Consolidated Compressor Company Ltd. v. Northwest Equipment Ltd., 2012 ABQB 222

Court of Queen ’ s Bench of Alberta Citation: Consolidated Compressor Company Ltd. v. Northwest Equipment Ltd., 2012 ABQB 222 Date: 20120404 Docket: 0101 08949 Registry: Calgary Between: Consolidated Compressor Company Ltd. Plaintiff - and - Northwest Equipment Ltd., Sidney Van der Meer, Sidney de Boon and James Wood Defendants _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice B.E.

Romaine _______________________________________________________ Facts [ 1 ] Consolidated Compressor Company Ltd. is a family owned company that sold and rented portable compressors, pneumatic tools, parts and supplies and ran a sand blasting business on the company’s premises. In 1999, Consolidated’s primary existing business was to provide construction contractors with diesel-powered portable compressors and abrasives equipment.

Lesley Smith was the President of Consolidated, handing financial and administrative affairs and Charles Smith, her father and the founder of the business, was the semi-retired Chairman of the Board. [ 2 ] The shares of Consolidated were owned by Ms. Smith, Mr. Smith and his wife. Consolidated had about ten employees.

[ 3 ] Mr. Smith wished to retire completely, but revenue in the business was on a downward trend. At the suggestion of his estate- planners, Mr. Smith hired Sidney Van der Meer as an outside consultant to help the Smiths decide whether it would be best to sell the company or whether, with some changes, it could be a viable continuing entity. [ 4 ] Mr. Smith had known Mr. Van der Meer for a number of years. Mr. Van der Meer was a part-owner of Britannia Compressor, a company that sold and serviced industrial air compressor systems mostly to the oil and gas market. Mr. Smith and Mr.

Van der Meer had met frequently in the course of their somewhat parallel businesses. In the summer of 1999, Mr. Van der Meer was at loose ends, having sold his interest in Britannia earlier that year. [ 5 ] Mr. Smith set out the terms of the consultancy in a July 15, 1999 letter. Mr. Van der Meer was engaged to evaluate Consolidated for three months, from September through November, 1999.

The letter indicated that the stockholders of the company were considering two possibilities: liquidation or continuing the company “with the assurance that it can return a minimum dividend of $100,000 per year to the stockholders.” If in Mr. Van der Meer’s opinion, there was “favourable growth potential that could achieve” the latter possibility, he was to formulate a business plan that would obtain that result. [ 6 ] The July 15, 1999 letter stated that it was understood that Mr. Van der Meer would have access to all company records, that such records were confidential and Mr.

Van der Meer was requested as part of the contract to sign a confidentiality agreement, “a copy of which is attached to this letter.” [ 7 ] Ms. Smith, who was there when the letter was presented to Mr. Van der Meer, testified that a confidentiality agreement was presented by her father to Mr. Van der Meer concurrently with the letter. She says that Mr. Van der Meer asked if he could take it home and read it before signing it and Mr. Smith agreed. Mr. Smith could not remember if the confidentiality agreement was presented at the same time as the letter. Mr.

Van der Meer testified that the confidentiality agreement was not given to him until later in 1999. I accept Ms. Smith’s evidence in this regard, but all parties agree that the confidentiality agreement was never in fact signed by Mr. Van der Meer. He testified that he just didn’t want to sign it. [ 8 ] Mr. Van der Meer also received the minutes of a May, 1999 staff meeting which described the issues faced by Consolidated at the time, together with financial statements for Consolidated over the previous few years. [ 9 ] The staff of Consolidated were advised that Mr.

Van der Meer had been hired as a consultant by email announcement dated August 15, 1999. They were told that, on a strictly confidential basis, he was to have full access to all company records, including customers, existing suppliers and potential suppliers, and that he would be soliciting their opinions on the potential of Consolidated. [ 10 ] Mr. Van der Meer’s first report to the Board of Consolidated dated September 30, 1999 described how he had the employees fill out a questionnaire on the company, its products, suppliers and themselves.

The report stated that lack of marketing was a problem and advised that he and Ms. Smith had agreed to hire Sidney de Boon as a full-time outside salesman. At the time, no outside sales’ activities were being conducted at Consolidated. The company relied on telephone enquiries and walk-in traffic. Mr. Van der Meer in his first report also suggested some changes to counter operations and the role of one of the existing employees. He described a visit to Consolidated’s main supplier and talked about “verifying” the financials. Overall, the report was positive about the future of the company. Ms. Smith and Mr.

Smith testified that they were happy with it. [ 11 ] Sidney de Boon is Mr. Van der Meer’s nephew. He had been working in sales at Britannia, and Ms. Smith testified that he turned up one day in September at Consolidated’s office to talk to his uncle. Mr. de Boon had just been let go by Britannia, and Mr. Van der Meer advised Ms. Smith that he would be a good fit for Consolidated. [ 12 ] Mr. Van der Meer prepared an offer of employment to Mr. de Boon for Ms. Smith to sign dated September 29, 1999. It offered Mr. de Boon employment as the “Outside Sales Representative” of Consolidated starting October 4, 1999.

It advised that Mr. de Boon would be required to sign a “non-compete document” that would be supplied on his first day of employment and that the offer was based on a 90 day performance review. Mr. de Boon was not provided with a form of non-competition agreement at this time. [ 13 ] Mr. Van der Meer prepared a second report to the Board dated November 6, 1999 on Northwest Equipment Ltd. letterhead,

which indicated that his “consultations with the board of directors have come to the conclusion that it may be more beneficial to the shareholders of the company to continue into the investigation of the company maintaining its operations”. He reported on some changes he had made, and remarked positively about Mr. de Boon’s performance. He talked about working on obtaining new distributorships. In the report, Mr.

Van der Meer stated that sales had increased in September and October, by his calculations by 8%, and commented that “I don’t think that an increase to . . . $2,750,000.00 for the year 2000 is an unrealistic target.” [ 14 ] Consolidated knew that Northwest Equipment Ltd. was a company that Mr. Van der Meer used to conduct some miscellaneous business such as buying and selling used equipment. The consulting fees for Mr. Van der Meer’s work in September through December 1999 were paid to Northwest, rather than to Mr. Van der Meer directly. [ 15 ] Ms. Smith testified that she, Mr. Smith and Mr.

Van der Meer had discussions in addition to the formal reports during this period of time. Mr. Van der Meer indicated that he thought Consolidated could pick up the service contract business that Britannia was abandoning and could develop an industrial air division. He said that through these new businesses, an outside sales push and someone who could maintain industrial compressors, he believed the business could generate about $750,000 more in the next year. [ 16 ] At some point prior to December 9, 1999, Consolidated decided to hire Mr. Van der Meer as its general manager. According to Ms.

Smith, he was specifically hired to bring in new product lines and to thus raise sales. Mr. Van der Meer’s duties were to officially begin in January, 2000. [ 17 ] In a last consultant’s report dated December 9, 1999, Mr. Van der Meer reported that he had been retained as general manager and commented that “Lesley Smith who will retain her position as president, and I will divide the senior management duties of [Consolidated].” He identified a focus on growth, with increased focus on complementary products, new clients and the “addition of new market places”. [ 18 ] Ms. Smith testified that Mr.

Van der Meer prepared an organizational chart that showed all of the employees except one reporting through various sub-levels to him on one side, and Candace Avramenko, who performed general office duties, shown as reporting to Ms. Smith on the other side. The chart showed that Ms. Smith and Mr. Van der Meer would ultimately report to the Board of Directors. She says that it was clear in discussions among her, her father and Mr. Van der Meer that Mr. Van der Meer was to attempt to achieve sufficient growth in sales to yield a $100,000 dividend to the shareholders. [ 19 ] Ms. Smith testified that Mr.

Van der Meer created a budgeting sheet in early 2000. This document is entitled “Consolidated Compressor Company Ltd. - Budgeting Sheet (Industrial Air 750K)”. Ms. Smith testified that this budget incorporated $750,000 in additional sales for the upcoming year, with total revenue from sales being stated to be $3.5 million. [ 20 ] The budget document lists under “Operating Expenses” the category “Management Bonus at $50,000" which Ms. Smith and Mr. Van der Meer both indicated represented a bonus of $25,00 to each of them had Consolidated achieved its budgeted targets. These bonuses were never paid.

It also lists under a category “Management Fee” the amount of $100,000. Ms. Smith testified that Mr. Van der Meer inserted this as an operating expense to reflect that $100,000 was to be paid to Consolidated’s shareholders, being herself and her parents, that year. This amount was not paid. [ 21 ] Mr. Van der Meer initially testified that the budgeting sheet was prepared by himself, Les Bell (another senior Consolidated employee) and Ms. Smith, although he conceded that he and Mr. Bell had the most input.

In later testimony, he denied having input into the document and suggested that this budgeting sheet was created at a later time. He was not able to explain why he had given different testimony on examination for discovery. [ 22 ] Mr. Van der Meer testified that the $100,000 management fee was a surprise to him and that Mr. Smith had not given the budgeting sheet to him until May, 2000. Mr. Van der Meer gave unconvincing and confusing evidence on the issue of his knowledge of and participation in the preparation of the budgeting sheet, and I accept Ms. Smith’s evidence that Mr.

Van der Meer prepared it in early 2000, with some input into operating expenses from Ms. Smith, and that both the projections of increased revenue of $750,000 and the plan to divide out $100,000 to existing shareholders were proposed by Mr. Van der Meer at the time.

[ 23 ] Ms. Smith testified that she and Mr. Van der Meer agreed that commencing in January, 2000, all Consolidated employees should sign employment contracts. Mr. Van der Meer prepared a contract for Mr. de Boon dated January 24, 2000, using an online form sourced by Ms. Smith which was executed by Mr. de Boon on January 31, 2000. Under this contract, Mr. de Boon was employed in the position of “Outside Sales” reporting to Mr. Van der Meer. Originally Mr. Van der Meer proposed to Ms. Smith that Mr. de Boon would be paid $42,000 plus commission on his sales but Ms.

Smith was not comfortable with that, as no other Consolidated employees were on commission, so this was changed to a flat $50,000. The employment contract provided that during the course of Mr. de Boon’s employment he would not compete with Consolidated’s present or contemplated business, or plan or organize any competitive business activity. It also provided that he would not within one year of his employment terminating “directly or indirectly, solicit or encourage any employee...supplier, customer...to terminate or alter a relationship with [Consolidated]”.

It is clear that this employment contract replaced the earlier offer of employment that was based on a 90 day performance review. [ 24 ] Mr. de Boon and Mr. Van der Meer both testified that these non solicitation provisions were not discussed when Mr. de Boon was handed the employment contract. Mr. Van der Meer also testified that he couldn’t remember what was discussed at the time.

I do not accept this self-serving and selective evidence and there is therefore no credible evidence as to discussions that took place at the time Mr. de Boon was presented with this agreement. [ 25 ] It is also noteworthy that, while Mr. de Boon did not execute an employment contract until a few months after he started, his first offer of employment in October, 1999 was on the basis of a 90 day performance review, which was eliminated in the new contract.

I also note that the provisions contract referred to a non-competition document, even though one was not provided at the time. [ 26 ] Mr. de Boon’s job description as prepared by Mr. Van der Meer indicated that he was responsible for the development of new clients and new product development, including “industrial compressed air systems”. [ 27 ] Mr. de Boon was given Consolidated’s customer and supplier lists. On a day-to-day basis, he was to contact customers and suppliers, introduce himself and generate sales. If he made a sale, he would provide either Mr. Bell or Ms.

Avramenko with a work order or sufficient information for them to prepare an invoice. [ 28 ] Mr. de Boon obtained new supplier lines for parts for Consolidated while he was an employee, and new lines of portable air compressor. He also brought in new customers. [ 29 ] Mr. Van der Meer was largely responsible for Consolidated being appointed by CompAir Canada as an authorized distributor for industrial air compressors and accessories, a new product line for Consolidated. CompAir personnel visited Consolidated’s office in March of 2000 and Mr. Van der Meer was in charge of negotiations.

An announcement on CompAir letterhead about Consolidated’s appointment dated April 1, 2000 was prepared by Chris Brohman, the National Sales Manager of CompAir Canada. Ms. Smith thinks she obtained a copy of the announcement from Mr. Van der Meer. [ 30 ] In March 2000, Consolidated hired Jim Wood at Mr. Van der Meer’s instigation. Mr. Wood is a service technician and was hired in order to obtain business for Consolidated in the service and maintenance area. Mr. Wood had worked previously with Mr. Van der Meer for several years.

He was certified to service and maintain industrial air products, and his job description, prepared by Mr. Van der Meer, referenced work in customer equipment repair and service, industrial compressors and accessories service and helping the sales department set up new industrial accounts. Mr. Wood was also to maintain industrial account service agreements, but Ms. Smith testified that he never progressed to this point while at Consolidated. Initially, Mr. Wood received a brief letter setting out an offer of employment dated March 3, 2000, prepared by Mr.

Van der Meer, which provided that he was required to sign a “non compete document’ to be supplied on the first day of employment and stipulated that it was based on a 90 day review period. Mr. Wood’s one formal employment agreement dated March 24, 2000, which was stated to be the first day of Mr. Wood’s employment, contained the same solicitation restrictions as were in Mr. de Boon’s agreement and eliminated the 90 day review period. Again, Mr. Van der Meer testified that he did not remember if he discussed the terms of the agreement with Mr. Wood. [ 31 ] As he was accustomed to do so, Mr.

Smith left the country in November, 1999 for Florida, with plans to return in April of 2000. He had no direct involvement in the day-to-day affairs of Consolidated during these months other than to receive monthly faxed financial statements and the occasional telephone call from Ms. Smith. [ 32 ] Mr. Smith testified that when he returned from Florida on April 25, 2000, he was alarmed to see from a review of Consolidated’s first quarter financials that the company’s cash position was deteriorating. Mr. Smith was of the view that the cause of

the poor financial situation was that Mr. Van der Meer’s “team”, meaning Mr. Van der Meer and Mr. de Boon, had not been generating enough profit, and in fact had lost money trying to make a profit. [ 33 ] Mr. Smith met with Consolidated’s employees on his return and discussed with them how they thought things had been going. Mr. Smith, Ms. Smith and Mr. Van der Meer met over lunch on May 3, 2000 to discuss the lackluster sales and what the employees were feeling about changes made by Mr. Van der Meer. In a memo prepared later by Mr. Smith, he advised that he told Mr.

Van der Meer that he was doing a good job and that he wanted him to be successful, but that sales were lower than his target and cash flow was becoming a concern. Mr. Smith noted in the memo that he asked Mr. Van der Meer what his plans were for getting Consolidated back on track. Mr. Smith testified that he was trying to encourage Mr. Van der Meer to carry on with what he said he was going to achieve. Ms. Smith testified that the general message at the lunch was that Mr. Van der Meer could still fix the situation. Mr.

Van der Meer in a later memo said that he expressed confidence at the lunch that Consolidated was heading in the right direction from a sales perspective as core business activities were up considerably from the previous first quarter. [ 34 ] Ms. Smith recalled that Mr. Van der Meer seemed surprised that the employees felt negatively about the changes and that he pointed out that sales were still in their infancy. Mr. Van der Meer was concerned that he had not been kept apprised on the cash flow situation and said he would be more observant of unnecessary expenditure. Ms. Smith, testified that, when she and Mr.

Van der Meer were driving back to Consolidated’s office after this lunch he expressed concern to her about whether he could still buy into the company. [ 35 ] Ms. Smith testified that the issue of Mr. Van der Meer buying into Consolidated had been discussed prior to and during the time he was a consultant. Her understanding was that, if Mr. Van der Meer met his targets as expressed in the budgeting sheet at year end, the $25,000 bonus to which he would be entitled could be paid in cash or in shares or in a combination. Therefore, she advised Mr.

Van der Meer during the drive back from the May 3, 2000 lunch that his concern was premature as Consolidated was only entering the second fiscal quarter and that he had not reached his goals. [ 36 ] Mr. Van der Meer testified that, arising from the discussions he had with Mr. Smith and Ms. Smith in the fall of 1999, it was his understanding that he would have the opportunity to acquire up to 50% of the shares of Consolidated, which he would fund through increased profitability. He conceded that there was no formal agreement to that effect. He said that during his discussions with Mr.

Smith in the spring of 2000 after his return to Canada, it sounded like his understanding with respect to buying shares in the company “was being challenged”. [ 37 ] Ms. Smith denied that there was any such understanding that Mr. Van der Meer would be entitled to buy-in to the extent of 50% of the company. She noted that a corporate restructuring of Consolidated during 1998 was put in place to provide the ability to allocate shares to employees. Mr. Smith recalled this as well, but was not asked directly about any arrangements with Mr.Van der Meer. [ 38 ] Mr. Smith attended a staff meeting chaired by Mr.

Bell and Mr. Van der Meer on May 8, 2000, and was unhappy with how Mr. Van der Meer conducted the meeting. He prepared a critique of the staff meeting and provided it to Mr. Van der Meer and Ms. Smith. [ 39 ] The memo was very critical of Mr. Van der Meer’s performance at the meeting, accusing him of poor communication skills and of running an ineffective meeting. It refers to a perceived lack of integration between Consolidated’s previous employees and the new hires, which Mr. Smith accused Mr. Van der Meer of reinforcing. Mr. Smith’s “recommendations” to Mr.

Van der Meer were harsh, including the comment “(b)efore any more time is wasted on this type of meeting, more preparation is required and more professionalism must be apparent”. [ 40 ] Mr. Smith also wrote a memo to Mr.

Van der Meer dated May 16, 2000, said to be on behalf of the board of directors of Consolidated, explaining some of the problems he had discovered from interviews with the employees and his observations at the office. [ 41 ] The memo started with the admonition that Mr. de Boon should immediately stop making sexist and inappropriate comments to female employees or any other female while representing the company. It stated that Mr. de Boon must treat all employees with respect, and no longer make demeaning comments or comments referring to his privileged position with Mr. Van der Meer.

He was to stop making derogatory comments about customers. The memo pointed out that Mr. de Boon’s attitude and behaviour were “at worst

potentially dangerous to the Company and at best, . . .counterproductive to a harmonious working atmosphere.” [ 42 ] The memo advised Mr.

Van der Meer to take immediate corrective action to dispel the feeling that there are two classes of employees, the old and the new and referred to many specific complaints and negative comments from long-time Consolidated employees about the new hires. [ 43 ] The memo also addressed the sales budget in pointed terms, advising that sales were 7% below budget, unbudgeted expenses had increased and that the company had lost $42,000 in cash reserves since the beginning of the year. Mr. Smith commented that money and time had “gone down the drain”, and gave examples.

This discussion ended with the comment that corrective action had to be taken to get the Company back on budget by the end of the next quarter. [ 44 ] Mr. Van der Meer responded by memo dated May 16, 2000. He advised that he was unhappy about Mr. Smith discussing matters with employees and felt that this undermined him as general manager. [ 45 ] Mr. Van der Meer referred to his work in developing a relationship with an industrial line of electric drive compressors that would complement Consolidated’s existing business, and advised that “(

a) tentative distributor agreement has been reached with CompAir”. [ 46 ] Mr. Van der Meer advised that he was not made privy to the status of cash flow, that Ms. Smith had mentioned to him that cash was getting tight but that this was a private area between Mr. Smith and Ms. Smith. He addressed the specific employee comments made in Mr. Smith’s memo. [ 47 ] Mr. Van der Meer defended Mr. de Boon, but advised he would discuss Mr. Smith’s criticisms with him.

He advised that the was “taken back” by the comments with respect to two classes of employees, and conceded he must be missing something. [ 48 ] With respect to the sales budget, Mr. Van der Meer stated that his sales budget was $2.75 million for 2000. He admitted some problems, but rationalized additional expenditures. [ 49 ] On May 23, 2000, Mr. Van der Meer met with Mr. Smith and Ms. Smith. They discussed the same concerns, and did not reach any constructive resolution. The next day, Mr. Van der Meer resigned. When Ms.

Smith asked him why, he said he was “a square peg in a round hole” and cited the problems between staff and his nephew. He also referred to other personal issues. [ 50 ] Mr. Van der Meer advised Ms. Smith that it had always been his plan that he and Mr. de Boon would start up their own company, but that she should not worry as they would not be competing with respect to portable compressors. She asked if he was planning to take other employees and he said yes. [ 51 ] Ms. Smith and Mr. Smith decided not to require Mr. Van der Meer to serve the two weeks notice he had given and asked him to leave immediately.

They then met with Mr. de Boon and Mr. Wood, who said that Mr. Van der Meer spoke for all of them and that they were leaving. [ 52 ] The next day, Mr. de Boon and Mr. Wood returned to the Consolidated office, gathered up the manuals associated with CompAir products and any other product lines that they had brought to Consolidated as employees and distributed new business cards in the name of Northwest Equipment Ltd., Mr. Van der Meer’s company. [ 53 ] All three of Mr. Van der Meer, Mr. de Boon and Mr.

Wood testified that the first time they discussed going into business with each other was on May 24, 2000 after they resigned. While the return of Mr. de Boon and Mr. Wood to Consolidated the next day with printed cards in the name of Northwest raises questions with respect to this testimony, there is no evidence that the Van der Meer group took any competitive action against Consolidated prior to their resignations.

[ 54 ] Ms. Smith started to keep a record of phone calls and business developments related to the resignations, and testified as to the following post-resignation events: 1. Beck Drilling had been a client of Consolidated for several years. It had ordered and received a helicopter portable compressor from Consolidated as part of a purchase order of parts and supplies that totalled approximately $99,000 in April and early May, 2000. Unfortunately the new equipment was destroyed and had to be replaced shortly after it was supplied. Mr. Van der Meer had been in discussions with the principal of Beck, Mr.

Wegleitner in the first week of May with respect to Consolidated contacting National Compressed Air Ltd. for a new quote and, Mr. de Boon had in fact asked National for such a quote on May 8, 2000. At a staff meeting, Mr. Van der Meer reported that Mr. Wegleitner of Beck drilling had still not made the decision to proceed. On May 26, 2000, Consolidated informed Mr. Wegleitner that the Van der Meer group no longer worked for Consolidated. He advised them that on May 25, 2000, Mr. de Boon had dropped off new business cards at Beck. When questioned about the new order, Mr.

Wegleitner said he still hadn’t made a decision. On June 16, 2000, Ms. Smith spoke to Mr. Wegleitner who reiterated that he still hadn’t made a decision. She decided that Consolidated should requote the equipment from National and asked Mr. Bell do so on June 21, 2000. National declined to provide a quote, saying that they were quoting this unit directly to the customer. Ms. Smith eventually discovered that the unit was ordered through Mr. Van der Meer when National mistakenly faxed the quote in the name of Northwest to Consolidated. Mr.

Van der Meer conceded that Beck Drilling was a Consolidated customer, but testified that Mr. Wegleitner contacted either himself or Mr. de Boon after they had resigned and asked for a quote on the new equipment. He testified that he had advised Mr. Wegleitner that they were no longer with Consolidated, and that they would have to seek permission form Consolidated to send the quote. Mr. Van der Meer said that he contacted Mr. Bell and obtained permission. I cannot believe Mr. Van der Meer’s versions of events. Although Ms. Smith’s evidence of her conversations with Mr.

Wegleitner and others are hearsay, and thus not reliable evidence, Mr. Van der Meer’s assertion that he sought permission from Mr. Bell to deal with Beck Drilling defies credibility, particularly as he testified during examination for discovery that he could not recall what Mr. Bell had said during the conversation. It is also noteworthy that Mr. Van der Meer testified on examination for discovery that “we”, referring to Mr. de Boon and himself, had contacted Beck Drilling and offered to supply the unit. The defendants did not call Mr.

Bell to testify about this alleged consent, and neither of the Smith’s were cross-examined about this. 2. In early May, 2000, Ms. Smith and Mr. Van der Meer had been working on an advertisement for Consolidated for the Yellow Pages which listed a number of suppliers for which Consolidated was distributor, including CompAir. On May 4, 200, Mr. Van der Meer told Ms. Smith to forget about the ad, advising her that Consolidated would not have any of the products to supply and no-one to service them. 3. On May 26, 2000, Ms.

Smith checked the CompAir website to ensure that Consolidated was listed as a distributor and noticed that, while Consolidated was listed as one of two authorized distributors for CompAir in Alberta, the website referenced Mr. Van der Meer’s personal e-mail. She requested that CompAir remove it and insert the correct one. On June 26, 2000, she discovered that Consolidated was no longer listed as a distributor and had been replaced by Northwest. She contacted Mr. Brohman of CompAir whom she said told her that Mr.

Van der Meer had contacted him and said that he had had an amicable parting from Consolidated, that Consolidated no longer required the CompAir line and that it was agreed that Mr. Van der Meer’s company could have it. On June 27, 2000, Ms. Smith received a letter from Mr. Brohman that stated the following: (

a) CompAir was contacted by Mr. Van der Meer when he was with Consolidated about becoming a distributor for an industrial compressor line in Southern Alberta, and CompAir agreed to make the line available to Consolidated for re-sale on a non-exclusive basis. (

b) Several weeks later, CompAir was advised of a disagreement between Mr. Van der Meer and Consolidated and that he would be leaving the company. Mr. Brohman indicated that since CompAir’s dealings were with Mr. Van der Meer, CompAir had agreed to make the line available to his new company on a non-exclusive basis.

While the letter refers to a non-exclusive distributorship, the agreement reached with Northwest Equipment Ltd. on August 4, 20111 is an exclusive right of sale of CompAir products in Alberta. Mr. Van der Meer conceded that he had worked on this corporate opportunity while he was with Consolidated. He conceded that he had contacted CompAir within a few days of resigning from Consolidated and asked it if it was interested in working with Northwest.

He purported not to remember what discussion he may have had with the CompAir people about the circumstances of his parting from Consolidated, and he later testified that he couldn’t remember whether he spoke to Mr. Brohman about the possibility that he would be leaving Consolidated before or after his resignation. 4. On May 29, 2000, Executive Millworks, a Consolidated client, executed a Performance Warranty Plan Renewal Registration with respect to CompAir product in the name of Consolidated. From correspondence from Mr.

Van der Meer in August, 2000, it is clear that Northwest took over the maintenance work after the resignations and began to invoice Executive Millwork for maintenance services. 5. Ms. Smith advised that the proprietor of another long time customer of Consolidated, Pro-coat Coatings, advised her that the Northwest group had visited Pro-coat three times. He told her that he was concerned about whether Consolidated would be able to continue to install and service new equipment. 6. The proprietor of another customer, High Hog Farm & Ranch Ltd. advised Ms.

Smith that Northwest had done work servicing its compressor in September, 2001 (although he said that he had been advised by Northwest that he had to continue to rent equipment from Consolidated). Northwest performed work for High Hog, and Mr. Van der Meer conceded that it was a client of Consolidated. 7. Another customer, the owner of PDS Rail Systems, advised that Mr. de Boon had told him he was now with Northwest, and asked whether Northwest could requote a job that had previously been quoted by Consolidated. 8. Ms.

Smith discovered that the credit application Northwest was distributing to customers was a near-duplicate to the one used by Consolidated. Mr. Van der Meer testified that it had been designed by his wife from a standard form, which was not credible. 9. Ms. Avramenko testified that she was advised by an employee of Ronalds Printing, a Consolidated customer, that he had been told on May 26, 2000 that Northwest had bought out Consolidated and that he would now have to fill out a new credit form for Northwest. [ 55 ] In

summary, after the Van der Meer group left, Consolidated was unable to continue purchasing from some of its existing suppliers. New business cards were left with Consolidated’s customers, leading to confusion . While some of the evidence described above is hearsay, and thus less reliable, it is clear from the documentary evidence of the list of quotes given to customers by Northwest after May 26, 2000 and a list of sales made by Northwest from June, 2000 through December, 2001 and from admissions made by Mr. Van der Meer, Mr. de Boon and Mr.

Wood that Northwest was dealing with a number of Consolidated’s customers in 2000 and 2001, and that Northwest entered into a number of service agreements between June, 2002 and December, 2001, some of which were with pre- existing clients of Consolidated. Some of those customers have returned to Consolidated: many of them didn’t. [ 56 ] Ms. Smith testified that the biggest effect of this competition was that when Mr.

Van der Meer left, burgeoning corporate opportunities left with him, and Consolidated was deprived of the fruits of the labour he had started as a Consolidated employee, to generate sales and new business opportunities. [ 57 ] The individual defendants had the following to say about their activities after their resignation: 1. Mr. Van der Meer was coy about his contact with Consolidated’s clients after his resignation. He suggested that he was not targeting Consolidated’s clients specifically, but was relying on clients he had had with Britannia, conceding that they could have been

Consolidated’s clients. He attempted to assert that Northwest’s business was very different from Consolidated’s, referring to it was “specialized”. This assertion was not credible, particularly when the Consolidated and Northwest advertising is compared. He testified that the business of the supply of industrial compressors was “not comfortable” for Consolidated. Mr. Van der Meer was self-serving, and evasive on his testimony and he was caught on contradictory evidence between examination for discovery and trial on several occasions. 2. Mr. Wood testified Mr.

Smith offered him the opportunity to continue his employment with Consolidated on March 26, 2000, but he thought that since Mr. Van der Meer was leaving, he would have no work to do in his area of expertise. Mr. Wood bought into Northwest for $18,000, and remains with that company as service technician and part owner. Mr. Wood conceded on examination for discovery that he was involved in efforts to obtain business while at Consolidated, including service contract business.

He also admitted that service work done for Lafarge Canada Ltd. and invoiced by Northwest on June 5, 2000 had been performed before he resigned from Consolidated on May 26, 2000, and that he continued to do service work through Northwest for clients of Consolidated after he left. 3. Mr. de Boon appeared to have a poor memory, frequently commenting that he “honestly couldn’t remember” events in 2000 and what occurred with respect to contacting customers after his resignation. He said that he had contributed $18,000 to the start-up capital of the new business within a month of leaving Consolidated.

On cross examination, he verified from documentation shown to him that he was a shareholder and director of Northwest as of June 1, 2000. He left Northwest after about a year, indicating that the new business was struggling and he was bought out. Mr. de Boon conceded that his memory had been better at examinations for discovery, and confirmed that he had told the truth then as far as he could remember. At examination for discovery, he confirmed that he was to develop new clients and new product lines for Consolidated; and that one of the new products he, Mr. Van der Meer and Mr.

Wood developed while at Consolidated was industrial compressed air systems. Mr. de Boon was vague and non-committal even on examination for discovery about whether he contacted Consolidated’s clients after resigning, but conceded that he may have. He conceded that Northwest was pursuing the same kind of business that he was suppose to be developing at Consolidated, industrial compressed air. He conceded that he had discussed a replacement order for Beck Drilling with the customer while he was still at Consolidated, and conceded that the eventual sale was through Northwest.

Eventually, he conceded that he was soliciting business for Northwest when he contacted former clients of Consolidated. [ 58 ] Consolidated had counsel send letters to Mr. Van der Meer, Mr. de Boon and Mr. Wood on June 7, 2000 advising them that they were in breach of the terms of their employment with Consolidated by contacting Consolidated’s customers and referring them to Northwest. Ms. Smith testified that the Van der Meer group were not replaced immediately after their resignations, as Consolidated’s cash reserves had been severely depleted. A new salesperson was hired in 2001. Analysis I. Liability Mr.

Van der Meer and Northwest Equipment [ 59 ] Mr. Van der Meer had a fiduciary obligation to Consolidated arising from his position as a key employee. While he submits that he lacked sufficient power and authority to be a key employee, the evidence is to the contrary. All employees other than Ms. Smith and Ms. Avramenko reported to Mr. Van der Meer, who reported directly to Mr. Smith as Chair of the Board of Directors. While he may not have had ultimate spending authority, which rested in Ms.

Smith, he was responsible for hiring employees, for the company’s interface with customers and suppliers and for developing new business activities. In his last consultant’s report to the Board, he made it

clear that he was dividing the senior management duties of Consolidated with its president, Ms. Smith. Applying the “functionalapproach” to Mr. Van der Meer’s employment described in Torcana Valve Services Inc. v. Anderson, 2007 ABQB 356 , [2007]A.J. No. 589 at para 35, Mr.

Van der Meer was trusted with all customer and supplier relationships, was given the mandate of improvingthe profitability of the business, controlled most of the employees and made recommendations with respect to hiring new employees andchanging the scope of duties of others and had been entrusted with a certain amount of confidential financial information. While not adirector or officer, he was the “face” of the company to its customers and suppliers. [60] While Mr.

Van der Meer did not sign the confidentiality agreement that was presented to him when he was hired as aconsultant to Consolidated, it was clear from his terms of engagement that he was being given access to confidential business records. Hewas given access to financial information and staff were instructed to be candid with him. This evidence supports a finding that Mr. Vander Meer was a fiduciary even if he was not bound by a formal restrictive covenant or non-competition agreement. [61] Mr.

Van der Meer’s own testimony that he understood that he was to be given the opportunity to acquire 50% of the shares ofConsolidated belies his submission that he was not a key employee. While I did not accept that a formal agreement with respect to buyinginto the company on the terms suggested by Mr. Van der Meer existed, I accept Ms. Smith’s evidence that Mr. Van der Meer, had heearned his bonus for the year, would have had an opportunity to take part of it in shares. This is another indication that Mr. Van der Meerwas a key employee. [62] As such a key employee, Mr.

Van der Meer was precluded from exploiting the vulnerability of Consolidated that flowed from such a status for his own interests: Torcana at para. 31, citing Physique Health Club v. Carlsen (1996), 141 P.L.R. (4th) 64 (Alta. C.A.)at 69. [63] While there is insufficient evidence to establish that Mr. Van der Meer began to make plans to compete with Consolidatedthrough Northwest prior to his resignation, he started to put Northwest in a position of competition with Consolidated immediately afterthat, agreeing to commence business operations with Mr. de Boon and Mr.

Wood that very day, printing cards, commencing to contactConsolidated’s customer and suppliers the next day, taking materials from Consolidated and copying certain business forms anddocumentation. It is clear from the documentary evidence, evidence from Ms. Smith and concessions made by Mr. Van der Meer, Mr. deBoon and Mr. Wood that Northwest solicited business from many of Consolidated’s customers from the day after they resigned, andusurped business opportunities that were developed while the Northwest trio were employed by Consolidated. [64] While Mr.

Van der Meer was free to compete with Consolidated after his resignation, as he was not bound by any specificagreement otherwise, he was restricted by his position as fiduciary with Consolidated. [65] In Physique Health Club, the Court of Appeal set out the following principles at paras. 66 - 67 in determining the scope of afiduciary’s obligations:

(1) A fiduciary cannot take a maturing business opportunity from an employer either while he is an employee or after theemployment relationship has been terminated. As the evidence make clear, Mr. Van der Meer was in breach of this duty with respect toboth Beck Drilling and the CompAir distributorship. Neither was a were mere “idea’ but a fully matured business opportunity that Mr.Van der Meer appropriated for Northwest.

(2) In opportunity cases, there must be a misuse of the fiduciary’s power before liability attaches. The evidence provides sufficientbasis that Mr. Van der Meer misused the relationships with customers and suppliers of Consolidated developed when he was generalmanager in order to benefit Northwest.

(3) The right to compete is qualified: the employee must not actively solicit the business of specific customers of the employer. Therestriction continues “for a reasonable period of time after termination of the employment”. In his testimony, Mr. Van der Meerattempted to suggest that he was targeting former Britannia customers for Northwest and not former Consolidated customers.

This wasnot credible, particularly given the documentary evidence that shows that Northwest performed work for clients of Consolidated fromthe time of the resignations of the Van der Meer group, and given Mr. de Boon’s admission that he was soliciting business for Northwestwhen he contacted former clients of Consolidated. The documentary evidence indicates clearly that such solicitation took place, and it isnot necessary that I rely on hearsay evidence with respect to customers who were not called to give evidence.

(4) After the employment relationship has terminated, the employee must not use or disclose confidential information learned in the course his employment, and

(5) Employees who are fiduciaries of their former employer breach those obligations when they take a confidential customer list and use trade secrets of the former employer for use in a competing enterprise. While the Mr.

Van der Meer suggests that he only used his memory in setting up customer lists, I do not find this evidence credible. [ 66 ] While generally speaking, it is not a breach of fiduciary duty for a key employee to engage in business with other former employees, as long as he does not induce them to leave during the course of their employment (and there is insufficient evidence that this occurred in this case), the fact that Mr. Van der Meer was well aware of the non-solicitation clauses in Mr. de Boon and Mr.

Wood’s contracts of employment, (and had in fact drafted them himself), makes his conduct agreeing to undertake a business that would involve them immediately soliciting Consolidated’s clients and suppliers a further breach of his fiduciary obligations. [ 67 ] What would be a reasonable period of non-solicitation in the Mr. Van der Meer’s case? Since he as general manager was responsible for extracting a contractual non-solicitation undertaking from Mr. de Boon and Mr. Wood for a period of one year, a reasonable period of non-solicitation for him would be no less.

A fiduciary’s duty of non-solicitation subsists for so long after his resignation as is reasonable in the circumstances to enable the former employer to contact clients and attempt to retain their loyalty, and will depend on the nature of the position held by the departing employee: Anderson , Smyth & Kelly Customs Brokers Ltd., v. World Wide Customs Brokers Ltd., Docket 19960517, Alta. C.A. However, given the relatively short period of time that Mr.

Van der Meer was employed as general manager, I cannot find that he should be restricted from soliciting former clients of Consolidated for a period of time longer than a year. [ 68 ] Mr. Van der Meer is the controlling mind of Northwest, and Northwest is the entity that benefitted from his breaches. I find that Northwest is equally liable with Mr. Van der Meer for his breaches of fiduciary duty. Mr. de Boon and Mr. Wood [ 69 ] Mr. de Boon was the principal outside sales person for Consolidated; indeed the only person other than Mr. Van der Meer who was involved in outside sales and solicitations. Mr.

Wood was the only employee capable of performing the service contract business that Consolidated hoped to develop. Both were subject to a non-solicitation provision in their employment contracts that, given the circumstances, was reasonable in scope and duration, being limited to one year after termination and to customers, suppliers, employees and others that had a relationship with Consolidated. It is important to note that neither Mr. de Boon nor Mr. Wood were fired, they resigned after Mr. Van der Meer resigned. While Mr.

Smith was unhappy with various aspects of Mr. de Boon’s performance, there had not been any threat to terminate him to the point of his resignation. With respect to Mr. Wood, Consolidated took active steps to retain him as an employee. [ 70 ] Counsel submits on behalf of Mr. de Boon that the non-solicitation provision of his employment contract is unenforceable because Mr. de Boon received no consideration for agreeing to it. [ 71 ] While Mr. de Boon had been employed earlier under an offer of employment, that offer was subject to a 90 day review period, and was to be accompanied by a non-competition agreement.

The new contract of employment entered into in January, 2000 eliminated the review period and thus marked a more permanent period of employment. This was therefore not a situation where employment was merely continued without fresh consideration. [ 72 ] The same is true of Mr. Wood’s situation. His contract was signed the first day of his employment and the necessary consideration is found in his employment. [ 73 ] While there was no evidence of what was discussed when the contracts were presented and executed, that is because it was Mr.

Van der Meer who presented them, and he testified that he could not remember what was said. Neither Mr. de Boon nor Mr. Wood gave any cogent evidence on that issue. In the circumstances, none is necessary, as consideration can be found from other factors.

[ 74 ] Consolidated submitted that Mr. de Boon was a fiduciary, but this is not justified on the evidence. While he was the principal contact with Consolidated’s customers, justifying as reasonable the imposition of a non-solicitation provision in his employment contract, Mr. de Boon was not key to Consolidated’s business in the same way as Mr. Van der Meer. II. Damages [ 75 ] Pursuant to an order of Master Hanebury, Consolidated was required to provide a pre-trial calculation of the damages it was claiming. It did so on September 4, 2009, advising that it claimed the following from Northwest, Mr. Van der Meer, Mr. de Boon and Mr. Wood: (

a) damages for breach of employment and consulting agreements in the amount of $102,666.28, allocated as follows: (

i) Van der Meer - $49,662 (ii) de Boon - $39,549 (iii) Wood - $6,478 (iv) $6,933.28 paid through Employment Standards; (

b) damages of $46,195 in respect of sales to Beck Drilling misappropriated by Northwest; (

c) damages of $7,514.23 in respect of sales to Hi Hog Farm & Ranch Equipment Ltd. misappropriated by Northwest; (

d) damages of $99,884.40 in respect of CompAir sales misappropriated by Northwest, calculated as follows: (i) $42,877.30 for the period June 1, 2000 to October 31, 2001; and (ii) $57,007.14 for the period November 1, 2001 to October 31, 2002. (

e) aggravated or punitive damages against individual defendants in the amount of $50,000; (

f) interest; and (

g) costs. [ 76 ] While there may be different methods of calculating damages in this case, and indeed there is evidence of solicitation of other clients, Consolidated is thus limited to its claims as specified in this pre-trial disclosure. (

a) Reimbursement of Salaries [ 77 ] Consolidated’s claim for damages for breach of employment and consulting agreements in the total amount of $102,666.28 against Mr. Van der Meer, Mr. de Boon and Mr. Wood appears to be a claim for the reimbursement of salaries paid to them.

[ 78 ] This claim cannot succeed against Mr. Van de Meer because Consolidated does not claim that Mr. Van der Meer breached his contractual terms of employment, but that he breached his duty as a fiduciary, a claim in restitution. Mr. Van der Meer’s salary as general manager is not forfeit for such a breach of fiduciary duty as that expenditure by Consolidated did not arise as a result of the breach of fiduciary duty. Mr. Van der Meer did not guarantee the increased profits that Consolidated hoped to reap from his efforts as general manager as a term of his contract of employment.

Nor is it a breach of his contract of employment that he resigned. [ 79 ] While Mr. de Boon and Mr. Wood can be said to have breached the non-solicitation provisions of their contracts of employment, the damages that resulted to Consolidated from these breaches arise from the loss of business from Consolidated’s clients and the loss of corporate opportunities, not from wasted expenditures on salaries. [ 80 ] It is a basic rule of expectancy damages in contract that the party in default under an agreement is liable to the non-defaulting party only for such losses as have been caused by the breach.

Consolidated’s claim for damages under this heading must thus fail. (

b) Damages - Beck Drilling [ 81 ] Consolidated’s claim for damages in the amount of $46,195 in respect of sales to Beck Drilling relates to the total amount charged by Northwest to Beck Drilling for the supply of the replacement helicopter portable compressor and related parts.

However, from the evidence it appears that Northwest paid $36,898.50 for the compressor to National Compression and charged Beck $43,410 plus $350 in delivery fees plus $2,060 for related equipment for a total of $45,481, giving it gross profit of $8,582.50. [ 82 ] Consolidated has thus established that damages in this amount representing foregone profit are payable, both by Mr. Van der Meer and Northwest on the basis of disgorgement of profits arising from Mr.

Van de Meer’s breach of his fiduciary obligations, and by Mr. de Boon on the basis of the expectancy principle for calculating compensatory damages for breach of contract. However, there was no evidence that Mr. Wood was involved in soliciting Beck Drilling, and the claim against him under this heading must fail. (

c) Damages - Hi Hog Farm & Ranch Equipment [ 83 ] Consolidated claims $7,514.23 in respect of sales to Hi Hog Farm & Ranch Equipment Ltd. [ 84 ] The actual sales from the documents in evidence amount to $7022.63. Of that amount, only $1,064.37 was sold prior to May 25, 2001 when the non-solicitation restriction would have expired. Consolidated concedes that this was probably not entirely profit. [ 85 ] From Northwest’s financial statements, it is possible to infer a profit margin of approximately 25%. Consolidated is thus entitled to damages of $267 against Mr. Van der Meer, Northwest, Mr. de Boon and Mr. Wood under this heading. (

d) Damages - CompAir [ 86 ] The evidence with respect to the claim relating to CompAir is clearer: the gross margin of sales to Northwest arising from the distributorship franchise from June 1, 2000 to October 31, 2001 was $13, 297.57 and from November 1, 2001 to October 31, 2002 was $18, 448.86 for a total of $31,746.43. No damages beyond October 31, 2002 for this diverted opportunity are claimed. [ 87 ] As this was the appropriation of a maturing corporate opportunity and not merely the solicitation of an existing customer, the one year time limit should not apply to Mr.

Van der Meer, and he and Northwest are liable for the entire amount of profit claimed in damages. However, the evidence does not disclose which, if any, of these sales were effected prior to May 25, 2001, so Consolidated has not been able to establish that any of the damages claimed under this hearing are attributable to Mr. de Boon or Mr. Wood. (

e) Mitigation

[88] The defendants submit that Consolidated failed to mitigate its damages, either by failing to hire replacements for Messrs. Vander Meer, de Boone and Wood immediately or by failing to apply for an injunction to enforce the non-solicitation covenant. [89] The mere fact that Consolidated did not apply for an injunction in this case is not evidence of a failure to mitigate. Manyfactors may have affected that decision, including the fact that an injunction would not be available if damages were a sufficient remedy. [90] Consolidated notes that it was left in a vulnerable position by the resignations.

None of the three employees could be easilyreplaced and it had depleted cash reserves. Even if it had been able to hire replacements immediately, new employees would not likely beable to prevent the loss of existing clients and the appropriation of corporate opportunitie, given that they would have lacked the personalrelationships with customers and suppliers that facilitated Mr. Van der Meer, Mr. de Boon and Mr. Wood being able to entice thesecustomers and suppliers to Northwest. I find that there was no failure to take reasonable steps to mitigate. (

e) Punitive Damages [91] Punitive damages are available in the context of tort or restitutionary claims such as breach of fiduciary duty and more rarelyin cases of breach of contract where the conduct is “deserving of punishment because of its harsh, vindictive, reprehensible andmalicious nature: Vorvis v. Insurance Corp. of British Columbia (SCC), [1989] 1 S.C.R. 1085 at para. 1107 and 1008. [92] The Supreme Court has also commented that it is sufficient if the conduct is “reprehensible and of a type of offend theordinary standards of decent conduct in the community”: Norberg v.

Wynrib (SCC), [1992] 2 S.C.R. 226 at 268. [93] I am unable to find that the conduct of the defendants meets even the lower threshold test set out in Norberg. While it wasreprehensible and commercially unethical, it was not so abusive as to warrant this exceptional form of damages, and this claim must fail. Conclusion [94] Consolidated is entitled to damages in the amount of $40,595.93 against Mr. Van der Meer and Northwest. Of this amount,Mr. de Boon is jointly and severally liable with Mr. Van der Meer and Northwest in the amount of $8,849.50. Of the amount of$40,595.93, Mr.

Wood is jointly and severally liable in the amount of $267. [95] Consolidated is entitled to interest as claimed. If the parties are unable to agree on costs, they may be addressed. Dated at the City of Calgary, Alberta this 2nd day of April, 2012. B.E. Romaine J.C.Q.B.A. Appearances:

Appearances: Brent Mescall for the Plaintiff Elmer S. Chiu for the Defendants