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Back to Rogue Traders case summary.

Back to Documents in support of Rogue Traders case.

Copy of the judgement in a Canadian case that mirrors the Bantock matter.

The fundamental difference in this case is that the struck off (disbarred) solicitor's credentials, nor those of his client, were made clear to Mr Bantock prior to entering into the business for which they had been retained to conduct appropriate due diligence.

Source


 DATE: 19980826



DOCKET: C27477

COURT OF APPEAL FOR ONTARIO


FINLAYSON, CARTHY JJ.A and THEN J. (ad hoc)


B E T W E E N : )

)

ROBERT E. MARTIN ) Geoffrey D. E. Adair Q.C.

) Krista Springstead

) for the appellants

(Plaintiff/ )

Respondent) )

)

and ) William G. Dingwall Q.C.

) Thomas S. Kent

) for the respondent

)

CLIFFORD GOLDFARB, FARANO, GREEN )

and ALEKSANDRA KUROWSKA-BARRIE )

(Defendants/ )

Appellants) ) Heard: May 19 and 20, 1998

)


FINLAYSON J.A.:

[1] This appeal concerns problems central to the remedy awarded to an entrepreneur whose corporate enterprises were victimized by a rogue under circumstances that might not have prevailed had his identity and background been disclosed to the plaintiff by his solicitors, the defendants in this action.

[2] After a lengthy trial, Lederman J. of the Ontario Court (General Division) found that the respondent Robert E. Martin ("Martin") suffered personal losses following a breach of fiduciary duty owed to him by the appellants Clifford Goldfarb ("Goldfarb") and his law firm, Farano, Green. He awarded damages against them for $5,949,447.00 together with pre-judgment interest of $3,051,006.82 and costs on a party and party basis.



The nature of the breach

[3] Nigel Stephen Axton ("Axton") was a client of Farano, Green. He was a disbarred lawyer who had been convicted of numerous counts of fraud in 1985 and sentenced to four years and six months in the penitentiary. Goldfarb knew about Axton's past and had told members of his firm of what he knew. The trial judge concluded that Goldfarb became responsible for the conduct of Axton which led to Martin's financial ruin by concealing Axton's past from Martin and by permitting Axton, without objection, to refer to himself as Nigel Stephens, and variations thereof. Goldfarb appeared to think that he was justified in suppressing Axton's background because he believed Axton when Axton told him he had reformed.

[4] Martin met Axton under the name of Nigel Stephens in the course of business dealings and it was Axton who referred Martin to Goldfarb as a client. At the time that Goldfarb started acting for Martin, Goldfarb knew that Axton had become the financial advisor to Martin and his various corporations. The trial judge found, and the appellants now concede, that the failure of Goldfarb to advise Martin of what he knew of Axton's background was a breach of his fiduciary duty as a solicitor to both Martin and his corporations. Martin asserts that had he known of Axton's past, he would have terminated his relationship with him or at the very least he would have been more careful before accepting his advice. He asserts that he was ruined because of Axton's direct actions or that of his associates, known as the Frog Pond Group. In the end, Martin and his companies were petitioned into bankruptcy.

Issues in appeal

[5] There are three issues in this appeal. They are interrelated and none is simple. The first relates to establishing a causal connection between Goldfarb's breach of fiduciary duty in the narrow area of the breach found by the trial judge and the damages suffered by Martin's corporations because of frauds perpetrated by Axton and his associates. The second addresses the failure of the trial judge to distinguish the losses suffered by Martin personally from those suffered by the corporations he controlled. The third addresses the lack of cogent evidence in this trial record to support the quantum of damages in the substantial award made by the trial judge. For the reasons that follow, I am of the opinion that Martin is entitled to only those losses he incurred personally in respect of transactions involving Axton that occurred after July 28, 1988. The identification and quantification of damages in this case is wholly unsatisfactory and I would remit the matter back to the trial judge to determine the proper award of damages.

Overview of the facts

[6] The respondent Martin was a successful owner and operator of a number of nursing homes, the first of which he purchased in Newmarket from his father and the rest he acquired systematically by conventional financing methods. He mortgaged or re-financed existing properties or sold them and utilized the proceeds to buy new nursing homes. In addition, he inherited his father's 75 per cent share interest in the company that owned the Newmarket Golf and Country Club and later acquired 150 acres of land adjacent to the golf course known as the Golf Course House lands. It is apparent that while Martin was land rich and cash poor, he was well to do by any standard before the happening of the events that I will briefly relate.

[7] Martin's assets were by and large owned by various corporations of which he was the controlling shareholder. However, by 1986 these corporations were generating significant negative cash flows on operations. Accordingly, he made a fundamental decision in late 1986 to seek public financing. He was introduced to a solicitor who specialized in initial public offerings and from that point forward the entire nature of his business changed. He became engaged in what is known as a reverse take-over whereby he incorporated a public company, TLC Properties Inc., and caused it to acquire from him two of his nursing homes. Martin became Chief Executive Officer and principal shareholder of TLC Properties. Shortly thereafter, he was introduced to the concept of acquiring nursing homes for syndication to limited partnerships.

[8] Martin engaged in an aggressive expansion program utilizing these financial initiatives and almost immediately encountered serious economic set backs. In May of 1987 he acquired a partially completed retirement home in Sudbury called Champlain Lodge. It was immediately syndicated to a limited partnership, TLC Sudbury Retirement Lodges L.P. with a Martin corporation, 716255 Ontario Limited, as the general partner. Martin's obligation was to complete the remaining construction. This became more expensive than anticipated. We do not have proper financial records of what occurred but it is apparent that it became a substantial cash drain to Martin during 1987 and 1988.

[9] In 1987, Martin decided to enter the Toronto nursing home market and was persuaded to make a substantial investment for ultimate syndication in a property at 500-504 Kingston Road. The corporate vehicle he used was TLC Properties. The vendor was 500 Kingston Road Properties Limited, a company owned by Garth Anthony, who was in business with Axton and others in what is referred to as the Frog Pond Group. Goldfarb had acted for Anthony on his initial acquisition of this property and again on its sale to Martin. At the closing of the Kingston Road acquisition, Martin met Axton under the name Nigel Stephens. He knew that Axton was then acting for the landlord (Anthony) in a dispute with the tenants.

[10] Once again, Martin had to undertake to complete substantial renovations. One of his companies entered into a contract with a company of Anthony's called Burbrook Developments Inc. to do the work at a fixed price of $1,600,000. This acquisition was replete with problems. They included difficulty in the removal of existing tenants. There was delay in obtaining a building permit and a permit for above grade work was never obtained. Applications were made to the Committee of Adjustments for ten separate variances including a variance to increase the number of beds in the renovated nursing home. The problem with the limited number of beds was never resolved. Martin accused Burbrook of cheating him. The trial judge found that the whole project was a disaster.

[11] Another venture was 412-14 Jarvis Street in Toronto. It also involved Anthony and the Frog Pond Group. After completing the negotiations for the purchase with Anthony, Martin accepted Anthony's suggestion to consult Goldfarb. On July 28, 1988, Martin caused Martinvale Estates to retain Goldfarb for the purpose of closing the deal. This transaction had striking similarities to Kingston Road. Without going into them in detail, it is apparent that it was a most unwise investment. As the trial judge found:

The Jarvis Street project turned out to be perhaps even a greater nightmare and financial disaster than that of Kingston Road. There were ongoing problems of trying to evict the tenants; there was a significant cash drain on Martin's resources in the form of legal fees for landlord and tenant applications and for work orders and by-law infractions, providing security for the building, repairing fire escape systems and furnace/boiler systems; and generally dealing with the advanced state of the deterioration of the building.

[12] What is important to remember at this stage is that Martin had made the decision to embark upon this vigorous expansion plan prior to meeting Axton or Goldfarb. His initial advisors were unrelated to the Frog Pond Group or to the law firm of Farano, Green. While he came into contact with the Frog Pond Group in the Kingston Road project, his dealings with them were at arms' length and he employed his own solicitors and financial advisors. Martin dealt with the Group as vendors again in the Jarvis Street project and for the first time retained Goldfarb to close the transaction. The trial judge deducted the losses on the Kingston Road and Jarvis projects and others from his computation of damages arising out of the misconduct of Axton for which he was prepared to make Goldfarb and his firm liable.

[13] Axton has been described as a charmer and a master manipulator. It did not take the relatively unsophisticated Martin long to fall under his spell. Shortly after Goldfarb started acting for Martin, Martin moved into the building that housed Axton and the Frog Pond Group. He very soon became totally dependent upon Axton for his financial advice.

[14] Under Axton's ministrations, a program for rapid expansion that had its own frailties when supported by honest advisors, quickly became a race to the bankruptcy courts. Axton reverted to his old criminal ways and he and the Frog Pond Group engaged in a succession of schemes whereby the value of the assets of Martin's corporations were artificially inflated to secure additional mortgage financing. Some of these mortgages were guaranteed by Martin personally. In many instances, the mortgages were supplied by corporations controlled by the Frog Pond Group and the spread between the true value of the properties and the inflated value was siphoned off by the Group.

[15] During this period, Goldfarb and his law firm acted for Martin and his corporations on acquisitions but Farano, Green did not act for the Frog Pond Group on its financing of these acquisitions. These were handled by in-house counsel for the Group, Aleksandra Kurowska-Barrie, another defendant in this action. There were also legitimate financial deals with bona fide financing with which Martin corporations became involved and Goldfarb acted in these transactions, as well. It is unnecessary here to refer to all the transactions in which Martin was involved with Axton when he was represented by Goldfarb. It suffices to say that during the period beginning July 28, 1988 and ending in the fall of 1989, Goldfarb represented various companies in which Martin had a direct or beneficial interest on a transaction-by-transaction basis. One of the principal tasks the trial judge undertook was to attempt to sort out from the multitude of complex transactions those which were bona fide and those which caused ruin to Martin because of the actions of Axton and his associates.

Chronology of the litigation

[16] In November of 1989, Martin, Newmarket Golf and Country Club Limited, and Martinvale Estates Limited commenced an action (#43071/89) in the Ontario Court (General Division) against Axton, his associates and numerous corporations that they controlled, claiming damages for fraud, misappropriation and conversion with respect to a number of the above referred to transactions. In early 1990, the plaintiffs obtained a Mareva injunction. On September 6, 1990, Martin was petitioned into bankruptcy along with Newmarket Golf and Country Club and Martinvale Estates by the Royal Bank of Canada.

[17] On December 21, 1990, the Registrar in Bankruptcy approved the sale by the trustee in bankruptcy of the estates of Martin and the two corporate plaintiffs of their causes of action against Axton and his associates contained in action # 43071/89. The causes of action were purchased by Axton and his group for $2,500. The solicitors for the various plaintiffs were then instructed not to proceed. Action #43071/89 was dismissed by order of O'Brien J. on February 11, 1991.

[18] On January 11, 1990, Martin commenced this action (#44653/90). It remained dormant throughout his bankruptcy. Following his absolute discharge from bankruptcy on July 9, 1992, Martin obtained a re-assignment of this cause of action (#44653/90) from his trustee. The Registrar in Bankruptcy approved this return of Martin's right, title and interest in and to the cause of action by order dated July 7, 1992. No request was made for an assignment of any cause of action Martin's corporations might have had against the defendants in this action.

[19] On May 19, 1995, the defendant Kurowska-Barrie, supported by the appellants, brought a motion before Wright J. for an order staying the action in appeal by reason first that the cause of action was included in those asserted by Martin against Axton and associates in action #43071/89 and that the dismissal of that action by O'Brien J. rendered the matter res judicata as between Martin and the defendants in this action. Secondly, it was argued that the cause of action asserted by the respondent Martin was wholly derivative in nature and belonged to corporations controlled by Martin and not to Martin personally. It was submitted that Martin required leave to proceed under s. 245(1) of the Business Corporations Act, S.O. 1982, Ch. 4 as well as an assignment of the corporate causes of action from the trustee in bankruptcy under s. 38 of the Bankruptcy and Insolvency Act, R.S.C., 1985, c.B-3.

[20] The plaintiff's claim at this time was contained in an amended statement of claim dated January 11, 1990 and sounded in negligence. No particulars of the claim for damages appeared in the pleading. There was an alternative claim for "an accounting of all funds and transactions handled by the defendants on the plaintiff's behalf from the period November 1, 1987 to the date of trial". The claim for breach of fiduciary duty was not advanced until September 13, 1996 when the statement of claim was amended, again without particulars as to damages.

[21] Wright J. dismissed the motion of Kurowska-Barrie on June 23, 1995. With respect to the first submission, he relied upon an earlier judgment in this action by Doherty J. dated June 8, 1990 (leave to appeal refused August 9, 1990) who held that the success or failure of Martin in the instant action was not contingent upon his success or failure in his action against Axton and his associates.

[22] As to the second submission, Wright J. held:

The defendant Kurowska-Barrie's second ground for a stay is a reference to s. 245(1) of the Business Corporations Act which requires a shareholder to apply to the Court for leave to bring an action in the name of or on behalf of a corporation. The defendant argues that the wrongs complained of by the plaintiff are claims of his corporation and not his personal claims. The defendant argues that the plaintiff has not sought leave of this Court to commence the action and if leave was requested, it would not be granted. In my view, s. 245(1) of the Business Corporations Act does not apply to a sole shareholder situation as the plaintiff in this case ╝ and he has a right to bring this action in his personal capacity.

[23] The defendant Kurowska-Barrie sought leave to appeal this interlocutory order, but leave was refused by Lissaman J. on August 1, 1995. As indicated above, on September 13, 1996 an amended statement of claim was served and filed alleging breach of fiduciary duty, but it included no particulars as to damages.

First issue: has the respondent established a causal connection between the breach of fiduciary duty alleged and the damages alleged?

[24] It was the evidence of Martin that had he known the truth about Axton's background, he would never have become involved with him let alone entrusted control over his entire finances to him. Moreover, had Goldfarb told Martin what he knew of Axton at any time during the fiduciary relationship, Martin said he would have terminated his association with Axton and the Frog Pond Group immediately, or at the very least, have made arrangements to carefully scrutinize their activities. However, this position ignores the fact that Martin was involved with Axton before he met Goldfarb. Indeed it was Axton who introduced Martin to Goldfarb, not the other way around. As the trial judge found:

By the time Goldfarb had started to act for him, Martin was deep into the Kingston Road and Jarvis Street projects. Even if he had learned from Goldfarb about Axton's identity and past, any bail out of the projects would have still resulted in heavy losses for Martin. The extreme costs incurred in the two projects, which ultimately resulted in the loss of the properties, no doubt are attributable to the risks of the development business and are not causally connected to any non-disclosure of the defendants. These losses are too remote from the breach of duty by the defendants.

[25] The trial judge accepted Martin's evidence as to his growing dependency upon Axton and his ultimate loss of control of his personal and corporate assets to Axton and his associates. He accepted that Goldfarb should have told him about Axton's background. As to Goldfarb, the trial judge found:

Goldfarb was obviously persuaded by Axton that he was truly reformed and would pursue only legitimate real estate activities. Goldfarb believed that Axton had paid his debt to society and was entitled to have the opportunity to earn a livelihood. Goldfarb testified that throughout the series of transactions in which he acted for Martin, during the height of the real estate boom - the freewheeling late 1980's, characterized by the Royal Bank's La Roche as "the glorious days" - he had no reason to believe that the Axton's transactions were anything but proper. Unfortunately, by not sharing what he knew about Axton with Martin, he deprived Martin of the opportunity of making his own business judgment about becoming involved with Axton and the transactions. Goldfarb should have so informed Martin the moment he accepted a retainer to act for any of the Martin companies.

By failing to disclose this material fact, Goldfarb concealed facts material to Martin's well-being and thereby violated his duty of loyalty to Martin and is in breach of his fiduciary duty.

[26] It is significant that the trial judge relied solely upon breach of fiduciary duty as the basis for finding liability against the appellants. The original claim in negligence is ignored, indeed it appears to have been abandoned by Martin. The trial judge stated:

In the instant case, Martin is not complaining about the quality of Goldfarb's legal work. The claim is not that Goldfarb negligently performed legal services or neglected to properly inform the client or explain important facts pertaining to the transactions themselves. Rather it is that Goldfarb deliberately failed to disclose an important piece of information to his client: namely, the history of Axton.

[27] Perhaps because of this position taken by Martin in this litigation, the trial judge did not make specific findings of negligence against Goldfarb. He seems content to observe that "there were a number of factors which should have set off alarm bells and must have created suspicion in Goldfarb and Kurowska-Barrie's minds". (Kurowska-Barrie also knew of Axton's past). The trial judge commented further that "their antennae would have been sensitive to the possibility of abuse by Axton in the sheer number of transactions that he was carrying on behalf of Martin". He also noted that they did not take any steps to learn about the details and business merits of the numerous purchases and financings despite their knowledge of Axton's past criminal practices. He concluded:

Axton used the fašade of solicitors such as Goldfarb and Kurowska-Barrie to give Martin a false sense that his affairs were being handled honestly by the FP Group and overseen by solicitors.

[28] More important than the absence of a finding of negligence against Goldfarb and his firm, the trial judge was not prepared to find that Goldfarb was complicit in the various frauds being perpetrated by Axton and the Frog Pond Group on Martin and his corporations. Specifically, the trial judge found that once Axton acquired control, neither Goldfarb nor Martin's other advisors really knew what was going on. Consequently, we are left with a threshold finding of breach of fiduciary duty by the trial judge but nothing seems to flow from that finding. However, in his assessment of damages, the trial judge does follow, with significant modifications, the "before" and "after" approach of Martin in determining the quantum of damages such that Martin's losses reflect the diminution of the value of his personal and corporate assets beginning in July of 1988 and terminating in his ultimate insolvency in September of 1990. Martin testified that he was a rich man before meeting Axton and now he is destitute. He seeks to be restored by Goldfarb and his law firm to the financial position he enjoyed prior to his becoming involved with Axton albeit conceding as a matter of law that Goldfarb is only responsible for the deterioration of his fortunes following July 28, 1988 when Martin became a client of Farano, Green. The problems inherent in the trial judge's assessment of the quantum of damages will be considered in a later section. I am concerned here with causation.

[29] Remedies in the nature of restitution are usually premised on the circumstance that the fiduciary has misused confidential information to his or her advantage and to the detriment of the person to whom a fiduciary duty is owed. Such a remedy might be appropriate in assessing damages against Axton, but here it is conceded, and so found by the trial judge, that Goldfarb did not profit personally from his relationship with Martin except to the extent that his law firm obtained legal fees for providing legal services. Failing a finding that Goldfarb was complicit in Axton's fraud, I cannot see a basis for directly attributing to Goldfarb all of the consequences of Axton's conduct that post dated July 28, 1988. Goldfarb and Axton were not co-conspirators or joint tort feasors. Indeed, far from being involved in the fraud, the reasons of the trial judge suggest that Goldfarb too was a victim of Axton's manipulation. He was not prepared to say even that Goldfarb and other members of his law firm, forewarned of Axton's criminal past, were negligent in failing to recognize indicia of fraud in the impugned transactions which Farano, Green handled as solicitors for Martin's corporations. The trial judge found:

Once Axton obtained control, he embarked upon a scheme so clever and devious that neither Martin nor, indeed, the professionals, such as Goldfarb or Kurowska-Barrie, really knew what was going on. Axton used Martin's assets for his and FP's own self interest by making false claims and exorbitant claims for fees and disbursements and obtaining mortgages as security for them; making secret profits; creating false mortgages and trying to mask the entire scheme by utilizing a vast array of shell companies.

[30] Notwithstanding his inability to tie Goldfarb into Axton's fraud, in his analysis of the evidence as to the responsibility of Goldfarb for Martin's losses, the trial judge concentrated upon the evidence of the actions of Axton and his associates. He found that they were acting in a fiduciary capacity to Martin and his corporations. He held that:

Martin had in a sense, completely delegated to them all his financial assets and followed their instructions and directions slavishly. He was completely dependent upon them for advice and deferred to their expertise in matters of land acquisition, financing and development.

. . . .

They [the Frog Pond Group] thereby acquired total control over his assets and monies and purportedly acted on his behalf.

[31] In support of this analysis respecting Axton and his associates, the trial judge relied upon the judgment of Wilson J. in Frame v. Smith, [1987] 2 S.C.R. 99 at p.136 where she held that relationships in which a fiduciary obligation have been imposed possess three general characteristics:

1. The fiduciary has scope for the exercise of some discretion or power,

2. The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary's legal or practical interests,

3. The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.

[32] The trial judge held that these features were present in the relationship between the Frog Pond Group and Martin. "Martin had reposed trust and confidence in the FP Group and in the circumstances was vulnerable to the latter's abuse of that trust". Taking the trial judge's analysis to this point, the principal fiduciary duty is that of Axton and his associates to Martin. It was that breach of trust which led to the financial losses of Martin and his corporations.

[33] The existence of a fiduciary relationship between Goldfarb and his law firm clearly arose out of the relationship of solicitor and client. The only breach of that duty as found by the trial judge is restricted to Goldfarb's failure to advise Martin of Axton's background. The problem is to determine what damages flow from that restricted breach.

[34] The trial judge made a full analysis of three decisions of the Supreme Court of Canada: Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787, Canson Enterprises Ltd. v. Boughton & Co., [1991] 3 S.C.R. 534 and Hodgkinson v. Simms, [1994] 3 S.C.R. 377. I agree with his analysis and adopt his final reconciliation of the opinions expressed by the members of the Supreme Court when he said:

Regardless of the doctrinal underpinning, plaintiffs should not be able to recover higher damage awards merely because their claim is characterized as breach of fiduciary duty, as opposed to breach of contract or tort. The objective of the expansion of the concept of fiduciary relationship was not to provide plaintiffs with the means to exact higher damages than were already available to them under contract or tort law.

[35] It is necessary to review the facts of these cases to determine if they provide a juristic basis for finding a causal connection between the breach of the fiduciary duty owed by Goldfarb and his firm to Martin and the damages assessed by the trial judge.

[36] Air Canada was a case involving a conventional trust fund. The issue before the court was whether strangers to the trust arrangements could be held liable for a breach of trust by a trustee. The ground of liability that is potentially applicable here is whether the strangers knowingly assisted in a dishonest and fraudulent design such as to be subject to a constructive trust with respect to the original trust funds. The degree of knowledge required was addressed by Iacobucci J. for the majority at pp. 811-12:

The latter point may be quickly addressed. The knowledge requirement for this type of liability is actual knowledge; recklessness or willful blindness will also suffice. See Belmont Finance Corp. v. Williams Furniture ltd. (No. 1), [1979] 1 All E.R. 118 at 130, 136; In re Montagu's Settlement Trusts, [1987] Ch. 274 at 271-72, 285; Carl-Zeiss-Stiftung v. Herbert Smith & Co. (No. 2), [1969] 2 All E.R. 367 (C.A.) at p. 379. In the latter case, Sachs L.J. stated that to be held liable the stranger must have had "both actual knowledge of the trust's existence and actual knowledge that what is being done is improperly in breach of that trust - though, of course, in both cases a person willfully shutting his eyes to the obvious is in no different position than if he had kept them open." Whether the trust is created by statute or by contract may have an impact on the question of the stranger's knowledge of the trust. If the trust was imposed by statute, then he or she will be deemed to have known of it. If the trust was contractually created, then whether the stranger knew of the trust will depend on his or her familiarity or involvement with the contract.

[37] In Canson Enterprises, supra, a solicitor, Wollen, acted on both sides of a real estate transaction. Canson entered into a joint venture agreement and the joint venturors were the purchasers of a property in which one Henderson appeared to be the owner and vendor. Wollen was aware that the property was not being purchased directly from Henderson because he had acted for an intermediary company that purchased the property and was now in the process of reselling it in Henderson's name at a higher price. The transaction was what in modern parlance is termed a "flip". For the purposes of closing, Wollen prepared a statement of adjustments for the vendor Henderson showing the purchase price to be $410,000 and a statement for the purchaser Canson showing the purchase price to be $525,000. After the closing, Wollen paid over the secret profit to the intermediary company and did not disclose the payment to Canson or Henderson. In billing Canson, he made no apportionment of land title fees or his own conveyancing fees to reflect what he had done for the intermediary company. Wollen was found to be in breach of his fiduciary duty in failing to disclose the secret profit to Canson arising out of the transaction.

[38] Following the purchase, Canson and its joint venture partners proceeded with a warehouse development on the property but suffered substantial losses when piles supporting the structure began to sink, causing extensive damage to the building. An action was commenced against the soil engineers and pile driving company. For various reasons that are irrelevant to this judgment, the action was settled at a figure less than Canson's actual damage. Canson and its joint venture partners then commenced an action against Wollen and his law firm for the amount of the shortfall, alleging that Wollen's failure to disclose the secret profit was actionable as deceit or breach of fiduciary duty.

[39] The case proceeded on the basis of an agreed statement of facts. It was accepted that Canson would not have purchased the property or entered into the joint venture agreement had it known about the secret profit. Thus, Canson sought an order that it and its partners were entitled to compensation for their entire loss, to be proved at trial, which was incurred as a result of embarking upon the joint venture. Damages would include the amount of the secret profit, and consequential damages unlimited by principles of remoteness, causation or intervening acts.

[40] The trial judge held that the Wollen was not liable in deceit but was liable for breach of fiduciary duty and awarded the same damages as for a cause of action sounding in deceit. On appeal to the British Columbia Court of Appeal, the appeal was dismissed. Canson further appealed to the Supreme Court of Canada on the ground that compensation for breach of fiduciary duty should be calculated on the same footing as for a breach of trust. The appeal was dismissed.

[41] In the Supreme Court, there were two sets of judgments, La Forest J. for the majority and McLachlin J. for the minority view. Both groups were of one mind in the result. The breach of fiduciary duty was conceded as was the finding that Canson would not have bought an interest in this property and the joint venture had there been no breach. This established that the breach of trust resulted in the acquisition of this joint venture interest. However, applying a common sense view of causation, the further losses sustained in the construction of the warehouse did not result from the breach of the fiduciary duty. McLachlin J. stated it this way at p. 557:

The construction loss was caused by third parties. There is no link between the breach of fiduciary duty and this loss. The solicitor's duty had come to an end and the plaintiffs had assumed control of the property. This loss was the result, not of the solicitor's breach of duty, but of decisions made by the plaintiffs and those they chose to hire. To put in the terms of Wilson J. in Guerin v. The Queen, [1984] 2 S.C.R. 335, what the plaintiffs lost as a result of the breach of fiduciary duty was the opportunity to say no to acquisition of the property represented by the joint venture. The difference in the price represented by the secret profit, together with expenditures incidental to the acquisition, restores the lost opportunity. Thereafter, recourse does not lie against the solicitor, whose duty and control had ended, but against others.

[42] La Forest J. addressed the difference in the manner of calculating compensation for breach of fiduciary duty as opposed to a traditional breach of trust with a clearly defined res (object of the trust), a trustee and a cestui que trust. He said at p. 578:

The appellant urged us to accept the manner of calculating compensation adopted by the courts in trust cases or situations akin to a trust, and they relied in particular on the Guerin case, supra. I think the courts below were perfectly right to reject that proposition. There is a sharp divide between a situation where a person has control of property which in the view of the court belongs to another, and one where a person is under a fiduciary duty to perform an obligation where equity's concern is simply that the duty be performed honestly and in accordance with the undertaking the fiduciary has taken on; see Sealy, "Some Principles of Fiduciary Obligation", [1963] Cambridge L.J. 119; Sealy, "Fiduciary Relationships", [1962] Cambridge L.J. 69. In the case of a trust relationship, the trustee's obligation is to hold the res or object of the trust for his cestui que trust, and on breach the concern of equity is that it be restored to the cestui que trust or if that cannot be done to afford compensation for what the object would be worth. In the case of a mere breach of duty, the concern of equity is to ascertain the loss resulting from the breach of the particular duty. Where the wrongdoer has received some benefit, that benefit can be disgorged, but the measure of compensation where no such benefit has been obtained by the wrongdoer raises different issues. I turn then specifically to that situation. [Emphasis added.]

At p. 580:

We have been given no case where the principles applicable to trusts have been applied to a breach of fiduciary duty of the type in question here, and for reasons already given, I see no reason why they should be transposed here. The harshness of the result is reason alone, but apart from this, I do not think that the claim for the harm resulting from the action of third parties can fairly be looked upon as falling within what is encompassed in restoration for the harm suffered from the breach. This is the view taken in all the Canadian courts that have dealt with the issue. [Emphasis added.]

[43] La Forest then goes on to state that the fusion of law and equity provides a general but flexible approach that allows for direct application of the experience and best features of law and equity whether the cause of action or remedy originates in one system or the other. He suggests that the equitable remedy of restitution is not likely to be resorted to frequently, except as an adjunct to some equitable remedy, and concludes that there is no reason why equity should not borrow from the common law. He appears to be of the view that the distinction between equity and the law is largely meaningless in cases involving breach of fiduciary duty such as Canson (and I would add the case in appeal) since the objectives of both equity and the law are the same. Consequently, it is appropriate to award damages in breach of fiduciary duty cases as in common law actions. The court should determine the loss occasioned by the breach where there is a direct link between the breach and the loss.

[44] In Hodgkinson v. Simms, supra, Hodgkinson was a stock broker who was inexperienced in tax planning. He wanted an independent professional to advise him respecting tax planning and tax shelter needs. He retained Simms, an accountant who specialized in these areas. On his advice, Hodgkinson invested in a number of MURBs as tax shelters and lost heavily when the value of the MURBs fell during a decline in the market. Unknown to Hodgkinson, Simms was also acting for the developers in structuring these MURBs and did not disclose that fact to Hodgkinson. It was accepted as a fact that Hodgkinson would not have made the investment if he had known of Simms' interest in the MURBs.

[45] Speaking for the majority of the Supreme Court, La Forest J. held that the proper approach to damages for breach of a fiduciary duty is restitutionary. The appellant was entitled to be placed in as good a position as he would have been in if the breach had not occurred. Hodgkinson was found at trial to have changed his position because of a material non-disclosure and Simms did not meet the burden of proving that the victim would have suffered the same loss regardless of the breach. La Forest J. stated that mere speculation is not enough. However, notwithstanding the general economic recession, the particular fiduciary breach triggered the chain of events leading to Hodgkinson's loss and Simms accordingly must account for this loss in full.

[46] On the findings made by the trial judge, it is not possible to make a direct application of the above principles to the case in appeal. The trial judge found that it was the breach of fiduciary duty by Axton and his group which caused the damage. He was not prepared to attribute all of Martin's losses to Goldfarb because some occurred before Goldfarb's fiduciary duty arose or was unrelated to Axton's conduct. To find Goldfarb liable for Axton's breach of trust, under Air Canada, it is necessary to find that Goldfarb knowingly assisted in Axton's dishonest and fraudulent design. No such finding was made. To the contrary, the trial judge appears to be of the view that Goldfarb was himself the dupe of Axton in finding that he and his firm were manipulated to provide a veneer of respectability to the transactions Axton caused Martin to enter into.

[47] In Hodgkinson, the measure of damages is more straightforward. The person owing the duty, Simms, recommended four distinct purchases which Hodgkinson would not have made had he known of Simms' interest in them. The MURBs suffered losses by reason of market forces. Had Hodgkinson not made the purchases he would not have incurred the market losses. To restore Hodgkinson to his original position, the court awarded damages equivalent to his market losses.

[48] What made Hodgkinson so straightforward was the fact that there was but one breach of duty, that of Simms. But for Simms' misconduct, there would have been no market loss. Ergo, the market loss is the measure of damage. In the case on appeal, it is very difficult to determine what losses incurred by Martin at the hands of Axton took place after Goldfarb's fiduciary duty arose and what losses resounded to Martin personally as opposed to the corporations of which he was a shareholder.

[49] Canson too, has its limitations when applied to this case. The solicitor, Wollen, acted for both parties and he was aware that an intermediary party, for whom he also acted, was making a secret profit. He not only actively participated in this deception but billed Canson and his joint venture partners for services rendered to that intermediary. The Supreme Court had no difficulty in determining the damages to Canson once they accepted that Canson would not have entered into the purchase had Canson known of the secret profit. The breach of duty led to Canson losing the opportunity to say no to the purchase. Accordingly the lost opportunity could be restored by returning to Canson the difference in price represented by the secret profit along with any incidental expenses incurred in closing the purchase.

[50] However, both the British Columbia Court of Appeal and the Supreme Court of Canada rejected the claim that the solicitor Wollen was liable for the harm resulting from the actions of a third party retained by the partners to construct the project. There was no causal link between the third party's negligence and the breach of fiduciary duty by Wollen, despite the finding that "but for" the deceit of Woolen, the partners would never have gone into the venture in the first place. The claim for the harm resulting from the action of a third party cannot be looked upon as falling within what is encompassed in restoration for the harm suffered from the solicitor's breach of duty.

[51] In the case in appeal, a chain of events involving numerous real estate transactions had been commenced prior to Goldfarb's arrival on the scene. On the findings of the trial judge, considerable harm had already occurred. Certainly the groundwork had been laid for Martin's ultimate ruin. Here, there never was an opportunity to say no: at best there was the loss of the opportunity to say no more. The burden rested on Martin to show that there was a causal connection between the breach of duty by Goldfarb and the actions of the third party Axton. I think that he succeeded, at least in part.

[52] Unlike Canson, the solicitor Goldfarb should have anticipated that Martin would have cut his losses and refused to continue to deal with Axton once he knew that he had a criminal record for fraud. The risk to Martin in continuing to deal with Axton is compellingly illustrated by examining what occurred. Moreover, Goldfarb's duties as solicitor continued. He had more than one opportunity to warn Martin about Axton and should have when he became aware of the number and extent of his business transactions.

Conclusions respecting causal connection

[53] This case is not like Air Canada. There is no finding of actual knowledge or willful blindness or even recklessness on the part of Goldfarb respecting the activities of Axton. It is similar to Canson in that Goldfarb found himself in a conflict of interest in representing both Martin and Axton and he committed a breach of fiduciary duty in not telling Martin what he knew of Axton's criminal past, a lack of disclosure that is related to Axton's dishonesty and consequent harm.. It is dissimilar, however, in that there is no finding that Goldfarb knew that Axton was making a secret profit at Martin's expense.

[54] I think that Canson combined with Hodgkinson provides the casual connection in this case. The consequence of Goldfarb's breach of fiduciary duty was that Martin was not given the opportunity to say no in the limited sense of being able to review his relationship with Axton and the Frog Pond Group in the light of the knowledge that he should have had of Axton's background. There is a causal connection between the breach of duty and the harm done but the harm cannot be quantified by the "before" and "after" approach advocated by Martin. He is not entitled to blame his solicitors for his total ruin. It is not at all clear that his initial decisions to expand and "go public" were not fatal to the financial health of his corporations. Moreover, he must show a direct personal loss that is attributable to transactions that his corporations entered into following July 28, 1988.

[55] I will make some suggestions later as to what could be fruitful lines of inquiry. There is certainly nothing in this record which is helpful. As I will develop, the record before the court contains no evidence of probity as to the financial condition of Martin and his corporations on July 28, 1988. We know that Martin's personal resources were badly depleted because of the two transactions, Kingston Road and Jarvis Street in which he was already involved with Axton, and that those resources were further eroded by later and separate transactions that Axton had nothing to do with such as a nursing home in St. Petersburg, Florida and an investment in a plastic engine being developed by Martin's friend Dr. Kerr.

[56] In my opinion, the damages in this case are limited to the direct loss caused to Martin personally by the transactions where he and his individual corporations dealt with Axton and the Frog Pond Group after July 28, 1988, the point at which Martin engaged Goldfarb to provide legal advice.

Second issue: the failure of the trial judge to distinguish the losses suffered by Martin personally from those suffered by the corporations he controlled.

[57] The reasons of the trial judge demonstrate that he was alive to the fact that most, if not all of the transactions under review, were carried out by corporations controlled by Martin. However, the significance of this fact is not developed. He treated all the damages suffered by the aggregate of these corporations as if they were the losses of Martin personally. However, under corporation law, Martin and his corporations are separate legal personalities. The fact that he is the principal shareholder and the directing mind of the corporations does not expose him to personal liability for the corporate losses and conversely does not entitle him to personal compensation from those inflicting harm on the corporations. In making his claim for compensation, Martin ignores the reality that, in most circumstances, it was the corporations, not the shareholders, that suffered the losses because of Axton's conduct. This point is in no manner an academic one. The corporate losses are translated into losses to those who looked to the corporate assets for payment of loans and trade debts. Upon a realization of these assets in a bankruptcy, the creditors are paid first, in order of priority, and the shareholders are paid last. By purporting to compensate Martin for what are in fact and law the losses of the corporations, the trial judge permitted Martin to jump to the front of the queue to the prejudice of all creditors of these corporations: see R. v. Rukland (1998), 123 C.C.C. (3d) 262 (Ont. C.A.) at 269.

[58] It is true that as a guarantor of some of the corporate mortgages, Martin was exposed to personal liability on those mortgages. Had he paid the amounts owing on them, he would have been entitled to claim against the corporations for indemnity and would become a creditor himself. However, there is no evidence that he did pay on his personal guarantees and this potential source of damage was not developed factually at trial.

[59] Martin's claim was premised on the loss he suffered as an equity holder in his various corporations because the conduct of Axton ruined the corporations and destroyed the value of his equity in the corporations. There is authority of long standing for the proposition that where a wrong is occasioned to a corporation, a shareholder has no claim for damages in respect of that wrong: see Foss v. Harbottle (1843), 2 Hare 460, 67 E.R. 189.

[60] In Hercules Managements Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165, the Supreme Court of Canada re-affirmed the principle of Foss v. Harbottle. Speaking for the court, La Forest J. stated at pp. 211-212:

The rule in Foss v. Harbottle provides that individual shareholders have no cause of action in law for any wrongs done to the corporation and that if an action is to be brought in respect of such losses, it must be brought either by the corporation itself (through management) or by way of a derivative action. The legal rationale behind the rule was eloquently set out by the English Court of Appeal in Prudential Assurance Co. v. Newman Industries Ltd. (No. 2), [1982] 1 All E.R. 354, at p. 367, as follows:

The rule [in Foss v. Harbottle] is the consequence of the fact that a corporation is a separate legal entity. Other consequences are limited liability and limited rights. The company is liable for its contracts and torts; the shareholder has no such liability. The company acquires causes of action for breaches of contract and for torts which damage the company. No cause of action vests in the shareholder. When the shareholder acquires a share he accepts the fact that the value of his investment follows the fortunes of the company and that he can only exercise his influence over the fortunes of the company by the exercise of his voting rights in general meeting. The law confers on him the right to ensure that the company observes the limitations of its memorandum of association and the right to ensure that other shareholders observe the rule, imposed on them by the articles of association. If it is right that the law has conferred or should in certain restricted circumstances confer further rights on a shareholder the scope and consequences of such further rights require careful consideration.

[61] The exception to the rule is also stated by La Forest J. at p. 214:

One final point should be made here. Referring to the case of Goldex Mines Ltd. v. Revill (1974), 7 O.R. (2d) 216 (C.A.), the appellants submit that where a shareholder has been directly and individually harmed, that shareholder may have a personal cause of action even though the corporation may also have a separate and distinct cause of action. Nothing in the foregoing paragraphs should be understood to detract from this principle. In finding that claims in respect of losses stemming from an alleged inability to oversee or supervise management are really derivative and not personal in nature, I have found only that shareholders cannot raise individual claims in respect of a wrong done to the corporation. Indeed, this is the limit of the rule in Foss v. Harbottle. Where, however, a separate and distinct claim (say, in tort) can be raised with respect to a wrong done to a shareholder qua individual, a personal action may well lie, assuming that all the requisite elements of a cause of action can be made out. [Emphasis in the original.]

[62] In Goldex Mines Ltd. v. Revill et al. (1974), 7 O.R. (2d) 216, this court was dealing with what was alleged to be "a false and misleading" annual report which was prepared, approved and circulated by the director of the corporation to the shareholders along with a solicitation of proxies on behalf of present management. The court was of the opinion that while such a document amounted to a wrong to the corporation, it was also a wrong to the shareholders, affecting their own personal rights. The court also noted that it would not be difficult to reach the conclusion that a shareholders' action is personal where one group of shareholders by their own non-representative activities (i.e. not as directors) acts in such a way as to deprive another group of shareholders of their rights, where those rights are derived from the letters patent (pp. 221-22).

[63] In dealing with a situation where the wrong could be to both the company and the shareholders, this court stated at p. 221:

In Farnham v. Fingold, [[1973] 2 O.R. 132] this Court was not required, on the facts of that case, to consider a situation where the same wrongful act is both a wrong to the company and a wrong to each individual shareholder. In one sense every injury to a company is indirectly an injury to its shareholders. On the other hand, if one applies the test: "Is this wrongful act one in respect of which the company could sue?", a shareholder who is personally and directly injured must surely be entitled to say, as a matter of logic, "the company cannot sue for my injury; it can only sue for its own". [Emphasis in original.]

[64] Perhaps the most helpful authority with respect to the case in appeal is one by the Divisional Court. In Hoskin v. Price Waterhouse Ltd. et al. (1982), 37 O.R. (2d) 464, Osborne J. for the court stated at p. 466:

As the court put it in the Goldex case at p. 220 O.R.:

Where the same acts of directors or of shareholders cause damage to the company and also to shareholders or a class of them, is a shareholder's cause of action for the wrong done to him derivative?

At p. 221 of that case the court, after referring to the constituents of a personal action, answered that question as follows:

A derivative action, on the other hand, is one in which the wrong is done to the company. It is always a class action, brought in representative form, thereby binding all the shareholders.

It is our view that the plaintiff's action is in substance a derivative action, that is, an action in which the damages sought arise simply because Unit Step has allegedly suffered a loss because of the pleaded wrongful acts of the defendants. The endorsement on the writ of summons claims damages for negligence, incompetence and breach of fiduciary duties owed by the defendants to the plaintiff as a shareholder of Unit Step. The original and amended statements of claim quantify the damages sought at $600,000. All of the facts referred to, and the losses claimed in both the original amended statement of claim are incidental to the losses of Unit Step, except for those claims referred to in para. 23 of the original statement of claim, and in paras. 22 and 23 of the amended statement of claim. Those paragraphs relate to claims asserted by the plaintiff as to damage to his reputation and credit, as well as claims that the plaintiff has been exposed to potentially larger claims under guarantees he signed then would have been the case were it not for the alleged wrongful acts of the defendants. Those claims are not derivative; they are personal. I observe, however, that the pleaded contention that the defendants' wrongful actions or omissions have exposed the plaintiff to an increased loss under guarantees he has signed represents a loss that the plaintiff has not yet incurred. The plaintiff has not paid anything under those guarantees. The plaintiff has not claimed an entitlement to a declaration as to the validity of the bank guarantees or indemnity from the defendants' on the Unit Step trade creditor guarantees.[Emphasis added.]

. . . .

Having determined that the plaintiff's claim is essentially and substantially derivative, there remains to be considered what should be done with it. Although the preliminary narrative paragraphs of the statement of claim might be looked at as supporting the plaintiff's personal claims, being claims for damages for damages to reputation and credit and claims peripherally made as to increased exposure under guarantees executed by the plaintiff, it is nevertheless our view that the statement of claim is so saturated by derivative claims that it cannot be allowed to stand.

[65] The respondent takes no issue with the above authorities but submits that they have no application because the issue of whether these claims are personal is res judicata between the parties. Counsel for the respondent supports the reasons of the trial judge where he held:

It should be pointed out that Martin personally guaranteed a large number of mortgages registered on the companies' properties, thereby exposing himself and his assets to personal liability and he was ultimately driven into bankruptcy. More importantly, this issue was raised earlier before Wright J. on June 23, 1995 as a basis for a motion to stay Martin's action. Wright J. dismissed the motion on the ground that s. 246 did not apply to the case where the plaintiff is the sole shareholder of the company which possesses the cause of action. He stated:

In my view, the loss suffered by the plaintiff as a result of the alleged negligence of the defendants is personal to the plaintiff sole shareholder and he has a right to bring this action in his personal capacity.

Leave to appeal this decision was dismissed by Lissaman J. In the circumstances, whether the defendants' argument has merit or not, the issue is res judicata and cannot be raised afresh before the trial judge (Newmarch Mechanical Constructors Ltd. v. Hyundai Auto Canada Inc. (1994), 18 O.R. (3d) 766 (Ont. Gen. Div.) at pp. 768-9).

[66] The issue before Wright J. was whether the facts as set forth in the statement of claim (at that time framed in negligence alone) pleaded a personal or a derivative claim. Accordingly, the sufficiency of the pleading in 1995 is the issue that is res judicata, not the nature of the evidence later relied upon by the respondent at trial to support his pleading. Furthermore, there were no particulars in the statement of claim of the damages alleged and consequently Wright J. was not in a position to give any guidance as to what kind of evidence would support what he held to be a personal claims. He was not in a position to rule on the admissibility of the evidence dealt with on this appeal. Leaving aside the fact that the trial judge's finding of liability was based on an allegation of breach of fiduciary duty which was not contained in the pleading considered by Wright J., a ruling on the sufficiency of a pleading does not excuse the trial judge from his responsibility to make sure that the evidence conforms with the pleading. The trial judge was in error in relying upon the ruling of Wright J. as closing the book on this issue. On the facts, there may exist the foundation for a personal action by Martin against his solicitors arising from his personal losses on some of the guarantees. However, the trial judge was insufficiently precise in distinguishing between corporate losses and personal losses. This error has led to the quantification of damages which do not flow entirely from Martin's personal losses and are, therefore, unsatisfactory. Further flaws in the damages assessment will be considered below.

Third issue: the lack of cogent evidence to support the quantum of damages in the substantial award made by the trial judge.

[67] Having concluded above that Martin is entitled to only the damages that he suffered personally as a result of the breach of fiduciary duty occasioned by Goldfarb's conduct once he was engaged in July, 1988, the burden lay on Martin to prove those losses. For the following reasons, I would conclude that Martin failed to prove the losses through appropriate evidence. The trial judge's award of damage is speculative at best, and does not reflect with much precision real losses flowing from the breach, notwithstanding that the plaintiff bore the burden of proving the losses in the normal course.

[68] The trial judgment is full of references to the inadequacy of the evidence available from which to determine damages. Specifically, the trial judge noted that :

No expert forensic accounting evidence was adduced by the plaintiff to explain the myriad of transactions and the money flow. Without a complete picture of the money flow and the interrelationship between all of the transactions, it is now impossible to determine what was lost and if so, whether it was the loss of the lenders or Martin. [Emphasis added.]

[69] The trial judge further noted as follows:

The evidence adduced by the plaintiff is not the most satisfactory. No expert evidence was called to establish the value of the Newmarket Golf club lands or the Golf Course house as of August 1988 or of the share value of Martin's holdings in TLC Properties Inc., Newmarket Golf and Country Club and Martinvale Estates Ltd.

[70] Notwithstanding the above, a damages award is conceived which the trial judge concedes may be nothing more than guess-work. He proceeded essentially on the premise that where, as here, a breach of duty has been established, a wrongdoer should not escape liability merely due to the difficulty in assessing damages. More specifically, the trial judge supported the guess-work by relying on the decision of the Supreme Court of Canada in Wood v. Grand Valley Railway Company (1915), 51 S.C.R. 283. The premise to surface in that case is that where it is impossible to measure with mathematical accuracy a plaintiff's damages, a court is required to impose a damages award "as best it can" so that a wrongdoer may be responsible for losses reasonably arising on breach. As a result of the trial judge's reliance on this case in his damages award, I think it is necessary to review the case with some scrutiny.

[71] In Grand Valley Railway Company, supra, the Supreme Court of Canada considered the proper determination of damages to which the plaintiffs would be entitled to recover by reason of the defendant's failure to continue the construction of the Grand Valley Railway from a point on the line called Blue Lake to the Village of St. George, as contracted. The trial judge awarded damages in the amount of $10,000, equally, approximately the value that the plaintiffs had invested in the venture through the purchase of bonds. The difficulty in determining the damages lay in the uncertainties that existed, particularly because great benefit would be derived by the plaintiff by the completion of the project as contracted. The uncertainty of future benefits arising from the successful completion of the project were regarded as future contingencies. These benefits could not be properly determined and were regarded by the Divisional Court, on appeal from the trial judge's award of damages, as sufficient to warrant a reduction of the damages award. The trial judge's award was upheld on further appeal to the Appellate Division of the Supreme Court of Ontario. The Supreme Court of Canada, Idington J. dissenting, upheld the trial court's damages award. The court did so largely on the basis that the trial judge's award of damages was consistent with the judicial reasoning of the English Court of Appeal in Chapman v. Hicks, [1911] 2 K.B. 786. The facts of the Hicks case are irrelevant for our purposes. However, the case stands for the proposition that the existence of a contingency which is dependent on third party conduct does not render damages for breach of contract incapable of assessment. Davies J. held as follows in summarizing the governing principle from the Hicks case:

It was clearly impossible under the facts of that case to estimate with anything approaching mathematical accuracy the damages sustained by the plaintiffs, but it seems to me clearly laid down there by the learned judges that such an impossibility cannot "relieve the wrongdoer of the necessity of paying damages for his breach of contract" and that on the other hand the tribunal to estimate them whether jury or judge must under such circumstances do "the best it can" and its conclusion will not be set aside even if the amount of the verdict is a matter of guess work.

[72] For our purposes, it is necessary to determine whether the judicial reasoning from Grand Valley Railway Co. extends to difficulty in quantification of damages not arising due to the existence of certain contingencies. Anglin J., concurring in the result, in Grand Valley Railway Co. narrowed the impact of the reasoning from Hicks in the following way at pp. 300-301:

But Chaplin v. Hicks is not authority for the proposition - for which an analysis of his argument makes it clear that counsel for the appellants really cited it - that, because the realization of the plaintiff's expectations under a contract is subject to a contingency, he is not bound to put to the jury in possession of information in his power to enable them to appreciate what would have been the advantages to be derived by him from his expectation if realized as a basis on which to assess the value of the chance of realization of which the breach has deprived him╝.The assessing tribunal is, however, entitled to such assistance by proof of material facts as the claimant may under the circumstances reasonably be expected to afford it.

[73] Anglin J.'s conclusion as to the responsibility of the plaintiff in adducing evidence as to the damages suffered finds support in the well-known passage from Bowen L.J. in the earlier case of Radcliffe v. Evans, [1892] 2 Q.B. 524 and 532-33:

The character of the acts themselves produce the damage, and the circumstances under which these acts are done, must regulate the degree of certainty and particularity with which the damage done ought to be stated and proved. As much certainty and particularity must be insisted on, both in pleading and proof of damage, as is reasonable, having regard to the circumstances and to the nature of the acts themselves by which the damage is done. To insist upon less would be to relax old and intelligible principles. To insist upon more would be the vainest pedantry.

[74] I believe the above quote of Anglin J.properly sets out a plaintiff's obligations to provide evidence capable of proving the existence of damages and the quantum of damages. With respect, I do not see how the reasoning from Grand Valley Railway Co., and Chapman v. Hicks can have any application to the facts of the case in appeal. Even assuming that the principle enunciated in those cases can apply to the assessment of damages for causes of action not sounding in breach of contract, the case in appeal does not involve contingencies that render the assessment of damages imprecise and speculative. The case in appeal involves circumstances where, by the appellant's own conduct, the court is not furnished with evidence necessary to properly dispose of the damages portion of the case. This is not the "impossibility" to which Davies J. refers. The impossibility to which the cases refer is an impossibility in precisely calculating damages due to the nature of the damages and the conduct giving rise to such losses. For example, a future contingency which can not be accurately characterized and calculated should not prevent the award of substantial damages where a breach has been made out and damages flowing from the breach have been established to the satisfaction of the court. Specifically, I do not read the cases as departing in any way from the general principle that the plaintiff carries the burden of establishing a breach and the damages, including the quantum of damages, flowing from that breach: see T.T.C. v. Aqua Taxi Limited et al., [1957] O.W.N. 65 (Ont. H. Ct.) As a result, the trial judge's reliance on guess work is not supported by the authorities to which he refers as they reflected courts' attempts to resolve complex damages questions in the face of future contingencies which could not easily be quantified. Such is not the case in the appeal in question. The difficulty in the present case arises where evidence is available but not adduced. Seemingly, any impossibility arising on the facts could have been cured by holding the appellant to his burden of establishing the damages and the quantum of damages through sufficient evidence.

[75] Having considered the above cases and others, notably Williamson v. Stephenson (1903), 33 S.C.R. 323 and Penvidic Contracting Co. Ltd. v. International Nickel Co. of Canada Ltd. (1975), 53 D.L.R. (3d) 748 (S.C.C.), I have concluded that it is a well established principle that where damages in a particular case are by their inherent nature difficult to assess, the court must do the best it can in the circumstances. That is not to say, however, that a litigant is relieved of his or her duty to prove the facts upon which the damages are estimated. The distinction drawn in the various authorities, as I see it, is that where the assessment is difficult because of the nature of the damage proved, the difficulty of assessment is no ground for refusing substantial damages even to the point of resorting to guess work. However, where the absence of evidence makes it impossible to assess damages, the litigant is entitled to nominal damages at best.

[76] In my opinion, the case in appeal is in the latter category. The respondent called no evidence that would assist in proving and identifying losses on a transaction by transaction basis. Instead, Martin testified and gave evidence of having a net worth of approximately $18 million as of August 1, 1988. His position at trial was that he had been rendered insolvent by October of 1989 as a result of the previously described machinations of Axton. A net worth statement was introduced into evidence on the basis of the respondent's testimony that it had been prepared in August of 1988 and not for the purposes of the litigation. On cross-examination, he agreed that the statement had not in fact been made until 1990 and that it was not only unsupported by any opinion evidence of value but contained "inaccuracies" such as the fact that one asset (Halsey Lodge) which supposedly accounted for approximately $1 million of equity had been disposed of in 1987.

[77] The respondent called the evidence of one Phillips, a Chartered Business Valuator, whose report was entered in evidence. Phillips, by agreement of counsel and a specific ruling of the trial judge, did not testify as an expert and all references to opinions in his report were to be ignored. Phillips reviewed documents supplied by the respondent's counsel and arrived at certain conclusions as to payments flowing or possibly flowing to Frog Pond companies from Martin companies. He did not go behind the documents to see if the flow of money actually took place. He had no idea whether the respondent received any benefit in return for whatever the flow was. He assumed that mortgages that in fact were never paid had indeed been paid. He made unwarranted assumptions as for example the estimate of a flow from Martin to Axton of some $1,780,000 which was advanced by the Royal Bank of Canada to The Frog Pond Group on the security of a mortgage on nursing home property owned by TLC Retirement Centre Windsor Limited. The Royal Bank ended up writing off the entire loan and it was the bank that sued Farano, Green (who also acted for the bank in this instance) respecting this loss and that action was settled. There was no evidence whether this mortgage created a loss to Martin.

[78] Even accepting that it was appropriate for Martin to equate his personal losses to the aggregate of the losses suffered by his corporations because of the diminution of his equity interest in the corporations as shareholder, the record does not disclose any reliable evidence of what were the values of these corporations before July 28, 1988. Without that initial aggregate figure, we have no bench mark from which to deduct pre-Goldfarb and non Axton transactions to arrive at the aggregate loss suffered at the hands of Axton. For example, Martin offered by way of evidence of the value of the Newmarket Golf and Country Club and Golf Course House lands, certain agreements of purchase and sale of the corporations. Offers came in as described by Martin for "$8 million one time, $10 million, $12 million". He stated that property values were going up at a very rapid rate and in significant amounts. These offers came in from mid-1988 to late-1989 although the only offers produced were in April of 1989. The offers ranged up to $15 million. The conditions placed on these offers, several of which were advanced by small corporations, were never removed and in many cases these corporations were unable to obtain financing. The last completed arm's length transaction relating to any corporate property was Martin's purchase, as the majority shareholder, of the remaining 25% minority interest in Newmarket Golf and Country Club Limited for approximately $396,000 in March of 1986.

[79] Another example is TLC Properties Inc. The sole evidence of value regarding the shares of this corporation consisted of Martin's evidence that the shares were trading on the Toronto Stock Exchange at approximately $1.00 per share in the summer of 1988. He himself re-purchased certain shares in TLC Properties Inc. as part of the consideration for a real estate transaction with the Frog Pond group in early 1989 at $0.30 per share. The respondent was challenged on proof of the share prices and acknowledged that records of any share sales for TLC Properties Inc. are kept at the Toronto Stock Exchange. He acknowledged that TLC Properties Inc. went from losing $0.05 per share in 1987 to losing $0.27 per share in 1988. He agreed there was a Stop Trading Order in place in the summer of 1988 which would not have helped share prices. He further acknowledged that share prices would be negatively affected by the Bradford and Newmarket nursing homes losing money and the problems with Kingston Road. Finally, he agreed that during the year 1988, 5,000 options at prices in the order of $0.50 per share were exercised and 107,000 options were terminated.

[80] There is simply no excuse for such a shoddy proffer of evidence by a plaintiff in an action is which he seeks damages in the millions. Assuming without acknowledging that Martin is entitled to be directly compensated for the loss of his corporate assets as a means of recognizing the reduced value of his equity interest in the various companies, the means to value those assets prior to July 28, 1988 was fully within the control of Martin. We have in evidence the unaudited financial statements of these corporations and with respect to all of them, their underlying worth was in real estate consisting of nursing homes, the golf course and other land. The explanation that Martin is bankrupt because of the activities of Axton and cannot afford to retain forensic experts to put together a credible estimate of damages does not justify his counsel dumping on the trial judge the responsibility for pulling a figure out of the air.

[81] One would have though that where, as here, the businesses are private companies owning land as their major corporate asset, the value of the corporations as going concerns prior to July 28, 1988, could be determined in one or more of the ways private corporations are valued for purposes of sale, winding up or to calculate income tax and succession duties. This is at least a starting point and in a proper case, experts would have little difficulty in then calculating the value of Martin's equity in these corporations.

[82] However, as I explained in my analysis of issue two, this approach is inappropriate as the damages suffered by the respondent's corporations are not, in law, losses to Martin personally. If Martin had not been forced into personal bankruptcy, no one can suggest that he could have valued his loss of equity in his bankrupt corporations and have been paid out by the appellants for that value in priority to the creditors of the bankrupt corporations. Martin seems to think that since he is a discharged bankrupt that he is in a different position. His counsel submits that the trustees of his bankrupt corporations gave up their remedy on behalf of the corporate creditors when they sold their cause of action against Axton (but not Goldfarb) for $2,500. The estates are for all practical purposes wound up. Accordingly, counsel submits, Martin is the only one interested in pursuing the remedy against Goldfarb that was available to both him personally and his corporations. That may be so, but the inactivity of the trustees of the bankrupt corporations, for whatever reason, does not place Martin in the position where he can claim as personal losses, losses which are those of the corporations he owned and controlled.

[83] As I have indicated, Martin's approach to damages was misguided from the outset in that he equated his personal losses with those of his corporations. Accordingly, I am of the opinion that the present assessment of damages cannot stand and unfortunately a new assessment will be necessary. On this new assessment, the onus will remain on Martin to establish his personal losses arising from those transactions he and his individual corporations engaged in with Axton and the Frog Pond Group after July 28, 1988. The corporate transactions are still relevant because Martin personally guaranteed some of the mortgages.

[84] My analysis to this point has been largely negative as to what damages Martin suffered, but I do believe that he did suffer personal damages and that they were substantial. I think evidence to support a personal claim is available and for this reason, I decline to suggest a nominal award and would order a new trial limited to determining the nature and quantum of the personal damages. Without limiting the scope of the evidence on the new assessment, it seems to me that the most fruitful area of inquiry is with respect to the personal guarantees Martin gave on his corporations' mortgages. I am at a loss to understand why there was no analysis of Martin's personal bankruptcy to determine if his insolvency was brought about by his exposure on these guarantees or to what extent he was called upon to respond to them. Further to this line of inquiry, there was a suggestion in the argument on appeal that Martin was obliged to provide fresh infusions of his personal resources to shore up his corporate operations where those corporations had suffered losses at the hands of Axton. In short, the starting point, I would have thought, was the bankrupt estate. An analysis should be provided as to what precipitated it in order to trace, if possible, the personal indebtedness of Martin back to the fraudulent transactions of Axton that happened during the relevant time.

[85] I also think that Martin is entitled to something for "the insult", as they say in settlement discussions. He did maintain a certain standard of living before the bankruptcy and he works now as a security guard at a motel in Florida. It may well be that the judge on the assessment would want to consider, if the evidence warrants it, general damages for loss of reputation and credit arising out of the bankruptcy itself: see Hoskins v. Price Waterhouse Ltd. et al., supra


Disposition

[86] In my opinion, the damage award cannot stand. Accordingly, I would allow the appeal in part, set aside the judgment below as it relates to damages, and order a new trial limited to the assessment of damages to Martin personally following the breach of fiduciary duty as found by the trial judge. I would allow the appellants their costs of the appeal. While the issues in appeal were restricted to damages, liability was contested at trial. Accordingly, the respondent should be entitled to retain his award of costs at trial relating to liability, the amount to be assessed. The costs of the new assessment of damages should be in the discretion of the judge hearing the assessment.


Released: August 26, 1998


Appeal Text

 

 

 

 

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