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Seeking Payment after the Fact: the Search for Reasonable Expectations - Ross Barristers Professional Corporation

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Seeking Payment after the Fact: the Search for Reasonable Expectations

in Contracts by Fidelia Ho / March 03,2020

The law is always striving to protect parties’ reasonable expectations, in contract and corporate law, and even restitution. When deals sour and parties dispute the meaning of what they thought were clear terms, the court is asked to step in to protect what they reasonably expected.

Especially when dealing with friends, parties tend to take much for granted and leave much unspoken and unwritten. The plaintiff in Maradadi Pacific Holdings Ltd. v. Call felt the consequences of proceeding on this basis. It was undisputed that the plaintiff provided valuable services. The question was what remuneration it was entitled to, if any, in the absence of agreement.

FACTS

The plaintiff, a business consulting company, sued for compensation allegedly owing for services rendered to the defendants. The plaintiff’s principal and the individual defendant were friends, which is likely why nothing was committed to writing. However, the failure to do so led to misunderstandings, the breakdown of the friendship and ultimately to litigation (what some might call the Dark Side).

The services at issue fell under two categories: (1) those provided to obtain provincial funding; and (2) those provided for the defendant’s other business interests.

Provincial funding program

In 2012, the parties discussed the possibility of the defendant’s businesses participating in a provincial program aimed at increasing consumer demand for local food products. The program was operated by a division of the provincial Ministry of Agriculture (the “province”). Funding was available on a matching basis of up to $100,000 with applicants required to contribute 50% of the total cost.

The plaintiff did all the groundwork for the application, doing the research, conceptualizing the proposed project and putting together the budget. The application was submitted for the maximum funding of $100,000 based on a proposed budget of $475,000.

The parties had different ideas about compensation. The plaintiff said it was entitled to a 60% share, upon approval of the $100,000 grant. The defendant understood the plaintiff would receive $60,000 of the $100,000 actually paid. Their agreement was not put in writing.

The defendant’s business entered into a Contribution Agreement with the province, which provided the types of eligible expenses, and the requirement that proper accounts be kept. The $100,000 funding would be made in two payments: half upon signing and half upon receipt of a final report and the project’s completion.

The plaintiff prepared the final report. Concerned about the types of expenses being claimed and the accounting, the province audited the defendant’s records and concluded that although there were some eligible expenses, they couldn’t determine what they were. The province required the defendant to reimburse what had already been paid. Consequently, the defendant lost faith in the plaintiff and she retained another consultant to assist. The new consultant provided a better report and proposed a revised budget to justify the initial grant of $50,000, claiming the original budget was too optimistic. The province accepted this proposal and permitted the defendant to keep the $50,000 grant.

Ultimately, the plaintiff was paid about $34,000 for its services, a combination of $30,000 in payments and $4,000 in in-kind benefits. The plaintiff sued for the difference it understood it was entitled to, i.e. the $60,000 of the original $100,000 grant.

Other services

The plaintiff also claimed compensation for a business plan she prepared so that the defendant could apply for financing. The defendant wanted to expand one of her businesses into a bigger building. The plaintiff said she told the defendant the market value of the business plan but that she wouldn’t charge for it, as she expected to be part of the new and expanded business.

The plaintiff was also involved in the negotiations of the defendant’s purchase of the building. The plaintiff drafted the proposal that ultimately formed the basis for the defendant’s purchase.

Finally, the defendant used the business plan to secure financing from an investment company. While the defendant found and pursued this opportunity herself, she did suggest the company speak to the plaintiff about the business plan since the plaintiff had drafted it. The defendant ultimately secured $250,000 for a 49% equity interest in the company. The plaintiff did not invoice for these services at the outset.

The plaintiff made these claims on a quantum meruit basis. The defendants denied ever having discussed compensation for any of these services.

COURT’S DECISION

Provincial Funding

The plaintiff’s claim with respect to the provincial funding services was based in contract. Where the parties have not agreed on remuneration, a valid contract may or may not exist depending on how central that term is to the arrangement. If there is a contract, a term to pay a reasonable price may be implied. If the contract fails, then the plaintiff would have to rely on unjust enrichment.

The court found the parties had a valid contract. The parties had clearly agreed that the plaintiff would be paid 60% of the grant money. Their dispute was whether it was payable upon approval and regardless of whether the entire $100,000 was received.

Both parties blamed each other for the failure to obtain the full grant, one for having maintained poor records, the other for submitting an unrealistic budget. The court saw merit in both positions. It also found that the defendant was prepared to pay for the services, having already paid a certain amount. Since the plaintiff’s efforts had resulted in payment of $50,000 of grant money, it was entitled to 60% of that, which was close to what it had already received. The court declined to order repayment of the in-kind benefits. In the court’s view, the in-kind benefits were akin to gifts or benefits provided in the context of friendship, rather than payments for services.

Additional claims in unjust enrichment

On the plaintiff’s own evidence, both parties had no expectation of payment for the services when they were rendered. No demands for payment were made until well after their friendship had ended. When the plaintiff sent an invoice in August 2015, it claimed only the balance owing for the provincial funding services. It was only after a failed mediation in small claims court that the plaintiff demanded payment for the other services rendered.

The court found that the plaintiff had no intention of charging for the additional services and likely would not have if it had been paid what it believed was owing for obtaining the provincial grant. The court also noted that while the parties had discussed entering into a long-term business relationship, the evidence did not establish that they had agreed or that they were “in business together” as alleged.

With respect to the investment financing, the court accepted that the defendant had been enriched to some degree by the plaintiff’s efforts and that the plaintiff had been deprived in some sense. However, the evidence did not establish that there was no juristic reason. Relying on the Supreme Court of Canada’s decision in Garland v. Consumers’ Gas Co., the court looked at the parties’ reasonable expectations. The plaintiff had no reasonable expectation of compensation for the services. At best, it had a hope or anticipation that a long-term business relationship would develop. The fact that this did not pan out was no basis for demanding payment after the fact.

While the plaintiff’s claims for preparing the business plan and for assisting in the building purchase were on stronger footing, they failed for the same reasons. The parties had no reasonable expectation that the plaintiff would be paid for the services, nor did the defendant expect to pay for them as was borne out in the history of the matter and the parties’ conduct throughout.

COMMENTARY

It was undisputed that the plaintiff did a lot of work for the defendant. While it doesn’t seem fair that the defendant got the benefit of these services mostly for free, the parties had no expectations that payment would be made. The unfairness seems obvious only in retrospect but this is not the relevant time frame. A person cannot provide services, even valuable ones, and expect compensation after the fact, without having made that expectation known, especially among friends. Perhaps among arms-length parties, the expectation to be paid is more reasonable, even when never explicitly articulated. As always, each case will be highly fact dependent.

This case is a reminder to clearly make expectations known, and to document terms and discussions. If you expect to be paid, make it a regular practice to invoice regularly. Don’t wait until after your friendship has soured and all you’re left with is regrets.