) Ltd., [1985] 6 W.W.R. 14 (B.C.C.A.). [40] In Cam-Net Communications, the Court of Appeal analysed a claim of equitable set-off in the context of proceedings conducted under the Companies' Creditors Arrangement Act R.S.C. 1985, c. C-36. The Court stated: ¶46 the doctrine of equitable set-off seeks to perform in essence a single task: to distinguish, on one hand, separable and independent cross-claims from, on the other hand, those which equity and justice cannot countenance separating. Thus, if a claim by the defendant is found under the jurisprudence to be properly an equitable set-off, then it follows that it would be inequitable and unjust to treat the plaintiff's claim in isolation from it ¶47 Equitable set-off, operating as it does as a true defence, is really a means of denying the plaintiff's claim in whole or in part and is not an attempt to raise an independent claim of the sort which should be compromised in a CCAA reorganization ¶49 As the definition of equitable set-off suggests, the defendant will typically not have an independent and free-standing claim to bring against the plaintiff in the absence of the plaintiff's demands; rather, a true claim of equitable set-off will be responsive to, and therefore contingent on, the plaintiff's bringing its action." [41] There are good reasons for distinguishing between true equitable set-off defences and separable cross-claims in the Rule 18 context. Where set-off in the nature of a defence is pleaded a triable issue with respect to the plaintiff's claim may well exist. On the other hand, an independent cross-claim may be advanced merely as a delaying tactic, or, even if meritorious, may be of a significantly lesser magnitude than the plaintiff's claim. As Tysoe J. noted in Clearly Canadian Beverage Corp. at ¶ 11: A defendant should not be permitted to delay the granting of judgment pending the trial of a cross-claim that may well not succeed or that is in an amount less than the plaintiff's claim. [42] If summary judgment is granted in the face of a cross-claim, the Chambers judge must go on to consider whether to stay execution, in whole or in part. In so doing, the Chambers judge should assess the merits and potential quantum of the cross-claim and stay execution to the extent necessary to provide reasonable security. If the merits and potential quantum of the cross-claim cannot be properly assessed, a separate application should be scheduled and execution of the entire judgment should be stayed for a period sufficient to allow the defendant to bring on the application for an extension of the stay: Clearly Canadian Beverage Corp. [27] The issue is therefore, whether, in the circumstances, the defendants' claim of equitable set-off raises a genuine triable issue with respect to the plaintiffs' claim in debt: see Tahvili v. H.S.B.C. Bank of Canada, 2004 BCCA 22, at para. 17. [28] The plaintiffs' case is predicated on para. 6 being construed as a stand-alone provision, a demand loan, with no connection to the contract for services. In essence, the defendants' position is the loan was intended as a bonus, and the plaintiffs' breach of the employment contract - by terminating his employment after four years - has prevented him from earning it. Therefore, the defendants say that they are entitled to set-off against the plaintiffs' claim in debt some portion of Vossenaar's services which have gone uncompensated. They submit that the issue as to how the Vossenaar's relationship with the plaintiffs ended is bound up with the loan issue and therefore, it is inappropriate to grant summary judgment on the loan separately. [29] The defendants' claim for a quantum meruit reduction of the loan relies on unjust enrichment, the elements of which are a benefit to the plaintiffs, and a corresponding detriment to the defendants for which there is no juristic reason: Becker v. Pettkus, [1980] 2 S.C.R. 834 at paras. 37-43. The evidence as to the basis for the set-off consists of Vossenaar's affidavit in which he swears that: 3. I did not resign from employment with the Plaintiff Pacific West, either as set out in the Affidavit of Ronald Roller, sworn September 12, 2011, (the "Roller Affidavit"), where in writing, verbally, by implication or at all. 4. I was terminated, without cause or notice, by Pacific West on February 7, 2011. 5. In my view, clause 6 of the Agreement does not contemplate my termination from PacWest. 6. Had I not been terminated, without cause or notice on February 7, 2011, I would have expected to have continued working with Pacific West for several years, and that the loan would have been forgiven, as contemplated in the Agreement. [30] In my view, while this evidence is limited, it is sufficient to satisfy the requirements of Rule 9-6(3) that the answering party to a summary judgment application set out, in affidavit material or other evidence, specific facts showing that there is a genuine issue for trial. Vossenaar does not say that it was understood that the plaintiffs would not frustrate his ability to remain employed for ten years and therefore obtain forgiveness of the loan, but he does state that he "would have expected to continue working with Pacific West for several years". While the defendants concede that para. 5 of the Term Sheet - which addresses termination before ten years - related to the acquisition of a shareholding in Pacific West, and not to the loan agreement, the question remains as to the effect of termination on the loan. [31] Applying the principles set out in Old Mac, the defendants' claim of equitable set-off goes to the root of the plaintiffs' claim in debt. It arises out of the same paragraph of the Terms Sheet as the plaintiffs' claim, and seeks an award in reduction of the plaintiffs' claim. It appears that it is properly dealt with alongside the plaintiff's claim: see also Kaspersky Lab, Inc. v. Bradshaw, 2010 BCSC 68. [32] I accept the submission of the defendants that the issues should be litigated together. The Court of Appeal has recently reiterated the warning against litigating issues separately, in the context of a matter involving contractual interpretation: Jones v. Mirminachi, 2011 BCCA 493. The issues here include the nature of the parties' relationship and its termination, and the effect of those on Vossenaar's obligation to repay the loan. [33] The application for summary judgment is dismissed, with costs to the defendants in the cause. "Master Scarth"