55668 Newfoundland v. Labrador Limited, 2022 NLSC 127

court crest IN THE SUPREME COURT OF NEWFOUNDLAND AND LABRADOR GENERAL DIVISION Citation : 55668 Newfoundland and Labrador Limited v. Sullivan , 2022 NLSC 127 Date : August 1, 2022 Docket : 201001G5302 Between: 55668 Newfoundland and Labrador Limited First Plaintiff And: Michael Hall Second Plaintiff AND: CANADIAN ROOFING SOLUTIONS INC . THIRD PLAINTIFF And: Robin Sullivan First Defendant And: Christopher Winsor Second Defendant (DISCONTINUED 10/03/2014) And: 61791 Newfoundland and Labrador Ltd. Third Defendant - AND -

Before: Justice Frances J. Knickle Docket : 201201g0454 Between: 55668 Newfoundland and Labrador Limited FIRST Plaintiff AND: MICHAEL HALL SECOND PLAINTIFF (Struck 02/20/2013) And: Paul Davis Systems Canada, Ltd. Defendant AND: PAUL DAVIS SYSTEMS CANADA, LTD. PLAINTIFF BY COUNTERCLAIM AND: 55668 Newfoundland and LABRADOR LIMITED FIRST DEFENDANT BY COUNTERCLAIM AND: MICHAEL HALL SECOND DEFENDANT BY COUNTERCLAIM AND: ROBIN SULLIVAN FIRST THIRD PARTY AND: CHRISTOPHER WINSOR SECOND THIRD PARTY (Discontinued 10/03/2014) AND: 61791 NEWFOUNDLAND AND LABRADOR LIMITED THIRD THIRD PARTY Place of Hearing: St. John’s, Newfoundland and

Labrador Date of Hearing: March 3-6, 2020; March 9-13, 2020; March 17-18, 2020; January 18-22, 2021 January 25-29, 2021; February 2, 2021; April 27-30, 2021; June 30, 2021, July 30, 2021 Appearances: Paul D. Dicks, Q.C. and Megan S. Reynolds Appearing on behalf of 55668 Newfoundland and Labrador Ltd, Canadian Roofing Solutions Inc. and Michael Hall Christopher E. Gill Appearing on behalf of Robin Sullivan and 61791 Newfoundland and Labrador Ltd. Peter N. Browne, Q.C. and Travis D. Payne and Shane R. Belbin Appearing on behalf of Paul Davis Systems Canada, Ltd. Authorities Cited: CASES CONSIDERED: Allen v.

Flood, [1898] A.C. 1, [1898] C.C.S. No. 35 (U.K.H.L.); Bram Enterprises Ltd. v. A.I. EnterprisesLtd., 2014 SCC 12; Alleslev-Krofchak v. Valcom Ltd., 2010 ONCA 557; Seto v. Wendy’s Restaurants of Canada Inc., 2016 ABQB 493;Canada Cement LaFarge Ltd. v. British Columbia Lightweight Aggregate Ltd., (SCC), [1983] 1 S.C.R. 452; AmericanReserve Energy Corp. v. McDorman, 2002 NFCA 57; 1384334 Alberta Ltd. v. Buster’s Pizza Donair & Pasta Enterprises Ltd., 2020ABQB 369; 373409 Alberta Ltd. (Receiver of) v. Bank of Montreal, 2002 SCC 81; Bhasin v. Hrynew, 2014 SCC 71; Kerr v.

Baranow,2011 SCC 10; Peel (Regional Municipality) v. Canada, [1991] 3 S.C.R. 762; 2671914 Manitoba Limited v. Suncorp Pacific Ltd., 2001MBQB 70; R. c. Gagnon, 2006 SCC 17; R. v. K.P., 2019 NLCA 37; R. v. Best, 2016 NLCA 10; R. v. S.O., 2019 NLCA 42; R. v. M.(R.E.), 2008 SCC 51; 55668 Newfoundland and Labrador Ltd. v. Sullivan, 2017 NLTD(G) 57; MDG Kingston Inc. v. MDG ComputersCanada Inc., 2008 ONCA 656 STATUTES CONSIDERED: Corporations Act, R.S.N.L. 1990, c. C-36; Limitations Act, S.N.L. 1995, c. L-16.1,

Interpretation Act,R.S.N.L. 1990, c. I-19; Judgment Interest Act, R.S.N.L. 1990, c. J-2 TEXTS CONSIDERED: Peter T. Burns & Joost Blom, Economic Interests in Canadian Tort Law (Markham: LexisNexis, 2009);Fridman, G.H.L., Law of Agency, 7th ed. (Toronto: Butterworths, 1996) REASONS FOR JUDGMENT Knickle, J.:

INTRODUCTION [ 1 ] This trial is the result of the conflict that ensued when the franchisor-franchisee business relationship broke down. The Plaintiffs are (1) the incorporation known as 55668 Newfoundland and Labrador Limited (55668),

(2) Mike Hall, and

(3) Canadian Roofing Solutions Inc. (Canadian Roofing Solutions). 55668 was incorporated to run the franchise known as Paul Davis Systems of St. John’s. Mike Hall was a director of both companies. He was also initially a Plaintiff in both actions; but after a pre-trial application had been removed as a Plaintiff in the action against Paul Davis Systems of Canada. [ 2 ] The Defendants are: (1) the franchisor Paul Davis Systems of Canada, and (2) the owner operator of the franchise that replaced 55668, 61791 Newfoundland and Labrador Limited (61791) and its director, Robin Sullivan.

Chris Winsor, was also initially a named Defendant. He, like Mike Hall, was a former owner of the Plaintiff 55668. He had partnered with Mike Hall in the operation of the franchise and, as well, Canada Roofing Solutions. The action against Chris Winsor has been discontinued. [ 3 ] The Plaintiffs, through two separate actions 201001G5302 (5302) and 201201G0454 (0454), alleged that the Defendants engaged in several torts: conspiracy, conversion of goods, and the tort of economic loss by unlawful means.

They also claim unjust enrichment and a breach of the duty of good faith against Paul Davis Systems of Canada in action 0454. In action 5302 the Defendants, Robin Sullivan and 61791, have counterclaimed for alleged costs incurred by 61791 in attempting to address outstanding debts of 55668. In action 0454, the Defendant, Paul Davis Systems of Canada, have counterclaimed against 55668, for outstanding royalties and other fees.

Robin Sullivan and 61791 have been named as third parties in the action 0454. [ 4 ] While the two actions have not been joined, the evidence of the trials was heard at the same time and is to be applied in both trials. [ 5 ] The claims of the Plaintiff 55668 are allowed in

part in action 5302. I am satisfied that the Plaintiff 55668 has established wrongful interference by 61791 and Robin Sullivan with the assets of 55668 when their assets were transferred to 61791, by way of an invalid written agreement dated April 29, 2010. Any transfer of the assets required the consent of Mike Hall, the majority shareholder of 55668. Mike Hall did not consent to or sign this transfer of assets agreement, and he did not know of the agreement until it was delivered to his counsel a month after it was executed.

As such, the assignment of the assets identified in this agreement was invalid and constitutes wrongful interference with these assets from 55668.

I am also satisfied that monies belonging to 55668 were deposited into bank accounts of 61791. 55668 is entitled to damages in the amount equal to the value of the assets. [ 6 ] I am also satisfied that the counterclaims of 61791 and Robin Sullivan should be allowed in part, and the damages owing to 55668 shall be reduced by this set-off amount. [ 7 ] In action 0454, I am not satisfied that the tort of conversion and/or trespass against the premises and goods of the Plaintiff 55668 has been established. I am not satisfied that 55668 established any damages as a result of this conduct.

I am also not satisfied that Paul Davis Systems of Canada breached their duty of good faith towards 55668. Nor was Paul Davis Systems of Canada unjustly enriched by the wrongful interference with 55668’s assets when 61791 took over these assets by way of the invalid agreement. [ 8 ] The counterclaims of Paul Davis Systems of Canada against 55668 are allowed. At the date of the termination of the franchise, the Defendant Paul Davis Systems of Canada, was owed more than $60,000 in royalties from the Plaintiff 55668.

This debt accrued well before the alleged tortious conduct, and 55668 is liable to Paul Davis Systems of Canada for these outstanding royalties. [ 9 ] In both actions, 5302 and 0454, the claims in conspiracy and unlawful means are dismissed. I am not satisfied that there was conduct on the part of any of the Defendants that constituted either of these alleged torts. In particular, there was no intent on the part of any of the Defendants to injure or cause harm to any of the Plaintiffs.

Nor have the Plaintiffs established any causal connection between the alleged tortious conduct of the Defendants and purported harm suffered by the Plaintiffs. [ 10 ] Any adverse consequences to 55668 (except as I have found in relation to the conversion of assets), or Mike Hall, whether economic or by way of mental distress as alleged by Mike Hall personally, were, at worst, incidental consequences to the legitimate business intentions of the Defendants in their conduct. As stated by Lord Davey in Allen v . Flood , [1898] A.C. 1, [1898] C.C.S.

No. 35 (U.K.H.L.) at page 173 : The right to which a man has to pursue his trade or calling is qualified by the equal right of others to do the same and compete with him, though to his damage. [ 11 ] The claims of the Plaintiff, Canadian Roofing Solutions, in both actions are dismissed as there was insufficient evidence to establish that there was any conduct that impacted the property or assets of Canadian Roofing Solutions. [ 12 ] In action 5302, the parties shall bear their own costs. [ 13 ] In action 0454, the parties shall bear their own costs.

THE FACTS [ 14 ] The presentation of evidence entailed several weeks spread over the course of 18 months; largely due to the advent of the Covid-19 pandemic. Apart from the several witnesses who testified on behalf of the parties, hundreds of pages of documents were filed which, to the credit of all the parties, were so done mostly by consent. The documentary evidence in

part comprises three binders with over 190 separate tabs, two additional books of documents, as well several documents filed individually. There was a series of photographs tendered by the Plaintiffs describing the alleged assets of 55668. There were also two expert reports filed as part of the evidence on the financial health of the company. [ 15 ] Myriad email communications were admitted. For the most part, there was little issue that the communications could be taken for the truth of their contents, and represented the intent of the person making the communication.

[ 16 ] I have reviewed this evidence and the viva voce testimony in its entirety. Many of the facts are not in dispute. Unless otherwise stated, the background described below can be taken as facts that I have accepted. Where there are conflicts in the evidence, I have explicitly explained my finding of fact on the particular point. [ 17 ] Mike Hall, majority shareholder of 55668, testified that he was employed as a municipal firefighter and had so been for many years. The nature of his work as a firefighter left time to pursue other business ventures.

In 2005, he opened a renovation business engaging in what he described as “small renovation” projects, such as kitchen renovations. The company incorporated to run the business was known as Eastern Restorations Limited. [ 18 ] Through a colleague he learned of Paul Davis Systems of Canada. It was described as being in the “restoration” business and was becoming national in scope. Paul Davis Systems of Canada was run by Ken Robinson and his brother, Stephen. Mike Hall understood the business was interested in expanding to the Atlantic Canada region where it was yet to be established.

Mike Hall stated that he did some research, and made a call to Ken Robinson. [ 19 ] As a result of meeting with the Robinsons, in 2005 the first Paul Davis Systems franchise was established, with the corporation, Eastern Restorations Limited, being the franchisee. Mike Hall managed the first franchise in partnership with his wife and from the couple’s home. Mike Hall testified that in the course of running the franchise he became friends with both Stephen and Ken Robinson. He visited them at their homes in Ontario and when either of the Robinsons came to Newfoundland they were welcomed to Mike Hall’s home.

He stated that he looked to them for advice and support but he had more contact with Stephen Robinson in running the franchise. He described Stephen Robinson as the “technical/money guy”, whereas Ken Robinson was “geared towards marketing”. [ 20 ] Mike Hall testified that the business struggled in the first two to three years. During this period, Mike Hall’s marriage deteriorated and he and his first wife divorced. In the course of the marriage break-up the first franchise was discontinued and Mike Hall declared personal bankruptcy.

Notwithstanding the bankruptcy, the Robinson brothers supported a further franchise and a second restoration company was established. [ 21 ] In November 2007, the second franchise agreement with Paul Davis Systems of Canada was signed. Mike Hall established the corporation 55668 to run the franchise. At the time of the establishment of 55668, Mike Hall was not yet discharged from personal bankruptcy and so could not be a director. His mother was a director until he was discharged from bankruptcy in December 2007.

She played no further role in the company. [ 22 ] Mike Hall also convinced Chris Winsor, a longtime friend, to take

part in the venture as one of the shareholders of 55668. Mike Hall testified that both Ken and Stephen Robinson had concerns about Mike Hall’s ability to be able to manage the business given that he maintained his employment as a firefighter. They wanted to know that there was someone managing the franchise on a full-time basis. For this reason, Chris Winsor joined as the minority shareholder and also as a director of 55668. [ 23 ] Chris Winsor confirmed that he joined the business because the head office of Paul Davis Systems of Canada wanted a full- time partner.

He testified that he and Mike Hall both ran the business. Mike Hall looked after the “financial stuff” while he was the “boots on the ground”. He testified that in the beginning “there was a good relationship” with the Robinson brothers. [ 24 ] The former company, Eastern Restorations Limited, was still in existence and Mike Hall used this corporation to be paid for work done on behalf of the franchise. Monies would be paid to Eastern Restorations Limited by 55668, which would then be paid to Mike Hall. Eastern Restorations Limited was also used to provide financial assistance for 55668.

The Franchise Agreement 2007 [ 25 ] The franchise agreement (Exhibit #1, Tab 11) governed the business relationship between Paul Davis Systems of Canada, as the franchisor, 55668 as the franchisee, and Mike Hall and Chris Winsor as individual “guarantors” and shareholders of 55668. It was a standard form agreement for all of the franchises operating as Paul Davis Systems. The franchise agreement permitted 55668 to operate under the trade name of “Paul Davis Systems of St. John’s” and to use the exclusive trademarks and trade secrets of Paul Davis Systems.

It also established the requirements for royalty payments, which were due monthly. There were several other fees that were required either on a monthly or annual basis. [ 26 ] The franchise agreement prohibited the franchisee from carrying on any other business under clauses 6.4 and 6.5., which stated: 6.4 Services Offered During the term of this Agreement, Franchisee agrees to offer to customers within the Franchise Territory insurance restoration construction, loss mitigation, emergency services and cleaning services. Franchisee may also engage in Optional Programs.

Franchisee shall not engage in any other business activity, which is not directly related to this Agreement . 6.6 Compliance with Operations Manual Franchisee agrees to devote, carry on, conduct and operate the business contemplated by this Agreement of a full time basis, in accordance with good business practice and in accordance with the standards and policies of PDSC set forth in the Operations Manual; to acquire, retain and own, during the term of this [A]greement, all assets determined by PDSC to be reasonably necessary for the operation of such business and to conduct no business other than the PDSC Business from the location for the Franchisee’s operation …

[ Emphasis Added ] [ 27 ] The franchise agreement also gave Paul Davis Systems of Canada the authority to terminate the franchise agreement, with or without an “option to cure” failures in adhering to the terms of the agreement (clauses 17.1 and 17.2). When given a notice to terminate with the option to “cure”, the franchisee was permitted 15 days to bring the franchise into compliance with the franchise agreement. Possible failures where the franchise might be permitted to cure the defect included the failure to make timely payments as required (17.1(a)), or to operate the business in accordance with the Operations Manual (17.1(b)). There was also a catch-all clause, under 17.1(

g) which described a failure of “any act” that could constitute a breach of the agreement. The clause stated: (

g) Commission or omission by Franchisee or any other act, not enumerated herein, which constitutes a breach of the terms of this Franchise Agreement or any other agreement or undertaking entered into between the Franchisor and Franchisee. [ 28 ] The franchise also contained a dispute resolution clause, by way of mandatory arbitration, under clause 24.1: Any controversy or claim arising out of or relating to this Agreement or the acquisition or operation of the franchise, shall be settled by binding arbitration in accordance with arbitration procedures set forth in the Operations Manual.

Any pending arbitration proceedings involving the Franchisee shall have no effect on PDSC’s right to terminate this Agreement and such [ sic ] to terminate shall not be abrogated by the commencement of arbitration proceedings after termination has begun or has been concluded. [ 29 ] The wording of this clause appears to contain a typographical error. The phrase “ ...and such to terminate ” probably was intended to state “ and such right to terminate ” as the sentence does not otherwise make grammatical sense. However, nothing turns on this in respect of these proceedings.

All parties agreed that arbitration was a component of the franchise agreement. [ 30 ] The franchise agreement also required both Chris Winsor and Mike Hall to act as guarantors and personally guarantee the monies owed by the franchise to the franchisor (Clause 18).

Nor could any transfer of the franchise to another entity take place without the approval of the franchisor. [ 31 ] The franchise agreement also contained a non-competition clause in the event the franchise agreement is terminated (Clause 23) prohibiting either 55668 or Mike Hall and Chris Winsor from engaging in any related business for a period of two years after the termination of the franchise agreement. The unanimous shareholder’s agreement [ 32 ] The franchise agreement further required there to be a shareholders’ agreement between the shareholders of the corporation running the franchise.

In 2009, a unanimous shareholders’ agreement was signed by both Mike Hall and Chris Winsor (Exhibit #1, Tab 2). The agreement confirmed that Mike Hall was majority shareholder at 60 per cent and Chris Winsor held the remaining 40 per cent. The agreement provided the mechanisms for the operation of 55668, especially as it related to any fundamental changes to the company. In particular, under

section 2.02, certain activities could not be undertaken without unanimous consent by the shareholders (both Mike Hall and Chris Winsor). Any “windup, reorganization, or dissolution” of 55668 also required unanimous consent by the two shareholders. Further, any transfer of shares could not be accomplished without a “first right of refusal” of the other shareholders, and with 60 days’ notice to address any possible transfer. The Farmington leases [ 33 ] The restoration business required specialized equipment.

Much of this equipment was leased through a business affiliated with the national Paul Davis Systems business, Farmington Equipment Limited (Farmington). Jim Johnson, the owner of Farmington and family friend to the Robinsons, testified as to how the arrangement worked. Copies of the leases for 55668 were tendered, (Exhibit J.Johnson #1, Tabs 3-9). Payments under the leases were monthly and would accrue towards the eventual purchase of the particular piece of equipment at the end of the lease period.

The leases were explicit that the equipment remained the property of Farmington until the full purchase price was paid. The growth of 55668 [ 34 ] Mike Hall testified that in the first years of business, he struggled to find clients. With encouragement from the Robinsons, Mike Hall took a more aggressive approach in marketing the franchise. This strategy proved successful and the franchise secured a major client, Johnson Insurance, also known as Unifund (Unifund). This was a significant gain for not only the franchise locally, but also Paul Davis Systems of Canada, because Unifund was national in scope.

This meant that there was a potential to expand the relationship to other Paul Davis Systems franchises across the country. [ 35 ] Mike Hall stated that having secured Unifund’s business, the franchise’s revenues started to improve. A second major client was secured, the Co-operators Insurance Company (the Co-operators). These two companies made up the bulk of 55668’s business and by 2009, 55668 experienced a substantial increase in revenue.

The financial reports (unaudited), and tendered by consent, showed an increase in business from a gross revenue of $613,771 in 2007 to a gross revenue of $1,848,698 in 2008 and $3,138,411 in 2009. The relationship with Robin Sullivan [ 36 ] It was during this time that Mike Hall also introduced Ken and Stephen Robinson to the Defendant, Robin Sullivan. Mike Hall testified he was familiar with Robin Sullivan, and recommended him as a potential franchisee. At the time, Robin Sullivan operated his own construction company.

The introduction was a success and Robin Sullivan established his own Paul Davis Systems franchise operating on the west coast of the island of Newfoundland; helping to expand the reach of Paul Davis Systems of Canada in Newfoundland and Labrador. Mike Hall testified that he took Robin Sullivan “under his wing”, taking him to meetings and introducing him to contacts in the restoration business in St. John’s. He testified he introduced Robin Sullivan to Michelle Stack who was Mike

Hall’s friend and contact at Unifund. Mike Hall testified that Robin Sullivan had been complaining to him about the difficulty in obtaining work, and because of this introduction, Robin Sullivan was able to establish his own relationship with Unifund for work on the west coast. [ 37 ] Robin Sullivan also testified at trial. He explained that he was in the construction business and was friends with Mike Hall. He confirmed that he learned of Paul Davis Systems through Mike Hall.

He also agreed that it was through Mike Hall that he was able to establish his own franchise on the west coast of the island of Newfoundland, “Paul Davis Systems Western”, in 2008. [ 38 ] There was evidence from an employee of 55668, Dwayne Kearney, that the relationship between the two franchises was good and that equipment was often shared. He testified that the St. John’s operation was larger and busier than Robin Sullivan’s franchise on the west coast.

Robin Sullivan agreed that the relationship between the two franchises was good. [ 39 ] Paul Davis Systems of Canada also expanded to other parts of Atlantic Canada. Mike Hall stated that he assisted other franchises by providing his expertise. He stated because of his efforts, in particular in attracting Robin Sullivan as a further franchisee owner, Paul Davis Systems of Canada reduced the amount of royalty payments from 55668 by 25 per cent.

A condition of this reduction was that the franchise remain up-to-date with payments, within a 90 day grace period. [ 40 ] Despite the positive growth and activity of 55668, expenses also increased. In 2009, 55668 took major steps to not only expand 55668’s scope of business but also to move to larger and more expensive premises. The leased premises at McNamara Drive [ 41 ] Mike Hall testified that with the growth of the business, the business moved on a couple of occasions.

In 2009, 55668 secured a large space on McNamara Drive, Paradise, NL that also required renovations to render it fit for the needs of the business. Many of 55668’s employees handled that renovation work. Chris Winsor testified that the renovations took approximately 6 to 8 weeks to complete. There was a period of time in 2009 during which 55668 paid rent on two premises while the renovations were completed, although it was unclear in the evidence the extent to which this overlap in rental payments occurred. Chris Winsor estimated 55668 may have paid rent for two premises for a period of six months.

The establishment of Canadian Roofing Solutions [ 42 ] Both Mike Hall and Chris Winsor testified that in the course of 55668’s projects, it was often necessary to subcontract work; especially in the area of roofing. However, it was difficult to hire qualified roofers and there were complaints about the quality of the work. To meet this demand, the two directors decided to establish their own roofing company so that they could have control over this work.

Mike Hall testified that clients such as Unifund responded positively to the idea. [ 43 ] Unfortunately, before so doing, neither Mike Hall nor Chris Winsor contacted or involved Paul Davis Systems of Canada, to seek either their approval or assistance with this venture. Nor did they consider the implications of starting another business on the franchise agreement; in particular, the prohibition in the franchise agreement from engaging in other businesses.

Chris Winsor testified that at the time, he and Mike Hall did not consider whether the creation of the new business put them in violation of the franchise agreement, but thought because of the apparent need, establishing the company would be a good idea. [ 44 ] Although Mike Hall testified that Canadian Roofing Solutions was not a drain or improperly drawing on the franchise’s resources, Chris Winsor testified that there was overlap in managing the two businesses. He understood that the revenues were kept separate, but there was “cross-over” as the two businesses were operating under the “same roof”.

The overlap was confirmed by other employees who testified, Larry Walton and Glen Cook. For example, Larry Walton, who worked with the franchise since 2007, testified that Canadian Roofing Solutions used the same phone system as the franchise.

Glen Cook also confirmed that assets of Canadian Roofing Solutions were kept at the premises of 55668, although he did not know if 55668 shared assets with Canadian Roofing Solutions. [ 45 ] I find as a fact that there was an overlap in running the two businesses insofar as the use of the same premises, employees and infrastructure such as equipment and payroll, to run the businesses. [ 46 ] Apart from the overlap of the roofing business with the franchise business, Canadian Roofing Solutions suffered what Mike Hall described as a “major financial setback” in 2009, when the one project that was independent of Paul Davis Systems failed.

Mike Hall testified that the value of the project was between $450,000-$500,000. He stated that one third of the way through the project the contractor defaulted on payments and he was forced to “call in the bond” in order to ensure suppliers were paid. [ 47 ] Chris Winsor testified that Canadian Roofing Solutions was never profitable. The equipment costs were “outrageous” and Paul Davis Systems was the only customer. He stated that if he had his time back, he would have never pursued this venture.

Asbestos remediation [ 48 ] Mike Hall testified that from his experience in the restoration business, many buildings required asbestos remediation before renovations could be completed. Given this, in 2009 he and Chris Winsor decided to have 55668 branch out into asbestos remediation, and took the steps necessary to become certified. He stated that the asbestos remediation business was to operate independently from the franchise business. Specialized and expensive equipment was needed which meant further expenses were incurred by 55668 to get the business established.

It was unclear in the evidence whether Paul Davis Systems of Canada had approved this venture. Industrial Cleaning [ 49 ] A further business commenced around the same period was that of cleaning industrial clothing, which meant further financial investment, including a new lease from Farmington for a specialized washer and dryer. Again, it was unclear in the evidence the extent to which, if any, Paul Davis Systems of Canada authorized this venture.

The deterioration of the relationship with Chris Winsor [ 50 ] Mike Hall testified that a further complicating factor in running 55668, as well as Canadian Roofing Solutions, in 2009 was the deterioration of his relationship with Chris Winsor. With the two having been longtime friends, Mike Hall stated the deterioration of their friendship was “like a divorce”. From his perspective, the main issue was that Chris Winsor became involved in a personal relationship with a former Co-operators adjuster, Kim Williams.

Mike Hall stated that in 2009 she took sick leave from the Co-operators and spent significant time in Chris Winsor’s company. Mike Hall was concerned about the time they spent together, especially while Chris Winsor was at work, given the potential for the appearance of, if not an actual, conflict of interest. He described that often Kim Williams was at the premises of 55668, and he was concerned she might have access to other files of 55668. He learned that she in fact attended site visits on claims that did not have to do with the Co-operators.

He stated he spoke to Chris Winsor about the potential for creating a conflict of interest with respect to non-clients of the Co-operators, but the problem continued. [ 51 ] To compound the financial and operational pressures on 55668 in 2009 (the increased expenses, the addition of the above- described new businesses and renovations to the newly leased premises), 55668 lost its two major clients: the Co-operators and Unifund. The loss of Co-operators Insurance business [ 52 ] According to the witnesses, the Co-operators Insurance Company made up almost 80 per cent of 55668’s business.

However, sometime between 2008 and 2009 problems developed with individual restoration jobs. Not only were there complaints regarding the quality of work, there was concern voiced of a potential conflict of interest in the personal relationship between Chris Winsor and Kim Williams, the adjuster with Co-operator’s. Complaints regarding the potential for conflict of interest developed as early as the fall of 2008 (see for example, Exhibits ML #3 and ML #5). In the spring of 2009, 55668 was suspended from the Co-operators’ roster of restoration companies with whom insurance adjusters were entitled to contract.

The loss of work meant a significant drop in revenue for 55668. [ 53 ] The adverse impact from the loss of revenue was evident by mid-summer. Royalty payments to Paul Davis Systems of Canada were late. This delay in payments precipitated a series of emails from various personnel from the franchisor. Around mid-August 2009, after several communications went unanswered or only briefly responded to by Mike Hall, Stephen Robinson sent a formal memorandum (Exhibit #1, Tab 42) to Mike Hall and Chris Winsor.

Stephen Robinson expressed not only his concerns with the delay in monies due to Paul Davis Systems of Canada, he was concerned that the two directors had commenced a new venture, Canada Roofing Solutions, without first getting approval from he and Ken Robinson. [ 54 ] Mike Hall testified that the reaction of Paul Davis Systems of Canada to establishment of Canadian Roofing Solutions was mixed, and that their main concern was if or how the business could impact royalty payments.

He stated there was discussion back and forth about an arrangement that might work for both parties, but there was “never a definitive no” to the business. Exhibit #1, Tab 42 suggests that the reaction was more than mixed: As you know, PDSC has been very patient with you and had given you a break on your royalty. They have gone beyond being supportive of your business and now have to react because of what has taken place. I have attached the part of your Franchise Agreement which states that you cannot conduct a business other than your Paul Davis business. (6.4 and 6.5).

Based on your financials you have not paid your taxes and are therefore in breach of the Operations Manual and MOR. Non payment of taxes is a serious breach. It seems that you have been funding your roofing company through your Paul Davis Company. We believe that you have loaned the roofing business thousand [ sic ] of dollars, while at the same time, not paying PDS Canada. I lack seeing the fairness in your decision on this point.

Ken and I have done everything from loan you money, to teaching you on how to become a successful business owner and can tell you we are both highly disappointed in your actions now. [ 55 ] The memorandum continued: The Franchise Agreement is very clear on what is expected of you and what is expected of us. We have no choice, but enforce this fully.

You should have no doubt that we cannot allow certain breaches to continue. … [ 56 ] Stephen Robinson expressed concern that not only did Canadian Roofing Solutions operate from the same premises as the franchise, used the same equipment and the same employees, there was concern that the revenue generated by 55668 from Paul Davis Systems was being used to run the roofing business. [ 57 ] The memorandum was also concerned with the financial health of the franchise generally and referred to it as “again” being “insolvent”. (The reference to “again” was to Mike Hall having had previously declared personal bankruptcy.) The memorandum stated that as of the summer of 2009, while accounts receivable were $157,552.28, accounts payable were $247,246.27.

There was concern that 55668 was having to rent two premises at the same time, and the franchise was behind not only in royalties, but statutory remittances. [ 58 ] The memorandum advised the two shareholders that they had “15 days to provide the following remedy”, and then listed a number of specific tasks to be performed; including furnishing information about the particulars of Canadian Roofing Solutions. The memorandum ended with what might be seen as a warning: It is unfortunate we have arrived at this point as all could have been prevented by simply heeding our advice and following your franchise agreement.

I don’t want to be forced to close your franchise, but it seems that that [ sic ] the franchise is being operated as if no agreements have been signed and no rules need be followed. [ 59 ] Mike Hall testified he did not recall that the memorandum included 15 days notice to complete the steps to remedy the situation. He did however immediately respond to the memorandum with an email (Exhibit #1, Tab 43) advising Stephen Robinson that “we feel confident that we will rebound from our seeming financial low we are enduring”. He also took “exception” to the assertion that

the other business ventures were financed by the franchise, and stated in the email: Our other ventures are supporting and fostering the growth of PDS, which will carry our parent company to the next level and allow us to repay our outstanding AP. [ 60 ] The email was signed as “Your friend, Michael”. Mike Hall testified that in his view, Canadian Roofing Solutions was an independent business that did not adversely affect the business interests of the Paul Davis Systems franchise.

Chris Winsor stated in his testimony that he also disagreed with the head office that royalties should be paid to Paul Davis Systems of Canada from Canadian Roofing Solutions’ revenue. [ 61 ] Mike Hall provided the information regarding Canadian Roofing Solutions as requested in the August memorandum. In an email sent September 2, 2009 (Exhibit #1, Tab 45), Mike Hall tried to assure the Robinson brothers that the franchise was on track, and that they were committed to paying outstanding royalties, which at that point were in excess of $48,000.

Although the email from Mike Hall maintained a friendly and even joking tone, the response from Ken Robinson was less so: Hi Mike and Chris Thank you for providing the information requested. I will review immediately upon receipt and get back to you. Steve and I are very concerned about your organization. You have moved forward with many initiatives this past year and been bitten by a few of them. We have both seen and experienced this type of situation before and the outcome is usually very bad. We both hope you will become very successful business people. Let’s hope this path does not prove fatal.

I have often said to my employees in the past, don’t mistake my kindness for weakness. Because I will always do what is necessary. Please don’t mistake me. That being said, I do consider you both friends and I’m sure we can get you back on the path. But you must be willing to listen! Best wishes. Ken Robinson [ 62 ] Upon review of the financial information forwarded by Mike Hall, on September 10, 2010 Stephen Robinson sent a further memorandum to both Mike Hall and Chris Winsor, outlining the concerns of Paul Davis Systems of Canada (Exhibit #1, Tab 47).

He confirmed the Robinson brothers’ view that not only were 55668, Mike Hall and Chris Winsor in breach of the franchise agreement, Stephen Robinson reminded Mike Hall and Chris Winsor that there were “outstanding A/R issues” and that the failure to address this problem could result in termination of the franchise. He wrote: It needs to be clearly understood that the St. John’s franchise could be terminated for these breaches.

It is not our intention to do so at this time, but all issues must be resolved. [ 63 ] Mike Hall responded to Stephen Robinson’s email agreeing with “some points” but reaffirming his view that the roofing company operated independently of the franchise. He stated that the company would continue to dispute that Paul Davis Systems of Canada was owed royalties from revenue of Canadian Roofing Solutions.

With respect to being in breach of clauses 6.4 and 6.5 of the franchise agreement, he stated: We see our dilemma as to the conflict of interest presented in our FA in sections 6.4 and 6.5 and we are seeking legal opinion as to a remedy. [ 64 ] In the email, Mike Hall stressed the desire to resolve the conflict and remain on good terms with the head office.

He expressed that he and Chris Winsor were willing to “make the necessary changes to the present structure” of Canadian Roofing Solutions so that “both PDSC and PDSJ will be happy with the compromise”. [ 65 ] Stephen Robinson responded to this email in a more conciliatory tone than earlier emails. He stated: “we do understand the reasoning behind your decision to open a roofing business”. He also supported Mike Hall discussing the issue with a lawyer, explaining that “[w]e (PDSC) don’t have many options but to enforce the agreement and let the process take its course”.

Stephen Robinson also stated that one option open to Mike Hall, once they received legal advice, was to pursue arbitration. He reminded Mike Hall that Paul Davis Systems of Canada had not received any payments from 55668 in “6 to 7 months”. [ 66 ] Ken Robinson testified that if the royalties from Canadian Roofing Solutions had been paid to Paul Davis Systems of Canada, they would have approved of the business. This supports Mike Hall’s testimony that a share of royalty payments from Canadian Roofing Solutions’ revenue was the Robinsons’ primary concern.

On cross-examination, Ken Robinson agreed that there were other franchisees who operated businesses in addition to their franchises. He agreed that Robin Sullivan operated a construction business as well as the

west coast franchise. Ken Robinson distinguished Robin Sullivan’s situation from that of Mike Hall and Chris Winsor in that “Robin was doing everything right” in making the required payments; whereas with Mike Hall and Chris Winsor, the concern was that the other businesses were a “distraction”. [ 67 ] In October 2009, an agreement to address the late royalty payments from 55668 was reached (Exhibit #1, Tab 48). It was signed by Mike Hall, Chris Winsor and Stephen Robinson.

Apart from the payment regime to address monies owed to Paul Davis Systems of Canada, 55668 was not permitted to assume new debt for equipment. The agreement also included the following statement in bold type: Please note that this is a notice of Non-Compliance as per the Operations Manual, Booklet III, MOR, where stated that each Franchise shall pay all sums due to the Franchisor as and when due.

Failing to do so will result in a monetary ($500.00) or network penalty (lose right to vote/awards/termination). [ 68 ] Although no agreement was reached as to whether royalties were owed by Canadian Roofing Solutions, Mike Hall testified that he thought “things were settling down” and a plan was in place. The meeting in November, 2009 [ 69 ] Around early November 2009, both Ken and Stephen Robinson came to St. John’s when the opening was held for the new premises at McNamara Drive.

Both Robinsons testified that they did not visit to celebrate the opening of the new premises, but to have a frank discussion with Mike Hall and Chris Winsor about the state of finances of the St. John’s franchise. [ 70 ] Chris Winsor testified that at that meeting, the brothers were upset about the “outstanding issues”. He testified that Stephen Robinson stated that the franchise was insolvent, to which Chris Winsor stated he did not appreciate the comment, and did not agree. He thought business was “good”, as at that point work was “still coming in”.

However, he also testified that at that time he did not know the full state of affairs with the finances of both 55668 and Canadian Roofing Solutions. [ 71 ] Mike Hall testified that at the meeting, in looking for a way to resolve the financial difficulties of 55668, Ken Robinson suggested that one option was for the business to be sold. Mike Hall stated he was open to selling the franchise. He stated that the brothers indicated to him that they had a buyer. During this meeting, Mike Hall stated that he was advised by the brothers that Robin Sullivan was a possible buyer for the franchise.

Both Ken and Stephen Robinson denied having said this; nor did Chris Winsor confirm that Robin Sullivan was mentioned as a potential purchaser. He did agree on cross-examination that approximately six months prior to the termination of 55668’s franchise, Robin Sullivan told him that he, Robin Sullivan, would be the new franchisee. [ 72 ] Robin Sullivan denied that he had been interested, or even approached by the Robinsons, to purchase the franchise in the fall of 2009. He also denied that he told Chris Winsor he would be the new franchisee.

Robin Sullivan testified that he was aware of the trouble faced by 55668, and was concerned how it might affect his operations on the west coast. He testified he was not approached by the brothers to possibly take over the franchise until after Christmas of 2009, or early January 2010. [ 73 ] I accept that there was discussion at the meeting in November 2009 that an option for the resolution of the franchise’s financial woes was to sell the franchise. I also accept that Robin Sullivan’s name may have come up in the meeting.

I also accept Chris Winsor’s testimony that Robin Sullivan advised him that he was going to be the new franchisee, but have difficulty accepting that this occurred six months prior to the termination of 55668’s franchise agreement. I agree with Robin Sullivan that it is more likely that he was approached by the brothers around Christmas 2009, or early January 2010, when 55668 lost its second major client, Unifund.

The loss of Unifund [ 74 ] Despite coming to an agreement in October 2009 as to how to return the business to more solid financial footing, towards the end of November 2009, 55668 suffered another major financial setback. Unifund suspended 55668 as a potential contractor for restoration work. Mike Hall testified that there was no formal notice, but he learned of the suspension while on a snowmobiling trip in the Rocky Mountains with Robin Sullivan.

Mike Hall stated that he received a phone call from Michelle Stack, the close friend and business associate from Unifund, who advised she had been fired from the company. [ 75 ] Mike Hall pursued the matter further with the regional manager at Unifund, Gerard Corcoran. A series of emails were tendered showing correspondence between the two (Exhibit #1, Tabs 49-50). In a lengthy email on December 1, 2009, Mike Hall requested to meet with Gerard Corcoran to try and resolve the suspension.

In the email, he described the franchise as a “loyal service provider” and took “enormous pride” in the position the franchise had held with Unifund. The email response from Gerard Corcoran was telling: [You have] no clue of the present state of affairs we (Unifund) finds itself in thanks to the lack of attention and control of several restoration jobs currently ongoing with your company. Over the past several weeks (and actually months) PDS has done anything but “make Unifund look good”.

We have adjusters scrambling to get control of several files that have gone clearly off the rails because of the incompetence [shown] by your staff by not “doing the right thing” and not “keeping control of the situation” when it comes to major restoration --- needed in a timely manner. [ 76 ] Gerard Corcoran stated in the email that until matters were under control, he would not discuss the situation with Mike Hall.

[ 77 ] Whether the work done by 55668 for Unifund was of less than satisfactory quality was not pursued in detail at trial. However, Gerard Corcoran testified that from his recollection, there were problems with particular restoration projects. He agreed on cross- examination that there could also be unreasonable clients. He testified that one concern was not so much about the quality of the work, but that 55668 had obtained a larger share of restoration work than was typical. That imbalance had to be rectified and was part of the reason for the suspension.

While he agreed that the suspension of the franchise was not necessarily permanent, he stated that as long as Mike Hall was associated with Paul Davis Systems, Unifund would not use the franchise for restoration work. I accept as a fact that by the end of November, 2009, Unifund no longer wished to utilize Mike Hall or 55668 for restoration work. [ 78 ] The loss of both Unifund and Co-operators for 55668 meant that by the end of December 2009, 55668 had lost its major sources of revenue. [ 79 ] Mike Hall stated that in late December or early January 2010, he had discussions with Robin Sullivan.

According to Mike Hall, Robin Sullivan expressed an interest in purchasing the business and was willing to discuss coming to an agreement. Mike Hall stated that in the meantime he also considered other potential buyers and even raised another specific potential buyer, Henry Power, with Chris Winsor. Robin Sullivan did not confirm the conversation. I find as a fact there was a conversation between Robin Sullivan and Mike Hall about selling the franchise, in late December 2009 or early January 2010.

The events of January 2010 [ 80 ] Matters came to a head in January of 2010. [ 81 ] Mike Hall testified that in his view, the deterioration of his relationship with Chris Winsor contributed negatively to business. He decided Chris Winsor should be removed from managing the business. Rather than approaching him directly, or taking any of the steps as established in the unanimous shareholder agreement, on January 3, 2010 Mike Hall sent an email advising several employees that Chris Winsor and he would be “parting ways” (Exhibit #1, Tab 55).

He forwarded a similar email to Ken and Stephen Robinson approximately an hour later. He did not send the email to Chris Winsor. Chris Winsor stated that he found out about the email from one of the recipients, Dwayne Kearney. [ 82 ] Chris Winsor stated upon learning of the email, his first concern was that he was losing his job. He telephoned Ken Robinson and was advised by him that Mike Hall could not “do this” as it would be in breach of the franchise agreement. Chris Winsor then wrote Mike Hall an email and advised him accordingly.

At the direction of the Robinsons, the four individuals spoke in a conference phone call the next morning. [ 83 ] Mike Hall stated that in that phone call he was told by the brothers to send out a retraction regarding Chris Winsor or there would be no “further dialogue” regarding helping out the franchise. Mike Hall stated that he was told that he had no authority to “break” his relationship with Chris Winsor, but had to obtain authorization from the head office. Mike Hall described the direction to him to either “back down” or it would be the end of the relationship with Paul Davis Systems of Canada.

Mike Hall stated that, for that reason, he sent an email to the Robinsons confirming that he would not pursue removing Chris Winsor as a director or shareholder of 55668 (Exhibit 1, Tab # 58). [ 84 ] Chris Winsor testified that when he learned from Dwayne Kearney of Mike Hall’s intention to remove him from the franchise, while he was worried about losing his job, he also wanted to quit. However, he testified that Ken Robinson convinced him to stay with the franchise.

After the phone conference in which the Robinsons directed Mike Hall to retract the email purporting to remove Chris Winsor as a director of 55668, Chris Winsor emailed the brothers advising that he would continue to work for and “support” the franchise “until I am directed from PDSC.” He advised he would update the brothers over the next month, and thanked them for their support. January 22, 2010 [ 85 ] Mike Hall testified that after the phone call on January 4, 2010, his relationship with both of the Robinsons and Chris Winsor became tense.

There was little communication thereafter. [ 86 ] Chris Winsor testified that after the phone call with the Robinson brothers, and during the month of January 2010, Mike Hall’s behavior was “unpredictable”. In particular, on the afternoon of Friday, January 22, 2010 during business hours, he noticed Mike Hall removing equipment and items from the workshop area of the premises. He could not recall exactly what was taken, except tools and a snow-blower, but he became concerned because he did not know what Mike Hall was removing or why.

There were items that belonged to homeowners or other clients of the insurance companies stored at the premises while restoration work was done. Chris Winsor knew that the franchise was responsible for the safekeeping of this property while at its premises. [ 87 ] He also became aware that on the same date, that Mike Hall had directed 55668’s bank to remove overdraft protection on its account. Mike Hall then transferred approximately $15,000 from 55668’s bank account to the bank account of Eastern Restorations Limited.

Mike Hall testified that he transferred the money because Eastern Restorations Limited had loaned this money to ensure that 55668 would have the necessary overdraft protection on its account. [ 88 ] Chris Winsor stated that he telephoned Ken Robinson the same day “looking for direction” as to what he should do. He stated that Ken Robinson told him to “change the locks”. On cross-examination by counsel for Paul Davis Systems of Canada, Chris Winsor qualified what Ken Robinson said to “he told me I could change the locks”.

Under further cross-examination by counsel for the Plaintiffs, Chris Winsor confirmed that it was Ken Robinson’s idea to change the locks. He stated he did not know of any authority under the franchise agreement to take such action but assumed there was authority given it was what Ken Robinson told him to do. He followed this direction and had the locks changed by an employee. He then sent an email both to Ken Robinson and Robin Sullivan (Exhibit #1, Tab 64) advising of having changed the locks.

He testified that his concern was to ensure that the property of third parties, and the contents of the building generally, were safe.

[ 89 ] Ken Robinson testified that while he had a conversation with Chris Winsor he did not direct him to change the locks at the premises. He may have suggested it as an option. He testified his main concern was to ensure that any property belonging to customers stored at the premises was protected from harm. [ 90 ] Mike Hall stated that on January 22, 2010 he received a call from one of the managers, Larry Walton, that the locks to the premises of McNamara Drive had been changed.

Mike Hall testified he tried the locks himself the next day, which was a Saturday when the offices would normally be closed, and was unable to access the premises. [ 91 ] Larry Walton testified that he was the person who actually changed the locks. He was instructed to so do by Chris Winsor, and then was told that he and other employees were not to allow Mike Hall into the premises except during business hours, and through the front door.

He testified that at the time he had no concerns that Mike Hall was removing assets of 55668 or insurance clients from the premises. [ 92 ] Dwayne Kearney similarly testified that he was also instructed to not allow Mike Hall on the premises. He testified that because of what happened, the “drama” as he described it, employees were concerned whether or not they would have a job. He also testified that before January 22 he did not see Mike Hall remove any property from the premises. He did not know if Mike Hall removed any of his personal property, but testified “I’m sure he did”.

Dwayne Kearney testified that he was told by Chris Winsor to report if Mike Hall came to the premises. [ 93 ] Glen Cook, another employee of 55668, confirmed that Chris Winsor advised that the locks were changed. He understood from Chris Winsor that the direction to do so “specifically” came from Ken Robinson. He testified he remembered this because he remembered stating “that’s going to have implications down the road”.

The termination of the franchise agreement [ 94 ] On January 26, four days after the locks were changed at 55668’s premises, a letter (CW #3, Tab 12) was sent from Paul Davis Systems of Canada to both Chris Winsor and Mike Hall advising that the franchise agreement was being terminated under

article 17 of the franchise agreement. The termination was for “failure to maintain business practices in accordance with the Paul Davis Systems Operations Manual”. The failure was as per

article 17.1(

A) of the franchise agreement by failing to pay “sums” as required. As a termination under

article 17.1, the termination should have included the 15 day notice period for 55668 to “cure” the failures. However, the notice provided no option to remedy the failures, in particular the late royalty payments. The termination notice also cited

article 6.2b for: “failing to conduct business as per the Franchise Agreement: Franchisee agrees to carry on, conduct and operate the business contemplated by this franchisee agreement on a full time basis, …etc.” [ 95 ] The citation of the relevant

article number as 6.2b appears to have been in error. The text of the

article cited as 6.2b is in fact the text of articles 6.4 and 6.5 of the franchise agreement referred to earlier in this judgment.

Article 6.2b of the franchise agreement refers to unrelated subject matter. Nothing turns on this apparent error in the letter, as it was clear from the evidence, and the parties agreed, that the basis for the termination of the franchise was because of the failure to pay the required royalties, and that 55668, by operating a separate business, Canadian Roofing Solutions, violated articles 6.4 and 6.5.

The new franchise agreement with 61791 and Robin Sullivan [ 96 ] On February 6, 2010, less than two weeks after the termination of the franchise agreement with 55668, Paul Davis Systems of Canada signed a franchise agreement with Robin Sullivan and 61791, his newly incorporated company (RS #2, Tab 10). The new name of the franchise was “Paul Davis Systems Eastern”. [ 97 ] Neither Robin Sullivan nor the Robinson brothers could recall with precision when Robin Sullivan was approached or agreed to run a franchise for Paul Davis Systems in eastern Newfoundland and Labrador.

Chris Winsor also initially testified that he was unsure at what point he knew that Robin Sullivan was going to take over the franchise, notwithstanding that he also testified that Robin Sullivan had told him he would be the new franchisee six months earlier. However, on cross-examination, Chris Winsor agreed he must have known at least by January 22, because he would not otherwise have advised Robin Sullivan that the locks had been changed. Chris Winsor also agreed that after the locks were changed he took direction from Robin Sullivan.

He stated that there was a two-week period before the locks were changed where he was given no direction by anyone. [ 98 ] Gerard Corcoran from Unifund confirmed email communication with Robin Sullivan as early as January 18, 2010 (Exhibit 1, Tab 63) in which Robin Sullivan advised he was taking over the Paul Davis Systems franchise in St. John’s. The email from Robin Sullivan to Gerard Corcoran states: Hi Gerard, I think that we haven’t officially met but I am told that Jason Hicks and Todd Blake have spoken to you in the past with regards to our work here on the west coast of the province.

I have been in conversation with Ken Robinson of PDS Canada and the PDS staff out in St. John’s with regards to the current issues in that location. I have been engaged to take over the business out there in an effort to right some of the wrongs that have been done. I am coming to St. John’s to begin this task and would like to ask for the opportunity to meet with you to discuss the issues so that I can or we can resolve them with the hopes of doing work in the future for your organization. Please let me know a time that I might come and speak with you in the next day or so.

Just 5 minutes would do. [ 99 ] Although Robin Sullivan could not recall the email, he did not dispute that he would have met with Gerard Corcoran in the course of doing his “due diligence” to determine whether or not he would take over the franchise. He did not agree that he had made a final decision to assume the franchise at that point, but was still doing his “due diligence”. Robin Sullivan stated that not only Unifund,

but other suppliers or contractors used by Paul Davis Systems in St. John’s did not want to hire, or be hired, if Mike Hall was associated with the franchise. Many suppliers had not been paid, and their relationships with the Paul Davis Systems franchise in St. John’s were strained. Robin Sullivan testified he had to meet with suppliers and clients to see if they would accept further business from the franchise with him at the helm, and it was for this reason he met with Gerard Corcoran. [ 100 ] Even earlier there was correspondence from Jim Johnson to Ken Robinson (J.

Johnson #3) dated January 13, 2010 before the termination of the franchise agreement that stated: … I spoke to Chris Winsor; who is very optimistic that the business will survive. He indicated that he is waiting for a decision from you (head office) on the future plans for St.

John’s. [ 101 ] Larry Walton, who kept a diary to keep track of work for the franchise (LW #1), had noted on January 25, 2010, before the new franchise agreement but after the locks were changed, to provide Robin Sullivan with a list of “courses and contacts”. [ 102 ] Similarly, Dwayne Kearney testified that on January 29, 2010 he went to the west coast of the island to help out with that franchise, while Robin Sullivan came to St. John’s to conduct business in relation to the St John’s operation. Robin Sullivan also agreed these events occurred.

January 29, 2010 would have been after the termination of the franchise agreement with 55668, but prior to Robin Sullivan signing the new franchise agreement with Paul Davis Systems of Canada in February. The transition from 55668 (Paul Davis Systems St. John’

s) to 61791 (Paul Davis Systems Eastern) [ 103 ] Although the new franchise agreement for 61791 was in place by early February 2010, it took several weeks for the operations that related to Paul Davis Systems to be transferred from 55668 to 61791. Chris Winsor testified that he understood that Mike Hall was going to continue with the roofing business. While 55668 would clue up any outstanding work for Paul Davis Systems, 61791 would take over new work that appeared. [ 104 ] During this period, the same employees were working for 55668 and 61791.

Both Robin Sullivan and Chris Winsor testified there was an effort to have employees paid by 55668 or 61791, depending on for whom work was being done, but the delineation was not clear. There was overlap as to which company paid which employee and when. For example, a check stub was filed for Larry Walton showing that for the weeks February 22, 2010 to March 3, 2010, after the franchise agreement was terminated with 55668, he was paid by 55668; although he was also assisting Robin Sullivan in organizing the new franchise.

By April 2010, it appears the employees were all transferred to 61791’s payroll. [ 105 ] There is ample correspondence during February and March 2010 that suggests that, for the most part, there was an amicable tone to the negotiations to the transfer of operations from 55668 to 61791. In particular, the email correspondence from March, 2010 described in Exhibit #1, Tabs 81, 82, 85, 87, shows that the parties not only came to an agreement on the assignment of the lease held by 55668 for McNamara Drive, but they were working towards an agreement on the assignment of 55668’s equipment and infrastructure.

The transfer of the lease of premises at McNamara Drive [ 106 ] The assignment of the lease was finalized on March 29, 2010 (Exhibit #1, Tab 13), and signed by Mike Hall and Robin Sullivan. Robin Sullivan testified that he did not want to lease McNamara Drive because in his view the premises were larger than what was needed to run the franchise. However, he testified that work started coming in almost immediately for the new franchise.

He needed not only space immediately within which to run the franchise; he also wanted to assure clients like Unifund that the new franchise was in control of the premises and business. For this reason, he testified he was willing to assume the lease. I accept his testimony that this was why he assumed the lease. [ 107 ] The lease, as had been arranged between 55668 and the owner of the building, included an option to purchase the building at the end of the lease period. The purchase price was just under one million dollars, less the rent that was paid during the term of the lease.

Included in the assignment to 61791, was a further clause that 61791 agreed to pay $50,000 to 55668 if, at the end of term of the lease, Robin Sullivan and 61791 decided to purchase the premises rather than continue to rent. [ 108 ] There was a conflict in the evidence as to the purpose of this clause. Robin Sullivan testified that this clause was to accommodate Mike Hall’s concern that 55668 be reimbursed for the improvements made by the company to the premises when it had renovated the building.

Under cross-examination, it was put to Robin Sullivan that the $50,000 represented reimbursement for monies 55668 had already paid under the lease. Robin Sullivan disagreed. [ 109 ] Part of the email correspondence on the terms of the lease assignment and transfer of operations included exchanges about compensation for the leasehold improvements.

In an email dated March 23, 2010 (Exhibit #1, Tab 85), Mike Hall stated: … In discussions with my lawyer, it is clear that unless you are willing to compensate Chris and I for our leasehold improvements, I’m not willing to sign the assignment … [ 110 ] Robin Sullivan responded: Fair enough. As for the leasehold improvements, I guess it would be easy enough then to put a clause in the assignment of the lease that if I decide to stay in the building and ultimately buy it out, which is not happening because it is too big for us, then at that time I would reimburse you for some of the costs of the infrastructure.

Does that solve the assignment issue with you? All we have to do is come to terms on a more reasonable value of the infrastructure and that is put to bed.

As for the assets, Chris has to put all the information together and then I can finalize my list for the agreement. Sound good? [ 111 ] Mike Hall responded back “Sounds good old friend!!” [ 112 ] Mike Hall denied in his testimony that the purpose of the $50,000 payment clause was to accommodate his concern that the improvements to the premises be accounted for in the transfer of assets. He stated that the clause was “earmarked for the opportunity Robin Sullivan was given to take over the lease agreement”.

Mike Hall testified that he signed the lease under duress and compulsion and if he had known that he would be treated dishonestly he would never have signed. The transfer of assets and equipment [ 113 ] There was both leased equipment as well as equipment owned by 55668 that was transferred from 55668 to 61791. [ 114 ] With respect to equipment owned by 55668, by March 18, 2010, Chris Winsor prepared a list with estimated values in dollars beside each item (Exhibit #1, Tab 82). The total value of the assets in this list was estimated to be $157,000.

This amount included a value of $75,000 for “building infrastructure” to account for the improvements that had been made by the renovations to the leased premises. This list was forwarded by email to Mike Hall on the same day. He responded by email (Exhibit #1, Tab 81): “Looks good to me”. Although the list was not attached to this email exhibit, given the timing of the emails I am satisfied this response was made regarding the list. [ 115 ] At trial, Mike Hall disputed that he agreed that this was a “complete” list of the assets of 55668. Nor did he agree with the valuations.

He testified that the item “GMC van caps” on the list valued at $4500 was inaccurate, as there were three such caps, which he would have valued at $7500 each. He testified that when he sent the email saying “Looks good to me”, he did not think this list was final, but was a starting point. [ 116 ] There was difficulty in coming to agreement, not solely regarding the value of the equipment; but how compensation for the acquisitions was to be effected.

Rather than pay 55668 directly, Robin Sullivan wanted to pay debts outstanding to creditors who were continuing suppliers or contractors used by the Paul Davis Systems franchise. However, Mike Hall testified that he did not agree that this was how the money should be used, if the money was not going to come directly to 55668.

He was more concerned with paying creditors such as Revenue Canada or Workplace Safety NL (see for example Exhibit #1, Tab 100), in which Mike Hall emailed Chris Winsor that he would only allow the sale of one of the vehicles if “the full proceeds go toward the Revenue Canada Remittance balance”). [ 117 ] On April 16, Chris Winsor emailed Mike Hall to tell him Robin Sullivan “has agreed to buy all the assets from 55668 for the prices that we had listed”. Chris Winsor testified he was referring to the list with values that had been prepared on March 18, 2010 (Exhibit #1, Tab 103).

Before Mike Hall responded to this email, Chris Winsor also emailed Mike Hall regarding payments on two vehicles owned by 55668, and other equipment (Exhibit #1, Tab 102).

Mike Hall responded to this second email first, stating: “When is Robin making the payment for the equipment?” [ 118 ] Mike Hall then responded to the first email about Robin Sullivan having agreed to purchase the assets, and stated: I will agree to the sale of these assets when the cheque has been delivered to our lawyers. ... [ 119 ] Chris Winsor testified that he took these responses as agreement from Mike Hall with the list and values as the proposal for Robin Sullivan.

Mike Hall testified that when he wrote this email, he was “wondering what was going on with the assets”. [ 120 ] An agreement was signed and dated April 30, 2010 (Consent #1, Tab 14). The assignment agreement contained the original list prepared by Chris Winsor without the item “building infrastructure”, as that had been accommodated in the lease assignment signed in March 2010. The value of the assets to be assigned to 61791 was also as per the original list except as reduced to account for the removal of the building infrastructure value of $75,000.

The amount of money to be paid for the remaining assets was $70,000. [ 121 ] There was a

Schedule “A” attached to the agreement which was a list of inventory different than the list prepared by Chris Winsor on March 18, 2010. However, the March 18 list was included (less the item “building infrastructure”) as

Schedule “C”, and

Schedule “A” referred to

Schedule “C” list of items where necessary. As well, the $70,000 did not initially include the harmonized sales tax (HST). Chris Winsor initialed and wrote in handwriting on the agreement that HST was to be added to the $70,000. Chris Winsor and Larry Walton also initialed all the pages of the agreement. [ 122 ] In terms of payments to creditors of 55668, the agreement stipulated: Whereas the assets as noted in

Schedule “A” of the assignor will be sold as is where is to the assignee for noted compensation of $70,000.00 CDN HST inclusive, which will be paid out solely to the creditors listed in

Schedule “B” for compensation of debt owed to them by the Assignor noted above. The above noted compensation will attempt to pay off debts owed by the assignor to the credits to the extent that the above notes compensation will allow. The Assignee extends no guarantee that the creditors will be paid in full and in no way is the Assignee responsible for these debts or any others owed by the Assignor. [ 123 ] Chris Winsor testified that he believed the $70,000 was used to pay the creditors listed in

Schedule “B” of the agreement. He testified that both he and Robin Sullivan decided which creditors to pay and chose to pay those creditors with whom the franchise needed to maintain a business relationship. The creditors listed in

Schedule “B” did not include creditors that Mike Hall testified he wanted paid, such as Canada Revenue Agency. At trial, Robin Sullivan and 61791 tendered a

summary of payments totaling $89,418.05, made by 61791 to creditors of 55668 (RS #3). Many of the vendors paid were the same vendors listed in

Schedule “B”, and I accept that RS#3 is

an accurate account of creditors of 55668 that were paid by 61791. [ 124 ] RS #3 also listed payments by 61791 for vehicles and miscellaneous items, for $19,605 and $5,650 respectively. It appears this money went directly to 55668, as evidenced by deposits from 61791 to 55668’s bank accounts. I also accept that this money was paid by 61791 for the vehicles of 55668. [ 125 ] Although the list prepared by Chris Winsor on March 18, and as attached as

Schedule “C” to the assignment agreement contained the item “GMC Van”, it appears that most of the vehicles were handled separately from the April 30, 2010 agreement. An email from Larry Walton to Robin Sullivan on March 25, 2010 (Exhibit #1, Tab 94) listed a number of vehicle purchases by 61791 from 55668, including three vans (1 Ford, and 2 Dodge) and a “Ford Cube Van”. There was also a steam cleaner and a “drain vac” listed.

The individual amounts paid for the items were also listed beside each item and totaled $23,500. [ 126 ] Mike Hall did not sign the agreement to assign the assets and asserted at trial that he never agreed to the terms of this agreement. Mike Hall testified he did not know it had been executed until it was forwarded to him and his lawyer in early June 2010 (Consent #2, Tab 115). Upon receipt of a copy of the assignment of assets agreement, then counsel for Mike Hall and 55668, wrote a letter to Robin Sullivan (Consent #2, Tab 115) challenging its legitimacy.

Mike Hall testified that when he became privy to the agreement, he told Robin Sullivan that he “would see him in court”. [ 127 ] Mike Hall further testified that the manner in which the creditors of 55668 were paid by Chris Winsor and Robin Sullivan meant that the unpaid creditors of 55668 started approaching him for monies owed. Often they were directed to him by Chris Winsor; particularly if it was a creditor for whom Mike Hall had provided a personal guarantee.

Both Robin Sullivan and Chris Winsor testified that their concern was to ensure creditors with whom Paul Davis Systems needed to maintain a relationship were paid. [ 128 ] Mike Hall made arrangements with some creditors, such as Bell Mobility, Honda, and Workplace Health and Safety NL to pay debts. The money owed to Workplace Health and Safety NL was $44,365.21. Debts totaling $28,302.26 to several other creditors were not paid. A further $10,000 was paid by Mike Hall on behalf of Canadian Roofing Solutions to a creditor (J.N.

Baird & Company), as part of a settlement (Exhibit M.H. #7). [ 129 ] The Farmington leases were handled independently of the agreement to transfer the assets. The leased equipment was transferred generally without issue; although Robin Sullivan testified that in his view, the leases he entered into with Farmington were new leases, as he renegotiated the dates of commencement and termination. The email (Exhibit #1, Tab 94) regarding the purchase of vehicles also referred to leases that were to be sent to Robin Sullivan.

It contained the line “two trailers, drying equipment, soda and ice blasters”. [ 130 ] However, the transfer or renegotiation of the lease for the specialized washer and dryer was delayed. There was correspondence from Jim Johnson in March 2010 which suggested, at least initially, that 61791 would not assume this lease (J. Johnson #2, Tab 75). However, it appears that at some point 61791 did take over the lease, as a copy of that lease was filed with the court (Exhibit #1, Tab 6). The commencement date was July 1, 2010.

The disposition of Canadian Roofing Solutions assets [ 131 ] At the time the franchise agreement between Paul Davis Systems of Canada and 55668 was terminated, like 55668, the financial picture for Canadian Roofing Solutions was not strong. There were outstanding debts, and apart from the one major project, there was little revenue being generated. [ 132 ] Soon after the locks were changed, Mike Hall sent an email to Kent Building Supplies (Exhibit #1, Tabs 65-66) advising that he would be continuing on with the roofing business without Chris Winsor.

However, there was also evidence that Mike Hall intended to and did sell the assets of the business to help realize some of the outstanding debt. Fred Stack, a retired firefighter who was acquainted with the Plaintiff, Mike Hall, testified that he purchased the equipment. He testified he had a conversation with Mike Hall about buying the equipment in 2010, and purchased it around August of 2010. He stated he thought it was a “good deal” as the equipment was in good condition. He testified he paid $7000.

Copies of two cheques tendered from the banking records of August 2011 showed that Fred Stack paid a total of $8000. Mike Hall testified that he used the money paid by Fred Stack to pay debts of Canadian Roofing Solutions. The business was discontinued. The personal items of Mike Hall [ 133 ] There was evidence that several items that belonged personally to Mike Hall were at the premises of McNamara Drive when the locks were changed.

Although there was continuous correspondence back and forth between Mike Hall, Chris Winsor and Robin Sullivan regarding Mike Hall’s retrieval of these items, this did not occur for some time. Mike Hall did eventually retrieve at least some of the items. It was not clear in the evidence what was missing, if anything, when Mike Hall was finally able to retrieve the items. The financial evidence [ 134 ] Financial reports for both 55668 and Canadian Roofing Solutions were filed by consent (Consent MP #5, Supplementary Book of Documents, Tab 9).

Similar financial statements were filed for 61791 (Consents 7-24, Tabs 18-35). Although the financial statements were not established as having been audited or externally verified, the parties were in agreement that the statements were generally representative of the financial health of all three companies. [ 135 ] As well, bank statements of 55668 between February 2010 and July 2010 (Consents #37-43, Tabs 173-179) showed that deposits

to 55668’s account totaled $550,863.08. There was further evidence that between January 22-28, 2010, 55668 received $51,289.61 in deposits. This revenue was explained as payment for projects that had either just finished, or were finished during 2010. THE EXPERT TESTIMONY [ 136 ] Michael Power, a chartered accountant, testified on behalf of the Plaintiff 55668, and Errol Soriano testified on behalf of the Defence. Both were qualified as experts in business valuation.

The evidence of Michael Power [ 137 ] The admissibility of Michael Power’s testimony as an expert was challenged both on the basis of his qualifications and alleged impartiality. After a voir dire , I was satisfied that Mr. Power was both qualified to give expert opinion and was an impartial witness. [ 138 ] The evidence on the voir dire was that Mr. Power has been a chartered accountant, managing his own firm since 1979. With over forty years’ experience as a chartered accountant, he had previously testified in the Supreme Court of Newfoundland and Labrador on matters relating to taxation and accounting.

He did not specify the number of times he has been qualified as an expert in accounting or whether he had been previously qualified to give expert opinion on business evaluation. He testified, however, that in the course of his work as a chartered accountant he developed a niche, advising clients on the financial implications in acquiring businesses. This required him to assess the value of a particular company including an assessment of the business’ current worth, and expected future profitability.

He explained this work also included advising clients on the value of the goodwill of a company that was a prospective purchase. On cross-examination, Mr. Power conceded that he did not have the formal designation of a “chartered business evaluator”, and agreed there is a national standard in doing such work. However, he testified that he had calculated the goodwill of a company on behalf of clients regularly, in the area of 100-200 times per year. [ 139 ] Mr.

Power was also challenged on his impartiality in these proceedings as he provided information to Canada Revenue Agency after 2009 on behalf of Mike Hall and 55668 respecting taxes owed by both Mike Hall and 55668. Mr. Power disagreed that when he provided information, he was acting as an advocate for Mike Hall. Mr. Power testified that he understood the need to be impartial.

He also agreed that his opinions were only as reliable as the information upon which they were based. [ 140 ] Upon hearing his testimony, I was satisfied that he was not acting as an advocate for Mike Hall, but did no more than explain facts as he understood them to be at the time. I was satisfied both that he would be an impartial witness and was qualified to opine on the value of a business. All other criteria

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