What happens when your “financial advisor” does not hold a valid licence

Par Bin Zeng, Gowling WLG

Par Bin Zeng, Gowling WLG
avec l’aide d’Isabelle Senécal, étudiante en droit

In Allyson Taylor Partners Inc. v. Peloton Pharmaceuticals Inc., 2016 QCCS 2580, the Court of Québec determined whether a “financial advisor” could still claim remuneration for services rendered even if they did not hold the necessary licence. The Court first looked at whether the company providing advisory services was truly acting as “financial advisor” without a valid licence, and subsequently considered whether the defendant had acted in good faith and suffered serious prejudice in order to claim nullity of its contract.
Context

The plaintiff, Allyson Taylor Partners Inc. (“ATP”), an advisory and business consulting enterprise, made a claim against Peloton Pharmaceuticals Inc. (“Peloton”) for its failure to pay ATP in full for services rendered. Following the “Financial Advisory Agreement” between the two parties, ATP’s owner and operator, Sean Budnik, had introduced prospective investors to Peloton’s executives, generating investments of $3,205,000 for Peloton.

Peloton refused to pay the completion fee under the agreement, alleging that ATP made false representations with regard to holding the appropriate certification to act as a securities dealer and assist in the transactions envisioned by Peloton and prospective investors. In particular, Peloton claimed that ATP didn’t have the right to use the title of “financial advisor” or enter into a contract as such without holding the necessary licence. As cross-plaintiff, Peloton claimed a full refund of all sums paid.

Analysis and Decision

With regard to whether ATP contravened the law by using the title of “financial advisor”, the Court stated that it “must not restrict itself to the mere reading of the wording of the agreement in question but must also consider the actual actions or services rendered as well.” Upon analysis of the nature of the services rendered by ATP and Budnik, the Court found that:

“[64] In a nutshell, regardless of the wording contained in the May 2014 Agreement, Budnik’s role in this matter was essentially to identify potential investors among his many business acquaintances and arrange for their visit at Peloton’s place of business for a presentation by Peloton’s representatives that would either lead to a Subscription Agreement being entered to or not with such investor after Agopian and his colleagues had terminated their sales pitch. There is no compelling evidence that in the execution of his contractual obligations, Budnik did significantly more than introduce potential angel investors to Peloton.”

As such, the Court concluded that, in the sense given by the Securities Act (the “Act”), the plaintiff did not act as an “advisor” or as a “financial advisor.”

The Court provided further analysis of the consequence of a violation of the Act in the event of a financial advisor acting without a proper licence. The Court noted that the Act is a statute of public order of protection and that a violation of the Act gives rise to relative nullity of contracts, rather than absolute nullity as would be triggered by a violation to a statute of public order of direction.

The Court reiterated the rulings rendered by the Court of Appeal in Groupe Trans-inter inc. v. Ragusa Canada inc., namely:

i.    The relative nullity of a contract may be confirmed if the person that the law purports to protect explicitly or tacitly renounces to claim the nullity of the contract.
ii.    In order to succeed in pleading the relative nullity of a contract, a party must have acted in good faith and suffered serious prejudice.
iii.    The burden of proof rests on the shoulders of the party which invokes the relative nullity of a contract.

In the present case, the Court found that the relative nullity of the contract appeared to be an afterthought on the part of Peloton, intended to justify its refusal to pay any form of remuneration. In fact, the Court was not convinced of Peloton’s good faith, particularly that of its president, who had known that the company needed a licensed broker, but had testified that they had only discovered ATP’s uncertified status after the institution of the proceedings. Moreover, Peloton clearly benefited from ATP’s services, which generated investments of $3,205,000. The only prejudice that Peloton would suffer was to pay ATP the amount agreed upon — therefore, no “serious prejudice,” according to the Court.

On these grounds, the Court ruled that ATP was entitled to the amount claimed and its action was granted.

Comments

The Superior Court teaches us that, regardless of how the parties are named in an agreement, it is the essence of the services rendered under the agreement that determine its nature. The designation of parties in a contract is not binding, and is subject to the interpretation of the Court. In addition, in order to invoke the relative nullity of a contract transgressing the rules of public order of protection, one must have acted in good faith and suffered serious prejudice.

You can read the full judgment here.