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CASE #024E – Extreme Venture Partners Fund I LP v. Varma
December 21, 2021

ONTARIO – In remedying illegal and unethical corporate behaviour and breach of fiduciary duty, there is no automatic rule that all profits earned by the wrongdoers must be disgorged. In the present case, an important purpose of the disgorgement remedy was deterrence, which required that the wrongdoers repay all of their profits, not just the plaintiffs’ actual loss.

Extreme Venture Partners Fund I LP v. Varma
2021 ONCA 853
ONCA (Hourigan, Huscroft and Coroza JJ.A.), December 1, 2021

This case involved appeals from the judgment of B. Conway J. (2019 ONSC 2907) following a five-week trial. The dispute concerned corporate malfeasance arising from the operations of a venture capital limited partnership. All of the limited partners and directors were parties to the action. The trial judge held that the appellants engaged in illegal and unethical conduct and directed a disgorgement of ill-gotten funds. The court allowed the cross-appeal by ordering that the disgorgement order should be prophylactic, which meant that the court should disgorge what the wrongdoers gained not just what the plaintiffs lost.

In lengthy reasons, which covered many corporate law topics, Hourigan, JA held that: (The cases cited in the decision have been omitted in this summary.)

  1. In summary, the trial judge made a sensible damages calculation, grounded in the evidence, which does not require appellate intervention. She also reasonably exercised her discretion in permitting the amendment of the claim and making the disgorgement order. There is also no basis to interfere with the trial judge’s conclusions on the issues raised by the Appellants in their written material but not addressed in their oral submissions; 6.
  2. The trial judge correctly applied well-established tort and corporate law principles as to the defendant’s conduct and made findings of illegality supported by the record. Counsel’s submission that the Appellants’ unethical and illegal behavior should be excused as standard examples of corporate conduct is meritless. The trial judge, an experienced commercial judge, saw through this argument and reached the correct conclusion. If the Appellants’ conduct was not the subject of adverse findings by her, the court would have communicated a message that there are few, if any, limits to corporate malfeasance. Such a message would have caused significant uncertainty in the Canadian business world: 10.
  3. Courts should have flexibility in making a prophylactic disgorgement order. There should not be an automatic rule for the disgorgement of all profits in all circumstances. In this case, where the Appellants engaged in a litany of brazenly illegal acts and where their counsel elected not to offer any submissions on the point, the full amount of the profits should be disgorged: 12.
  4. The jurisprudence recognizes that trial judges are not held to a standard of perfection in making damages awards. Appellate courts will not interfere with reasonable damages awards where they have an evidentiary basis, as damages cannot always be calculated with mathematical precision. Sometimes the trial judge must do the best they can in the circumstances. An appellate court should interfere with a trial judge’s damages assessment only if it is “tainted by an error in principle or is unreasonably high or low”: 53.
  5. The fiduciaries hid an investment in another company. As a result, Fund lost the opportunity to participate in the upside of the investment. It is not a defence to take the position that no one knew that the investment would be profitable. A fiduciary has a duty of utmost good faith and an obligation to disclose the investment to the beneficiary so that the beneficiary has an opportunity to make an informed decision. By breaching their duty in this case, the appellants denied the respondents the opportunity to make that decision; 68.
  6. The elements of the tort of knowing assistance in breach of a fiduciary duty are : (i) there must be a fiduciary duty; (ii) the fiduciary must have breached that duty fraudulently and dishonestly; (iii) the stranger to the fiduciary relationship must have had actual knowledge of both the fiduciary relationship and the fiduciary’s fraudulent and dishonest conduct; and (iv) the stranger must have participated in or assisted the fiduciary’s fraudulent and dishonest conduct:. 74
  7. It would be an anomalous result if the law offered no remedy for the breach of a director’s fiduciary duty in circumstances where the limited partnership suffered the resulting loss. If that were the case, there would be no legal consequences for directors who act with impunity to damage the interests of the limited partnership, including by engaging in self-dealing, and there would be no remedy for such a breach of fiduciary duty. The law of fiduciary duties, which is based in equity, should not brook such a lacuna in its remedies: 96.
  8. When there are claims of breach fiduciary duties, McGrail v. Phillips, 2018 ONSC 3571, (Div. Ct.), at para. 33 is not binding on the Court of Appeal for the proposition that the directors owe a duty only to the corporate general partner, not to the limited partnership itself: 97.
  9. The theory underlying fiduciary duties is consistent with recognition that a director of a corporate general partner bears such a duty towards the limited partnership. That duty, of course, extends only to dealings with the partnership’s property or affecting its business, but, so limited, its existence seems apparent in any number of circumstances: 105.
  10. Referring to Strother v. 3464920 Canada Inc., 2007 SCC 24, the Court of Appeal held:
  • W]here a conflict or significant possibility of conflict existed between the fiduciary’s duty and his or her personal interest in the pursuit or receipt of such profits . . . equity requires disgorgement of any profits received even where the beneficiary has suffered no loss because of the need to deter fiduciary faithlessness and preserve the integrity of the fiduciary relationship: 111.
  • Where, disgorgement is imposed to serve a prophylactic purpose, the relevant causation is the breach of a fiduciary duty and the defendant’s gain (not the plaintiff’s loss). Denying the plaintiff the profit generated by the financial interest that constituted his conflict teaches faithless fiduciaries that conflicts of interest do not pay. The prophylactic purpose thereby advances the policy of equity, even at the expense of a windfall to the wronged beneficiary: 112.
  1. The trial judge was obliged to fashion a remedy that would have a deterrent impact. Simply ordering the appellants to pay the respondents what they would otherwise have been entitled to receive serves as no disincentive. A party considering breaching a fiduciary duty could reasonably look at the trial judge’s decision and conclude that in a worst-case scenario, they would only be forced to pay over to the aggrieved beneficiary what the beneficiary was always owed, thereby profiting from the breach of their fiduciary duties: 113
  2. There may well be circumstances where it would be inequitable to order a faithless fiduciary to disgorge all profits. Equity seeks what is fair and what is fair should be determined with flexibility, not by means of hard and fast rules. For that reason, there is no inflexible rule that full disgorgement of all profits must be ordered in all cases, but the Court did not speculate on the sorts of reasons that may justify something less than full disgorgement: 116.
  3. There was no basis for the Court of Appeal to interfere with trial judge’s exercise of discretion to apply the default exchange rate in s. 121(1) of the Courts of Justice Act: 92.

About Us

Arbitration & Business Cases is a blog created by Igor Ellyn and Robin Dodokin in September 2021. Kathryn Manning joined us in October 2022. Our intention is to provide timely, concise summaries and commentary of Ontario and Canadian case law on arbitration and business matters.


Igor Ellyn,
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Robin Dodokin,
FCIArb., Q.Arb., LL.M, Q.Med.

Kathryn J. Manning,