In a dispute that’s more than 20 years old, a former Montreal fund manager won a court ruling against a back-office provider that, the fund firm alleged, improperly stopped serving the firm.
The Quebec Superior Court ruled in favour of TIP Investment Advisors Ltd. in its legal action against Felcom Data Services Inc., alleging that the back-office firm breached its contract with the fund manager back in 2002, when it cancelled their service agreement less than a month into a contract that was supposed to run for three years.
According to the court’s ruling, at the time, TIP was in the process of moving back-office providers to CITAC Inc., which was later acquired by Felcom — which is now part of iA Financial Group — when the fund firm discovered an error in its fund valuation calculations, which delayed the transition. And, soon after, CITAC cancelled the agreement and stopped providing services to the firm.
The fund firm alleged that this amounted to putting it out of business since it couldn’t find an alternate back-office firm, and regulators ordered it to cease operations and liquidate its funds.
Now, the court has ruled that the back-office firm breached the agreement by cancelling the contract without notice, and absent one of the reasons that it could be cancelled under the terms of the deal — such as the fund firm falling into bankruptcy, or undergoing a change of control.
“CITAC cannot ignore that its withdrawal without notice is wrongful in the absence of any justifiable reason,” the court noted in its ruling (translated from French) — adding that the services it provided were essential to the fund firm’s operations.
“The grounds for cancellation invoked by CITAC do not justify the cancellation,” it noted.
According to the court, the firm argued that the cancellation was justified based on a meeting with the provincial securities regulator, which was undertaking a compliance review of the fund firm at the time, and led it to conclude that it had been misled when signing the deal with TIP.
However, the court rejected this argument, concluding that CITAC didn’t learn anything at that meeting that justified a conclusion that it had been misled. The court also rejected its argument that the fund manager failed to disclose that the regulator allegedly found serious compliance issues at the firm.
“It is difficult to imagine the scope of such a disclosure obligation,” the court said. “As long as the inspection is ongoing, the content of any potential inspection report is purely speculative.”
The court also dimissed the argument that TIP could have returned to its previous back-office provider, noting that the firm was dissatisfied with that provider, which was why it was in the process of moving in the first place — and that it would take several weeks to move to another provider.
Ultimately, it ruled that CITAC (now Felcom Data Services) was “at fault for transmitting the notice of cancellation” of the administrative services agreement. Both sides were ordered to prepare for the second stage of the hearing, which will determine whether to order damages in the case.