Executive Summary: Key Legal and Evidentiary Issues

• Whether an enforceable oral contract existed between Lee Smith and Steven Mann regarding business ownership in the Dawgs Clogs venture.

• Dispute over the credibility of Smith’s testimony and whether it supported the existence of contractual terms.

• Examination of agency principles to determine if Double Diamond Distribution Ltd. was also liable for breach.

• Consideration of whether Mr. Smith fulfilled conditions alleged by Mr. Mann, such as contributing to business growth in Europe.

• Whether the trial judge correctly applied the doctrine of alternative liability in holding both Mann and Double Diamond liable.

• Determination of appropriate cost awards in a bifurcated trial and whether trial judge’s discretion was exercised judicially.

Background and initial business relationship

Lee Smith and Steven Mann had been friends since university. In 2005, they began discussions about importing and distributing EVA shoes, later branded as Dawgs Clogs. Smith, residing in Sweden, claimed he and Mann entered into an oral agreement in which he would be entitled to a one-third share in the venture in exchange for contributing $23,000—one-third of the cost of the first shipment from China. Mann incorporated Double Diamond Distribution Ltd. to conduct the business. However, he did not issue shares to Smith and recorded the contribution as a loan.

Disputed terms and formation of agreement

Mann argued there was no enforceable agreement, asserting that Smith’s participation was conditional on further investment and active involvement in European expansion. He claimed no binding contract was formed. Smith maintained that their agreement was simple and clear: his contribution would entitle him to equity, later diluted to 8% to accommodate new investors.

The trial judge found that a binding oral contract existed, supported by consistent testimony and documentary evidence. The judge found Smith credible, rejecting Mann’s version of events. The initial agreement for a 33% shareholding was amended to 8% during a May 2006 meeting, based on representations by Mann about other investors' contributions.

Corporate structure and share issuance

Although Double Diamond Distribution Ltd. was used to facilitate the venture, no shares were ever issued to Smith. Instead, shares were issued to other entities and individuals, including Steven Mann and his wife. Smith was excluded from ownership, contrary to what the court found had been agreed upon.

The court held that Mann had breached the agreement by not causing shares to be issued to Smith. Double Diamond was also held liable, not as a separate contracting party, but because Mann acted as both actual and ostensible agent of the company throughout.

Application of agency and alternative liability

The Court of Appeal agreed with the trial judge’s finding that Mann was acting in both personal and representative capacities. Although Mann signed the agreement personally, Double Diamond was found liable through the doctrine of alternative liability. Under this doctrine, where an agent contracts for an undisclosed principal, both may be liable to the third party until that party elects from whom to seek a remedy. The appellate court confirmed that Smith could only obtain a remedy from one of them, but both were properly held liable at the liability phase.

Counterclaims and trial structure

Double Diamond counterclaimed, accusing Smith of passing off products in Europe under the Dawgs brand. The trial judge dismissed the counterclaim due to lack of evidence. The trial was bifurcated, with liability and remedies addressed separately. The remedies—specific performance (issuance of shares) or damages—were deferred to a future proceeding.

Costs and appellate findings

On costs, the trial judge awarded Smith costs against Mann and Double Diamond but made no order in relation to the other defendants. The Court of Appeal upheld this decision, finding no error in the judge's exercise of discretion. The general rule that costs follow the event was considered inapplicable due to the minor role of the other parties and the divided success of claims and counterclaims.

The Court of Appeal dismissed the appeal in its entirety. It concluded that the trial judge had properly applied legal principles on contract formation, credibility, agency, and alternative liability. Smith was awarded one set of costs on the appeal.