DATE: 20010925 DOCKET: C33543

COURT OF APPEAL FOR ONTARIO

OSBORNE A.C.J.O., FINLAYSON and WEILER JJ.A.

B E T W E E N:

UNISYS CANADA INC.

K. Scott McLean and Charles J. Brannen, for the appellant

Plaintiff (Appellant)

• and -

YORK THREE ASSOCIATES INC. and GEORGE H. CANCILLA

Martin Sclisizzi, for the respondent and GEORGE H. CANCILLA

George H. Cancilla

Defendants (Respondents)

Heard: August 28, 2001

On appeal from the judgment of Justice Robert A.F. Sutherland dated December 17, 1999.

FINLAYSON J.A.:

[1] The appellant, Unisys Canada Inc. (“Unisys”), appeals the judgment of Mr. Justice Sutherland dated December 17, 1999 in which, following a 6½-day trial, he dismissed Unisys’ claim against the defendant, George H. Cancilla (“Cancilla”), for allegedly inducing the breach of a sub-sublease agreement dated January 27, 1992 (the “sublease”) between York Three Associates Inc. (“York Three”), as sub-subtenant, and Unisys, as sub‑sublandlord, in respect of approximately 5,900 square feet of office space on the 10th floor of 130 Adelaide Street West, Toronto (the “premises”). The trial judge’s judgment is reported at 39 R.P.R. (3d) 220.

[2] The action as framed was for payment of rent and for damages equal to the balance of the unexpired term of the sublease for the commercial space to which I have referred above. The trial judge awarded judgment in favour of Unisys against York Three in the amount of $276,131.00, $260,000 less than the amount claimed. The trial judge deprived Unisys of the balance of its claim on the ground that it failed to mitigate its damages. The action as framed against Cancilla was for the balance owing on the limited guarantee of the sublease that Cancilla had signed as the President of York Three and against Cancilla personally for inducing a breach of the sublease, for intentional interference with contractual relations and for exercising control over and improper use of the corporation York Three as a vehicle to unlawfully breach the lease. The latter three claims were pleaded in an amended statement of claim.

[3] Early in the proceedings Hoilett J. granted Unisys’ summary judgment on consent against Cancilla under his limited guarantee in the amount of $100,000 plus interest thereon in the amount of $3,484.93 for a total of $103,484.93, which sum was paid by Cancilla. The summary judgment, however, was without prejudice to Unisys’ right to proceed with the balance of its claims against York Three and Cancilla. York Three did not deliver a statement of defence or appear at trial.

[4] Unisys also appeals the trial judge’s order that Unisys pay Cancilla 98% of his costs assessed on a party-and-party basis to and including October 25, 1998 (the date of amendment of the statement of claim to allege misconduct tantamount to fraud), and on a solicitor-and-client basis thereafter.

Facts

[5] The facts of this case are straightforward. Cancilla is a practising lawyer and was the principal shareholder and the directing mind of York Three. He had incorporated the company solely for the purposes of subleasing the premises in issue from Unisys and then sub-subleasing them. He caused York Three to enter into the sublease with Unisys for a period of five years and six months at a base rent of $12 per square foot. York Three in turn entered into a sub-sublease with Jean Yves David, a solicitor, for almost 80% of the premises. Cancilla personally took the balance of the space from York Three under another sub-sublease. At the time these arrangements were made, Unisys was well aware of Cancilla’s relationship with York Three and that York Three was a shell corporation whose only assets were the sub-subleases referred to above.

[6] Unfortunately, well into the term of the sublease, David went bankrupt. Cancilla scrambled on behalf of York Three to acquire new subtenants, principally from among the legal profession. However the rental market in Toronto had gone into a deep slump and it was impossible for Cancilla to sub-sublease the David portion of the premises at the base price of $12 per square foot, much less at the increase called for in the sublease with Unisys. Comparable rents were as low as $2 to $3 per square foot.

[7] Cancilla attempted to renegotiate the sublease with Unisys to obtain lower rents that he could pass on to his prospective subtenants but Unisys refused to consider any adjustments in the sublease. Cancilla then negotiated for himself a new sub-sublease for premises at 401 Bay Street in Toronto with a new landlord, Markborough Properties Inc. (“Markborough”) for a base rent of $7 per square foot. The sub-sublease included a provision that the new landlord would provide its new tenant with a cash allowance of $107,000. Cancilla then walked away from the Unisys premises. Lacking any cash flow, York Three was unable to meet its subleasing obligations to Unisys and defaulted in its rental payments thus breaching its sublease. Cancilla was called upon to honour his guarantee of a portion of the sublease and used the cash allowance from Markborough to pay $100,000 towards the consent summary judgment referred to above.

Analysis

[8] Unisys takes the position that it had a valid sublease with York Three and that it was under no obligation to renegotiate it in order to mitigate its damages in the event that York Three should default. It is correct in this. The trial judge should not have penalized Unisys for its failure to mitigate. The judgment against York Three should be increased by $260,000. Cancilla concedes the above but argues that mitigation is relevant for the claims asserted against him other than the claim under the guarantee. In view of the disposition that I propose, it is not necessary to deal with this issue.

[9] York Three is still a shell company and there is no live issue about the balance owing by Cancilla on his guarantee. Unisys’ appeal is really about the claims against Cancilla for inducing a breach of the sublease, for intentional interference with contractual relations and for exercising control over and improper use of the corporation York Three as a vehicle to unlawfully breach the lease. The last claim has been abandoned. In asserting the first two, Unisys does not take appropriate account of the nature of the corporate structure. It talks about York Three not being able to act without Cancilla. It states in its factum that Cancilla was the sole, controlling director, and that it was in that capacity that he entered into the sublease and into a sub-sublease with himself in his capacity as a lawyer. According to Unisys, York Three could not breach the sublease or abandon the premises without action on the part of Cancilla.

[10] Corporate entities must by their very nature operate through human agency. This aspect of the corporate structure was explained in ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. (1995), 1995 CanLII 1301 (ON CA), 26 O.R. (3d) 481 (C.A.) at p. 491:

A corporation may be liable for contracts that its directors or officers have caused it to sign, or for representations those officers or directors have made in its name, but this is because a corporation can only operate through human agency, that is, through its so-called “directing mind”. Considering that a corporation is an inanimate piece of legal machinery incapable of thought or action, the court can only determine its legal liability by assessing the conduct of those who caused the company to act in the way that it did. This does not mean, however, that if the actions of the directing minds are found wanting, that personal liability will flow through the corporation to those who caused it to act as it did. To hold the directors of Peoples personally liable, there must be some activity on their part that takes them out of the role of directing minds of the corporation. In this case, there are no such allegations.

[11] It is well established that the directing minds of a corporation cannot be held civilly liable for the actions of the corporations they control and direct, unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the corporation so as to make the acts or conduct complained of those of the directing minds: see Normart Management Ltd. v. West Hill Redevelopment Co. (1998), 1998 CanLII 2447 (ON CA), 37 O.R. (3d) 97 (C.A.) at 102; ScotiaMcLeod Inc. v. Peoples Jewellers Ltd., supra at p. 491. Therefore, a claim in tort may proceed against the directing minds of corporations for acts performed in the course of their duties. This court has recently confirmed that in all events, directors, officers 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, provided that the evidence justifies an allegation of a personal tort: see ADGA Systems International Ltd. v. Valcom Ltd. (1999), 1999 CanLII 1527 (ON CA), 43 O.R. (3d) 101 (C.A.), leave to appeal to the Supreme Court of Canada refused April 6, 2000.

[12] However, in the case in appeal the trial judge found that Cancilla neither induced a breach of contract by York Three nor interfered with the commercial relationship between York Three, as sub‑subtenant and Unisys, as sub-sublandlord. The trial judge also found that Cancilla “did no wrongful act” and that at all times he acted in good faith. He was fully justified on the evidence in so finding.

[13] The tort of intentional interference with contractual relations requires proof of the following elements:

(1) an enforceable contract; (2) knowledge of the plaintiff’s contract by the defendant; (3) an intentional act on the part of the defendant to cause a breach of that contract; (4) wrongful interference on the part of the defendant; and (5) resulting damage to one of the parties to the contract.

See Colonia Life Holdings Ltd. v. Fargreen Enterprises Ltd. (1990), 1990 CanLII 6976 (ON SC), 1 O.R. (3d) 703 (Gen. Div.) at 708; Posluns v. Toronto Stock Exchange, 1964 CanLII 199 (ON SC), [1964] 2 O.R. 547 (H.C.), aff’d, 1965 CanLII 32 (ON CA), [1966] 1 O.R. 285 (C.A.), aff’d, 1968 CanLII 6 (SCC), [1968] S.C.R. 330.

[14] The trial judge correctly held that Cancilla’s conduct did not amount to interference with Unisys’ contractual relations or to an inducement of breach of contract because the requisite elements of the tort were not proved. In particular, the trial judge correctly found that Cancilla had not performed any intentional act to cause York Three to breach the sublease. York Three simply lost the revenue it needed to pay rent to Unisys when one of its subtenants went bankrupt and another abandoned the premises in anticipation of the termination of the rent free period. Without subtenants, York Three had no revenue. It could not, therefore, honour the sublease. No intentional act was required and none was performed.

[15] On the issue of costs we agree with the respondent that the appellant’s conduct in making unsubstantiated allegations of fraud, misconduct, or dishonesty, (or other conduct analogous to the foregoing), is sufficiently reprehensible to warrant awarding solicitor-and-client costs in favour of the aggrieved party: see Murano v. Bank of Montreal (1995), 41 C.P.C. (3d) 143 (Ont. Gen. Div.) at 145-46, aff’d, (1998), 1998 CanLII 5633 (ON CA), 163 D.L.R. (4th) 21 (Ont. C.A.). Conduct of this nature is particularly blameworthy when aimed at the integrity of a lawyer: see Parsons v. NRS March Real Estate Ltd., a judgment of the Ontario Court General Division, delivered May 23, 1995, at para. 84.

[16] We would not interfere with the exercise of discretion by the trial judge in this case given that Unisys failed to prove its allegation that Cancilla acted dishonestly when he formed and used York Three to commit unlawful acts. In the circumstances the trial judge was justified in ordering Cancilla’s costs on a solicitor-and-client basis from the date the statement of claim was amended to allege that Cancilla engaged in conduct tantamount to fraud (i.e. from October 26, 1998) to the conclusion of the action.

Disposition

[17] The appeal is allowed to the extent of varying the judgment below to allow Unisys to recover $536,131 and pre-judgment interest from the respondent York Three. In all other respects the appeal is dismissed. Since the increase in the judgment against the shell corporation was never the motivation of the appeal, the respondent Cancilla is entitled to his full costs of the appeal.

Released: SEP 25 2001 CAO

Signed: “G.D. Finlayson J.A.”

“I agree C.A. Osborne A.C.J.O.”

“I agree K.M. Weiler J.A.”