Court File and Parties

Court File No.: 15-64402 Date: March 5, 2021 Superior Court of Justice – Ontario

Re: 4197658 Holdings ULC, Plaintiff And: The Atlas Corporation, Defendant

Before: Muszynski J.

Counsel: Daria A. Strachan, for the Plaintiff Barry S. Greenberg, for the Defendant

Heard: March 3, 2021

Endorsement

[1] The plaintiff, 4197658 Holdings ULC (the “Plaintiff”), brings this motion seeking, primarily, leave to amend the Amended Amended Statement of Claim. The motion is opposed by the defendant, The Atlas Corporation (the “Defendant”).

Issue

[2] Should the Plaintiff be granted leave to amend the Amended Amended Statement of Claim?

Result

[3] For the reasons that follow, the Plaintiff is granted leave to amend its Amended Amended Statement of Claim in the form attached to the Supplementary Motion Record without prejudice to the Defendant’s ability to raise a limitation defence at trial.

Position of the Parties

[4] The Plaintiff seeks leave to amend the Amended Amended Statement of Claim pursuant to Rule 26.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 to allege new allegations of fraud, fraudulent misrepresentation and deceit and to seek punitive damages. The Plaintiff claims that these allegations arise from information that was only discoverable in the fall of 2019. As the action was previously set down for trial by the Plaintiff, the Plaintiff also seeks leave to bring the subject motion pursuant to Rule 48.04(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 if it is deemed necessary on the basis that the discovery of the alleged fraud constitutes a substantial change in circumstances.

[5] The Defendant firstly takes the position that the Plaintiff requires leave pursuant to Rule 48.04(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 to bring the subject motion and that such leave should not be granted as there has been no substantial or unexpected change in circumstances. The Defendant further submits that the Plaintiff should not be granted leave to amend the Amended Amended Statement of Claim as proposed as the amendments amount to a new cause of action that are statute barred by the Limitations Act, 2002, SO 2002, c 24, Sch B (the “Limitations Act”) and that the Defendant would suffer prejudice that could not be compensated for by costs.

Background

[6] There is a lengthy and complicated background to this litigation.

[7] The action arises out of a dispute about a construction contract (the “Contract”) dating back to 2011. The Plaintiff contracted with the Defendant to provide construction management services relating to the construction of a retirement residence.

[8] As early as 2014, the Plaintiff asked the Defendant to provide an accounting.

[9] Litigation was commenced on May 22, 2015. The original Statement of Claim alleges that the Defendant was overpaid by the Plaintiff in the amount of $281,403.90. In the Statement of Claim the Plaintiff seeks repayment of those funds.

[10] In 2017, the Plaintiff brought a similar motion to amend the original Statement of Claim following Examinations for Discoveries when more information became available about the alleged overpayment. The Defendant resisted the Plaintiff’s motion at the time on similar grounds to those advanced in the subject motion (i.e. the proposed amendments raise a new cause of action and are statute barred by virtue of the Limitations Act).

[11] In her August 3, 2017 Endorsement, Master Champagne (as she was then) allowed the Plaintiff’s motion to amend its Statement of Claim. In particular, she found that the proposed amendment did not raise a new cause of action. Master Champagne then stated: “If I am wrong, I nonetheless find that discoverability is a live issue for the trial judge.”

[12] There have been issues with the production of accurate and reliable records in this case that was specifically acknowledged in Master Champagne’s Endorsement:

I reject the defendant’s argument that Waterford had all the financial information it required to make its proposed amended claim in January 2014. Atlas, on the same financial information was unable to produce accurate accounting summaries and in fact produced different accounting summaries five times. This ultimately lead to the production of their General Ledger on August 30, 2016. The email exchanges between counsel make clear Waterford required answers to undertakings before it could provide a draft amended claim and it was only after the General Ledger was produced and a forensic audit of the ledger was performed that Waterford produced its draft amended claim.

[13] The Plaintiff served its Trial Record in October 2018.

[14] The action was scheduled to proceed to trial commencing October 28, 2019. That trial date was vacated due to lack of judicial resources and rescheduled for April 2020.

[15] Before the anticipated April 2020 trial date, but after the service of the Trial Record, the Plaintiff alleges it made a discovery that lead to a suspicion that the Defendant had been engaged in fraudulent accounting to the Plaintiff’s detriment. The Plaintiff claims that two events resulted in this suspicion.

[16] Firstly, in or about November 2019, the former President of the Plaintiff, Fred Zlepnig, spoke with a former employee of the Defendant, Hans Vander Mey. Mr. Vander Mey was a Site Superintendent for the Defendant at the material time and was involved with the Plaintiff’s construction project. Mr. Vander Mey signed a willsay statement wherein he confirmed that part of his job as Site Superintendent was to keep track of the subtrades and to make sure work was being completed on time. Mr. Vander Mey completed time sheets for labourers which would be remitted to the Defendant. After reviewing the time sheets, Mr. Vander Mey claims that one worker appeared to have been added to various time sheets. Mr. Vander Mey claims he does not know how that name came to be on the time sheet and denies that individual ever worked on the job site.

[17] Secondly, it is the evidence of Mr. Zlepnig that in January of 2020 he discovered certain entries contained in the Defendant’s cost ledger were inconsistent with invoices submitted to the Plaintiff for payment. These inconsistencies related to two subcontractors: MSE Contracting Inc. and Vaughan Masonry Ltd. It is conceded that these subcontractors have a non-arm’s length relationship to the Defendant. The evidence on this motion is that the inconsistencies were only discovered after the Defendant’s principal went through a rigorous analysis of the records in preparation for trial. The inconsistencies had not been discovered previously by a forensic accountant hired by the Plaintiff.

[18] There is no question that following the discovery of the inconsistencies, counsel for the Plaintiff immediately made requests to counsel for the Defendant for additional records and information that might provide clarification.

[19] When no satisfactory explanation was received, the Plaintiff’s evidence is that the necessary steps were taken to advance the subject motion to amend the Amended Amended Statement of Claim to include the fraud allegations and punitive damages claim. The Plaintiff’s motion also included a request for an order requiring the Defendant to produce additional records. The production request will be discussed in more detail below.

[20] On March 5, 2020, Regional Senior Justice MacLeod adjourned the April 2020 trial date again to allow the Plaintiff an opportunity to bring the amendment motion, which was scheduled for May 21, 2020.

[21] In the leadup to the motion, the Plaintiff requested that its expert forensic accountant, KMPG, provide additional information about the inconsistencies that were identified regarding the non-arm’s length subcontractors. In a letter dated May 8, 2020, KPMG wrote to counsel for the Plaintiff and states, in part, as follows:

As we noted in our report dated June 8, 2018, we did not carry out an audit, nor did we attempt to verify the accuracy of the underlying information and documentation used in our analysis. We assumed in good faith that the information provided to us accurately reflected the actual amounts paid by the Defendant to subcontractors. We note this is a typical assumption for work of this nature, unless we are asked to investigate specific inconsistencies or concerns.

Because of this assumption, we did not verify that the financial information included in monthly draws agreed to the specific invoices that were included in Atlas’ detailed cost ledger. It was assumed that these two information sources would agree with each other and we were provided no reason to suspect otherwise. If it was determined that the information could not be relied upon, in order to fully validate the information, one would need to compare each draw with each invoice, and then verify each invoice payment to Atlas’ banking information. This is normally not a practical approach unless the veracity of all records is in question, which was not the case at the outset of KPMG’s involvement.

The variances identified appear to suggest that the amounts invoiced to and paid by Waterford do not reflect the actual costs incurred by Atlas. In total, as described in the sections below, amounts included in the Draws exceed amounts incurred in the Ledgers by $145,728. Stated differently, the amounts paid by Waterford to Atlas as per the Draws are greater than the amounts reflected in Atlas’ own accounting records as represented by the Ledgers.

[22] An adjournment of the May 21, 2020 motion was required due to issues related to the COVID-19 pandemic. The motion was rescheduled for December 17, 2020.

[23] On December 17, 2020, there was yet another adjournment of the subject motion. This was because the Defendant raised the issue of leave being required pursuant to Rule 48.04(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, which had not been sought in the Plaintiff’s motion materials.

[24] The matter was subject to a case conference with Master Kaufman on January 14, 2021 at which time a timetable was ordered with respect to the delivery of materials for the subject motion.

[25] On March 3, 2021 the Plaintiff’s motion was finally heard.

Analysis

Does the Plaintiff require leave pursuant to Rule 48.04 to bring the subject motion?

[26] The Defendant takes the position that because the Plaintiff’s action was set down for trial, leave to bring the amendment motion is required pursuant to Rule 48.04(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 which states “any party who has set an action down for trial and any party who has consented to the action being placed on a trial list shall not initiate or continue any motion or form of discovery without leave of the court.” The Defendant submits that there is a two-step process involved: 1) should leave be granted to hear the motion pursuant to Rule 48.04(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194; if so, (2) should leave be granted to allow the amendment pursuant to Rule 26.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194?

[27] The Plaintiff submits that leave is not required to bring this motion under Rule 48.04(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, but rather under the provisions of Rule 26.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 which states: “On motion at any stage of an action the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.”

[28] The Defendant has put forward several cases that support the position that leave is required to bring a motion after an action is set down for trial. Only two of those decisions relate to amendment motions.

[29] The 1997 decision of Rosenthal v. Lau, 1997 CarswellOnt 4160 [Rosenthal] is an appeal of a Master’s decision dismissing a plaintiff’s motion to amend its claim. In Rosenthal, the plaintiff brought the motion pursuant to Rule 26.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 and the defendant opposed the motion on the basis of Rule 48.04(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. The judge hearing the appeal appears to have accepted that Rule 48.04(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 was applicable in the circumstances of that case in the following sentence: “The Plaintiff has not shown such a substantial and unexpected change of circumstances as would justify granting leave to amend after the action has been set down for trial under Rule 48.04(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.” Among other things, the moving party in Rosenthal sought to add additional parties to the litigation.

[30] The Defendant further relies on the 2010 case of Atlas Corp. v. Ingriselli, 2010 ONSC 1960. In that case, the plaintiff sought to amend the Statement of Claim to add an additional party after the action had been set down for trial. The plaintiff’s motion was dismissed. The motion judge considered whether leave was required to bring the motion pursuant to Rule 48.04(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. It was ultimately determined that leave was required, which the motion judge declined to grant. The motion judge referred to the decision of Cook v. Toronto Police Services Board [Cook] which he noted to be “on all fours with the fact pattern in the case at bar.”

[31] The Cook decision provides guidance on the relationship between Rule 48.04 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 and motions to amend. In Cook, the moving party also sought to add a party after having set the action down for trial. Master Haberman clarified: “Although this is a motion to amend pleadings, it falls under Rule 5.04(2) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rather than Rule 26.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, as it involves an alteration to the title of proceedings and the identity of the parties. Although motions under either rule may be brought at any stage of a proceeding, Rule 5.04 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, unlike Rule 26.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, is discretionary in nature, such that the court is not required to allow an amendment of this nature at any stage of the proceeding.”

[32] I agree with Master Haberman’s conclusion in Cook and the rationale for applying the same in the 2010 decision of Atlas Corp. v. Ingriselli. Both of those cases involved motions to add parties pursuant to Rule 5.04 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. A distinction can made between motions to add parties pursuant to Rule 5.04 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 and motions to amend more generally under Rule 26.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.

[33] This case does not involve Rule 5.04 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. I find that in the circumstances of this case, that being a more general motion to amend that does not involve the addition of parties, leave to bring the subject amendment motion is not required under Rule 48.04 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. This is consistent with the approach taken in the case of Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Company et al, [1995] O.J. No. 2220.

Would the proposed amendment result in prejudice that could not be compensated for with costs or an adjournment?

[34] Given the stage of proceedings and since this motion is opposed, the Plaintiff requires leave of the court to make an amendment. The mandatory language in Rule 26.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 provides that the court shall grant leave to amend on such terms as are just unless prejudice would result that could not be compensated for with costs or an adjournment.

[35] The Defendant submits that there are two reasons why the proposed amendments would result in non-compensable prejudice:

1. The proposed amendments amount to what is essentially a new cause of action that is statute barred by virtue of the Limitations Act;
2. Since the Plaintiff set the action down for trial and certified that documentary disclosure was complete, the Defendant allowed business records to be purged and can no longer provide a fulsome defence to the new allegations of fraud that the Plaintiff seeks to introduce.

Do the proposed amendments amount to a new cause of action?

[36] The proposed amendments include the addition of a claim for damages on account of “fraud, fraudulent misrepresentation, deceit and breach of contract” and a claim for punitive damages. Further, the Plaintiff seeks to add material facts that support the claim that there was a “fraudulent scheme” involving the two non-arm’s length subcontractors.

[37] The Plaintiff submits that the proposed amendments are part and parcel of the same factual matrix of the original claim in that it all relates to the alleged failure of the Defendant to provide proper accounting required by the Contract. The Plaintiff classifies the proposed amendments as merely a “new theory” of the same case.

[38] The Defendant’s position is that the original claim was a contractual dispute about an overpayment and the proposed amendment would turn the claim into one centred on tortious acts. The Defendant relies on the case of Ascent Incorporated v. Fox 40 International Inc., [2009] O.J. No. 2964 [Ascent] that involved a similar situation. In Ascent, the moving party sought to amend its claim to make new allegations of fraud and fraudulent misrepresentation together with adding the material facts required to support those allegations. At paragraph 11 of that decision, Master Dash writes:

In my view, the allegations of fraudulent misrepresentations by the non-corporate defendants set out a new cause of action. It is not simply an alternate claim for relief or a different legal conclusion based on facts already pleaded. The new facts pleaded are necessary to support the new cause of action based on fraudulent misrepresentation. They are not particulars of the initial claims pled based on breach of contract and breach of fiduciary duty. Although the new allegations arise in a very general sense out of the same factual matrix as the originally pled allegations, they add a markedly different and new set of facts to fashion liability against the individuals based on their separate tortious acts.

[39] The proposed amendments in this case relate to the contractual relationship between the Plaintiff and the Defendant in a general way. However, the proposed amendments also include new material facts which are plead to support the new claims being advanced. I find that the proposed amendments amount to a new cause of action.

Should the Plaintiff be denied leave to amend on the basis that the proposed amendments are statute barred by virtue of the Limitations Act?

[40] It is common ground that a new cause of action cannot be bootstrapped to an existing claim in order to avoid being statute barred by the Limitations Act.

[41] At the hearing of the motion, counsel agreed that the main issue is when the Plaintiff knew or ought to have known about the alleged fraud. When was this new cause of action discoverable?

[42] The two-year limitation period and principle of discoverability is codified in ss. 4 and 5 of the Limitations Act which states:

4. Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.

5.(1) A claim is discovered on the earlier of,

(a) The day on which the person with the claim first knew,

(i) That the injury, loss or damage had occurred,

(ii) That the injury, loss or damage was caused by or contributed to by an act or omission,

(iii) That the act or omission was that of the parson against whom the claim is made, and

(iv) That, in having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and

(b) The day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).

[43] The Plaintiff claims that the alleged fraudulent scheme involving the two non-arm’s length subcontractors was only discoverable in late 2019 / early 2020 when Mr. Vander Mey came forward about the purported errors on the time sheets and Mr. Zlepnig identified inconsistencies in the costs ledger after a rigorous analysis of the data.

[44] The Defendant submits that there are major credibility issues with respect to Mr. Vander Mey. Further, the Defendant states that the Plaintiff was provided with the cost ledger and all of the records required to identify the inconsistencies on or about January 23, 2017.

[45] While not referred in the Limitations Act itself, it is accepted that a plaintiff must act with due diligence in determining whether they have claim. Evidence must be advanced that some action or due diligence was exercised in order to toll a limitation period. See Longo v. MacLaren Art Centre, 2014 ONCA 526 at para 42.

[46] The Plaintiff’s position is that they exercised due diligence by providing the Defendant’s accounting records to KPMG. The Plaintiff submits that KMPG operated under the typical assumption that the figures represented in the cost ledger were not fraudulent. KMPG’s May 8, 2020 letter to counsel for the Plaintiff is in evidence on this motion and confirms that they did not identify the inconsistencies when they conducted their typical documentary review. It was only after Mr. Vander Mey came forward and Mr. Zlepnig conducted his more rigorous review of the records that the inconsistencies became obvious.

[47] The Plaintiff is not responsible for the challenges in reconciling the accounting summaries and cost ledger. The Defendant admittedly provided inaccurate accounting summaries to the Plaintiff on several occasions. There is still a real question as to whether the Plaintiff has been provided with all, or the correct, information. I am not compelled by the Defendant’s argument that the errors in accounting should have been found sooner. This assumes that the Plaintiff should have second guessed the accuracy of every entry of every account provided. I do not accept that this was required.

[48] Based on the materials filed on this motion, I am unable to make a determination one way or another as to whether the proposed amendments, which I have found represent a new cause of action, are statute barred by virtue of the Limitations Act. This issue is better determined by the trial judge who can better assess the evidence, including any credibility issues.

[49] I am not prepared to deny the Plaintiff leave to amend on the basis that the proposed amendments are statute barred.

Should the Plaintiff be denied leave to amend on the basis that the Defendant has been prejudiced in its ability to access documents that have been purged or are no longer available?

[50] The Defendant submits that they relied on the Plaintiff’s Certification and Request Form dated October 11, 2018 that was delivered by the Plaintiff at the time the Trial Record was filed wherein it was certified that discoveries were complete, all undertakings were answered and documentary production was complete.

[51] The Defendant’s position is that it was at liberty to purge records in the usual course of business after the Certification and Request Form was delivered. Indeed, the Defendant claims that “documentation relating to Atlas’ dealings with both Vaughan Masonry and MSE have been purged from Atlas’ records in the usual course of business as no further documentation was considered to be relevant to Waterford’s claim as the Plaintiff’s lawyer had certified that all productions were complete in October 2018.”

[52] The position advanced by the Defendant is untenable. Litigation related to accounting for work completed and invoices rendered was ongoing. The suggestion that the Defendant would think it appropriate to purge records that in any way related to the Contract is not credible. If the Defendant destroyed accounting records in the midst of litigation involving the same accounting dispute, any prejudice they now claim they will suffer if the proposed amendments are allowed are of the Defendant’s own creation.

[53] With respect to the Defendant’s allegation that certain documents, such as cheques and invoices from the two subcontractors are no longer available, I am not satisfied on the record before me that the Defendant has made sufficient attempts to even obtain this information.

[54] I am not prepared to deny the Plaintiff leave to amend on the basis that Defendant is prejudiced in its ability to mount a complete defence due to the lack of access to records.

Conclusion on Amendment Motion

[55] The Plaintiff is granted leave to amend its Amended Amended Statement of Claim in the form attached to the Supplementary Motion Record without prejudice to the Defendant’s ability to raise a limitation defence at trial.

Production Motion

[56] The parties agreed that, should I grant the Plaintiff’s motion for leave to amend, the production motion brought by the Plaintiff could be largely resolved on consent.

[57] Given my decision to grant the Plaintiff leave to amend, I also order, on consent of the parties, as follows:

1. The Defendant shall instruct its bank to preserve all records;
2. The Defendant shall inquire from MSE Contracting Inc. and Vaughan Masonry Ltd. as to what documentation exists regarding invoicing, accounting, cheques and payment regarding the Waterford project and shall produce any such documentation to the Plaintiff;
3. The Plaintiff will provide the Defendant with information as to how to deliver searchable PDF Excel spread sheets of the detailed cost ledger. The Defendant will then use best efforts to produce a searchable version of the detailed cost ledger to the Plaintiff; and
4. The Plaintiff will provide the Defendant with information as to how to access the property pages for each of the subcontractor revision invoices. The Defendant will then use best efforts to produce a searchable version of the property pages of each of the subcontractor revision invoices to the Plaintiff.

[58] If the Plaintiff wishes to continue with any other aspects of the production motion, it shall schedule a new date to have the remainder of the motion heard.

Order

[59] An order shall issue as follows:

1. The Plaintiff is granted leave to amend its Amended Amended Statement of Claim in the form attached to the Supplementary Motion Record without prejudice to the Defendant’s ability to raise a limitation defence at trial.
2. On consent of the parties, (a) The Defendant shall instruct its bank to preserve all records; (b) The Defendant shall inquire from MSE Contracting Inc. and Vaughan Masonry Ltd. as to what documentation exists regarding invoicing, accounting, cheques and payment regarding the Waterford project and shall produce any such documentation to the Plaintiff; (c) The Plaintiff will provide the Defendant with information as to how to deliver searchable PDF Excel spread sheets of the detailed cost ledger. The Defendant will then use best efforts to produce a searchable version of the detailed cost ledger to the Plaintiff; and (d) The Plaintiff will provide the Defendant with information as to how to access the property pages for each of the subcontractor revision invoices. The Defendant will then use best efforts to produce a searchable version of the property pages of each of the subcontractor revision invoices to the Plaintiff.

Costs

[60] Costs are reserved. If the parties cannot come to an agreement on costs of the motion on or before April 9, 2021, counsel shall file cost outlines in accordance with the following schedule: the Plaintiff shall serve and file its cost outline on or before April 23, 2021; the Defendant shall serve and file its cost outline on or before May 7, 2021; after which time I will determine the issue of costs based on the material filed.

[61] Counsel shall file their respective cost outlines by sending them by email to the Superior Court of Justice civil motion coordinator in Ottawa assigned to this matter.

Muszynski J. Date: March 5, 2021