Date: 19990611
Docket: T-2185-88
BETWEEN:
TICKETNET CORPORATION
Plaintiff
- and -
HER MAJESTY THE QUEEN
Defendant
REASONS FOR JUDGMENT
EVANS J.:
| A. Introduction |
[1] Ticketnet Corporation claimed an investment tax credit for expenses of $2,000,000.00 incurred in the years 1985 and 1986 for research and development undertaken to produce software for automated ticketing. Revenue Canada disallowed the claim, and Ticketnet has appealed against this assessment.
[2] The expense on which Ticketnet relies for its investment tax credit is a contractual obligation to pay $2,000,000.00 to Air Canada, with which it had worked to develop the software. The resolution of the legal issue at stake turns on the interpretation of that contract. Ticketnet alleges that on June 30, 1986, the relevant date for present purposes, it was unconditionally indebted to Air Canada for $2,000,000.00, even though payment was not yet due.
[3] Revenue Canada, on the other hand, interprets the contract as imposing on Ticketnet only a conditional liability to pay, which would become unconditional on the happening of a future event that might not occur, and in fact did not. It is agreed that, if Revenue Canada is correct to interpret the contract as imposing only a contingent liability, paragraph 18(1)(e) of the Income Tax Act precludes Ticketnet"s claim to a scientific research and development tax credit under subsection 37(1) of the Act. Conversely, if Ticketnet"s interpretation prevails, then it is entitled to the tax credit. Furthermore, since Ticketnet was an "accrual basis" taxpayer, the tax credit would be payable in respect of the tax year when its liability to pay arose, and not when payment was actually made.
| B. Factual Background |
[4] David Clark and Gilles Lamarre met in Ottawa in the mid 1970s. Mr. Clark has a background in electronics and computer systems, and Mr. Lamarre was the box office manager at the National Arts Centre. In the late 1970s Mr. Clark"s consulting firm was assisting the NAC to automate its ticket sales.
[5] Mr. Clark and Mr. Lamarre had a very good idea. They thought that it should be possible to develop software that would enable a person anywhere in Canada, who had access to a computer, to book a ticket for an entertainment event anywhere else in the country. The program would display the seat plan of the auditorium or arena, and indicate the seats still available. After the customer had purchased the ticket the seat selected by the customer would show as sold when the next user accessed the program to see what seats were available for that particular event.
[6] In 1984 Messrs. Clark and Lamarre incorporated Ticketnet as the corporate vehicle for this project, on which they both started working full time. But they needed capital to finance it. In the spring of 1984 they managed to interest Air Canada officials in the project which, of course, also had an obvious application for transportation ticket sales.
[7] The essential element of the commercial relationship contemplated between Air Canada and Ticketnet for the development of the software was set out in correspondence in December 1984 between Mr. Clark and Mr. Ingham, Air Canada"s General Manager, Computers/Communications, Marketing and Sales. Air Canada was to bear most of the cost of developing the software by using its own staff and other resources, and by hiring staff for the project. At this stage, Air Canada"s costs were estimated at $1.4 million, a figure that was later increased to $2 million so as to include $0.6 million as profit.
[8] Ticketnet would be responsible for the costs that it incurred in the course of working with Air Canada on the project. It was always understood that Ticketnet would be the owner of the final product. Air Canada was to recover its development costs from the sale of tickets through the use of the software: five cents per ticket was to be paid by Ticketnet to Air Canada for this purpose.
[9] At this stage there were still important details to be worked out, such as the number of years" sales for which payments would be made: Mr. Clark proposed the first five years. The possibility of granting a stock option in Ticketnet to Air Canada was also contemplated. Marketing arrangements were also to be agreed upon. These and other matters were resolved over the next 6 months prior to the signing of the contract, the software development agreement, on July 23, 1985.
[10] The tax aspect of the arrangements was also in Mr. Clark"s mind from the beginning. In a letter to Mr. Ingham, dated December 12, 1984, he wrote:
The overall project should be structured so that your development resources are perceived as being under contract to Ticketnet. This arrangement will permit R & D [research and development] tax credits to be issued by Ticketnet (on the basis of equity issue) to enhance the probability of success of Ticketnet without any detriment to Air Canada. Air Canada will therefore invoice Ticketnet for expenditures incurred.
[11] In his reply of December 17, 1984 Mr. Ingham confirmed Air Canada"s official approval of the project:
As we agreed, Air Canada will provide research and development services to Ticketnet to develop these new software products. It is expected that our total expenditures in this regard, measured at our cost rate for salaries and applicable overheads, would amount to $1.4 million. Repayment of this amount without interest by Ticketnet will be made on the basis of five cents per ticket sold using the resulting software product.
[12] In other words, the parties intended that through the tax credit, which eventually rose to 100 percent of allowable expenses, taxpayers would reimburse Ticketnet for the $2,000,000.00 that Ticketnet had agreed to pay to Air Canada from the ticket sales. However, it is not sufficient for Ticketnet simply to establish that the parties always intended to structure their arrangements so as to enable Ticketnet to claim the benefit of the tax credit. Rather, the question is whether the terms of the contract ultimately agreed between the parties succeeded in implementing that intention by imposing a liability on Ticketnet that, properly interpreted, can be characterized as an unconditional obligation, and thus as an expense incurred on research and development, so as to qualify for the investment tax credit.
[13] Before turning to the relevant provisions in the software development agreement between the parties I should sketch in more of the factual background to this litigation.
[14] The Ticketnet project appears to have been controversial within Air Canada, and it did not proceed smoothly. For example, perhaps because costs outstripped the original estimates at a time of financial constraint for the corporation, Air Canada came close to cancelling the project, but instead pressed for a larger stake in the profits that it was anticipated would be generated by the software. Air Canada seems also to have been concerned about the possible sale of the software by Ticketnet to another airline. Accordingly, it took longer than Ticketnet had expected for the parties to sign the contract, and the target date for the completion of the software was pushed back from some time in 1985 to the spring of 1986. There were also technical difficulties with aspects of the software that proved difficult to overcome, in particular the display at a distance of the auditorium seating plan.
[15] For reasons that are not material to this litigation the relationship between Ticketnet and Air Canada broke down before the development of the software was complete. By the spring of 1986 most of the work had been done, although some of the modules continued to be plagued with "bugs", and the modules had not yet been tested as a system to ensure that the software functioned satisfactorily. Ticketnet had approved the components of the software as they were developed, but the final product was not delivered or accepted by Ticketnet.
[16] Air Canada continued to work on the project until the end of June 1986, by which time the software development was complete, although a few wrinkles needed to be ironed out of some modules, and the system still had to be tested. In August of that year it locked Ticketnet out of the project site. This was effectively the end of the project.
[17] Meanwhile, early in 1986 American Airlines had expressed great interest in the software, and provided operating funds for Ticketnet in the first part of that year. Ticketnet was ultimately purchased in November 1986 by American Airlines through its holding company, which stands to benefit if Ticketnet is found entitled to an investment tax credit for the years 1985 and 1986 in respect of the $2,000,000.00 liability to Air Canada.
[18] The contractual dispute between Air Canada and Ticketnet resulted in a trial of four months" duration in the Ontario Court (General Division) before Farley J., who determined that the contract between Air Canada and Ticketnet was valid and binding, and that Air Canada had committed a repudiatory breach of the software development agreement: Ticketnet Corporation v. Air Canada (Ont. Ct. Gen. Div; Action No. 161251/86; February 10, 1993).
[19] Farley J. calculated Ticketnet"s gross loss at approximately $13.5 million, but in awarding damages against Air Canada, he deducted $2 million in respect of Ticketnet"s contractual liability to pay Air Canada, although the payment "had not yet become due": op. cit. , paragraph 111. Farley J. based his award on the familiar principle that damages for breach of contract are intended to put the parties in the position that they would have been if the contract had been performed: op. cit., paragraph 126. However, he also recognized (at paragraph 125) that calculating loss of future profits was always a difficult task
and requires giving a degree of certainty to that which has not yet happened (and may in fact never have happened even if the defendant had not breached the contract).
[20] Air Canada was also ordered to return the software to Ticketnet, and a counterclaim by Air Canada was dismissed. On November 17, 1997 the Ontario Court of Appeal allowed an appeal by Air Canada, but only to the extent of reducing the damages payable by approximately $1.3 million: Ticketnet Corporation v. Air Canada (1997), 154 D.L.R. (4th) 271 (Ont. C.A.).
| C. The Contract |
[21] For the purpose of this litigation it is only necessary to focus on a few of the provisions of the software development agreement between Air Canada and Ticketnet. One of the key clauses is 1.2, which states:
AC agrees to develop the Entertainment Software in accordance with a design statement and functional specifications for a fixed price of $2 million. ... AC shall invoice TN on a regular basis with final invoicing to the $2 million level to occur on April 30, 1986 [the target date for completion of the software]. AC agrees to advance credit to TN for the $2 million fee invoiced, to be repaid in accordance with clause 3 below.
[22] Clause 3 is headed "Payment"
| 3.1 For the first five year period after the Entertainment Software acceptance, as defined in the functional specifications, AC will receive an amount of $0.05 per ticket sold by TN or by others under licence to TN, as repayment of the amount advanced pursuant to section 1.2 above. Should this advance be repaid before the five year period is completed, AC will continue to receive this $0.05 per ticket sold as an investment bonus. ... Fifth year revenue obtained by AC according to the formula above will not exceed $1,000,000.00. |
3.2 As additional compensation TN will also pay to AC a royalty of $0.05 per ticket sold using the Entertainment Software during the first five years after the Entertainment Software is accepted.
3.3 The following terms and conditions shall apply to repayment pursuant to section 3.1 At the rate of $0.05 per ticket sold, the following minimum payment schedule is agreed:
Elapsed Months After Acceptance
36
48
60
Period Payment
Due
$300,000.00
$700,000.00
$1,000,000.00
Cumulative Payment
Due
$300,000.00
$1,000,000.00
$2,000,000.00
(b) At the end of each of the above intervals, if the minimum cumulative payment due has not been received by AC, then AC may acquire title to the Entertainment Software from TN for a consideration of $2 million provided that TN must repay the balance owing on the amount advanced to TN by AC pursuant to section 1.2 simultaneously with the payment.
[23] Acceptance of the software by Ticketnet also has a contractual significance under clause 2.2., which is headed "Responsibilities". Paragraph 2.2(d ) provides as follows:
Following acceptance of the Entertainment Software by TN as described in the functional specifications, it is agreed that all subsequent maintenance, upgrade and revisions to the Entertainment Software are at the cost and sole responsibility of TN. Furthermore, TN cannot use the Entertainment Software prior to final acceptance for revenue generation purposes except as mutually agreed by AC for market development, testing or progressive, phased implementation.
D. Analysis
[24] Counsel for Ticketnet advanced alternative interpretations of the contract, either of which, she submitted, leads to the conclusion that on June 30, 1986 Ticketnet owed $2 million to Air Canada, and that while the payment was not due at that time it was not contingent upon the happening of an uncertain event.
(i) the dual contract theory: services and loan
[25] The first and principal basis on which counsel put her case was that the software development agreement had two distinct and independent parts. The first part was a contract for the supply of services by Air Canada in connection with the development of software for Ticketnet for a fee of $2 million. The second part was an interest-free loan of $2 million by Air Canada to Ticketnet to enable it to pay Air Canada"s fee for the software service. The loan was to be repaid through a royalty on the ticket sales, and in the event that the royalties exceeded $2 million the excess represented an investment bonus.
[26] The mechanics of the loan were that, as Air Canada submitted its periodic invoices for services rendered to date, an equivalent sum was drawn down from the $2 million loan until April 30, 1986, when the last invoice was rendered for the final portion of the $2 million. Air Canada could have written a cheque to Ticketnet for the amount of each invoice that it submitted, and Ticketnet could have written a cheque to Air Canada for an equivalent amount to pay the invoice. But, counsel said, whether the parties crossed cheques or simply noted the debits and credits on their books should make no difference to the substantive nature of the obligation. Acceptance of the software by Ticketnet was regarded by the parties as a formality, and simply served to measure the time from which the repayment of the loan and the payment of the additional compensation through the royalties would commence.
[27] Counsel supported her theory of the dual contracts by reference to the language of the agreement, Ticketnet"s audited financial statements and considerations of fairness.
| (a) the contractual language |
[28] Clause 1.2 of the agreement provides for development of the software for a fixed fee of $2 million and for regular invoicing by Air Canada, the final account to be invoiced by April 30, 1986. Air Canada also agreed under this clause to "advance credit" for the $2 million fee invoiced, to be repaid in accordance with clause 3.1. Counsel emphasized the word "repay" as clearly indicating the repayment of money lent, not the payment of a fee for services rendered.
[29] The same idea, she pointed out, is found in clause 3. Thus, clause 3.1 refers to the $0.05 per ticket sold as "repayment of the amount advanced pursuant to section 1.2"(emphasis added), and goes on to provide that if the "advance be repaid" within the five year period, the $0.05 payable to Air Canada on each ticket sold shall continue as "an investment bonus".
[30] Similarly, clause 3.3 sets out the terms and conditions applicable to "repayment pursuant to section 3.1" (emphasis added). Furthermore, clause 3.3(b) provides that if the minimum payments due from the ticket sales are not received by Air Canada, then it may acquire title to the software from Ticketnet from $2 million "provided that TN must repay the balance owing on the amount advanced to TN by AC ... simultaneously with the payment" (emphasis added).
[31] One problem with this argument is that the agreement nowhere uses the terms "loan", or "amount lent" by Air Canada to Ticketnet. The fact that the audited financial statements describe Ticketnet's liability with respect to the $2 million as a "non-interest bearing Air Canada loan" does not take matters much further. However, I am prepared to accept that the references to "advance credit" and "amount advanced", coupled with the corresponding obligation of Ticketnet to "repay" this amount, are not inconsistent with an interpretation of the software development agreement as including an independent contract of loan.
[32] More serious, however, is the point relied on by counsel for the Crown, who argued that an essential feature of a loan is a promise to repay the amount lent, with or without interest, and Ticketnet did not make an express or implied promise to repay, except as provided by the agreement. This is because, as of April 30, 1986, it was not clear that Ticketnet would ever be required to "repay" $2 million to Air Canada, since "repayment" was only to occur after the acceptance of software by Ticketnet and if the ticket sales generated a minimum of $2 million dollars at the rate of $0.05 per ticket within five years.
[33] As of June 30, 1986 the development of the software may well have been almost complete; however, there were still "bugs" to be got out of some of the modules and the system as a whole had yet to be tested. In fact, for other reasons Ticketnet never did accept this software within the meaning of the contract. The contract is silent on the duty to "repay" in such an eventuality, and given the carefully structured provisions for repayment from the sales of tickets, and the option considered in the next paragraph, I do not think that an obligation to this effect can be implied.
[34] The agreement expressly contemplates the possibility that, after acceptance of the software, Ticketnet might fail to pay to Air Canada five cents for each ticket sold through the software in accordance with the schedule. This could be because the software was not a commercial success and insufficient tickets were sold to produce the minimum amounts at the stipulated intervals. It could also be because, while the prescribed amounts were generated in the requisite periods, Ticketnet failed to make the payments.
[35] Whatever the reason for Ticketnet"s failure to make the stipulated payments, the agreement created an option for Air Canada to purchase the software for $2 million, against which Ticketnet was required to set-off so much of the $2 million advanced by Air Canada that it had not repaid from the ticket sales. The contract does not provide that Air Canada could in these circumstances elect to sue Ticketnet for the amount of the loan that it had not "repaid" instead of exercising the option to purchase.
[36] Counsel for the plaintiff referred me to Canada Deposit Insurance Corp. v. Canadian Commercial Bank, [1993] 3 S.C.R. 558 for the proposition that a transaction does not lose the character of a loan because it also includes provisions for the participation by the party advancing the money in the profits generated by the recipient. The question in Canada Deposit Insurance was whether such a hybrid agreement in substance constituted a loan, to which the other features were ancillary.
[37] In concluding that the agreement was in essence a loan Iacobucci J. (at 599) noted in particular the provision in the agreement by which the recipient promised to indemnify those advancing capital against any loss that they might sustain if the profits were insufficient to cover the amount advanced. In this case, however, I have not found that Ticketnet unconditionally promised to repay the $2 million, so that there was no contract of loan.
[38] Counsel for the Crown relied on Alberta and Southern Gas Co. Ltd. v. The Queen (1976), 76 D.T.C. 6362 (F.C.T.D.), where the Court rejected the argument that a transaction constituted a loan because Amoco, the alleged borrower, did not assume a personal liability to repay. Under the agreement, Cattenach J. said (at 6368),
the plaintiff for its reimbursement shall look exclusively to the petroleum substances to the extent of Amoco's share therein which was assigned to the plaintiff.
[39] The present case may appear to be distinguishable from Alberta and Southern Gas because Ticketnet did not assign to Air Canada the royalties, but assumed a personal liability to "repay" the $2 million from them. However, according to article 3.3(b) of the software development agreement if Air Canada did not receive the minimum stipulated payments at the end of any of the prescribed periods, it had an option to purchase the software from Ticketnet for $2 million, against which Air Canada could set-off the unpaid amount of the "loan" that had not been repaid by Ticketnet from the proceeds of ticket sales.
[40] Thus, just as the plaintiff in Alberta and Southern Gas looked for repayment to the assigned petroleum substances, so Air Canada could ultimately resort to its option to purchase the software for reimbursement in the event that it did not receive the agreed payments from the ticket sales.
[41] Another difficulty with counsel for the plaintiff"s characterization of the agreement as a loan that was independent of the delivery and acceptance of the software is that its sole commercial rationale seems to be the tax benefit. Stripped of the references to "repayment" and "amount advanced" by Air Canada, the essence of the transaction is that Air Canada is to bear a substantial part of the cost of the development of the software for Ticketnet and in return to participate to a defined extent in the anticipated profits. Alternatively, Air Canada could be regarded as simply providing services on credit, services that Ticketnet was to pay for from the profits arising from the use of the software. This, of course, does not make the contract one of loan.
[42] Of course, if on their proper construction the terms of the agreement created a relationship of lender and borrower between Air Canada and Ticketnet by clearly imposing on Ticketnet either expressly or by implication an obligation to repay, then that would be conclusive, and Ticketnet would be entitled to the tax credit. However, if the terms of the contract are unclear in this regard, then, in the absence of a commercial rationale other than obtaining a tax credit, the Court should not in my opinion strive to construe the contract in the way that counsel for the plaintiff has urged.
| (b) the accounting evidence |
[43] In order to plug any leaks that may seem to be springing from the terms of the software development agreement, counsel for Ticketnet submitted that weight should be attached to the characterization of Ticketnet"s obligation in the financial statements prepared by its auditors in accordance with Canadian generally accepted accounting principles.
[44] Thus, for the year 1985 the company"s expenses were shown as including an item, "subcontract, $1,192,800.00"; this is the amount for which Air Canada had submitted a statement on January 3, 1986. This same figure also appears as "Long Term Debt" with the following explanatory note:
Non-interest bearing Air Canada loan, repayable at the rate of five cents per ticket sold by the system, with minimum repayments to be made after software acceptance as follows: 15% after 36 months, 35% after 48 months and 50% after 60 months.
[45] Similar entries are found in the auditor"s financial statements of Ticketnet for the 6 months ending June 30, 1986. For this period, however, the expenses attributable to the subcontract are $807,200.00, and the long term debt owing to Air Canada is shown as $2 million, with the same explanatory note as appeared in the 1985 statement.
[46] I do not find this evidence persuasive. First, whether Ticketnet"s liability to Air Canada is properly characterized as arising from a loan or from the supply of services, or as unconditional or contingent, is a question of law that depends on the construction of the contract between Air Canada and Ticketnet. It is not a matter of the general principles of accounting.
[47] This is consistent with Canderel Ltd. v. R. [1998] 1 S.C.R. 147, where Iacobucci J. stated (at 166) that, while generally accepted accounting or business principles could be of assistance in the interpretation of a term in a taxing statute for which Parliament had not provided a definition,
". . . well-accepted business principles are not rules of law and thus a given principle may not be applicable to every case. More importantly, these principles must necessarily take a subordinate position relative to the legal rules which govern."
Thus, whether Ticketnet's liability was "contingent" for the purpose of paragraph 18(1)(e) of the Income Tax Act, or the advance was a loan, could not be conclusively determined by its inclusion in the financial statements under the rubric of "long term debt".
[48] Furthermore, as Mr. Machado, a Revenue Canada tax audit manager, testified, the purpose of a financial statement is to give investors a complete and accurate picture of a company"s financial position. In this context, it would be prudent to include a debt, regardless of whether it was contingent or accrued but payable in the future. For tax purposes, however, the distinction between contingent and unconditional liability is critical: J.L. Guay Ltée. v. Minister of National Revenue (1971), 71 D.T.C. 5423, 5426-27 (F.C.T.D.); aff'd. (1975), 6 N.R. 550 (S.C.C.); Canderel Ltd. v. R. supra, at page 179.
[49] Mr. Machado also raised a question about the nature of the documents provided to Ticketnet by Air Canada recording the work done, and attaching a dollar amount to it on the basis of the number of "person months" at $8,400.00 each that had been spent on the project. All but one of these documents, he pointed out, were described as a "statement", and had been signed by the project leader, and not someone from Air Canada"s accounts department. They were, he suggested, more akin to informational progress reports than to invoices showing an amount due, as Ticketnet characterized them. Moreover, the one unequivocal "invoice" included in the documents for the year 1985, was for $2 million, while the statement submitted by Air Canada showed only $1,192,800.00, the amount that the auditors used in the financial statement.
[50] I do not attach much significance to these irregularities: the contract called upon Air Canada to "invoice TN on a regular basis", and the fact the Air Canada may have been sloppy about the discharge of its obligation cannot be held against Ticketnet.
[51] However, the apparently casual and inaccurate way in which some of these statements and the invoice appear to have been prepared may reflect the fact that, even if, as Ticketnet alleges, these statements or invoices had the effect of drawing down instalments of the $2 million loan, this was not a matter of any commercial or accounting significance as far as Air Canada was concerned. Not altogether surprisingly, there was no evidence before me about Air Canada"s internal documentation of its making a loan to Ticketnet.
| (c) fairness considerations |
[52] Counsel for Ticketnet also maintained that considerations of fairness supported Ticketnet"s analysis of the agreement. She argued that there should be no objection in principle to the fact that one party, Air Canada, wore two contractual hats: one as the provider of services, and the other as the lender of money to pay for those services. After all, she said, if Ticketnet had borrowed the money from a third party to pay Air Canada"s periodic statements of account for services rendered, there would have been no doubt about Ticketnet"s right to an investment tax credit for the expense thereby incurred in the form of an obligation to repay a loan to finance research and development. It would be unfair, counsel argued, to deny Ticketnet the benefit of the tax credit simply because Air Canada was providing both the service and the financing for the service.
[53] This argument misses the point. The problem is not that the service provider and the lender are one and the same person, but that the terms of the contract do not impose on Ticketnet an unequivocal obligation to repay money lent, one of the defining legal characteristics of a loan. If Ticketnet had found a third party willing to finance the development of the software by Air Canada on the same terms to which Air Canada agreed, then my analysis of the transaction would have been the same.
| (d) conclusion |
[54] For these reasons I am not satisfied that the terms of the contract created two independent legal relationships between Ticketnet and Air Canada, those of lender and borrower, and provider and recipient of services. Despite the elegant arguments advanced on behalf of Ticketnet, counsel for the Crown is correct to say that the legal obligations assumed by Ticketnet under the contract were not those of a borrower, and that the underlying commercial reality, tax considerations aside, gives no substance to this characterization. Nor do I find anything in the accounting evidence to dissuade me from the view that I have formed on the basis of the contractual document.
| (ii) the single contract theory |
| (a) unconditional liability |
[55] If I was not persuaded by the dual contract theory, which I am not, counsel submitted an alternative theory on which to base Ticketnet"s claim for the tax credit. It was that the contract obliged Ticketnet to pay for the services rendered by Air Canada that was not conditional on Ticketnet"s acceptance of the software. The argument is that the contract was for the provision of services, and not for the delivery of a product.
[56] The evidence of Mr. Clark was that since Ticketnet had accepted the software in its various stages of development final acceptance was merely a formality. Indeed, by June 30, 1986, he said, the work had progressed to the point that the software was for all intents and purposes complete. Indeed, Ticketnet had advised Air Canada that it was prepared to accept the software as it was, before the final testing and "debugging" had been completed.
[57] Counsel put her point powerfully when she asked whether it could really be the case that Ticketnet would be entitled to avoid liability to pay for the work done by Air Canada by arbitrarily refusing to accept the software. Surely not, she said, seeing that Ticketnet would thereby end up as the owner of valuable software without having had to pay for the improvements made to it by Air Canada at the request of Ticketnet and in the expectation that they were to be paid for.
[58] Furthermore, she submitted, it would be a mistake to think that Ticketnet was not entitled to a tax credit because it had incurred no actual loss. On the contrary, in the civil action between Air Canada and Ticketnet Farley J. had reduced by $2 million the damages that he would have otherwise awarded to Ticketnet as a result of "netting out" the amount of its contractual obligation to Air Canada.
[59] In my opinion, the judgment in Ticketnet Corporation v. Air Canada is of no assistance to the plaintiff because, in deducting $2 million from the damages awarded to Ticketnet by way of "netting-out" its loss, Farley J. did not decide that as of June 30, 1986 Ticketnet"s obligation to Air Canada was unconditional. Rather, he based his award of damages on an estimate of the net profits that Ticketnet would have made if the contract had been performed. If the contract had been performed and events had turned out as the parties anticipated, Ticketnet"s profits would have been reduced by the $2 million paid to Air Canada from the proceeds of the sales of tickets through use of the software.
[60] In other words, there is nothing in the judgments of either Farley J. or the Court of Appeal to contradict the Crown"s submission in this case that the contract was for the development and the delivery of a product, namely software that met the design and functional specifications of Ticketnet. Moreover, until the finished product was delivered by Air Canada and accepted by Ticketnet, Ticketnet"s liability to pay was contingent only: it might never be obliged to pay anything.
[61] It would not necessarily follow from this view of the contract that Ticketnet could refuse without good reason to accept the software. Ticketnet would obviously be required to decide in good faith whether or not to accept it. No court would countenance a claim by Ticketnet that it was entitled under the contract to enrich itself at Air Canada"s expense by the simple expedient of refusing without good reason to accept the software, thus avoiding triggering the provisions in the contract for the payment of a share of the proceeds of the ticket sales.
[62] Suppose, however, that for reasons of its own Air Canada decided to pull out of the project before completing the work, or that it delivered software that did not operate as a system in accordance with the specifications, so that Ticketnet was fully justified in not accepting it. In these circumstances I do not think that Air Canada would be able to claim a payment of $2 million. This is simply not what the contract provides: payments are dependent on the commercial success of developing and marketing software for a prescribed function. Nor would a quantum meruit liability be imposed in the face of the clear contractual provisions prescribing the manner in which Ticketnet was to pay for the software.
[63] The fact that Ticketnet would not be liable to pay if Air Canada failed to deliver the software, or the software that it delivered was not accepted by Ticketnet for good reason, is sufficient to make the debt contingent as defined in Samuel F. Investments Ltd. v. Minister of National Revenue (1988), 88 D.T.C. 1106 (T.C.C.).
[64] For these reasons, I am satisfied that on June 30, 1986 Ticketnet"s liability to pay $2 million to Air Canada was contingent. Acceptance was a condition to the "vesting" of that liability: Air Canada"s entitlement to receive payment was not simply a matter of the passage of time.
| (b) condition subsequent |
[65] Counsel"s last argument was that even if I found, as I have, that Ticketnet"s acceptance of the software was a condition that attached to its liability to Air Canada, the agreement should be interpreted as imposing a condition subsequent, not precedent. On this view, the liability of Ticketnet was not contingent on June 30, 1986, but at most might be terminated on the happening or, more accurately, the non-happening, of an event, namely, Ticketnet"s good faith non-acceptance of the software.
[66] Whether a condition operates as a condition precedent or subsequent depends entirely on the construction of the instrument creating the conditional liability in question. Counsel did not point me to anything in the wording of the software development agreement that supported her interpretation. Indeed, it is in my view clear on the face of the contract that Ticketnet did not assume an unconditional liability to pay until the software was accepted and tickets sold. If the software was accepted, but less than the specified payments were made from the ticket sales, Ticketnet would be liable, if requested, to transfer title to the software to Air Canada for a net amount that depended on how much of the $2 million had been paid by Ticketnet from the proceeds of the ticket sales.
[67] Counsel relied on Canadian Pacific Ltd. v. Minister of National Revenue (1998), 41 O.R. (3d) 606 (Ont. C.A.) as an example of a situation in which it was held that the existence of a future uncertain event that affected the taxpayer's liability was regarded as a condition subsequent. However, in that case the uncertainty related only to the amount of the liability, and not the liability itself: moreover, any change to the amount was said by Borins J.A. (at page 621) likely to be "relatively inconsequential".
[68] The distinction between uncertainty as to liability, as opposed to quantum, is supported by J.L. Guay Ltée, supra, where the uncertainty was said (at 5427) to render the debt contingent because
we are dealing with amounts withheld which are not only uncertain as to quantum if partial damages result from badly done work, but which will no longer be ever due or payable if damages exceed the amount withheld.
[69] The parties might, of course, have agreed that Ticketnet was liable to pay $2 million to Air Canada for services rendered, a liability that terminated on the good faith non-acceptance of the software. In my view, however, this is not what the contract provides.
| E. Conclusion |
[70] For these reasons the plaintiff"s claim is dismissed. Counsel may make written submissions on costs within 14 days from the date of this judgment.
OTTAWA, ONTARIO John M. Evans
June 11, 1999. J.F.C.C.