Marcos Limited Building Design Consultants v. Lad et al.

[Indexed as: Marcos Limited Building Design Consultants v. Lad]

Ontario Reports Ontario Superior Court of Justice Seppi J. October 3, 2018 143 O.R. (3d) 665

Case Summary

Civil procedure — Costs — Costs against non-party — Non-party principal of unsuccessful plaintiff in construction lien action lying, altering and fraudulently creating documents to advance plaintiff's claim — Principal's conduct amounting to abuse of process — Costs awarded against principal personally.

Civil procedure — Costs — Full indemnity costs — Principal of unsuccessful plaintiff in construction lien action lying, altering and fraudulently creating documents to advance plaintiff's claim — Defendants awarded full indemnity costs on basis of principal's egregious conduct.

The plaintiff registered a lien against the defendants' property and commenced an action claiming $523,068.52. The action was dismissed and the defendants' counterclaim for damages to repair deficiencies was allowed. The court then ruled on costs.

Held, the defendants should be awarded full indemnity costs; costs should be awarded against the plaintiff's principal personally.

M, the plaintiff's principal (and a non-party to the action), lied, fabricated evidence, altered documents and created false paper trails in order to advance the plaintiff's claim. The plaintiff also engaged in unreasonable tactics in the conduct of the case, such as last minute productions contrary to the court-ordered timeline and failing to admit uncontroverted facts, thereby necessitating the calling of witnesses and unnecessarily extending trial time. M's egregious conduct justified an award of costs on a full indemnity basis. M's conduct amounted to an abuse of process. In the circumstances, it was appropriate to award costs against M personally. Costs were not awarded against M's brother J, also a non-party. The evidence did not establish that the plaintiff was advanced to shield J from personal liability for costs. While there was evidence of dishonesty on J's part as it related to his taxes and financial dealings, it was M who orchestrated the scheme to deceive the court. J's misconduct was not in relation to the litigation. Costs were awarded in the amount of $578,973.29, payable by the plaintiff and M jointly and severally.

Considered Cases: 1318847 Ontario Ltd. v. Laval Tool & Mould Ltd. (2017), 134 O.R. (3d) 641, [2017] O.J. No. 1098, 2017 ONCA 184, 411 D.L.R. (4th) 340, 276 A.C.W.S. (3d) 46; Canadian Affordable Roofing Ltd. v. Law, [2008] O.J. No. 3817, 186 A.C.W.S. (3d) 603 (S.C.J.)

Other cases referred to: Deep Foundations Contractors Inc. v. B. Gottardo Construction Ltd., [2016] O.J. No. 2015, 2016 ONSC 2612, 52 C.L.R. (4th) 288, 265 A.C.W.S. (3d) 846 (S.C.J.); Marcos Limited Building Design Consultants v. Ishver, [2018] O.J. No. 2852, 2018 ONSC 3273, 82 C.L.R. (4th) 57, 295 A.C.W.S. (3d) 70 (S.C.J.); Mitchell v. Lewis (2016), 134 O.R. (3d) 524, [2016] O.J. No. 6286, 2016 ONCA 903; Net Connect Installation Inc. v. Mobile Zone Inc. (2017), 140 O.R. (3d) 77, [2017] O.J. No. 5150, 2017 ONCA 766; Petrelli Construction & Renovation Inc. v. Phillips, [2016] O.J. No. 6798, 2016 ONSC 8159, 73 C.L.R. (4th) 275, 275 A.C.W.S. (3d) 697 (S.C.J.); Tsymbalarou v. Gordon, [2013] O.J. No. 4927, 2013 ONSC 6406 (S.C.J.)

Statutes referred to: Construction Act, R.S.O. 1990, c. C.30, s. 86 [as am.], (1) [as am.] Courts of Justice Act, R.S.O. 1990, c. C.43, s. 131(1)

Rules and regulations referred to: Rules of Civil Procedure, R.R.O. 1990, Reg. 194, Rule 49

RULING on costs.

Counsel: Gregory N. Hemsworth, for plaintiff and Manny Marcos. Jonathan Speigel, for defendants Ishver and Sumitra Lad. Ted Evangelidis, for non-party Jose Luis Marcos.

[1] Costs endorsement of SEPPI J.: — As noted in the reasons for judgment dated May 29, 2018 [2018] O.J. No. 2852, 2018 ONSC 3273 (S.C.J.)], the defendants, Ishver and Sumitra Lad, as the successful parties are entitled to costs. The court dismissed the plaintiff, Marcos Limited Building Design Consultants' ("Marcos") claim, ordered the lien to be removed from title and awarded $65,112.86 in damages to the defendants on their counterclaim.

[2] The written submissions on costs, received and reviewed, give rise to the following issues:

(1) whether costs be awarded as partial, substantial or full-indemnity; (2) proportionality in the quantum of costs; and (3) non-party liability for costs, namely, (a) personally as against Manuel Marcos ("Manny"); and (b) personally as against Jose Marcos ("Joe").

[3] The defendants (the "Lads") seek full-indemnity costs of $578,793.29, inclusive of time, disbursements and HST. Should the court not find an entitlement to full indemnity throughout, their alternative claims are $521,809.74 as substantial indemnity throughout, or $504,421.83 as partial indemnity to August 5, 2016, and substantial indemnity thereafter. These amounts do not include time and disbursements associated with motions. They ask that the costs award be joint and several against the plaintiff, Manny and Joe Marcos.

[4] This is a lien action which was commenced on January 25, 2011, claiming $523,068.52, after a lien for the same amount was registered by the plaintiff against title to the Lads' custom house it built in Caledon. The Lads counterclaimed for $65,612.86 in damages to repair Marcos' deficient work.

[5] The Lads made three offers to settle: on August 5, 2016 to settle the claim and counterclaim by having no payments by either party; on January 3, 2017 for $50,000 plus reasonable partial indemnity costs paid by the Lads; and on April 25, 2017 for $140,000 plus interests and costs to be determined by the court. Clearly all three offers were more favourable to the plaintiff than the result.

[6] The plaintiff's one formal offer to settle dated July 20, 2011 was for $420,000 plus interest and costs payable by the defendants, with an informal offer to settle for the all-inclusive sum of $415,000, provided that payment was made within three months of the offer.

[7] The defendants submit costs should be full indemnity. They rely on authorities which have made such orders in circumstances where a party has engaged in very egregious conduct, such as fraud or deceiving the court, has conducted itself in a way that is reprehensible, scandalous or outrageous, has fraudulently created documents and repeatedly lied under oath in an attempt to perpetrate a fraud upon the other party and the court.

[8] The defendants acknowledge the requirement that the impugned conduct be "egregious" to justify full indemnity costs. The defendants reference the reasons for judgment whereby Manny Marcos was found, inter alia, to have repeatedly lied and fraudulently altered and created documents to advance the plaintiff's claim.

[9] The plaintiff submits the defendants were inconsistent in their position during the progress of the action, which increased the time and exacerbated the complications in the proceedings. Counsel submits certain admissions, later amended after the defendants hired trial counsel, and positions taken earlier in the process should negate any entitlement to full indemnity costs. The plaintiff also submits the total being claimed, which it says is actually $649,233.32 if the motions costs are included, far exceeds what would be fair, reasonable and proportionate and within the reasonable expectation of the unsuccessful party. Plaintiffs' counsel argues "the amounts docketed and claimed by any measure or comparison are widely excessive". He submits that with the proper application of all the guiding principles on costs the total costs award as full indemnity would be $380,559.97, inclusive of HST and disbursements.

[10] The plaintiff and non-parties against whom costs are claimed submit Manny and Joe Marcos do not fall within the factors and exceptional circumstances which permit the court to make a costs order against a non-party. They submit this case is one in which the purpose or motive for naming the corporate plaintiff Marcos as the litigant was bona fide in relation to the nature of the claim, and it was not for the purpose of protecting the individuals from liability. They submit there has not been proper notice to the non-parties of the intention to seek costs personally against them, and the circumstances in which the court could exercise its discretion on costs against a non-party, as articulated by the Ontario Court of Appeal in the Laval Tool case, 1 do not exist in this case.

[11] Joe Marcos submits he had no involvement in this litigation, he is not a principal of the plaintiff corporation and was merely a witness. He submits he was therefore in no way involved to the extent that costs against him as a non-party ought to be awarded.

1) Substantial or Full Indemnity

[12] Having regard to their offers to settle and Rule 49 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, the defendants are prima facie entitled to costs of partial indemnity up to August 5, 2016 and substantial indemnity thereafter. What moves the costs consideration beyond this entitlement are the findings of this court in regard to the reprehensible and dishonest conduct of Manny Marcos in advancing the plaintiff's claim. The same findings necessitate a consideration of the defendants' request to order costs personally against the non-parties.

[13] The defendants' written submissions in para. 23(a) to (h) highlight the extent of the dishonesty perpetuated on behalf of the plaintiff by Manny Marcos in the conduct of this case. This includes, inter alia, findings of "fabricated or deceptively manipulated" evidence, false paper trails and false and altered documents, and multiple deliberate lies. Also, as found by this court, the plaintiff engaged in unreasonable tactics in the conduct of the case, such as last-minute productions contrary to the court ordered timeline, and failing to admit uncontroverted facts, thereby necessitating the calling of witnesses and unnecessarily extending trial time.

[14] Full indemnity costs are justified only in very narrow circumstances to sanction particularly egregious conduct on the part of a party. 2 This court is mindful of the law on "the seldom imposed full indemnity scale of costs" and recognizes "that only very egregious conduct, such as fraud or deceiving the court, supported the award of costs on a full indemnity basis". 3

[15] In this case the cumulative instances of dishonesty and deceit shown by the plaintiff by its principal, Manny Marcos, in the conduct of this action falls into this exceptional category. It was truly troubling for this court to observe this egregious deliberate deception by the plaintiff, which became more and more obvious as the trial progressed. When the fair, honest and functional administration of justice is overtly and deliberately thwarted by a litigant, full indemnity costs is the appropriate sanction.

2) Proportionality

[16] There was a lot at stake for the defendants in this action. The amount claimed was $523,068 and there would have been a significant amount of prejudgment interest over the period of many years from when the action began had the plaintiff been successful. Added to this is the defendants' claim for damages of $65,112.86 for deficient work.

[17] The quantum of costs claimed by the defendants is proportionate and not beyond the expectation of the plaintiff, having regard to the length of the trial and the extensive documentation which the plaintiff produced late in the overall process. In an attempt to prove its claim, the plaintiff's productions combined valid documentation with what the court has found to be false, fraudulent or misleading documents. This added to the trial preparation time and effort needed in order to facilitate the court's proper assessment regarding the veracity and reliability of the documentary evidence.

[18] The plaintiff's own legal fees, including HST are shown to have been $483,789.72. The case took years to reach trial. The defendants' counsel was required by its own investigation to arduously spend significant time to uncover and demonstrate the plaintiff's scheme to mislead the court, and to establish proof for the court of the lies being advanced. This was extra time the defendants' counsel was required to spend to properly defend the claim. The trial was much longer as a result of the plaintiff's attempts to deny or justify the dishonesty.

[19] In these circumstances, which necessitated the meticulous examination and analysis of a large number of documents produced by the plaintiff, the costs as claimed by the defendants are fair, reasonable and proportionate to what the plaintiff would expect in comparison to its own significant costs.

[20] Costs in full indemnity are therefore awarded to the defendants fixed at $578,793.29.

3) Non-Party Liability for Costs

[21] The defendants' claim for costs against the non-parties, Manny and Joe Marcos, arises from the submission that Manny and Joe, as equal partners, were responsible for the decision to commence this action and for the egregious conduct of the action on the plaintiff's behalf. They reference the evidence of both Manny and Joe at trial and the manner in which Joe and Manny operated Marcos together. They highlight the personal mingling of funds paid by the defendants for the work in the course of the construction. The defendants submit the gross and vexatious misconduct of Manny and Joe undermines the fair administration of justice.

[22] The Lads rely on s. 131(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43 ("CJA"), by which the court has a broad discretion to determine "by whom and to what extent the costs shall be paid". They also rely on s. 86 of the Construction Act, R.S.O. 1990, c. C.30 ("CLA"), which explicitly contemplates awarding costs against a non-party. Both authorities are applicable in this case. Section 86(1) of the CLA states:

86(1) Subject to subsection (2), any order as to the costs in an action, application, motion or settlement meeting is in the discretion of the court, and an order as to costs may be made against,

(a) a party to the action or motion; or (b) a person who represented a party to the action, application or motion, where the person, (i) knowingly participated in the preservation or perfection of a lien, or represented a party at the trial of an action, where it is clear that the claim for a lien is without foundation or is for a grossly excessive amount, or that the lien has expired, or (ii) prejudiced or delayed the conduct of the action,

and the order may be made on a substantial indemnity basis, including where the motion is heard by, or the action has been referred under section 58 to, a master, case management master or commissioner.

[23] Manny Marcos submits his claim and the lien were not without foundation or excessive. He submits the action was bona fide based on his assessment and position regarding the value of the custom home that was built. He also submits the claim of costs against him personally, without prior notice is procedurally unfair.

[24] The thrust of Joe Marcos' submissions relate to his position that he is not an officer, director or shareholder of the corporate plaintiff. He submits he was merely a witness and also had no prior notice of the defendants' intention to seek costs against him personally.

[25] The defendants rely upon the authority of Deep Foundations Contractors Inc. v. B. Gottardo Construction Ltd., 4 in which the plaintiffs sought costs on a full indemnity basis against both the corporation and its general manager found to have been one of the controlling minds of the defendant in that case. The court found the corporation and the manager jointly and severally liable for costs. 5 In Mitchell v. Lewis, the Court of Appeal noted that piercing the corporate veil is not limited to sham corporations and can also be pierced if those in control expressly direct wrongful things to be done. 6

[26] The defendants in their submissions also reference the authorities of Petrelli Construction & Renovation Inc. v. Phillips, 7 as well as Canadian Affordable Roofing Ltd. v. Law, 8 both authorities in which the court found the individuals personally liable for costs for having caused the corporate litigant to do wrongful things and engage in improper conduct.

[27] In Canadian Affordable Roofing the individual was only an employee of the corporation and yet the court held that the person made decisions for the corporation and was its directing mind. On that basis it held the person liable for costs personally. In dispensing with the argument the person was only an employee, the court found he had held himself out as the principal of the corporation and was therefore personally liable for the costs of the litigation. 9

[28] The defendants submit the actions of both Manny and Joe, as the directing minds of Marcos, expressly caused Marcos to do wrongful things and engage in improper conduct, therefore warranting a piercing of the corporate veil. They submit the conduct amounts to an abuse of process and undermines the fair administration of justice and therefore warrants an order of non-party costs pursuant to the court's inherent jurisdiction.

[29] In opposing costs against a non-party both Manny and Joe rely on 1318847 Ontario Ltd. v. Laval Tool & Mould Ltd., and submit the court must be satisfied that the person against whom costs are claimed is a "person of straw". The court in Laval Tool indicated the person of straw test is satisfied if

(a) The non-party has status to bring the action; (b) The named party is not the true litigant; and (c) The named party is a person of straw put forward to protect the true litigant from liability for costs. 10

[30] The non-parties in this case, namely, Manny and Joe Marcos, submit the issue is not whether a non-party engaged in misconduct serious enough to amount to abuse of the court's processes, but rather it is a factual inquiry as to whether the party of record is only a "formal" or "ostensible" litigant and whether the non-party is the "real" or "substantial" litigant, controlling the proceedings and advancing the named party for the purpose of deflecting liability for costs.

[31] The Ontario Court of Appeal in Laval has acknowledged that the "person of straw" test is to be considered in any assessment of whether it is appropriate to order non-party costs pursuant to s. 131(1) of the CJA. 11 In the same case, however, the court also states that "Superior courts of record have inherent jurisdiction to control their own processes and protect them from abuse", and that while inherent jurisdiction must be exercised "sparingly and with caution". "The language of s. 131(1) of the CJA does not exclude inherent jurisdiction to order costs against a non-party who commits an abuse of process. It is 'permissive' in that it confers broad discretion to make costs orders", and to consider "any other matter relevant to the question of costs". 12

[32] While there is much evidence to support the finding that it was Manny who was the perpetrator of the egregious conduct referenced in the decision in this case, there is no evidence to support a finding that Marcos was named plaintiff and utilized solely for the purpose of insulating Manny or his brother Joe from potential costs liability. There's also no evidence to suggest Marcos is a shell company with no exigible assets available to satisfy a judgment or that Marcos is not a going concern.

[33] With respect to Joe Marcos, the evidence does not satisfy a finding that the plaintiff corporation was advanced to shield Joe from personal liability for costs. Also, his involvement in this action was not nearly to the same degree as the misconduct which occurred on the part of Manny in the conduct of this litigation. Although there is evidence of dishonesty on the part of Joe as it relates to his taxes and financial dealings, on the evidence it was Manny who orchestrated the scheme to deceive the court.

[34] The fraud and gross misconduct on the part of the non-party must relate to conduct during the litigation for the costs to be awarded against the non-party. Findings of this court are replete with acts relating to Manny Marcos' gross misconduct during the litigation for the purposes of advancing the claim. Manny Marcos' conduct amounted to an abuse of the process beyond the purported subject matter in the litigation. The action was of a construction company claiming for its work. The misconduct of Manny Marcos, as this court has found, was deliberate in an attempt to justify and falsely support an inflated claim outside the scope of the agreement between the parties.

[35] On the submission regarding lack of notice for the claim of costs personally against the non-parties, the full extent of the deceitful conduct of Manny Marcos, and abuse of the court's process, could not be fully assessed by the defendants until the decision of the court following trial was rendered. Clearly proper notice of a costs claim against a non-party must be given. In the context of this case, the written submissions on costs from the defendants provided notice following the decision. Both Manny and Joe Marcos were given the opportunity to respond on the defendants' costs submissions in writing. Having regard to all the circumstances sufficient notice was provided and the non-party litigants were given a fair opportunity to respond to the claim.

[36] In the result, therefore, the costs award, as noted above in the sum of $578,793.29 as full indemnity, is payable by the plaintiff and Manny Marcos, jointly and severally.

[37] Joe Marcos asks for costs of his costs' submissions. Having regard to the findings in the decision regarding the dishonesty of Joe Marcos as a witness, his claim for costs is dismissed. Although his conduct did not rise to the level of the egregious conduct of Manny Marcos, the perpetrator of the deceit in the litigation, Joe Marcos on his own evidence was involved in the operation of the plaintiff corporation. He was not merely a witness. The claim of costs against him personally was reasonably advanced.

[38] No costs are awarded either in favour of or against Joe Marcos.

Order accordingly.

Notes

1 1318847 Ontario Ltd. v. Laval Tool & Mould Ltd. (2017), 134 O.R. (3d) 641, [2017] O.J. No. 1098, 2017 ONCA 184, at paras. 59 and 60.

2 Net Connect Installation Inc. v. Mobile Zone Inc. (2017), 140 O.R. (3d) 77, [2017] O.J. No. 5150, 2017 ONCA 766, at para. 8.

3 Tsymbalarou v. Gordon, [2013] O.J. No. 4927, 2013 ONSC 6406 (S.C.J.), at paras. 4 and 14.

4 [2016] O.J. No. 2015, 2016 ONSC 2612 (S.C.J.).

5 Ibid., at para. 81.

6 (2016), 134 O.R. (3d) 524, [2016] O.J. No. 6286, 2016 ONCA 903, at para. 18.

7 [2016] O.J. No. 6798, 2016 ONSC 8159 (S.C.J.), at para. 10.

8 [2008] O.J. No. 3817, 2008 CarswellOnt 9437 (S.C.J.).

9 Ibid., at paras. 30 and 31.

10 Supra, at paras. 59 and 60.

11 Ibid., at para 59.

12 Ibid., at paras. 65 to 69.

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