October 18, 2012

Just the facts, please: an examination of Downey v. Ecore International Inc.

Downey v. Ecore International Inc.,1is an Ontario Court of Appeal decision that addresses the court’s approach to interpreting inconsistent interrelated agreements and identifying the parties to those agreements.

The plaintiff Paul Downeywas a former consultant for Ecore International Inc. (“Ecore”), formerly known as Dodge-Regupol Inc. (“DRI”).2 A consulting agreement was prepared by Downey’s lawyer which contemplated that Downey’s services would be provided to Ecore through Downey’s company, CSR Industries Inc. (“CSR”). Downey was not a named party to the consulting agreement. However, the consulting agreement identified Downey as a “key person” of CSR,  who would “perform all services” under the consulting agreement. Section 8 also required CSR to execute a copy of Ecore’s standard confidentiality agreement which would form part of the consulting agreement.

The major issue of the case arose when Downey signed the confidentiality agreement in his individual capacity as an “employee,” rather than on behalf of CSR. The confidentiality agreement’s forum selection clause (the “FSC”) gave exclusive jurisdiction to the state of Pennsylvania to litigate “any action that in any way relates to Ecore’s business relations with the employee.” Sometime later, Ecore attempted to have Downey sign a second confidentiality agreement that named both himself and CSR as parties. Downey refused.

The business relationship soured when Downey commenced an action in Ontario against Ecore to enforce an oral promise to compensate Downey for his assignment of certain inventions. Ecore responded by terminating the consulting agreement and brought a motion to have Downey’s action dismissed for want of jurisdiction. According to Ecore, the matter was governed by the confidentiality agreement, which provided Pennsylvania was the appropriate forum.

The motion court agreed with Downey’s position. According to the motions Judge, the true recipient of the confidential information – pursuant to the consulting agreement – was not Downey himself, but the corporate person CSR. The motions Judge therefore concluded that both the confidentiality agreement and the FSC were invalid, since they did not provide consideration to the “employee” Downey. On this basis, Ecore’s motion was dismissed and Ontario was ruled the most convenient forum.3

On appeal, the motions court’s decision was reversed. In a unanimous decision, the Ontario Court of Appeal held that the lower court had erred and Downey had received good consideration. The Court of Appeal reasoned that in accordance with the principles of contractual interpretation, its task was to determine:

    1. the intentions of the parties in accordance with the language used, having regard to the context in which the contract is signed;
    2. the meaning of the entire contract, in a manner that gives meaning to all of its terms; and
    3. the “factual matrix” or context underlying the negotiation of the contract.4

Using this approach, the court determined that it was the parties’ intent that Downey and not CSR be a party to the contract.5 The pre-contract correspondence revealed that it was Downey personally who would be “joining” the Ecore team by sitting as a member of its management group and personally committing to protect its confidential information.6

Moreover, the Court of Appeal concluded that the consulting and confidentiality agreements should be read together and viewed as a “composite.”7 The court noted that the consulting agreement recognized Downey, in his personal capacity, as the corporation’s “key person”8 and that it was clearly Downey who was to reap the benefits and bear the responsibilities of the contractual relationship: he would personally provide consulting services, as well as receive Ecore’s confidential information in the course of his employment.9

The Court of Appeal ruled that Downey’s insistence on having CSR sign the consulting agreement was a “mere tax device,” and further, that his refusal to execute a confidentiality agreement on behalf of CSR was merely a failure to commit CSR to the contractual protections that Ecore already enjoyed from Downey.10 As a result, the court decided that Ecore and Downey were engaged in a de facto relationship.11

The court concluded that to find the confidentiality agreement unenforceable against Downey for lack of consideration would, in the words of Salah v. Timothy’s Coffees of the World Inc., 12[fail] “to accord with sound commercial principles and good business sense, and [to] avoid commercial absurdity.”13

On this reasoning the court concluded that Downey’s personal execution of the confidentiality agreement was supported by valid consideration. Given that Downey and Ecore were found to be in a de facto relationship, the requirements of the confidentiality agreement represented a quid pro quo: Downey’s access to Ecore’s proprietary information under the confidentiality agreement was necessary to allow him to perform his duties under the consulting agreement. The two contracts could therefore be viewed as a cogent whole, ultimately meaning that each and every provision of the confidentiality agreement, including the FSC, was valid and operative.14 The correct legal forum was therefore Pennsylvania and not Ontario.

Downey is valuable from a practical perspective. It reminds those seeking to take advantage of a corporation’s separate legal status to be clear and consistent in their approach to signing interrelated agreements reflecting a business relationship.15

In instances where the negotiations, representations, provisions and signatories to a group of interrelated agreements point to a relationship with the individual behind the corporation, then Downey suggests that a de facto relationship with the individual may be found.

While the court in Downey used the existence of a de facto relationship as a basis for enforcing a confidentiality agreement and the FSC, query what a finding of a de facto relationship may mean in other contexts.

1 Downey v. Ecore International Inc., 2012 ONCA 480, 2012 CarswellOnt 8459 (Ont CA) [Downey].

2 Prior to 2008, Ecore carried on business under the name DRI. For convenience, the Court of Appeal treated Ecore and DRI as one and the same in its reasons.

3 Downey v. Ecore International Inc., 2011 ONSC 6617, 209 ACWS (3d) 538 (Ont SCJ).

4 Downey, supra at paras  37 & 38.

5 Downey, supra at paras 39-41.

6 Downey, supra at para 40.

7 Downey, supra at paras 42 & 43.

8 Downey, supra at para 44.

9 Downey supra at paras 45-47.

10 Downey, supra at para 50.

11 Downey, supra at para 47.

12 Salah v. Timothy’s Coffees of the World Inc., 2010 CarswellOnt 7643, 268 OAC 279 (Ont CA) [Salah].

13 Downey, supra at para 51;  Salah, supra at para 16.

14 Downey, supra at para 57.

15 See also Royal Stores Ltd. v. Brown, 39 MPR 217, 1956 CarswellNfld 14 (Nfld SC). (Brown stands for the proposition that those who do not give proper notice of incorporation to a supplier may not use that corporation to escape personal liability).