Fero Waste v. Recycling Inc. and Al Pischiutta, 2003 NSCA 34

NOVA SCOTIA COURT OF APPEAL Citation: MacNeill v. Fero Waste and Recycling Inc ., 2003 NSCA 34 Date: 20030320 Docket: CA 179161 Registry: Halifax Between: Fero Waste and Recycling Inc. and Al Pischiutta Appellants v. George Hubert MacNeill, Q.C. Respondent Judges: Roscoe, Cromwell and Oland, JJ.A. Appeal Heard: January 23, 2003, in Halifax, Nova Scotia Held: Appeal dismissed; cross-appeal allowed per reasons for judgment of Oland J.A.; Roscoe and Cromwell, JJ.A. concurring.

Counsel: Douglas Shatford, Q.C., for the Appellants Eric LeDrew and Micheline Gleixner, for the Respondent Reasons for judgment : [ 1 ] This is an appeal and a cross-appeal of a judgment of the Honourable Justice D.L. MacLellan. His written decision dated April 3, 2002 is reported in (2002), 2002 NSSC 86 (CanLII) , 203 N.S.R. (2 d ) 186. Background [ 2 ] In 1989 the respondent, George Hubert MacNeill, a lawyer, acted for Burton Teddy Gaudet and his wife, Donalda Gaudet, in purchasing a garbage collection company called Amherst Garbage Disposal Limited (Amherst Garbage).

When his clients had difficulty obtaining financing, MacNeill advanced $30,000 and delivered to the Royal Bank of Canada (the Bank) his guarantee for $53,900 of the debts and liabilities of Amherst Garbage to that Bank. As security, he took a mortgage on land owned by the Gaudets. In subsequent years, he signed guarantees for $26,000 and $6,000 for additional Bank loans to Amherst Garbage and to Mr. Gaudet. MacNeill was never an officer, director, or shareholder of Amherst Garbage and never took

part in its operations.

[ 3 ] By 1995, Amherst Garbage was experiencing very significant financial difficulties. MacNeill knew this when, on behalf of that company and the Gaudets, he negotiated its sale to the appellants, Fero Waste and Recycling Inc. (Fero Waste) and its principal, Al Pischiutta (Pischiutta). Pischiutta told MacNeill that he was not going to use a lawyer and to contact his accountant, Paul Bourque. [ 4 ] MacNeill and Bourque discussed Amherst Garbage’s financial situation. The Bank sent Fero Waste particulars of the amounts it was owed.

Outstanding obligations for GST and for workers’ compensation and employee deductions were referred to in letters from MacNeill to Bourque. During the negotiations, Pischiutta was aware that amounts were owing for these and of the poor financial situation that Amherst Garbage and the Gaudets were in. As he put it, “there were money owed everywhere” and the Gaudets were “at the end of the line”. Matters were so serious that, as MacNeill reported to Bourque, he and Mr.

Gaudet had met with a trustee in bankruptcy regarding the possible bankruptcy of Amherst Garbage and the Gaudets’ personal financial situation, but had learned that the Gaudets as directors would still be personally liable for those deductions. In his correspondence with Bourque, MacNeill set out his clients’ requirement for an indemnity with regard to the Bank loans and the outstanding deductions. [ 5 ] The appellants were unable to obtain any more credit with the Bank, which was its bank as well, for the purchase of Amherst Garbage.

The Bank was agreeable, however, to Fero taking over its payment obligations to the Bank. [ 6 ] MacNeill drafted an Agreement of Purchase and Sale (the agreement), which was reviewed by the appellants. On September 22, 1995 Amherst Garbage and the Gaudets as vendors, and Fero Waste and Pischiutta as purchasers, signed it. The agreement ran just over a page long and consisted of two recitals, five short paragraphs, and a schedule.

It commenced: WHEREAS the vendors . . . have operated a garbage business in Amherst, since 1989, under the name, Amherst Garbage Disposal Limited, and the said business is now in financial difficulties and cannot meet its obligations ; AND WHEREAS the vendors wish to sell Amherst Garbage Disposal Limited and the purchasers wish to purchase it on the following terms and conditions, which the parties hereto agree to: 1. The purchasers will take over Amherst Garbage Disposal Limited’s debts at the Royal Bank of Canada, Amherst branch--as set out in

Schedule “A” attached hereto--and pay the debts off in an orderly manner under the present bank arrangements and the security now at the bank will remain in place until the loans are repaid. The purchasers agree to indemnify and save harmless the vendors and their guarantor, G. H. MacNeill, Q.C., from the said Royal Bank of Canada loans . (Emphasis added) [ 7 ]

Schedule “A” to the agreement consisted of print-outs pertaining to monies owed to the Bank by Mr. Gaudet or by Amherst Garbage. The agreement also provided that the Gaudets would transfer their interest in a 1984 International truck to the purchasers, that the Bank would seize the accounts receivable and, after the monies collected were applied against the overdraft, the purchasers would pay the balance, that the purchasers would take over the garbage collection operation and employ Mr.

Gaudet on terms to be agreed upon, that the Gaudets would sign a 5 year non-competition agreement, and that the purchasers could use the name “Amherst Garbage Disposal”. [ 8 ] The agreement did not stipulate any monetary payment by the purchasers to the vendors. MacNeill witnessed the signatures of the vendors and the purchasers, but did not himself sign as a party to the agreement. [ 9 ] The agreement did not specify whether the sale was of assets or of the shares of Amherst Garbage, and this basic distinction cannot be ascertained from its wording.

However, both MacNeill and Pischiutta testified at trial that the parties had agreed that Fero Waste was to acquire the assets, namely four trucks (the 1984 International in the name of the Gaudets, a 1989 Mercedes, and two older and non-operational trucks), its customer list, its accounts receivable, the use of the name, and the transfer of the license issued by the Town of Amherst. The purchasers were to make payments on the Bank loans. [ 10 ] Following the execution of the agreement, a number of difficulties arose very quickly.

These involved liens on the International and Mercedes trucks, non-delivery of the other two trucks, the amount of the GST liability, liens on certain accounts receivable, allegedly inaccurate customer lists, and alleged violation of the non-competition terms. Neither the employment contract nor the non-competition agreement contemplated by the agreement or any bills of sale for the trucks were ever prepared or delivered to the purchasers. [ 11 ] After the difficulties with Amherst Garbage and the Gaudets became apparent, Fero Waste and Pishuitta refused to make the payments on the Bank loans.

The Bank eventually pursued MacNeill under his guarantees. MacNeill paid the Bank and then sued the appellants to recover the amount of his payment and interest. His action in the Supreme Court of Nova Scotia claimed that the appellants had breached their agreement to indemnify him and, alternatively, unjust enrichment and restitution. [ 12 ] The trial judge was of the view that the requirements in Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd. , 1999 CanLII 654 (SCC) , [1999] 3 S.C.R. 108 had been met and consequently, even though he was not a party to it, MacNeill could sue the

appellants on the agreement. However, the judge did not believe that MacNeill should have any greater claim against them than the Gaudets would have had. After finding that the appellants were liable to MacNeill for his payment of the Bank loans in the amount of $67,528, he deducted from that liability, amounts in regard to the Mercedes truck, the customer list, and the workers’ compensation and GST claims, which he calculated totaled $28,700. In the result, he awarded MacNeill $38,828 together with costs and pre-judgment interest. Issues [ 13 ] The appellants frame their grounds of appeal as follows:

(1) That the learned Trial Judge erred in law in finding that the Respondent could, as a third party, rely and enforce the terms of a contract between two other parties to which the Respondent was not a party;

(2) That the learned Trial Judge erred in law in failing to find the Respondent was not in conflict with the Appellant and did owe the Appellant the fiduciary duty;

(3) That the learned Trial Judge erred in law in failing to determine that there was no contract or that the contract between the Respondent and the other contracting party was void: (

a) because of the bankruptcy of the third party; (

b) because the contract was unenforceable and was fundamentally breached. MacNeill cross-appealed on several grounds including alleged errors of law in setting off the appellants’ claims against MacNeill’s claim and in failing to determine entitlement pursuant to the law of restitution and unjust enrichment, and alleged error in fact by finding that the appellants were unaware of the lien against the Mercedes truck.

Analysis [ 14 ] For the reasons which follow, I am of the respectful opinion that a contract of indemnity existed between the appellants and MacNeill and that, in setting off the appellants’ claims against Amherst Garbage and the Gaudets against their liability to MacNeill, the trial judge erred in law. I will deal first with indemnity and set-off, and then with the remaining grounds of appeal and cross-appeal. (

a) Indemnity [ 15 ] For convenience, I repeat here the wording at the end of ¶ 1 in the purchase and sale agreement between the appellants and Amherst Garbage and the Gaudets: The purchasers agree to indemnify and save harmless the vendors and their guarantor, G. H. MacNeill, Q.C., from the said Royal Bank of Canada loans. [ 16 ] MacNeill claims a right of indemnification pursuant to this provision.

It appears that the trial judge accepted his argument that there was a contract of indemnity between MacNeill and the appellants, for at ¶ 80 of his decision he states that he had found that the appellants accepted responsibility for all loans of the Gaudets to the Bank. [ 17 ] Whether a contractual provision constitutes an indemnity often arises in the context of the difference between guarantees and indemnities.

Halsbury’s Laws of England (4 th ed. rev.) vol. 20 (London: Butterworths, 1980) at 56, para. 101 reads: A guarantee is an accessory contract by which the promisor undertakes to be answerable to the promisee for the debt, default or miscarriage of another person, whose primary liability to the promisee must exist or be contemplated.

And at 221, para. 345: [The term ‘indemnity’] is normally used in law to denote a contract by which the promisor undertakes an original and independent obligation to indemnify, as distinct from a collateral contract in the nature of a guarantee by which the promisor undertakes to answer for the default of another person who is to be primarily liable to the promisee. This meaning of indemnity was accepted in MacMillan Bloedel Ltd. v. Youell [1993] B.C.J. 2957 (C.A.) at ¶ 24 and Bank of British Columbia v. Hayes (1980), 1980 CanLII 1101 (AB KB) , 116 D.L.R. (3 d ) 726 (Alta.

Q.B.) at ¶ 11 and 12 . [ 18 ] In McDougall v. Gariepy (1922), 1922 CanLII 443 (AB CA) , 17 Alta. L.R. 209, Justice Hyndman considered the nature of contracts of indemnity and of guarantee and suretyship and stated at ¶ 17 and 18: Indemnity springs from contract, express or implied...the engagement is to make good and save another from loss upon some obligation which he has incurred or is about to incur to a third person, and is not...a promise to one to whom another is answerable.

It is an original and not a collateral undertaking. [ 19 ] Not only does ¶ 1 of the agreement specify that the appellants agree to “indemnify and save harmless” MacNeill in regard to the Bank loans, but the evidence at trial supports the characterization of the arrangement between them as a contract of indemnity. The circumstances which gave rise to this were clearly set out at trial. The Bank had refused to extend the appellants financing for their acquisition of this business.

Pischiutta testified that he discussed with Bourque the agreement to be made with Amherst Garbage and the Gaudets: [Bourque] said, you know, it’s a simple deal, right? The bank refused to take over...to give us the payment...I mean the...the loan and he said just leave it the way it is. Leave it however (inaudible) on the...one the loan and go in with them together and you work the company out and you pay the loan back. That’s it...that’s it. He said you don’t need big...big rigmarole contract. Just a simple contract. Tell him to make a simple contract, that’s it.

It is telling that under cross-examination, Pischiutta agreed that the agreement was between himself and Fero Waste and the Gaudets and MacNeill . Moreover, when asked whether it was his accountant’s idea to keep MacNeill “on the hook”, that is, on his guarantees for the Bank loans, Pischiutta replied: “Any other way, I couldn’t [have] bought the company.” [ 20 ] That it was critical for the appellants that MacNeill leave his guarantees in place was also apparent from MacNeill’s testimony: Well, I...I had a continuing contractual obligation to leave the guarantee there.

That...that was...that was why I was at risk. That’s what I...that’s...that’s a consideration that I put forward to conclude this deal. I stayed on. The bank... the deal wouldn’t have gone on unless I stayed on the guarantees and I could’ve called those guarantees and stopped the sale. I didn’t do that.

I accommodated, as I was asked to do by the defendants here to stay on the guarantees and let them purchase the prop...the assets of the business and I did that because that was the agreement. (Emphasis added) [ 21 ] While its underlying rationale pertained to a requirement for the transaction between the appellants and Amherst Garbage and the Gaudets, namely its financing, this contract of indemnity between the appellants and MacNeill was separate from the purchase and sale of the garbage disposal business.

The appellants assumed a primary obligation to repay any payments by MacNeill pursuant to his guarantees with the Bank. [ 22 ] The relationship between the appellants and MacNeill, being one of indemnity, is also independent of the relationship between the appellants and the Gaudets. An indemnifier is liable even if the principal debt is void or otherwise uneforceable: Communities Economic Development Fund v. Canadian Pickles Corp ., 1991 CanLII 48 (SCC) , [1991] 3 S.C.R. 388 (S.C.C.) at p. 413.

Accordingly, the liability of the Fero Waste and Pischiutta to MacNeill under their contract of indemnity does not depend on the existence or success of any claim the appellants may have against Amherst Garbage or the Gaudets for any breach of the purchase and sale agreement. (

b) Set-Off

[ 23 ] In his cross-appeal, MacNeill submitted that the trial judge erred in law in setting off the appellants’ claims against his claim for indemnity. He argues that the appellants did not make a proper claim of set-off in their pleadings, either in their original defence or in their amended defence which they were permitted to file the day the trial began.

In the alternative, he says the appellants have not met the requirements for an equitable claim of set-off. [ 24 ] The trial judge rejected MacNeill’s argument that his right to indemnity was not affected by any defences as between the appellants (the defendants at trial) and the Gaudets, saying that he did not believe that MacNeill should have any better claim against them than would the Gaudets.

He continued: 59 The Law Reform Act of New Brunswick upon which the plaintiff wished to rely provides by Section 4(2) that "any defence may be raised that would have been raised in proceedings between the parties." 60 I interpret that to mean that if that law was applied here, the defendants would have the right to raise as a defence against the plaintiff any defences they would have against the Gaudets. That statute does not apply to this contract as I have found, however, I believe its provision reflects the common law on this issue. It also provides the equity I feel is necessary in this case.

From the liability for which he found the appellants responsible to MacNeill, the trial judge deducted amounts for breaches by Amherst Garbage and the Gaudets of their agreement with the appellants. [ 25 ] Assuming, without deciding, that set-off was properly pleaded in accordance with Civil Procedure Rule 14.20 and Lever v.

Positronic Software Inc. (1996), 1996 NSCA 188 (CanLII) , 155 N.S.R. (2d) 197 (C.A.), I am of the view that the trial judge erred in law in allowing Fero Waste and Pischiutta a set-off against MacNeill for alleged breaches of the agreement by the Gaudets. [ 26 ] The appellants claim an equitable defence of set-off. The law of equitable set-off was summarized in Telford et al. v. Holt et al. (1987), 1987 CanLII 18 (SCC) , 41 D.L.R. (4 th ) 385 (S.C.C.), [1987] 2 S.C.R. 193. Wilson, J. at p. 212 referred with approval to Coba Industries Ltd. v.

Millie's Holdings (Canada) Ltd. et al. (1985), 1985 CanLII 144 (BC CA) , 20 D.L.R. (4th) 689 (B.C.C.A.) wherein Macfarlane, J.A., reviewed the English authorities and from them drew the following principles: 1. The party relying on a set-off must show some equitable ground for being protected against his adversary's demands. 2. The equitable ground must go to the very root of the plaintiff's claim before a set-off will be allowed. 3.

A cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross-claim. 4. The plaintiff's claim and the cross-claim need not arise out of the same contract. 5. Unliquidated claims are on the same footing as liquidated claims. (Authorities omitted) [ 27 ] In Telford , supra at p. 213, Justice Wilson also cited Lord Denning in Federal Commerce & Navigation Co. Ltd. v.

Molena Alpha Inc. , [1978] 3 All E.R. 1066 , where he said at p. 1078: We have to ask ourselves: what should we do now so as to ensure fair dealing between the parties? (see United Scientific Holdings Ltd. v. Burnley Borough Council n2 per Lord Diplock). This question must be asked in each case as it arises for decision . . . But one thing is quite clear: it is not every cross-claim which can be deducted. It is only cross-claims that arise out of the same transaction or are closely connected with it .

And it is only cross-claims which go directly to impeach the plaintiff’s demands, that is, so closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim. (Emphasis added) [ 28 ] See also Ian Spry, Equitable Remedies , 6 th ed. (Toronto: Carswell, 2001) which opens its

section on equitable set-offs at p. 173 as follows: . . . To decide that there is an equitable set-off is to decide that, on grounds that are set out hereunder, it would be unjust to order the specific enforcement of a particular obligation without lessening or reducing it by reference to a related obligation of the plaintiff to the defendant or making specific enforcement conditional on performance of that related obligation. And continues at p. 176:

What must be established is a relationship between the respective claims of the parties which is such that the claim of the defendant is so closely connected with the rights that are relied on by the plaintiff that it would be unjust that he should proceed without permitting a set- off. [ 29 ] As is apparent from the case authorities and this legal text, a claim of equitable set-off must demonstrate a close connection between the plaintiff’s claim and the cross-claim or defence, and an equitable basis for the claim.

The breaches of the agreement, if any, suffered by Fero Waste and Pischiutta are not, in my view, clearly or closely connected to MacNeill’s claim of indemnity. Any breaches were not by MacNeill. Under cross-examination, Pischiutta agreed that he was not alleging that MacNeill failed to do anything and also agreed that MacNeill did his best.

While set-off for any breaches of the agreement might have been claimed and enforced by the appellants against Amherst Garbage and the Gaudets, in these circumstances, it is not available as against MacNeill. [ 30 ] Equitable set-off may be available when the result would otherwise be, as described in Telford , supra, “manifestly unjust” and by Spry, supra “unjust”. Even if the appellants had been able to show the requisite degree of connection, I am not persuaded that they have established an equitable basis for this defence. Amherst Garbage and the Gaudets were clearly in difficult straits in early 1995.

Had the Bank called his guarantees then, MacNeill stood to suffer financially. The indemnity in the purchase and sale agreement he drafted and which the appellants signed that fall had the potential to reduce or eliminate MacNeill’s exposure to the Bank. However the evidence at trial shows that, whether or not they knew their full extent, Fero Waste and Pischiutta were aware that the business had serious financial problems and outstanding obligations. They were also aware of MacNeill’s guarantees, and the indemnity sought in the agreement. They chose to close the transaction.

Moreover, while they may not have obtained all the assets they allege were expected, Fero Waste and Pischiutta did receive one operational vehicle and gained entry into the Amherst market. They then operated the business for some seven years before selling it. [ 31 ] Since neither a close connection nor an equitable basis has been demonstrated, equitable set-off cannot be maintained as a defence to MacNeill’s claim of indemnity. No other basis for set-off was raised by the appellants.

In my respectful view, the trial judge erred in law in setting off their claims against their liability to MacNeill under their contract of indemnity. (

c) Conflict and Fiduciary duty [ 32 ] The appellants argue that the trial judge erred in law in failing to find that MacNeill was in conflict with them and owed them a fiduciary duty. At ¶ 56 of his decision, the trial judge stated: The defendants claim that the plaintiff was in conflict because he was acting for both parties on the contract. I reject that argument. It is clear from the evidence that the plaintiff was acting for the Gaudets and that this was clear to the defendants during the time leading up to and at the signing of the contract.

Based on this finding, I would dismiss the counter-claim of the defendants. The appellants do not dispute this finding. Fero Waste and Pischiutta say, however, that the trial judge failed to consider MacNeill’s obligation as a solicitor and his ethical duties and obligations owed them pursuant to

Chapter 8 of the Legal Ethics and Professional Conduct: A Handbook for Lawyers in Nova Scotia (Halifax: Nova Scotia Barristers’ Society, 1990). I am unable to agree. [ 33 ] Assuming, without deciding, that a breach of any of the principles set out in the Handbook could serve as a basis for liability, the evidence is overwhelming that even if MacNeill did not formally make a full disclosure to the appellants of his involvement in Amherst Garbage, the appellants were not his clients.

Furthermore, they were well aware of his involvement and of his interest, as a guarantor of that struggling company, in the completion of the purchase and sale transaction. Indeed, the appellants not only knew that MacNeill had a personal or business interest in the transaction but counted on his continued participation in the business by way of his serving as a guarantor. Remaining Grounds of Appeal and Cross-Appeal [ 34 ] Having found that there was a contract of indemnity between the appellants and MacNeill, I need not deal with the remaining grounds of the appeal or the cross-appeal.

I am satisfied from the record that the trial judge, in calculating the amount of the appellants’ liability to MacNeill, did not consider MacNeill’s third guarantee to have been for $12,000 but correctly for $6,000. [ 35 ] I make no comment pertaining to the trial judge’s consideration and disposition on the privity of contract issue and the application, if any, of Fraser River Pile & Dredge Ltd. , supra, in the circumstances of this case. Disposition [ 36 ] I would dismiss the appeal and allow the cross-appeal.

I would grant a declaration that Fero Waste and Pischiutta are liable, jointly and severally, to indemnify MacNeill in the amount of $67,528.30. I would also order that the appellants pay MacNeill

prejudgment interest on that amount at the rate of 1% above the Bank’s prime rate as of October 16, 2000, the date of MacNeill’s final payment to the Bank, to the date of the issuance of the order of this court, and would fix costs payable by the appellants to the respondent, both on this appeal and at the Supreme Court, at $8,000 plus disbursements as agreed or taxed. Oland, J.A. Concurred in: Roscoe, J.A. Cromwell, J.A.