Albert Manley v. Her Majesty the Queen, [1984] CTC 8, 83 DTC 5440

Collier, J:—The plaintiff appeals against a reassessment of income tax by the Minister of National Revenue.

The Minister, for the plaintiffs 1974 taxation year, added into income $293,700, plus interest of $33,490.42 on that amount. The plaintiff contends the amounts included by the Minister were not income but, if anything, a receipt on account of capital.

The facts are unusual. They are not in dispute.

In an action brought in the Trial Division of the Supreme Court of Ontario, the plaintiff was awarded damages of $125,000 and costs. On appeal to the Ontario Court of Appeal the judgment of the lower court was varied to increase the damages to $587,400. The judgment of the Court of Appeal was, on May 27, 1974, affirmed by the Supreme Court of Canada.

The facts come essentially from-the reasons for judgment in the three courts referred to.

The plaintiff, in 1968, was a businessman. By the fall of that year, a wood products company, owned by him, had “gone under” with a loss of approximately half a million dollars.

One Ben Levy was, in 1968, president of Levy Industries Limited. It was a public company, but was controlled by Ben Levy, his brothers and sisters and certain other limited companies. Those latter companies were, apparently, owned by various Levys. The individuals and the companies owned 52 per cent of the shares of Levy Industries Limited.

The plaintiff, in October of 1968, had a brief discussion with Ben Levy in respect of the finding of a buyer for the Levy family shares. The details and effect of that encounter were a matter of serious dispute before the Ontario trial judge, Donohue, J. There were difficult questions of credibility. In any event, within a few days of the Manley-Ben Levy conversation, a company, called Seaway Corporation, agreed to buy the Levy shares for just under 30 million dollars.

The plaintiff claimed a finder’s fee in respect of the sale of the Levy family shares. He alleged that Ben Levy, on behalf of himself and the other holders of the shares, had orally agreed to pay him a two per cent finder’s fee. This was to be calculated on the total amount paid by the purchaser.

The plaintiff eventually had to assert his claim by the litigation earlier referred to, commenced in the Supreme Court of Ontario. He sued Ben Levy and the other owners of the Levy family shares. He also sued the purchaser of the shares. Ben Levy denied any agreement to pay any fee or commission of any kind. He also denied he was authorized to act on behalf of the other family members and corporations; he further denied he led the paintiff to believe he had authority to so act. He also took the position that if any fee was payable in respect of the sale to Seaway, that fee was to be paid by the purchaser.

The trial judge reviewed the evidence in great detail. He accepted the plaintiffs version of the transaction, in preference to that of Ben Levy. The plaintiffs testimony was that he had known the Levy family for many years. Donohue, J found, however, that . . the plaintiff had merely a passing acquaintance with the Levy brothers”. He and the Levys belonged to the Primrose Club. On Tuesday, October 15, 1968, he, by chance, met Ben Levy at the Club. While dressing after having a shower, Levy asked the plaintiff about his wood products business. Manley told him of the company’s failure. Some discussion took place about the Levy Industries business. Ben Levy told Manley the Levys were negotiating in respect of the purchase of the family shares. Levy asked the plaintiff if he knew of any potential purchasers. Manley replied he might know of some interested persons. The price of the shares was said by Levy to be 25 to 30 million dollars. The plaintiff brought up the question of a finder’s fee, and suggested two per cent if he could introduce a buyer. Ben Levy agreed. It was from this fortuitous meeting, and this casual conversation, the Ontario litigation arose.

The plaintiff had been dealing with one Perry Sherman in respect of a possible sale of Manley’s failed company to Seaway. He regarded Sherman as an agent for Seaway. He met Sherman two days following the conversation with Levy. As the trial judge said (Ex 5, p 10):

As a result of this meeting, Norton Cooper, the president of Seaway, got in touch with Ben Levy and, as mentioned above, in an astonishingly short time a contract was made for the purchase of the Levy family shares by Seaway at a price of approximately thirty million dollars.

The trial judge made this key finding:

I find as a fact that Ben Levy agreed with the plaintiff to pay the plaintiff a two per cent finder’s fee and that he represented to the plaintiff that he had authority to make this deal on behalf of all the defendants other than Seaway.

I find also that Ben Levy got Seaway to agree to pay some part of the finder’s fee. (Ex 5, p 25)

He went on to say (Ex 5, p 26):

. . . the plaintiff has failed to establish any case in contract or in damages against the other Levys and the action against them will be dismissed with costs.

As I have found there is no case in damages against the other Levys, but it is otherwise with respect to Ben Levy. He represented to the plaintiff that he had authority to act for the other Levys and that the plaintiff would be paid by him and the other Levys. The plaintiff carried out his part of the bargain and now Ben Levy and the other Levys refuse to pay. There is certainly a breach of contract here on the part of Ben Levy with respect to his own obligation to pay his proportionate share of the finder’s fee. But on the evidence before me, I cannot find either that he agreed to pay the entire fee himself or even guaranteed payment by the other Levys.

The plaintiff had claimed damages in the amount of $600,000 against all the Levys. In respect of damages, the trial judge said (Ex 5, pp 26-27):

Hence the claim for damages against Ben Levy cannot be based on two per cent of the entire Levy holdings. I was informed at trial that Ben Levy’s personal holdings were only 801 shares. But, apart from damages for breach of contract by Ben Levy, the plaintiff has, I consider, a claim for damages for deceit which lies in leading the plaintiff to believe that all of the Levys would pay him their proportionate share of the finder’s fee. The result of this was that the plaintiff at all times looked to the Levys to pay him, thereby foregoing a very favourable opportunity to bargain with Seaway for a fair fee. That Seaway was eager to buy and ready to pay a substantial finder’s fee is amply demonstrated by what took place. In my view, therefore, what the plaintiff has lost is a fair and reasonable finder’s fee on this transaction. There is some evidence in the case to assist in assessing damages for a loss of such fee. It is known that the Levys were ready to pay the broker Harold Smith $110,000 on a sale at a lower price and Seaway set up a finder’s fee of $100,000. I would therefore assess the plaintiffs claim for damages against Ben Levy at $125,000.

Ben Levy appealed the judgment at trial. The plaintiff cross-appealed. The Court of Appeal, in upholding the finding of liability against Ben Levy, said (Ex 7, pp 3-4):

He [the trial judge] found specifically that the appellant Levy had agreed “to pay the plaintiff a two per cent finder’s fee” and “that he had represented to the plaintiff that he had authority to make this deal on behalf of all the defendants other than Seaway”. We are not satisfied that the learned Judge failed to make full use of the advantages which he enjoyed as a Judge presiding at the trial of the action and we are not persuaded that we would be warranted in disturbing his findings.

As to damages, the Court increased the award to $587,400. This was said (Ex 7, P 4):

It follows from the learned Judge’s findings that the plaintiff is entitled to recover damages against Benjamin Levy for breach of warranty of authority, and counsel for the said appellant does not contest the claim of the plaintiff that the measure of damages to be awarded for said breach is equivalent to the amount of the finder’s fee determined in accordance with the agreement between the plaintiff and the defendant Benjamin Levy.

The matter then went to the Supreme Court of Canada. Ben Levy appealed. The plaintiff cross-appealed. The judgment of the Ontario Court of Appeal was affirmed. Laskin, CJC, giving the reasons of the Court, said (Ex 9, pp 3-4):

The trial judge made strong findings in favour of Manley’s version of the transaction but found that the appellant had no authority to bind the Levy group for whom he purported to speak. There was thus a breach of warranty of authority . . .

On the basis of a finding of breach of warranty of authority, the Court of Appeal in supporting that finding felt impelled to assess the damages according to what Manley would have recovered if the appellant had the authority that he represented. This view of the matter, once the findings below were accepted, was not contested and, accordingly, damages were fixed at 2 per cent of the purchase price, namely $587,400.

And at p 6 of Ex 9:

It cannot be doubted that the record looked at coldly as it must be by an appellate Court, could equally support a finding in favour of the appellant. The Court of Appeal did not, however, find in the case any ground for rejecting the trial judge’s findings in favour of the respondent on the main issue of the nature of the arrangement. However doubtful I may be whether I would have made the same findings as did the trial judge, I, too, can see no basis in the record for second-guessing him in a situation which called especially for the exercise of judgment which only a trial judge can provide. I would accordingly dismiss the appeal with costs.

The formal judgment of the Supreme Court was dated June 7, 1974.

The Minister of National Revenue, by reassessment notice dated August 25, 1975, added $587,400 to the plaintiff's 1974 income. The amount was described as “finder’s fee”. The plaintiff objected to that reassessment.

I go back in time. Another action had been, on May 26, 1972, commenced in the Supreme Court of Ontario. The plaintiffs were the Perry Sherman earlier referred to, and a company called Brusil Holdings Limited. The plaintiffs sought a declaration that Manley be required to pay to them one-half of any moneys found due and owing to the plaintiff in the 1969 action heard by Donohue, J. The Sherman action came on for trial in 1976. That, of course, was after the completion of Manley’s litigation in the Supreme Court of Canada. On November 8, 1976, Craig, J, awarded Sherman and the other plaintiff one-half of $587,400, together with accrued interest of $33,490.

On May 12, 1977, the Minister of National Revenue reassessed the plaintiff by reducing the former amount of $587,400 by one-half, to $293,700, and by including interest of $33,490. The $293,700 was described as “finder’s fee received”. That reassessment is the one now under attack.

The plaintiff appealed the decision of Craig, J. But as of the date of the May 12, 1977 reassessment, the appeal had not been heard by the Ontario Court of Appeal.

That concludes my recounting of the essential facts.

Counsel for the plaintiff submitted the Minister of National Revenue’s reassessment is factually incorrect. I agree. The Minister characterized the amount in issue as “finder’s fee received”. What was received was not a finder’s fee, but damages for breach of warranty of authority.

It is helpful to look at the basis of the plaintiffs action against Ben Levy, and the measure used to assess damages. Warranty of authority is dealt with in volume 1 of Halsbury’s Laws of England (4th Ed) para 857:

(ii) Warranty of Authority

875. Warranty implied. Where any person purports to do any act or make any contract as agent on behalf of a principal, he is deemed to warrant that he has in fact authority from such principal to do the act or make the contract in question. If, therefore, he has no such authority, he is liable to be sued for breach of warranty of authority by any third person who was induced by his conduct in purporting to act as agent to believe that he had authority to do the act or make the contract, and who, by acting upon such belief, has suffered loss in consequence of the absence of authority.

At paragraph 858 of the same volume of Halsbury, the measure of damages is set out:

858. Measure of damages for breach of warranty. The measure of damages for a breach of warranty of authority is the measure normally applicable in contract, namely loss actually sustained by the third person as the natural and probable consequence of the non-existence of the authority or such as both parties might reasonably expect to result as a probable consequence of the breach of warranty. In the case of a contract made without authority and repudiated by the principal, the loss will be the amount that could have been recovered from the principal in an action for breach of the contract if it had in fact been made with his authority, together with the costs of any action upon the contract reasonably brought by the third person against him.

The author of the above extracts treats the action for breach of warranty of authority as one founded on breach of a contract. The author’s view as to the damages recoverable is again based on breach of a contract. That approach may be too confined. The basis of the action is, to my mind, more likely a form of misrepresentation. Professor Fleming, in the Law of Torts (5th Ed) p 634, characterizes it as . . a hybrid of contract, quasi-contract and tort”. A fuller discussion is set out in Winfield, The Province of the Law of Tort (1931-Cambridge Press) pp 177-178. It seems to me the compensation may, depending upon the facts of a particular case, be assessed on a breach of contract, quasi-contract, or tort basis.

In this case the damages were calculated by reference to two per cent of the purchase price of the Levy shares — what Manley would have been paid if the rest of the Levy group had been bound by the transaction between the plaintiff and Ben Levy.

The issue between the plaintiff and the Minister is then reduced to whether the damages and interest were rightly included in income.

Mr Laskin, for the plaintiff, argued the damages were in the nature of a capital receipt, and not income. Mr Hobson, for the defendant, took the view the damages recovered were, when analysed, income from an adventure in the nature of trade.

The question of the treatment of damage awards for income tax purposes is frequently a difficult one. Each case depends on its own facts.

In Canada, compensation paid by an employer to settle a potential claim by an employee for damages for wrongful dismissal has been held not to be income

for tax purposes: The Queen v Atkins, [1976] 68 DLR (3d) 187, affirming [1976] 59 DLR (3d) 276. Some of the reasoning in that decision has been criticized, in obiter, in the Supreme Court of Canada: Jack Cewe Ltd v Jorgenson [1980] 1 SCR 812. But it has not been overruled. Jackett, CJ in the Atkins case, said, in respect of breach of the contract of employment (failure to give adequate notice), at 189:

Damages for breach of contract do not become “salary” because they are measured by reference to the salary that would have been payable if the relationship had not been terminated or because they are colloquially called “salary”.

Similarly, in the plaintiffs case, just because the damages awarded against Ben Levy were measured by the moneys the plaintiff might probably have been paid by all the Levys, does not automatically make the receipt “income”.

The defendant relied on London and Thames Haven Oil Wharves Ltd v At- twooll, [1967] 2 All ER 124. In that case, a taxpayer owned a jetty. It was struck and damaged by a tanker. A claim was launched for damages for loss of use of the jetty for 380 days while it underwent repairs. Partial compensation for that claim was recovered. The Court of Appeal held the damages were assessable as income, and were not a capital receipt. In the course of his reasons, Diplock, LJ said at 135:

The method by which compensation has been assessed in the particular case does not identify for what it was paid; it is no more than a factor which may assist in the solution of the problem of identification.

Diplock, LJ went on to formulate a test, in respect of a trader who receives compensation, as follows: (134)

I start by formulating what I believe to be the relevant rule. Where, pursuant to a legal right, a trader received from another person compensation for that trader’s failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at that time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as the sum of money would have been treated if it had been received instead of the compensation. The rule is applicable whatever the source of legal right of the trader ro recover the compensation. It may arise from a primary obligation under a contract, such as a contract of insurance; from a secondary obligation arising out of non-performance of a contract, such as a right to damages either liquidated as under the demurrage clause in a charterparty, or unliquidated; from an obligation to pay damages for tort, as in the present case from a statutory obligation; or in any other way in which legal obligations arise.

The Court had no difficulty, in that case, in concluding the damages recovered were to replace the shortfall of revenue to a trader, where there had been interference with an income-producing asset of the business.

Counsel for the defendant endeavoured to apply the London and Thames principle to the plaintiff by characterizing him, in respect of the Levy transaction, as engaging in “an adventure or concern in the nature of trade”; the fee to be paid, and consequently the damage award based on that possible fee, would have been taxable as income.

I do not accept that submission.

The characterization of the arrangement between Ben Levy and the plaintiff as an adventure in the nature of trade is based on what the transaction might have been if Manley had, in fact, held the authority from all the Levy shareholders, to be paid a fee if he found a purchaser of the shares. But that hypothesis involves speculation. It does not follow that the other Levy shareholders would have agreed to the plaintiffs fee stipulation. They might have said no, or insisted Manley should look to a potential purchaser for a fee, or part of any fee.

There never was, in fact, a contract between all the Levy shareholders and Manley. If there had been, and depending on the particular facts, that hypothetical transaction might, or might not, have been classed as an adventure in the nature of trade.

All that Manley was left with was a claim for damages against Ben Levy for breach of warranty of authority. The measure was found to be the money he might have been paid if he had had a contract with all the Levy shareholders.

The arrangement entered into between Ben Levy and the plaintiff does not, in my view, come within the generally accepted criteria described in MNR v Taylor [1956-60] Ex CR 3. Manley neither risked nor used money or property; he bought and sold nothing; the transaction was not in the nature of commercial enterprise. What occurred was something almost akin to a windfall. The ultimate windfall was damages, not a finder’s fee.

The appeal is allowed. The reassessment of the Minister is vacated.