Court File and Parties

COURT FILE NO.: 1285/20 DATE: 2022-05-10 SUPERIOR COURT OF JUSTICE – ONTARIO

RE: FNF Enterprises Inc. and 2378007 Ontario Inc., plaintiffs AND: Wag and Train Inc. and Linda Ross, defendants

BEFORE: Mr Justice Ramsay

COUNSEL: Mark Gallagher for the plaintiffs; Simenpal Kainth and Patrick Kraemer for the defendants

HEARD: May 10, 2022 at Kitchener by videoconference

Endorsement

[1] The plaintiffs are suing for breach of contract on a non-residential lease.

[2] The defendants move under Rule 21 for the following orders:

a. A stay of proceedings under s.7 of the Arbitration Act;

b. An order striking the statement of claim as far as it claims against the individual defendant Linda Ross for breach of contract, interference with contractual relations and oppression under s.248 of the Business Corporations Act, on the ground that it discloses no reasonable cause of action;

[3] The plaintiffs move for an order imposing a discovery plan.

[4] The plaintiffs are the landlord, and the defendant corporation is the tenant. The individual defendant Linda Ross is the sole director and shareholder of the defendant corporation. The defendants moved out of the premises and stopped paying rent a year before the end of the lease. In a motion under rule 21, the court is limited to the pleadings and, in this case, the lease.

Arbitration

[5] The Arbitration Act provides:

7 (1) If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding.

[6] The defendant relies on paragraph 31.9 of the lease, which begins:

If any issue shall arise between the Landlord and Tenant, which in accordance with the provisions of this Lease shall be determined by arbitration, in the absence of agreement between the Landlord and Tenant, such issue shall be determined by arbitration in accordance with the following:

[7] This clause standing alone, particularly in view of the commas that separate the underlined portion from the rest, suggests issues that arise from the contract shall be determined by arbitration. The clause, however, has to be interpreted in light of the entire contract. Three provisions are relevant.

[8] First, the immediate context of the excerpted clause is the rest of paragraph 31.9, which sets out the procedures to be followed in the event of arbitration. That suggests that the purpose of this paragraph is not to require matters to be arbitrated, but to set out the procedure in the event of arbitration.

[9] Second, paragraph 23.1 provides that the landlord is entitled to recover legal costs “if the landlord shall commence an action for collection of rent” unless the landlord “shall lose such action.” The contract explicitly contemplates an action for recovery of rent. What are the provisions of the lease, then, that make sense of paragraph 31.9?

[10] They are paragraph 3.1, which provides that the term of the lease ends on March 31, 2021 and paragraph 3.2, which provides that the tenant is entitled to extend the term twice for an additional 60 months. Any extended term shall be on the same conditions as in the lease, except for basic rent, which shall be fair market rent, “which, if not agreed to by the parties sixty days prior to the end of the term, shall be determined by arbitration pursuant to the provisions hereof.”

[11] Looking at the lease as a whole I conclude that the parties meant that rent for any extended term would be submitted to arbitration, but collection of unpaid rent could be sought by action.

[12] I decline to stay the proceedings.

Liability of Linda Ross for interference with contractual relations

[13] The pleadings clearly allege that Linda Ross, a director of the corporate defendant, caused it to breach its contract with the plaintiffs. The plaintiff concedes that according to the doctrine in Said v. Butt, [1920] 3 KB 497 Linda Ross cannot be held liable for the tort of interference with contractual relations by inducing her own company to breach a contract. Accordingly paragraph 21 of the statement of claim is struck without leave to amend.

The oppression remedy in s.248 of the Business Corporations Act

[14] To succeed in striking the pleadings on the basis that they do not disclose a reasonable cause of action, the defendant has to show that taking the material facts pleaded as true, it is plain and obvious that the plaintiff cannot succeed: Progressive Casualty Insurance v. Sayigli, 1999 ONSC 15092, [1999] O.J. No. 3331 (S.C.J.).

[15] The plaintiffs plead that they are creditors of the corporate defendant, that Linda Ross is a director, and that she and the corporation are responsible for actions that were oppressive, unfairly prejudicial and that unfairly disregarded the interests of the plaintiffs. “Namely, the severe mismanagement of funds, self-dealing and disregard for statutory and common law trust obligations constitute, inter alia, a breach of the protection afforded the plaintiffs’ interests under s.248 of the Act.

[16] The particulars given are that Linda Ross caused the defendants to vacate the premises on Maple Avenue in Kitchener near the end of March 2020, a year before the term of the lease, without restoring it to the agreed “broom swept condition” and to stop paying rent. The defendants moved the business to a new location on Victoria Street. They did not notify the plaintiffs of the move and did not respond to emails.

[17] Linda Ross is the alter ego of the corporate defendant. She is the sole director and shareholder of the corporation and treats its earnings as her own. She moved to avoid paying amounts properly owing under the lease. The statement of claim uses the word “fraud” to describe her conduct.

[18] No particulars are given of mismanagement of funds, self-dealing and trust obligations. If Linda Ross is the sole shareholder of the corporate defendant, presumably she is entitled to use its money as her own.

[19] Section 248 of the Business Corporations Act, R.S.O. 1990, c. B 16, gives the court a broad discretion to fashion a remedy for creditors who are treated unfairly by corporations and their directors. The oppression remedy is not, however, a means by which commercial agreements negotiated at arms length by sophisticated parties can be rewritten to accord with a court’s after-the-fact assessment of what is “just and equitable” in the circumstances. It is not the function of the court to rewrite contracts or to relieve a party to a contract of the consequences of an improvident agreement: See J.S.M. Corporation (Ontario) Ltd. v. The Brick Furniture Warehouse Ltd., 2008 ONCA 183, paragraph 60.

[20] In that case at paragraph 65, the Court of Appeal adopted the following statement from Kevin P. McGuiness, The Law and Practice of Canadian Business Corporations (Toronto: Butterworth, 1999) at para. 9.247:

In most cases it would seem reasonable to hold the creditors of the corporation are limited to the normal remedies for a breach of contract (including any available security or personal guarantee) should the corporation default in performance, for it cannot have been intended that the oppression remedy would be available where a creditor failed to protect himself or herself adequately against the inherent risks of doing business with a corporation. While acts of oppression may entail a breach of contract, or the commission of some tortious or similar wrong, against the complainant, it is doubtful that the oppression remedy was intended to be a substitute for an ordinary right of action in contract – or tort for that matter. Where the sole complaint is that of a breach of contract, then a contract action should be pursued.

[21] Nothing in the pleadings takes this case out of that general category. I think it plain and obvious that the claim of oppression cannot succeed.

Individual liability of Linda Ross

[22] The lease was signed by Linda Ross on behalf of Wag and Train Inc. Linda Ross is not a party to the lease. She is not liable for the actions of the corporate defendant unless the circumstances justify lifting the corporate veil.

[23] Again, the claim is based on the allegations that the defendants vacated the premises early and without cleaning up, stopped paying rent, gave no notice and declined to answer all communications. They started up the same business in plain sight near by. Linda Ross is the sole shareholder and director of the corporation and treats its earnings as her own. It is alleged that these acts constitute fraud or improper conduct designed to avoid paying amounts properly owing.

[24] In 642947 Ontario Ltd v. Fleischer, 2001 ONCA 8623, [2001] O.J. No. 4771, Laskin J.A. said at paragraph 67:

To pierce the corporate veil is to disregard the separate legal personality of a corporation, a fundamental principle of corporate law recognized in Salomon v. Salomon & Co., [1897] A.C. 22, [1895-9] All E.R. 33. Only exceptional cases -- cases where applying the Salomon principle would be "flagrantly" unjust -- warrant going behind the company and imposing personal liability. Thus, in Clarkson Co. v. Zhelka, 1967 ONSC 189, [1967] 2 O.R. 565 at p. 578, 64 D.L.R. (2d) 457 (H.C.J.), Thompson J. held that instances in which the corporate veil has been pierced "represent refusals to apply the logic of the Salomon case where it would be flagrantly opposed to justice". Similarly, Wilson J. observed in Kosmopoulos v. Constitution Insurance Co., 1987 SCC 75, [1987] 1 S.C.R. 2 at p. 10, 34 D.L.R. (4th) 208, that the law on when the corporate veil can be pierced "follows no consistent principle. The best that can be said is that the 'separate entities' principle is not enforced when it would yield a result 'too flagrantly opposed to justice, convenience or the interests of the Revenue': L.C.B. Gower, Modern Company Law (4th ed. 1979), at p. 112".

One category of the exceptional cases in which the corporate veil is lifted includes the case in which there is some conduct on the part of the directing mind that is either tortious in itself or exhibits a separate identity or interest from that of the corporations such as to make the acts or conduct complained of those of the directing mind: Normart v. Lebovic, 1998 ONCA 2447, [1998] O.J. No. 391 (CA), citing Montreal Trust Co. v. ScotiaMcLeod, 1995 ONCA 1301, 26 OR (3d) 481 (CA). That would not include the tort of inducing the corporation to breach a contract: Said v. Butt, [1920] 3 KB 497. As the Court of Appeal said in Adga Systems International Ltd. v. Valcom Ltd., 1999 ONCA 1527, [1999] O.J. No. 27, paragraph 18, the consistent line of authority in Canada holds simply that, in all events, officers, directors and employees of corporations are responsible for their tortious conduct even though that conduct was directed in a bona fide manner to the best interests of the company, subject to the Said v. Butt exception.

[25] Here the facts pleaded do not disclose an actionable tort committed by Linda Ross. Nor do they disclose fraud or improper conduct, or conduct by her that exhibits a separate identity from that of the corporation. If what is pleaded is true, she caused her closely-held corporation to breach its contract. She did not cause the corporation to disappear. Linda Ross’s conduct does not rise to such a level that application of the logic of Salomon would lead to a result that is flagrantly opposed to justice. I find it plain and obvious that the action cannot succeed against her personally.

[26] It is not a question of drafting. The pleadings are well drafted, but the facts that they allege do not make out a case for the relief sought. In these circumstances I decline to give leave to amend.

Discovery plan

[27] The action having survived, the imposition of a discovery plan is no longer controversial.

Conclusion

[28] I make the following orders:

a. The motion to stay the proceedings is dismissed.

b. Unopposed, paragraph 21 of the statement of claim is struck without leave to amend.

c. Paragraphs 17 to 20 and 22 to 28 of the statement of claim, as well as the first two words of paragraph 4, are struck without leave to amend.

d. References in the statement of claim to defendants in the plural shall be read as a reference to the defendant Wag and Train Inc.

e. The parties are ordered to exchange affidavits of documents within 30 days of release of this decision, to complete examinations for discovery by July 31, 2022 and to fulfil undertakings arising out of discovery by September 30, 2022.

f. Success having been divided, the parties shall bear their own costs of these motions.

J.A. Ramsay J. Date: 2022-05-10