A recent Ontario decision demonstrates the down-side of family businesses – as well as the risks involved in allowing assumptions to remain unspoken. More importantly, it shows what can happen when business-operating family members fail to document important agreements, expectations and obligations in written form.
A company was founded and was being run by the father Larry. Six of his adult children were now holding key management positions. One of his sons, Emmanuel, initially went off to pursue his own business interests, but eventually returned to the fold in 1999 to assist the company in various capacities, including tax consulting in connection with the company’s application for federal and provincial tax credits for the years 1999 through 2010. Emmanuel’s efforts resulted in the company securing approximately $2.6 million in scientific research and experimental development (SRED) tax credits for a 20-year period.
The court introduced the facts this way:
While the claims are framed as traditional commercial disputes, the substance of these actions is really a story about the tumultuous relationship between a father and son. Emmanuel assisted the family business (LTM) without an expectation of compensation, admittedly, in order to acknowledge the debt of gratitude he felt he owed to his father and out of a sense of obligation he felt for his family.
Evidently that changed, because once the father died unexpectedly Emmanuel requested that the company pay him almost $420,000 to cover 25% of the tax benefits it received on account of his tax consulting efforts. Management denied his requests, so Emmanuel sued under an implied contract for what he considered was his entitlement. He also asserted a claim based in quantum meruit (i.e. a promise to pay a reasonable amount for work performed).
Emmanuel brought these claims despite the lack of any written contract or document to evidence the alleged agreement to pay him. He also conceded that he never requested payment for his services at all for 8 years, until 2011 when he presented the company with his invoice. He explained to the court that he decided to withhold asking for compensation because he was dealing with family, and because he believed he would eventually become an owner of the company. He also claimed that he knew that the company had insufficient cash to pay him during those years, and was relying on his father’s prior promise to pay him.
In considering his legal position, the court assessed Emmanuel’s evidence “disfavouably”, finding that some of it contradicted other evidence, or else was downright incredible. For example, his claim that he refrained from asking for compensation during times when the company had cashflow problems did not hang together well with the fact that he did not ask for payment even during those periods that the company was flush.
In the end, the court concluded that Emmanuel was not entitled to payment for his historic services to the company from 1999 through 2010, and in any event he had was too late: the 2-year limitation period for bringing any claims had expired by the time he got around to suing.
For the full text of the decision, see:
1318847 Ontario Limited v. Laval Tool & Mould Ltd., 2015 ONSC 2664 (CanLII)
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