IN THE PROVINCIAL COURT OF BRITISH COLUMBIA

[1]           Where a contractor and homeowner have an agreement that a substantial part of the price of a construction project shall, for no apparent legitimate purpose, be segregated for payment in cash, should they—when a dispute later arises between them—be permitted to turn to the courts to adjudicate their claim and counterclaim?   These reasons for judgment address the threshold question of whether the agreement that is at the centre of controversy in New Westminster Provincial Court Action No. C14276 is unenforceable by either party by reason of common law illegality.

[2]           In this proceeding, the claimant Stevens Pools Ltd. (“SPL”) brings action against the defendants Maryanna Carlsen (“Ms. Carlsen”) and Steven John Carlsen (“Mr. Carlsen”) (collectively, the “Carlsens”) for monies that SPL says are outstanding on an unpaid invoice relating to the construction of a swimming pool (the “Pool”).  The amount claimed by SPL consists of $24,772.24 on account of goods and services allegedly provided, together with filing and service fees of $156 and $90, respectively.  The Carlsens defend SPL’s claim saying, inter alia, that what SPL has claimed in its suit vastly exceeds what remains payable according to the alleged agreed price for the construction of the Pool.  They have also brought a counterclaim against SPL for $19,507.67—the estimated cost of completing aspects of the Pool construction they say were left unfinished—together with GST of $975.38 and filing fees of $156.

[3]           Partway into the trial of the main claim and counterclaim, evidence surfaced to show that the written contract between SPL and the Carlsens under which the Pool was to be built existed in two forms. 

[4]           In the first, marked as Exhibit 2, tab 1 (“Contract Version No. 1”), the stated contract price for the Pool construction, apart from GST, excavation, extras and certain other specified exclusions, is $50,000.  In the second, marked as Exhibit 3, tab 1 (“Contract Version No. 2”)—which is the same as Contract Version No. 1 in all respects other than price—the stated contract price was $35,000 (Transcript, September 11, 2013, p. 32, lines 14-17).  Contract Version No. 2 is however accompanied by a memorandum from SPL to the Carlsens, marked as Exhibit 3, tab 2 (sometimes referred to in evidence as an “addendum”), that states, inter alia, “$15,000 fees as discussed … 50% due when concrete shell poured … 50% due prior to plastering pool”.  I shall refer to that latter document as the “Addendum”. 

[5]           Although it is not mentioned in the Addendum, both Mr. Howard Stevens, the principal of SPL (“Mr. Stevens”), and Mr. Carlsen testified that the $15,000 addressed in the Addendum was part of the price for the construction of the Pool and that it was to be paid by the Carlsens to SPL in cash.  Indeed, the evidence of both Mr. Stevens and Mr. Carlsen was to the effect that $15,000 of the contract price for the Pool was segregated, spoken to in the Addendum, and slated for payment in cash.  The effect of this was to reduce the contract price showing on the face of Contract Version No. 2 from $50,000 to $35,000. 

[6]           That Contract Version No. 2, augmented by the Addendum, is the governing version of the contractual documentation defining the parties’ rights and obligations with respect to the construction of the Pool is not in controversy.  Similarly, neither party has suggested in evidence or submissions that the goods and services that were contemplated by Contract Version No. 2 and the Addendum were not properly subject to the goods and services tax (the “GST”).  (Excavation work, performed by King Kubota Services Ltd. [“King Kubota”], was initially excluded from the parties’ agreement to construct the Pool.  However, that aspect later came within the expanded scope of work with King Kubota serving as SPL’s excavation subcontractor.  I will return to that subtopic later in these reasons.)

[7]           Contract Version No. 1 is found among the documents tendered in evidence at trial by SPL.  It does not figure among the documents tendered in evidence by the Carlsens.  Contract Version No. 2 and the Addendum are found among the documents tendered in evidence at trial by the Carlsens.  They do not figure among the documents tendered in evidence by SPL.  (I pause here to note that only SPL is represented by counsel in this proceeding and that Mr. Wijesinghe did not step into that role until after pleadings had closed and document production orders had been made and acted upon by SPL.)

[8]           The emergence in evidence of two versions of the parties’ agreement—one involving a partial payment of a substantial amount in cash—raises a potentially dispositive, threshold issue of enforceability. Accordingly, I gave both SPL and the Carlsens an opportunity to lead all the evidence they wished to lead on the circumstances surrounding the existence of two versions of their agreement and the partial cash payment.  I then invited submissions so that the parties could present arguments, based on the evidence and the governing law, as to whether their agreement regarding the construction of the Pool is enforceable or not.  I have now received and considered those submissions and these are my reasons for judgment on the threshold issue of enforceability.

[9]           As I have noted, the governing version of the parties’ agreement—that is, Contract Version No. 2 augmented by the Addendum—reduces the face price of the agreement as originally stated in Contract Version No. 1 from $50,000 to $35,000 and (on the parties’ sworn testimony) allocates $15,000 to the Addendum to be paid in cash.

[10]        What follow are two extracts from the testimony of Mr. Stevens of SPL on that point taken from the second day of his examination-in-chief:

[11]        It is clear from the foregoing exchanges that SPL was content to proceed with bifurcated documentation and an arrangement with the Carlsens under which $15,000 of the price of construction of the Pool would be paid by them to SPL in cash.

[12]        While he claimed he was not told so explicitly, it was at the very least Mr. Stevens’ surmise that the Carlsens sought to configure the payment arrangements in the way reflected by Contract Version No. 2 coupled with the Addendum “for tax reasons”.  I quote again from his testimony, given during his evidence-in-chief:

[13]        I must acknowledge that after enforceability had taken its place at the front and centre of this action as a threshold issue, Mr. Stevens gave different testimony on the GST topic, suggesting (during a continuation of his examination-in-chief almost a year later) that SPL’s arrangement with the Carlsens included a discount to reflect the GST payable on the $15,000 cash portion.  His testimony then was to the effect that by agreeing to cover the GST on that portion itself, SPL was able to afford the Carlsens a break on the price such that the actual price of the work covered by Contract Version No. 2 together with the Addendum, apart from exclusions, was reduced from $50,000 to $49,250.  When giving this testimony Mr. Stevens sought to persuade the court that under this arrangement SPL agreed to pay the $750 in GST on the $15,000 portion to the Canada Revenue Agency (the “CRA”) on the Carlsens’ behalf: see, for example, Transcript, July 17, 2014, p. 5 at line 2 to page 6 at line 17. 

[14]        I cannot accept Mr. Stevens’ testimony given in July of 2014 in this regard as being credible.  He made no mention whatsoever of any such arrangement when he testified in September of 2013 about the $15,000 cash component of the parties’ bargain.  Materialising as it did almost a year later when issues of illegality and potential unenforceability had come plainly into view, Mr. Stevens’ explanation in July of 2014 came across as an ex post facto reconstruction of events that was more favourable to SPL’s interests in this action than the portrayal of those events he had given when he testified about these matters the previous September. 

[15]        Moreover and perhaps more importantly, Mr. Stevens’ later testimony that SPL had agreed to reduce the gross price for constructing the Pool from $50,000 to $49,250 to give the Carlsens a $750 GST-related discount on the $15,000 cash component is contradicted by his repeated references—found in the passages from his testimony quoted above and elsewhere—to the gross price, apart from exclusions, having been always fixed at $50,000.

[16]        Mr. Stevens gave evidence-in-chief during his later (July, 2014) court appearance to the effect that SPL had in fact remitted the $750 in GST payable on the $15,000 cash component of his company’s agreement with the Carlsens to CRA directly.  However, he was unable to offer any documentary proof of SPL having done so, saying simply that that remittance was commingled within an omnibus remittance made by SPL to CRA of all of the GST it was obliged to remit for the period in question.

[17]        This testimony, too, undermines the court’s confidence in the evidence Mr. Steven gave on behalf of SPL.  While it very likely is the case that any GST which was payable by SPL to CRA at the relevant time was paid in a lump sum remittance, that lump sum would have represented the aggregate of all of the individual amounts of GST that SPL was bound by law to collect and remit during that period.  This means that someone within SPL (perhaps Mr. Stevens’ wife) must have been tasked with identifying what GST was payable, file by file, as a result of all of the company’s dealings with its various customers and totalling those amounts in order to ascertain what the lump sum remittance ought to be.  It is inconceivable that paper trails would not link each lump sum GST remittance made by SPL back to the various individual transactions giving rise to SPL’s GST collection and remittance obligations.  Without that documentation, I cannot accept as credible Mr. Stevens’ uncorroborated assertion that GST on the $15,000 component of its agreement with the Carlsens was in fact paid to CRA, particularly when it is recalled that there was no mention whatsoever made by Mr. Stevens of any discount/vendor remittance arrangement with the Carlsens in that regard until a later phase of his evidence-in-chief.

[18]        Beyond all of that, Mr. Stevens’ evidence—in which he sought to explain why $15,000 of the contract price for the construction of the Pool was segregated for payment in cash—lacks an air of reality.  It simply does not accord with common sense.

[19]        At bottom, that explanation involves a negotiated arrangement between SPL and the Carlsens under which SPL would provide a measure of price relief to the Carlsens by paying itself part of the GST that would otherwise have been payable by the Carlsens on the cost of construction of the Pool.   The mechanism said by Mr. Stevens to have been chosen by the parties to operationalise that arrangement was the segregation of about $15,000 of the $50,000 price of construction of the Pool for payment in cash. 

[20]        However, this mechanism, on all the evidence before the court, was entirely superfluous in terms of SPL’s professed intention to provide the Carlsens with a lawful, above-board discount.  SPL was always at liberty to grant a discount to the Carlsens of any kind, including absorbing (and remitting to CRA itself) some or all of the GST otherwise payable by the Carlsens on their transaction.  There is nothing about granting a lawful discount that requires any part of the contract price for the Pool to be paid in cash.  I repeat that that or any legitimate discount could have been granted to the Carlsens by SPL on an entirely above-board basis without disturbing the way the work was to be paid for as between cash or other methods.  In other words, Mr. Stevens’ explanation involves the coupling of his discount explanation to a cash payment regime when no cash payment regime was necessary to permit or facilitate the granting of a lawful discount.  SPL’s specification of a partial cash payment was plainly done to effect some purpose but I cannot accept that it was done for the purpose given by Mr. Stevens in his testimony because that purpose was not dependent in any way upon payment of part of the agreed price for the Pool being made in cash.

[21]        This brings me to the proverbial elephant in the room. 

[22]        SPL led no evidence whatsoever to show, much less prove, that it reported, as income to CRA, any part of the $15,000 cash it received from the Carlsens for the construction of the Pool.  This, to my mind, stands as a remarkable gap in SPL’s evidence.  It is even more surprising than the fact that SPL led no documentary evidence whatsoever to show that the GST payable on the $15,000 component—which Mr. Stevens said in the second phase of his testimony was remitted by SPL to CRA on the Carlsens’ behalf—was ever in fact remitted.

[23]        I have explained already that when the issue of the $15,000 cash payment first arose the question of enforceability surfaced with it, and that I gave the parties an opportunity to return to court and call all of the evidence they cared to call in light of the questions that the cash payment presented.

[24]        That there exists an underground economy in Canada—in which payments for goods and services are made in cash as a tax evasion ploy—is, I believe, a “social fact” in the sense meant by cases such as R. v. Spence, 2005 SCC 71 (CanLII), [2005] 3 S.C.R. 458.  It is a social fact of such notoriety that I am permitted to take judicial notice of it.  Case law refers to CRA or its predecessors having, at times, “underground economy auditors” and investigation units: see, for example, R. v. Giroux, [2014] B.C.J. No. 823 (Prov. Ct.), R. v. Granger, [2014] O.J. No. 3978 (C.J.) and R. v. Ostrowski, O.J. No. 2793 (S.C.J.).  CRA has recently published, on its website, a Tax Alert entitled “Reducing Participation in the Underground Economy—Canada Revenue Agency 2014–2015 to 2017–2018” (accessible online at http://www.cra-arc.gc.ca/gncy/lrt/strtgy-eng.html).  One can find decisions in which the existence of the underground economy, and its effects, are acknowledged without any formal proof of the same having been tendered: see, for example, King v. Canada, [2002] T.C.J. No. 489 (T.C.C.).  And while stopping just short of taking judicial notice of the underground economy, Forsyth J. of the Ontario Court of Justice was prepared in R. v. Borg, 2007 ONCJ 451 at least to acknowledge that the following description—given by Crown counsel of one of the ways that that economy operates—has an “air of reality”:

[25]        One would have expected that, given the spectre of a potential finding that the cash payment feature of its dealings with the Carlsens was incorporated for tax evasion purposes (thereby potentially rendering its claim against the Carlsens unenforceable), SPL would have moved swiftly and decisively to scotch any suggestion of such tax evasion.  That is, one would have expected that SPL would have spared no effort in these circumstances to prove to the court that its dealings with the Carlsens were not “under the table”, underground economy dealings by tendering proof that the cash it received pursuant to the Addendum to Contract Version No. 2 did indeed figure in what SPL reported to CRA as part of its earnings for the year in which that cash was received.

[26]        SPL called no such evidence. 

[27]        In the circumstances, I consider—upon the authority of, inter alia, Boggs v. Harrison, [2009] B.C.J. No. 1181 (S.C.)—that I am justified in exercising my discretion to draw an adverse inference against SPL in this regard, namely, an inference that whatever filings it made to report its income in the year in question would not have been helpful to it for present purposes in that those filings would not have included any reporting of the cash component of the contract price that the Carlsens paid to it for the construction of the Pool.

[28]        I so find.

[29]        Mr. Carlsen was the only witness to give evidence on behalf of the defendants.  In his testimony he disagreed with the evidence of Mr. Stevens in a number of respects.  For example, he denied having ever seen or discussed Contract Version No. 1—the version which on its face specifies a $50,000 contract price: Transcript, July 17, 2014, p. 18, lines 21-27.  To the contrary, he testified that the only version he ever saw was Contract Version No. 2, accompanied by the Addendum: Transcript, July 17, 2014, p. 22, lines 4-6.  

[30]        Mr. Carlsen also flatly denied what was said by Mr. Stevens in the second phase of his evidence-in-chief (but not the first) about a discussion in which the Carlsens sought a lower price for the construction of the Pool and which led, ultimately, to a discount being granted: see, for example, Transcript, July 17, 2014, and p. 22, lines 7-16. 

[31]        Mr. Carlsen’s evidence regarding what happened and his understanding of how it came to pass that $15,000 of the price of construction of the Pool came to be segregated from the other $35,000 for cash payment, is best captured in this exchange during his evidence-in-chief:

[32]        In an exchange I had with Mr. Carlsen at the conclusion of his cross-examination by counsel for SPL (followed by further such cross-examination), Mr. Carlsen gave the following, additional evidence regarding the Pool project’s pricing structure, the $15,000 cash component and the tax aspects of the arrangement:

[33]        The testimony and documentary exhibits I have reviewed above invite the inference that SPL and the Carlsens structured their agreement regarding the construction of the Pool to include a $15,000 cash payment component for the purpose of evading the payment of tax on that component.  The testimony and documents invite the further inference that this was a bilateral and consensual deception.  SPL benefited by securing the Carlsens as customers.  It was able to do so because it could offer them a more competitive price, given that $15,000 of the revenues to SPL from the Carlsens were “off book” revenues and thus not taxed.  The Carlsens benefited by getting SPL to commit to constructing the Pool for a more competitive price overall, and by being able to evade payment of GST on the $15,000 cash component.

[34]        Mr. Stevens gave evidence, quoted earlier, in which it was his surmise that the Carlsens wished to pay $15,000 “for tax reasons” (which I take to mean “tax savings”).  That evidence I accept (in contradistinction to the conflicting evidence he later gave about SPL having discounted the price for construction of the Pool by the amount of the GST on the $15,000 component and remitted payment of that GST to CRA directly—evidence that I found was not credible).

[35]        As can be seen, Mr. Carlsen chose his words carefully when he gave his testimony about the cash payment.  He confined his testimony in this regard mainly to the GST issue.  However, the words Mr. Carlsen chose in my view reflect his knowledge that GST had to be paid by someone in respect of the goods and services covered by the $15,000 component of the agreement under which the Pool was to be constructed if the law were to have been complied with.  Mr. Carlsen knows he didn’t pay that tax directly himself.  He did not say that he knew that SPL paid that tax.  And he was careful to say that he wasn’t about to assume anything about SPL paying that tax—either out of the $15,000 it received from him or out of other funds at its disposal.

[36]        Mr. Carlsen said nothing at all about the larger question of whether he was able to secure a better price from SPL for the construction of the Pool because SPL was going to receive $15,000 of the contract price in cash—cash that he and anyone might reasonably infer would not be reported or taxed in SPL’s hands.  The hiving off of $15,000 for cash payment had no apparent, legitimate purpose.  Surely, that aspect of the scheme put Mr. Carlsen on inquiry if it wasn’t discussed directly.  Surely he had some thoughts about why the transaction was structured in the manner it was.   I infer that, even if nothing was said explicitly, Mr. Carlsen recognised that SPL could give him a better price because its margin for the job would be improved if it got some of its money in a manner that would enable it to avoid paying tax on it.  Is this any different from those situations that sometimes arise when, for example, a customer asks an antique dealer what price he is charging for, say, a pewter candlestick, only to be met with the question in reply, “How will you be paying?”  To borrow a phrase from Forsyth J. in Borg (at para. 166), one would have to have been reposing for a long time “under a rock” not to understand the message that is being conveyed in such dealings.

[37]        In approaching this matter I instruct myself that the evidence of the parties’ true purpose in structuring their dealings as they did regarding the $15,000 cash payment must be approached, as to standard of proof, from a balance of probabilities perspective.  Regardless of the moral turpitude that clings to the dealings currently under scrutiny, the “more likely than not” standard of proof that governs in all civil matters in Canada is the standard that applies here: F.H. v. McDougall, 2008 SCC 53 (CanLII), [2008] 3 S.C.R. 41.  I further instruct myself that, there being no direct evidence of the reason the parties had for segregating $15,000 of the contract price for the Pool for cash payment, I am operating in the realm of circumstantial evidence and that, accordingly, I must approach the question before me in the manner summarised in this helpful passage from the recent decision of Williams J. in Paguio v. Fraser et al., 2011 BCSC 1519 at para. 61:

[38]        I begin with the GST.  In my respectful opinion, the evidence before me compels, on a balance of probabilities, the reasonable inference that, at the very least, there was a tacit understanding (if not an express agreement) between SPL and the Carlsens that no tax would be remitted by either party on the $15,000 component of the cost of construction of the Pool.  There is no credible evidence before the court that GST was ever paid on that component by either the Carlsens or SPL on the Carlsens’ behalf.  Moreover, neither party gave any evidence to show that there was any legitimate commercial or business purpose served by segregating $15,000 from the cost of construction and subjecting it to different treatment than was given to the remainder of the contract price.

[39]        I return now to the adverse inference I have drawn against SPL, namely, that SPL did not report the $15,000 cash payment as income or pay tax on it.  Here, too, the evidence before me compels, on a balance of probabilities, the reasonable inference that, at the very least, there was a tacit understanding (if not an express agreement) between SPL and the Carlsens that the Pool could be constructed at a lower cost if SPL didn’t have to share some of its revenue from the project with CRA.  The way this was operationalised was to segregate $15,000 for payment in cash, thereby pushing it “under the table”.  There is no evidence before the court that tax was ever paid on that component by SPL. 

[40]        This arrangement worked illegitimately to the mutual benefit of both parties.  By effectively removing tax on the $15,000 component from the equation, the Carlsens stood to get the Pool they wanted at a better price; SPL, for its part, stood a better chance of “making the sale”—that is, getting the Carlsens to commit to engaging SPL to build the Pool that the Carlsens wanted because the actual cost to them could be lowered.  And, SPL got to keep the part of the $15,000 cash payment that ought to have been remitted to CRA. 

[41]        In sum, the irresistible inference is that $15,000 of the cost of construction of the Pool was effectively pushed “under the table” by both SPL and the Carlsens, thereby benefiting both but depriving CRA of the tax that was payable on it. 

[42]        I so find.

[43]        At the beginning of this section of these reasons for judgment I posed the following question: “Why was $15,000 segregated from the contract price for the Pool for payment in cash?”  After analysing the evidence the answer I have come to is this: “Some $15,000 was segregated from the contract price for the Pool for payment in cash in order to move that part of the contract price ‘under the table’ and thereby enable both SPL and the Carlsens to benefit by eliminating some of the tax payable in connection with their transaction.”

[44]        A court is not foreclosed from potentially deciding a contract case on the basis of questions of illegality and unenforceability simply because those questions are not raised in the pleadings.  In this regard, in Menard v. Genereux, (1983), 1982 CanLII 2076 (ON SC), 39 O.R. (2d) 55 (H.C.), Krever J. (as he then was) stated the following:

[45]        This passage has been quoted with approval by the Supreme Court of Canada in Continental Bank Leasing Corp. v. Canada, 1998 CanLII 794 (SCC), [1998] 2 S.C.R. 298 and, as well, in various decisions of the British Columbia Court of Appeal.  One of those decisions is Canada Trustco Mortgage Co. v. Renard, [2008] B.C.J. No. 1704 (C.A.), where Frankel J.A. (Finch, C.J.B.C. and Groberman, J.A. concurring) also noted that, where a trial judge identifies issues of illegality and unenforceability that are not pleaded, the parties must be afforded a proper opportunity to address those issues in evidence and argument (see paras. 33-42).

[46]        As has been explained above, I invited SPL and the Carlsens to call all of the evidence they needed to call and make all of the submissions they needed to make to address the issues of possible illegality and unenforceability that arose partway through trial in the case at bar.  I believe, therefore, that I have acknowledged and responded to the legitimate concern, described in para. 38 of Canada Trustco, that “[f]airness requires that a trial judge not bring issues into litigation without giving the parties an opportunity to address them”.

[47]        I have earlier concluded that under the governing agreement—that is, Contract Version No. 2 coupled with the Addendum—SPL and the Carlsens agreed to segregate $15,000 from the contract price for the Pool for payment in cash in order to move that part of the contract price “under the table” and thereby evade the payment, by both, of tax on it.

[48]        I have little difficulty in concluding that any contract entered into by parties with, inter alia, that kind of purpose in mind is immoral, illegal and contrary to public policy.  As Sutherland J. stated in Webster v. Madigan, [1994] O.J. No. 3034 (C.J.), “[i]t is beyond doubt that an agreement or scheme that is designed to mislead taxing authorities is illegal [citations omitted]” (at para 144).

[49]        A partial parallel to the facts of the case at bar can be seen in the decision of Letkeman v. Zimmerman 1977 CanLII 196 (SCC), [1978] 1 S.C.R. 1097.  In that case, an intending purchaser of real property had sought financing from a mortgage company.  To enable himself to obtain a larger loan, he and the vendor collaborated in preparing two sets of purchase and sale documentation—one reflecting a fictitious purchase price of $135,000 (to deceive the mortgage company into advancing more than the property could truly secure) and the other reflecting the true purchase price of $117,000.  When the vendor refused to complete the transaction, the purchaser sought to specifically enforce their agreement.  Evidence of the two sets of documentation surfaced at trial.  The trial judge held that the parties’ bargain was an immoral transaction and that for that reason they could not look to the courts to enforce it.  That result was ultimately upheld by the Supreme Court of Canada.

[50]        Like the parties in Letkeman, SPL and the Carlsens also had documentation which misrepresented the true consideration passing from the purchasing party to the selling party.  While both understood and agreed that the real contract price for the Pool (apart from exclusions) was $50,000, they were content to document their bargain with Contract Version No. 2 which stated the contract price to be $35,000.  The other part of their bargain, reflected in part by the Addendum, segregated $15,000 of the $50,000 contract price for special treatment—that is, payment by cash (though the parties did not, in fact, record in writing the fact that the $15,000 would be payable in cash in the Addendum or anywhere else).  I have found that there was no legitimate purpose served by the parties choosing to make $15,000 of the price of construction of the Pool payable in cash; rather, I have concluded that that mutually beneficial manoeuvre was aimed at isolating $15,000 from tax.  I have also concluded that tax has not been paid on that $15,000 portion of the price of construction by either party.  Just as it was immoral for the parties in Letkeman to arrange their dealings to gain an advantage by making their purchase and sale transaction more likely to be consummated by obtaining financing that would not have been available on the true figures, so too was it immoral for SPL and the Carlsens to arrange their dealings to move $15,000 “under the table” as a cash payment upon which no tax was paid.

[51]        Frohling v. Mussfeld, [1987] B.C.J. No. 2402 (S.C.) is a somewhat more recent British Columbia case on similar facts which yielded a similar result to that seen in Letkeman.  In that case there was a contract to purchase property for $170,000 with $100,000 on paper and $70,000 in “cash under the table” to avoid capital gains tax.  There too, the court found the parties’ contract to be immoral and thus illegal.

[52]        Viewing the facts of the case at bar through the lens afforded to me by these authorities I find that, by reason of the segregation of $15,000 for payment in cash for a colourable purpose, the parties’ agreement for the construction of the Pool is an immoral and illegal contract.  For similar decisions of this court, see Prince Electric Ltd. v. Brar, [2004] B.C.J. No. 353 (Prov. Ct.) and, very recently, Poore v. Aimola, [2014] B.C.J. No. 292 (Prov. Ct.).

[53]        Illegal contracts are presumptively unenforceable.  As Laycraft J.A. stated in McDonald v. Fellows, [1979] A.J. No. 841 (C.A.), “[s]ince 1775 this principle has been repeatedly applied with the result, generally, that gains or losses resulting from illegal transactions remain where they have fallen” (at para. 24).

[54]        Moreover, parties to an illegal contract are prima facie equally culpable for the illegality: Rosemary v. Nuberg & Dale Construction (1982), 1982 CanLII 1845 (ON SC), 40 O.R. (2d) 152 (H.C.J.).

[55]        Nevertheless, the presumption against enforceability does yield in some circumstances.  Exceptions to the general rule are acknowledged, by Laycraft J.A. in McDonald v. Fellows and in numerous other authorities: see, especially, Webster v. Madigan and the cases cited therein.

[56]        If an illegal contract remains executory and a party to it “repents”, that party may be able to turn to the courts to enforce the other party’s obligation.  That exception, however, has no application to the case at bar because the parties’ agreement to construct the Pool is manifestly not executory but has been substantially performed.  Neither have SPL or the Carlsens “repented” or renounced the illegality that is writ large on the face of their bargain.  To the contrary, each seeks to invoke the assistance of a court of law to enforce against the other the parts of the illegal contact that favour their respective interests.

[57]        Another exception to presumptive unenforceability is sometimes recognised where the parties to an illegal contract are not in pari delicto—that is, where they are not equally culpable for the wrong that inheres in the illegality. Thus, in some circumstances a less blameworthy party may be permitted to recover what has been transferred to the more blameworthy party under an illegal contract.  Here as well the parties to the case at bar do not qualify for this exception because, as the evidence shows, they are consummately in pari delicto.

[58]        In this case, each of SPL and the Carlsens seek to enforce aspects of their agreement against the other.  Their bargain is their joint work product, formulated to serve the interests of both SPL and the Carlsens.  (I have already described, earlier in these reasons, how the parties’ plan to push $15,000 of the purchase price “under the table” and isolate it from tax helped SPL “make the sale” and gave the Carlsens some welcome price relief.)  Had their bargain been performed fully at both ends, SPL and the Carlsens would have benefited fully from it, including in ways associated with tax evasion.  Plainly, SPL and the Carlsens are equally culpable for having created an agreement which was fashioned in such a way as to redound to their mutual benefit and which both parties knew and intended would permit the payment of tax to be evaded on $15,000 of the $50,000 that the parties agree was the real cost, apart from exclusions, of construction of the Pool.

[59]        Even the framework within which SPL and the Carlsens have litigated their claim and counterclaim, respectively, confirms the conclusion that they have always been in pari delicto.  SPL seeks to recover contract damages from the Carlsens and it does so through the main action.  The Carlsens also seek to recover contract damages from SPL via their counterclaim.  This is not, therefore, a case where a defendant (or defendant by counterclaim) raises illegality as a way of attempting to defeat the claim of its opponent.  Here, neither SPL nor the Carlsens invokes illegality at all; to the contrary, both parties, for their separate reasons, seek to enforce a bargain despite its manifestly immoral and illegal character.

[60]        Where, as here, the parties to an illegal contract are demonstrably in pari delicto, then neither should be permitted to turn to the courts to enforce it.  Macdonald L.J.S.C. took that view in Frohling when he declined to enforce the parties’ immoral and illegal contract for the purchase of real property, given the “off book” $70,000 price component, stating:

[61]        Another exception, in which a remedy might remain available to a party who has suffered losses in relation to an illegal contract, is sourced in the equitable realm of unjust enrichment.  In those circumstances the party seeking relief does not, in effect, seek to enforce the illegal contract but, rather, turns to equity for a remedy. 

[62]        However, where (as here) the parties to the impugned transaction are manifestly in pari delicto, recourse to equity is, and should be, difficult indeed.  In such circumstances, neither can claim to have the clean hands with which equity must be both greeted and entreated. 

[63]        Wojnarowski v. Bomar Alarms Ltd., O.J. No. 87 (S.C.J.) is an Ontario case in which plaintiffs sought repayment of monies they had advanced to a defendant.  The loans were secured by three promissory notes.  Interest payments made by the defendant borrower under the notes were made, at the plaintiffs’ insistence, to fictitious payees in order to evade tax payable by the plaintiffs on that interest.  The defendant willingly participated in this deceptive scheme for a time and then, when he later defaulted on the loans, the plaintiffs brought action against him.  The defendant raised illegality as a defence to enforcement of the outstanding debt but the court had little patience with the either party’s arguments, and especially those raised by the plaintiff which invoked the equitable notion of unjust enrichment.

[64]        Quinn J. used strong language in Wojnarowski—stronger language, I hasten to say, than is apt to describe the parties and circumstances here—although the analysis and application of the law are, in my respectful view, perfectly sound and transferable to the case at bar.  Some sense of where his Lordship’s reasoning was headed can be discerned from the opening words of the judgment:

[65]        Dealing specifically with remedies, Quinn J. went on to state (again, using epithets I would not employ to describe SPL and the Carlsens but reasoning that I nevertheless find compelling):

[66]        I believe the court should, in the case at bar, be similarly hesitant to yield to the submission that equitable relief be granted to either party, and for the same reasons.  Both parties are tainted with the illegality that is manifest in the terms on which they chose to do business. Neither should have expectations that this court’s limited equitable jurisdiction would be available to them in the circumstances of this case.

[67]        Moreover, to the extent that the notion of a “windfall” to the Carlsens pervades some of the reasoning behind the unjust enrichments arguments advanced by SPL, I would make the observation that the consequences of this court declining to enforce the bargain at issue in the present case falls hard on both the claimant and the defendants.  There is no asymmetry of the kind sometimes seen in the unjust enrichment jurisprudence.  The loss of the ability by either party to enforce the terms of the bargain under which the Pool was constructed deprives both SPL and the Carlsens of recovery on claims—one asserted as a five-figure main claim and the other asserted as a five-figure counterclaim.  In that respect, each of SPL and the Carlsens is deprived of a right of action against the other, leaving neither with a “windfall” and making the end result for both, in a sense, something of a “wash”.

[68]        Lastly, SPL has argued before me that it should be permitted to pursue its counterclaim against the Carlsens because the subject of the main claim relates to excavation costs—costs which were not initially within the scope of either Contract Version No. 1 nor Contract Version No. 2 augmented by the Addendum.  This argument is made by SPL in order to create distance between the actual work for which it now claims payment and the aspect of the parties’ dealings involving the $15,000 cash payment. 

[69]        I will say, with respect, that this argument, too, has no merit.  

[70]        The evidence before the court shows clearly that while excavation was, indeed, initially excluded from the original scope of work to be performed by SPL, the contract under which the construction proceeded—that is, Contract Version No. 2 plus the Addendum—was eventually amended to include excavation. 

[71]        It is common ground that there was no privity of contract between King Kubota and the Carlsens.  King Kubota was SPL’s excavation subcontractor and it rendered all of its accounts to SPL, not to the Carlsens.  When King Kubota’s principal, Andrew Kettner—a witness at trial for SPL—was introduced to the court by SPL’s counsel, he was introduced as “the subcontractor from King Kubota” (Transcript, June 6, 2013, p. 11).  During his examination-in-chief, when Mr. Kettner was asked who King Kubota did its work on the Carlsen pool project for, he replied “for Stevens Pools” (Transcript, June 6, 2013, p. 17). 

[72]        Exhibit 1 is King Kubota’s estimate of the cost of excavation services.  In the line next to the word “Customer” on the form, Mr. Kettner has written in “Stevens Pools”.  King Kubota’s invoices for the work it did on the Pool project are, similarly, addressed to “Stevens Pools Ltd.” as King Kubota’s “Customer” in the documents that SPL tendered in evidence as Exhibit 2, tabs 4 and 5.

[73]        There are no third party proceedings on foot under New Westminster Provincial Court Action No. C15276.  It is SPL that has asserted a claim against the Carlsens to recover what it says is outstanding to it from them in relation mostly to the excavation work that had to be done before the Pool could be put in the ground. 

[74]        The Amended Notice of Claim identifies SPL’s claim as one for “goods and services unpaid”.  One question posed on the Notice of Claim form is this: “Describe the goods and services you provided” (emphasis added).  SPL’s response to that question is “Site preparation, excavation, backfill and site grading, remove debris and spoils, deliver and place gravel products”.  The “you” in that exchange is SPL.  The Amended Notice of Claim goes on to allege that the Carlsens agreed to pay SPL for the services that SPL rendered to them through King Kubota as its subcontractor.

[75]        There could be no Pool without the initial excavation that made room in the ground for it.  I find as a fact that as matters unfolded, the scope of work of Contract Version No. 2 plus the Addendum was extended to include that excavation.  It is SPL that now sues the Carlsens in contract to recover payment for it.  The excavation work is all of a piece with the rest of the activities contemplated by Contract Version No. 2 plus the Addendum that, together, had to be performed in order that the Pool might be constructed.   It would be consummately artificial for the court to sever for separate enforcement aspects of the project overall that SPL itself has brought under its own contractual umbrella and sued for in its own name.  I therefore decline to provide SPL with the detour around the consequences of its own illegality that its counsel has urged upon me. 

[76]        Beyond all of that, as Sutherland J. stated in Webster, severability is generally unavailable in cases, like the case at bar, where tax evasion is involved:

[77]        Like the illegality in the agreement in Webster, the illegality in the agreement in the case at bar was motivated by tax evasion.  The contract for the construction of the Pool, too, is “highly objectionable” in the sense meant by Sutherland J. and that illegality “taints the whole of the agreement” including the part that SPL seeks to sever and enforce.  In my view, SPL’s “plea for partial enforcement” must, in these circumstances, be rejected.

[78]        SPL places considerable reliance upon the decision of Bowden J. in Tsoi v. Lai, [2012] B.C.J. No. 1538 (S.C.) and, in particular, the determination in that case that an otherwise illegal contract could still be enforced in order to prevent the unjust enrichment of one of the parties.  I do not question that there are occasions where, to overcome that particular kind of injustice, courts can and do find ways to grant relief to certain, qualified parties to illegal bargains.  However, Tsoi is distinguishable from the case at bar in several respects and, thus, it does not avail either of the parties here. 

[79]        To begin, the illegality in Tsoi was not rooted in tax evasion but in concerns about illegal gambling.  I do not mean to suggest that illegal gambling is not a matter of pressing concern but, as the quotation from Webster quoted above makes plain, contracts involving tax evasion are singled out by the courts as being “highly objectionable” and, in my opinion, the law seems to be clear that they are less likely to be enforced despite their illegality than contracts relating to illegal gambling.

[80]        Moreover, the court in Tsoi recognised the potential for a true windfall to one party resulting in that case if equitable intervention did not occur; here, as I have sought to explain, the consequences of non-enforcement of the contract for SPL and the Carlsens is roughly symmetrical, making it difficult for either party to argue credibly that the other will be unjustly enriched if enforcement is denied.  A ruling of unenforceability deprives both of their rights of action against each other for amounts that do not differ greatly.

[81]        The courts in pari delicto analysis in Tsoi led Bowden J. to recognise significantly greater blameworthiness in the defendant than in the plaintiff.  That, too, is a distinguishing feature.  In the case at bar, on the facts as I have found them, both SPL and the Carlsens were content to structure the terms of the agreement under which the Pool was constructed in a way that conferred on them a symmetrical, mutually beneficial and satisfactory outcome—that is, a bargain that, through tax evasion, amounted to a better deal for both than they would have had if everything had been done above board and taxed.  In my view, neither SPL nor the Carlsens can be said to be more or less culpable than the other in relation to the plan they formulated together to have the Pool constructed according to the shadowy dictates and practices of the underground economy.

[82]        Brazier v. Columbia Fishing Resort Group Corp., [1997] B.C.J. No. 1006 (S.C.), was also cited to me by SPL, mainly in support of its unjust enrichment argument.  In that case the court doubted that the conduct of the parties even amounted to common law illegality (see para. 19), but if it had, Burnyeat J. recognised the strong policy argument advanced to the effect that to allow one of the parties to be unjustly enriched by $400,000 at the expense of the others called for the court’s equitable intervention.  Here again, a decision to decline to enforce the illegal agreement at issue in the present case would create no such asymmetrical effect given that both a claim and a counterclaim seeking the same amount (within a few thousand dollars) would fall together, leaving neither party in a substantially better position than the other.

[83]        I have found earlier in these reasons that $15,000 was segregated from the contract price for the Pool for payment in cash, and that that segregation was performed for a colourable purpose.  I have found that partial payment in cash was agreed upon by the parties in order to move that part of the contract price “under the table” and thereby enable both SPL and the Carlsens to benefit by eliminating some of the tax payable in connection with their transaction.  This renders their agreement immoral and, hence, illegal at common law.  Because it is an agreement motivated by tax evasion, it is—by comparison to other forms of illegal contract that come before the courts from time to time—particularly objectionable in the eyes of the law.

[84]        The agreement at issue in this case is prima facie unenforceable by either party owing to its illegal character.  I have considered the various exceptions that can sometimes open the door to enforcement of illegal contracts but I have found none of them to be applicable in the case at bar. 

[85]        These parties’ bargain cannot be saved on the ground that it is executory and that one or more of the parties has “repented”.  To the contrary, the contract here has been substantially performed and, far from repenting, SPL seeks to enforce it against the Carlsens by bringing the main action and the Carlsens seek to enforce it against SPL by bringing their counterclaim. 

[86]        Neither of the parties is less blameworthy than the other in the circumstances of this case and, thus, neither is deserving of a more lenient approach to the illegality that has cast a shadow over their bargain.  Rather, SPL and the Carlsens are consummately in pari delicto as regards the illegality that taints their bargain.

[87]        Equitable intervention to prevent unjust enrichment is sometimes seen in illegal contract cases but the fact that the parties here are in pari delicto renders such intervention unlikely.  But, more importantly, a ruling of enforceability in the case at bar strikes hard at both SPL and the Carlsens.  Both lose the right to pursue against each other claims that are not greatly different as to quantum.  This is not, in other words, a case in which a ruling that an illegal contract is unenforceable would produce markedly asymmetrical consequences for the parties who entered into it.

[88]        Lastly, there is no way lawfully to sever the illegal content from the remainder of these parties’ bargain.  Illegality pervades and taints the entirety of their undertaking—an undertaking pursuant to which both parties sought to gain a mutual benefit by isolating $15,000 of the cost of construction of the Pool from tax. 

[89]        In the result, the door to enforcement remains closed and, to paraphrase the language employed by Laycraft J.A. in McDonald v. Fellows, the gains and losses flowing from the illegal transaction into which SPL and the Carlsens entered must remain where they have fallen.

[90]        SPL’s claim against the Carlsens as set out in its Amended Notice of Claim is, accordingly, dismissed.  Similarly, the Carlsens’ claim against SPL as set out in its Amended Reply and Counterclaim also stands dismissed.

[91]        Orders accordingly.