Court File and Parties
COURT FILE NO.: CV-10-3822-00 DATE OF ENDORSEMENT: March 24, 2017 DATE OF RELEASE: April 24, 2017
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: QUEST MANAGEMENT SERVICES INC. AND QUEST MANAGEMENT SYSTEMS INC., Plaintiffs AND: QUEST MANAGEMENT SYSTEMS, A DIVISION OF 1281068 ONTARIO INC., Defendant
BEFORE: Barnes, J. – Handwritten Endorsement
COUNSEL: David Schatzker & Michael Magonet, for the Plaintiffs Bayo Odutola, for the Defendant
HEARD: October 20, 2016
TRANSCRIPTION OF HANDWRITTEN ENDORSEMENT
INTRODUCTION
[1] Quest Management Systems, a division of 1281008 Ontario Inc. and Eileen Shewen (defendants) seek an order to vary the cost orders awarded against Quest Management Services Inc. (plaintiffs), against a non-party, Peter Merrill.
[2] On March 3, 2017, I inadvertently released an endorsement dismissing the defendant’s motion with reasons to follow. The correct notation on the endorsement is “defendant’s motion is granted” not dismissed. These are my reasons.
BACKGROUND FACTS
[3] The plaintiffs’ action for trade mark infringement, passing-off and unlawful interference with economic interests was unsuccessful. The plaintiffs and the defendants are competitors. They all operate in the ISO 9000, ISO 14000 and 150 management systems consulting services area.
[4] On November 6, 2013, the plaintiffs brought an interlocutory injunction motion. The motion was dismissed on June 6, 2014. On December 3, 2013, the defendants brought a successful motion for particulars. The defendants were awarded costs. The plaintiffs had 45 days to pay.
[5] The plaintiffs’ action was dismissed on October 19, 2015. To date, none of the cost awards have been paid.
ISSUE
a) Is this court functus officio after releasing the March 3, 2017 endorsement with reasons to follow? b) Should the cost awards be varied to include an award against Peter Merrill (a non-party)?
(i) Is this court functus officio?
[6] The court is not functus officio. In circumstances where judgment has been announced but not entered the Court has a broad discretionary power under Rule 59.06 of the Ontario Rules of Civil Procedure to amend a judgment where there has been an inadvertent error: Vicckies v. Vicckies, [1990] O.J. No. 1659, 45 C.P.C. (2d) 200 (Gen. Div.).
[7] The judgment as announced on March 3, 2017 has not been entered. The result as announced was in error and inadvertent. No new evidence was received to correct the error and no party was adversely affected, i.e. prejudiced, by the correction. Therefore the judgment as announced can be amended: See Vicckies. The result as announced is corrected. The defendant’s motion is granted not dismissed.
(ii) Should the Cost Orders be amended to award costs against Peter Merrill (a non-party)?
[8] I conclude that there is no basis to award costs against Peter Merrill as a non-party under the (straw-person) criteria. However, on the basis of fraud and abuse of process, costs are awarded against Peter Merrill personally.
[9] The defendant seeks an order to vary a cost award on the “ground of fraud or of facts arising or discovered after [the order] was made: Rule 59.06(2)(a) of the Ontario Rules of Civil Procedure (the Rules) and “to obtain other relief than originally awarded”: Rule 59.06(2)(d).
[10] A corporation is a legal entity separate from its members. Its transactions “create legal rights and obligations vested in the company [corporation] itself as opposed to its members”: See Television Real Estate Ltd. v. Rogers Cable T.V. Ltd., [1997] O.J. No. 1944, 34 O.R. (3d) 291 (Ont. C.A.), at paragraphs 21 and 22.
[11] The fact that a corporation has one shareholder who may also be the corporation’s operating mind does not strip the corporation of its status as a separate entity distinct from the shareholder. In this case, these corporate plaintiffs have a separate legal identity from Peter Merrill. Peter Merrill is not a party to this action.
[12] There are two circumstances under which costs could be awarded against a non-party: (1) when the plaintiff is a “straw-man/person” and (2) when the plaintiff’s action is fraudulent or amounts to an abuse of process.
[13] Under the straw person principle the real litigant hides behind another litigant to bring the action all in an effort to avoid an exposure to costs: Strumer and Beaverton (Town), [1912] O.J. No. 184, O.L.R., 25 O.L.R. (Ont. Div. Crt), leave to appeal refused.
[14] Under the straw-person principle costs may be awarded against the non-party if these three criteria are met:
- The non-party must have standing to bring the action themselves.
- The party put forward as plaintiff is not the true plaintiff [straw-person].
- The straw-person [the plaintiff] has been put forward to protect the non-party from liability. See Television.
[15] Under the second circumstance, the plaintiff is not put forward as a straw-person to protect the real litigant from a cost award. Rather, the plaintiff’s conduct of the litigation is based on fraud or is an abuse of the court’s process: See Notice of Intention to make a Proposal of 1730960 Ontario Ltd., 2009 ONCA 720 at paragraph 6 to 8; Dallas/North Group Inc., 148 O.A.C. 288 para 13 to 15.
[16] I agree with the plaintiffs’ submission that there is no evidence that Mr. Merrill had any status to bring the action himself. At no point did the defendants plead or seek to establish Mr. Merrill as the true plaintiff. The plaintiffs could have continued the litigation even if Mr. Merrill was not their director. There is no basis to award costs against Mr. Merrill under the straw-person criteria.
[17] There is however, a basis to award costs personally against Mr. Merrill as a non-party on these two grounds:
a) The litigation was an abuse of the court’s process b) The plaintiffs provided a fraudulent undertaking to the court thereby making a mockery of the court process.
[18] As an abuse of process: “In an endorsement dated June 6, 2014, Barnes J. concluded that the plaintiffs had sought an interlocutory injunction for the sole purpose of conducting a fishing expedition, i.e. to cross-examine the defendant to see if there is a basis for seeking injunctive relief.”
[19] In his costs endorsement dated September 16, 2015, Barnes J. observed:
“…so many paragraphs of the plaintiffs’ Statement of Claim were stuck such that the decision not to strike the entire statement of claim was indeed a close one.”
[20] On October 19, 2015 RSJ Daley concluded:
“that the action is frivolous, vexatious and otherwise an abuse of process and as such the action is dismissed.”
[21] In the result, the plaintiffs’ action was frivolous, vexatious and an abuse of process. Under these circumstances costs are awarded against the non-party, Peter Merrill.
[22] Fraudulent undertaking: The plaintiffs gave the court a fraudulent undertaking when it sought injunctive relief. The plaintiffs gave an undertaking which was supported by an affidavit sworn by Mr. Merrill on behalf of the plaintiffs as follows:
“The plaintiff, Quest Management System Inc. hereby undertakes to abide by any Order concerning damages that the court may make if it ultimately appears that the granting of the Order requested has caused damages to the respondents for which the plaintiffs, Quest Management System Inc. ought to compensate the defendants.”
[23] The defendants rely on new evidence obtained in response to the Notice of Examination in Aid of Execution served on the plaintiffs. The following information was obtained:
a) Mr. Merrill is the owner and president of QMS Inc. (the plaintiffs); b) Mr. Merrill owns 100 per cent of the shares of QMS Inc.; c) QMS Inc. had losses of $36,200 in 2013 and $25,000 in 2012; d) QMS Inc. had negative shareholder equity for 2014, 2013 and 2012; and assets of less than $800.00.
[24] The cost award judgments of Barnes J. and Daley RSJ have been entered. Under these circumstances, the costs motion can only be reopened in circumstances where the new evidence sought to be introduced could not have been obtained by the exercise of due diligence: Trenwith (Trustee of) v. Goddard (Trustee of), [1937] S.C.J. No. 24.
[25] The due diligence requirement need not be satisfied by the moving party where the basis for the application is grounded in allegations of fraud, perjury or deliberate misleading of the court. Once established, the due diligence requirement is dispensed with: 1307347 Ontario Inc. v. 1243058 Ontario Inc., [2001] O.J. No. 257, 4 C.P.C. (5th) 153 at para 6, 9 (S.C.J.).
[26] The new evidence was discovered by the defendants after the cost orders were made. The new evidence establishes that at the time the undertaking was given to the court, the plaintiffs did not have the financial resources to honour the undertaking. I conclude that the representations made to the court were fraudulent. The plaintiffs did not have the requisite financial resources at the time the representations were made to the court. The due diligence requirement is dispensed with.
[27] The plaintiffs submits that there was no undertaking given because the representations made to the court had certain caveats:
- The court must first grant the injunction and;
- The granting of the injunction must cause the defendants to suffer damages.
[28] The plaintiffs explain these events never occurred and therefore there was no undertaking given.
[29] The plaintiffs’ argument fails to consider that the plaintiffs made representations (the undertaking) to the court in support of the plaintiffs’ bid for injunctive relief. The plaintiffs asked the court to accept the representations as true. If there were any qualifications to representations about the plaintiffs’ financial resources the court should have been informed.
[30] The plaintiffs’ submissions also fail to consider the purpose of an undertaking as to the damages which are to:
- To compensate the responding party if the injunction is granted and ultimately causes the responding party damage;
- The undertaking reflects the law’s concern that the responding party may suffer damages and once the merits are determined it may turn out that the moving party should not have obtained the interlocutory remedy: Israel Discount Bank of Canada v. Genova 13 C.P.C. (3d) 104 (Ont.Gen.Div.) Vieweger Construction Co. v. Rush and Tompkins Construction Ltd, [1965] S.C.R. 195 (S.C.C.) Nelson Burns and Co. v. Coratham Industries Ltd., 23 C.P.C. (2d) 279 (Ont. C.A.)
[31] If the court determines that a party does not have sufficient assets to honour the undertaking, the court may order that the responding party provide security to support the undertaking: McCaffery Group Inc. v. Bradlee, [1997] A.J. No. 453 (Alta Q.B.) a party seeking the interlocutory injunction must disclose if it does not have the financial resources to support the undertaking for damages: 642947 Ontario Ltd. v. Fleischer, [2001] O.J. No. 4771 (Ont. C.A.).
[32] All of these principles underlie the fact that information put before the court must be truthful. To conclude that a party who puts fraudulent information before the court and asks the court to rely on it, shall only face sanctions if the court rules in its favour, makes a mockery of the administration of justice.
[33] The undertaking under consideration came into effect when it was made to the court because the court was asked by the plaintiffs to rely on it as part of the court’s determination of whether the interlocutory injunction should be granted in favour of the plaintiffs.
[34] The plaintiffs made a fraudulent representation to the court. It constituted a fraudulent undertaking. Under these circumstances costs are awarded against the non-party Peter Merrill.
Order
[35] The cost orders of:
a. Barnes, J. dated September 16, 2015 in the amount of $20,000.00; b. Barnes J. dated September 16, 2015 in the amount of $11,938.28; c. Of RSJ Daley dated December 7, 2015 in the amount of $46,779.00
are amended and awarded against the plaintiffs and Peter Merrill. Payment in full by either party shall constitute payment of the cost orders in full.
[36] The cost orders are payable forthwith. All other terms of the cost orders remain the same.
[37] Should the parties be unable to agree on costs, cost outlines shall be submitted in 20 days.
Original Signed by Justice Barnes