May 1, 2014

The Ontario Court of Appeal in Pirani v Esmail was asked to determine the appropriate way to determine the quantum of damages when no accounting records are available. In a 2-1 decision, the majority held that the expert’s reconstruction of accounts was not reliable given the near absence of accounting records. However, the dissenting judge found that, in the circumstances, the reconstructed accounts were reliable.

The dispute centred around an illegal rooming house. Mr. Esmail bought the property in 1989. He asked his friend, Mr. Pirani, to invest in the property in return for a 1/3 interest. A trust deed was executed confirming that Mr. Esmail held the property in trust for himself as 2/3 beneficiary and for Mr. Pirani as 1/3 beneficiary.

Over the next 13 years, Mr. Esmail provided few reports to Mr. Pirani and usually only to explain that the property was operating at a loss and to request more money. Mr. Esmail did not keep any records of the rent received or invoices of expenses, nor did his wife when she took over the management of the property.

In 2002, the property was sold. The net sale proceeds were distributed 1/3 to Mr. Pirani and 2/3 to Mr. Esmail.

In 2003, Mr. Pirani sought a full and proper accounting from Mr. and Mrs. Esmail. In 2004, after no satisfactory accounting was provided, Mr. Pirani issued a statement of claim against the Esmails.

The matter proceeded to trial. Both the Esmails and Mr. Pirani hired accountants to reconstruct the accounts as best possible. Mr. Pirani’s accountant, relying heavily on data of historical trends in the rental market, produced a report showing that the property ran at a surplus. In contrast, the Esmails’ accountant produced a report claiming that the property ran at a loss.

The trial judge found that the Esmails had committed a breach of trust and that Mr. Pirani was owed damages. In determining the amount of damages, the trial judge relied on Mr. Pirani’s expert’s report, finding his evidence the most credible.

The Esmails’ appealed. Amongst other grounds, they argued that the trial judge erred in relying on Mr. Pirani’s expert report. It was their position that the trial judge ought to have rejected both expert reports.

The Court of Appeal acknowledged that the trial judge was faced with a difficult task – determining the amount of damages in a near total absence of records. However, the Court found that the trial judge erred in accepting and relying on Mr. Pirani’s expert report. On its review of the evidence, it found that Mr. Pirani’s expert’s report was not consistent with the little available accounting evidence. It held that an expert’s report is only as good as the underlying data and assumptions, making Mr. Pirani’s expert’s report “virtually valueless.” In the absence of reliable accounting evidence, the trial judge ought to have found that the property ran at neither a loss nor a profit. As a result, the Court of Appeal reduced the amount of damages awarded to Mr. Pirani.

In the dissenting opinion, Pepall J.A. held that the expert’s opinion was reliable in the circumstances. The expert was able to explain and justify his findings and his report was reasonable. Given that there was no “palpable and overriding error,” the trial judge’s decision to rely on the report when determining the amount of damages should not be interfered with.