‘CONFIDENTIALITY AGREEMENT’ BETWEEN TWO CORPORATIONS FOUND TO BE PERSONALLY BINDING ON AN INDEPENDENT CONTRACTOR

Downey v. Ecore International Inc. 2011 ONSC 6617 (CanLII)

A confidentiality agreement contained a forum selection clause that provided that an action or suit to enforce the agreement would be resolved under the exclusive jurisdiction of Pennsylvania, United States. The clause was not enforced by the Ontario Superior Court in an Ontario action brought by the plaintiff, an Ontario resident, in his personal capacity. The Ontario court ruled that the confidentiality agreement contemplated that compensation was to flow to the plaintiff’s corporation, and not to the plaintiff personally, and this by itself was not sufficient consideration to bind the plaintiff personally to the Agreement. The Ontario Court of Appeal overturned this decision, and found that the confidentiality agreement and the consulting agreement formed a single transaction between the parties. The agreements were to be interpreted so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity. The confidentiality agreement was intended to bind the plaintiff personally, and there was sufficient consideration to bind the parties.

Drafters need to ensure that the correct parties are named in the agreement. If an individual signs the agreement on behalf of a corporation, but is to be bound in their personal capacity as well, the individual should execute the agreement in their individual capacity, and there must be sufficient consideration flowing to both the individual and the corporation. Descriptions of the parties’ intent found in the ‘Background’ clauses of an agreement can be used by the court to determine intention. These ‘Background’ clauses should be drafted and reviewed carefully to ensure they are accurate.

Details of the case:

In Downey v. Encore International Inc. (2011) (ONSC), Mr. Downey entered into a Consulting Agreement on behalf of his corporation CSR Industries Inc. (“CSR”) to provide services to the defendant corporation Ecore International Inc. (“Ecore”), which then carried on business under the name Dodge-Regupol Inc. (“DRI”). A clause of that agreement required CSR to execute a copy of DRI’s “standard confidentiality agreement.” Another clause stated that Ecore would provide CSR with confidential information and compensation in exchange for the services of Mr. Downey as a “key person” of CSR. The purpose of this arrangement was to obtain Canadian tax advantages by being characterized as an independent contractor rather than an employee. (Please note that subsequent changes by the CRA have made the use of a personal consulting corporation with only one employee problematic.) Although remuneration was to be paid to CSR, in practice, commission payments were made personally to Mr. Downey.

In 2001, Mr. Downey invented a new product and assigned his rights in his inventions to Ecore. Mr. Downey submitted that his assignment was given in consideration for Ecore’s oral promise to “reasonably compensate” him for his inventions and assignment. However, Ecore argued that his assignment was instead in accordance with the terms related to inventions and discoveries captured in the confidentiality agreement. Ecore terminated the consulting agreement in 2011 but did not pay Mr. Downey any compensation for his assignment of the inventions. Mr. Downey then brought an Ontario action against Ecore in his personal capacity. In determining whether to allow Ecore’s motion to dismiss the action on the basis that the courts of competent jurisdiction should be Pennsylvania, United States, the lower court found that the clause should be enforced and that Mr. Downey’s compensation claim was within the ambit of the clause. The court found that the parties were bound to the agreement and that Mr. Downey would have had insufficient reasons to show why it would be unreasonable or unjust to adhere to the terms of that clause. However, the lower court ultimately held that the confidentiality agreement failed to bind Mr. Downey personally for lack of consideration flowing directly to him, as opposed to his corporation. The Ontario Court of Appeal overturned this decision.

The Court of Appeal held that the agreements formed a single transaction between the parties and needed to be read together to avoid commercial absurdity. Encore intended to protect its confidential information and the parties intended to bind Mr. Downey personally, regardless of the fact that the agreement was signed only on behalf of the consultant’s corporation. The fact that the confidentiality agreement was to apply “during and after” his employment meant that it was to apply during and after their relationship regardless of whether Mr. Downey was an employee or an independent contractor, and employee status was not a condition to the confidentiality obligations. The court looked to the wording of the ‘Background’ clauses to determine the parties’ intentions.

To read the full case on CanLII, click here.