This document summarizes a court case between First Internet Holdings and Eric Watchorn regarding allegations of breach of contract relating to their business agreement. It outlines the disputed facts between the parties, including whether Watchorn assigned his trading contract to their shared company and whether First Internet was a party to their original oral agreement. It also notes procedural issues with deciding the case by summary trial given conflicts in evidence on key issues that require credibility determinations.

1. IN THE SUPREME COURT OF BRITISH COLUMBIA
Citation: First Internet Holdings v. Watchorn et al,
2006 BCSC 500
Date: 20060328
Docket: 043645
Registry: Victoria
Between:
First Internet Holdings Limitada
Plaintiff
And
Eric Watchorn, TradeTrue Securities Inc.
and Versa Trading Corp.
Defendants
Before: The Honourable Mr. Justice Halfyard
Reasons for Judgment
Counsel for Plaintiff P. Guy
R. Warburton
Counsel for Defendants A.M. Rafuse
Date and Place of Trial/Hearing: February 24 and 28, 2006
Victoria, B.C.
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2. First Internet Holdings v. Watchorn et al Page 2
[1] The plaintiff First Internet Holdings Limitada ("First
Internet") applies for summary trial and, if that application
is granted, for summary judgment against all of the
defendants, on the issue of liability. If the plaintiff is
successful, damages would be assessed at a later date. At
this time, the plaintiff seeks an order for an accounting, and
a declaration that the defendants hold certain property in
trust for the plaintiff.
[2] The claim of the plaintiff is based mainly on allegations
of breach of contract. In the alternative, the plaintiff
relies on breach of fiduciary duty and unjust enrichment.
[3] The defendants object to the summary trial procedure.
They say that there are conflicts in the evidence on material
issues, that these conflicts cannot be resolved without
deciding the credibility of opposing witnesses, and that
credibility cannot be decided on the evidence before the
court.
[4] In the alternative, if the case is to be decided on the
merits, the defendants say that the action should be dismissed
on two independent grounds, as follows:
(a) The contract which must be relied on by the
plaintiff was frustrated by the actions of a third
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3. First Internet Holdings v. Watchorn et al Page 3
party, over which the defendants had no control,
before the defendants committed the alleged breach.
(b) The plaintiff breached a condition of the written
contract dated December 23, 2003, the defendants
accepted the plaintiff's breach as terminating the
contract and gave written notice of termination on
or about February 20, 2004, and as a result both
parties were relieved from further performance of
their contractual obligations.
[5] Finally, the defendants say that, in any event, the court
should refuse to grant an order sought by the plaintiff,
namely, a declaration that the defendants hold 50% of the
shares of Versa Trading Corp. in trust for the plaintiff, on
the ground that such an order would contravene an order of the
B.C. Securities Commission dated May 6, 2004.
[6] I will outline some of the undisputed facts, so as to
provide a context for consideration of the procedural and
substantive issues raised.
[7] By a complicated series of dealings between Michael Ruge
and the defendant Eric Watchorn in 2001, an oral agreement was
concluded, which included the following terms:
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4. First Internet Holdings v. Watchorn et al Page 4
(a) Trade True Securities Inc. ("Trade True") would be
incorporated as a British Columbia company having
its registered and records office in Victoria;
(b) First Internet and Watchorn would own all of the
common shares in Trade True;
(c) In consideration of financial assistance to Watchorn
as arranged by Ruge, Watchorn would pay to Trade
True, all of the money that he received from Swift
Trade Securities Inc. ("Swift Trade") as a result of
his trading in securities pursuant to his contract
with Swift Trade; and Trade True would pay 50% of
the net profits to each of Watchorn and First
Internet.
[8] Trade True was incorporated on or about July 31, 2001.
From then until August 2002, Watchorn was the general manager
of Trade True, and Ruge was the sole director as well as a
management consultant to Trade True. Ruge resigned as a
director in September 2002, leaving Watchorn as the sole
director. Thereafter Watchorn continued as manager, and Ruge
continued to provide consulting services.
[9] Beginning in August 2001, Watchorn paid 50% of the net
trading profits he earned pursuant to his contract with Swift
Trade, to First Internet, on a monthly basis. At some point,
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5. First Internet Holdings v. Watchorn et al Page 5
in May 2003, Swift Trade began making payments to Trade True,
rather than to Watchorn personally, but Trade True paid 50% of
the net profits to Watchorn, and 50% to First Internet. That
was done, up to January 31, 2004.
[10] In 2002, the British Columbia Securities Commission began
investigating Ruge for suspected offences related to his
trading in securities. One of the consequences of this
investigation was that the bank accounts of Trade True were
frozen on August 8, 2003, for an unspecified period of time.
[11] Watchorn wanted to exclude Ruge from all involvement in
the business operations of Trade True. He also wanted to
terminate all obligations that he and Trade True owed to Ruge,
First Internet and other companies owned or controlled by
Ruge. Watchorn wanted to terminate the obligation to pay 50%
of net business profits to First Internet. He sent a letter
to Ruge dated December 2, 2003, demanding a dissolution of
their "partnership". Watchorn stated his concern that the
B.C. Securities Investigation of Ruge was jeopardizing his
business, and complained that Ruge and his company had
received too much money in proportion to the work and money
they had invested. Watchorn made a proposal for the
termination of their relationship. Ruge did not accept that
proposal.
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6. First Internet Holdings v. Watchorn et al Page 6
[12] However, Watchorn and Ruge did negotiate another
agreement, this time in writing, which had an effective date
of December 23, 2003. The parties to the agreement were
Watchorn, Ruge, First Internet, Trade True, two companies
controlled by Ruge or First Internet, and one company
controlled by Watchorn. The recital to the agreement
confirmed that Watchorn and First Internet each held one
million common shares of the two million common shares issued
by Trade True. Para. 3 of the agreement required Trade True
to pay a dividend to the holders of its common shares on the
last day of each month, "... to the extent that the directors
deem appropriate and in accordance with applicable laws ...."
[13] Para. 2 of the agreement said this:
"Ruge hereby covenants that, in order to protect the
business interests of TradeTrue, he will not hold
himself out as being involved with TradeTrue in any
way whatsoever, either as a partner, contractor,
director, employee or shareholder of TradeTrue."
[14] Para. 6.3 of the agreement states as follows:
"6.3 The terms and provisions herein contained
constitute the entire agreement between the parties
and shall supersede all previous oral or written
communications."
[15] In December 2003 and January 2004, Swift Trade informed
Watchorn that it required a change to the contract it had with
Watchorn. Swift Trade sent out the new form of agreement to
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7. First Internet Holdings v. Watchorn et al Page 7
Watchorn in January 2004, and he signed it in February. Under
the new contract, the employees of Trade True (other than
Watchorn) became independent contractors who were paid by a
company incorporated in Cyprus which had some connection with
Swift Trade.
[16] The new agreement also gave Watchorn the right to use a
company to exercise most of his powers and to perform most of
his obligations under the agreement with Swift Trade, but it
required that, if he did utilize such a company, he must "...
retain full and complete legal and beneficial ownership of all
equity and debt and full and complete operational control over
such company."
[17] In late January 2004, Watchorn incorporated Versa Trading
Corp. ("Versa") as a new vehicle for operating his business
with Swift Trade. He was the sole director and shareholder of
Versa. As of February 1, 2004, Watchorn ceased payments of
any share of the net business profits to First Internet.
[18] Watchorn (purporting to act on behalf of Trade True) sent
a letter to First Internet and Ruge dated February 20, 2004.
The first paragraph of that letter reads as follows:
"On January 31st
, 2004, Swift Trade Securities Inc.
gave notice of termination of its contract with
TradeTrue. The termination was effective on January
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8. First Internet Holdings v. Watchorn et al Page 8
31, 2004, on which date TradeTrue ceased to carry on
its trading business."
[19] The letter goes on to say that Trade True has sold its
assets and has set aside money for tax liabilities and legal
fees and says "... the company will be wound-up, subject to
the shareholders deciding otherwise." The letter states that
Trade True will cease paying the car allowance to Ruge as it
had been required to do by the written agreement of December
23, 2003.
[20] The letter of February 20, 2004, does not disclose that
Watchorn had signed a new contract with Swift Trade, or that
he had incorporated Versa and was carrying on his business
arrangement with Swift Trade through Versa. In stating that:
"as a result of the termination of the Swift Trade contract,
TradeTrue lost its only source of income ...", the letter
implies that there will be no further payments of 50% of the
net profits to First Internet, but does not state this
expressly.
[21] This action was commenced on August 24, 2004. The
statement of defence was filed on October 1, 2004. Watchorn
was examined for discovery on April 19, 2005, but Ruge has not
yet been examined for discovery. The notice of motion for the
present application was dated October 18, 2005, and the notice
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9. First Internet Holdings v. Watchorn et al Page 9
of hearing is dated November 30, 2005. The application came
on for hearing on February 24, 2006.
[22] The statement of claim alleges that an oral agreement was
entered into between First Internet and Watchorn, but makes no
mention whatever of the written agreement dated December 23,
2003. The statement of defence alleges that the oral
agreement was made between Watchorn and Ruge, and alleges that
the terms were different than those pleaded in the statement
of claim. But it is admitted (in para. 10(d)) that "Watchorn
and the plaintiff would divide net profits equally, after
Watchorn was paid his salary." The statement of defence does
not plead the defence of frustration, although it is arguable
that it does plead the essential facts that are said to
constitute frustration. The written agreement of December 23,
2003, is pleaded, but there is no allegation that Ruge or
First Internet has committed a breach of that agreement.
THE PROCEDURAL ISSUE
[23] Counsel for the defendants submits firstly that there is
a conflict in the evidence on the issue of whether Watchorn
assigned his interest in his contract with Swift Trade, to
Trade True.
[24] It is alleged in para. 8(b) of the statement of claim
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10. First Internet Holdings v. Watchorn et al Page 10
that Watchorn agreed to assign his rights under his contract
with Swift Trade, to Trade True. It is not expressly alleged
that Watchorn did in fact assign his Swift Trade contract to
Trade True, although that seems to be implied by paras. 10, 11
and 18. In paras. 15 and 16 of his affidavit sworn August 20,
2004, Ruge deposes that Watchorn did in fact make the
assignment in question, and, in effect, that Swift Trade
consented to the assignment.
[25] The statement of defence denies the alleged agreement to
assign, by the general denial in para. 1, and by implication
from the facts stated in para. 39. In para. 5(f), it is
alleged, in substance, that Watchorn's contract with Swift
Trade prohibited him from assigning his interest in the
contract without the written consent of Swift Trade. In his
affidavit sworn February 14, 2006, Watchorn deposes that "...
there is no document concerning an assignment of the Agreement
between myself and Swift Trade to TradeTrue as such a document
does not exist."
[26] In para. 12 of his affidavit sworn February 18, 2006,
Ruge deposes:
"12. Attached hereto and marked exhibit "F" is a
true copy of a memorandum dated August 21, 2001
signed by Eric Watchorn in which he signed over all
rights to the Swift Trade Securities Franchise to
Trade True Securities."
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11. First Internet Holdings v. Watchorn et al Page 11
[27] The letter of August 21, 2001 indicates that it is "From
the desk of Eric Watchorn", and "Trade True Securities,
Victoria, BC". The letter reads as follows:
"To Whom It May Concern,
This letter is to confirm the fact that all assets
have been seized by Scotia Bank and that, according
to my knowledge, Trade True Securities has purchased
all of Rapid Access Management Corporation's assets.
I hereby sign over all rights of the Swift Trade
Securities Franchise to Trade True Securities.
Regards,
"Eric Watchorn"
Eric Watchorn
Director"
[28] Counsel for the defendants objected to the admissibility
of this letter, on the ground that it was not disclosed until
February 20, 2006. In my opinion, the letter is admissible.
[29] Watchorn swore another affidavit on February 26, 2006.
In para. 4 of that affidavit, Watchorn says, in substance,
that he did sign the letter of August 21, 2001, but did not
prepare the letter, and that he signed the letter without
reading it, as one of a number of documents that Susan Knight,
a director of First Internet, had given to him to sign.
Watchorn does not retract his denial that he ever agreed to
make the assignment which is asserted by Ruge.
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12. First Internet Holdings v. Watchorn et al Page 12
[30] Peter Beck of Swift Trade Inc. swore an affidavit on
November 29, 2005, but neither admits nor denies that he had
knowledge of any assignment by Watchorn. He simply does not
mention it, and so there is no conflict between him and Ruge
on that point. (The evidence establishes that the contract
between Watchorn and Swift Trade prohibits Watchorn from
assigning his contract without the advance consent of Swift
Trade.)
[31] During the hearing, I expressed the opinion that the
issue of whether or not Watchorn made an effective assignment
in law may have relevance to the issue of damages, but that it
seemed irrelevant to the issue of liability. I noted that
Watchorn had conducted himself for several years in a manner
that was consistent with him having assigned his rights under
his Swift Trade contract to Trade True. I said I could not
see how Watchorn's obligation to pay 50% of net profits to
First Internet could depend on whether there was an
assignment, or on whether Swift Trade consented to the alleged
assignment. On further reflection, I think it would be wrong
to disregard this conflict in the evidence, because it relates
to the issue of what were the terms of the oral agreement.
[32] Next, it appears that there is a conflict in the evidence
on the issue of whether First Internet was even a party to the
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13. First Internet Holdings v. Watchorn et al Page 13
oral agreement made in 2001. If so, this would be a conflict
on a crucial point, because the plaintiff pleads, and of
necessity must rely upon, the oral contract. The written
contract dated December 23, 2003, does not confer on First
Internet the right to receive 50% of the net profits. Under
that agreement, it is only entitled to receive a monthly
dividend in an amount in the discretion of Watchorn as the
sole director.
[33] It may be arguable that First Internet would be
foreclosed from proving that part of the oral contract, by
para. 6.3 of the written agreement, which purports to
terminate all previous agreements. That would depend on
whether the right to receive 50% of net profits is
inconsistent with the right to receive only a discretionary
monthly dividend. See Ahone v. Holloway (1988) 30 B.C.L.R. 2d
368 (C.A.) at 372-373. For purposes of the present issue, I
will assume that, if First Internet was party to the oral
agreement, it could enforce the term which required Watchorn
to pay 50% of the net profits to First Internet. But it is a
fundamental rule of contract law that only a party to a
contract can sue on it. See Greenwood Shopping Plaza v.
Beattie (1980) 111 D.L.R. 3d 257 (S.C.C.) at 262-263.
[34] The statement of claim alleges (in para. 8) that First
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14. First Internet Holdings v. Watchorn et al Page 14
Internet was the contracting party. In his affidavit sworn
August 20, 2004, Ruge deposes (in para. 5) that the facts
alleged in the statement of claim are true; and in para. 12 he
uses the phrase: "It was agreed between First Internet and
Watchorn ..."
[35] The statement of defence (para. 10) alleges that the oral
agreement was between Watchorn and Ruge. In para. 2 of his
affidavit sworn February 14, 2006, Watchorn deposes:
"2. The plaintiff's claim rests on the court
upholding a version of an oral agreement propounded
by Michael Ernst Ruge."
[36] In paras. 33 to 35 and 37 of his February 14, 2006,
affidavit, Watchorn asserts, in effect, that the oral
agreement was between him and Ruge.
[37] In paras. 3(a) and 3(b) of his February 14, 2006,
affidavit, Watchorn refers to evidence given by Ruge in an
affidavit sworn April 15, 2004, in which Ruge deposed that a
completely different legal entity (First Internet Holdings
Ltd.) was the party to the oral contract with Watchorn, was a
shareholder in Trade True, and was entitled to receive 50% of
the net profits. This evidence was part of the evidence
designed to show that Ruge is not a credible witness, but it
also illustrates the point of conflict.
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15. First Internet Holdings v. Watchorn et al Page 15
[38] Watchorn was subjected to a very lengthy and detailed
examination for discovery, in the course of which he made many
admissions which support a cause of action. But it was not
suggested that Watchorn admitted that it was First Internet,
and not Ruge, with whom he made the oral contract. I conclude
that there is a conflict in the evidence on a second material
issue.
[39] There is another issue of fact raised on the pleadings.
In para. 8(d) of the statement of claim, it is alleged that
the parties agreed that "First Internet and Watchorn would
each own a one-half interest in Trade True ...." In para.
10(a) and (b) of the statement of defence, it is alleged, in
substance, that Watchorn would own 50.1% of Trade True, and
First Internet would own 49.9%. There is also a conflict
between Ruge and Watchorn on this point. See paras. 11 and 12
of Ruge's affidavit sworn August 20, 2004, and paras. 34, 35,
37 and 43 of Watchorn's affidavit sworn February 14, 2006.
(An issue may arise as to whether the recitals to the written
agreement could constitute an estoppel against Watchorn, and
prevent him from contesting the plaintiff's version of this
term of the oral agreement.)
[40] The issue of whether it was Ruge, and not First Internet,
that Watchorn made the agreement with, will require an inquiry
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16. First Internet Holdings v. Watchorn et al Page 16
as to what exactly was said by the two men to each other. The
times and places of their conversations, whether anyone else
was present, whether any notes were taken, and whether there
were written communications, will also likely be relevant.
The terms of the oral agreement are also in dispute, and these
same matters will be relevant to that issue.
[41] In my opinion, there is a further conflict in the
pleadings (and in the evidence, by necessary implication) as
to whether the oral agreement contained the terms alleged in
the statement of claim (at paras. 8(e), 9, 10 and 11) which
would impose fiduciary obligations on Watchorn.
[42] The conflicts I have identified cannot be resolved
without an assessment of the credibility of witnesses.
Credibility cannot be determined on the evidence before the
court. In these circumstances, the action is not suitable for
disposition by summary trial, because "the court is unable ...
to find the facts necessary to decide the issues of fact or
law." See, e.g., Jutt v. Doehring (1993) 82 B.C.L.R. 2d 223
(C.A.) at para. 13.
[43] Counsel for the defendants did not argue, in the
alternative, that it would be unjust to decide the issues by
way of summary trial. As I see it, it would be unjust to do
so. The pleadings are in an unsatisfactory state. They do
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17. First Internet Holdings v. Watchorn et al Page 17
not fully set out the issues of fact and law that appear to
exist between the parties. It is my further opinion that the
plaintiff's application to split the issues of liability and
remedy may be objectionable, on the ground that the
credibility of witnesses could be in issue on both aspects of
the action. I would exercise my discretion to dismiss the
plaintiff's application for summary trial, on the ground that
it would be unjust to proceed under Rule 18A.
[44] In view of my decision on the procedural issue, I do not
think I should express any opinion on the merits of the claim
or defence.
[45] The plaintiff's application for summary trial is
dismissed. The costs of the application will be costs in the
cause.
[46] I understood Mr. Watchorn would consent to an order
restraining him from disposing of his shares in Versa, without
further order of the court. I think that order should go, and
I presume that counsel will be able to agree as to the form.
“D.A. Halfyard, J.”
The Honourable Mr. Justice D.A. Halfyard
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