CITATION: Maynes v. Allen-Vanguard Technologies Inc. (Med-Eng Systems Inc.), 2011 ONCA 125
DATE: 20110214
DOCKET: C52263 and C52584
COURT OF APPEAL FOR ONTARIO
Weiler, Watt and Karakatsanis JJ.A.
BETWEEN
Steve Maynes, 6223087 Canada Inc.,
6223362 Canada Inc., Jean Robichaud and Ken Gingrich
Plaintiffs (Appellants)
and
Allen-Vanguard Technologies Inc. (formerly Med-Eng Systems Inc.),
Maurice J.M. Baril, Pierre Boivin, Thomas Csathy, Paul Echenberg, Mathieu Gauvin, Cecile Ducharme, Mark Norton, Danny Osadca, Richard L’Abbé
(Collectively, the “Original Defendants”)
Allen-Vanguard Corporation, 1062455 Ontario Inc.,
GrowthWorks Canadian Fund Ltd.,
Schroder Venture Managers (Canada) Limited
in its capacity as general partner of each of
Schroder Canadian Buy-Out Fund II Limited Partnership CLP1,
Schroder Canadian Buy-Out Fund II Limited Partnership CLP2,
Schroder Canadian Buy-Out Fund II Limited Partnership CLP3,
Schroder Canadian Buy-Out Fund II Limited Partnership CLP4,
Schroder Canadian Buy-Out Fund II Limited Partnership CLP5,
Schroder Canadian Buy-Out Fund II Limited Partnership CLP6,
Schroder Ventures Holding Limited, in its capacity as general partner
of Schroder Canadian Buy-Out Fund II UKLP, and on behalf of
Schroder Canadian Buy-Out Fund II Coinvestment Scheme and SVG Capital plc (formerly, Schroder Ventures International Investment Trust plc),
and Computershare Trust Company of Canada
(Collectively, the “Added Defendants”)
Defendants (Respondents)
John P. O’Toole and Mandy E. Moore, for the plaintiffs
Ronald G. Slaght, Q.C., and Eli S. Lederman, for the defendants Allen-Vanguard Technologies Inc. (formerly Med-Eng Systems Inc.) and Allen-Vanguard Corporation
K. Scott McLean and Christopher R.N. McLeod, for the defendants Maurice J.M. Baril, Pierre Boivin, Thomas Csathy, Paul Echenberg, Mathieu Gauvin, Cecile Ducharme, Mark Norton, Danny Osadca and Richard L’Abbé
Thomas G. Conway and Christopher J. Hutchison, for the defendants Richard L’Abbé, 1062455 Ontario Inc., GrowthWorks Canadian Fund Ltd., Schroder Venture Managers (Canada) Limited and Schroder Ventures Holding Limited
Heard: December 16, 2010
On appeal from the order of Justice James E. McNamara of the Superior Court of Justice, dated May 18, 2010.
Weiler J.A.:
OVERVIEW
[1] The issue on this appeal is whether the motions judge erred in granting the defendants’ motion to strike the plaintiffs’ statement of claim in their New Action (Ottawa Court File No. 09-45392) and in dismissing the plaintiffs’ cross-motion seeking leave to amend that claim or to join that claim to two pre-existing Ongoing Actions (Ottawa Court Files 06-CV-36222 and 07-CV-38942).
[2] I agree with the motions judge that the statement of claim in the New Action is an abuse of process (rules 21.01(3)(d) and 25.11(c)). It repeats substantially the same allegations against the same defendants, known as the Original Defendants, as in the two other Ongoing Actions. As against the Added Defendants (i.e. those defendants who had not been named in the Ongoing Actions[^1]), the statement of claim in the New Action circumvented the requirement in rule 26.02(c) to obtain leave of the court to add a non-consenting party to an action after pleadings are closed.
[3] The motions judge also held that, as against the Added Defendants, the claim in the New Action disclosed no reasonable cause of action (rule 21.01(b)). I agree with the motions judge. As I understand it, however, the plaintiffs further argue that even if they have not pled a cause of action against the Added Defendants, they may nevertheless be entitled to the imposition of a constructive trust against the Added Defendants on the basis of the oppression remedy pleaded against the Original Defendants. For the reasons that follow, I do not agree that the Added Defendants are properly parties on this basis.
[4] Having regard to my reasons, the appeal of the motions judge’s refusal to grant leave to amend the statement of claim in the New Action is dismissed, as is his refusal to grant joinder or consolidation. Accordingly, I would dismiss this appeal.
THE LITIGATION
i. The pleaded facts relating to the Ongoing Actions and the Original Defendants
[5] The plaintiffs Steve Maynes, Jean Robichaud, and Ken Gingrich were all senior executives of Med-Eng Systems Inc. (“Med-Eng”), an Ontario corporation that specialized in the research, design, and manufacture of personal protective military equipment. In the course of their employment, they each acquired a number of Class A common shares in Med-Eng through the company’s employee stock option plan (“the Plan”). Maynes also transferred some of his shares to his two corporations, 6223362 Canada Inc. and 6223087 Canada Inc., which are the remaining plaintiffs.
[6] Under the Plan, Med-Eng was entitled under certain circumstances to elect to repurchase the shares at fair market value, which was determined by Med-Eng’s Board of Directors. The Plan stipulated that if Med-Eng were to exercise this share repurchase option, it had to give written notice to the employee shareholder and state what the Board determined to be the fair market price.
[7] All of the Med-Eng shares that the plaintiffs held were deposited with Richard L’Abbé, a director of Med-Eng, who held the shares in trust as Trustee under a Voting Trust Agreement. Under that agreement, L’Abbé could exclusively exercise all shareholders’ rights on behalf of the plaintiffs.
[8] In February 2006, Med-Eng issued a notice of repurchase to both Maynes and Robichaud, stipulating a fair market price of $1.60 per share. The notices contained a number of errors and deficiencies that were not resolved to the plaintiffs’ satisfaction. Subsequent to issuing the notices, the Board of Directors twice assigned a new fair market value to Med-Eng’s common shares—first at $2.00 per share in April 2006, then at $4.00 per share in July 2006—but did not advise Maynes or Robichaud of the second valuation and did not seek to amend or reissue the repurchase notices to them.
[9] Similarly, Med-Eng issued two written notices to Gingrich in May and June 2006 informing him that the company was exercising its option to repurchase his shares at a fair market value of $2.00 per share. As in the case of Maynes and Robichaud, the notices contained a number of errors and deficiencies that were not resolved to Gingrich’s satisfaction. When the Board of Directors re-evaluated Gingrich’s common shares in Med-Eng at $4.00 per share in July 2006, they failed to advise him of the new valuation and did not amend or reissue the repurchase notices.
[10] The plaintiffs claim that the repurchase of their shares by Med-Eng was invalid, ineffectual and void because the repurchase notices did not conform to the requirements of the Plan, and the Board of Directors was acting oppressively and did not determine the fair market value listed in the notices in good faith. The plaintiffs allege that the actual market value of the shares was considerably higher than what was stated in the notices, and so the stock repurchases constituted an unlawful expropriation from the plaintiffs. They further allege that the shares that Maynes had transferred to 6223362 Canada Inc. and 6223087 Canada Inc. were not subject to the Plan. Finally, they allege that L’Abbé breached his fiduciary duties to the plaintiffs as trustee of their shares by endorsing and delivering their share certificates to Med-Eng without their authorization under the terms of the Voting Trust Agreement.
ii. Procedural history respecting the Ongoing Actions and the Original Defendants
[11] On October 18, 2006, Maynes, Robichaud, 6223362 Canada Inc. and 6223087 Canada Inc. initiated proceedings against Med-Eng and its directors (collectively, “the Original Defendants”),[^2] by way of a statement of a claim. On August 7, 2007, Gingrich followed suit and filed a statement of claim against the Original Defendants, asserting substantially the same claims.
[12] In summary, the plaintiffs in these two actions seek: a declaration that the Original Defendants breached their fiduciary duties to them; a declaration that Richard L’Abbé breached his duties as trustee under the Voting Trust Agreement; a declaration that the repurchase transactions were invalid and so they continue to be registered shareholders of Med-Eng; and an order directing Med-Eng to pay the plaintiffs all unpaid dividends accruing in respect of their shares. In the alternative, the plaintiffs advance an oppression claim against the Original Defendants pursuant to s. 248 of Ontario’s Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”). They seek as an oppression remedy an order directing Med-Eng, now Allen-Vanguard Technologies Inc., to repurchase their shares at a price equal to fair market value.
[13] The proceedings for these two actions are ongoing. The pleadings have closed and documentary and oral discovery is substantially complete.
iii. The pleaded facts relating to the genesis of the New Action and the Added Defendants
[14] Subsequent to Med-Eng’s repurchase of the plaintiffs’ shares and the plaintiffs’ commencement of proceedings against Med-Eng and the other Original Defendants, Med-Eng became the target of a takeover bid. On or about August 2, 2007, Allen-Vanguard Corporation (“AVC”) offered to pay $600 million to purchase 100% of the issued and outstanding shares of Med-Eng from certain shareholders (“the Offeree Shareholders”[^3]) whose combined interests constituted 70% of Med-Eng’s capital stock. Since the Offeree Shareholders had a majority stake in Med-Eng, pursuant to a shareholders’ agreement they could compel all minority shareholders to sell their shares to AVC in accordance with the terms of the accepted offer.
[15] On or about August 23, 2007, the Offeree Shareholders accepted AVC’s offer by way of a share purchase agreement. They compelled the minority shareholders to sell their Med-Eng shares to AVC. The plaintiffs also each sold their non-disputed shareholdings (i.e. shares that were not purchased through Med-Eng’s employee stock option plan) to AVC pursuant to the shareholders’ agreement. The minority shareholders were advised that the purchase price would be in the range of $11.50 to $12.00 per share. The plaintiffs allege that at all material times, the Offeree Shareholders and AVC were fully aware of the litigation against Med-Eng and the Original Defendants.
[16] The share purchase transaction closed on or about September 17, 2007. Following the closing, two developments occurred.
[17] AVC eventually merged Med-Eng with another of its subsidiaries to form Allen-Vanguard Technologies Inc. The successor corporation remains an Original Defendant in the Ongoing Actions.
[18] As well, pursuant to the share purchase agreement, an Escrow Fund was established in the amount of $40 million. The purpose of the Escrow Fund was to create a fund to which AVC could have recourse if the representations and warranties of Med-Eng and/or the Offeree Shareholders proved to be incorrect. To the extent that the Escrow Fund is not applied in satisfaction of successful claims asserted by AVC, the Escrow Fund will be released to all shareholders of Med-Eng who sold their shares to AVC under the share purchase agreement. AVC has asserted a claim against the entirety of the Escrow Fund, which is now the subject of separate litigation.
iv. The Added Defendants
[19] After the close of pleadings in the Ongoing Actions, the plaintiffs sought to combine the Ongoing Actions and also to add as defendants the Offeree Shareholders, AVC and the escrow agent Computershare Trust Company of Canada (collectively, “the Added Defendants”). Counsel for the plaintiffs sent a letter dated June 4, 2009, to the Original Defendants with a draft Fresh As Amended Statement of Claim. The letter stated, “As you will see, we propose to combine the Maynes/Robichaud action with the Gingrich action. All Plaintiffs then join in an enhanced claim against the ‘Added Defendants’ to seek relief in relation to the Escrow Fund that was established in the context of the Allen-Vanguard share purchase transaction.” The plaintiffs did not obtain the consent required by rule 26.02(b) of the Rules of Civil Procedure to add a party after pleadings have closed.
[20] Rule 26.02 provides:
26.02 A party may amend the party’s pleading,
(a) without leave, before the close of pleadings, if the amendment does not include or necessitate the addition, deletion or substitution of a party to the action;
(b) on filing the consent of all parties and, where a person is to be added or substituted as a party, the person’s consent; or
(c) with leave of the court.
[21] When the consent of the defendants was not given, the plaintiffs did not seek leave of the court under rule 26.02(c) to have the proposed Added Defendants added as parties to the Ongoing Actions. Nor did they bring a motion pursuant to rule 26.01, which obliges the court to grant an amendment to a pleading “on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.”
[22] Instead, on June 18, 2009, the plaintiffs initiated a New Action against both the Original and Added Defendants, and sought joinder or consolidation of the New Action to the Ongoing Actions.
v. What is sought in the New Action
[23] The New Action duplicated the same five claims the plaintiffs made against the Original Defendants in the Ongoing Actions. However, under the heading, “Claims Arising From the Allen-Vanguard Share Purchase and Related Events”, the statement of claim in the New Action also stated that:
• The individual Original Defendants (i.e. the former directors of Med-Eng) and the Offeree Shareholders each obtained a financial benefit (directly or indirectly) from the purported Med-Eng share repurchases upon the conclusion of AVC’s purchase of the Med-Eng shares in September 2007.
• The plaintiffs are the lawful owners of certain shares in Med-Eng and, as such, “are entitled to compensation and payment by way of distribution of a portion of the Escrow Fund”.
• The Escrow Fund is subject to an express, implied or resulting trust in the plaintiffs’ favour.
• The Added Defendants have a form of discretion or power in relation to the Escrow Fund that could unilaterally be exercised so as to prejudice the plaintiff’s interests and that the plaintiffs are “particularly vulnerable to the Added Defendants in respect of the Escrow Fund”. As such the Added Defendants are fiduciaries of the Plaintiffs.
• If the Escrow Fund were to be paid out or distributed without regard to their claims, the individual Original Defendants and the Offeree Shareholders would be unjustly enriched.
[24] The plaintiffs sought a series of declarations in “Claim Six” against the Added Defendants:
• A declaration that the Added Defendants are fiduciaries of the plaintiffs in relation to the Escrow Fund.
• A declaration that some of the Added Defendants have been unjustly enriched to the extent of the plaintiffs’ interest in the Escrow Fund.
• A declaration that the Escrow Fund (or a portion thereof) is subject to an express, implied or resulting trust in favour of the plaintiffs (the plaintiffs later conceded at the motions hearing that they were pursuing a declaration of a resulting trust only).
• A declaration that the Added Defendants are constructive trustees of the Escrow Fund to the benefit of the plaintiffs, and an order imposing a remedial constructive trust and primary first charge over the Escrow Fund in favour of the plaintiffs.
• Some other declaration that the plaintiffs are entitled to compensation and payment by way of distribution of a portion of the Escrow Fund, and an order that Computershare pay this entitlement out to them from the Escrow Fund.
[25] In the alternative, the plaintiffs sought damages by way of restitution and compensation for the “wrongful conduct of the Added Defendants”.
[26] All the defendants in the Ongoing and New Actions moved to strike the claim in the New Action.
ISSUES AND ANALYSIS
[27] I propose to deal with the abuse of process issue first.
[28] The motions judge considered whether the New Action was an abuse of process. With respect to the Original Defendants, given that Claims One through Five were already the subject of Ongoing Actions before the Superior Court of Justice, he held that the New Action created a multiplicity of proceedings that constituted an abuse of process. In relation to the Added Defendants, he held that the New Action was an attempt to re-litigate issues that should have been raised by the plaintiffs in the Ongoing Actions. The motions judge remarked that key representatives of the Added Defendants were already involved in the Ongoing Actions. For example, Richard L’Abbé is an Original Defendant, though he was being named again as an Added Defendant in his capacity as an Offeree Shareholder. Also, the Original Defendants Echenberg, Gauvin and Ducharme were representatives of the Schroder shareholders’ interests. If the Plaintiffs succeeded in the Ongoing Actions they would be able to execute against the Original Defendants. The motions judge held that the statement of claim in the New Action was nothing more than an attempt to file execution against the Escrow Fund without having to prove a claim against the Added Defendants.
i. Did the motions judge err in striking the New Action on the basis that it constituted an abuse of process?
[29] As the plaintiffs concede, Claims One through Five in the New Action are substantively identical to claims already being asserted in the two Ongoing Actions. Specifically, Claims One through Four are the subject of ongoing proceedings against the Original Defendants in the action initiated on October 18, 2006.[^4] Claim Five is the subject of ongoing proceedings commenced as against the Original Defendants in the action initiated on August 7, 2007.[^5]
[30] The plaintiffs submit that the motions judge erred in holding that Claim Six constituted an abuse of process. They state in their factum that the claims against the Added Defendants arose in September 2007 with the completion of the Allen-Vanguard share purchase transaction—that is, after the litigation against the Original Defendants had begun. Consent to amend the pleadings in the Ongoing Actions was not requested from the Original Defendants until June 4, 2009, at which time it was refused. The plaintiffs’ reason for not bringing a motion to seek leave from the court to amend their pleadings, pursuant to rule 26.02(c), is that “a potential limitation period was approaching” and they were concerned that the motion would not be heard prior to the expiry of the limitation period. As I understand it, the potential limitation period that the plaintiffs were concerned about was the basic two-year limitation period, which would have ended two years after the closing of the Allen-Vanguard share purchase transaction, or September 2009: see Limitations Act, 2002, S.O. 2002, c. 24, s. 4.
[31] The plaintiffs’ reason for not seeking leave of the court to amend their pleading to add the Added Defendants is not tenable for three reasons.
[32] First, the limitation period may not have begun to run until October 2008. If the affidavit of Maynes, filed in opposition to the motion to strike, is accepted, the court might have agreed that “[i]t was not until after the completion of the Examinations for Discovery in the Original Actions in October of 2008 that the Plaintiffs discovered they had a basis upon which to … assert enhanced claims against the Offeree Shareholders” (emphasis added). Having regard to the discoverability principle in Peixeiro v. Haberman, [1997] 3 S.C.R. 549, the limitation period would only have begun to run when the plaintiffs discovered they had “a cause of action” or a basis on which to make a claim.
[33] Second, assuming they had a cause of action (an issue I will address below), and that the limitation period did begin in September 2007, the plaintiffs had all the information they needed to try and obtain the defendants’ consent or to obtain leave of the court to amend their pleadings in the Ongoing Actions after discovery in October 2008. Paragraph 68 of their factum even acknowledges:
The doctrine of abuse of process, which underlies Rule 21.01(3)(d), seeks to prevent a multiplicity of proceedings or the litigation of issues that could have been raised in earlier proceedings but the party now raising the issues before the Court chose not to do so.
[34] The plaintiffs chose to do nothing from October 2008 until June 2009; that is, about seven months.
[35] Third, even if a limitation period was imminent, the plaintiffs could have invoked rule 37.05(3), which provides, “An urgent motion may be set down for hearing on any day on which a judge or master is scheduled to hear motions, even if a lawyer estimates that the hearing is likely to be more than two hours long.” The plaintiffs’ other arguments that the motions judge misapplied the doctrine of abuse of process similarly have no merit.
[36] The doctrine of abuse of process seeks to promote judicial economy and to prevent a multiplicity of proceedings: Toronto (City) v. C.U.P.E., Local 79, 2003 SCC 63, [2003] 3 S.C.R. 77, at para. 37. The motions judge correctly identified Claims One to Five against the Original Defendants in the New Action as being an abuse of process because they were virtually identical to the claims asserted against them in the Ongoing Actions. If Claims One to Five in the New Action were allowed to proceed, it would amount to a relitigation of the same issues as between the same parties. The rationale against this approach is found in para. 51 of Toronto (City) v. C.U.P.E., Local 79:
First, there can be no assumption that relitigation will yield a more accurate result than the original proceeding. Second, if the same result is reached in the subsequent proceeding, the relitigation will prove to have been a waste of judicial resources as well as an unnecessary expense for the parties and possibly an additional hardship for some witnesses. Finally, if the result in the subsequent proceeding is difficult from the conclusion reached in the first on the very same issue, the inconsistency, in and of itself, will undermine the credibility of the entire judicial process, thereby diminishing its authority, its credibility and its aim of finality.
[37] The plaintiffs submit that the motions judge was wrong to strike the entirety of their statement of claim as an abuse of process because while Claims One to Five are already being litigated in the Ongoing Actions, Claim Six has never been asserted before and could not have been raised when the statements of claim for the Ongoing Actions were filed. They submit that if the motions judge found that Claim Six was deficient because it was not sufficiently particularized, he should have allowed leave to amend. They also argue he should have granted the plaintiffs an order to join Claim Six with the Ongoing Actions. During oral submissions, counsel for the plaintiffs submitted that Claim Six may stand on its own even if Claims One through Five are struck as an abuse of process.
[38] In addition to avoiding a multiplicity of actions, the doctrine of abuse of process seeks to uphold the integrity of the administration of justice: see Toronto (City) v. C.U.P.E. at paras. 35-37. In the present case, the plaintiffs’ assertions in Claim Six are intricately linked to Claims One through Five, which are already being pursued in the Ongoing Actions. The plaintiffs should have sought leave of the court to name the Added Defendants in the Ongoing Actions and to amend their pleadings to plead any relief they had not already claimed, either pursuant to rule 26.02(c) or rule 26.01. As mentioned, rule 26.01 obliges the court 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.”
[39] Instead, the plaintiffs commenced the New Action for the purpose of naming the Added Defendants as parties to the related litigation and sought declaratory relief against them in Claim Six. By doing so, the plaintiffs effectively circumvented the express procedural requirement in rule 26.02(c) that leave of the court be obtained to add a non-consenting party to the proceeding after pleadings have closed. This was an abuse of process. By starting the New Action instead of moving to amend their pleadings in their existing actions to claim “enhanced relief” against the Added Defendants, the plaintiffs circumvented the court’s jurisdiction to: (1) assess whether the defendants would be prejudiced by an amendment and to determine whether that prejudice can be compensated for by costs; (2) to impose costs in favour of the defendants for granting the amendment; and (3) to impose other terms that are just.
[40] The filing of the statement of claim in the New Action also placed an inappropriate burden on the defendants who had to bring a motion to strike the New Action, when the onus should have properly been on the plaintiffs to convince the court that leave should be granted to amend their pleadings in the Ongoing Actions.
[41] My conclusion that there has been an abuse of process is buttressed by the principle of law that the court should refuse to grant a declaration when an alternate appropriate process is available. This principle was put to the plaintiffs in oral argument as a basis for upholding the motions judge’s decision to strike Claim Six, which claims only declaratory relief. The plaintiffs made no comment.
[42] In Kourtessis v. M.N.R., [1993] 2 S.C.R. 53 at pp. 85-88, La Forest J. observed that two judicial policies historically prevented the use of the declaration. The first was the discretion to refuse the granting of a declaration when other remedies were available and the second was the refusal to grant it where no other relief was sought. In relation to the first barrier, La Forest J. held at p. 87:
The policy concern against allowing declarations, even of unconstitutionality, as a separate and overriding procedure is that they will, in many cases, result in undesirable procedural overlap and delay. As long as a reasonably effective procedure exists for the consideration of constitutional challenges, I fail to see why another procedure must be provided.
[43] The court's inherent jurisdiction to grant declaratory relief is not to be exercised in a vacuum. As Morawetz J. observed in Scion Capital, LLC v. Gold Fields Ltd. (2006), 15 B.L.R. (4th) 331 (Ont. S.C.), at para. 34:
Inherent jurisdiction [to grant a declaration] is a power derived from the very nature of the court as a superior court of law, permitting the court to maintain its authority and to prevent its process being obstructed and abused. In Re Stelco [(2005), 75 O.R. (3d) 5], the Court of Appeal, at para. 35, states:
In spite of the expansive nature of this power, inherent jurisdiction does not operate where Parliament or the legislature has acted. As Farley J. noted in Royal Oak Mines [(1999), 7 C.B.R. (4th) 293], inherent jurisdiction is "not limitless; if the legislative body has not left a functional gap or vacuum, then inherent jurisdiction should not be brought into play”.
[44] The second barrier to granting a declaratory order, i.e. that no other relief is sought, has been removed in Ontario by the enactment of s. 97 of the Courts of Justice Act, R.S.O. 1990, c. C.43. This reform does not detract from the plaintiffs’ inability to overcome the first barrier. I note that s. 97 does not exist to enable litigants to do an end run around the Rules of Civil Procedure. The plaintiffs’ conduct in initiating the New Action against the Added Defendants effectively eviscerates the requirements of rule 26.02(c) and robs the court of its discretion to grant leave to add parties to an action after pleadings have closed.
[45] Disputes about whether parties may be added and whether a claim may be amended must be resolved through the process established by the Rules, not by circumventing them by the commencement of a new action seeking declaratory relief. Where, as here, the Rules provide an effective means to obtain a remedy, it is reasonable to assume that the legislature intended that litigants and their counsel would rely on the prescribed provisions. Otherwise, the integrity of the administration of justice is undermined, as is the goal of efficiency.
[46] The present statement of claim is an abuse of process because it duplicates claims in the two Ongoing Actions with respect to the Original Defendants and undermines the integrity of the administration of justice by circumventing rule 26.02(c) with respect to the Added Defendants.
[47] While my conclusion that the statement of claim in the New Action is an abuse of process is sufficient to dispose of this appeal, I will, like the motions judge, consider whether a reasonable cause of action exists against the Added Defendants.
ii. Did the motions judge err in holding no reasonable cause of action had been pleaded against the Added Defendants?
[48] The motions judge identified four claims made in Claim Six, all of which relate to the Added Defendants. He found that, given the pleaded facts, none of the claims had a basis on which the court could find a reasonable cause of action or grant the relief sought. I review his decision on each claim and comment on it below.
a. Declaration of unjust enrichment
[49] To briefly review the facts, AVC presented an offer to the Offeree Shareholders to buy their shares at a certain price, and the Offeree Shareholders accepted. Together, they agreed to set aside a certain portion of the consideration paid for the shares in escrow, to be used as security against any claims of incorrect representations or warranties by Med-Eng and the Offeree Shareholders in the purchase agreement. The motions judge held that any benefit to the Offeree Shareholders or any of the other Added Defendants from the Escrow Fund would be in accordance with the contract between those parties. The contract constituted a valid juristic reason for any potential enrichment. As a result, the requirements of the unjust enrichment principle could not be satisfied.
[50] Although the plaintiffs submit that the motions judge accepted that the first two criteria of the unjust enrichment claim were met—namely a benefit to the Added Defendants and a corresponding deprivation to the plaintiffs—on my reading of the motions judge’s reasons he formed no conclusion as to whether the pleaded facts disclosed any benefit or corresponding deprivation. He merely wrote that “there was an interesting debate amongst Counsel as to whether the competing claims of the added Defendants ... could be characterized as a ‘benefit’ with a corresponding deprivation”.
[51] I would agree with the motions judge’s conclusion that, regardless of whether there was a benefit and corresponding deprivation, the escrow agreement between AVC and the Offeree Shareholders constituted a clear juristic reason for any alleged or potential enrichment. Since the Escrow Fund was purely a contractual creation between AVC and the Offeree Shareholders, any benefit enjoyed by either AVC or the Offeree Shareholders would be received as consideration from the other party under a contract.
[52] I would therefore hold that the motions judge did not err in striking the claim of unjust enrichment.
b. Declaration of breach of fiduciary duty
[53] The motions judge observed that novel fiduciary relationships are generally marked by three characteristics. First, the fiduciary must have the ability to exercise some discretion or power on behalf of the beneficiary. Second, a unilateral exercise of this power can affect the beneficiary’s legal or practical interests. Third, the beneficiary is peculiarly “vulnerable” or at the mercy of the fiduciary holding this power or discretion. See Hodgkinson v. Simms, [1994] 3 S.C.R. 377, at p. 408; Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 S.C.R. 574. In addition, I note that a critical characteristic of a fiduciary relationship is that of loyalty: the fiduciary undertakes to act in the interests of another person. See Galambos v. Perez, 2009 SCC 48, [2009] 3 S.C.R. 247, at para. 69.
[54] The motions judge held that the statement of claim failed to disclose any facts to support the proposition that the Added Defendants were in a fiduciary relationship with the plaintiffs, nor to establish the nature and scope of the discretion and power that the Added Defendants could exercise over the plaintiffs so as to place them in a vulnerable position. The statement of claim also contained no allegation that any duty was breached.
[55] I would agree with the motions judge.
[56] Even assuming all the plaintiffs’ allegations are taken to be true, AVC is nothing more than an arm’s length purchaser of Med-Eng shares, the Offeree Shareholders are merely co-shareholders with the plaintiffs, and the only role played by Computershare is to hold a sum of money in escrow for the potential benefit of the Offeree Shareholders. It cannot be said that the relationship between the plaintiffs and any of the Added Defendants is one where the Added Defendants have undertaken to act in the plaintiffs’ interests.
[57] The plaintiffs argue that they are vulnerable to the Added Defendants because the Added Defendants have significant power over the distribution of the Escrow Fund that, if exercised, could adversely affect their interests. However, the Supreme Court of Canada has expressly rejected the notion that a fiduciary duty may arise in "power-dependency" relationships without any express or implied undertaking by the fiduciary to act in the best interests of the other party: Galambos at paras. 71-74. Not all relationships involving power imbalances are fiduciary in nature, and a power dependency does not, on its own, materially determine whether a relationship is fiduciary.
[58] It is therefore plain and obvious that the plaintiffs’ claim for a declaration of a fiduciary relationship cannot succeed.
c. Declaration of resulting trust
[59] The motions judge found that there were no facts pleaded that could suggest that the Escrow Fund was subject to a resulting trust in favour of the plaintiffs. No facts were pleaded that the plaintiffs contributed to the Escrow Fund or that the Added Defendants intended the Escrow Fund to be held in trust for them.
[60] In their submissions on the resulting trust claim, the plaintiffs asked this court to consider the following passage from Gorecki v. Canada (Attorney General), [2005] O.J. No. 3465 (S.C.), at para. 67, which was also quoted by the motions judge:
Waters describes a resulting trust as arising "whenever legal or equitable title to property is in one party's name, but that party, because he is a fiduciary or gave no value for the property, is under an obligation to return it to the original title owner, or to the person who did give value for it" (op.cit. at p. 362). Like an express trust, the settlor's intent is important but intent is inferred as a matter of law: Rathwell v. Rathwell, [1978] 2 S.C.R. 436.
[61] There is no fiduciary relationship between the plaintiffs and the Added Defendants, and the Added Defendants never received property “for which they gave no value”. The plaintiffs merely make a bare submission that it would be open to a trial judge to find that the Escrow Fund was being held as a resulting trust in favour of the plaintiffs, “either as an independent equitable remedy or as an appropriate element of” an oppression remedy.
[62] The plaintiffs’ submission misapprehends the law of resulting trust. An essential characteristic of all resulting trust situations is that “either the claimant [i.e. the would-be beneficiary of the resulting trust] originally transferred the property in question to the alleged resulting trustee, or that the claimant supplied the whole or part of the purchase price when the property was bought from a third party and transferred into the alleged resulting trustee’s name”: Donovan W.M. Waters, Q.C., Mark R. Gillen & Lionel D. Smith, eds., Waters' Law of Trusts in Canada, 3rd ed. (Toronto: Thomson Canada, 2005), at pp. 365-66. In the present case, the plaintiffs seek a resulting trust over the Escrow Fund. However, as the motions judge noted, the facts as pleaded do not show that the plaintiffs were ever the original title owner of the Escrow Fund nor did they ever contribute to it. The money in the Escrow Fund originated solely from the Added Defendants, not the plaintiffs.
[63] I would therefore hold that the motions judge did not err in holding that there were no facts pleaded that would form a basis on which a resulting trust might be found.
d. Oppression claim and remedial constructive trust remedy
[64] The motions judge observed that a remedial constructive trust had been imposed in situations where claims based on unjust enrichment, breach of fiduciary duty or oppression had been made out. He had already held that there was no basis on which to argue unjust enrichment or breach of fiduciary duty in relation to the Added Defendants. The oppression remedy did not exist at common law but was a statutory cause of action created by the provisions of Ontario’s Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”), and had to be specifically pleaded. It was not. As a result, he held it “plain and obvious that there is no basis for a declaration that the Escrow Fund is held as a constructive or remedial trust in favour of the Plaintiffs.”
[65] I have already determined that even if all the pleaded facts are accepted as true, a claim for unjust enrichment or breach of fiduciary duty cannot succeed. Therefore, the only remaining ground upon which a constructive trust could possibly be imposed in this case is as a remedy for oppression.
[66] Counsel for the plaintiffs made forceful oral submissions that the motions judge, in concluding that it was plain and obvious that there was no basis for a declaration of constructive trust, misinterpreted the plaintiffs’ pleadings and erred in finding that they had failed to plead an oppression claim. As I have indicated, the plaintiffs’ counsel explained at the oral hearing before this court that the plaintiffs do not, in fact, wish to assert a claim of oppression against the Added Defendants. Instead, they advance an oppression claim against the Original Defendants only, and seek a constructive trust over some or all of the Escrow Fund as a remedy for the Original Defendants’ oppressive conduct.
[67] The claim for declaratory relief in the form of a constructive trust cannot stand on its own in the present action. A constructive trust is an equitable remedy imposed by the court and cannot be declared or recognized in the abstract without a finding of a breach of an equitable obligation. Since the claims against the Original Defendants have been struck as an abuse of process, and since the plaintiffs do not assert any actionable wrong against the Added Defendants, it follows that there is no basis in the present action upon which the court could impose a constructive trust.
[68] In other words, once Claims One through Five are struck, there is no cause of action from which a constructive trust remedy could flow. Otherwise, it would be akin to allowing a claim for damages to proceed without there being any pleading of an actionable wrong. The motions judge was therefore correct in holding that the statement of claim provided no basis upon which the court could declare a constructive trust over the Escrow Fund in favour of the plaintiffs.
[69] This alone is a basis for dismissing this ground of appeal.
[70] Having regard to the plaintiffs’ cross-motion for joinder or consolidation, however, I must make further comment. Even if this court were to grant an order joining or consolidating Claim Six to the Ongoing Actions, it is still plain and obvious that there is no factual basis upon which a trial judge could impose a constructive trust over the Escrow Fund—which is essentially property belonging to third parties—as relief against the Original Defendants’ oppressive conduct.
[71] Section 248(3) of the OBCA provides that “the court may make any interim or final order it thinks fit” as a remedy for oppression. In some circumstances, the court has imposed a constructive trust as an oppression remedy: see e.g. Waxman v. Waxman, infra, and C.I. Covington Fund Inc. v. White (2000), 10 B.L.R. (3d) 173 (Ont. S.C.). However, it must also be remembered that the constructive trust, as a general remedial device, is founded squarely on the principles of “good conscience” or preventing an unjust enrichment: Peter D. Maddaugh, Q.C., & John D. McCamus, The Law of Restitution (Toronto: Canada Law Book, 2010) at c. 5:200; see also Pettkus v. Becker, [1980] 2 S.C.R. 834, and Soulos v. Korkontzilas, [1997] 2 S.C.R. 217.[^6]
[72] I have already held that the plaintiffs’ claim for unjust enrichment against the Added Defendants is not made out in law. The pleaded facts also do not allege that the Added Defendants breached any equitable obligation or committed any other actionable wrong against the plaintiffs.
[73] The plaintiffs argue, however, that if all the pleaded allegations relating to the Original Defendants’ conduct are proven and there is a finding that the Original Defendants oppressed the plaintiffs, then it is open to the trial judge to fashion a remedy that would impose a constructive trust over the property of the Added Defendants (i.e. the Escrow Fund), even though there are no pleaded facts alleging that the Added Defendants had any role in the plaintiffs’ oppression. Because s. 248(3) of the OBCA allows the court to make any “order it thinks fit” to remedy oppressive conduct, the plaintiffs submit that the remedies available to the court are “virtually unlimited” and include awarding a constructive trust over third party recipients of the benefits from oppression. As support for the court’s authority to fashion such a remedy, they cite Waxman v. Waxman (2002), 25 B.L.R. (3d) 1 (Ont. S.C.), at para. 1641, aff’d with minor variations (2004), 44 B.L.R. (3d) 165 (Ont. C.A.), at paras. 571-589.
[74] In Waxman, two brothers, Morris (the plaintiff) and Chester (the defendant), built up a multi-million dollar scrap metal and refuse business, with each owning a 50% share in the company. While Morris was ill and preoccupied with his health problems, Chester tricked him into signing an agreement that sold his stake in the company to Chester. Chester also inappropriately allocated company bonuses to himself and his sons, and had allowed the diversion of company assets to various other corporations owned by his sons. The trial judge found, among other things, that Chester was liable for oppression and breaches of fiduciary duty, and that the share transfer agreement could be set aside on the basis of undue influence and unconscionability. The trial judge also made various findings of knowing receipt and knowing assistance against Chester and his sons. As a remedy for the invalid share transfer, the trial judge ordered that 50% of Chester’s share in the company be held in constructive trust for Morris. She also ordered Chester to pay Morris 50% of the profits and distribution of equity of the company from the date of the impugned share transfer to the date of judgment. Finally, she ordered a tracing process to permit Morris to attempt to trace these profits into the hands of Chester’s sons and other persons who were not bona fide purchasers for value without notice. The trial judge’s decision in Waxman was largely upheld on appeal to this court, which found that the constructive trust was imposed on the basis of both equity (for example, as a remedy for the breaches of fiduciary duty) and as a remedy of oppression under s. 248 of the OBCA.
[75] Waxman, however, is not authority for the proposition that the court, in fashioning an oppression remedy under s. 248, may impose a constructive trust over the property of third parties that had no role in the oppressive conduct. In Waxman, all parties whose property was subject to the constructive trust by virtue of the tracing order were participants in or otherwise directly benefited from the oppressive conduct. For example, Chester’s son Robert and his companies were found liable for knowing receipt of the profit diversions from Morris and Chester’s company as a result of Chester’s oppressive acts and breach of fiduciary duty. Waxman is readily distinguishable from the present case, where the plaintiffs have not pleaded a cause of action against the Added Defendants in knowing receipt, and have not pleaded that AVC and the Offeree Shareholders had anything to do with the Original Defendants’ alleged oppressive conduct as described in Claims One through Five.
[76] The plaintiffs argue that, nevertheless, if the trial judge found that the Original Defendants had engaged in oppressive conduct it would be open to the trial judge to fashion a remedy that would impact the Added Defendants and thus in fairness they ought to be before the court.
[77] I do not agree. Oppression is a fact-specific determination. The reach of the oppression remedy is limited by the reasonable expectations asserted by the claimant: BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560, at paras. 59, 68, 72, 89 and 95. The plaintiffs do not plead that the shareholder agreements they had with the Original Defendants gave them a reasonable expectation that the Added Defendants would have regard to their interests. Indeed, the plaintiffs have not asserted any basis on which they had a reasonable expectation that the Added Defendants—namely, the Offeree Shareholders, AVC and Computershare—would protect their economic interests.
[78] In assessing a claimant’s reasonable expectations, the court looks to a variety of factors, including commercial practice and any shareholder agreements: see BCE at paras. 73 and 79. The Supreme Court stated that the latter “may be viewed as reflecting the reasonable expectations of the parties”.
[79] The plaintiffs do not suggest that the escrow agreement established to compensate AVC in the event of a breach of Med-Eng’s and the Offeree Shareholders’ representations and warranties is a departure from commercial practice. Nor do they submit that anything in any shareholder agreements creates a reasonable expectation that AVC and the Offeree Shareholders would have regard to the plaintiff’s interests. The same is all the more true with respect to the agreement with the escrow agent Computershare. Consequently, I would hold that it is plain and obvious that there is no basis in law for the court to impose a constructive trust over the Added Defendants’ Escrow Fund as an oppression remedy against the Original Defendants.
[80] It is plain and obvious that Claim Six must be struck in its entirety.
iii. Did the motions judge err in dismissing the plaintiffs’ cross-motion?
[81] The motions judge did not err in denying the plaintiffs leave to amend their statement of claim. As I have indicated the New Action constituted an abuse of process. To grant the plaintiffs request for joinder or consolidation would only continue the abuse of process.
[82] I would also agree with the motions judge that, as against the Added Defendants, the claim disclosed no reasonable cause of action (rule 21.01(1)(b)). The pleading discloses no basis on which to grant a remedy over the Escrow Fund. Thus, a basis for joinder or consolidation of the New Action with the Ongoing Actions does not exist.
[83] I would therefore uphold the motions judge’s decision to refuse a joinder or consolidation.
iv. Are there inconsistent judgments?
[84] In advance of the appeal hearing, counsel for the plaintiffs referred this court to a recent motion decision in one of the Ongoing Actions (Ottawa Court File 06-CV-36222) that was rendered by Master C.U.C. MacLeod on August 27, 2010: Maynes v. Med-Eng, 2010 ONSC 4704. That decision was released just shortly before the present appeal was perfected.
[85] Counsel for the plaintiffs submits that the motions judge’s decision (which is the subject of the current appeal) is at odds with Master MacLeod’s ruling. The plaintiffs argue that while the motions judge found that there was no basis on which to award a constructive trust, Master MacLeod states that if the former directors were found liable for an oppression claim, then the court would clearly have jurisdiction to structure a remedy that would extend beyond those individual defendants. The plaintiffs submit that Master MacLeod’s decision allows for a constructive trust to be imposed on the Escrow Fund.
[86] I disagree. Master MacLeod’s decision concerns a Rule 20 motion for partial summary judgment brought by the former directors of Med-Eng (who, along with Med-Eng itself, constitute the Original Defendants in the Ongoing Actions). He found that the question of whether or not the former directors of Med-Eng were acting oppressively when they set the strike price and triggered the buyback provisions was a genuine issue requiring a trial. He also found that the former directors were proper parties in the litigation because an oppression remedy may be made against them personally. In the process of coming to this conclusion, he wrote:
The OBCA permits orders binding directors and officers of a corporation following a finding of oppression ... . Here however we are dealing with former officers and directors who for the most part were also the shareholders ultimately benefitting from the concentration of shares. ... Given that AVTI [Allen-Vanguard Technologies Inc.] has subsequently been sold, it is far more likely that a court would order a remedy in damages against the enriched former shareholders than against the merged subsidiary of Allen-Vanguard. The personal defendants [i.e. the former Med-Eng board members] are therefore in my view proper parties.
[87] As the above passage makes clear, in referring to the court’s ability to fashion an appropriate remedy, Master MacLeod refers only to the possibility that the former officers and directors of Med-Eng, as “enriched former shareholders” benefiting from the alleged oppression, may be found liable for damages. Master MacLeod makes no mention of a constructive trust, the Escrow Fund, or any of the Added Defendants. His statements certainly cannot be read as stating that an oppression remedy can involve imposing a constructive trust over the funds of parties which shares no nexus whatsoever to the oppression pleaded. Master MacLeod’s decision has no relevance to the present appeal.
CONCLUSION
[88] For the reasons given, I would dismiss the appeal.
COSTS
[89] I would award the costs of the appeal on a partial indemnity basis to the defendants as follows: $12,000 to the individual Original Defendants; $20,000 to Allen-Vanguard Corporation and Allen-Vanguard Technologies Inc.; and $18,500 to the Added Defendants Richard L’Abbé, 1062455 Ontario Inc., GrowthWorks Canadian Fund Ltd., Schroder Venture Managers (Canada) Limited, and Schroder Ventures Holding Limited.
RELEASED: Feb. 14, 2011 “Karen M. Weiler J.A.”
“KMW” “I agree David Watt J.A.”
“I agree Karakatsanis J.A.”
[^1]: There is one exception. Richard L’Abbé is named as an Original Defendant in his capacity as former director of Med-Eng Systems Inc. and Trustee of a Voting Trust Agreement among participating shareholders of the corporation. He is also being sued in the New Action as an Added Defendant in his capacity as a shareholder.
[^2]: The former directors of Med-Eng who are being sued as Original Defendants are Maurice J.M. Baril, Pierre Boivin, Thomas Csathy, Paul Echenberg, Mathieu Gauvin, Cecile Ducharme, Mark Norton, Danny Osadca, and Richard L’Abbé. As mentioned, Richard L’Abbé was also Trustee under a Voting Trust Agreement among participating shareholders. He has also been named as an Added Defendant in his capacity as a Med-Eng shareholder.
[^3]: The Offeree Shareholders, as defined in their share purchase agreement with AVC and Med-Eng, are: 1062455 Ontario Inc., GrowthWorks Canadian Fund Ltd., Schroder Canada Ventures Managers (Canada) Limited (in its capacity as general partner of each of Schroder Canadian Buy-Out Fund II Limited Partnership CLP1, Schroder Canadian Buy-Out Fund II Limited Partnership CLP2, Schroder Canadian Buy-Out Fund II Limited Partnership CLP3, Schroder Canadian Buy-Out Fund II Limited Partnership CLP4, Schroder Canadian Buy-Out Fund II Limited Partnership CLP5, and Schroder Canadian Buy-Out Fund II Limited Partnership CLP6), and Schroder Ventures Holding Limited (in its capacity as general partner of Schroder Canadian Buy-Out Fund II UKLP, and on behalf of Schroder Canadian Buy-Out Fund II Coinvestment Scheme and SVG Capital plc (formerly Schroder Ventures International Investment Trust plc)). The Offeree Shareholders were co-shareholders of Med-Eng with the plaintiffs.
[^4]: Ottawa Court File No. 06-CV-36222.
[^5]: Ottawa Court File No. 07-CV-38942.
[^6]: In Soulos, McLachlin J. recognized that “under the broad umbrella of good conscience,” constructive trusts serve to remedy both: (1) situations where the formal elements of unjust enrichment are made out; and (2) situations where a person charged with an equitable obligation has committed a wrongful act, but there has been no enrichment and corresponding deprivation: Soulos at para. 43. She held the view that a constructive trust may not only be a remedy for an unjust enrichment but can also serve “to condemn a wrongful act and maintain the integrity of the relationships of trust which underlie many of our industries and institutions”: Soulos at para. 14. McLachlin J. thus determined that although the case before the Court did not have the formal characteristics of an unjust enrichment, a constructive trust could nonetheless be imposed based on the concept of “good conscience”, because the defendant had breached an equitable obligation to the plaintiff. However, Maddaugh & McCamus note at c. 5:200.50 that the Court did not need to recognize a separate type of constructive trust based upon the notion of “good conscience”, because even such cases can be subsumed within a broader reading of “unjust enrichment”.