Trudeau v. Cochrane, [1977] 2 SCR 55

Supreme Court of Canada

Trudeau v. Cochrane, [1977] 2 S.C.R. 55

Date: 1976-01-30

William Adrien Trudeau (Defendant) Appellant;

and

Edward Grant Cochrane (Plaintiff) Respondent;

and

Casualty Adjustment Company Ltd. Mise en cause.

1975: March 7; 1976: January 30.

Present: Laskin C.J. and Judson, Pigeon, Dickson and Beetz JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR QUEBEC

Contracts—Stipulation not to compete—Penal clause—Interpretation of the contract inferred from behaviour of the parties—Testimony—Civil Code, art. 1234.

In 1960 appellant Trudeau and respondent Cochrane, both claims adjusters, were shareholders of the third party, Casualty Adjustment Company Ltd., the head office of which was in Montreal. On December 19, 1960 Cochrane sold Trudeau his entire interest in the third party for the sum of $11,300, $3,000 of which was in cash, $3,000 payable one year from the date of the agreement and $5,300 payable in the amount of $100 per month. The agreement stipulated that Cochrane undertook not to act as a claims adjuster for a period of ten years within a certain radius of Montreal. This stipulation was accompanied by a penal clause under which, if Cochrane violated the agreement, he undertook to pay Trudeau the sum of $25,000 and forfeited the moneys still due to him. Trudeau made the initial payment of $3,000 and eleven payments of $100, but he stopped all payments in November 1961 although a balance of $7,200 remained unpaid. On January 10, 1964 Cochrane brought an action in the Superior Court to claim payment of this sum. Trudeau relied on the penal clause to move both that the action be dismissed and, by a cross-demand, that Cochrane pay him the sum of $25,000. To support his claim, Trudeau referred to some fifteen incidents in which Cochrane allegedly acted as a claims adjuster, contrary to the prohibition stipulated in the agreement. The Superior Court allowed Cochrane’s action and dismissed Trudeau’s cross-demand. The Court of Appeal unanimously upheld this decision. Hence the appeal to this Court.

Held: The appeal should be dismissed.

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This Court is left to decide whether the penal clause should be implemented because Cochrane allegedly breached the stipulation not to compete in some fifteen incidents which occurred after the date of the December 19, 1960 contract and until March 23, 1962. The Superior Court judge studied the facts in detail and came to the conclusion that, despite the contract, the parties continued to co-operate with each other because it was in their common interest to do so and not to consider themselves as strict competitors; the breaches imputed to Cochrane were apparently not taken seriously by Trudeau, who reproached the former for them but tolerated or allowed them. The trial court considered that the parties gave to the contract, by their conduct and actions, a certain interpretation which it would be improper for it to change. After reviewing the evidence, the Court of Appeal concluded that it was not able to say that there was a manifest error on the part of the trial judge. Moreover, of all the incidents described, only two would be capable of being viewed as breaches of the stipulation not to compete. In particular, one must ask whether Trudeau himself, from the moment he became aware of these incidents, regarded them as breaches warranting application of the penal clause. In view of the lack of detail provided by Trudeau and the compromises he agreed to when he saw an advantage in doing so, it is not unreasonable to infer that for the period in which these incidents occurred he refrained from availing himself of the penal clause. In the circumstances, that becomes a question of fact and of appreciation of the facts, and it cannot be said that the concurrent conclusions of the Superior Court and the Court of Appeal are in error in this respect. There is also a problem of credibility here and the trial judge, who saw and heard the parties and the witnesses, clearly preferred Cochrane’s version.

The Court is no more able to accept Trudeau’s claim that the Superior Court and the Court of Appeal contravened art. 1234 C.C. in allowing the contradiction of a written instrument by testimony, since this was only done to establish the existence of a tacit understanding subsequent to the written agreement and which could be inferred from the behaviour of the parties.

APPEAL against a decision of the Court of Appeal of Quebec affirming a judgment of the Superior Court. Appeal dismissed.

I.L. Adessky, Q.C., for the appellant.

Bernard Dorais, Q.C., and Lise Desjardins, for the respondent.

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The judgment of the Court was delivered by

BEETZ J.—In 1960 appellant and respondent, both claims adjusters, were shareholders and employees of the third party, Casualty Adjustment Company Ltd., the head office of which is in Montreal. Respondent was its president and majority shareholder. Appellant was its vice‑president.

By private writing concluded on December 19, 1960 (Exhibit P-1), respondent sold to appellant his entire interest in the third party, for the sum of $11,300: $3,000 in cash; $3,000 payable one year from the date of the agreement with a promissory note negotiable eleven and a half months from its date; and the balance by appellant’s undertaking to pay, on behalf of respondent, in the amount of $100 per month, a hypothecary obligation of $5,300.

Respondent for his part undertook not to act as a claims adjuster for a period of ten years within a certain radius of Montreal:

6. THAT the First Party convenants and agrees that he shall not during the following ten (10) years from the date of the signing of these presents, either directly or indirectly, in his own name or in the name of a prêtenom, enter into or be interested in any business competing with that carried on by the said Corporation, nor adjust, deal in or handle any claim of any nature whatsoever originating in or occurring within a twenty (20) mile radius of the geographical limits of the Island of Montreal including the City of Montreal and any other municipalities, townships, cities, towns or suburbs situated on and composing the said Island; however, the First Party shall have the right to adjust, deal in or handle any claim of any nature whatsoever originating North of the Southern limits of the Municipality of Rosemere; and within a twenty (20) mile radius of the geographical limits of the City of Sherbrooke, in the Province of Quebec, as owner, Shareholder, employer or manager and that he shall not as employee or in any other capacity solicit adjusting business in those areas during that period for any person, firm or corporation whatsoever. However, the First Party shall have the right to be employed as a staff Insurance Adjuster by an established insurance company, insurance brokers, agents or company manager such as Chubb & Son Ltd.,

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Massé Renwick Ltd., in the above areas, but it is clearly understood that he shall not have the right to be employed in any capacity whatsoever for or with business competing with that carried on by the said Corporation. Furthermore, anything herein to the contrary notwithstanding, the First Party shall have the right to act as a public adjuster which shall mean and include anyone who for remuneration adjusts a loss, or claim exclusively on behalf of a claimant (other than insurance company or companies, insurance broker or brokers, or underwriters of Lloyd’s of London) whether such loss or claim is or is not covered by an insurance policy.

The obligations of the seller were accompanied by a penal clause:

12. THAT in the event that the First Party contravenes or violates any term or terms or undertaking or undertakings contained in this Agreement, then he must pay forthwith to the Second Party as a penalty the sum of Twenty-five Thousand Dollars ($25,000.00) as liquidated damages, stipulated in advance, as well as immediate forfeiture of all the monies still due and owing by the Second Party to the First Party in accordance with paragraphs 3(a), (b) and (e) of this Agreement.

Appellant made the initial payment of $3,000 and eleven payments of $100 on the hypothecary obligation, but he stopped all payments in November 1961. By his action, respondent claimed the balance of the sale price, namely $7,200, and in addition the amounts of $338.15 for services rendered to the third party and $6 to obtain a release of the hypothecary obligation. In his defence, appellant argued that respondent breached the contract in agreeing to handle cases of accidents that occurred in the prohibited area; he invoked para. 12 of the agreement, moved that the action be dismissed and, by a cross‑demand based on the same paragraph, claimed $25,000 from respondent. The Superior Court allowed the action with the exception of the amounts of $338.15 and $6, and dismissed the cross-demand. The Court of Appeal unanimously upheld the decision. Hence the present appeal.

Neither the validity of the above-mentioned paras. 6 and 12 of the agreement (Exhibit P-1), nor the amounts of $7,200 and $25,000, are at

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issue. The Court is therefore left to decide whether the penal clause should be implemented.

In substance the Superior Court found that, despite the contract, the parties continued to cooperate with each other for a year because it was in their common interest to do so and not to consider themselves as strict competitors; the breaches imputed to respondent were apparently not taken seriously by appellant, who reproached the former for them but tolerated or allowed them until the promissory note he had signed became negotiable:

[TRANSLATION] The parties for almost a year gave to the contract, by their conduct and actions, a certain interpretation, in this case a broad interpretation involving some compromise. In the light of this attitude, it would be improper for the Court to change this interpretation, to give the contract a different interpretation, namely one that was stricter and more strigent than that of the parties themselves.

After reviewing the evidence, the Court of Appeal was not able [TRANSLATION] “to say that there was a manifest error on the part of the trial judge”.

In his judgment, the latter studied the facts in great detail, following the order in which they had been presented to him, which was not the chronological order. I shall briefly review these facts and try to present them chronologically, although the record is extremely confused. However, it should first be noted that respondent was the majority shareholder of another business that also adjusted insurance claims, Casualty Adjustment (Laurentian) Ltd., (“Laurentian”) in which appellant held no interest. This business undertaking was managed by the employee Hébert, who became the majority shareholder in October 1962. The head office of Laurentian was in Saint-Jérôme, but in April 1961 respondent opened a branch office in Rosemere, outside the prohibited area. It was primarily through this channel and the third party that business relations between the parties continued after the December 19, 1960 contract was signed (Exhibit P-1). What appellant complains of is that respondent acted directly as the agent of insurance companies when accidents involving a claim occurred in the prohibited area. However,

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apart from the fact that interpretation of the prohibition and the exact demarcation of the prohibited area did cause some difficulty, the parties co-operated several times with each other for purposes of investigation, wherever an accident occurred taking into account the place of residence of witnesses or other similar circumstances.

The evidence reproduced in the printed case refers to some fifteen incidents that occurred after the December 19, 1960 contract (Exhibit P-1).

1. On January 1, 1961, the Guardian Insurance Company referred to Laurentian the case of an accident that occurred in the Town of Mount Royal in the prohibited area on December 28, 1960 (Exhibit P-4, Vol. II).

Respondent himself did not act. It was Hébert, the employee of Laurentian, who acted. Either for the sake of economy, or else through inadvertence the stationery of the third party was used. Respondent apparently believed that this was not an act of prohibited competition because Guardian was not a regular customer of the third party. (Case Vol. I, at pp. 47, 48, 66, 68 and 111, Vol. II, at pp. 145 and 146, and Vol. IV, at p. 599).

2. On January 5, 1961, Hébert, an employee of Laurentian, received a file regarding an accident that occurred in Montreal, in the prohibited area, on December 26, 1960, and obtained a statement from the insured. (Exhibit P-14, Vol. III).

The evidence shows, however, that Hébert acted at the request of an employee of the third party to whom his account was sent. (Case Vol. I, at pp. 118 and 119 and Vol. III, at pp. 430 et seq.).

3. On February 8, 1961, Mercantile referred to Laurentian the case of an accident that occurred in Montreal, in the prohibited area, on February 6, 1961. (Exhibit P-17, Vol. IV).

Hébert, who was dealing directly with the insurance company, contacted Dubuc, an employee of the third party, to ask him to meet the persons involved in the accident living in Montreal and Verdun and send him a report, which the latter did. The third party allegedly sent its account, which was set off against others. (Case Vol. I, at p. 121). This testimony, which is corroborated by documents (Exhibit P-17, Vol. IV, at pp. 514 to

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517) contradicts appellant’s statement that he absolutely refused to act as respondent’s correspondent for cases involving claims arising in the prohibited area. (Case Vol. I, at p. 114). It is true that appellant did not act personally, any more, incidentally, than did respondent in the first case supra.

4. On March 1, 1961, Guardian referred to Laurentian the case of an accident that occurred in Montreal, in the prohibited area, in June 1960. (Exhibit P-12, Vol. III).

This case developed like the third case, thereby constituting a precedent prejudicial to the position of appellant, who appeared to attach no importance to it because, although Guardian referred the case to Laurentian after the contract of December 19, 1960, the accident itself occurred earlier. (Case Vol. I, at pp. 36 and 115 to 117, Vol. III, at pp. 378 and 382 et seq.).

5. On March 9, 1961, an employee of the third party referred to Hébert of Laurentian a case that occurred at Bois des Filions, Terrebonne County on November 5, 1960. (Case Vol. I, at p. 118 and Vol. III, at p. 402, Exhibit P-13).

Laurentian reported to the third party. At p. 409, Vol. III, a letter sent to Hébert of Laurentian by an agent of the third party attests to the co-operation between the two offices.

6. On April 11, 1961, Hartford referred to Laurentian the case of an accident that occurred on March 23, 1961 at Saint-Martin, in the prohibited area. (Exhibit P-7, Vol. III).

Respondent telephoned appellant, who expressed the fear, apparently for the first time, that this case constituted a precedent. Respondent withdrew and took no further part in the case. He claimed no fees. (Case Vol. I, at p. 53 and Vol. III, at pp. 321,322).

7. On April 18, 1961, an agent of Mont-Rolland referred to Laurentian the case of an accident that occurred in Montreal, in the prohibited area, on April 16, 1961. (Exhibit P‑15, Vol. IV).

Hébert, an employee of Laurentian, contacted appellant who agreed to Laurentian’s acting as his correspondent. A substantial part of the work was

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carried out by Laurentian, which billed the third party. (Case Vol. I, at pp. 119, 120, Vol. IV, at pp. 443 to 489).

8. In April, 1961, respondent announced the opening of a Laurentian branch office at Rosemere. (Exhibit D-1, Vol. I).

The Superior Court held that this undertaking was lawful. The branch is located outside the prohibited area and serves regions that are not referred to in the prohibition. (Case Vol. I, at p. 142 and Vol. IV, at p. 622).

9. On July 6, 1961, the Prudential Assurance Company referred to Laurentian the case of an accident that occurred in Montreal, in the prohibited area, on June 15, 1961. (Exhibit P-6, Vol. III).

Laurentian accepted this commission directly from the insurer but in the capacity of correspondent of the third party, an employee of which later asked it to submit an account. (Case Vol. III, at pp. 301 to 320).

10. On July 11, 1961, the Hartford Insurance Company referred to Laurentian the case of an accident that occurred on July 10, 1961 in Laval West. (Exhibit P-5, Vol. II).

Respondent seemed to believe, as in the first case, that this was not a case of prohibited competition because Hartford was not a regular customer of the third party. (Case Vol. I, at p. 106 and Vol. II, at pp. 224 and 225).

11. On July 14, 1961, a Saint-Jérôme insurance broker referred to Laurentian the case of an accident that occurred on July 12, 1961 in Montreal, in the prohibited area. (Exhibit P-16, Vol. IV).

With appellant’s consent, Laurentian acted as correspondent of the third party, reported to the latter and sent it an account. (Case Vol. I, at p. 120 and Vol. IV, at pp. 490 et seq.).

On October 31, 1961, appellant’s attorney wrote a formal notice of default to respondent alleging that Laurentian was not identifying itself properly, that it was passing itself off as the third party and was in breach of the agreement of December 19, 1960. This letter enjoined respondent to cease its contraventions and suggested that he communicate with the writer of the letter (Case Vol. I, at pp. 143, 144).

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Around November 2 or 3, 1961 appellant and respondent met to discuss their disagreement. Their respective versions of the meeting are at variance. (Case Vol. I, at pp. 81, 82, 100, 101). Respondent alleges having also met appellant and his counsel in the latter’s office, but appellant and his counsel deny this.

12. On November 29, 1961, the Prudential Assurance Company referred to Laurentian the case of an accident that occurred at Ile Perrot, in the prohibited area, on June 25, 1961. (P-9, Vol. III).

Respondent testified that only after accepting this commission did he realize that he might be infringing the agreement of December 19, 1960. He tried to co-operate with appellant, who refused. Respondent withdrew and claimed no fees. (Case Vol. I, at p. 54 and Vol. III, at pp. 343, 338, 340).

In November 1961, appellant stopped paying on behalf of respondent the $100 per month he had undertaken to pay on a hypothecary obligation.

13. On December 5, 1961, Phoenix of London allegedly referred to Laurentian the case of an accident that occurred in Montreal, in the prohibited area, on October 2, 1961. (Exhibit P-8, Vol. III).

The particulars of the correspondence exchanged by the parties, to be found in Exhibit P-8, do not tally. Respondent has no copy of them. Here again, subject to the lack of agreement of the documents relating to the identity of the accident, there appears to have been an attempt to co-operate on the part of respondent, a refusal by appellant and a withdrawal by respondent. (Case Vol. IV, at p. 601 and Vol. III, at pp. 328, 329, and 326).

14. There was apparently another case of breach alleged by appellant with respect to an accident that occurred around November 22, 1961 at Saint-Martin.

The record of this accident has not been reproduced. There is, besides the allegation, a qualified admission of respondent that he received no fee since he had no copy of the record. (Case. Vol. I, at pp. 45, 46 and 55).

15. On March 23, 1962, the Zurich Insurance Company referred to Laurentian the case of an accident that occurred on March 20, 1962 at Sainte-Marthe sur le Lac. (Exhibit P‑10, Vol. III).

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The accident apparently occurred on the periphery of or outside the prohibited area. (Case Vol. I, at p. 54, Vol. III, at pp. 348 and 349 and Vol. IV, at p. 602).

The action brought by respondent was dated January 10, 1964, the defence of appellant July 8, 1964, and his cross-demand August 20, 1964.

The trial judge, with respect to the chronology of the events just referred to, made the following observations:

[TRANSLATION] It is apparent from the evidence that defendant completely changed his way of acting toward plaintiff at the end of October 1961, or rather after November 3, 1961 when he consulted with his lawyer, namely at the exact moment when his promissory note was about to become negotiable or due and payable. The record also shows that plaintiff’s action of claiming the balance of the sale price was not taken until January 10, 1964, namely about two years after the last case of breach. On his part, defendant ceased making payments on the mortgage in November 1961, and waited at least two years before instituting the action against plaintiff in execution of the penal clause, apparently satisfied with dispensing with payment of the balance of the sale price and not having to pay it.

Of the seven incidents mentioned specifically by appellant in his brief (at pp. 12 to 16), there are two, 6 and 12 supra, from which respondent withdrew, a third, 13, on the subject of which the documents submitted do not agree, a fourth, 14, that contains only qualified admissions, and a fifth, 9, in which respondent acted as correspondent for appellant. It is surprising that the last case is part of the claim since appellant pleads elsewhere (at p. 33 of his brief) that no breach of the agreement occurred, nor was there any precedent favourable to respondent when the latter acted as appellant’s correspondent for accidents that had occurred in the prohibited area.

The only incidents capable, when considered out of context, of being prima facie viewed as breaches, are incidents 1 and 10, supra. Certainly the minimal profit that respondent was able to draw from them should not be taken into consideration, as it was by the Superior Court, in order to

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decide whether the penal clause should be applied or not; the Court of Appeal noted this error but still upheld the trial judgment because that point was not a ratio of the judgment. Furthermore, it is irrelevant that according to the contract (Exhibit P-1) the insurance companies with which respondent did business were not regular customers of the third party.

Nevertheless, these incidents must be put in their proper context and compared with the sixth case, supra, from which respondent withdrew after having himself taken the initiative of communicating with appellant, with the twelfth case from which he also withdrew, and with cases three and four in which appellant apparently acted as respondent’s correspondent.

In particular, one must ask in this context whether appellant, from the moment he became aware of these incidents, regarded them as breaches warranting application of the penal clause. Appellant is less than exact as to the moment when he was informed of the breaches which are the basis of his claim against respondent. (Case Vol. I, at p. 99). While he seems to have been careful at the time to preserve for the future the principle of the prohibition imposed by contract, he did not fail to agree to compromise in several specific cases when he saw an advantage in doing so. It is not unreasonable to infer from this that for the period in which these incidents occurred, if not for the entire period stipulated in the agreement, he refrained from availing himself of the penal clause. Bearing in mind these circumstances, I cannot say that the concurrent conclusions of the Superior Court and the Court of Appeal are in error with respect to what is in substance a question of fact and of appreciation of the facts. The appreciation of the facts is complicated in the case at bar by a problem of credibility. Appellant’s and respondent’s versions are contradictory. The trial judge, who saw and heard the parties and their witnesses, clearly preferred respondent’s version:

[TRANSLATION] From the evidence it appears that the parties have contradictory versions, both on interpretation of the agreement and on the co-operation that existed between them. However, it should be added that on the latter point, defendant’s statements correspond

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neither with his actions nor with the actions of plaintiff that were authorized or at least tolerated by defendant. There can be no doubt that the parties co-operated with each other and worked together when it was in both their interests not to refuse a case, and consequently to act together, rather than to always regard themselves strictly as independent hostile competitors.

Consequently, defendant’s peremptory statement to the effect that he categorically forbade plaintiff to act in the prohibited area before October 31, 1961, and that in no case did he authorize him to act is hardly plausible or probable, in the light of defendant’s actions and the relations of friendship and business that existed between the parties during the year following the signing of the contract, and also in the light of plaintiff’s statements to the effect that he was asked to make at least partial investigations and to act as correspondent of the mise en cause. Furthermore, these statements are corroborated by the disinterested witness Louis-Paul Hébert. (The emphasis is mine).

In his brief, appellant referred to certain rules of law that are not, in my opinion, applicable to this case. He discussed at length agreements prohibiting the carrying on of a business or the conduct of a trade or profession, as well as penal clauses. The validity of the October 19, 1960 agreement is conceded. The trial judge also allowed under reserve of an objection evidence submitted by appellant tending to establish that the third party was in financial difficulty when appellant acquired respondent’s shares. He later disallowed this evidence and the Court of Appeal affirmed his decision. Like the Superior Court and the Court of Appeal, I am of the opinion that such evidence is irrelevant. Lastly, appellant argued that the Superior Court and the Court of Appeal contravened art. 1234 of the Civil Code in allowing the contradiction of a written instrument (Exhibit P-1) by testimony. This was only done to establish the existence of a tacit understanding subsequent to the written agreement and which could be inferred from the behaviour of the parties.

I would dismiss the appeal with costs.

Appeal dismissed with costs.

Solicitors for the appellant: Adessky, Kingstone, Zerbisias & Poulin, Montreal.

Solicitors for the respondents: Dorais & Lamontagne, Ste-Thérèse, Que.