May 1, 2015 By: Kyle Stout
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In a 70-page decision released on December 17, 2014, the Ontario Superior Court of Justice, awarded damages in the amount of $11 million to Nelligan O’Brien Payne’s client, Rougemount Capital Inc. (“Rougemount”), for breach of contract in Rougemount Capital Inc. v Computer Associates International Inc.

What Happened – Chronology of Events

In 2004, Sixdion was an Indigenous-owned IT company uniquely positioned to take advantage of federal Indigenous procurement initiatives, and an untapped global Indigenous market for IT and enterprise solutions. Founded in 1997, Sixdion had, by 2004, obtained a significant competitive advantage as a first mover in the $1.25 billion Canadian Indigenous market. As an Indigenous company, it also benefited from the Procurement Strategy for Aboriginal Businesses (“PSAB”) and Industrial Regional Benefits Programs (“IRBs”) – Federal Government initiatives designed to encourage federal government departments to acquire goods and services from Indigenous companies, and mandating specified Indigenous spending.

By 2004, Sixdion had a successful track record of contracting with the Federal Government, and had secured a number of contracts with large private sector clients. However, Sixdion’s vision extended beyond such traditional markets. By 2004, the principals of Sixdion had decided to shift the focus of their business to the development and sale of an enterprise software solution conceived by Sixdion and known as the Information Centric Community (“ICC”). Through the ICC, Sixdion sought to become the first company to sell enterprise community solutions specifically serving Indigenous communities. In order to fund such growth strategy, Sixdion needed an infusion of capital. In 2004, the principals of Sixdion decided that the best strategy was to bring in a strategic partner or partners which could bring investment, expertise and technology to Sixdion, and which would allow Sixdion to develop the ICC. One such partner was Computer Associates International (“CA”).

As noted by Justice Sanderson, “it was CA that first approached Sixdion”. A sales account executive at CA’s Ottawa office first contacted Sixdion to discuss CA’s desire to access PSAB benefits through Sixdion. The sales account executive gave evidence that, prior to contacting Sixdion in March, 2004, CA was aware that access to PSAB through an Indigenous partner would provide CA with easier and quicker access to Federal Government markets and would reduce delays in selling CA products to the Federal Government. What followed were a series of negotiations involving the principals of Sixdion and CA executives, including the Vice President, Partners, of CA International Inc. who was introduced to Sixdion by the Senior Manager of Strategic Business Alliances at CA Canada as “the man”, and ultimately culminating in: (1) a Term Sheet prepared by Sixdion on May 6, 2012 and delivered to CA on May 12, 2012; and (2) “the man”, with the approval of one of only five Executive Vice Presidents of CA International, committing to contract with Sixdion, orally, on July 30, 2004, and in writing, on August 11, 2004 (the “Commitment Letter”).

Rougemount claimed that by July 30, 2004, the parties had agreed on all the essential terms of the contract – CA would assist Sixdion in developing the ICC by providing technological expertise, training and servicing (including integration) opportunities, and by paying Sixdion $1.5 million in installments: $250,000 immediately, $250,000 in January 2005 and $1 million in April 2005. Sixdion would cooperate by integrating CA products into its enterprise suite and by selling CA products to the Federal Government, and provide it with a means to obtain the advantages of PSAB and other federal Indigenous procurement initiatives. Sixdion would give CA warrants exercisable for 10% of the Sixdion shares.

Rougemount further claimed that CA breached the contract when, in the midst of internal turmoil at CA involving criminal charges laid against top CA executives, $2.2 billion in restated revenue, and other appurtenances of accounting fraud allegations, CA representatives in New York unjustifiably retracted and “killed” the deal.

CA, for its part, claimed that CA never entered into an enforceable contract on July 30, 2004, August 11, 2004, or at any other time. Neither “the man” nor the Executive Vice President that approved the deal had actual authority to bind CA to the contract. CA further claimed that the essential terms of the contract were not agreed upon – both the Commitment Letter and the May 6 Term Sheet, to which it referred, failed to specify all the essential terms, including the terms and conditions of the shareholders agreement, and the subscription agreement mandated in the Term Sheet. In the alternative, CA claimed that because the Commitment Letter referenced the Term Sheet, any agreement was conditional on the terms set out therein, including, most notably, completion of a satisfactory due diligence review by CA.

The Decision

CA and Sixdion entered into a Binding Agreement

As discussed above, in part on the basis of key admissions made by a CA witness during cross-examination, Justice Sanderson rejected CA’s position that the CA executives did not have actual authority to bind CA. Justice Sanderson rejected CA’s characterization of the $1.5 million investment in Sixdion as an acquisition requiring further approval of corporate strategy/business development in New York, stating that:

[I] infer and find that Q had actual authority to authorize and incur a $1.5 million marketing expense. In essence Q authorized a marketing deal that gave CA the additional option of exercising the warrant if it so chose. Q and D considered that aspect to be an additional peripheral benefit, not the essence of the deal.

Noting that counsel for CA did not lead evidence regarding whether the Executive Vice President had ostensible or apparent authority, Justice Sanderson stated that:

CA held out D/Q as having the requisite authority and did nothing to suggest to Sixdion that Q/D were not authorized to make the deal. I find the principals of Sixdion reasonably relied on what D told them in regard to Q and D’s authority.

Commentary

At law, a company may be bound by an agreement entered into by an employee or agent lacking actual authority where the company represents, or “holds out” that the employee or agent has the requisite authority. This is referred to as ostensible or apparent authority. The Supreme Court of Canada has affirmed that the representations that will create ostensible authority may take a variety of forms, the most common being representation by conduct. That is, by permitting the agent to act in some way in the conduct of the principal’s business with other persons. As stated by the Supreme Court of Canada in Rockland Industries Inc v Amerada Minerals Corp of Canada:

Surely, there can be no stronger instance of representing an agent as having permission to act in the conduct of the principal’s business with other persons than by permitting an agent to negotiate who is clothed with actual authority to do so.

Interestingly, although Justice Sanderson found that the Executive Vice President had actual authority to bind CA to the contract, she would have also found that CA was bound on the basis of ostensible or apparent authority.

The decision is an important reminder for clients, particularly corporate clients, to ensure that limits on employee or agent authority are communicated both to: (1) the employee or agent; and (2) third parties dealing with the employee or agent. Where a corporation places an individual in a functional role that would normally confer upon the person occupying it authority to perform certain acts, including the entering into contracts on behalf of the corporation, the act of appointment alone may be sufficient to justify reliance by a third party.

The Essential Terms of the Contract Were Agreed Upon

Citing the decision of the Ontario Superior Court of Justice in Georgian Windpower Corp v Stelco Inc., Justice Sanderson rejected the submission of counsel for CA that there was no binding enforceable contract because the essential terms were not agreed upon. In Georgian Windpower, the Court stated:

What constitutes the "essential terms" depends on the subject matter of the contract and what transpired at the time of the alleged agreement: see United Gulf Developments Ltd. v. Iskandar, 2008 NSCA 71, 69 R.P.R. (4th) 176 (N.S. C.A.). Cromwell J.A. (as he then was) stated at para. 1

To have an enforceable contract, there must be agreement between the parties as to all essential terms. To use the language of a leading case, a contract '…settles everything that is necessary to be settled and leaves nothing to be settled by agreement between the parties': May & Butcher Ltd. v. R. (1929), [1934] 2 K.B. 17 (U.K.H.L.) at p. 21. Determining what terms are 'essential' in a particular case is, however, more difficult than stating the principle. The sort of terms that are considered essential varies with the nature of the transaction and the context in which the agreement is made: Mitsui & Co. (Point Aconi) Ltd. v. Jones Power Co., 2000 NSCA 95, 189 N.S.R. (2d) 1 (N.S. C.A.), at para. 64.

Justice Sanderson found that, as of the date of the Commitment Letter, CA and Sixdion believed that they had settled everything they needed to settle, and that they had agreed on the essential terms of the contract, “All that remained was papering the deal they had already reached”.

CA’s Commitment to Invest in Sixdion was Unconditional

Counsel for CA submitted that the Commitment Letter incorporated by reference the terms set out in the May 6 Term Sheet, and was thus conditional upon, among other things, completion of satisfactory due diligence by CA. According to CA, due diligence was required as part of the approval process undertaken by CA for all acquisitions. As discussed above, Justice Sanderson rejected CA’s characterization, as the $1.5 million investment in Sixdion as an acquisition requiring further due diligence by CA in New York. Justice Sanderson found that, in the period leading up to the making of the contract on July 30, 2004, the CA representatives contracting with Sixdion were not characterizing the deal as an acquisition of shares, and therefore did not anticipate that due diligence would be done in the ordinary course. They expected the $1.5 million to be treated as a marketing business expense. In part on the basis of the admission of a CA witness during cross-examination, Justice Sanderson further rejected CA’s characterization of a new approval process implemented by CA: (1) subsequent to CA’s commitment to contract ; and (2) in the midst of internal turmoil at CA, as due diligence, stating that:

[I] find that the approval process CA instituted in September and October 2004 had nothing to do with due diligence under the May 6 Term Sheet. C conceded that what he did was not due diligence.

I find when CA entered into the contract on July 30, 2004, neither Q nor D understood that it would be contingent upon completion of any further due diligence. I infer they were anxious for CA and Sixdion to be able to get selling by early September when the federal government procurement cycle would get into full gear.

Ultimately, Justice Sanderson found that CA unjustifiably subjected the Sixdion contract to an additional and unwarranted approval process, ignoring the fact that the contract had already been committed to and approved, stating that:

I have found that had CA not embarked on a new and unwarranted approval process, completion of the written contract would have been accomplished quickly, as in the past…

To be continued…

Kyle Stout is a member of our business law practice group. He can be reached by emailing kyle.stout@nelligan.ca or by calling 613-231-8246. For more information on business law issues, click here to view our services, or click here to view our Business Law Focus blog.

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.

Service: Business Law