Court File and Parties

COURT FILE NO.: CV-18-00591679-0000 CV-17-00586380-00A1 CV-17-50086381-00A1 DATE: 20230626

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

PREMIUM HOST INC. Plaintiff – and – PARAMOUNT FRANCHISE GROUP INC., PARAMOUNT FRANCHISE INC., 2302733 ONTARIO INC., MOHAMAD FAKIH, HOLLY GRAHAM and MICHEL GAGNON Defendants

Counsel: Adrienne Boudreau and Daniel Hamson, for the Plaintiff and Defendants to the Counterclaim Nadia Campion, Andrew Winton and Carter Liebzeit, for the Defendants and Plaintiffs by Counterclaim Paramount Franchise Group Inc., Paramount Franchise Inc., 2302733 Ontario Inc., Mohamad Fakih and Holly Graham

AND BETWEEN: PARAMOUNT FRANCHISE GROUP INC., PARAMOUNT FRANCHISE INC. and 2302733 ONTARIO INC. Plaintiffs by Counterclaim – and – PREMIUM HOST INC., GUL NAWAZ SHEIKH, SHAHID KHAWAJA and SARDAR SAMIUDDIN KHAN Defendants to the Counterclaim

BETWEEN: ROYAL BANK OF CANADA Plaintiff – and – VERSATILE HOLDINGS INC., SARDAR SAMIUDDIN KHAN, also known as SARDAR M. KHAN SAMIUDDIN, NIDA SHAHID and SHAHID SALEEM KHAWAJA Defendants – and – PARAMOUNT FRANCHISE GROUP INC., PARAMOUNT FRANCHISE INC., FAKIH GROUP INC., 2302733 ONTARIO INC., MOHAMAD FAKIH, HOLLY GRAHAM and MICHEL GAGNON Third Parties

BETWEEN: ROYAL BANK OF CANADA Plaintiff – and – EVEREST GROUP INC., YOUSAF JAMEEL KHAN, also known as YOUSAF JAMIL, ZARMINA S. KHAN and SHAHID SALEEM KHAWAJA Defendants – and – PARAMOUNT FRANCHISE GROUP INC., PARAMOUNT FRANCHISE INC., FAKIH GROUP INC., 2302733 ONTARIO INC., MOHAMAD FAKIH, HOLLY GRAHAM and MICHEL GAGNON Third Parties

Adrienne Boudreau and Daniel Hamson, for the Defendants Nadia Campion, Andrew Winton and Carter Liebzeit, for the Third Parties Paramount Franchise Group Inc., Paramount Franchise Inc., Fakih Group Inc., 2302733 Ontario Inc., Mohamad Fakih and Holly Graham Adrienne Boudreau and Daniel Hamson, for the Defendants Nadia Campion, Andrew Winton and Carter Liebzeit, for the Third Parties Paramount Franchise Group Inc., Paramount Franchise Inc., Fakih Group Inc., 2302733 Ontario Inc., Mohamad Fakih and Holly Graham

HEARD: In writing

Endorsement as to Costs

VERMETTE J.

[1] On March 3, 2023, I released reasons for judgment (2023 ONSC 1507):

a. dismissing the claims for statutory compensation of Versatile Holdings Inc. (“Versatile”) and Everest Group Inc. (“Everest”) under subsection 6(6) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (“Act”);

b. granting the claim for statutory compensation of Premium Host Inc. (“Premium Host”) under subsection 6(6) of the Act as against Paramount Franchise Group Inc. (“Paramount”), Paramount Franchise Inc. (“Paramount Leasing”), Mohamad Fakih and Holy Graham; and

c. granting the counterclaims of Paramount, Paramount Leasing and 2302733 Ontario Inc. (“Paramount Wholesale”) as against Versatile and Everest.

[2] The parties were not able to agree on costs and have delivered costs submissions.

[3] Versatile, Everest, Premium Host and the individuals associated with them will be referred to below as the “Plaintiffs”. Paramount, Paramount Leasing, Paramount Wholesale, Fakih Group Inc., Mohamad Fakih and Holly Graham will be referred to below as the “Defendants”.

1. Costs Endorsement of Justice Cavanagh dated March 8, 2021

[4] Earlier in the litigation, the Plaintiffs brought motions for summary judgment which, ultimately, did not proceed. Justice Cavanagh ordered that the actions be adjudicated at trial and he directed the parties to use the summary judgment materials for the trial to the extent possible (which the parties did). The Defendants subsequently sought an order for costs thrown away against the Plaintiffs.

[5] Justice Cavanagh found that the Defendants were entitled to costs of the motions for summary judgment on a partial indemnity scale. However, he did not fix the amount of costs payable to the Defendants. He stated the following in his costs endorsement:

In respect of the motions in the cases before me, the defendants seek an order for recovery of “their costs thrown away” from the plaintiffs’ abandoned motions. I also note my endorsements encouraging the parties to use the summary judgment materials to the extent possible at trial which would limit the amount of wasted costs. In my view, in the circumstances, if the defendants are unsuccessful at trial, it would be unfair for the plaintiffs to be required to pay costs for work done by defendants’ counsel to prepare evidence actually used at trial to unsuccessfully defend the plaintiffs’ actions.

On the materials before me, I am unable to determine that, as the defendants submit, none of the materials prepared for the summary judgment motions will be used at trial. For this reason, I am unable [to] fix the amount of costs which should be paid to the defendants.

The defendants are entitled to costs of the motions for summary judgment on a partial indemnity scale. These costs are to the defendants in any event of the cause. The amount to be paid will be determined by the trial judge following the trial.

2. Positions of the parties

[6] Premium Host, having been successful in its action and based on the conduct of the Defendants throughout the litigation, seeks its costs on an elevated partial scale of 75% of actual fees ($363,929.40) plus 100% of its disbursements ($17,068.65) for a total all-inclusive sum of $380,998.05.

[7] The Defendants seek costs on a partial indemnity basis in the amount of $429,895.44 against Versatile and its guarantors, and in the amount of $451,811.84 against Everest and its guarantors. They indicate that these amounts reflect a $50,000 reduction per action to acknowledge the overlap of work between the Defendants’ former counsel and their trial counsel.

a. Position of the Plaintiffs

[8] Versatile and Everest submit that any costs that are awarded against them ought to be significantly reduced to reflect that the Defendants engaged in a pattern of conduct designed to delay and/or avoid the trial, which increased costs and resulted in unnecessary duplication of work. They argue that the Defendants changed counsel multiple times, persistently refused to cooperate on basic procedural matters, and effected two tactical adjournments.

[9] In support of their claim for an elevated scale of costs in favour of Premium Host and for reduced costs as against Versatile and Everest, the Plaintiffs set out in their written submissions a non-exhaustive list of the “sanctionable conduct” of the Defendants, including: the Defendants’ refusal to cooperate to advance the litigation giving rise to the need for judicial assistance; the failure of the Defendants to comply with a production order until contempt motions were brought; the Defendants’ failure to attend scheduled examinations; the Defendants’ multiple requests to adjourn the trial and, after they were all refused, their firing of their then-counsel on the business day before the trial was set to commence. [1] The Plaintiffs also refer to conduct of the Defendants’ former counsel that they say is worthy of sanction.

[10] The Plaintiffs argue that the Defendants should bear responsibility for costs increases as a result of their litigation decisions, and for the manner in which they conducted themselves in these proceedings, generally. They submit that without costs sanctions for such behaviour, the Court’s directions to counsel to cooperate on procedural matters and counsel’s obligations to conduct themselves professionally and as officers of the Court are rendered effectively meaningless.

[11] The Plaintiffs’ position is that the costs sought by the Defendants are not reasonable given that plaintiffs will generally incur greater costs as a result of having the primary obligation of moving the litigation forward. The Plaintiffs note that the Defendants have failed to put forward any explanation that would justify this excessive rate of legal spend. In the Plaintiffs’ submission, the Defendants’ significantly higher costs arise as a result of duplicated efforts, multiple counsel changes, and their sustained efforts to delay the progression of the litigation.

[12] The Plaintiffs state that the Defendants’ prior counsel refused to turn existing trial preparation work over to current counsel in a prompt, organized and complete way and that the costs of any duplicated work should not be borne by them. In their view, the “$50,000-per-action deduction” that the Defendants applied to their costs request does not come close to meaningfully addressing the duplication of costs resulting from the Defendants’ decision to change counsel multiple times, and the excessive costs resulting from their litigation conduct. They point out that the Defendants incurred nearly $820,000 more in costs than the Plaintiffs in the defence of the three actions.

[13] The Plaintiffs state that there is no basis for this Court to make any costs awards against non-parties to the various actions, in particular against the individual guarantors in the rescission actions advanced by Versatile and Everest. They submit that the “person of straw” test cannot be satisfied in this case: see 1318847 Ontario Ltd. v. Laval Tool & Mould Ltd., 2017 ONCA 184 at paras. 59-60 (“Laval Tool”). They also point out that the guarantees do not contain general litigation indemnities and are restricted to the franchisees’ obligations under the franchise agreements.

[14] The Plaintiffs point out that they accepted that if the rescission claims that they advanced failed, then the counterclaims would necessarily succeed on liability. Therefore, the only outstanding issue relating to the counterclaims was in respect of quantum. The Plaintiffs state that minimal pre-trial and trial time was devoted to the counterclaims. They submit that, as a result, costs awarded against them and the individual defendants by counterclaim should likewise be nominal. They suggest that a reasonable costs award would be 15% of the sums awarded on the counterclaims (i.e., $18,787.73 with respect to Versatile and $45,524.58 with respect to Everest).

[15] Finally, the Plaintiffs make submissions regarding the order made by Justice Cavanagh regarding costs thrown away in relation to the motions for summary judgment. They argue that no costs thrown away should be levied against Premium Host and that the costs sought as against Versatile and Everest are grossly disproportionate to the work done by the Defendants in response to the motions.

[16] The Plaintiffs’ bills of costs reflect the following costs:

a. Premium Host: $308,074.30 on a partial indemnity basis;

b. Versatile: $307,854.30 on a partial indemnity basis;

c. Everest: $313,142.70 on a partial indemnity basis.

b. Position of the Defendants

[17] The Defendants state that the Plaintiffs’ submissions do not displace the presumption that the successful Defendants are entitled to partial indemnity costs with respect to the actions brought by Versatile and Everest. They also state that Premium Host should only be awarded its partial indemnity costs, which should be reduced on account of Justice Cavanagh’s costs thrown away order and the failed claim against Paramount Wholesale.

[18] The Defendants submit that the costs that they are seeking are reasonable in light of the complexity of the actions, the Plaintiffs’ own costs, the order of Justice Cavanagh granting the Defendants costs thrown away on account of the Plaintiffs’ abandoned motions for summary judgment, and the conduct of the Plaintiffs that drove up the costs of the litigation for the Defendants. They note that their partial indemnity costs are proportionate to the damages sought by Versatile ($3,085,658 plus interest) and Everest ($2,718,650 plus interest).

[19] The Defendants argue that while the amounts of costs that they seek are higher than the $308,074.30 and $313,142.70 in partial indemnity costs incurred by the Plaintiffs in respect of the actions commenced by Versatile and Everest, such amounts are within the Plaintiffs’ reasonable contemplation in light of the complexity of the actions and how they were pursued.

[20] The Defendants provide reasons as to why the Defendants’ costs are higher than the Plaintiffs’ costs. They point out that the Defendants were responsible for producing most of the documents in the litigation. They also submit that the Plaintiffs took several steps that unduly complicated the proceeding, including the motions for summary judgment, the late production of David Gray’s file and other documents which required further examinations for discovery, and their refusal to admit facts that should have been admitted in the Defendants’ Requests to Admit.

[21] With respect to the costs ordered by Justice Cavanagh regarding the motions for summary judgment, the Defendants submit that the order of Justice Cavanagh does not affect the quantum owed to the Defendants in relation to the actions brought by Versatile and Everest as the Defendants were successful at trial in these actions. As for the action brought by Premium Host, the Defendants state that Justice Cavanagh’s order should result in a reduction of Premium Host’s costs. The Defendants identified in their bills of costs which costs were costs thrown away.

[22] The Defendants argue that any costs awarded against Versatile and Everest should be made jointly payable by the corporations and their guarantors. They point out that Versatile and Everest are shell corporations that do not have any assets and are not carrying on business. They submit that the guarantors/shareholders ran the litigation through these companies for their personal benefit. The Defendants also rely on the guarantees signed by the guarantors and take the position that the costs of the proceeding are included in the definition of “indebtedness” in the guarantees.

[23] The Defendants state that, at a minimum, the guarantors ought to be held jointly and severally liable for the costs of prosecuting the counterclaims against them. They note that Associate Justice La Horey accepted that at least 10% of the costs related to the counterclaims when she determined the Defendants’ motion for security for costs. [2]

[24] The Defendants request confirmation in the costs order that they are entitled to payment of the costs paid into court by Versatile and Everest as security for the Defendants’ costs.

[25] With respect to Premium Host’s request for elevated costs and the request for deductions in the other actions, the Defendants submit that while it is clear from the record that the Plaintiffs’ counsel and the Defendants’ former counsel did not have a cooperative relationship, the Plaintiffs’ submissions tell an incomplete story. According to the Defendants, the blame for counsel’s unproductive relationship should not be laid at either party’s feet. The Defendants state that they also had to seek the Court’s assistance in many instances. They note that while the Court could have awarded costs to reflect a party’s “blame” for the need for a case conference, it did not do so. The Defendants point out that the Defendants also brought a contempt motion and that the Plaintiffs produced documents in response to that motion. The Defendants argue that these motions do not warrant costs consequences at this stage as neither side proceeded with its contempt motion. They also argue that the Plaintiffs’ allegation that the Defendants refused to attend scheduled examinations numerous times is misleading, and that the case was not trial ready in March 2021.

[26] The Defendants’ position is that Premium Host’s costs should be limited to partial indemnity costs in the amount of $308,074.30 less deductions, for a total of $224,490.30.

[27] The Defendants submit that there should be a deduction for costs thrown away in relation to the motion for summary judgment. They state that their partial indemnity costs thrown away are in the amount of $58,584, which include all time other than the time spent reviewing the Plaintiffs’ motion records and preparing a responding record.

[28] The Defendants also request a $25,000 deduction to Premium Host’s costs to reflect its failed claim against Paramount Wholesale. The Defendants point out that Paramount Wholesale successfully defended the case against it as it did not meet the definition of franchisor’s associate. They submit that this was a material issue that consumed valuable trial time. They note that both sides called evidence and cross-examined the opposing witnesses on the issue, and made written and oral closing submissions on the issue.

[29] The Defendants’ bills of costs show the following costs:

a. Premium Host’s action: $472,837.30 on a partial indemnity basis;

b. Versatile’s action: $479,895.44 on a partial indemnity basis;

c. Everest’s action: $501,811.84 on a partial indemnity basis.

3. Discussion

a. Scale of costs

[30] As has been observed in many cases, costs on an elevated scale are exceptional and are reserved for those situations when a party has displayed reprehensible, scandalous or outrageous conduct: see Quickie Convenience Stores Corp. v. Parkland Fuel Corporation, 2021 ONCA 287 at para. 4. In my view, this principle applies to the “elevated partial scale of 75% of actual fees” sought by Premium Host.

[31] I find that the conduct of the Defendants in this case does not rise to the egregious level required to award costs on an elevated scale. As the parties’ submissions show, the issues that arose during the litigation were not one-sided. Therefore, I conclude that this is not an appropriate case for costs on an elevated scale. However, as discussed further below, the conduct of the Defendants and their former counsel is a relevant factor to take into consideration when determining the quantum of the partial indemnity costs to be awarded to the Defendants with respect to the actions brought by Versatile and Everest.

b. Liability of the guarantors

[32] I agree with the Plaintiffs that it is not appropriate to order costs against non-parties – the guarantors – with respect to the rescission actions of Versatile and Everest because the “person of straw” test set out by the Court of Appeal in Laval Tool is not met: see paras. 59-60. Among other things, Versatile and Everest were the true litigants in this case and the guarantors did not have status to bring the rescission actions. I note that the Court of Appeal expressly stated that the “person of straw” test for statutory jurisdiction to order non-party costs does not allow the court to award costs against a corporate officer, director, shareholder or principal of a corporation merely because that person caused the corporation to commence litigation as the named party or because the corporation is without assets: see Laval Tool at para. 63. As a result, I decline to make the costs awarded against Versatile and Everest jointly payable by the corporations and their guarantors.

[33] However, there is an exception with respect to the costs of the counterclaims that were brought against Versatile and Everest and to which the guarantors were proper parties. I agree with the Defendants that the guarantors should be jointly and severally liable for the costs of the counterclaims. Based on the little time that was spent on the counterclaims at trial and the fact that the counterclaims did not raise any complex issues, I find that the appropriate percentage of costs to be allocated to the counterclaims is 7.5%.

[34] As for the Defendants’ argument that the guarantors are liable to pay the costs of the actions under the guarantees, I am of the view that such an issue cannot be adequately determined in the context of a costs award. This is especially the case since the issue of the guarantors’ liability under the guarantees with respect to litigation costs is not an obvious one.

c. Costs of motions for summary judgment

[35] Based on the endorsement of Justice Cavanagh, I find that the Defendants are entitled to their costs thrown away as against Premium Host, and to their costs of the motions as against Versatile and Everest. Since the Defendants were successful in the actions brought by Versatile and Everest, the costs of the motions for summary judgment that were not costs thrown away (i.e., costs for work or work product that was used at trial) should be part of the costs of the actions to which the Defendants are entitled as the successful parties.

[36] However, I find that the amount claimed by the Defendants for costs thrown away is excessive. The Defendants claim costs thrown away on a partial indemnity basis in the amount of: (a) $58,584 as against Premium Host (more than 185 lawyer-hours); (b) $58,584 as against Versatile (more than 185 lawyer-hours); and (c) 60,483 as against Everest (more than 190 lawyer-hours). They state that these amounts cover activities like attendances at case conferences, research, client meetings, correspondence and preparation for cross-examinations. Given that the case conferences addressed all three motions (i.e., there was not one case conference per motion), that the Defendants approached the three motions as one (e.g., they delivered one responding motion record for all three motions), that the costs thrown away do not include the preparation of the responding motion record, and that no cross-examinations took place, a claim for costs thrown away in the total amount of $177,651 on a partial indemnity basis, based on more than 560 lawyer-hours, is preposterous. This grossly exceeds any reasonable expectations that the Plaintiffs may have had.

[37] I note that the claim for costs thrown away is for the period March 15, 2019 to July 18, 2019, i.e., approximately 125 days. If the Defendants’ former lawyers truly spent the number of hours reflected in the bills of costs, this means that the two lawyers involved would have collectively worked on the motions for the equivalent of approximately 4.5 hours every day, including the weekends, for four months. This is not credible nor reasonable.

[38] In my view, the appropriate amount of costs thrown away on a partial indemnity basis for the motions for summary judgment is: (a) $17,000 as against Premium Host; (b) $17,000 as against Versatile; and (c) $18,000 as against Everest.

d. Quantum of the costs to be awarded to Premium Host

[39] Premium Host’s bill of costs reflects costs on a partial indemnity basis in the amount of $308,074.30. I agree with the Defendants’ submission that two deductions should be applied to this amount:

a. a deduction for costs thrown away with respect to the motion for summary judgment, which I have found to be $17,000; and

b. a deduction to reflect the dismissal of Premium Host’s claim as against Paramount Wholesale. Based on the time that was spent at trial on this issue, and given the fact that the evidence and argument on the issue of whether Paramount Wholesale was a franchisor’s associate was the same for all three actions, I find that the appropriate amount for this deduction is $20,000.

[40] Accordingly, I find that the appropriate quantum of costs to be awarded to Premium Host is $271,074.30.

e. Quantum of the costs to be awarded to the Defendants as against Versatile and Everest

[41] While the hourly rates of the Defendants’ lawyers are higher than the hourly rates of the Plaintiffs’ lawyers, they are, generally speaking, reasonable and should have been within the reasonable expectations of the Plaintiffs. Nevertheless, it is my view that the costs claimed by the Defendants as against Versatile and Everest should be reduced.

[42] In addition to the reductions related to the costs thrown away discussed above, it is my view that further reductions should be applied to the costs sought by the Defendants based on duplication of work and the conduct of the Defendants and their prior counsel “that tended […] to lengthen unnecessarily the duration of the proceeding”: see Rule 57.01(1)(e) of the Rules of Civil Procedure.

[43] Given the hourly rates and the number of hours involved, I find that more than $50,000 need to be deducted per action to realistically take into account the overlap of work between the Defendants’ former counsel and their trial counsel.

[44] Further, while both sides bear some responsibility for the “unproductive relationship” that emerged between the Plaintiffs’ counsel and the Defendants’ former counsel, and while both sides may have legitimate complaints about some steps that were or were not taken during the litigation by the other side, I conclude that a disproportionate part of the blame for the lack of cooperation and the delay in this matter must be attributed to the Defendants and their prior counsel. I come to this conclusion based on the parties’ submissions on costs and the documents they provided in support of their submissions, but also based on the knowledge of the case that I acquired during the trial and the many trial management conferences that were held before me prior to the trial.

[45] Taking the foregoing into account, as well as the factors set out in Rule 57.01(1) of the Rules of Civil Procedure and the reasonable expectations of the parties, I find that the fair and reasonable award of costs to be paid to the Defendants are in the amount of: (a) $360,000.00 with respect to Versatile’s action; and (b) $375,000.00 with respect to Everest’s action.

4. Conclusion

[46] Paramount, Paramount Leasing, Mohamad Fakih and Holly Graham are ordered to pay costs to Premium Host on a partial indemnity basis in the all-inclusive amount of $271,074.30.

[47] Versatile is ordered to pay costs to Paramount, Paramount Leasing, Paramount Wholesale, Fakih Group Inc., Mohamad Fakih and Holly Graham on a partial indemnity basis in the all-inclusive amount of $360,000.00. Sardar Samiuddin Khan and Nida Shahid are jointly and severally liable with Versatile with respect to the payment of $27,000.00 out of the total $360,000.00.

[48] Everest is ordered to pay costs to Paramount, Paramount Leasing, Paramount Wholesale, Fakih Group Inc., Mohamad Fakih and Holly Graham on a partial indemnity basis in the all-inclusive amount of $375,000.00. Shahid Saleem Khawaja, Zarmina Khan and Yousaf Jameel Khan are jointly and severally liable with Everest with respect to the payment of $28,125.00 out of the total $375,000.00.

[49] The costs are to be paid within 30 days.

[50] The Defendants are entitled to payment of the costs paid into court by Versatile and Everest as security for the Defendants’ costs, which funds are to be applied to the costs ordered above.

Vermette J. Released: June 26, 2023

Footnotes:

[1] The Plaintiffs argue that the purported breakdown in the lawyer-client relationship was purely tactical as the Defendants’ previous counsel commenced new litigation on behalf of Mr. Fakih in an unrelated action only ten days after the purported breakdown of their relationship. However, the Defendants point out that a Notice of Change of Lawyers was delivered shortly after the commencement of the new action, and they state that the Defendants’ former counsel only commenced the litigation because of the pending expiry of a limitation period.

[2] Associate Justice La Horey stated the following in paragraph 120 of her endorsement (2021 ONSC 5691): The plaintiffs should not have to post security for the defence of the counterclaim. The defendant estimated that the counterclaim would take up approximately 10% of the 15 days of trial time. However, that estimate does not appear to take into account the fact that the central liability issue in both the main action and counterclaim is the validity of the recission [sic]. Accordingly, a more significant reduction is appropriate.