Legal Blog
Surprised?
In general, fair settlements of disputes beat the alternatives of litigation or arbitration. However, fair settlements cannot be fair if one litigant does not live up to the terms of the settlement. Parties to a settlement have to ask themselves: what happens if the other party does not perform its settlement obligations? Once they ask this question, they have to ensure that the settlement agreement provides the answer. If they fail to do so, or even fail to contemplate the question, then nasty surprises can occur. The plaintiff in Finness Yachting Inc. v. Menzies, a 2015 British Columbia Supreme Court decision experienced a nasty surprise – or did it?
Dispute #1
The parties had a dispute regarding the ownership of a yacht. The plaintiff commenced a court action against a defendant (the “corporation”) and its sole director, officer, and shareholder (the “owner”), but the parties subsequently decided to submit the dispute to arbitration. Before the arbitration hearing, the parties agreed to an arbitral award in favour of the plaintiff of $196,000. That award, which was converted to a judgment of the court on consent, was not to be enforced until 3 weeks had elapsed after the corporation sold the yacht. The parties contemplated that the corporation would not be in funds to pay the award until the yacht was sold.
The settlement also provided that, if the corporation did not pay at least $100,000 of the award within the 3 weeks, then the owner would pay $60,000 of the award.
The corporation sold the yacht; the plaintiff demanded payment; the corporation paid nothing; and the owner initially paid nothing on his guarantee. Ultimately, the owner paid the full $60,000 guaranteed.
Dispute #2
The owner had used the corporation to receive and distribute the owner’s consulting fees. The owner did so solely to gain a tax advantage. Once the judgment debt became due, the owner merely used a different corporation through which to receive and distribute his fees; accordingly, the corporation lost its only income source.
The plaintiff commenced an action against the owner because the corporation had no assets to pay the remaining $136,000 judgment debt. The plaintiff claimed that the owner’s diversion of income was a fraudulent conveyance and was oppressive to its interests.
Fraudulent Conveyance
The court accepted that the corporation had been receiving income from the consulting services that the owner supplied to his clients and, more importantly, accepted that the clients would not have contracted with the corporation were it not for the direction that the owner gave to the clients to do so. In effect, the clients did not care who billed them as long as they received their services from the owner personally.
The judge also noted that the plaintiffs never alleged that the owner improperly transferred or disposed of any property belonging to the corporation, including draws or dividends that the owner received after the parties entered into the settlement. This puzzles us; what happened to the money the corporation received from the sale of the yacht? If it did not go to the owner, where did it go?
The judge acknowledged that the owner’s direction that the income he generated be paid to a different corporation may well have been done to ensure that the plaintiff was not paid. However, it was not a fraudulent disposition of property.
Oppression
The plaintiff also argued that the actions of the owner were oppressive to it as a creditor of the corporation. The judge agreed that the British Columbia equivalent of the Ontario Business Corporations Act oppression provisions extend to creditors of a corporation. However, the judge was not satisfied that the owner’s conduct was oppressive. The judge went through a two-step process: did the plaintiff subjectively have an expectation that the corporation would have sufficient assets to pay the settlement and, if it did, were those expectations objectively reasonable?
The plaintiff acknowledged that he entered into the settlement with legal advice and knew that there was no guarantee that the corporation would be able to pay the settlement amount. However, he testified that he expected the owner to continue to operate the corporation as a going concern, just as the owner had done previously.
The judge noted that: “The oppression remedy is an equitable one. It seeks to ensure fairness and is fact specific. The concept of reasonable expectations is both objective and contextual. While it is impossible to catalogue all of the situations where a reasonable expectation may arise, what is clear from the jurisprudence is not every unmet expectation gives rise to a claim.”
Based on this the judge analysed the matter as follows:
Viewed objectively and contextually, the factors relevant to determining whether the plaintiffs’ expectations of (the owner and the corporation) were reasonable lead me to conclude they were not. Those factors are as follows:
- The (plaintiff) knew there was a risk (the corporation) would not be able to pay the judgment when he entered into the settlement.
- Rather than negotiate an agreement that would have better protected them from that risk, the plaintiffs agreed to the terms of the settlement negotiated at arm’s length, while represented by counsel.
- The terms of the settlement itself, including but not limited to the amount of the personal guarantee provided by (the owner); the absence of any representations or assurances by him referred to above; and the nature of the release.
- The limited evidence regarding the relationship between the parties.
- The fact that the corporation is and was a very small closely held corporation.
In effect, the judge held that the plaintiff either was not surprised or, because of the terms of the settlement agreement, ought not to have been surprised.
Upshot
The plaintiff entered into a wonderful settlement – with only one problem, it was not enforceable. It may be that the plaintiff’s original action against the corporation and the owner was weak and the plaintiff settled just to be able to get $60,000. Conversely, the plaintiff may have had a good case against the owner in the original action and ought not to have settled unless the owner guaranteed the full payment.
Image courtesy of DAS71.
Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices. |