NIN 94/04 - Decision of the Court of Appeal for British Columbia in the matter of Hamelin v. Seven Mile High Group Inc. [NIN - Rescinded]

Published Date:	1994-05-20
Effective Date:	1994-05-17

Because of its potential relevance to participants in the local securities market, particularly to reporting issuers listed on the Vancouver Stock Exchange, the attached decision of the Court of Appeal for British Columbia has been included in the Weekly Summary.


DATED at Vancouver, British Columbia, on May 17, 1994.

Dean E. Holley
Superintendent of Brokers

Attachment

AND:

Before: The Honourable Mr. Justice Lambert

J.A. McAfee Counsel for Appellant

W.J. Worrall, Q.C. Counsel for Respondent

Place and Date of Hearing Vancouver, British Columbia January 19, 1994
Place and Date of Judgment Vancouver, British Columbia March 29, 1994

Written Reasons by:
The Honourable Mr. Justice Legg

Concurred in by:
The Honourable Mr. Justice Finch

Reasons Concurring in the Result:
The Honourable Mr. Justice Lambert (Page 25, Paragraph 55)

Maurice G. Hamelin

- v. -

Seven Mile High Group Inc.

Reasons for Judgment of the Honourable Mr. Justice Legg

1 The plaintiff Hamelin appeals the dismissal of his action for compensation against the defendant Company. He was at all relevant times the President and a director of the defendant.

2 At all relevant times the defendant's shares were listed for trading on the Vancouver Stock Exchange ("V.S.E."). On the 14th of September, 1988, Mr. Hamelin entered into a management contract with the defendant. The contract provided that he should be paid very substantial compensation by the defendant if its board of directors was completely or substantially replaced.

3 On June 22, 1990, the Superintendent of Brokers of British Columbia ordered, pursuant to the Securities Act, S.B.C. 1985, c. 83, as amended, that Mr. Hamelin and two other directors of the defendant cease to act as directors of the defendant and of any other reporting Company by June 27, 1990. Mr. Hamelin and his co-directors thereupon resigned as officers and directors of the defendant.

4 On August 10, 1990, Mr. Hamelin commenced an action against the defendant claiming compensation in the sum of $1,390,000.00 under the September, 1988, management contract.

5 Mr. Justice Arkell dismissed the action. He held that the September, 1988, contract was subject to a condition precedent that it be filed with and accepted by the V.S.E., that this condition had not been met, and that the contract could not be enforced. He held further that Mr. Hamelin was estopped from denying the existence of the condition precedent. He also held that the management contract was required to be submitted to the shareholders of the defendant for approval before it became effective and that this had not been done. He also found that Mr. Hamelin was in breach of his fiduciary duty to the Company when he entered into the management contract and failed to submit it to the shareholders of the defendant for approval.
6 The defendant was incorporated as a private company in 1984. The plaintiff was its President and chief executive officer and a director of the Company from its inception until June 22, 1990.

7 On June 26, 1985, the directors of the Company resolved that it should list its common shares on the V.S.E. and that it enter into a listing agreement with the V.S.E. That same day the Company executed a listing agreement with the Exchange. The plaintiff was one of the directors who signed this listing agreement. Under the terms of the listing agreement, the defendant agreed to be bound by and comply with all applicable by-laws, rules and policies of the Exchange and agreed to give the Exchange prompt written notice of any proposed material change in the business, property, or affairs of the Company. The listing agreement provided that a material change included
8 In May, 1986, the Company entered into a joint venture agreement with Canadian Nickel Company Limited (INCO) for the development of some mineral claims known as the Vault property. Later in 1987, INCO purchased 400,000 shares of the Company pursuant to that agreement. By this time, drilling by the Company and INCO indicated that there was gold on the Company's property.

9 According to the report by the auditors of the Company, from 1984 until 1989 the Company's assets increased from an amount of $116,734, as of April 30, 1985, to an amount of $2,451,680, as of April 30, 1989.

10 On January 1, 1987, the plaintiff, through his management Company M.G. Hamelin & Associates Ltd., entered into a management contract with the Company. Under that contract, which was effective from October 1, 1984, the Company agreed to pay the plaintiff's management Company $2,000 per month as a management fee. This compensation was the maximum allowed by the V.S.E. pursuant to its policy statement No. 7/83. Although this maximum was later increased to $2,500 per month, $2,000 per month was the maximum compensation acceptable to the V.S.E. before the execution of the September, 1988, contract.

11 The September, 1988 management contract replaced the 1987 management contract. Both Mr. Hamelin and Mr. Harrison, the controller of the defendant Company were directors of the Company and were aware for some time before September, 1988, that a new contract was being prepared.

12 The provisions of the September, 1988, management contract, upon which the plaintiff's claim for compensation relied, were contained in paragraph 16, which reads as follows:
13 On August 24th, 1988, before the Annual General Meeting on September 16th, 1988, the President's Report, the Notice of the Annual General Meeting, an information circular dated August 19th, 1988, and an Instrument of Proxy were circulated to the shareholders. In none of this material was there any reference to the proposed management contract although there was a reference to the compensation payable under the 1987 management contract. No information of the proposed terms was given to the shareholders in the proxy solicitation materials. Mr. Hamelin did not consider adjourning the meeting to give shareholders an opportunity to be provided with full particulars of the proposed terms of the management contract. The contract was executed on September 14, 1988, two days before the Annual General Meeting on September 16.

14 Only three shareholders were present in person at the Annual General Meeting. One of these was Mr. Hamelin. Another was Mr. Harrison, the controller. Twenty-four were present by proxies. The minutes of that meeting show that approval of the management contract with Mr. Hamelin and a similar contract with Mr. Harrison as controller and managing director was dealt with under the heading of "other business". The minutes read in part:
15 Following the resolution of the shareholders at the Annual General Meeting, corporate counsel of the defendant Company submitted the management contracts for filing with the V.S.E. He wrote in his accompanying letter that in his submission the limits imposed by the V.S.E. Policy Statement No. 7/83, which restricted compensation, had no application to the defendant Company.

16 The listings officer of the V.S.E. did not agree. She wrote on September 22nd, 1988 to the defendant Company's solicitor advising that she had reviewed the contract between the Company and Mr. Hamelin and the contract between the Company and Mr. Harrison. She advised that the Company was a "development" Company with no cash flow, was not generating any revenues, and that the remuneration in excess of the amounts allowed under the Policy Statement No. 7/83 of the Exchange was inappropriate. She advised:
17 The defendant Company acted on the compensation contract, however, and proceeded to pay Mr. Hamelin compensation in accordance with the contract. This occurred notwithstanding a letter dated April 20th, 1989, written by the Company solicitor, which drew Mr. Hamelin's attention to the fact that the V.S.E. had not accepted the compensation contract and that the Company was therefore in default of its listing agreement.

18 The Company applied for reclassification so that it would no longer be subject to scrutiny by the Exchange in respect of a contract for remuneration paid to the plaintiff. On September 22nd, 1989, the listings officer of the Exchange advised that the terms of the compensation contract "must be altered and subject to the Exchange's approval". The listing officer's letter stated:
19 The directors of the Company scheduled the 1989 Annual General Meeting of the Company for October 13th, 1989. The information circular sent to the shareholders of the company dated "as at September 7th, 1989", stated under the heading of "executive compensation":
20 A note to the financial statements for the period ending April 30th, 1989, circulated to the shareholders before the 1989 Annual General Meeting, stated:
21 At the Annual General Meeting held on October 13th, 1989, approval was not specifically given to the September 14th, 1988, compensation contract but a resolution was passed approving "all acts, deeds, contracts, resolutions and proceedings of the directors since the date of the last annual general meeting." There was no discussion of the management contract signed on September 14th, 1988.

22 Dissident shareholders of the Company started an action that caused a halt in trading of the shares of the Company and led to a Securities Commission hearing. This led to the previously-mentioned order made by the Superintendent of Brokers on June 22nd, 1990, by which the plaintiff and two other directors of the defendant were ordered to cease to act as directors of the defendant and of any other reporting company and the subsequent resignation of the plaintiff as a director and officer of the defendant.

Grounds of Appeal

23 Appellant's counsel submitted that the learned trial judge erred in finding:
3. that it was necessary for the management contract to be submitted to the shareholders of the Company for approval; and
Discussion

24 I intend to consider grounds one and two together and grounds three and four separately.

Grounds One and Two

25 Counsel for the appellant submitted that the evidence established that it was never intended by the defendant Company or Mr. Hamelin that the obtaining of the approval of the V.S.E. to the terms of the management contract was a condition precedent to its becoming enforceable. In support of this submission, counsel relied upon the absence of any provision to that effect in the contract and upon the provisions of paragraph 25 of the management contract which provided:
26 Counsel argued that the condition precedent found by the learned trial judge was a contradiction of the express terms of the contract and that under the parol evidence rule, evidence that V.S.E. approval was required before the contract could be enforced against the Company was not admissible. Counsel submitted that although the learned trial judge accurately summarized the effect of the parol evidence rule he erred in failing to take into consideration the provisions of paragraph 25 of the contract. Counsel supported his submission by reference to the decision in Ahone v. Holloway (1988), 30 B.C.L.R. (2d) 368 at 372 (C.A.) where McLachlin J.A., as she then was, stated:

27 In support of his argument on this point, counsel also referred to the decisions in Norman Estate v. Norman, 43 B.C.L.R. (2d) 193 at 199 (S.C.B.C.) and Smith v. Hamelin (May 16th, 1991, Vancouver C907691, at 5-6 ((S.C.B.C.)), both of which applied Ahone.

28 In my opinion, where the parties have agreed that the enforceability of their contract is subject to a condition that it must be approved by a third party, evidence of that agreement is not precluded by the parol evidence rule.

29 The evidence in the case under appeal shows that the plaintiff knew before the Annual General Meeting of September 16th, 1988, before he signed the contract on his own behalf, and on behalf of the Company, that the listing agreement between the Company and V.S.E. required the Company to comply with all applicable bylaws, rules, and policies of the V.S.E. and that the Company was required to give the V.S.E. prompt written notice of any proposed material change in the business of the Company, and that material changes included the management contract and any non arms-length transaction.

30 At the Annual General Meeting, the Company, through its shareholders, which included the plaintiff, approved the agreement "subject to the acceptance by the Vancouver Stock Exchange". This resolution of the shareholders created a condition binding upon both parties to the contract which suspended the enforceability of the contract until the condition was fulfilled. The suspension was similar to the suspension of an agreement which is made subject to court approval. In Smallman v. Smallman, [1971] 3 All E.R. 717 (C.A.), an agreement made "subject to the approval of the Court" was held to be suspended in its operation until court approval was obtained.

31 Lord Denning M.R. said at 720:
32 The agreement between the Company and the plaintiff suspended the operation of the contract until the V.S.E. approved it. If the V.S.E. approved it, it was binding on the plaintiff and the Company. If the V.S.E. did not approve it, it was not binding. In my opinion, the admissibility of evidence of the provisions of the listing agreement between the Company and of the V.S.E. and the evidence in the minutes of the Annual General Meeting of the Company was not precluded by the parol evidence rule.

33 As long ago as the decision in Pym v. Campbell, [1856] 6 El. & Bl. 370, 119 E.R. 903 (K.B.), it was held that parol evidence was admissible to show that the parties did not intend a document to become an enforceable agreement until another party had been consulted and had approved it. In M.P. Furmston, ed., Cheshire, Fifoot and Furmston's Law of Contract, 12th ed. (London: Butterworths, 1991) at 118, the editor cites Pym v. Campbell to support his conclusion that where there is a document, which on its face purports to record a valid and immediately enforceable contract, evidence of an agreement to suspend the operation of the contract until the occurrence of some future event, such as the approval of a third party, which has not yet taken place is admissible because the parol evidence rule does not extend to such evidence. The editor states that the effect of such evidence is not to "add to, vary or contradict, the terms of a written contract, but to make it clear that no contract has yet become effective".

34 Counsel also relied upon the decision in Meyers v. Freeholders Oil, [1960] S.C.R. 761 to support his submission that the contract could be enforced notwithstanding the failure to obtain the approval of the V.S.E. Counsel referred to passages in the judgment at 771, 772, 774, 775, and 776 and submitted that in that case a contract was held to be enforceable notwithstanding the breach of the Securities Act of Saskatchewan, R.S.C. 1940, c.287 as amended. Counsel likened the failure to obtain V.S.E. approval to the breach of the provisions of the Securities Act and submitted that we should conclude on the authority of that decision that the contract in the case under appeal remained enforceable notwithstanding the absence of approval by the V.S.E.

35 I am unable to agree with counsel's submission. My reading of Mr. Justice Martland's reasons in Meyers indicates that the determination of the effect of a breach of the provisions in a statute which govern a contract is often a difficult one and depends upon the terms and intent of the provisions under consideration. In my opinion, that case is clearly distinguishable. When the condition precedent created by the listing agreement and the minutes of the Annual General Meeting are considered, it is clear that the intent of the parties to the contract is that the contract shall not become enforceable against the Company until approval of V.S.E. has been obtained to the amount of the compensation covered by the contract.

36 Counsel also relied upon the decision in Nike InformaticSystems Ltd. v. Avac Systems Ltd. (1979), 16 B.C.L.R. 139 at 145 and the discussion in that case of the effect on a contract of a breach of s. 5 of the Alberta Franchises Act. In Nike, Locke J. quoted at length from Meyers v. Freeholders Oil. The reasoning in that case is distinguishable for the same reasons as the decision in Meyers v.Freeholders is distinguishable. I would not give effect to counsel's submissions.

37 Counsel also relied upon the decision of this Court in Ames and Mickelson v. lnvesto-Plan Ltd. (1973), 5 W.W.R. 451. In that case, the court considered the effect of a violation of s. 37 of the Securities Act, 1967 (B.C.), c. 45.The court referred to Meyers and held that it could not impute to the legislature an intention to prevent the enforcement of contracts made in contravention of the statute. In my opinion, that decision has no application to the facts before us where the evidence clearly shows that the shareholders had resolved that the contract between the plaintiff and the Company was not to be enforceable unless it was acceptable to the V.S.E.

38 Counsel also submitted that even if the trial judge was correct in concluding that there was a condition precedent which rendered the contract unenforceable the parties acted upon the contract from September, 1988, until the spring of 1990 and the condition precedent was waived by the acts of the parties. Counsel relied upon Aquis Estates Ltd. v. Minton (1975), 1 W.L.R. 1452 and Dorsch v.Freeholders Oil Co. (1965) 52 W.W.R. 304 in support of this submission.

39 I must reject that submission. The decisions in AquisEstates Ltd. and Dorsch are clearly distinguishable. There is no evidence to show that the shareholders of the Company were aware of matters that were highly material to their giving their approval to the contract. In particular they were not informed that the compensation provided by the contract was not acceptable to the V.S.E. prior to the 1989 Annual General Meeting.

40 The shareholders of the Company were never informed that the Exchange had advised the Company solicitor that a "golden parachute" clause such as paragraph 16 of the contract was not acceptable to the Exchange regardless of the Company's stage of development. Under the circumstances the Company cannot be held to have waived its right to object to the enforceability of the contract.

41 Counsel also relied upon the resolution passed at the Annual General Meeting held on October 13, 1989, when the shareholders passed a resolution approving "all acts of the directors since the last Annual General Meeting". However, this approval was not effective. In the first place, the contract had been executed by the directors of the Company before the 1988 Annual General Meeting; the approval given by the shareholders did not apply to the acts of the directors in entering into the contract before that meeting. In the second place, there was insufficient information concerning the September 14th contract contained in the information circular sent to the shareholders before either the 1988 or the 1989 meeting to enable the shareholders of the Company to make an informed decision to approve the contract or to waive the condition precedent.

42 As for the second ground of appeal, I agree with the learned trial judge that Mr. Hamelin is estopped from denying the existence of the condition precedent. The minutes of the Annual General Meeting of the shareholders held on September 16th, 1988, stating that the compensation contract was subject to acceptance by the V.S.E., recorded the understanding of all shareholders of the Company, including Mr. Hamelin, that this condition was to be complied with before the agreement became effective. Mr. Hamelin did not take issue with this position of the shareholders at the Annual General Meeting on September 16, 1988. Under all of the circumstances, it was unfair and unjust for Mr. Hamelin to resile from that position and he was estopped from so doing: see LitwinConstruction (1973) Ltd. v. Pan (1988), 29 B.C.L.R. (2d) 88, 52 D.L.R. (4th) 459 (C.A.) and Amalgamated Investment & Property Co. Ltd. v. Texas CommerceInternational Bank Ltd., [1981] 3 All E.R. 577, [1981] 3 W.L.R. 565 (C.A.).

43 For the foregoing reasons I would reject grounds one and two.

Ground Three

44 In support of ground three, counsel for Mr. Hamelin submitted in his factum that the Articles of the Company provided that the directors could bind the Company and that the contract was put before the shareholders at the Annual General Meeting to provide information to them but that if approval of the shareholders was not obtained the contract was nevertheless valid.

45 That submission must be rejected. The management contract was an item of business transacted at the Annual General Meeting in 1988. It was thus deemed to be "special business" under the provisions of Part 10 of the Articles of the Company. It was thus a matter which required the approval of the shareholders.

46 At the hearing of this appeal I understood counsel for the appellant to concede that the contract had to be approved by the shareholders before it bound the Company. I would reject this ground of appeal.

Ground Four - Fiduciary Duty

47 Mr. Hamelin testified that the main reason for entering into the September 14th, 1988 contract was to protect the Company from a hostile takeover by INCO and to discourage any such attempt at takeover. He also testified that the remuneration of $250,000 per annum was arrived at by agreement between himself, Mr. Harrison and Mr. Taylor. Mr. Taylor was a lawyer selected by Mr. Hamelin but retained by the Company.

48 If one accepts Mr. Hamelin's testimony that the threat of a takeover bid was the explanation for the provisions in paragraph 16 of the compensation contract, there was clearly a conflict of interest between Mr. Hamelin's interests under the contract and his duties as director to act in the best interests of the Company.

49 In my opinion, the onus was upon Mr. Hamelin to prove that the defensive measure adopted to oppose an apprehended takeover was reasonable and directed to the benefit of the defendant Company and its shareholders. I find support for this opinion in the decision of the Saskatchewan Court of Appeal in 347783 Alberta Ltd v. Producers Pipeline Inc. (1991), [1991] 4 W.W.R. 577, 80 D.L.R. (4th) 359, 3 B.L.R. (2d) 237 92 Sask. R. 81 and the reasons for judgment of Mr. Justice Sherstobitoff at 261 B.L.R.. In my opinion, when Mr. Hamelin acted as a director and caused the Company to enter into the management contract with him personally, he must show that the considerations upon which he decided to enter into the contract were consistent with the best interests of the Company and inconsistent with any other interest. In my opinion he has failed to satisfy that onus.

50 Generally speaking, I think it would be difficult to see how a "golden parachute" provision, standing alone, could be of benefit to the shareholders generally. However, in my opinion it is unnecessary to decide that issue on this appeal.

51 Apart from the evidence of Mr. Hamelin and his advisors, there was no evidence to support his testimony that a takeover was apprehended. What Mr. Hamelin did in this case was more consistent with his self-interest than a bona fide interest in the Company. By so acting he breached the fiduciary duty which he owed as a director to the Company and the shareholders. 52 In reaching that conclusion I have adopted the principles discussed by the Saskatchewan Court of Appeal in Producers Pipeline, supra, at 256 to 261 B.L.R.

53 In my opinion, the learned trial judge was correct in finding that Mr. Hamelin was in breach of his fiduciary duty as a director in causing the Company to enter into a management contract which contained the provisions of paragraph 16. I would therefore reject this fourth ground of appeal.

Summary

54 It will be noted from my discussion of the first and second grounds of appeal that I have concluded that the management contract was subject to the condition precedent of the approval of the V.S.E. and that as that approval was not given the contract never became effective. I also concluded that Mr. Hamelin is estopped from denying the existence of the condition precedent in my discussion of ground 2. The rejection of the first and second grounds are sufficient to dispose of this appeal. In addition, however, I have concluded in my discussion of grounds 3 and 4 that the management contract was one which under the Company's Articles and in accordance with the fiduciary duty of Mr. Hamelin to the Company, and to the shareholders, had to be submitted and approved by the shareholders before it became effective. For those further reasons, I would dismiss the appeal.


I AGREE: ___________________________
The Honourable Mr. Justice Legg



____________________________
The Honourable Mr. Justice Finch




Maurice G. Hamelin

v.

Seven Mile High Group Inc.


Reasons for Judgment of the Honourable Mr. Justice Lambert


55 I have had the advantage of reading the reasons of Mr. Justice Legg, in draft.

56 Having regard to the terms of the contract generally, and to the "golden parachute" provisions in particular, I agree with Mr. Justice Legg that the management contract executed on 14 September, 1988, just two days before the Annual General Meeting of the Company, was intended and agreed by the parties to the contract, namely Mr. Hamelin and the Company, to be subject to the approval of the shareholders. The timing of the execution of the contract in relation to the Annual General Meeting tends to confirm that conclusion, as does the fact that the contract was actually submitted to the shareholders at the Annual General Meeting and was the subject matter of a resolution of the shareholders.

57 Having regard to the terms of the shareholders' resolution to the effect that the management contract was subject to acceptance by the Vancouver Stock Exchange, I do not think that the approval of the shareholders to the management contract could be considered to have been given until the approval of the Vancouver Stock Exchange was obtained.

58 The approval of the Vancouver Stock Exchange was never obtained, though it was sought. It follows, in my opinion, that since a condition precedent to the management contract coming into effect was never fulfilled, the contract never came into operation.

59 For those reasons I would not accede to the first three grounds of appeal. It is not necessary for me to deal with the fourth ground of appeal which relates to a separate and distinct reason why the trial judge dismissed the action.

60 During the course of argument reference was made to the parol evidence rule in relation to whether a condition requiring shareholder approval or a condition requiring the approval of the Vancouver Stock Exchange could be applied where the management contract itself, on its face, did not impose such a condition. In my opinion that argument misconceives the nature of the parol evidence rule. In this case the management contract in its terms and in its context, including that part of the context represented by the listing agreement with the Vancouver Stock Exchange, required the approval of the shareholders before it became effective, and the parties could not have agreed otherwise even if they had wished to. That requirement did not have to be expressed in the contract nor did its terms have to be implied within the management contract. As between Mr. Hamelin and the Company, the requirement constituted either a collateral contract or a condition precedent quite separate from the management contract itself and it cannot be said that the requirement contradicted or varied the written management contract. 61 We were referred in the course of argument to the reasons of Madam Justice McLachlin in Ahone v. Holloway (1988), 30 B.C.L.R. (2d) 368 (C.A.), and particularly to this passage at p. 372:
62 I consider that Professor Corbin's statement of the parol evidence rule is an accurate statement of the classical formulation of the rule. Under that formulation the rule applies to exclude consideration of an oral agreement only if the oral agreement is antecedent to the written agreement; only if the written agreement is one which both parties would describe as the definite and complete statement of their agreement; and only if the oral agreement varies or contradicts the written agreement.

63 In this case none of those three conditions for the application of the parol evidence rule was present. Accordingly, the parol evidence rule, to the extent that it can be considered in its classical formulation to represent a continuing part of our law, has no application in this case. As to the continuing scope of what Professor Corbin calls "this supposed rule" in the law of British Columbia, see Gallen v. Butterley (1984), 53 B.C.L.R. 38.

64 I would dismiss this appeal.



______________________________
The Honourable Mr. Justice Lambert