Court won’t release advisor from email agreement to buy a book

Ontario’s top court has upheld a ruling ordering a portfolio manager to pay $90,000 to a former colleague to purchase his book of business, despite there being no formal written, signed contract.

Andrew Monkhouse, managing partner of Monkhouse Law in Toronto, said he’s seeing more cases arising from disputes over the ownership of books of business — a realm that used to “historically be a bit of a handshake deal.”

The case

Patrick Farrell, an investment advisor with Gravitas Securities, sued Ronald Riley, a portfolio manager at the same firm, after Riley backed out of an email agreement to purchase Farrell’s book, according to the 2024 ruling from the Ontario Court of Appeal.

Trading securities in Farrell’s book of business generated between $250,000 to $300,000 per year in revenue for Gravitas. The firm kept 40% and the remaining 60% was split between Farrell and Riley.

Riley became the portfolio manager for Farrell’s clients in 2016. Tensions began rising in 2017 when Riley, without telling Farrell, began contacting their clients to “update their investment needs.” Farrell interpreted this as an attempt to take over his business.

After some internal conversations, Gravitas asked Riley to work with Farrell on an arrangement to buy the book. Via email on Sept. 27, 2017, Riley offered to buy Farrell’s participation rights to the 60% of revenue for $90,000, payable in 36 equal monthly instalments of $2,500, or a lump sum of $76,500.

Critically, Riley did not reference any earlier conversations between the parties, including an email Farrell had sent in July to Gravitas and Riley that said “none of the suggestions below will either individually or taken together constitute an agreement unless and until they are set out in writing and signed by all relevant parties.”

On Oct. 2, 2017, Gravitas terminated Farrell’s employment. Two days later, Farrell accepted the offer from Riley — leaving the choice between monthly payments or a lump sum up to him. But the following day, Riley said the offer was null and void. Farrell maintained there was a binding contract.

No payment was ever made, and Farrell sued Riley in October 2018 for $90,000 in damages for breach of contract.

What makes a contract?

Contract law says there must be an offer, an acceptance and “consideration” flowing between the parties for a contract to be valid.

“Both parties have to give up something, and there needs to be a meeting of the minds,” Monkhouse said. “They have to agree, basically, on what’s going to happen.”

There is no requirement for a contract to be in writing or signed. A judge just needs to find a “coherent agreement that the parties agreed to. Something as simple as saying verbally to someone ‘Hey, why don’t you work for me? Start work Monday at 9 a.m.’ That can be a contract,” Monkhouse said.

The issues in Farrell v. Riley could have been avoided by putting pen to paper.

“It really does highlight that you’re putting yourself in a risky situation if you don’t put all the terms down in writing,” Monkhouse said. “No court has ever said that we suggest against putting things in writing. This is a cautionary tale.”

Rich Appiah, founder and principal of Appiah Law in Toronto, agreed that sending the offer to purchase via email — without cross-referencing any earlier conversations or conditions — was a mistake.

“If Riley intended to rely on conditions that needed to be met to confirm a deal was in place, then he ought to have cross-referenced those conditions or he ought to have just stated his own conditions,” Appiah said.

How to sell a book properly

A critical lesson from this case is not to make any assumptions. “Be absolutely clear on the terms of the offer and don’t assume that terms of prior discussions are incorporated into the offer,” Appiah said. “Don’t leave anything to chance.”

It’s also a good idea to include timelines for acceptance.

“If Riley had put a timeline for acceptance, and that timeline expired, then he might have been able to get out of the deal,” Appiah said.

Other items can be included, such as reasons the offer could be withdrawn prior to acceptance, he added. Examples include making the offer conditional on an inspection of financial statements or a certain percentage of clients agreeing to come over.

“A contract is any document that contains terms agreed on by both parties, and it’s okay for parties to be creative as to what those terms are,” Appiah said. “If there is a concern of particular interest to a purchaser, the purchaser should think about how those concerns can be addressed through a contract.”