CITATION: Cascadia Fine Art Limited Partnership v. Gardiner Roberts LLP, 2014 ONSC 6602

DIVISIONAL COURT FILE NO.: 468/13

DATE: 20141117

ONTARIO SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

BETWEEN:

CASCADIA FINE ART LIMITED PARTNERSHIP, CASCADIA FINE ART NO. 2 LIMITED PARTNERSHIP and PANFIN EQUICAP LTD.

Plaintiffs (Appellants)

– and –

GARDINER ROBERTS LLP and GOWLING LAFLEUR HENDERSON LLP

Respondents

Alfred J. Esterbauer, for the appellants

Harvin Pitch, for the respondent Gardiner Roberts LLP

Christine Fotopoulos and Scott Jones for the respondent Gowling Lafleur Henderson

HEARD at Toronto: October 30, 2014

c. horkins J.

[1] The plaintiffs appeal the final order of Master Graham dated September 17, 2013 that dismissed this action at a status hearing. The Master found that there were three years of unexplained delay and the plaintiffs failed to show that if the action continued there would be no non-compensable prejudice to the defendants.

Overview

[2] The plaintiffs commenced the action in November 2007, against the defendant law firms, Gowling Lafleur Henderson LLP ("Gowlings") and Gardiner Roberts LLP (“Gardiner Roberts”) seeking $3,000,000 in damages for breach of contract, negligence and breach of fiduciary duty.

[3] The plaintiffs, Cascadia Fine Art Limited Partnership and Cascadia Fine Art No. 2 Limited Partnership (respectively "LP1" and "LP2") are limited partnerships (together, the "Limited Partnerships") formed in accordance with the laws of British Columbia. The Limited Partnerships were established for the purpose of commissioning, marketing and selling original works of art. Their activities were financed through a series of private placement limited partnership offerings. The plaintiff, Panfin Equicap Ltd. ("PanFin"), was an agent for the promoter of the offerings, whose role was to secure investors for the partnership business.

[4] The General Partner of LP No. 1 (“GP1”) was 657617 B.C. Ltd. and the General Partner of LP No. 2 (“GP2”) was 679113 B.C. Ltd., both of which were owned and/or controlled by Frans Wynans (“Wynans”) at all material times. The claims against the defendant law firms arise out of the alleged misappropriation of partnership funds by Wynans.

[5] The plaintiffs allege that they retained Gardiner Roberts to create the Limited Partnerships and set out the legal basis under which they would operate. As such, it is alleged that Gardiner Roberts owed the plaintiffs a fiduciary duty.

[6] The plaintiffs further allege that the retainer required Gardiner Roberts to ensure that the documentation governing the operation of the limited partnerships, the compensation to be paid to GP1 and GP2, the accountability of Wynans to LP1 and LP2, and the safeguards to ensure that monies invested by LP1 and LP2, were not being misused.

[7] The plaintiffs allege that in October 2005, the accountants conducting an audit of the Limited Partnerships sent a letter to LP1 and LP2, advising they were withdrawing from the audit as a result of suspicious related party transactions.

[8] PanFin soon discovered that Wynans had incorporated two new companies and had assigned all of the rights of GP1 and GP2 to these companies, agreeing to pay to them all of the investment monies that investors provided to LP1 and LP2. Wynans had also been signing exorbitant cheques without a countersignature, based on questionable invoices sent to GP1 and GP2 by Wynans' new companies. At the same time, there was no artwork being sold.

[9] The plaintiffs allege that William Johnstone, a partner at Gardiner Roberts (“Johnstone”) represented them at a November 2005 meeting between PanFin (on behalf of LP1 and LP2), and Wynans (on behalf of GP1, GP2, and his newly incorporated companies). As a result of this meeting, a "Safeguard Agreement" was executed.

[10] The Safeguard Agreement required Wynans to repay some amounts personally and to change the authorized signatures on the bank accounts of LP1, LP2, GP1, and GP2. It was further agreed that every cheque would be signed by any two of three people: Wynans, Luna Vince (an officer of PanFin) or Irene Stewart (“Stewart”) a lawyer at Gowlings.

[11] The plaintiffs allege that Johnstone and Gardiner Roberts were negligent with regard to the establishment of the partnerships originally, and the creation and implementation of the Safeguard Agreement. These allegations are denied.

[12] The plaintiffs further allege that after the signing of the Safeguard Agreement, Stewart unilaterally withdrew her signing authority contrary to the Safeguard Agreement, and did not advise the plaintiffs. Wynans was subsequently able to alter the cheque signing requirements to improperly withdraw over $800,000 from the partnership funds.

[13] The plaintiffs allege that Stewart was negligent or in breach of her fiduciary duty in failing to comply with an agreement setting out various internal protocols and controls with respect to the operation and financial management of the partnership business.

[14] Gowlings states that neither the existence of the Safeguard Agreement nor the terms were ever made known to Stewart at the material times. Gowlings pleads that it was retained, on a very limited basis, only on behalf of the General Partners, through the instruction of Wynans. At no time did Gowlings act or agree to act on behalf of the Limited Partnerships or Panfin.

[15] In 2006 the limited partners removed Wynans as a general partner and commenced various litigation in British Columbia (since both Wynans and the artwork were located there) to secure possession of the artwork (the "B.C. litigation"). Court orders were made in British Columbia in 2006 to appoint a Monitor to report to the investors.

The Progress of the Ontario Action

The Pleadings

[16] The plaintiffs issued a notice of action on November 13, 2007 and a statement of claim on December 13, 2007.

[17] Gardiner Roberts delivered its statement of defence in September, 2008. The plaintiffs did not demand Gowlings’ statement of defence until April 2010. As a result, the claim against Gowlings sat dormant from December 13, 2007 until April 2010.

[18] Gowlings delivered its statement of defence on August 31, 2010. In September 2010, Gardiner Roberts amended its statement of defence on consent.

[19] On November 1, 2010, the plaintiffs served their replies to the statements of defence.

Affidavit of Documents and Discoveries

[20] On August 27, 2010, plaintiffs’ counsel sent an email suggesting he would be in touch in the next week or two to firm up a discovery plan. Counsel took no steps to do so. Instead, it was Mr. Pitch on behalf of Gardiner Roberts who took steps to move this action forward to examinations for discovery. He prepared a draft discovery plan that he forwarded to counsel with his letter dated October 31, 2010.

[21] On October 21, 2010, counsel discussed dates for examinations for discovery and a proposed discovery plan. The month of March 2011 was proposed for the examinations for discovery.

[22] Gardiner Roberts delivered an affidavit of documents on February 24, 2011. The plaintiffs delivered their affidavit of documents on March 3, 2011. Gowlings delivered a draft affidavit of documents on March 8, 2011.

[23] The examinations for discovery of Gardiner Roberts and the plaintiffs proceeded in March 2011.

[24] Counsel for Gowlings had advised that Stewart was unavailable in March 2011, but was available that summer to be examined for discovery. Since Stewart lives in British Columbia, counsel offered to have her examination take place in Toronto, if her costs were paid for and this term was included in the discovery plan. The plaintiffs did not reply. Two follow up letters were sent to plaintiffs’ counsel. On February 23, 2011, plaintiffs’ counsel replied. While the plaintiffs agreed to pay for the cost to have Stewart attend for discovery in Toronto, they wanted her to be examined before the summer, even though counsel had made it clear that she was unavailable until the summer. On March 16, 2011 Gowlings’ counsel wrote to plaintiffs’ counsel setting out again their position on Stewart’s discovery. No reply was received.

[25] When counsel attended the other examinations in March 2011, they discussed a date to examine Stewart, but no agreement was reached. Plaintiffs’ counsel took no further steps to schedule Stewart’s discovery.

[26] After March 2011, the plaintiffs took no steps to move the action forward. The plaintiffs have not answered their undertakings, scheduled a mediation or set the matter down for trial.

Request for a Status Hearing

[27] On September 18, 2012, Mr. Pitch wrote to the court requesting that a Status Notice be issued. A copy of his letter was sent to all counsel. The plaintiffs did not respond to this letter. The court issued a Status Notice on September 20, 2012.

[28] On November 13, 2012, almost two months after the Status Notice was issued, plaintiffs' counsel wrote to counsel for the defendants asking, for the first time, whether they would consent "to hold this matter in abeyance pending the outcome of related litigation proceedings in British Columbia".

[29] On November 22, 2012, Gardiner Roberts' counsel responded to this request and stated that:

… This action has been outstanding for some time. It is going nowhere.

Our instructions are to require you to set the action down within the timeframe called for under the status notice and we will object to any extension.

No agreement to hold the Ontario action in abeyance was reached.

[30] On December 17, 2012, the plaintiffs delivered a Status Hearing Request Form. The Court issued a Notice of Status Hearing returnable April 2, 2013.

[31] On December 28, 2012, Mr. Pitch wrote to plaintiffs' counsel confirming receipt of the Notice of Status Hearing and stated as follows:

There is no reason why your client cannot conduct an examination for discovery of the co-defendant and be in a position to set the action down before the status hearing date.

This letter is being written on the record and we will be bringing it to the attention of the Court at the status hearing if in fact the plaintiff has not conducted an examination for discovery of the co-defendant by that time.

In our view, the Court will not be sympathetic to delaying the action pending an order from the B.C. Court.

If the plaintiff is unsuccessful in its argument and then seeks a timetable to examine the co-defendant, we will insist the action be dismissed with costs.

[32] The plaintiffs took no steps to schedule Stewart’s examination for discovery.

[33] On March 20, 2013, Gardiner Roberts delivered its answers to undertakings.

[34] Gardiner Roberts delivered its affidavit for the Status Hearing on March 21, 2013. Gowlings delivered its affidavit and supplementary affidavit for the Status Hearing on March 25 and March 28, 2013, respectively. The plaintiffs did not deliver their affidavit until April 2, 2013, the morning of the Status Hearing

[35] Due to a scheduling conflict in the Master’s office, the Status Hearing was aborted after preliminary submissions were made. It was rescheduled to September 17, 2013.

[36] Counsel for the plaintiffs then wrote to Gowlings’ counsel suggesting that Stewart’s examination take place any time over the following two months. It was not scheduled.

The Master’s decision

[37] The Master dismissed the plaintiffs’ action pursuant to rule 48.14(13) of the Rules of Civil Procedure, R.R.O. 1990, Regulation 194 (“the Rules”). This rule provides that at a status hearing, the plaintiff shall show cause why the action should not be dismissed for delay and:

(b) if the presiding judge or case management master is not satisfied that the action should proceed, the judge or case management master may dismiss the action for delay.

[38] The Master correctly set out the test in Khan v. Sun Life Assurance Co. of Canada, 2011 ONCA 650 (“Khan”), 1196158 Ontario Inc. v. 6274013 Canada Ltd., 2012 ONCA 544 (“1196518 Ontario Inc “) and Faris v. Eftimovski, 2013 ONCA 360 (“Faris”) (collectively referred to as the “Faris test”).

[39] The Faris test is conjunctive, requiring the plaintiffs to satisfy both parts of the test. The plaintiffs must provide an acceptable explanation for the delay and demonstrate that if the action proceeds the defendants will not suffer any non-compensable prejudice.

The Delay

[40] Dealing with the explanation for the delay, the defendants relied on two significant periods of delay and the Master considered each separately.

[41] The first period of delay ran from issuance of the notice of action in November 2007 until March 2010, when the plaintiffs requested a statement of defence from Gowlings. The Master stated that even allowing for a reasonable period of time after filing the statement of claim, the delay was approximately two years. The Master found that Gowlings’ failure to defend in a more timely manner accounted for six months of the delay, but this did not explain the entire two year period. The Master reduced the two year delay by six months.

[42] The second period of delay ran from the examinations for discovery in March 2011 until the issuance of the Status Notice in September 2012, a period of 18 months.

[43] The plaintiffs argued that the defendants had acquiesced to this second period of delay. Specifically, they argued that the defendants agreed that the Ontario action would be held in abeyance while the plaintiffs proceeded with the B.C. litigation.

[44] The Master rejected the plaintiffs’ explanation for the second period of delay. He stated as follows at page 3:

[T]he Lake affidavit says that the plaintiffs’ decision to proceed might depend on the outcome the British Columbia litigation. If the plaintiffs were not sure of this how could the defendants be? This is especially the case where Mr. Shapiro, on behalf of the plaintiffs, deposes at paragraph seven of his affidavit, that the claims and bases for damages in the B.C. proceedings and the Ontario action are unrelated.

The onus is on the plaintiffs to prove the defendants’ consent or acquiescence as to the delay, and this is not demonstrated here. Even if the British Columbia litigation could be in respect of mitigation for the damages claimed in Ontario, it does not justify delay of the Ontario action without consent or acquiescence on the part of the defendants, neither of which has been established in this case.

[45] The plaintiffs argue that the defendants were aware of the B.C. litigation as a result of questions that they asked at the discovery. However, plaintiffs’ counsel conceded that they had never sought or obtained the defendants’ consent to the Ontario action be held in abeyance.

[46] The Master correctly noted that the onus rests on the plaintiffs to prove the defendants’ consent or acquiescence to the delay. He rejected the plaintiffs’ submission that an agreement or acquiescence flowed from asking questions at the discovery.

[47] In total, the Master found that there was a delay of three years that the plaintiffs did not adequately explain. He concluded that this period of delay was sufficient to preclude the action from proceeding. He stated as follows at pages 3-4:

I therefore find that there have been three years of inadequately explained delay. Considering that rule 48.14 contemplates that an action be set down for trial within two years of the first defence, this period of delay is sufficient to preclude the plaintiff from proceeding with the action.

As the test for whether the action may proceed is conjunctive, the action is dismissed on this ground alone. Nonetheless, I will deal with the second part of the test, pertaining to prejudice.

The Prejudice

[48] The plaintiffs were required to demonstrate that if the action proceeded the defendants would not suffer any non-compensable prejudice. The only evidence that the plaintiffs provided was found in para. 38 of Mr. Shapiro’s affidavit. The Master quoted Mr. Shapiro’s evidence in his reasons at page 4 follows:

With respect to the alleged prejudice arising from the delay as outlined in paragraphs 58 through 59 of the Lake affidavit and referenced in the Crowell affidavit, I do not believe the delay to date has prejudiced the defendants. Apart from the bald assertions that the passage of time diminishes the memories and recollection of witnesses, there is no prejudice articulated. Any presumed prejudice resulting from the passage of time can be rebutted, by the fact that documentary production is complete and witnesses that could be expected to be called at trial are available.

[49] The Master rejected this evidence. First, he noted that while Mr. Shapiro asserted that the documentary production was complete, this was not accurate because the plaintiffs had not answered any of the undertakings they gave at their discovery. Second, it was not enough for the plaintiffs to simply say that the witnesses are available. The Master explained this at page 5 as follows:

Secondly, with respect to the assertion that witnesses are available, as I said in my decision in Deverett Professional Corp. v Canpages, 2012 ONSC 5835, at para. 14, it would be necessary for the plaintiffs to identify the witnesses and to state the gist of their evidence and how it relates to the issues in the action and this evidence is not provided. I therefore also find that the plaintiffs have failed to meet their onus to show that if the action proceeded there would be no prejudice to the defendants.

standard of review

[50] It is common ground that a Master's Order dismissing the action for delay is discretionary and is entitled to deference on appeal. It may be set aside if it was made on the basis of an erroneous legal principle, or if it discloses a palpable and overriding error of fact. It is not the function of a reviewing court to weigh the various factors and come to its own conclusion as to how to exercise an available discretion. (See Zeitoun v. Economical Insurance Group, 2009 ONCA 415 at para. 1; Wellwood v. Ontario (Provincial Police), 2010 ONCA 386 at para. 28).

The Appeal is dismissed

1. There is No Third Step in the Faris Test

[51] Plaintiffs’ counsel accepts the two step Faris test, but argues that a third step is required before the court decides that an action should be dismissed. The third step is explained as follows. If the plaintiffs have not satisfied the first two steps, then the court must consider whether dismissal of the action is a just result in the circumstances before concluding that the action should be dismissed. Further, the plaintiffs say that the court must approach the matter contextually. If dismissal is not a just result, then the action should not be dismissed. This is the main thrust of the plaintiffs’ appeal.

[52] The plaintiffs argue that Khan, 1196518 Ontario Inc. and Faris “did not derogate from the court's mandate to allow for the just determination of actions on their merits, should that amount to the just order in all of the circumstances.”

[53] In their factum, the plaintiffs state that the Master made a legal error because he applied the Faris test in a “rigid and mechanical way … failed to view the matter contextually, and failed to make the just order that the circumstances of this case required”.

[54] The plaintiffs’ articulation of a third step is not the current state of the law. To the extent that some cases may have suggested that a third step was required, such an approach is not consistent with Khan, 1196518 Ontario Inc. and Faris. If there was any doubt about this, such doubt evaporated in Deverett Professional Corp. v. Canpages Inc., 2012 ONSC 5835 (“Deverett”).

[55] In Deverett, Master Graham rejected Master Dash’s view in Koepcke v. Webster, 2012 ONSC 357 that there was a contextual approach to be added to the Faris test. The Master’s decision in Deverett was upheld on appeal to the Divisional Court (Deverett, 2013 ONSC 6954). The Divisional Court stated that previous decisions that favoured what was called a balancing approach had been “overtaken” by appellate authority. Pervious cases that suggested a third step were rejected. The court stated at paras. 6 and 7:

6 This is the primary position taken by the appellant. The submission is that the Master erred in law by failing to balance these competing principles. The appellant relies on several masters' decisions where a balancing approach, giving some consideration to the principle in favour of cases being determined on their merits, was taken. For the reasons that follow, I am of the view that those cases have been overtaken by recent decisions of the Court of Appeal for Ontario: 1196158 Ontario Inc. v. 6274013 Canada Ltd., 2012 ONCA 544, 112 O.R. (3d) 67, and Faris v. Eftimovski, 2013 ONCA 360, 87 E.T.R. (3d) 204.

7 The appellant also relies on two Superior Court of Justice cases, but neither accurately reflects the combined thrust of the 1196158 and Faris decisions. The first case, Tri-Peak Holdings Inc. v. Metroplex Developments, 2012 ONSC 6234, predates Faris, and the court does not appear to have been referred to 1196158. The second, Pouget v. Hynes, 2013 ONSC 487, also predates Faris and, although the court did refer to 1196158, it was distinguished by noting that the status notice in Pouget was issued only twenty months after the close of pleadings.

[Emphasis added.]

[56] Leave to appeal the decision of the Divisional Court in Deverett to the Ontario Court of Appeal was dismissed on January 31, 2014 and leave to appeal from this dismissal to the Supreme Court of Canada was dismissed on June 19, 2014. As a result, the Faris test applies. It is a two-step test and the Master in this case correctly articulated and applied the test.

No Palpable and Overriding Error

[57] In my view, there is no basis for concluding that the Master made a palpable and overriding error.

[58] The plaintiffs argue that the result is unfair because the action was so far down the path to trial. This ignores the Faris test. When the Master applied the Faris test, he identified three years of unexplained delay.

[59] The Master fairly assessed the evidence and reduced the first period of delay by six months to account for Gowlings failure to defend in a timely manner. As counsel for Gowlings noted on this appeal, the plaintiffs offered no other explanation for the first period of delay. The onus was on the plaintiffs to move the action forward and they did not. The evidence before the Master was replete with examples of their failure to do so.

[60] Dealing with the second period of delay, the plaintiffs’ evidence failed to demonstrate that the defendants had consented or acquiesced to the Ontario action being held in abeyance while the plaintiffs pursued the B.C. litigation. The plaintiffs offered no other explanation for this delay.

[61] The Master proceeded to consider step two of the Faris test, although as he noted this was not necessary because the plaintiffs failed to provide an acceptable explanation for the delay. This alone was fatal.

[62] The plaintiffs incorrectly approach the issue of prejudice. It is their onus to show that the defendants will not suffer non-compensable prejudice if the action proceeds. The plaintiffs cannot discharge this onus by criticizing the lack of evidence from the defendants on the issue. The Master made this clear and relied on his decision in Deverett that has been upheld on appeal.

conclusion

[63] The plaintiffs’ appeal from the decision of Master Graham is dismissed.

[64] It is agreed that the successful parties on this appeal are entitled to costs of $12,500 all inclusive. I order the plaintiffs to pay Gowlings costs of $12,500 and Gardiner Roberts costs of $12,500.

___________________________ C. Horkins J.

Released: November 17, 2014

CITATION: Cascadia Fine Art Limited Partnership v. Gardiner Roberts LLP, 2014 ONSC 6602

DIVISIONAL COURT FILE NO.: 468/13

DATE: 20141117

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

BETWEEN:

CASCADIA FINE ART LIMITED PARTNERSHIP, CASCADIA FINE ART NO. 2 LIMITED PARTNERSHIP and PANFIN EQUICAP LTD.

Plaintiffs (Appellants)

– and –

GARDINER ROBERTS LLP and GOWLING LAFLEUR HENDERSON LLP

Respondents

REASONS FOR JUDGMENT

C. Horkins J.

Released: November 17, 2014