Case Review – Homegold Resources Ltd. v. Jazz Resources Inc., 2023 BCSC 423

Lessons Learned

1. Be clear about the difference between a “draw” and a “payment”.
2. Be aware that audited financial statements containing mention of a debt may waive a limitation defence.
3. Don’t assume that services for which no invoice has been provided haven’t created a debt.
4. Make your pre-trial demands reasonable or risk losing prejudgement interest from the date of the demand.
5. Make your lien claims reasonable to avoid a potentially hefty fine.
6. If you intend to pursue a Builders Lien Act fine on the basis of an inflated lien claim by the plaintiff, be sure to mention that counterclaim in your pleadings.

Facts

Jazz Resources Inc. is a publicly-traded junior mining company that owned a mineral tenure in B.C.’s Teddy Glacier, south of Revelstoke, where its mine was intended to produce zinc, lead, silver, and gold.

Between 2008 and 2010, Jazz extracted a 2,000-ton bulk ore sample from the mine, but that ore remained in a pile high in the mountains: a canyon-spanning bridge on the forestry road between the mine and the nearest location where the ore could be processed was dilapidated, and Jazz lacked the funding to repair it.

In early 2015, Jazz crossed paths with Robert Klenk, a financier who offered to use up to $175,000 of his own funds to rebuild the bridge. Klenk had reservations, though: Jazz was carrying substantial insider debt. Among other obligations, Bryan Glen, the former president and chief executive officer of Jazz, had been lending Jazz money to cover its operating costs through his personal company, Glen Developments Ltd., prior to his death in 2014, as well as using Glen Developments to charge Jazz for his management services.

Johan Shearer was originally a geologist employed by Jazz before becoming part of the management team. He also provided his services to Jazz through a personal company, in his case, Homegold Resources Ltd. Shearer had purchased Glen Developments from Glen’s estate and was now Jazz’s new president and chief executive officer. He agreed to Klenk’s preconditions for a loan, including that Glen Developments assign Klenk $100,000 of the debt owed by Jazz to Glen Developments.

Shearer began to retain engineers and contractors to repair the bridge, and also turned his attention to the need to build a mill to process the ore once it had been transported across the bridge. A company by the name of Neolife shipped the necessary components to the chosen site and in summer 2015 began to assemble the mill.

Now all came crashing down. The Chinese-made motors in Neolife’s mill were not approved for use in Canada, and it soon turned out the mill itself wasn’t approved for use in Canada, either: in January 2016, the provincial Ministry of Energy and Mines issued a stop work order on all construction of the mill and its associated tailings management facility until Jazz received a permit – its previous permit to construct and operate a mill having expired at the end of 2014.

Jazz had not yet received a permit by the time Shearer resigned in March 2016. When the Ministry eventually made it known in 2018 that the permit would only issue conditional on the deposit of a $481,525 reclamation bond against the risk of the site eventually requiring remediation – funds Jazz couldn’t pull together – the plan to process the ore collapsed. Jazz abandoned its claim to the Teddy Glacier and the ore was sold in its unprocessed state to a Chinese buyer.

The matter descended into litigation, and Shearer filed a claim in his own name and on behalf of his personal company, Homegold.

Homegold’s Claim

Shearer alleged that Homegold was owed nearly $300,000 in unpaid invoices for the management services he’d provided through the company, originally plead in the form of a lien claim that was abandoned before trial.

Jazz countered that as there had been no contract between Jazz and Homegold, any recovery could only occur according to the doctrine of unjust enrichment, and since Shearer had misled Jazz as to the permit status of the mill, Jazz derived little benefit from Homegold’s work.

Jazz also argued that the claim, having been initially plead as a lien claim, could only apply to Homegold’s work associated with mineral exploration, and that the administrative work itemized in Homegold’s invoices was unrecoverable.

Unjust Enrichment

It was conceded at trial that there was no contract between Jazz and Homegold, written or otherwise, and the Court concluded that Homegold’s claim would indeed need to rely on the doctrine of unjust enrichment, which requires (i) an enrichment of the defendant, (ii) a corresponding deprivation of the plaintiff, and (iii) the absence of a juristic reason for the enrichment.

The Court found without difficulty that Shearer’s substantial, unpaid efforts on behalf of Jazz established a deprivation, but the question of whether there had been an enrichment of Jazz was more complicated.

The Court found that Shearer had deliberately withheld information from Jazz, its board, and its contractors relating to the permit issue, including a written statement to investors that misrepresented the status of the permit: the Court found that he had been the only person within Jazz before the issuance of the stop work order to know that the permit had in fact expired.

However, critically, the Court also found that “it would not be appropriate to evaluate Mr. Shearer’s contributions solely based on hindsight.” Shearer would not necessarily have known of the scale of the reclamation bond that the Ministry ultimately demanded, and his misrepresentation about the permit, whether reckless or deliberate, was consequently held not to be disqualifying: his work had advanced Jazz’s ability to obtain a permit that it was reasonably believed at the time that Jazz would have the financial resources to utilize.

“Draw” vs. “Payment”

If no established category of juristic reason justifies the enrichment, such as a contract, then a court may assess the merits of recovery by considering both the reasonable expectations of the parties and public policy implications.

The financier, Klenk, argued that an oral agreement between himself and Shearer limited Shearer’s compensation to $4,000 per month. While the Court acknowledged that such an agreement would constitute a juristic reason, the Court disbelieved Klenk’s statement of the facts: the Court found that Shearer and Klenk had agreed to a $4,000 monthly draw, which the Court found to be a word that implies a partial advance on final payment.

Quantum

In valuing Homegold’s services, the Court found that the following factors weighed against Homegold:

1. Homegold’s service rate was appropriate for technical labour but overpayment for administrative work.
2. Because Homegold only charged in half-day increments, many of Homegold’s time entries would have resulted in overpayment relative to value provided.
3. The delay obtaining the permit did not render all of Shearer’s work valueless, but it did render some of his work valueless, e.g., his negotiations with buyers for byproducts of ore processing that never occurred.
4. Shearer’s work was mostly unsupervised, the tasks he undertook were largely those he personally decided to undertake, and many of those activities had proved duplicative on cross-examination.

The Court ultimately decided that of the Homegold invoices totalling $268,128 plus expenses, Homegold was entitled to payment of $100,000 plus all invoiced expenses.

Shearer’s Claim

In addition to his claim through Homegold for compensation for services rendered, Shearer also claimed in his personal capacity for money owed to him by Jazz via his purchase of Glen Developments, to which Jazz was indebted both (i) as a matter of direct loans made to Jazz by its former president and CEO through Glen Developments, and (ii) as a matter of services rendered by the former president and CEO through Glen Developments for which a rate had been agreed but which had not been invoiced.

Jazz made several arguments in response.

First, that management fees which hadn’t been invoiced did not result in a crystallized debt. The Court disagreed, finding that no physical invoice is required in order to make contractually-agreed fees payable: the Court likened the situation to a landlord not needing to invoice a tenant monthly for rent to become due. Here, one part of the written agreement between Glen Developments and Jazz obligated Glen Developments to provide management services, another part obliged Jazz to provide monthly payment, and a third part provided termination provisions. As neither party had availed itself of the termination provisions, the Court found that all of the management fees remained payable.

Second, Jazz argued that the direct loans were made via an agreement that was, per its conditions, subject to the approval of the TSX Venture Exchange, and no such approval had ever been explicitly granted. The Court disposed of that argument by finding that a fax from the Exchange confirming that the loan agreement had been “accepted for filing” was adequate: there was no evidence that the Exchange was expected to, or intended, to pass any further judgement on the loan agreement.

Finally, Jazz argued that the Limitation Act statute-barred the majority of the debt claims. The Court acknowledged that the loan agreement caused the direct loans to become due and payable in 2015 and a two-year clock began running as of that date. However, the Court found that audited financial statements issued by Jazz confirmed the claim that the debt was owed, nullifying any limitation defence.

Effect of Audited Financial Statements

Jazz retorted that the audited financial statements were inadmissible, and couldn’t be used even if admitted to prove that the debt was owed. The Court began its analysis by observing that the Evidence Act made an explicit exception to the hearsay rule for business records, and that the financial statements in question, being necessary to provide evidence on the matter, prepared in a reliable fashion, and authenticated when they were audited (Jazz being a publicly-traded company), qualified under the statutory exception for business records.

The Court then cited John B. Pub Ltd. v. Genco Resources Ltd., 2011 BCSC 657, for a detailed analysis that had led that court to conclude that financial statements could constitute an acknowledgement for the purposes of confirming a cause of action, with the effect of extending the limitation period: the balance sheet and the notes to the financial statements acknowledged the cause of action, and the confirmation of the debt was held to have occurred on the date of issuance of the financial statements.

The Court warned, however, that the fact that the financial statements constitute an acknowledgement of a claim does not mean the Court is bound to award the amounts indicated in the financial statements, and in fact with respect to the amounts claimed by Homegold, the Court declined to award the entire amount Homegold had invoiced for.

The Court, having determined that Shearer was owed money with respect to the direct debts of Jazz to Glen Developments and the contracted management fees owed to Glen Developments, found that the amount owed was $406,558, as reflected in Jazz’s audited financial statements. However, the Court also determined that prejudgment interest only began to run as of the date of the filing of the claim, not as of the date of a pre-trial demand letter, because that pre-trial demand had been for a substantially inflated sum and had demanded interest that was not in fact owed.

Builders Lien Act

Jazz ultimately sought to reduce its liability by arguing that the original claim of lien was improperly filed. It cited s. 45 of the Builders Lien Act, which states that a person who knowingly files a claim of lien containing a false statement is liable to a fine not exceeding the amount by which the stated claim exceeds the actual claim.

Jazz argued that Shearer knew or ought to have known that the claim of lien couldn’t be maintained, especially the portion of the lien claim related to non-payment for administrative work,^[1]See also Chaston Construction Corp. v. Henderson Land Holdings (Canada) Ltd., 2002 BCCA 357, in which that court held that off-site work done relating to a building that was never constructed could … Continue reading and repeated its arguments regarding the lien claim being inflated.

The Court decided that no fine should issue in this case, concluding (i) that it was not apparent on the face of the evidence that Shearer had knowingly filed a false claim, (ii) that Jazz had not raised the possibility of a fine in its pleadings, and (iii) that regarding the administrative work claimed under the lien, Shearer’s responsibilities had been complex, and neither party had taken any steps to ascertain the dividing line between work that could have been the subject of a lien, work that clearly could not be, and work that would fall somewhere between the two.

Lastly, the Court observed that the common concern in lien claims is that the party improperly inflating the value of the lien is gaining leverage by precluding the owner from either disposing of or utilizing their equity in the property. In this case, the Court found no evidence that Jazz had suffered either an actual or tactical loss.