Executive Summary: Key Legal and Evidentiary Issues

• Validity and enforceability of the referral and non-competition agreements between ICM and Optimize.

• Determination of whether more than 15% of the value of client portfolios transferred from Optimize to TIP, triggering a refund clause.

• Classification of the stipulated remedy clause as a forfeiture clause versus an unenforceable penalty.

• Assessment of whether there was any genuine issue for trial regarding the calculation of transferred assets.

• Analysis of bargaining power and fairness in the contractual terms under unconscionability principles.

• Appropriateness of the costs awarded to Optimize as the successful party.

Facts of the case

International Capital Management Inc. (ICM), founded by John and Javier Sanchez, entered into two agreements with Optimize Inc., a wealth management firm, in 2017. The agreements included a referral agreement and a non-competition agreement, under which ICM sold its client portfolio to Optimize. The agreements were executed in December 2017, but the transaction was only completed after regulatory requirements and client consents were obtained. The transferred clients were referred to as “Referred Parties” in the agreements.

Under the terms, Optimize was required to pay ICM monthly non-competition fees and referral fees, which were paid as agreed until September 2018. The agreements contained a clause stipulating that if more than 15% of the value of the transferred client assets were subsequently moved from Optimize to entities related to ICM or the Sanchez brothers, Optimize would be entitled to a refund of all fees paid.

Events leading to litigation

Optimize alleged that, starting in August 2018, the Sanchez brothers encouraged former clients to transfer their portfolios from Optimize to TIP Wealth Manager Inc. (TIP), a firm associated with them. Optimize claimed that more than 15% of the value of the initial portfolios was transferred to TIP, thus triggering the refund clause. Optimize terminated the agreements and demanded repayment of $747,094.34 in fees. In response, ICM initiated legal action seeking a declaration that the agreements were valid and binding, and claimed damages totaling $3.6 million for alleged breaches by Optimize. Optimize counterclaimed for repayment of the fees.

Policy terms and clauses at issue

The central contractual issue was the enforceability of the clause requiring ICM to refund all fees if more than 15% of the client assets were transferred away from Optimize to related entities. ICM argued that this clause was an unenforceable penalty, while Optimize maintained it was a valid forfeiture clause.

Decisions of the lower court and the Court of Appeal

On a motion for summary judgment, the Superior Court judge found in favor of Optimize, granting its counterclaim and dismissing ICM’s action. The judge held that there was no genuine issue for trial regarding whether the 15% threshold had been exceeded, accepting evidence that 32% of the assets had been transferred to TIP. The judge also determined that the remedy clause was a forfeiture clause, not a penalty, and that there was no unconscionability in the agreements’ terms.

ICM appealed, arguing that the motion judge erred in both the factual findings and the legal characterization of the remedy clause. The Court of Appeal rejected these arguments, finding no error in the motion judge’s analysis or application of the law. The appellate court affirmed that the clause was a forfeiture clause and that the evidence supported the finding that the 15% threshold was exceeded. The court also agreed with the lower court’s application of equitable principles and unconscionability analysis, referencing the precedent set in Peachtree II Associates - Dallas L.P. v. 857486 Ontario Ltd.

Ruling and outcome

The Court of Appeal dismissed the appeal and refused leave to appeal the costs decision. Optimize, as the successful party, was awarded $747,094.34 plus prejudgment interest of $75,049.21, as well as $25,000 in costs for the appeal. The total amount ordered in favor of Optimize was therefore $847,143.55 plus the agreed costs for the appeal.