



COURT OF APPEAL FOR ONTARIO

CITATION: Kechnie v. Sun Life Assurance Company of Canada,

2016 ONCA 434

DATE: 20160602

DOCKET: C60952

Strathy C.J.O., Blair and Lauwers JJ.A.

BETWEEN

Doug Kechnie and Kechnie Financial Group Inc.

Plaintiffs

(Appellants)

and

Sun Life Assurance Company of Canada, Sun Life
    Financial Investment Services (Canada) Inc. and Sun Life Financial Distributors
    (Canada) Inc.

Defendants

(Respondents)

Jeffrey Larry and Alysha Shore, for the appellants

Stephen F. Gleave and Richelle M. Pollard, for the respondents

Heard: May 13, 2016

On appeal from the Judgment of Justice E. M. Stewart of
    the Superior Court of Justice, dated November 25, 2015, with reasons reported
    at 2015 ONSC 3714.

R.A. Blair J.A.:

Factual Overview

[1]

The appellants seek to set aside the judgment of Stewart J. dismissing
    their claim against Sun Life Assurance Company of Canada for the payment of
    certain commissions.

[2]

Doug Kechnie is an insurance agent and investment advisor who sold Sun
    Life insurance and financial products to his clients for more than 30 years,
    through his company Kechnie Financial Group Inc. (KFG). Sun Life terminated
    its agreements with Mr. Kechnie and KFG (together, the Kechnies), as it was
    entitled to do, in October 2008.

[3]

At the time, the Kechnies had accumulated a book of business that
    would entitle them to post-termination commissions of $22,435.19 per month for
    a period of 10 years (roughly $1.85 million in present value terms) in
    accordance with what is known as Sun Lifes Commissions on Release (CORe)
    program.  Under that program, Sun Lifes advisors and agents were paid
    commissions following termination over a 10-year period, based on a percentage
    of the value of the estimated commissions that Sun Life reasonably anticipated
    would be payable on the products sold by them but remaining with Sun Life
    following termination for that period.

[4]

But the CORe agreements also provided, in s. 6.7.2, that no further
    commissions would be payable if, after termination and during the 10-year
    period, the advisor advises, counsels or induces a Client holding a Policy on
    which such Commissions are being paid, to: (a) terminate, surrender, cancel, or
    Replace the Policy; (b) allow the Policy to lapse; or (c) reduce the amount of
    the Premiums being paid under the Policy. It is the enforceability of Sun
    Lifes ability to terminate the Kechnies CORe payments pursuant to this clause
    that is at the heart of the dispute.

[5]

Following the termination, Mr. Kechnie joined his son at another
    insurance and financial advisory agency. Although there is a dispute over the
    extent to which it occurred, and the value of the business involved, it is
    uncontestable on the record that Mr. Kechnie advised, counselled or induced a
    significant number of his Sun Life clients to terminate or replace their Sun
    Life products and policies and to transfer them to his new business. Upon
    discovering this  after payment of the first monthly amount  Sun Life
    terminated the future stream of CORe payments. The Kechnies claim to recover
    them was dismissed at trial.

[6]

The Kechnies appeal, arguing that their CORe rights were vested
    proprietary rights at the time of termination, that the CORe termination provisions
    were unenforceable forfeiture provisions, and that they were entitled to relief
    from forfeiture and, therefore, to the payment of the commissions (or at least
    the CORe commissions less the commissions Mr. Kechnie admits to have received
    from the transferred business). They contend that the trial judge erred in failing
    to hold that their rights to the payment of CORe commissions were vested
    rights at the time of termination and by holding, instead, that they were contingent
    rights conditional upon the appellants compliance with the payment-for-release
    requirements in the CORe agreements.

[7]

I reject these submissions.

Analysis

The CORe Program

[8]

Although it may be expressed in differing ways, the central concept
    driving the CORe program is the following. In exchange for the terminated
    advisors book of business remaining within the Sun Life constellation  for
    transition to other Sun Life advisors who are willing to pay a price for
    receiving them  and in recognition of the advisors contribution in creating
    that asset for Sun Life, the terminated advisor is to be paid commissions
    reflecting some portion of the continuing premium and other incidental revenue generated
    by that business over a period of 10 years. The terminated advisor profits from
    a continuing flow of revenue, tied to the previous business, for an extended
    period. Sun Life profits by retaining the benefits of the long-term retention
    of existing business and the potential for the generation of new business from
    those clients; it does so through its ability to transfer the business to new
    advisors for a price. To protect the integrity of the CORe program, however, the
    terminated advisor loses the right to the stream of post-termination commissions
    if the advisor engages in replacement activities that result in the book of
    business being transferred elsewhere. Were it otherwise, the entire purpose of
    the CORe program would be undermined: new advisors would be unwilling to pay
    for a book of business that might well be enticed away from them by a
    terminated advisor with an existing long-standing client relationship; Sun Life
    would therefore lose the long-term benefits of retention of the business; and
    the terminated advisor would profit twice over, by receiving both the CORe
    payments based on the released book of business in addition to the revenues and
    other benefits derived from the book of business the advisor is supposed to
    have released, but rather entices away.

[9]

The key is that the book of business remains with Sun Life. As the
    respondent observes: It is for this exact reason that CORe is called Commission
on Release
 (emphasis added). In relation to the termination of the
    CORe payments, the agreements also stipulated in s. 6.7.4:

The Advisor acknowledges and agrees that:

(b) in agreeing to the terms of [the Schedule setting out the
    CORe payments] the Company assumes that the Advisor and the Representative will
    not engage in the conduct referred to in section 6.7.2 of this Agreement.

[10]

The
    trial judge accurately captured the sense and purpose of the CORe program when
    she stated, at para. 28:

The clear language of the Agreements demonstrates that the
    parties intended that continuation of the CORe payments was to be contingent
    upon compliance with the obligations imposed upon the Agents, and [upon the
    Agents] refraining from interfering with Sun Lifes arrangements to retain the
    business of those clients historically serviced by the Plaintiffs. If the
    Plaintiffs were not prepared to comply, they were free to engage in such
    conduct subject to any non-solicitation provision.  By so doing, however, they
    would give up all entitlement to receipt of CORe payments.

The Vesting Issue

[11]

At
    trial and on appeal the appellants argued that their right to CORe payments was
    a vested proprietary right that had been fully earned, and to which they had
    become fully entitled, prior to termination. They see the resolution of the
    vesting issue as a threshold question that must be dealt with before the
    secondary question regarding the enforceability of the CORe termination
    provisions can be considered. In their view, it is a legal pre-requisite that
    an advisors right to CORe payments be vested in order for the [relief from]
    forfeiture analysis to apply.

[12]

The
    appellants submit that the trial judge failed to conduct a proper analysis of
    the issue and erred in failing to hold that their right to CORe payments was
    vested.

[13]

I
    see it differently.

[14]

The
    foregoing observations about the nature and purpose of the CORe program apply
    equally whether the right to the future stream of commissions is characterized as
    vested or contingent. If the Kenchies entitlement to CORe payments was a
    vested right, it was subject to being divested, or forfeited, upon their
    choice to engage in the targeted economic activity; if it was a contingent
    contractual right, it was subject to being defeated, or forfeited, if the
    conditions underpinning that right to payment were not satisfied because of
    that same choice.

[15]

The
    appellants provide no authority for the proposition that relief from forfeiture
    only lies where a contractual provision operates to deprive a defaulting party
    of a vested or proprietary right and, in my view, the jurisprudence does not
    impose such a requirement.

[16]

Accordingly,
    while a finding that the CORe program provided the Kechnies with a vested proprietary
    right to the future stream of payments may provide them with a stronger footing
    to resist forfeiture  because of a general reluctance by the courts to deprive
    people of a vested property right  such a finding is not necessary for a determination
    of the proceeding. A contractual term that provides for the forfeiture of the
    right to future payments in the event the holder of the right engages in
    certain conduct in the future may or may not be enforceable by the courts,
    whether the right has become vested or not. As I explain below, enforceability depends
    on whether the forfeiture clause has penal consequences and, if so, whether it
    would be unconscionable for the innocent party to receive the benefit of the
    forfeiture:
869163 Ontario Ltd. v. Torrey Springs II Associates Ltd.
    Partnership
(2005), 76 O.R. (3d) 362 (C.A.). Whichever
path
is followed  a vested property right or a contingent contractual right  each
    leads to the same gateway through which the appellants must pass: relief from
    forfeiture.

[17]

The
    real issue here is not whether the Kechnies right to CORe payments was vested
    or contingent. The real issue is whether the CORe payment termination provision
    is properly characterized as a forfeiture clause with penal consequences and,
    if so, whether the Kechnies are entitled to relief from forfeiture in the
    circumstances. The trial judge adopted this overall approach. In the process,
    she analysed the nature of the CORe agreements for this purpose and concluded
    that they provided for a contingent right to the future payments, subject to
    the Kechnies complying with the non-replacement restrictions of s. 6.7.2. That
    she declined to adopt the appellants submission that the rights were vested
    was not fatal to her ultimate decision rejecting their claim.

The Forfeiture Analysis


[18]

The
    appellants rightly refrain from asserting that the CORe payment termination
    clause is a penalty and therefore unenforceable because of the common laws
    reluctance to enforce such clauses. A penal clause involves the payment of a
    sum as a consequence of a breach that does not represent a genuine pre-estimate
    of damages at the time the contract is entered into:
Dunlop Pneumatic Tyre
    Co. v. New Garage & Motor Co.
, [1915] A.C. 79 (H.L.), at pp. 86-87.

[19]

The
    CORe payment termination clause is not such a provision. However, it may
    properly be characterized as a forfeiture clause, because it involves the
    loss, by reason of some specified conduct, of a right, property, or money:
Torrey
    Springs
, at para. 22. And it could, potentially, involve penal
    consequences, since the right forfeited by the defaulting party might in some
    circumstances bear no relation to the loss suffered by the innocent party. Counsel
    for the appellant gave us an example of the latter when he posited a situation
    where termination of a significant CORe payment stream occurred after a
    terminated advisor enticed away a
de minimus
portion of the total book
    of business the advisor had released to Sun Life on termination.

[20]

Default
    triggering the operation of a forfeiture clause attracts a
    relief-from-forfeiture analysis where there are concerns about penal
    consequences and about unconscionability. The jurisprudence recognizes  in the
    spirit of honouring parties rights to freedom of contract and their right to
    define their own consequences of breach  that penal clauses and forfeiture
    clauses (referred to below as stipulated remedy clauses) may be enforced
    unless these two requirements underlying the granting of relief from forfeiture
    weigh against it.

[21]

For
    this reason, the appellants are incorrect when they assert that the trial judge
    erred in considering whether the CORe payment termination clause had penal
    consequences. Penal consequences are the first concern in the relief-from-forfeiture
    inquiry. Equity does not relieve against all forfeiture consequences that may
    be negotiated by parties. It relieves against penal forfeitures.  The
    analysis is conducted as of the time of the default, and not on the basis of a
    hypothetical situation.

[22]

Sharpe
    J.A. put it this way in
Torrey Springs
, at paras. 25-26:

Equity, on the other hand, considers the enforceability of
    forfeitures at the time of breach rather than at the time the contract was
    entered.
[1]
Equity also looks beyond the question of whether or not the stipulated remedy
    has penal consequences to consider whether it is unconscionable for the
    innocent party to retain the right, property, or money forfeited. As explained
    by Denning L.J. in
Stockloser v. Johnson
, [1954] 1 All E.R. 630 (Eng.
    C.A.) at 638: 
Two things are necessary
: first, the
    forfeiture clause must be of a penal nature, in the sense that the sum
    forfeited must be out of all proportion to the damage; and, secondly, it must
    be unconscionable for the seller to retain the money.

The central pillar of the appellants argument, as I
    understand it, is that there is an iron-clad rule to the effect that all
    stipulated remedy clauses, whether penalties or forfeitures, assessed at the
    date of the contract as having penal consequences will not be enforced. In my
    view, that proposition does not represent an accurate statement of the law.
Not
    all stipulated remedy clauses having penal consequences are unenforceable. In
    particular, the equitable doctrine of relief from forfeiture enforces such
    penalty clauses, where they are in the form of a forfeiture, where it is not
    unconscionable to do so.
[Emphasis added.]

[23]

Much
    of the analysis in
Torrey Springs
was directed towards smoothing out
    the rigid distinction between the common laws treatment of penal clauses
    (unenforceable at common law) and equitys treatment of forfeiture clauses
    (subject to relief if the penal consequences and unconscionability requirements
    are met), concluding, at para. 32, that, courts should, whenever possible,
    favour analysis on the basis of equitable principles and unconscionability over
    the strict common law rule pertaining to penalty clauses. While this
    distinction is not important for this appeal, the underlying principle for
    moving away from the distinction  a reluctance to extend the strict common law
    rule refusing to enforce penalty clauses  is of some significance because it
    reinforces the growing tendency in the jurisprudence favouring the enforcement
    of stipulated remedy clauses that have been freely negotiated by the parties. Referring
    to the reluctance to extend the common law rule and to the enforcement of
    stipulated remedy clauses, Sharpe J.A. added the following, at para. 34 in
Torrey
    Springs
:

This is closely related to the fourth factor, namely, the
    policy of upholding freedom of contract. Judicial enthusiasm for the refusal to
    enforce penalty clauses has waned in the face of a rising recognition of the
    advantages of allowing parties to define for themselves the consequences of
    breach.  As I have already noted, in
Elsley, supra,
[2]

Dickson J. labeled the penalty clause doctrine as a blatant interference
    with freedom of contract, a sentiment echoed by the English Court of Appeal in
Else
.
[3]

[24]

What
    flows from this is that the trial judge was required to determine whether the
    CORe payment termination clause had penal consequences  a determination that
    is made as of the time of default  and, if so, whether relief from forfeiture
    should be granted because it would be unconscionable to permit Sun Life to
    retain the benefits of the unpaid CORe amounts.  That is precisely the analysis
    in which she engaged.

Relief from Forfeiture

[25]

After
    examining the provisions of the CORe agreements and arriving at her interpretation
    of their meaning, beginning at para. 44, the trial judge addressed the question
    whether the provisions disentitling the appellants to receive the CORe payments
    were unenforceable as punitive forfeiture clauses or an unreasonable restraint
    of trade.
[4]
She held they were not.

[26]

The
    appellants accept that trial judge applied the proper test for granting relief
    from forfeiture, as set out in
Kozel v. Personal Insurance Co
., 2014
    ONCA 130, 119 O.R. (3d) 55, at para. 31:

In exercising its discretion to grant relief from forfeiture, a
    court must consider three factors: (i) the conduct of the applicant, (ii) the
    gravity of the breach, and (iii) the disparity between the value of the
    property forfeited and the damage caused by the breach.

[27]

However,
    they submit that she erred in in applying the test. I disagree.

[28]

Whether
    to grant or refuse relief from forfeiture, as an equitable remedy, is a purely
    discretionary decision: the
Courts of Justice Act
, R.S.O. 1990, c.
    C.43, s. 98;
Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance
    Co.
, [1994] 2 S.C.R. 490, at para. 32. Here, the trial judge reviewed the
    record in the context of all three of the foregoing factors. In substance, the
    appellants simply disagree with the findings she made.

[29]

For
    example, the appellants contend that the disparity between their loss of the
    CORe payments and any damage Sun Life suffered from the breach was entirely
    disproportionate. They submit that they lost over $1.8 million in CORe
    payments, while recovering only about $600,000 from the transferred business
    and that Sun Life benefitted additionally by receiving almost $675,000 from
    other Sun Life advisors who purchased portions of the Kechnies book of
    business.  They say that Mr. Kechnies conduct was reasonable and did not
    constitute a blatant or intentional breach of the terms of the agreement, and
    that Sun Life treated the Kechnies badly.

[30]

The
    trial judge did not see it that way, however. She accepted Sun Lifes evidence
    and held that its reconstructed data was more reliable than the figures
    offered by the Plaintiffs (para. 57). She found that: Mr. Kechnie had
    transferred over 600 Sun Life clients and 60 life insurance policies to his
    sons firm; roughly $20 million of Mutual Funds assets were moved from Sun Life
    to the new business; the market value of the mutual funds and segregated funds
    in the book of business formerly serviced by Mr. Kechnie at Sun Life decreased
    by 84% between 2008 and 2014; and Mr. Kechnie could earn between $2-3 million
    in revenue from the transferred business with the result that he would earn
    from those clients revenue that was at least equal to or greater than the CORe
    payments he would otherwise have received (paras. 33-40). She also found that
    Mr. Kechnie knew very well the nature of the provisions he had contracted to
    and their implications for conduct following termination and, indeed, had been
    directly involved in the various internal discussions which occurred
    surrounding the rollout of the new system (paras. 49 and 52).

[31]

On
    the basis of this evidence the trial judge characterized Mr. Kechnies
    activities as a systematic attack on the goodwill in the former block of
    business (para. 33) and (on his premise that he would be entitled to receive
    the CORe payments) as a flagrant breach of contractual obligations (para. 53).

[32]

In
    the end, the trial judge determined that the CORe payment termination
    provisions were not punitive in nature or a penalty, nor were they contrary to
    public policy. Having so found, she correctly concluded that the principles of
    relief from forfeiture were not engaged. Nonetheless, she went on to address
    the appellants claim that the operation of the provisions was unconscionable,
    harsh and inequitable. Her findings led her to reject these claims as well.

[33]

These
    conclusions were amply supported by the record and completely justify the trial
    judges conclusion that the appellants were not entitled to relief from
    forfeiture in the circumstances.

Other Considerations

[34]

Because
    it is unnecessary to characterize the CORe payment right as vested or
    contingent for the purposes of resolving this proceeding, I need not address
    the jurisprudence referred to us in which courts have characterized payments
    made under the CORe program, or similar programs, for other purposes and in
    other contexts such as those related to compensation payments (e.g.,
Levinsky
    v. Toronto-Dominion Bank
, 2013 ONSC 5657), or to the calculation of
    equalization payments in family law situations (e.g.,
Dunham v. Dunham
,
    2012 ONSC 2338;
Brandt v. Brandt
, [1998] M.J. No. 531 (Man. Q.B.)).

[35]

Nonetheless,
    the trial judges decision is consistent with other authorities supporting the
    enforceability of forfeiture provisions in contracts of a similar nature to the
    CORe payment termination clause.

[36]

For
    example,
Inglis v. The Great-West Life Assurance Co.
, [1942] 1 D.L.R. 99
    (Ont. C.A.), involved a forfeiture clause respecting payments by an insurer to
    an insurance agent following termination of employment. The clause provided
    that the company would continue to pay the agent the commissions on business
    written during the continuance of this agreement to which the Agent would have
    been entitled if this agreement had remained in force; however, if the agent became
    connected with or [did] business directly or indirectly for any other life
    insurance company the commissions were forfeited. The agent subsequently began
    to work for another life insurance company. His claim to recover the
    commissions was unsuccessful. The Court of Appeal held that the forfeiture
    clause did not constitute a penalty. Its reasoning is instructive for the
    present appeal.  At p. 102, Masten J.A. said:

We are of the opinion that the provisions of [the forfeiture
    clause] are not in the nature of a penalty.  Whether it is to be considered as
    part of the remuneration provided by the agreement when read as a whole, or as
    a separate provision entered into in consideration of the right of either party
    to cancel on notice, appears to the Court to be immaterial. In either case it
    is the agreement of the parties, not a penalty.  The plaintiff agreed that if
    he chose to join another life insurance company these payments would cease. He
    did so choose, and their cessation is not in the nature of a penalty but is in
    pursuance of the agreement by which the plaintiff voluntarily bound himself in
    the beginning.

[37]

The
    Court also agreed that the clause was not in restraint of trade. Other
    authorities holding that similar forfeiture provisions are valid and enforceable
    against the defaulting party, either because they do not constitute a penalty
    or because they do not operate in restraint of trade, or both, include:
Webster
    v. Excelsior Life Insurance Co.
(1984), 50 B.C.L.R. 381 (S.C.), at p. 382;
Roy v. Assumption Mutual Life Insurance Co.
(2000), 222 N.B.R. (2d)
    316 (Q.B.), at paras. 56-61;
Burgess v. Industrial Frictions & Supply
    Co
. (1987), 12 B.C.L.R. (2d) 85 (C.A.), at pp. 89-90. These decisions
    support the trial judges conclusions.

Disposition

[38]

For
    the foregoing reasons, I would dismiss the appeal.

[39]

In
    accordance with the agreement of counsel I would fix the costs of the appeal in
    favour of the respondents in the amount of $24,600 inclusive of disbursements
    and all applicable taxes.

Released:  June 2, 2016

R.A. Blair J.A.

I agree G.R. Strathy C.J.O.

I agree P. Lauwers J.A.





[1]

In contrast to the common law, which focused on whether a
    clause was a penalty clause as at the time the contract was made.



[2]

Elsley v. J. G. Collins Insurance Agencies Ltd.
, [1978] 2 S.C.R. 916.



[3]

Else (1982) Ltd. V. Parkland Holdings Ltd.
, [1993] E.W.J. No. 4674 (C.A.).



[4]

The appellants do not assert a restraint of trade argument on
    appeal.


