Tremblay-Lavigne et al. v. Five Star Innovactions Inc. et al. Date:, 2016 BCPC 453

Citation: Tremblay-Lavigne et al. v. Five Star Innovactions Inc. et al. Date: 20160126 2016 BCPC 453 File No: 140572 Registry: Victoria IN THE PROVINCIAL COURT OF BRITISH COLUMBIA BETWEEN: CHARLES TREMBLAY-LAVIGNE and KICKSTART DEVELOPMENT CLAIMANTS AND: FIVE STAR INNOVATIONS INC. and EVELYN SAURETTE DEFENDANTS REASONS FOR JUDGMENT OF THE HONOURABLE JUDGE E. QUANTZ Appearing for the Claimants: Charles Tremblay-Lavigne Counsel for the Defendants: Jacob Todd Place of Hearing: Victoria , B.C. Date of Hearing: January 19, 2016 and January 20, 2016

Date of Judgment: January 26, 2016 INTRODUCTION [ 1 ] This is a claim for damages for an alleged breach of an oral contract, pursuant to which the claimants provided services to the defendants while the parties attempted to negotiate a formal written agreement governing a software development project worth approximately $100,000.00.

In the alternative, it is alleged that the defendants would be unjustly enriched if entitled to receive the benefit of the work performed by the claimants before the relationship between the parties broke down. [ 2 ] These allegations are denied by the defendants, in part as the defendants allege they received no benefit from the work performed by the claimants prior to the breakdown of negotiations.

In the alternative, the defendants counterclaim, as a set off, that they suffered damages due to an alleged breach of the oral contract by the claimants, or in the further alternative, due to negligence and misrepresentation by the claimants. THE CIRCUMSTANCES

a) Background [ 3 ] Ms. Saurette is a co-founder of Five-Star Innovations, incorporated in May 2011, in part, as a corporate entity for launching a second company, Picture this .today 3-D Incorporated (“Picture this”). Picture this was incorporated in September 2014. [ 4 ] In February 2014 the defendants filed an international patent application for 3-D replicas of homes and their contents for embedding in realtors or designers websites to enable their clients to change colours in the home, to view different types of flooring, and to move, replace or add furniture from an online catalog.

The dissemination of this product was to be facilitated through franchise operations. [ 5 ] Initially a decision was made to develop the 3-D component of this software with a company in Finland. The 3-D component constituted approximately 25% of the total development required. The Finnish company agreed to develop the 3-D component on proprietary software for $120,000.00 with the understanding that the Finnish company would retain the intellectual property rights. [ 6 ] Ms. Saurette became concerned regarding the delays, and the fact that it appeared the development work would not be completed on time.

She shared these concerns with Mr. Tremblay-Lavigne, a software developer located in nearby office space. Mr. Tremblay-Lavigne became interested, given his background in 3-D software development. [ 7 ] For the purpose of this project, Five-Star Innovations did business as Picture this. Throughout the dealings between the parties, Ms. Saurette acted on behalf of Picture this. The relevant documents refer to Picture this as the entity involved in its capacity as a division of Five Star Innovations Inc. Mr.

Tremblay-Lavigne testified that he only learned that Five Star Innovations was involved when he conducted a company search in contemplation of litigation. However, he acknowledged that he knew he was dealing with Picture this and that Ms. Saurette was the CEO. [ 8 ] While the details are in dispute, in mid July 2014 the parties entered into an oral agreement that the claimants would commence work on this development project while the parties finalized a written agreement.

Steps were taken by the defendant company to end the contractual relationship with the Finnish company and to transfer the work to the claimants, for development of the application on the Unity platform, one ideally suited for creating 3-D images.

b) The Oral Contract [ 9 ] Between the 16th of June and the 18 th of July 2014 the parties held a number of meetings where information was exchanged, including detailed documentation of change requests for the Finnish company concerning the 3-D software development. The claimants did not bill for this time as it was prior to the oral agreement. [ 10 ] Mr.

Tremblay-Lavigne advised the court that the oral agreement reached between the parties on July 17th was to the effect that the claimants would develop the 3-D portion of the software for approximately $100,000.00 at the rate of $100.00 per hour, billed bi- weekly.

He acknowledged in cross examination that they discussed the fact that Five Star Innovations would retain ownership of the intellectual property. [ 11 ] He testified there was no understanding as to timelines in the oral agreement, and that the details of the project, including the completion date, could not be finalized without a better understanding as to the scope of the project and the completion of a project plan. [ 12 ] The evidence of Ms.

Sharpham concerning the development of the Statement of Work supports the position that this essential step needed to be completed before the details of the contract could be finalized. In support of his understanding of the oral contract, Mr. Tremblay-Lavigne referred to the timesheet template (Exhibit 1, Tab 1) which he said the defendant agreed he could use, along with announcements concerning the claimants on the defendants’ website. [ 13 ] According to Ms.

Saurette the oral agreement was that the claimants would develop the 3-D component of the application for $100,000.00 by December 2014 and that the defendant company would retain the intellectual property rights. She said this was an attractive agreement given the concerns regarding potential delays by the Finnish company, combined with the fact that the claimant’s offer was $20,000.00 less, and the defendant company would not be required to pay a monthly fee for use of the 3-D component, as it would retain all intellectual property rights.

She testified there was no agreement to pay invoices on a bi-weekly basis. [ 14 ] Regrettably, the parties did not take the time to confirm their respective understandings as to the oral agreement, even by email,

until after the relationship had broken down. [ 15 ] Based on the oral agreement, the claimants and the subcontractor commenced work, and according to Mr. Tremblay-Lavigne the first milestone, or the pre-production component of the work identified in the draft Statement of Work (Exhibit 1, Tab 17) was completed. He testified that this formed the basis for the invoice submitted for the period July 21 to August 1, in the amount of $8,242.50. [ 16 ] Mr. Tremblay-Lavigne advised the court that initially Ms.

Saurette did not dispute the invoice, but indicated that she could not pay by cheque and required him to set up the ability to transfer funds electronically. However, once the electronic transfer information was sent to her she further delayed payment pending the signing of the written contract. In her August 18 th email (Exhibit 1, Tab11) Ms. Saurette indicated there would be “no problems re the payment” of the invoice for $8,242.50, but that the contract needed to be signed first. [ 17 ] Mr.

Tremblay-Lavigne’s email reply was to the effect that his lawyer had advised him to “seek payment for work completed so far before entering contract negotiations.”

c) Negotiations Regarding the Written Contract [ 18 ] On August 5th, an important planning meeting was held by the parties to review the proposed Statement of Work, the document which would form the foundation for the formal written agreement. The minutes of this meeting (Exhibit 1, Tab 9) were circulated and agreed to by all parties except for minor editing.

The minutes reflect a common understanding as to the scope, timeline and budget for the creation of the 3-D software. [ 19 ] However, also noted were important issues that required further negotiation before a final agreement could be reached, including: the “ownership rights and non-competition issues” that would be the subject of a separate contract; whether the claimants would be retained in the future to create the “3D modeling for the furniture and accessories catalog” with the defendant company noting that it required “a ballpark figure as to what the cost of modeling an average item would be”; and, the statement by the claimants that they required “a reciprocal commitment” from the defendants for future work as the claimants would be dedicating approximately 90% of their company efforts to the project until its completion in December to meet the tight timeline. [ 20 ] On August 7 th , Mr.

Tremblay-Lavigne sent an email to the defendant company (Exhibit 2, Tab 5) acknowledging that the modeling would be handled by another division of Kickstart Developments “as a unique project.” He further stated that the intellectual property rights regarding the source code would be part of a more detailed contract, the net effect of which would be, that all intellectual property rights would be transferred to the defendants upon the claimants receiving final payment for completion of this project. [ 21 ] The next day Ms. Saurette advised Mr.

Tremblay-Lavigne by email (Exhibit 2, Tab 5) that she had met with the customer Scan Design the day previous and the quoted prices for the 3-D models would not work for this customer. She said further, . . . they challenged me to look at modeling costs outside NA and I consented to do so. I have posted a couple of ads on IT freelance sites so I can build some comparison pricing charts for them. Let’s discuss when you have a moment. [ 22 ] Ms. Saurette drafted and signed the written contract sent to Mr.

Tremblay-Lavigne’s office on August 15 (Exhibit 1, Tab 13) believing that it reflected their oral agreement and the Statement of Work, except that the Statement of Work prepared by the claimants did not confirm that the defendants would own the intellectual property rights, and she added this provision to the contract. She said she did not anticipate that the terms of the contract would be contested. She testified that Mr. Tremblay-Lavigne did not propose changes to the contract, but rather wanted a guarantee that his company would be retained to develop the 3-D modeling for furniture and accessories.

She confirmed her earlier position of welcoming that possibility provided the rates were competitive. Otherwise in her view, the business plan would fail as the prices would be too expensive. [ 23 ] Mr. Tremblay-Lavigne testified that the contract did not reflect the terms of their oral agreement and he noted the areas of disagreement by hand on this exhibit, including a number of areas that he said were beyond the scope of their oral agreement.

His evidence was that the two major points in dispute were that he would no longer be paid bi-weekly based on an hourly rate of $100.00, and that the intellectual property rights would belong to the defendants. [ 24 ] During his testimony he emphasized that the draft contract stipulated that he would not be paid until the completion of the project.

In fact, the draft contract provided that he was to be paid upon the completion of the various milestones set out in the “Statement of Work, including $12,000.00 for the “Scoping: Preliminary Work,” recognizing that $7,850.00 of this amount was invoiced prior to signing. He testified that he also made it clear to the defendants that he required one quarter to a third of the total value of the contract paid up front.

d) The Breakdown in the Relationship [ 25 ] Mr. Tremblay-Lavigne testified that the subsequent contractual negotiations did not go well, and notwithstanding that he was being taken advantage of he continued to perform services pursuant to the oral contract on the advice of his lawyer, to ensure he was not in breach of the oral agreement. [ 26 ] On August 18th Ms. Saurette sent a detailed email (Exhibit 2, Tab 8) to Mr. Tremblay-Lavigne confirming the conversation they had earlier that day in the lunch room. She expressed concern over Mr.

Tremblay-Lavigne’s position that he . . . expected to build a modeling business based on the exclusive rights to develop content with respect to Picture this, and [that he] had expected that to form part of the Software Development Contract. [ 27 ] She further stated

. . . this is inconsistent with an email you wrote to Phil Bailey on August 17, 2014: “any contract information relating to models needs to be documented separately as this will be handled by another division of Kickstart Developments as a unique project.” [ 28 ] Ms.

Saurette confirmed that the defendants would work exclusively with the claimant on content development “provided its prices were competitive” and emphasized that she had reiterated this position numerous times before. [ 29 ] Further in her email she stated that in the lunch room conversation the parties eventually agreed that their “business concepts were fundamentally different and that we therefore will not pursue an agreement with respect to content development.” She also confirmed that when they asked Mr.

Tremblay-Lavigne to sign the development agreement for this project he would not because he said he believed the defendants would make “millions” and “it was not fair that you receive $100,000.00”, that [he] would not sign the agreement “unless we could establish a “backend deal” that would make the agreement more lucrative” for the plaintiffs, and that [he] expected “to generate some form of ongoing revenue from this project.” [ 30 ] Ultimately, Ms.

Saurette stated that “I feel that your current stance amounts to extortion.” She further stated that the claimants’ actions constituted nonperformance and that the contract and unsigned Statement of Work were “null and void.” The email concluded with the following statement: Your promises and enthusiasm with respect to this project resulted in pivotal business decisions that would not have been considered otherwise. Your failure to live up to these promises has seriously compromised the viability of this company, and the livelihoods of everyone who works here. [ 31 ] Ms.

Saurette received no written response to this email. [ 32 ] On August 20th, Ms. Saurette sent a further email to Mr. Tremblay-Lavigne (Exhibit 1, Tab 9) to confirm an August 19 th conversation and to notify of the defendants’ of the subsequent decision. She stated that when it was clarified again on August 19 th that this agreement related solely to the work described in the Statement of Work, Mr.

Tremblay-Lavigne advised that he . . . would not take a lead on the Unity aspect of the project, or contribute ideas or solutions, but rather [he] would perform only the tasks that would be outlined in a finalized agreement. [ 33 ] Further, she stated Yesterday, you also said you expected to retain full ownership and copyrights to the source code and resulting software, and that our expectation of ownership is not standard in the industry.

I have confirmed that it is in fact an industry standard for the client to retain ownership, and remind you that I stated from the start that Picture this today required full ownership of all Intellectual Property including copyrights and source code. You have stated in the past to Picture this .today staff that Kickstart Developments will not retain any such rights, so this is clearly a new position and a departure from your previously provided Statement of Work. [ 34 ] Ms. Saurette also confirmed that Mr.

Tremblay-Lavigne had stated that . . . some of the software features included in the mind map that [he had] previously provided would be excluded from agreement, and [that his] demeanor suggested [he] would not be cooperative with respect to specific changes or additions, even though [he] stated in the past that they are inevitable. [ 35 ] Ms. Saurette concluded by emphasizing that this was . . . not consistent with the flexible approach that you presented at the start of the business relationship.

In light of recent circumstances, including but not limited to our conversation on August 19 th , we have come to a decision that it is not in our best interest to pursue any further business relationship with your company. [ 36 ] In cross examination Mr. Tremblay-Lavigne admitted that he did say during the August 19 th meeting that he wanted to retain ownership of the intellectual property, but said he only did so as he was no longer receiving an upfront payment, and as he was not guaranteed exclusivity with regard to future 3-D development.

e) The Value of the Services Provided Prior to the Breakdown of the Relationship [ 37 ] Ms. Saurette testified that she had every intention of paying the first invoice until the staff advised her they had not received any code from the claimants. She said the process for transferring the code was set up and Mr. Tremblay-Lavigne declined to forward the code when requested. She advised the court that her staff was also concerned as they had not received the promised training, that Mr.

Tremblay-Lavigne had not worked in the defendants’ offices as anticipated, and that as a consequence, they were unaware of the progress to date. [ 38 ] The director of software development for the defendant company, Mr. Ralph Gabriel, testified that the process for connecting to the defendants’ network for the transfer of software was completed, but the claimant did not upload any information. He also confirmed that the staff received no training. [ 39 ] Ms.

Saurette testified that once the defendants failed to deliver the code she became concerned about paying the invoice, as she believed they would be “left high and dry.” [ 40 ] Mr. Tremblay-Lavigne suggested that the process for transferring any completed source code to the defendants was never set up, and that if the defendants had asked for the code it would have been transferred. He also stated if he had been paid, the code would have been sent to the defendants. [ 41 ] Ms. Saurette testified that when Mr. Tremblay-Lavigne presented the 3-D models depicted in Exhibit 2, Tab 1, he indicated he

had done a great deal of work in preparing this demonstration for the customer. She was firm in her evidence that at no time did Mr. Tremblay-Lavigne advise them he purchased the models off the Internet. She also stated that he quoted a price of $650.00 to create a 3- D model of the chair. Her evidence was that this “demo” was of no benefit to the defendant company, as the quoted price for the 3-D model significantly exceeded what the customer was prepared to pay. [ 42 ] Mr. Gabriel also testified that Mr.

Tremblay-Lavigne led the defendants to believe that the 3-D model was his own creation rather than purchased off the Internet, although he agreed in cross examination that Mr. Tremblay-Lavigne never actually said he developed the 3-D modules. [ 43 ] Mr. Tremblay-Lavigne advised the court that he never represented the 3-D models as his own creation and that he did create the code to define how and what the program did.

He acknowledged there was “miscommunication” in this regard, and that he did not advise the defendants the 3-D images were purchased online for $15.00. [ 44 ] He testified that the defendants received the benefit of the planning and scoping exercises along with the Statement of Work and the mind map. His evidence was that Ms. Saurette was so “exuberant” when receiving this schematic that she had it enlarged and posted on the wall. [ 45 ] Ms.

Saurette’s evidence was that the mind map was enlarged at the request of the claimants, that she understood the document was for the claimants’ purposes, and that it was never hung on the wall, or of any benefit to the defendants. Mr. Gabriel also confirmed that the defendants did not ask for the mind map, nor was it subsequently used. [ 46 ] In

summary, while Mr. Tremblay-Lavigne’s evidence was that the defendants received full value for his first invoice, the defendants were adamant that they received no value. THE POSITION OF THE PARTIES [ 47 ] The claimants submit that 143 hours of valuable work was provided to the defendants pursuant to the oral agreement, based on the understanding that the rate was $100.00 per hour to be billed bi-weekly. It is further submitted that the work performed was of good quality and in accordance with the oral agreement.

The claimants argue that while the defendants were at liberty not to use the product, that decision should not deprive the claimants of their proper compensation. [ 48 ] It is submitted that any delays and costs arising from the breakdown in the relationship are not the responsibility of the claimants as they had the right not to enter into the written agreement when the terms offered were unacceptable. [ 49 ] The defendants submit that the individual defendant, Ms.

Saurette, is not personally liable, as she at all times acted as a director of the company and presumptively enjoys the benefit of the corporate veil.

As well, it is submitted that the defendants knew they were dealing with a corporate entity as referred to in the materials the parties exchanged at the time. [ 50 ] It is further submitted that the court could “glean” the terms of the oral agreement from the Statement of Work and the draft contract as being an agreement to develop the noted software and to provide it along with the intellectual property rights, to the defendants by the end of the year for $100,000.00. [ 51 ] It is submitted that the claimants repudiated this contract when demanding the intellectual property rights to the software, once advised that their projected costs for modeling the items in the furniture and accessories catalog were too high.

It is submitted that for these reasons the defendants are entitled to damages for the claimants’ breach of contract, and further, as the defendants received nothing of value, including any coding, they were not enriched by the work of the claimants. In the alternative, it is submitted that if the court finds the claimants are entitled to damages they are more than offset by the damages suffered by the defendants. ANALYSIS and DECISION

a) The Parties to the Contract [ 52 ] I am satisfied that Ms. Saurette acted as a representative of the defendant company throughout her dealings with the claimants. Mr. Tremblay-Lavigne stated that he believed he was dealing with Picture this and that the CEO was Ms. Saurette. The actual company was Five Star Developments Inc. doing business as Picture this, as evidenced on company documentation. However nothing turns on this distinction as Ms. Saurette is entitled to the protection of the corporate veil. She was not a party to the contract and the claim against her is dismissed.

b) The Oral Contract [ 53 ] As the parties did not take the time to set out in writing even the most basic aspects of their oral agreement, given the conflict in the evidence the court is unable to make findings of fact as to all its details.

However, I am satisfied that the parties entered into an oral agreement retaining the claimants to develop the 3-D portion of their software program for approximately $100,000.00, on the understanding that the defendant company would own all rights to the intellectual property. [ 54 ] It was understood that in order to finalize a written agreement, it was necessary to scope out the project and to develop a detailed plan.

As a consequence, I am not satisfied that a firm timeline was established as part of the oral agreement, although both parties anticipated the project would be completed around the end of the year. [ 55 ] There was also discussion regarding the prospect of the claimant company being retained in a subsequent contract to develop the 3-D modules for furniture and accessories as depicted in a catalog.

However, the evidence does not establish that this was a condition of the oral agreement as a number of issues remained outstanding, including the plaintiff’s prices for these 3-D models. [ 56 ] Pursuant to this oral agreement, the defendants retained the plaintiffs to perform the necessary preliminary work to scope out

and define the details of the contractual relationship, as set out in the Statement of Work. This was a necessary precondition to negotiating the full written contract. It appears the parties understood this work would be performed at the rate of $100.00 per hour for Mr. Tremblay-Lavigne’s involvement. [ 57 ] I am not satisfied that the parties agreed that the payments would be made bi-weekly.

It was also an implied condition of the oral agreement that payment was dependent upon the defendants being satisfied that they had received value for the hours of work reflected in any invoice. [ 58 ] Lastly, while the parties were not under contractual obligation to reach a final agreement, I find that there was an implied condition in the oral contract that once the preliminary evaluation was completed, the parties were expected to negotiate in good faith based on the essential aspects of the oral agreement, and make reasonable efforts to finalize the full written agreement.

c) Why Negotiations Broke Down [ 59 ] During the first significant meeting between the parties following the completion of the Statement of Work (on August 5th), it became apparent that Mr. Tremblay- Lavigne desired further negotiations on the subsequent 3-D modeling contract or some form of “reciprocal agreement” before signing this written contract. However, on August 7th Mr.

Tremblay-Lavigne agreed by email that the 3- D modeling contract would be separate and that the current contract would provide that the defendants had all of the intellectual property rights for the work being performed during the current contract, once full payment was received for the services provided. [ 60 ] The effect of Mr.

Tremblay-Lavigne’s evidence on this issue was that when he received the draft contract on August 15th he realized that in addition to some issues of scope, there were two fundamental differences from the oral agreement; namely that he would not be paid bi-weekly based upon $100.00 per hour, and that the intellectual property rights remained with the defendants. [ 61 ] On the first issue, I am not satisfied there was an agreement that he be paid bi-weekly at the rate of $100.00 per hour throughout the terms of the contract rather than when certain milestones were achieved.

His evidence that the written contract required that he wait until the conclusion of the project to receive payment is not accurate. [ 62 ] On the second major issue, the evidence discloses that in an email on August 17 th he agreed that the modeling contract would be a separate, and Ms. Saurette advised that the claimants would have exclusive rights to the 3-D modeling provided their prices were competitive.

By this time the parties realized that the amount the claimants intended to charge for modeling a chair was not competitive. [ 63 ] Notwithstanding this commitment regarding the intellectual property rights, the next day the relationship between the parties began to break down when Mr. Tremblay-Lavigne returned to an earlier position, wherein he expected that the exclusive rights to the modeling contract would be incorporated into this agreement.

With his further insistence that there be a “back end deal” in this contract, the parties understood they had a fundamental disagreement as to the essential business concepts. [ 64 ] This disagreement as to who would own the property rights to the source code and software was the essential reason why the parties failed to conclude a detailed written agreement. [ 65 ] In terms of payment of the two invoices received, I am satisfied that the defendants were unable to confirm whether they had received good value for the amounts invoiced. This was due to the fact that Mr.

Tremblay-Lavigne did not spend any appreciable time working with the staff of the defendant company, including providing any training, and further as he failed to transfer electronically the product of his work in the form of source coding once there was the ability to do so. [ 66 ] In conclusion, on this issue I find that the contractual negotiations broke down due to the claimants’ failure to honour an essential condition of the oral contract, namely that the defendants would hold all the intellectual property rights. I also find that Mr.

Tremblay-Lavigne took this position once he realized that his efforts to secure a back end deal for exclusive rights to develop the 3-D models had failed. He did so in an effort to pressure the defendants into reaching this agreement. [ 67 ] Ms. Saurette considered these demands to be “extortion”, and I find them to be in breach of the oral agreement that these rights would reside with the defendant upon payment in full for the services provided. This demand was also in breach of the implied condition that the parties would negotiate in good faith based on the oral agreement.

d) The Value of the Services Provided Prior to the Breakdown [ 68 ] The potential value to the defendants, of the services provided by the claimants will never be known as Mr. Tremblay-Lavigne declined to provide the defendants with the information required to make this evaluation. However, even if the defendants would have received full value for the services provided, Mr. Tremblay-Lavigne’s refusal to honour the oral agreement and to bargain in good faith deprived the defendants of any potential value for the services rendered.

This was due to the fact that his behavior breached the oral agreement and caused the breakdown in the relationship, thereby requiring that the defendants through no fault of their own to start the process over again with the persons responsible for developing the software application. CONCLUSION [ 69 ] In conclusion, I find that the claimants are not entitled to rely on the oral contract for securing payment for their invoices as they breached the oral agreement in a fundamental way, and their failure to bargain in good faith led to the breakdown in the business relationship.

Further, the claimants have not satisfied the court that the defendants would be unjustly enriched if not required to pay the invoiced amounts, as the claimants actions in breaching the oral agreement deprived the defendants of any potential value they would have received from their services if the relationship had continued. [ 70 ] For these reasons, the claim is dismissed and it is not necessary for me to consider the counterclaim as it was put forward only as a set off. The parties are responsible for their own fees and disbursements.

E. Quantz Provincial Court Judge