Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Official Citation: 2024 CLD 58
Court / Jurisdiction: Supreme Court of Canada
Year of Decision: 2023
Decision Date: 2023-10-27
Ruling Summary: This decision was rendered by the Supreme Court of Canada on 2023-10-27, officially reported as 2024 CLD 58. In this matter between the Petitioner and the Respondent, the court adjudicated key questions of statutory construction, procedural regularity, and legal precedent under Pakistani law.
Core Holding: The honorable bench evaluated governing statutory provisions and judicial authorities to establish the rights of the parties, delivering the binding reasoning set out below.
Case cited as 2024 CLD 58
Court Name: Supreme Court of Canada Judge(s):Andromache Karakatsanis, Russell Brown, Malcolm Rowe, Nicholas Kasirer,
JUDGMENT
[2021] AZ-51794090 Date of Judgment:2023-10-27 Reported As: 2024 CLD 58 Result: Appeal dismissed Judgment JUDGMENT English version of the judgment of the Court delivered by KASIRER J. I. Overview [1] Antoine Ponce and Daniel Riopel, presidents of a group of three thriving companies in the insurance industry, learned that a major company was interested in acquiring the group of companies that they ran. Rather than revealing this to the group's majority shareholders. Michel Rheaume and Andre Beaulne and their investment companies ("the shareholders"), the two presidents decided to buy the companies themselves and then resell them at a substantial profit. The shareholders felt betrayed; not only had they trusted the presidents, but they had entered into an incentive pay agreement that gave the presidents significant benefits, including a right of first refusal in the event that the shareholders decided to divest themselves of their interests in the group. [2] Considering this conduct to be disloyal, the majority shareholders blamed the presidents for not disclosing to them the interest expressed by a prospective purchaser in acquiring the companies, arguing that this was a breach of the presidents' duty to inform that justified disgorgement of the profits they had made by unlawfully appropriating that business opportunity. The presidents answered that, during the negotiations leading to their purchase of the companies, they had been
---
## Page 2
under no legal obligation to subordinate their interests to those of the shareholders in such a manner. [3] The Superior Court ruled in the shareholders' favour and ordered the presidents solidarity to pay them an amount equal to the profits earned on the resale of the shares. The Court of Appeal confirmed the trial judge's conclusions, while specifying the nature of the obligations breached by the presidents in relation to the shareholders, and upheld the remedy awarded at trial. [4] This appeal requires the Court to consider the basis for and parameters of the obligation of loyalty in order to determine whether a duty to inform was incumbent on the presidents. The Court must also clarify the conditions under which a court may award disgorgement of profits as a remedy, in particular for a contracting party's disloyal conduct. Specifically, it must trace the boundaries of the moral precept that "no one should profit from their own wrongdoing", on which the shareholders rely, as a justification for the remedy of disgorgement of profits made in bad faith. [5] A first observation flows from the debate between the parties: the obligation of loyalty arising from the exercise of powers in the interest of another -- like the one resting on an administrator of the property of others or a mandatary -- is not at issue here. An obligation of that kind would have required the presidents to subordinate their interests to those of the shareholders by requiring them to disclose the prospective purchaser's interest in acquiring the group. But as Professor Madeleine Cantin Cumyn has written, the [TRANSLATION] "basis for this loyalty . . . differs substantially from the one dictating contractual loyalty, which applies to a person who performs a prestation or exercises a right under a contract and who is bound to act in good faith" ("L'obligation de loyaute dans les services de placement" (2012), 3:1 B.D.E. 19, at p. 21). Unlike loyalty tied to legal powers that must be exercised in the interest of another or to achieve a particular purpose, the 'obligation of contractual loyalty rooted in good faith in the performance Cs of a contract under art. 1375 of the Civil Code of Quebec ("C.C.Q.") does not require a contracting party to subordinate their interests to those of the other party. In this case, the presidents are neither the shareholders' mandataries nor administrators of the property of others, which means that they cannot be held to an obligation of loyalty like the one provided for in arts. 1309 para. 2 and 2138 para. 2 C. C.Q. [6] A second observation is in order: despite the absence of an obligation of loyalty arising from the exercise of powers in the interest of another, the presidents' conduct is nonetheless wrongful. Although contractual loyalty tied to good faith did not prevent the presidents from performing the contract to further their self-interest, it did require them to consider the interests of the other contracting parties and, for this reason, it could impose on them a duty to inform. Accordingly, while the presidents did not have to subordinate their interests to those of the shareholders, the fact remains that, in pursuing their own interests, they could not conceal the prospective purchaser's interest in the companies without incurring contractual liability to the shareholders. By doing so, they breached contractual loyalty linked to good faith, which was an implied obligation under the contract through the combined effect of arts. 1434 and 1375 C.C.Q. Moreover, the trial judge was correct to conclude that the incentive pay agreement involved an implied obligation to inform that required the presidents to provide the shareholders with all information relevant to making an informed decision about the sale of their shares. This implied obligation flowed from the nature of the contract, reflecting the presumed intention of the parties, in accordance with art. 1434 C. C. Q. [7] The wrongful nature of the presidents' conduct raises a second issue: Could the non-disclosure of the prospective purchaser's interest justify, as a remedy, disgorgement of profits to the shareholders, who lost a business opportunity as a result of that wrongful conduct? An obligation of loyalty like the one resting on an administrator of the property of others or a mandatary in the exercise of their powers may justify disgorgement of profits for a restitutionary purpose, but
---
## Page 3
generally not for a compensatory one. However, the presidents are correct to say that they had no such obligation of loyalty. [8] Determining the appropriate remedy in this case therefore presents an opportunity for the Court to clarify what Professor Pascal Frechette calls [TRANSLATION] the boundary between restitution and compensation" in the civil law (La restitution des prestations (2018), at p. 9). Compensation for the injury caused by a breach of contractual loyalty is distinct from disgorgement of profits arising from non-performance of the obligation of loyalty in the exercise of powers. To justify an award of damages, the party wronged by a breach of contractual loyalty bears the burden of establishing compensable injury, in accordance with the fundamental principle of restitutio in integrum (or full reparation) that is central to the law of civil liability. [9] Relying on decisions of this Court in which good faith was in issue, particularly Bank of Montreal v. Kuet Leong Ng, [1989] 2 S.C.R. 429, the shareholders seek disgorgement of profits as a remedy for the presidents' breach of the requirements of good faith. In my respectful view, the shareholders are misreading Kuet, which relates to the exercise of a power similar to that of a mandatary. Absent proof of injury, Kuet cannot justify disgorgement of profits based solely on the breach of the presidents' obligation of contractual loyalty. That said, this misreading of Kuet does not preclude an award of damages to the shareholders for an amount equivalent to what would have been disgorged to them to compensate for the advantage they lost due to the presidents' fault. [10] In this case, the harm resulting from the presidents' contractual fault must therefore be proved in accordance with the typical rules of civil liability. The shareholders seek compensation for lost profits under the rule for assessing damages set out in art. 1611 C.C.Q. Although the law of civil liability does not, as a general rule, excuse a plaintiff from proving the injury sustained, it is the defendant's disloyal conduct that prevents the plaintiff from making such proof here. This is because, in this case, the presidents' non-disclosure of information to the shareholders was accompanied by efforts to conceal the prospective purchaser's interest in the companies and, according to a determination that is ultimately left to the trier of fact, by lies told to the shareholders to shut them out of the proposed deal. [11] The presidents cannot be allowed to profit from their breach of the requirements of good faith by arguing that the shareholders failed to prove their injury. In a case such as this one, the presidents' wrongdoing gives rise to a rebuttable presumption that the shareholders' lost advantage is equivalent to the profits unjustly realized by the presidents (see Biotech Electronics Ltd. v. Baxter, [1998] R.J.Q. 430 (C.A.)). The presidents could rebut this presumption by establishing the actual quantum of the lost gain on a balance of probabilities. They did not do so. Since the presidents have shown no palpable and overriding error in the trial judge's conclusion that the shareholders' lost gain is equivalent to the profits made by the Presidents, I am the view that there is no reason to interfere with the assessment of the quantum of damages. [12] I would dismiss the appeal with costs. II. Background [13] Groupe Excellence was comprised of three companies operating in the insurance industry: two brokerage firms, Michel Rheaume & Associes inc and Beaulne & Rheaume Assurance Itee, as well as The Excellence Life Insurance Company. At the time of the events in dispute, Michel Rheaume and Andre Beaulne, through the respondent investment companies, owned all the shares of the two brokerage firms and 93.1 percent of the shares of The Excellence. Mr. Rheaume and Mr. Beaulne, who were in their late sixties at the relevant time, describe themselves as having little formal education. However, they were very successful in the insurance field over the years, having founded the companies making up Groupe Excellence in the late 1970s. [14] In February 2002, the appellants, Antoine Ponce and Daniel Riopel, were appointed presidents of the Groupe Excellence companies. An actuary since 1978, Mr. Ponce became the president of The
---
## Page 4
Excellence Life Insurance Company, a position that Mr. Rheaume had offered him several times before. Mr. Riopel, who became a lawyer in 1986, is Mr. Beaulne's nephew. He worked with both of the brokerage firms for more than 20 years before becoming their president. [15] On March 15, 2002, Mr. Ponce and Mr. Riopel, designated in their capacity as [TRANSLATION] "presidents" of the Groupe Excellence companies, and the investment companies of Mr. Rheaume and Mr. Beaulne, as "majority shareholders", entered into a contract described in its preamble as an "incentive pay agreement" ("Presidents' Agreement" or "Agreement") (A.R., vol. X, at p. 3652). The Agreement governed the parties' relationship during the entire period relevant to this litigation, including during the negotiations and then the sale by Mr. Rheaume's and Mr. Beaulne's investment companies of their shares in Groupe Excellence to Mr. Ponce and Mr. Riopel. The Agreement, which had an initial term of five years, was to be renewed automatically for additional two-year periods unless written notice to the contrary was given. [16] The Presidents' Agreement formalized a business relationship between the parties that was based on their commitment to work toward the common goal of ensuring the success of Groupe Excellence as an ongoing business, even with a view to a potential sale. To this end, the Agreement provided for various forms of incentive pay for the presidents in addition to what they received as directors of the companies. The Agreement had only eight clauses and, aside from requiring the subsequent negotiation of a ron-competition clause in favour of the shareholders, imposed no express obligation on the presidents. [17] It was in this context, and while the Agreement was still applicable, that the actions alleged took place. [18] In April 2005, Industrial Alliance Insurance and Financial Services Inc. ("IA") informed the presidents, Mr. Ponce and Mr. Riopel, of its interest in acquiring Groupe Excellence. A series of discussions and exchanges of documents between the presidents and IA took place over several months. In July 2005, during that process, the presidents. and IA entered into an [TRANSLATION] "Undertaking of Confidentiality" concerning "a potential partnership agreement and/or any other form of transaction that may be entered into by the (*flies" (A.R., vol. IV, at p. 1110, el. 2). In the Undertaking, the presidents and IA agreed to the mutual disclosure of confidential information relative to their circumstances. At the presidents' request, an exclusivity clause in their favour was also included with respect to any transaction involving IA and Groupe Excellence. The purpose of that clause -according to the presidents themselves -- was to prevent IA from dealing directly with Mr. Rheaume and Mr. Beaulne as well as with their holding companies. [19] The presidents never informed the shareholders of these exchanges with IA or of IA's interest in acquiring Groupe Excellence, nor were the shareholders told of the existence of the Undertaking of Confidentiality. [20] In 2006, when the shareholders had been contemplating the possibility of selling their interests in Groupe Excellence for some time, Mr. Beaulne asked Mr. Ponce whether IA would be interested in buying the shares. Despite the prior exchanges between and the presidents, Mr. Ponce answered that he had already checked and that IA was not interested. The parties disagree as to the exact date of that interaction. The appellants say that the conversation took place before IA's interest led to a preliminary valuation in May 2006 and an acquisition proposal in August 2006. The respondents say instead that the conversation took place following these events. Thus, according to the respondents, Mr. Ponce deliberately lied to Mr. Beaulne. [21] In any event, the respondents did not know about the interest expressed by IA in acquiring Groupe Excellence at the time they agreed to sell the whole of their interests to the presidents. Mr. Rheaume did so in the fall of 2006, and Mr. Beaulne followed suit in the spring of 2007. As consideration for that sale, Mr. Rheaume received approximately $23,500,000 together with a full release for his debts under the Agreement. Mr. Beaulne received $10,371,210 together with a release
---
## Page 5
similar to Mr. Rheaume's. In the months following those transactions, the presidents in turn resold to IA, for a total of $74,280,000, the interests they had acquired from the shareholders. [22] In December 2007, IA issued a press release announcing its acquisition of Groupe Excellence from the presidents. The respondents learned of the sale at that time. In response, they filed a motion to institute proceedings for damages in the Superior. Court, claiming approximately $24 million as compensation for the gain they would have made through that transaction of which they were deprived. [23] In their motion, the respondents alleged that the presidents' failure to inform them of IA's interest had caused them a [TRANSLATION] "serious loss" (motion to institute proceedings, at para. 57, reproduced in A.R., vol. II, at p. 674). They stated that they had been deprived of the difference between the price they received when they sold their shares to the presidents and the higher price the presidents obtained on the resale to IA. They alleged that the presidents had breached [TRANSLATION] "their contractual and legal obligations, their fiduciary obligations and their obligations to act in good faith, with loyalty and transparency" by "intentionally" failing to inform the shareholders of the interest expressed by IA in acquiring Groupe Excellence (para. 41). The respondents stated that, because of the [TRANSLATION] "unlawful actions" of Mr. Ponce and Mr. Riopel, they were entitled to claim "the equivalent" of the excess profits made by them (paras. 57- 57.1). [24] In defence, the appellants argued that the respondents were conflating the obligations the appellants owed to the companies and the obligations they owed to the shareholders. Here, they said, the appellants [TRANSLATION] "are under no obligation whatsoever to the former shareholders, Beaulne and Rheaume" (A.R., vol. II, at p. 689, para. 93). The appellants also argued that they had complied with their obligations under the Presidents' Agreement and, more broadly, that they had committed [TRANSLATION] "no fault" against the respondents (para. 240). In addition, according to the appellants, Mr. Rheaume and Mr. Beaulne had been aware of the prospective purchaser's interest in acquiring Groupe Excellence, so the appellants could not be accused of hiding or concealing relevant information about the transactions that led to the resale of the shares to IA. Finally, the appellants disputed the calculation of the damages arising from the harm allegedly suffered by the respondents, saying that they were in no way [TRANSLATION] "indebted" to the respondents (para. 241). III. Judicial History A. Quebec Superior Court, 2018 QCCS 3538 (Deziel J.) [25] The trial judge granted the respondents' motion in part. He stated that, under both the Civil Code of Quebec and the Canada Business Corporations Act, R.S.C. 1985, c. C-44, the appellants, in their capacity as directors, owed duties of honesty, loyalty, prudence and MI diligence to Groupe Excellence. The trial judge found that these same duties can be extended to shareholders [TRANSLATION] "where there is an independent relationship between the directors and the shareholders" (para. 427 (CanLII)). In his view, this kind of independent relationship existed here, particularly because of the Presidents' Agreement, which [TRANSLATION] is key in illustrating the obligations assumed by the [appellants]" (para. 430). [26] In the trial judge's opinion, the Agreement entailed three implied obligations for the appellants: (1) to maximize, in the performance of their mandate and for the shareholders' benefit, the profits and value of Groupe Excellence; (2) to report to the shareholders, in a full and transparent manner, all information that might enable them. to assess the value of Groupe Excellence or make a decision to sell their shares and, in such a case, to determine a sale price; and (3) not to use information for their personal benefit without obtaining the shareholders' consent. [27] The judge then found that the appellants had secretly negotiated the resale of Groupe Excellence with IA. He noted that the appellants had signed an Undertaking of Confidentiality with
---
## Page 6
IA to ensure that IA did not deal directly with the shareholders. By doing so, the appellants had intentionally concealed from the shareholders the interest expressed by IA in acquiring 'Groupe Excellence, knowing that if the shareholders had been told of it, they [TRANSLATION]. "would have sought to maximize the sale price for their shares and it would then have been more costly for the [appellants' to exercise their right of first refusal under the Presidents' Agreement" (para. 487; see also paras. 436-37, 445-46 and 486). Considering the appellants' conduct in light of the obligational content of the Agreement, the trial judge held that they had breached their duties of good faith and loyalty as well as their duty to inform owed to shareholders Rheaume and Beaulne. [28] The trial judge then assessed the injury resulting from the appellants' fault, applying the principle of full reparation (restitutio in integrum). For that purpose, he essentially used the method of assessing injury proposed by the respondents' expert, which was based on the following key assumption: [TRANSLATION] ". . . had it not been for the acts alleged against the [appellants], the [respondents] would have received consideration equivalent to what IA paid to acquire the [appellants'] interests in Groupe Excellence rather than the amount they obtained from the [appellants] . . ." (A.R., vol. VII, at p. 2295, quoted with approval by the trial judge at para. 598; see also paras. 615 and 638-39). [29] # Accepting the hypothesis put forward by the respondents' expert, the trial judge held that the injury corresponded to the gains lost on the business opportunity unlawfully appropriated by the appellants. The gains lost were therefore equivalent to the profits made by the appellants when they resold the shares to IA, which the judge assessed at $11,884,743. He ordered the appellants solidarily to pay that amount and, taking note of the agreement reached by Mr. Rheaume and Mr. Beaulne concerning the distribution of their respective interests in Groupe Excellence, he allocated $7,368,540.60 to Mr. Rheaume's investment companies and $4,516,202.40 to Mr. Beaulne's investment companies. B. Quebec Court of Appeal, 2021 QCCA 1363 (Rancourt J.A., Mainville and Fournier M.A. concurring) [30] The Court of Appeal, per Rancourt J.A., unanimously dismissed the appeal and affirmed the trial judgment. However, the court noted that the trial judge erred in finding that the duties of honesty and loyalty provided for in att. 322 C.C. Q. and s. 122(1)(a) of the Canada Business Corporations Act, which the appellants had owed to Groupe Excellence in their capacity as directors, could be extended to the shareholders. But the court found that this error was not an overriding one given the other bases for the appellants' liability, which were correctly identified by the judge. His analysis of the obligational content of the Presidents' Agreement supported his conclusions regarding the appellants' fault, namely that they had breached their contractual obligation of good faith and duty to inform (see paras. 84, 94 and 110-11 (CanLII)). [31] Discussing the duty to inform in greater detail, the Court of Appeal held that the appellants' conduct fell within the three criteria set out in Bank of Montreal v. Bail Ltee, [1992] 2 S.C.R. 554. The Court of Appeal focused specifically on the fact that it had been impossible for the shareholders to inform themselves of the interest expressed by IA in acquiring Groupe Excellence as well as on the atmosphere of trust that had existed between the appellants and the shareholders (see paras. 90- 91). The court therefore concluded that the appellants breached the obligation of contractual good faith and the obligation to inform they owed to the shareholders, including by keeping them out of the negotiations with IA and secretly signing the Undertaking of Confidentiality with IA (see paras. 93-94; see also paras. 110-11). [32] With respect to the remedy, the Court of Appeal noted that it was not the role of an appellate court to substitute itself for the trial judge in assessing contradictory expert evidence or in fixing the quantum of damages (para. 119). The total award of $11,884,743 in damages was upheld. IV. Parties' Arguments and Issues
---
## Page 7
[33] Broadly speaking, two lines of argument are made by the parties before this Court. First, the debate turns on whether the appellants' failure to inform the shareholders of the interest expressed by IA in acquiring Groupe Excellence was a breach of an obligation, be it contractual or legal. In this regard, the appellants argue that their failure cannot constitute a civil fault because there was no legal basis requiring them to share that information in this case. As for the respondents, they take the view that the appellants are minimizing the scope and impact of the Presidents' Agreement, which was applicable during the entire period in issue. In their opinion, the requirements of good faith in the performance of that agreement made it obligatory for the appellants to disclose to the respondents the interest expressed by IA in acquiring Groupe Excellence. [34] Second, the parties disagree as to the appropriate remedy in the event that fault is established. The appellants submit that there were no grounds upon which the trial judge could award disgorgement of profits or even compensatory damages to the respondents by way of remedy. There are two possibilities: either the trial judge ordered disgorgement of profits without having any legal basis for doing so, or he awarded damages without having sufficient evidence of harm (A.F., at para. 92). Noting that the profits flowed from the appellants' wrongdoing, the respondents counter that the appellants must hand over to them the profits made on the resale of Groupe Excellence to IA, in accordance with the general principle of full compensation that is at the heart of the law of civil liability. [35] In light of the parties'…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.