Strand v Strand, 2014 ABQB 754

Court of Queen ’ s Bench of Alberta Citation: Strand v Strand, 2014 ABQB 754 Date: 20141212 Docket: 1001 10706 Registry: Calgary Between: Donald Douglas Strand and 101131440 Saskatchewan Ltd. Plaintiffs - and - Richard Gordon Strand, Farrago Investments Ltd. and Homes Investment Management Inc. Defendants Corrected judgment: A corrigendum was issued on May 18, 2016; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice C. Dario _______________________________________________________ I. OVERVIEW

[ 1 ] This dispute arises following a breakdown in an investment and employment relationship between brothers and their privately held companies. The action involves allegations by the Plaintiffs that the Defendants are in breach of their contractual commitments.

Alternatively, the Plaintiffs assert that negligent misrepresentations were made by Defendants that impacted the Plaintiffs’ decision to invest in the corporate Defendant’s business. [ 2 ] In their breach of contract claim, the Plaintiffs allege the corporate Defendant breached subordination agreements by failing to pay monies owing pursuant to the terms of these agreements. Some of these agreements are subject to postponement agreements.

The Defendants contend that, pursuant to a term of the postponement agreements, the Plaintiffs require prior written consent of the Executive Director of the Alberta Securities Commission before the Plaintiffs can demand repayment, which consent was not obtained. As a result, the Defendants argue that the Plaintiffs’ claim is barred. [ 3 ] The individual Plaintiff also claims for payment of unpaid salary and unpaid consulting fees assigned by agreement to the corporate Defendant.

At issue is whether the postponement agreements are applicable to the deferred consulting fees and the employment income of the individual Plaintiff. II. FACTS [ 4 ] There were two actions tried before me in succession. This decision addresses the action brought by Donald Douglas Strand and 101131440 Saskatchewan Ltd. against Richard Gordon Strand, Farrago Investments Ltd. and Home Investment Management Inc.

The other action is brought by Farrago Investments Ltd. against 101070373 Saskatchewan Ltd., Patricia Strand and Donald Douglas Strand, and is addressed in my decision in Farrago Investments Ltd v 101070373 Saskatchewan Ltd , 2014 ABQB 755 , released concurrently with this decision. While Farrago Investments Ltd. (“ Farrago ”) is a named Defendant in this action, the trial focused on the conduct of the other Defendants. A. The Parties [ 5 ] The Plaintiff, Donald Douglas Strand (“ Douglas ” or the “ Plaintiff ”), resides in Saskatchewan and has been a professional in the finance industry for 40 years.

He has worked for chartered banks and in the credit union system, and has several professional designations (including as a branch manager for financial institutions and, for 12 years, as a broker). He has experience in financial planning and investment, including retail investment and quality corporate bonds for institutions.

The Plaintiff, 101131440 Saskatchewan Ltd. (“ 101 Co. ”), is a corporation owned and controlled by Douglas. [ 6 ] The Defendant, Richard Gordon Strand (“ Richard ” or the “ Defendant ”), the Plaintiff’s brother, resides in Alberta and is also an experienced professional in the financial services industry.

He has been registered and licensed since 1986 as a stock, futures and options broker with several industry designations (including being a chartered investment manager), and is also a qualified futures and options principal. [ 7 ] At trial, neither Douglas nor Richard claimed to have any business valuation experience, though they are both experienced professionals in the financial services industry. [ 8 ] Richard, together with his spouse, incorporated Farrago, which in turn initially wholly owned the Defendant, Home Investment Management Inc. (“ Home ”), incorporated in 2007.

Home carries on business as a discretionary Portfolio Manager and an Exempt Market Dealer registered with the Alberta Securities Commission (“ ASC ”). Home was the sole shareholder of Canadian Managed Futures Inc. (“ CMFI ”), prior to its amalgamation with Home on July 1, 2009. [ 9 ] In this decision, references to the “ Plaintiffs ” are to both the individual plaintiff (Douglas) and corporate plaintiff (101 Co.), and to the “Plaintiff” in the singular are to Douglas.

References to the “ Defendants ” are to both the individual defendant (Richard) and the corporate defendant (Home), and to the “Defendant” in the singular are to Richard. [ 10 ] There are several instances where the agreements referred to in this action are signed by the incorrect entity, such as one of the parties in his individual, rather than corporate, capacity.

None of the parties challenged the enforceability of the agreements or argued that they were not valid or binding on the intended entity, and the agreements are all included in the Agreed List of Exhibits and mentioned in the Agreed Statement of Facts. Accordingly, I accept the Plaintiff parties acted with authority to bind each other, as did the Defendant parties, and that the agreements have binding effect as intended. B. ASC Requirements [ 11 ] As a registered Exempt Market Dealer, Home is subject to ASC regulation, which includes the requirement that it maintain a minimum threshold of working capital.

In order to retain its Exempt Market Dealer registration with the ASC, Home was at all relevant times required to maintain a positive cash account of $50,000 in working capital, pursuant to

part 12 of National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (“ Registration Requirements ”). The parties were aware that long-term related party debts would need to be set off against the existing capital in the working capital calculation, unless the parties subordinated that debt in accordance with a form (Form 31-103F1), as required by the ASC. In the event the working capital requirement is not maintained, the ASC can impose various terms and conditions, or suspend the company’s registration. C.

Events leading to this Action [ 12 ] A timeline of the key events leading up to this dispute is included in Appendix 1 to this decision for ease of reference. [ 13 ] In 2008, the Plaintiff decided he would retire soon from his employment with an unrelated company. In the spring through fall of 2008, the Plaintiff and the Defendant discussed the possibility of the Plaintiff investing in and working for Home following his retirement.

In August 2008, the Defendant provided the Plaintiff with a seven-page financial “snapshot” of the two companies (Home and CMFI) (the “ Snapshot Document ”) to assist in assessing the deal they could structure.

[ 14 ] There is some evidence that the parties had agreed in principle to the Plaintiff investing in and working for Home prior to the agreement being signed or the funds changing hands, as described in further detail below. Despite this, no money was advanced by the Plaintiffs, and no agreement signed by the parties, until October 23, 2008, when the Plaintiff signed a revised one-page employment offer and loan agreement (the “ Engagement Agreement ”) purchasing 40% of the shares of Home.

On the same day, 101 Co. loaned $167,200 to Home (the “$167,200 Loan ”). [ 15 ] The $167,200 Loan was secured by a Subordinated Debenture and General Security Agreement (the form of which is defined as the “ Debenture and GSA ”), and was subject to a Postponement and Subordination Agreement (the form of which is defined as the “ Postponement Agreement ”), each signed October 24, 2008, (the “ October Debenture and GSA ” and the “ October Postponement Agreement ” respectively). [ 16 ] Around the time the Plaintiff was considering retiring from his prior employment, he also entered into discussions with a third party client for the Plaintiff to provide consulting services upon his retirement.

The Plaintiff and the client entered into a consulting agreement on October 28, 2008 (the “ Consulting Agreement ”). The consulting fees received under that agreement (the “ Consulting Fees ”) were for work performed by the Plaintiff. The Consulting Fees were subsequently assigned to Home, in part to assist Home with its cash flow requirements, with the understanding that they would be repaid to the Plaintiff as salary. [ 17 ] The Plaintiff deferred Home’s payment of his salary and the Consulting Fees as part of the terms of the Engagement Agreement.

No separate subordination agreement was signed by him regarding these payments. The treatment of the employment salary and Consulting Fees are an outstanding issue between the parties in this action. [ 18 ] In February 2009, another individual also invested in and became an employee of Home. She initially received a 5% interest in Home (the “ Third Shareholder ”). Through the period of his employment, the Plaintiff’s salary was deferred and he was not reimbursed for certain business expenses.

At the same time, the Defendant and the Third Shareholder both received salaries and had their business expenses paid. [ 19 ] The relationship between the parties started to deteriorate, likely in part due to this disparity in treatment, and even more so, due to issues that arose relating to financial disclosure. [ 20 ] With respect to financial disclosure, the Plaintiff discovered one issue in December 2008, when he found out that the Defendant assumed responsibility to reimburse a client for a trading error.

Through CMFI, the Defendant had placed a trade on October 14, 2008 on behalf of that client which resulted in a sizeable loss. The Defendant, through CMFI, agreed with the client to assume responsibility for it. The loss was not disclosed to the Plaintiff until later, although the Defendant was aware of it since at least October 16, 2008, and confirmed he would assume responsibility for it (through CMFI) on October 31, 2008. [ 21 ] Once the parties’ relationship began to deteriorate, the Plaintiff requested payment of his salary.

The Plaintiff was not, however, paid his salary, as Home could not pay it and at the same time maintain its cash flow obligations. The Plaintiff arranged with his consulting client to have future Consulting Fees paid directly to 101 Co. The Consulting Fees previously paid to Home were not repaid to the Plaintiff and remain outstanding. [ 22 ] Subsequent to the initial loan amount of $167,200, 101 Co. made further loans to Home in the amounts of $10,000 and $20,000 reflected in agreements dated March 5, 2009 and December 9, 2009, respectively.

The Plaintiff testified that the March 5 investment agreement was executed September 2009, but backdated to March, however, payment of the money occurred on March 5, 2009 and the agreement is effective as of that date. [ 23 ] The terms of the various agreements are discussed in the

section on “Breach of Contract” below. Of note is that for the December 9, 2009 loan, the Defendants filed a Subordination and Postponement Agreement with the ASC, indicating “signature unavailable” where the Plaintiff was to have signed. The Defendants did the same in March of 2010 for a Subordination and Postponement Agreement related to the deferred salary and Consulting Fees.

In both instances, the Defendant did so knowing the Plaintiff would not have signed these subordination agreements, either on his own behalf or on behalf of 101 Co. [ 24 ] While the parties dispute whether the Plaintiff was suspended and then quit, or was fired, it is clear that by the end of January 2010, the Plaintiff was no longer an employee of Home. By resolution dated March 31, 2010, Home bought back and then cancelled the Plaintiff’s 40% shareholding in the company for $1.00, in accordance with the terms of the Engagement Agreement. [ 25 ] Another issue relating to financial disclosure arose in May 2010.

At that time, the Plaintiff received the audited financial statements of Home and CMFI for the year ending June 30, 2008, which reflected a different financial picture than the Snapshot Document previously provided in August 2008. D. Claims in this Action [ 26 ] 101 Co has not been paid interest for the loans under the various agreements or the principal loan amounts once the maturity date in the agreements passed. The Plaintiffs seek damages for breach of contract.

The Plaintiffs allege the Defendants breached the Debenture and GSA agreements, as they failed to pay the annual interest amounts required, as well as failed to satisfy the repayment obligations after the term of the Debenture and GSA was completed and the principal amount of the loan was due.

The Plaintiffs seek restitution for these alleged breaches to recover the amounts lent to or invested in Home and CMFI. [ 27 ] Alternatively, the Plaintiffs allege that, at the time they invested in Home, the Defendant had misrepresented the value of the companies (Home and CMFI); had not corrected this misrepresentation when the audited financial statements were available; and failed to disclose a material loss to Home, which constitutes a negligent misrepresentation.

While the Plaintiffs are treating these events as a cumulative negligent misrepresentation, each will be separately evaluated in the context of the circumstances in existence at the relevant time. The remedy the Plaintiffs seek for negligent misrepresentation is to be restored to the position they were in before entering into the various agreements.

[28] In addition, the Plaintiff claims for payment pursuant to the Engagement Agreement of retroactive salary which was deferredbut never paid, and for payment of the Consulting Fees which had been paid to Home by way of an assignment and that were supposedto be paid to Douglas in the form of salary, but were deferred.

At issue is whether either of these payments is subject to the subordinationand ASC consent requirements set out in the Engagement Agreement or subject to the terms of the Postponement Agreement, and if so,what are the implications of such terms. [29] At the commencement of the trial, the Plaintiff sought reimbursement for unpaid business expenses while an employee ofHome, and the Defendants sought reimbursement for certain office equipment damaged by the Plaintiff.

During the trial, the partiesresolved these issues by setting off these claims, with the Defendant paying the Plaintiff the remaining balance of $1,200, which thePlaintiffs advised has been paid. III. ISSUES [30] The Plaintiffs seek damages from Home for breach of contract arising out of the parties’ agreements. Alternatively, thePlaintiffs seek a remedy in tort for negligent misrepresentations allegedly made by the Defendants. In order to set out the chronology ofevents, I first address the negligent misrepresentation claim, followed by the breach of contract claim. The issues considered are asfollows: 1. A.

Did the Defendants make a negligent misrepresentation in respect of:

a) the contents of the Snapshot Document;

b) the non-disclosure of the financial statements; or

c) the non-disclosure of the investor loss? B. Does waiver or estoppel apply in this case? C. What is the appropriate remedy? 2. A. Was there a breach of contract on the part of the Defendant to:

a) the Corporate Plaintiff for repayment loaned amounts under the loan agreement;

b) the Corporate Plaintiff for interest owing under the loan agreement;

c) the Personal Plaintiff for unpaid (deferred) salary; or

d) the Personal Plaintiff for unpaid (deferred) Consulting Fees? B. What is the effect of the ASC’s working capital requirements? C. What is the appropriate remedy? IV. ANALYSIS AND DECISION A. Negligent Misrepresentation 1. Law of Negligent Misrepresentation [31] The five-part test for negligent misrepresentation was set out by the Supreme Court of Canada in Queen v Cognos Inc, (SCC), [1993] 1 SCR 87 [“Cognos”] and applied by the Alberta Court of Appeal in Condominium Corp No 0321365 v970365 Alberta Ltd, 2012 ABCA 26 at para 65, 519 AR 322, paraphrased as follows: 1.

There must be a duty of care based on a “special relationship” between the representor and the representee; 2. The representation in question must be untrue, inaccurate or misleading; 3. The representor must have acted negligently in making the representation; 4. The representee must have relied, in a reasonable manner, on the negligent misrepresentation; and, 5. The reliance must have been detrimental to the representee in the sense that damages resulted. Each element of this test is discussed below. Part One

[32] In the present case, the Defendants acknowledge that the first requirement - that there be a special relationship - is met byvirtue of the parties being brothers. The Defendants assert, however, that none of the other factors can be established, and thus the claimmust fail. Having established the special relationship element, it is necessary to examine whether the other elements of the test can bemet. Parts Two and Three [33] The Courts have long recognized that a negligent misrepresentation may occur by omission.

In Opron Construction Co vAlberta (1994), (AB KB), 151 AR 241 (QB) [“Opron”], Justice Feehan stated the principle that “Cognos makes itclear that nondisclosure in the course of precontractual negotiations may be actionable”: para 529. [34] Opron also addresses the circumstance where a party fails to correct a prior impression or where there are fresh acts ofreliance upon the original disclosure that turns out to be incorrect. Following a

summary of the law on negligent misrepresentation,Justice Feehan states that there are two distinct factual situations wherein a misstatement by omission may occur [at para 514]: 1. where an event occurs in the course of the parties’ dealings in relation to the contract which creates a duty of disclosure; and, 2. where the parties’ relationship itself creates a duty of care. [35] Where the parties’ relationship itself creates a duty of care, there may be a duty of disclosure: …The law may also place upon a party an obligation to speak from the outset, originating in the nature of the relationship between theparties.

If that duty of care is breached, the positive misstatement or nondisclosure may be actionable in deceit or negligence: para 527. [36] Justice Feehan also considered whether something occurred during the negotiations or performance of the contract that wouldimpose a duty of disclosure: paras 515-518.

He identified two instances where duties of disclosure may arise in the course ofnegotiations: First, where a contracting party says or does something, or something happens which, having regard to that party's previous declarationsor acts, requires that party to correct or remove a delusion in the mind of the other party for which he or she is responsible for creating.Secondly, where one party is asked a question by the other in respect of any matter, whereupon a duty is incumbent on the first party, ifhe or she answers the question at all, to answer it truthfully and fully: para 516. [37] During the performance of a contract, there may be a duty of full disclosure where there is fresh reliance upon the originalnon-disclosure or untrue misrepresentation: para 517.

Justice Feehan noted that an examination of the following four circumstanceswould be of assistance in determining whether it is incumbent upon one party to the negotiations for contract to make full disclosure[paras 519-526]: (

a) Did an omission render the representations incorrect? (

b) Did silence amount to a positive assertion that certain facts did not exist, or create a false impression? (

c) Did the defendant fail to answer accurately a direct inquiry from the plaintiff? (

d) Did the defendant make statements with an honest belief in their truth, and subsequently discover they were false? [38] In the present case, the Plaintiffs argue that the Defendants’ failure to disclose information satisfies parts two and three of thetest. Part Four [39] The Plaintiffs contend that part one of the test - determining whether there is a special relationship - includes a determinationthat the representee would rely on the statements of the representor.

As such, where there is a special relationship, the Plaintiffs arguereasonable reliance required for part four of the test can generally be inferred from meeting this requirement of part one of the test. Thatis not how I read the test in Cognos. Cognos sets out the elements required to establish negligent misrepresentation, including that theremust be a special relationship between the representor and the representee (part one of the test), and that the representee must havereasonably relied on the misrepresentation (part four of the test): para 33.

If I accept the Plaintiffs’ argument, there would not be a needto ever establish reasonable reliance, as there must always be a special relationship to satisfy the first part of the test in Cognos. Tosuccessfully make out their claim for negligent misrepresentation, the Plaintiffs must establish both that they relied upon themisrepresentations made, and that such reliance was reasonable.

Part Five [40] The fifth part of the test relates to proof of damages as a result of detrimental reliance on the representations. [41] As the parties agree that the first part of the test has been satisfied by virtue of their special relationship, I will now apply partstwo through five to each of the alleged negligent misrepresentations in this case. 2. Alleged Negligent Misrepresentations in Present Case a. Negligent Misrepresentation Related to the Snapshot Document

[ 42 ] The Defendants sent the Snapshot Document to the Plaintiff in August 2008 to provide a

summary of Home and CMFI’s loans, assets, liabilities and “value” as of June 30, 2008, as well as unaudited balance sheets for each of those companies as of June 30, 2008. These documents were prepared by Richard, with some assistance from his administrative staff. The cover note on the email attaching the Snapshot Document suggested the information could be used to create a formula, presumably for the amount required from the Plaintiff to invest in Home by way of loan in order to become a shareholder. The Snapshot Document states that the “value” of the companies (Home and CMFI) was $277,863.78.

This amount is erroneously not stated as a negative value. [ 43 ] The Plaintiffs allege that the Snapshot Document representation of Home’s and CMFI’s cumulative “value” was a negligent misrepresentation on the part of the Defendant.

The actual “value” of Home at that time should have been stated as a negative amount, and the Snapshot Document therefore materially understated the liabilities, and overstated the value, of the company. [ 44 ] Upon a review of the Snapshot Document, it is easily observable that the “value” is arrived at as follows: loans provided by Richard (plus interest owing), minus the value of the current assets, plus the current liabilities.

While this may not be a standard form of calculation to determine value, I find the methodology would be clear to a reader with some business experience, and the reader would be on notice to consider what “value” means for the purpose of the Snapshot Document based on how the amount was derived. The unaudited balance sheets attached to the Snapshot Document show total liabilities greatly in excess of assets, and also reveal a combined retained earnings amount of -$226,348.12, which is another indicator that liabilities exceeded assets and that the Snapshot Document warranted further inquiry.

The attached income statements show a combined net income of -$209,179.91, with expenses greatly exceeding revenues.

It is clear from the income statements that these expenses were primarily comprised of salaries, office expenses, insurance, meals and entertainment, and memberships, and were thus not just losses due to accounting treatment. [ 45 ] The Plaintiffs ask this Court to find that the single entry of the line item of “value” stated as a positive number is the basis for the representation to be found to be untrue, inaccurate or misleading, and that the Plaintiffs reasonably relied upon this negligent misrepresentation. [ 46 ] I find the Plaintiffs’ argument on this point difficult to accept.

The presence of the one word “value”, or the failure to put a negative sign in front of the numeric item, cannot override the content contained in the remaining seven pages of financial information. Such a conclusion could barely be drawn had the Plaintiff no understanding of financial statements; however, he is an experienced professional in the finance industry.

To accept the Plaintiffs’ argument, one would have to accept that Douglas looked only at that one line item as the basis for his entire investment decision, ignoring the substance of the rest of the information contained in the Snapshot Document calculation and the attached financial statements. Yet the evidence of the Plaintiff himself is that he reviewed the document in enough detail to identify what he thought was an irregularity in the insurance premiums, which arose from information contained in a line item on the Income Statement for Home and is found on the last page of the seven-page document.

It does not make sense that the Plaintiff would question the insurance premiums but not question the value of the companies in the Snapshot Document. [ 47 ] Even if the Plaintiff had only considered this one line item, and relied upon the misrepresented term “value” as stated in the Snapshot Document to determine the financial position of the companies, this Court must also find that such reliance was reasonable. As Home was a private company, there were limited alternative sources of information available to the Plaintiff, other than what the Defendant provided to him.

As such, reliance on the Snapshot Document itself may be reasonable. Reliance on only one number in the document, however, when it is at odds with all other representations within the document and without any further questioning or context, is not.

In the circumstances of this case, in the face of the other information presented in the document, and given the financial acumen of the Plaintiff, such reliance is not reasonable. [ 48 ] For this reason, the Plaintiff fails to establish two parts of the test, namely: that the representation in question was untrue, inaccurate or misleading; and that he relied, in a reasonable manner, on the negligent misrepresentation. As such, the error in the Snapshot Document does not constitute a negligent misrepresentation by the Defendants. b.

Negligent Misrepresentation Related to the Failure to Provide Audited Financial Statements [ 49 ] The Defendants had access to the companies’ audited financial statements for the year ending June 30, 2008 (the “ 2008 Statements ”) by no later than September 30, 2008. The evidence at trial established that the 2008 Statements were not provided to the Plaintiffs by the Defendants until May, 2010. The 2008 Statements show the actual combined value of the two companies to be - $354,953.

The Plaintiffs argue that this differs from the representation in the Snapshot Document, where the value stated was $277,863.78, such that the difference in the value, and the amount of the misrepresentation, was in excess of $632,816. [ 50 ] Given the discrepancies between the Snapshot Document and the 2008 Statements, the Plaintiffs argue that the representations in the Snapshot Document were in fact untrue, inaccurate or misleading, and that the Defendant failed to take steps to remedy the misrepresentation in the Snapshot Document by failing to provide the 2008 Statements when they became available. [ 51 ] As discussed above, a negligent misrepresentation may occur by omission.

Generally, representations about the financial health and valuation of a company would be of central relevance and material to a decision to enter into a loan or investment contract. The transaction in this case was a financially material event for the parties, involving a transfer in ownership of 40% of Home, and a sizable loan in comparison to the value of Home and CMFI. Therefore, full and accurate disclosure was paramount. In the current case, the Defendants also took the position that the shareholders had an ongoing obligation to continue funding the company.

This suggests an even greater rationale for the Defendants to ensure ongoing and timely financial disclosure is provided to the shareholders, including the Plaintiffs. [ 52 ] When better information about the financial health and valuation of the companies was available, the Defendants did not provide corrected or updated information within a reasonable period of time. This silence may have resulted in inducing the Plaintiffs to continue with the loan transaction and investment in Home.

This is only sufficient to constitute a negligent misrepresentation, however, if all five elements of the five-part test are met. [ 53 ] The Defendants concede the first part of the test is met. We turn to the second and third parts of the test.

[ 54 ] In addition to the differences in the understanding of the companies’ valuation, which issue will be addressed below, the Defendants raise two objections to this claim of negligent misrepresentation: 1) The Plaintiffs did not request the financial statements at an earlier date, and had essentially committed to the investment prior to when the financial statements were finalized; signing the agreements was just a formality; and, 2) The Plaintiff had access to, and could have reviewed, the audited financial statements on the company’s computer server, but was being willfully blind in not locating the information. [ 55 ] Regarding the first argument that there was a pre-existing commitment to invest in the companies, there is some evidence that the parties had agreed in principle (or at least the Defendant believed they had agreed in principle) to the Plaintiff investing in and working for Home prior to the agreement being signed or the funds changing hands.

For example, in the fall of 2008, the Defendant made some preparations to open a Saskatchewan branch office for Home. The timing of the incorporation of 101 Co. in Saskatchewan on October 21, 2008 lends credence to the suggestion that the parties were just waiting for the incorporation of the Plaintiff’s numbered company to be finalized so that 101 Co. could be a party to any deal. The evidence also suggests that the Defendant advanced to Home a portion ($50,000) of the amount the Plaintiffs were to loan to Home prior to the deal being finalized.

This amount was repaid by the Plaintiffs to Richard on the ultimate date of the transaction. It is not clear whether the Plaintiff was aware of these advances at that point. No money was advanced by the Plaintiffs, and no agreement was signed by the parties at that time. There is also evidence that the terms were proposed by the Defendants, without much negotiation or even response by the Plaintiff. The Plaintiff testified that this was because he did not dispute the terms being proposed thus far.

There was no evidence as to whether he advised the Defendant of his agreement to the terms at any prior point, or which of the terms were before him then. On October 22, 2008, the Defendant forwarded to the Plaintiff a “revised” employment offer and new loan agreement pre-dated for October 23, 2008 (which forms the Engagement Agreement) along with the link to the Postponement Agreement on the ASC website. No prior versions of the Engagement Agreement were introduced into evidence, however, the evidence suggests that the revision was with respect to the employment start date.

Douglas, 101 Co. and Home entered into that Engagement Agreement on October 23, 2008. On the same day, 101 Co. made the $167,200 Loan to Home. The Plaintiff forwarded the signed October Postponement Agreement and October Debenture and GSA to the Defendant the next day. [ 56 ] In order for a contract to be binding, the parties must agree upon all the essential terms.

Agreements to agree or negotiate, where there is uncertainty as to the terms of the contract, are not enforceable: Drew Oliphant Professional Co v Harrison , 2011 ABQB 216 at paras 39-40 , 56 Alta LR (5 th ) 233; Georgian Windpower Corp v Stelco Inc , 2012 ONSC 3759 at paras 121-122 , 113 OR (3d) 81. In the present case, prior to signing the agreements on October 23 and 24, there was no point in time that any of the parties pointed to where the “deal” had been concluded.

There was no evidence led to suggest that the Plaintiffs had even seen the Debenture and GSA or the Postponement Agreement prior to October 22, which agreements formed essential terms of the deal to Home. There is not sufficient evidence to establish that the Plaintiffs had fully and finally agreed to all essential terms, including the terms of the Debenture and GSA or the Postponement Agreement prior to signing these agreements. I find that there was a pre-existing agreement to agree, but the essential terms were not fully finalized until incorporated into a formal signed agreement.

Until that time, the Plaintiffs still had the opportunity to change their mind or further negotiate terms. Had the Plaintiffs decided not to proceed before signing the agreements, the Defendants would not be able to establish an enforceable agreement on the evidence before me, requiring the Plaintiffs to follow through with providing the loan amounts. As of September 30, 2008, when the financial statements were finalized, there was no enforceable agreement between the parties. [ 57 ] The Defendants’ second contention is that the Plaintiff was being willfully blind in not locating the information himself earlier.

The Plaintiff had access to the corporate server once an employee, and on October 26, 2009, was informed of the location of the subsequent years’ audited financial statements (the “ 2009 Statements ”) on the server. The Plaintiff testified that the financial statements he accessed from the server at that time were only the 2009 Statements. [ 58 ] The Defendant states that the 2008 Statements were accessible on the server in the same file location, and had been available in that location from prior to the Plaintiff joining the company. [ 59 ] There are a few problems with the Defendants’ argument.

The Plaintiff did not have access to the server, and thus, the 2008 Statements or other documents relating to the 2008 Statements until after he commenced his employment with Home (October 31, 2008), after the transaction was completed, and then he had documented technical issues with access to the company’s internal system. Even had he not had such technical issues, the Defendant is suggesting that it was incumbent on the Plaintiff to root around the system to look for information on his own initiative without any information as to where on the system it was located.

That is not a reasonable manner of disclosure. The Plaintiff first was informed of the location and accessed the 2009 Statements from the server on October 26, 2009. That does not mean, however, that it occurred to him to go back and check the 2008 Statements for discrepancies from the information that had previously been provided to him. I find the 2008 Statements were made available to the Plaintiff in May 2010.

I therefore find the Defendants’ second objection, that the Plaintiff could have accessed the financial statements for the year ended June 2008 at any time during his employment, is without merit. [ 60 ] The Plaintiffs have satisfied the second and third parts of the test for negligent misrepresentation in Cognos that there has been an inaccurate and misleading representation, and that the Defendants acted negligently in making the representation. [ 61 ] The fourth part of the test, whether the Plaintiffs reasonably relied on the negligent misrepresentation, is more problematic.

The difficulty for the Plaintiffs in establishing that the failure to correct the representation in the Snapshot Document with the information from the audited financial statements constitutes a negligent misrepresentation is that the Plaintiff takes an implausible starting position. The Plaintiff testified that he believed, based on the one word “value” in the Snapshot Document, that the companies were in a positive valuation position in the amount of $277,863.78. I have already concluded this was not a reasonable

interpretation of the Snapshot Document taken as a whole, and that the Plaintiff ought to have known that the value of the companies represented by the Snapshot Document was -$277,863.78. Based on this understanding, the true difference in the value between the Snapshot Document and the 2008 Statements is approximately -$77,090 (being -$354,953 from the 2008 Statements less -$277,863.78 from the Snapshot Document). Because the Plaintiff’s position is that he thought the discrepancy was $632,816, it is difficult to assess whether the

Plaintiff’s investment decision was truly altered by a misstatement amounting to a difference of -$77,090. It is also unclear how much his current position is negatively impacted from this misstatement; in other words, the extent to which damages resulted. [ 62 ] There was no evidence provided at trial on this point. It may be that the Plaintiff would have negotiated a lower loan amount or a higher percentage of share ownership in Home. It may be that the Plaintiffs would not have completed the transaction, or that it would make no difference at all.

This is pure speculation, and it is not clear what affect this had on the Plaintiffs’ decisions. The reality is that the Plaintiffs knowingly invested in a company that was thinly capitalized and likely to continue operating at a loss, at least in the short term. Because there was no evidence provided as to what impact a difference in value of -$77,000 would have had on the Plaintiffs’ decision to invest in Home, I find that the Plaintiffs have failed to establish detrimental reliance and damages as a result.

The Plaintiffs have not proven the failure of the Defendants to provide audited financial statements on a timely basis constitutes a negligent misrepresentation. [ 63 ] Taking into account subsequent events (addressed further in

section 1(c)), I will consider below the cumulative effect of this representation by the Defendant with the subsequent one on the Plaintiffs’ investment decisions. c. Negligent Misrepresentation Related to the Trading Loss [ 64 ] The third alleged negligent misrepresentation relates to the Trading Loss. On October 14, 2008, the Defendant completed a futures trade through CMFI on behalf of a client through the client’s discretionary trading account, which exposed the client to substantial risk.

On October 15, 2008, the Defendant unwound the prior day’s futures trade which had resulted in a loss to the client of $125,160 (USD). That amounted to $147,713.83 (CAD) based on the applicable conversion rate (the “ Trading Loss ”). The Defendant was aware of the full value of this loss by October 16, 2008. [ 65 ] The Defendant testified that he was unsure whether the Trading Loss was an error on his part or on the part of the brokerage firm, and also whether he had misunderstood the directions of the client.

Richard’s testimony was that his client was out of the country; consequently he did not discuss the Trading Loss with the client until October 31, 2008, at which time he advised the client that he would assume responsibility for this loss through CMFI. Richard did not clarify the trade placed with the brokerage firm until November 2, 2008.

Richard explained that this did not occur earlier because he wanted first to speak with his client. [ 66 ] The existence of the Trading Loss was not communicated to the Plaintiff until early December 2008, even though the brothers spent a week together on a personal trip in mid-November. The evidence suggests that, in early December, the Plaintiff was told the loss to the companies (through CMFI) was approximately $100,000, and not until a month later, after prodding for disclosure by the Plaintiff, was he told that the loss was $130,000.

The Defendant justified the earlier amount by saying that he was referring to US currency. The evidence suggests that full disclosure to the Plaintiff of this loss did not occur until October 27, 2009, despite prior requests by the Plaintiff for more information. [ 67 ] The Plaintiffs assert that the Defendant knew or ought to have known about the Trading Loss and the impact of that loss on the valuation of the companies prior to October 23, 2008, and was under an obligation to advise the Plaintiffs of this loss.

The Plaintiffs state that the Defendant’s failure to do so constitutes a negligent misrepresentation. [ 68 ] In response, the Defendant argues that the Plaintiff could have located information regarding the Trading Loss from files stored on the company server at an earlier date. I have already indicated in 1(

b) above that I disagree with this position; even more so in this circumstance, where the Plaintiff would not even have initially been aware of this Trading Loss to search for information about it. It was not for the Plaintiff to search out information; rather, it was information held by the Defendant and it was incumbent upon him to disclose it.

Further, even if the Plaintiff did search the corporate server to find such information, he could not have discovered it prior to entering into the Engagement Agreement and related agreements. [ 69 ] The Defendants again assert that the Plaintiff had already committed to the investment before the Trading Loss occurred. Although the parties were clearly making preparations for the contemplated transaction, the money was not actually forwarded from the Plaintiffs, the employment had not commenced, and the contract was not finalized, signed or effective until October 23, 2008.

For the reasons set out above, I disagree with the Defendants’ assertion. With access to additional information, the Plaintiff may have fully been within his rights to pull out of the deal or to have re-negotiated its terms. [ 70 ] Applying the five-part test for negligent misrepresentation to the failure to advise of the Trading Loss in a timely manner, the Defendants acknowledge the special relationship element of the test is met, but argue none of the other elements can be established. [ 71 ] As discussed above, non-disclosure can constitute a misrepresentation.

In this case, the Defendants suggest that the non- disclosure of the Trading Loss did not satisfy the second requirement of the test in Cognos - that the statement is untrue, inaccurate or misleading - because the Trading Loss only became a liability of the companies after the call with the client in late October and subsequent call with the brokerage firm in early November, after the transaction with the Plaintiffs was completed. [ 72 ] The Defendant was fully aware of this material and foreseeable contingent liability by or before October 16, 2008, before Douglas and Richard signed the Engagement Agreement on October 22, 2008.

I find that until the determination was made as to who was responsible for the Trading Loss, it constituted a material contingent liability of the company. By not advising the Plaintiff of this material contingent liability, the Defendant’s prior representations became untrue, inaccurate or misleading, and the Defendant was negligent in not making this disclosure.

The Defendant’s conduct in not disclosing the Trading Loss, even when spending a week together with his brother shortly thereafter, and again after specifically being asked about the details of the loss, leads me to conclude that the Defendant intended to hide this information from his brother, or at least was negligent in not disclosing it.

The second and third parts of the test are met. [ 73 ] As the Plaintiff would have had no other meaningful way to gain access to information about (or even become aware of) the Trading Loss, I find the Plaintiff relied in a reasonable manner on this negligent misrepresentation. He had no reason to assume that the valuation of the companies had been materially impacted in the absence of this disclosure. The fourth element required to establish a negligent misrepresentation is satisfied.

[74] As to the fifth part of the test, the Defendants assert that the financial health of the companies has not been materially affected,as the client has patiently waited for a repayment for the loss, taking a note for a year and allowing the loss to be paid down throughcommission and participation fees of subsequent trades made by Home on his behalf. [75] I do not accept this argument.

The loss is still an obligation owing by the companies and subject to repayment at some point inthe future; it affects the overall valuation and capitalization of the companies, as well as the revenue that could otherwise be generatedfrom this client.

Given that the amount of the Trading Loss was almost the size of the Plaintiffs’ loan contribution to Home, I find that itis highly likely that this information would have altered the Plaintiffs’ investment activity, or at least the investment structure negotiated.Indeed, once the Plaintiffs became aware of the Trading Loss, the evidence confirms that the Plaintiffs attempted to negotiate Richard’spersonal assumption of this loss or a similar shift of allocation of this responsibility to Richard. [76] The failure to disclose the Trading Loss as a contingent liability prior to October 23, 2008, and as a crystalized liability afterRichard and the client agreed on reimbursement, constitutes a negligent misrepresentation.

While the failure to disclose the Trading Lossalone is sufficient to constitute a negligent misrepresentation, when combined with the omission in 1(

b) to provide the audited financialstatements in a timely way, there is even further support for such a finding. 3. Waiver and Estoppel [77] The Defendants argue that even if there had been a negligent misrepresentation, the Plaintiffs’ conduct amounts to a waiver oftheir right to pursue their claim for negligent misrepresentation, or the Plaintiffs are estopped from pursing their claim, due to:

a) the delay in bringing this action, and

b) the fact that the Plaintiffs continued to contribute to the companies (by way of additional loan amounts on March 5, 2009 andDecember 9, 2009) well after they became aware of the 2008 and 2009 Statements and the existence of the Trading Loss. [78] The timing of events is a central consideration in evaluating a defense of waiver and estoppel.

I have found that the Plaintiffhad no knowledge of the Trading Loss until December 2008, with more fulsome disclosure happening in the months that followed.Further, the Plaintiff was not provided the 2008 Statements until May 2010, and only accessed the 2009 Statements in October 2009. Thesubsequent loans advanced by 101 Co. occurred in March 2009 and December 2009.

The Defendants argue that in 2009 the Plaintiffshad full information regarding the negligent misrepresentations, but continued to invest in Home. [79] The evidence suggests that the Plaintiffs were aware of the Trading Loss at the time of the March and December 2009 loans,but not the 2008 Statements. The evidence at trial also established that once the Plaintiff learned about the Trading Loss, he wanted theDefendant to assume responsibility for repayment or contribution to Home to offset this loss.

By October 2009, the parties wereattempting to resolve the dispute about who should be responsible for the October 2008 Trading Loss. The Defendant suggested asubordination of $130,000 of his capital contribution to the rest of the shareholder contributions to be achieved by converting certainshareholder loans and debt instruments into preferred shares. This was not satisfactory to the Plaintiff, and no preferred shares wereissued. The Plaintiff instead wanted Richard to contribute additional capital to cover the loss.

The Plaintiff offered to assist in this to theextent possible, including purchasing the Defendants’ shares in another company to generate funds for this purpose. The shares werepurchased by the Plaintiff under this understanding, however, the Defendant did not use all of the sale proceeds for this purpose. Thistransaction is the subject of the related action. [80] The Defendants did not plead waiver or estoppel in accordance with the Alberta Rules of Court, Alta Reg 124/2010: r 13.6(3)(

c) and (m). The Defendants further did not seek to amend their Amended Statement of Defence at trial to do so. Even if they had, theDefendants do not satisfy the requirements for waiver or estoppel in this case. [81] The Supreme Court of Canada set out the requirements for waiver in Saskatchewan River Bungalows Ltd v Maritime LifeAssurance Co, (SCC), [1994] 2 SCR 490 at para 20, as follows: Waiver will be found only where the evidence demonstrates that the party waiving had (1) a full knowledge of rights; and (2) anunequivocal and conscious intention to abandon them.

The creation of such a stringent test is justified since no consideration moves fromthe party in whose favour a waiver operates. An overly broad

interpretation of waiver would undermine the requirement of contractualconsideration. [82] The Court clarified that intention may be expressed formally (such as in a legal document), informally, or inferred by conduct:at para 19. Regardless of the manner the intention is discerned, the conscious intention to do so must be ascertained. [83] In this case, there was no evidence that the Plaintiffs had an unequivocal and conscious intention to abandon their rights. Tothe contrary, Douglas made efforts to resolve the Trading Loss issue and did not unequivocally abandon any legal recourse.

By the timethe further loans were made in March and December 2009, the Plaintiff was already deeply invested, not only due to the loans, but alsowith deferred salary and assigned Consulting Fees. The decision to wait to take action in these circumstances is reasonable and does notdemonstrate an unequivocal and conscious intention to abandon their rights. In addition, the evidence demonstrates that the Defendantswere fully aware that the Plaintiffs were protesting what was occurring. Specifically, the Plaintiffs were unwilling to sign theSubordination and Postponement Agreement for the last loan in December 2009.

The Defendant improperly printed 101 Co.’s name and“Doug Strand” on the signature line, noting “signature not available”, and submitted the agreement to the ASC. [84] The basic principles of estoppel were set out in John Burrows Ltd v Subsurface Surveys Ltd, (SCC), [1968]SCR 607 [“John Burrows”], at paras 17-18: It seems clear to me that this type of equitable defence cannot be invoked unless there is some evidence that one of the parties enteredinto a course of negotiation which had the effect of leading the other to suppose that the strict rights under the contract would not beenforced, and I think that this implies that there must be evidence from which it can be inferred that the first party intended that the legalrelations created by the contract would be altered as a result of the negotiations.

It is not enough to show that one party has taken advantage of indulgences granted to him by the other for if this were so in relation tocommercial transactions, such as promissory notes, it would mean that the holders of such notes would be required to insist on the veryletter being enforced in all cases for fear that any indulgences granted and acted upon could be translated into a waiver of their rights toenforce the contract according to its terms. [85] John Burrows was subsequently referred to by the Supreme Court of Canada in Maracle v Travelers Indemnity Co ofCanada, (SCC), [1991] 2 SCR 50 at para 13: The principles of promissory estoppel are well settled.

The party relying on the doctrine must establish that the other party has, by wordsor conduct, made a promise or assurance which was intended to affect their legal relationship and to be acted on. Furthermore, therepresentee must establish that, in reliance on the representation, he acted on it or in some way changed his position. [86] In this case, the Defendants suggest that as a result of the Plaintiffs’ conduct in continuing to contribute to the companies andtheir delay in bringing the action, they are estopped from proceeding.

I find the Plaintiffs’ actions to be reasonable, and do not constitutea promise or assurance affecting the parties’ legal rights. The Defendants have not established that they relied on the Plaintiffs’ actions orchanged their conduct as a result. 4. Remedies for Negligent Misrepresentation [87] In the present case, the parties filed supplementary written submissions on the appropriate remedy in the event a negligentmisrepresentation is found.

The appropriate remedy in tort for negligent misrepresentation is discussed in Blue Range Resource Corp,Re, 2000 ABQB 4 at paras 66-67, 259 AR 30: It is a first principle of tort law that a person is entitled to be put in the position, insofar as possible, that he or she was before the tortoccurred. … The proper measure of damages in cases of misrepresentation is discussed in S.M.

Waddams, The Law of Damages (Toronto: CanadaLaw Book Inc., Looseleaf, Dec. 1998), where the author states: The English and Canadian cases have consistently held that the proper measure [with respect to fraudulent misrepresentation] is thetortious measure, that is the amount of money required to put the plaintiff in the position that would have been occupied not if thestatement had been true but if the statement had not been made. [Emphasis added.] [88] In order to put the parties in the position they were in before the contract was entered into, a court may rescind the contract oraward damages in tort.

Courts have granted rescission of a contract where there has been a negligent misrepresentation: see, for example,Laidler v Richer, [1999] OJ No 1315 (OCJ (Gen Div)); Beer v Townsgate I Ltd (1997), (ON CA), 36 OR (3d) 136(CA).

Courts have also granted damages where there has been a negligent misrepresentation: see, for example, Xerex Exploration Ltd vPetro-Canada, 2003 ABQB 746, 343 AR 347, aff’d 2005 ABCA 224, 267 AR 201 [“Xerex”], where this Court concluded that damageswere the most appropriate and most practical remedy in that case: para 129. [89] In their supplementary written submissions, the Plaintiffs indicate that although rescission is an available remedy, it is likelymore practical to award damages and terminate certain of the agreements between the parties.

The Defendants submit that it would beunjust to grant rescission in this case, as the Plaintiffs did not act promptly upon learning of the misrepresentation and because it is notpossible to restore the parties substantially to their pre-contract position. The Defendants further submit that, in the event a claim fornegligent misrepresentation is made out, damages are the appropriate remedy. They say, however, that the Plaintiffs have not proventhey have suffered any damages arising out of any misrepresentation. [90] Given the Defendants’ position, I consider each of the remedies of damages and rescission. a.

Damages [91] The Plaintiffs assert that the appropriate remedy for negligent misrepresentation is damages, and that the proper quantum ofdamages is the aggregate of the loan amounts. 101 Co. seeks damages of $197,200.00 as damages for the funds loaned to Home, whileDouglas seeks damages of $151,562.27 for unpaid salary and consulting fees, totalling $348,762.27 for both Plaintiffs. They also claiminterest at the rate set out in the Judgment Interest Act, RSA 2000, c J-1, together with costs. [92] Damages for negligent misrepresentation are awarded to compensate for the economic loss suffered by the Plaintiffs.

TheSupreme Court of Canada assessed damages for negligent misrepresentation in Rainbow Industrial Caterers Ltd v Canadian NationalRailway, (SCC), 1991 SCC 27, [1991] 3 SCR 3 [“Rainbow”], holding: 20.

The plaintiff seeking damages in an action for negligent misrepresentation is entitled to be put in the position he or she wouldhave been in if the misrepresentation had not been made. [93] The Court went on, at the same paragraph, to quote GL Fridman, The Law of Torts in Canada, (1990) vol 2 at 136, where theauthor states that the accepted test seems to be restoration of the plaintiff to the position in which he would have been if the negligentmisrepresentation had never been made. Some cases suggest that what the plaintiff can recover is what might be termed “out-of-pocketexpenses”.

In other words, he is entitled to be reimbursed for those costs and expenses which he has incurred and has expended inreliance on the misrepresentation. [94] The Court further held: 22 What that position would have been is a matter that the plaintiff must establish on a balance of probabilities. In a case in which amaterial negligent misrepresentation has induced the plaintiff to enter into a transaction, the plaintiff's position is usually that, absent themisrepresentation, the plaintiff would not have entered into the transaction. …

[ 95 ] The plaintiff must establish what his position would have been if the negligent misrepresentations had not been made on the balance of probabilities: Rainbow at para 22 . If the defendant then argues that the plaintiff would have still entered into the agreement, but on different terms, this requires the Court to engage in a hypothetical and speculative analysis: Rainbow at para 24 . This is a new issue, and the burden of proof rests with the defendant: Rainbow at para 24 . [ 96 ] Out-of-pocket expenses are an appropriate, and likely the most accurate, measure of damages.

In McConnel v Wright , [1903] 1 Ch. 546 (CA) , the Court held: …it is an action for a wrong done whereby the plaintiff was tricked out of certain money in his pocket; and therefore, prima facie , the highest limit of his damages is the whole extent of his loss, and that loss is measured by the money which was in his pocket and is now in the pocket of the company.

That is the ultimate, final, highest standard of his loss: at 5-19, 5-20. [ 97 ] Similarly, in his text, Waddams cites Hedley Byrne Ltd v Heller & Partners Ltd, [1964] AC 465 (HL) for the following principles on damages: Since the decision of the House of Lords in 1963 in Hedley Byrne Ltd. v. Heller & Partners Ltd. [1964] A.C. 465 (H.L.) it has been established that an action lies for negligent misrepresentation causing economic loss.

It naturally follows from acceptance of out-of- pocket loss rather than the contractual measure as the basic measure of damages for fraud, that the same basic measure applies to negligent misrepresentation: SM Waddams , The Law of Damages , loose-leaf (Toronto: Canada Law Book Inc) at 5.6.10. [ 98 ] In this case, the Plaintiff testified that had he known about the negligent misrepresentations, he would not have entered into the agreements. This statement, however, is made in relation to all of the negligent misrepresentations alleged.

The Plaintiff’s position is somewhat muddied by the assertion that the value of the companies, as understood by the Plaintiff, was in excess of $632,816. Yet I have found that this basis for a negligent misrepresentation is not plausible. I note, however, that the amount related to the misrepresentation is close to the total amount of the Plaintiffs’ investment (and when this amount is combined with the difference between the Snapshot Document and the 2008 Statements, the amount exceeds the Plaintiffs’ investment).

Further I note the Plaintiff attempted to have Richard personally assume the Trading Loss entirely, and that this issue was significant in the ultimate departure of the Plaintiffs from their roles in Home. On a balance of probabilities, I am satisfied that the Plaintiffs would not have entered into the agreements in the face of the misrepresentation in respect of the Trading Loss. The Plaintiffs are entitled to damages to restore them to the position they would have been in had the misrepresentation not been made. The loan amounts are 101 Co.’s out-of-pocket losses.

If the Defendants wished to argue that the Plaintiffs still would have entered into the agreements, but on different terms, they bear that burden of proof: Rainbow at para 24 . They made no such argument at trial, instead focusing on whether there was a misrepresentation at all. [ 99 ] The Defendants submit that the Plaintiffs are not entitled to damages, as they have not established what the damages would be had the negligent misrepresentations not occurred. They argue that the Plaintiffs have not in fact demonstrated any damages.

Specifically, they say that as the loan amounts are still due and owing, there is no loss yet to 101 Co. If damages for misrepresentation are granted, the Plaintiffs would then be entitled to double recovery: damages under this claim, as well as the outstanding amounts owed pursuant to the loan agreements. It is trite law that a plaintiff cannot obtain double recovery arising out of the same circumstances.

It would place 101 Co. in a better position than if the agreements had not been entered into if it could recover the value of the loans by way of assessment of damages for negligent misrepresentation, and then proceed to collect on the loans. The parties all agree that this is not the objective; the remedy for negligent misrepresentation is to place the parties in the same position they would be in had the misrepresentation not been made.

The Plaintiffs proffer that if granted damages in tort, the Debenture and GSA agreements between the Plaintiffs and the Defendants should be terminated to prevent any inequities as suggested by the Plaintiffs. [ 100 ] The situation in this case is similar to Xerex , where the plaintiff was awarded damages for negligent misrepresentation in an action involving an oil and gas licence and a royalty agreement. The damages awarded at trial included an award for future payments that would otherwise become owing while the royalty agreement continued to exist.

At trial, LoVecchio J. awarded damages and terminated the ongoing obligation to pay royalties. On appeal, the Court of Appeal in Xerex concluded, at para 109 : …As Xerex had already been fully compensated for its loss, through the award of damages, it made more sense for the trial judge to simply exercise a second option, which was to terminate the [ongoing royalty].

We do not think the trial judge erred in taking this course of action... [ 101 ] Similarly, in the present case, I find that if damages in tort put the Plaintiffs back into the position they would have been had they not entered the agreements, Home’s obligation to repay the loans under the agreements must be terminated. [ 102 ] The Defendants ask the Court to find that no damages can be established as the amounts owing to the Plaintiffs might be paid at some future point in time. This, in my view, is speculative and would lead to an unjust result.

The amounts loaned by 101 Co. which remain unrepaid constitute the damages in this case; these amounts crystalized at the time loaned. There is no evidence to suggest the Defendants have any plan or ability to repay 101 Co. even through the loans are past due, nor would this necessarily alter the determination of damages. [ 103 ] The Defendants raise the final argument that this does not put the Defendants back into its position prior to the contract, as had the Plaintiffs not invested, the Defendants would have been free to seek alternate financing. This argument is not compelling.

While the Defendants would have been free to seek alternate financing, they have not demonstrated that by entering into the agreement with the Plaintiffs they are in a worse position to do so now. The shares originally acquired by the Plaintiffs have all been repurchased by Home for $1. Home has had the benefit of the assigned Consulting Fees to improve its balance sheet until now, and has had five more years to build its business and improve its financial position without paying any salary to the Plaintiff for his services.

If the Defendants are not in the same (or better) position to raise alternate financing than they were in 2008, they have not established that this has anything to do with the Plaintiffs’ participation as a financier in 2008, or the remedy provided to the Plaintiffs through this decision. [ 104 ] I find a negligent misrepresentation occurred and the appropriate remedy is damages in tort, being the repayment of all out-of- pocket amounts lost by the Plaintiffs. In the current case, this includes the loan amounts which total $197,200.

An argument could be made that the out-of-pocket damages could also include the Consulting Fees that were funneled through Home. Although these amounts

were not provided directly from 101 Co. (or its lending agencies), these amounts were in essence payments being indirectly made toHome from amounts that would otherwise have landed in 101 Co.’s “pocket”, and in that sense could potentially form part of theeconomic loss. In this case, the situation is complicated somewhat by the parties’ characterization of the repayment of these amounts as“salary”.

Whether either the unpaid salary or Consulting Fees could be considered part of the Plaintiff’s damages of economic loss orout-of-pocket expenses, and therefore, part of the damages awarded for negligent misrepresentation, need not be determined in thisdecision, as the Plaintiff is entitled to pursue full recovery of these amounts in contract. [105] The claims regarding the loans arise out of the same occurrences, specifically, the Defendants’ negligent misrepresentations thatI have found affected the Plaintiffs’ decision to invest.

Separate is the Plaintiff’s claim for payment of his employment income, which isa claim pursuant to contract and is considered below in the

section on breach of contract. It is well-settled in law that a plaintiff may beliable concurrently in contract and tort: BG Checo International Ltd v British Columbia Hydro & Power Authority, (SCC), [1993] 1 SCR 12 [“BG Checo”]. BG Checo and Cognos were released by the Supreme Court of Canada concurrently. Themajority in Cognos noted, at para 1: …the present case is not one of concurrency at all.

It is sufficient for me to say that the tort here was independent of the contract and theliability was not limited by an exclusion clause in the contract. [106] Similarly, I find the negligent misrepresentation leading to the execution of various agreements and the loans to Home isindependent of the Plaintiff’s claim for payment of his salary and the Consulting Fees pursuant to the terms of his employment and theassignment of the Consulting Fees. b.

Rescission [107] The objective of rescission as a remedy for negligent misrepresentation is to put the parties back in their original positions hadthere been no reliance on the negligent misrepresentation. While the parties made submissions on rescission as a remedy, they were inagreement that damages, if made out, are the more appropriate remedy in this case. I agree that damages are a more appropriate remedy,however, rescission is potentially an available option. A

summary of the parties’ positions on this issue and my reasons for coming tothis conclusion follow. [108] As a preliminary issue, the Defendants argue that rescission cannot be granted in this case because it was not plead, and topermit the Plaintiffs to seek rescission would be manifestly unfair to the Defendants. [109] In this case, the Plaintiffs provided particularized claims for damages for breach of contract and damages on the basis ofnegligent misrepresentation, asking that they be placed in the position they would have been in had the agreements not been entered into.The trial proceeded on this basis.

The parties were also given an opportunity to make further submissions on remedy, including equitable remedies. Contrary to the case law relied upon by the Defendant (Sethi v Dawnne, 2002 ABQB 736, 10 Alta LR (4th) 294), in thecircumstances of the present case, I find that if rescission is granted as a remedy, no prejudice would result to the Defendants. (This issimilar to the findings of the Court in Abbey Glen Property Corp v Stumborg, 1978 ALTASCAD 115 , [1978] 4 WWR 28 (AltaCA).) [110] I now turn to the question of whether rescission is the appropriate remedy in this case.

The factors the Court ought to considerin determining whether to grant rescission of a contract are set out in Kingu v Walmar Ventures Ltd (1986), (BC CA),10 BCLR (2d) 15 (CA) [“Kingu”] by McLachlin J.A., as she then was, at para 15. [111] The Defendants argue that two factors in Kingu have not been satisfied in this case: it is not possible to restore the partiessubstantially to their pre-contract positions, and the Plaintiffs did not act promptly after learning of the misrepresentation to disaffirm thecontract. [112] The Plaintiffs rely on Canada Deposit Insurance Corp v Canadian Commercial Bank (1987), (AB KB), 83AR 349 (QB) in support of the principle that rescission may be granted if it is practically just, even where the parties cannot be restoredexactly to the same position they would have been in had the contract not been entered into.

In that case, Wacowich J. (as he then was) indealing with an order for rescission, confirmed that it is the role of a Court of Equity to give relief that is practically just whenever it can,even if it does not restore the parties into precisely the same state as they were in prior entering into the contract: at paras 24-25. [113] I accept that generally, this Court may grant rescission even where the parties cannot be restored to their original positions.While identical restoration is not required, in accordance with Kingu, it must be possible to substantially restore the parties to thepositions they would have been in had the contract not been entered into. [114] The Defendants further rely on the Ontario Court of Appeal decision in Samson v Lockwood (1998), (ONCA), 40 OR (3d) 161 (CA) for the principle that “a party who affirms a contract after becoming aware of the nature of themisrepresentation loses the right to rescind”: para 46.

That case dealt with a party, aware of the facts giving rise to a right to rescind,expressly affirming a contract with reckless indifference to the need to inquire into his or her legal rights. That Court did not determinewhether affirmation would preclude rescission where the affirmation is implied by conduct, and where the party was something less thanreckless with his or her legal rights. Yet it is this latter scenario that matches the fact pattern of the current case. [115] Thus, rescission as a remedy is an issue open for the Court to consider.

Whether affirmation precludes rescission does not needto be determined in the current case, however, as I have found that damages are the more appropriate remedy. The practical effect ofrescinding the contract in the current case would be to negate the employment obligations in the Engagement Agreement and the termsof the assignment of the Consulting Fees and the associated repayment. In this way, rescission would not truly bring the parties back totheir original positions.

If granted, reliance on some other equitable form of relief (such as quantum meruit) would be required to addressthe loss related to the unpaid salary and Consulting Fees, hence my determination that damages are the more appropriate remedy in thiscase. B. Breach of Contract

[ 116 ] The primary issue raised between the parties is the

interpretation of the Engagement Agreement and the associated loan agreements entered into between them. The Plaintiffs seek damages from Home for breach of contract arising out of these agreements. 1. Loan Agreements a. Engagement Agreement [ 117 ] As mentioned above, the Plaintiffs and Home entered into an Engagement Agreement dated October 23, 2008. The Engagement Agreement refers to the Plaintiffs’ positions as Shareholder, Director, Portfolio Manager, and Managing Director of Home. The one-page Engagement Agreement includes terms of Douglas’ employment, the details of which are set out below in the

section on Salary and Consulting Fees.

Other material terms of the Engagement cxAgreement may be paraphrased as follows: - 101 Co. would purchase 40% of Home for $0.40 with the understanding 101 Co. would supply $167,200 of the capitalization of the company through debt. - All shareholder debt would be subordinated and requires the written permission of the ASC for repayment. - All debt instruments are of the same rank, and repayment is only with directors’ approval. - Upon the Plaintiff’s departure from the company, another employee, or failing that, Home, may purchase the Plaintiff’s shares at a value of 2 times gross revenue or 10 times profitability, whichever is the lesser.

Any remaining debt would be retired as scheduled. b. Debenture and GSA [ 118 ] 101 Co. signed both the October Debenture and GSA with Home, and the October Postponement Agreement, all dated October 24, 2008. Under the terms of the October Debenture and GSA, Home agreed, among other things, to repay the principle sum of $167,200 to 101 Co. on June 29, 2012. Home also agreed to pay to 101 Co. interest on the outstanding principal sum at the rate of 10% per annum, calculated and payable annually commencing July, 15, 2008.

Timely repayment of the principal and interest payments constitute the “Obligations” under this agreement. [ 119 ] The Debenture and GSA grants a security interest from Home to 101 Co. No evidence was provided as to whether the security was perfected, and 101 Co. does not now seek to enforce its security.

The agreement provides that the Obligations shall become immediately payable, including where Home fails to pay any of the Obligations when they are due, or where “any…representation made to induce [101 Co.] to extend credit to [Home], under this [agreement] or otherwise, is false in any material respect when made.” The agreement further provides that “[t]he Obligations hereby secured shall immediately become due and payable if [Home] defaults in payment or performance of any of its obligations [under that agreement]”. c.

Postponement Agreement [ 120 ] The October Postponement Agreement was signed on the same date as the October Debenture and GSA. This agreement was entered into in order to comply with the working capital requirements of the ASC and set out in NI 31-103 (the Registration Requirements document). Otherwise, the $167,200 Loan from a related party would be subtracted from Home’s available working capital, and would put the company off-side the working capital requirements of the ASC.

The form of Postponement Agreement used was obtained by Richard from a link on the ASC website. [ 121 ] This two-page agreement requires the secured amount to be subordinated to other creditors, although the circumstances of when that subordination applies are in issue. The agreement further provides that 101 Co. will not demand, and Home will not pay, the loan without the prior written consent of the Executive Director of the ASC. The

interpretation of this approval requirement, as well as whether it applies to the interest payments applicable to the loan, are also in dispute. d. Subsequent Loan Documents [ 122 ] Home requested, and 101 Co. subsequently lent, a further $10,000 to Home as a capital contribution. This loan was evidenced by a Subordinate Debenture and General Security Agreement and the second Postponement Agreement dated March 5, 2009 the “ March Debenture and GSA ” and the “ March Postponement Agreement ” respectively).

The terms of those agreements are substantially similar to the Debenture and GSA and the Postponement Agreement for the $167,200 Loan. [ 123 ] By October 2009, the parties were in discussions to resolve the issue of who should be responsible for the Trading Loss. In December 2009, at the Defendants’ request, 101 Co. lent a further $20,000 to Home as a capital contribution. The parties did not enter into agreements in respect of this advance - the parties were not on good terms at this point.

At the time of the last loan, it appears the ASC changed its required terms contained in a new form of subordination and postponement agreement, referred to in this decision as the “ Updated Postponement Agreement ”. The Defendant purported to enter into an Updated Postponement Agreement on behalf of the parties. On December 10, 2009, or sometime after that (the Defendant could not remember), he signed an Updated Postponement Agreement on behalf of 101 Co. and he noted “signature not available” where Douglas was to have signed.

Richard filled out and signed the same form in the same manner on March 31, 2010 for the amount of $151,522.27, which he intended to be in respect of the outstanding salary, Consulting Fees and related amounts. Richard acknowledged that Douglas would not have agreed to sign these documents at the time. He signed and submitted them because the forms were required by the ASC in order to comply with the working capital minimum threshold.

[ 124 ] Home made no interest payments to 101 Co. as contemplated in the agreements. Subject to other provisions of the agreements (which are the subject of this dispute), the principal sums loaned were due and payable on June 29, 2012. On September 4, 2012, 101 Co. provided written notice to Home that it was in default in respect of the principal owing of $177,200 (being the initial $167,200 and the subsequent $10,000 secured by a Debenture Agreement), together with accrued interest. 2.

Parties’ Positions [ 125 ] The Defendants argue that the wording of both the Engagement Agreement and the Postponement Agreement bars the Plaintiff from seeking any repayment in priority to other creditors, and further, or in the alternative, the wording clearly establishes that the Plaintiff cannot demand repayment of the loaned amounts, even after the repayment date has passed, without the prior approval of the Executive Director of the ASC.

For the amounts not subject to a properly executed Updated Postponement Agreement (namely, the agreement pertaining to the loan of $20,000 of December 5, 2009, and the agreement pertaining to the deferred salary and Consulting Fees), the Defendant argues that the Engagement Agreement itself imposes the very same restrictions and, in the same way, is a bar to such demand. [ 126 ] The Plaintiffs assert that if the principal amounts loaned are subordinated, it is only with respect to the $50,000 required by the ASC for Home to meet its cash flow requirements.

Further, 101 Co.’s position is unaffected by the ASC requirement; the ASC requirements do not make the Defendant creditor-proof. In other words, the Plaintiffs argue that Home cannot hide behind the ASC consent requirement as a total defense to its obligations to repay long-term debt as such debt comes due to a related party. Finally, the Plaintiffs submit that, in accordance with the terms of the Postponement Agreement, the loans are only subordinated if the Defendant goes into bankruptcy. 3. Analysis [ 127 ] The Plaintiffs rely on certain provisions in the relevant agreements to support the claim for breac

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