Ottawa Community Housing Corporation v. Foustanellas, o/a Argos Carpets, et al.
[Indexed as: Ottawa Community Housing Corp. v. Foustanellas]
Ontario Reports
Court of Appeal for Ontario,
Cronk, Pepall and Benotto JJ.A.
April 21, 2015
125 O.R. (3d) 539 | 2015 ONCA 276
Case Summary
Civil procedure — Costs — Full indemnity costs — Trial judge finding that defendants participated and acquiesced in deliberate scheme to defraud public housing corporation by falsifying more than 1,000 invoices for carpet installation — Trial judge not erring in awarding plaintiff its costs on full indemnity basis.
Contracts — Interpretation and construction — Contract providing that contractor was not entitled to any further payment (including payments then due but not yet paid) where owner had taken work out of contractor's hands because of contractor's non-compliance with contract — Clause not constituting penalty or liquidated damages provision.
Damages — Punitive damages — Trial judge finding that defendants participated and acquiesced in deliberate scheme to defraud public housing corporation by falsifying more than 1,000 invoices for carpet [page540] installation — Trial judge awarding plaintiff punitive damages in amount of $250,000 — Punitive damages appropriate but trial judge erring in holding all defendants liable on joint and several basis and in awarding punitive damages against estate of one defendant.
The plaintiff, a non-profit public housing corporation, entered into a contract with Argos for the supply and installation of carpets in some of its housing units. It subsequently withdrew the work from Argos after discovering that Argos was overbilling it and furnishing and installing substandard carpets. The plaintiff sued Argos; ACL; F (who operated as Argos and who was ACL's president, sole shareholder and director); and G, a former employee of ACL. ACL was not a party to the contract. G died prior to trial. The trial judge found that, since the plaintiff was unaware of ACL's involvement in the carpet contract, both F and G were personally liable as agents of an undisclosed principle, together with ACL, for any amounts owing to the plaintiff for the breach of the contract. He found that clause 1.6.3 of the contract, which provided that the contractor was not entitled to any further payment (including payments due and owing but not yet paid) where the owner had taken work out of the contractor's hands because of the contractor's non-compliance with the contract was not a penalty clause or a liquidated damages provision. He found that Argos breached its contract with the plaintiff by engaging in a deliberate and intentional course of falsified invoicing and by supplying and installing substandard carpets, that Argos' false invoicing scheme constituted fraud, and that F and G knew about and acquiesced or were directly involved in the fraudulent scheme. He awarded the plaintiff punitive damages in the amount of $250,000 as against all the defendants on a joint and several basis. He awarded the plaintiff its costs on a full indemnity basis. ACL and F appealed.
Held, the appeal should be allowed in part.
The trial judge did not err in finding that clause 1.6.3 of the contract did not constitute a penalty or liquidated damages provision. Properly read, clause 1.6.3 functioned as a "stop payment" provision. It was designed to halt the owner's contractual obligation to make any payments to the contractor pending determination of the owner's losses and damages arising from the contractor's breach of contract. A penalty clause and a liquidated damages clause both specify a stipulated sum agreed on by the parties at the time of the contract formation. Clause 1.6.3 made no mention of a stipulated or agreed sum recoverable on breach, whether as a penalty or otherwise.
The trial judge's finding that the plaintiff had no knowledge of ACL's involvement in the contract was open to him on the evidentiary record. Moreover, the trial judge found as a fact that F and G acted throughout their dealings with the plaintiff as the agents of an undisclosed principle, ACL. Consequently, neither individual could be shielded from personal liability on the basis that OCHC knowingly contracted with ACL.
It was open to the trial judge to find that F and ACL were parties to the fraud against the plaintiff.
The defendants falsified more than 1,000 invoices over a significant period of time. An award of punitive damages was appropriate. However, the trial judge erred in awarding punitive damages on a joint and several basis. Punitive damages arise from the misconduct of the particular defendant against whom they are awarded. Joint and several responsibility for such an award cannot be imposed. The trial judge also erred in awarding punitive damages against G's estate. Punitive damages are intended to achieve the objectives of retribution, [page541] specific and general deterrence, and denunciation. None of those objectives could be met by an award against the estate.
There was no basis for appellate interference with the trial judge's ruling that the plaintiff was entitled to its costs of the trial against all of the defendants. In the circumstances, it was open to the trial judge to award costs on the full indemnity scale.
Cases referred to
Canadian General Electric Co. v. Canadian Rubber Co. of Montreal (1915), 1915 45 (SCC), 52 S.C.R. 349, [1915] S.C.J. No. 58, 27 D.L.R. 294; Cinar Corp. v. Robinson, [2013] 3 S.C.R. 1168, [2013] S.C.J. No. 73, 2013 SCC 73, 452 N.R. 123, 2014EXP-62, 118 C.P.R. (4th) 1, J.E. 2014-32, 366 D.L.R. (4th) 193, 8 C.C.L.T. (4th) 1, EYB 2013-230908, 235 A.C.W.S. (3d) 495; de Montigny v. Brossard (Succession), [2010] 3 S.C.R. 64, [2010] S.C.J. No. 51, 2010 SCC 51, 2010EXP-3601, J.E. 2010-1962, 408 N.R. 80, EYB 2010-181731, 325 D.L.R. (4th) 577, 78 C.C.L.T. (3d) 1, 62 E.T.R. (3d) 161, 196 A.C.W.S. (3d) 217; Elsley Estate v. J.G. Collins Insurance Agencies Ltd., 1978 7 (SCC), [1978] 2 S.C.R. 916, [1978] S.C.J. No. 47, 83 D.L.R. (3d) 1, 20 N.R. 1, 3 B.L.R. 183, 36 C.P.R. (2d) 65, [1978] 1 A.C.W.S. 514; Hamilton v. Open Window Bakery, [2004] 1 S.C.R. 303, [2003] S.C.J. No. 72, 2004 SCC 9, 235 D.L.R. (4th) 193, 316 N.R. 265, J.E. 2004-470, 184 O.A.C. 209, 40 B.L.R. (3d) 1, [2004] CLLC para. [210-025], 128 A.C.W.S. (3d) 1111; Hill v. Church of Scientology of Toronto (1995), 1995 59 (SCC), 24 O.R. (3d) 865, [1995] 2 S.C.R. 1130, [1995] S.C.J. No. 64, 126 D.L.R. (4th) 129, 184 N.R. 1, J.E. 95-1495, 84 O.A.C. 1, 25 C.C.L.T. (2d) 89, 30 C.R.R. (2d) 189, REJB 1995-68609, 56 A.C.W.S. (3d) 495; Ottawa Community Housing Corp. v. Foustanellas, [2010] O.J. No. 3366, 2010 ONSC 4370, 191 A.C.W.S. (3d) 619 (S.C.J.); Plester v. Wawanesa Mutual Insurance Co., 2006 17918 (ON CA), [2006] O.J. No. 2139, 269 D.L.R. (4th) 624, 213 O.A.C. 241, 39 C.C.L.I. (4th) 44, [2006] I.L.R. 4539, 148 A.C.W.S. (3d) 628 (C.A.) [Leave to appeal to S.C.C. refused [2006] S.C.C.A. No. 315]; Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, [2014] S.C.J. No. 53, 2014 SCC 53, 2014EXP-2369, J.E. 2014-1345, 373 D.L.R. (4th) 393, [2014] 9 W.W.R. 427, 59 B.C.L.R. (5th) 1, 461 N.R. 335, 25 B.L.R. (5th) 1, 358 B.C.A.C. 1, 614 W.A.C. 1, 242 A.C.W.S. (3d) 266; Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 595, [2002] S.C.J. No. 19, 2002 SCC 18, 209 D.L.R. (4th) 257, 283 N.R. 1, J.E. 2002-405, 156 O.A.C. 201, 20 B.L.R. (3d) 165, 35 C.C.L.I. (3d) 1, [2002] I.L.R. I-4048, REJB 2002-28036, 111 A.C.W.S. (3d) 935
Rules and regulations referred to
Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 31.11(6)
APPEAL from the judgment of D.J.A. Rutherford J., [2013] O.J. No. 765, 2013 ONSC 973 (S.C.J.) and [2013] O.J. No. 3850, 2013 ONSC 5443 (S.C.J.) for the plaintiff.
Gary G. Boyd, for appellants.
Joseph Y. Obagi and Elizabeth A. Quigley, for respondent.
The judgment of the court was delivered by
[1] CRONK J.A.: — This appeal arises from a dispute concerning the supply and installation of carpets and underpads in various residential housing units in Ottawa. At issue is the trial judge's holding of the carpeting contractor and its principal [page542] liable in fraud, and his assessment of compensatory and punitive damages and costs in favour of the owner of the units.
Background in Brief
[2] The respondent, Ottawa Community Housing Corporation ("OCHC"), is a not-for-profit organization that provides subsidized social housing for low-income individuals in Ottawa. The appellant Peter Foustanellas is the sole shareholder, president and director of the corporate appellant, Argos Carpets Ltd. ("ACL"), a carpeting contractor. Robert Grimes, now deceased, was a former employee of ACL.
[3] In mid-July 2004, OCHC invited competitive tenders for a one-year contract concerning the supply and installation of carpets and under pads in some of its housing units. It eventually accepted the lowest of five tenders, a bid submitted by "Argos Carpets" ("Argos") and signed by Grimes. Argos' successful bid, as calculated and approved by Foustanellas, contemplated a 10-15 per cent profit margin for Argos.
[4] The contract between OCHC and Argos (the "carpet contract")1 provided for a fixed charge per installed square yard of carpet and underpad, with no extra charge for wastage. It also set out certain quality criteria and other specifications for the product and services Argos was to provide.
[5] Neither the original carpet contract nor subsequent renewal contracts identified ACL as a party to the contractual arrangements with OCHC.
[6] Over time, OCHC became suspicious that Argos was inflating the quantities of installed carpet and underpad identified in its invoices, suggesting significant overbilling of OCHC. It therefore undertook a series of investigations, eventually concluding that Argos had engaged in systemic overbilling for carpet and underpad allegedly supplied and installed in OCHC units. OCHC also concluded that, in many instances, the carpets furnished and the installations carried out by Argos were substandard, falling below the quality criteria and other specifications set out in the carpet contract.
[7] Accordingly, in late May 2006, OCHC invoked clauses 1.6.1 and 1.6.3 of the carpet contract, described below, and provided [page543] notice that it was withdrawing the remaining work under the carpet contract from Argos. It also withheld $141,724.55 in payments allegedly owing to Argos for work performed.
[8] Litigation ensued. ACL commenced an action against OCHC for amounts allegedly owing under the carpet contract, together with damages for wrongful termination and breach of contract, amongst other relief. OCHC, in turn, sued Foustanellas, Grimes, Argos and ACL for damages for breach of contract and fraudulent and/or negligent misrepresentation, as well as punitive and exemplary damages. The two actions were eventually consolidated and heard together. OCHC was the plaintiff and Foustanellas, Argos, Grimes and ACL (collectively, the "defendants") were the defendants in the consolidated action. ACL was the named plaintiff, and OCHC the named defendant, by counterclaim.
Trial Judge's Decision
[9] Grimes was Argos' main contact with OCHC in relation to the carpet contract. Unfortunately, he died prior to trial. For the purpose of the trial, David Grimes was added as a party defendant in his capacity as litigation administrator for Robert Grimes' estate (the "estate").
[10] OCHC relied on parts of Grimes' discovery evidence, which was read in at trial pursuant to leave granted under rule 31.11(6) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. On his examination-for-discovery, Grimes testified that, "from day one" of the carpet contract, the invoices tendered to OCHC were falsely inflated to generate a profit margin in the range of 25-40 per cent for Argos, as opposed to the 10-15 per cent contemplated by the carpet contract. According to Grimes (i) the falsification of the invoices was readily apparent on inspection of the original copies of the invoices; (ii) Foustanellas examined each and every invoice sent to OCHC; (iii) Foustanellas wanted to be sure that OCHC did not have its own measurements of the units that Argos was carpeting, so that OCHC could not determine that Argos' invoices had been inflated; (iv) he had been instructed not to disclose carpet measurements to clients; (v) Foustanellas had instructed him to increase the markup on OCHC invoices in retaliation for OCHC's decision to install hardwood, rather than carpet, in some of the units; (vi) an OCHC invoice showing less than a 30-35 per cent profit margin for Argos "wouldn't get past [Foustanellas]"; and (vii) Foustanellas knew that Argos was not complying with the carpet contract.
[11] Foustanellas denied any knowledge of the falsified invoices. He testified at trial that he left all the details of business with [page544] OCHC to Grimes and an assistant, and he learned of the billing improprieties only when OCHC terminated the carpet contract.
[12] The trial judge rejected Foustanellas' evidence virtually in its entirety. He made the following key findings [2013 ONSC 973, [2013] O.J. No. 765 (S.C.J.)]:
(i) since OCHC was unaware of ACL's involvement in the carpet contract, both Foustanellas and Grimes were personally liable as agents of an undisclosed principal, together with ACL, for any amounts owing to OCHC for breach of the carpet contract (at para. 39);
(ii) clause 1.6.3 of the carpet contract was neither a penalty clause nor a liquidated damages provision. Rather, it relieved OCHC of the obligation of making further payments to Argos once the clause was properly invoked (at paras. 69-70);
(iii) the evidence overwhelmingly established that Argos breached its contract with OCHC by engaging in "a deliberate and intentional course of falsified invoicing" and "a pervasive course of supply of sub-standard carpet product and of sub-standard installation" (at para. 72);
(iv) Argos' false invoicing scheme constituted fraud. Both Grimes and Foustanellas knew about and were acquiescent or directly involved in carrying out the fraudulent scheme that resulted in overcharges to OCHC (at paras. 75, 86-87);
(v) the amount of the overcharges was $282,069.10, exclusive of adjustments on account of wastage and quality issues (at paras. 45 and 88);
(vi) OCHC was entitled to a 25 per cent reduction in the total cost of carpet supplied because Argos, contrary to the terms of the carpet contract, included charges for wastage in its invoices to OCHC (at paras. 51 and 89);
(vii) OCHC was entitled to a further 20 per cent reduction in the amount otherwise owed to Argos under the carpet contract on account of Argos' delivery and installation of substandard quality carpet and underpad (at paras. 63 and 90); and
(viii) after applying the 25 per cent wastage and 20 per cent quality adjustments referenced above, the total amount of OCHC's overpayment to Argos was $633,844.65 (at para. 91).
[13] Based on these findings, the trial judge held all the defendants liable to OCHC, on a joint and several basis, for [page545] compensatory damages in the total amount of $633,844.65. He calculated this amount as follows:
(i) $282,069.10 -- for inflated quantities of carpet and under pad invoiced to OCHC;
(ii) $206,842.36 -- for improper wastage charges; and
(iii) $144,933.19 -- for substandard quality carpets, underpad and installations.
[14] The trial judge awarded the damages under items (i) and (ii), above, on account of the defendants' fraudulent conduct, and the damages under item (iii), above, for breach of contract.
[15] The trial judge also awarded OCHC punitive damages, in the amount of $250,000, as against all the defendants on a joint and several basis by reason of the fraudulent scheme that he found they had perpetrated against OCHC.
[16] In connection with the counterclaim, the trial judge awarded ACL damages in the amount of $141,724.55 for outstanding payments owed to ACL. He directed that this amount be set off against any amounts recovered by OCHC from ACL.
[17] Finally, the trial judge awarded OCHC its costs of the trial, on a full indemnity basis, in the amount of $630,475.47, payable by the defendants on a joint and several basis.
Issues on Appeal
[18] Foustanellas and ACL appeal to this court from the trial judgment. The estate took no part in the appeal.
[19] The appellants acknowledge OCHC was fraudulently overbilled in the amount of $282,069.10 by reason of the falsification of Argos' invoices. However, they maintain that Grimes was responsible for the falsified invoices, and that Foustanellas and ACL neither knew about nor were parties to the fraud. Thus, the appellants say, the trial judge erred by finding that they participated or acquiesced in the fraudulent overbilling.
[20] The appellants also argue (i) clause 1.6.3 of the carpet contract operated to limit the amount of damages recoverable by OCHC; (ii) to the knowledge of OCHC, ACL alone among the defendants was the contracting party under the carpet contract; (iii) the trial judge erred in reducing the amount owed to ACL under the carpet contract on account of wastage and quality issues; and (iv) the trial judge further erred by awarding OCHC punitive damages, as well as its costs of the trial on a full indemnity basis. [page546]
[21] The issues on appeal may therefore be framed as follows:
(1) Did the trial judge err by holding clause 1.6.3 of the carpet contract was neither a penalty nor a liquidated damages provision?
(2) Did the trial judge err by holding the appellants were parties to the fraud perpetrated on OCHC?
(3) Did the trial judge err by holding OCHC was unaware of ACL's involvement in the carpet contract?
(4) Did the trial judge err in reducing the amount otherwise owing to Argos under the carpet contract on account of wastage and quality deficiencies?
(5) Did the trial judge err in his assessment of punitive damages?
(6) Did the trial judge err by awarding OCHC its trial costs on a full indemnity basis?
Analysis
(1) Clause 1.6.3 of the carpet contract
[22] The appellants argue clause 1.6.3 of the carpet contract constitutes a penalty or liquidated damages provision, the effect of which is to limit the amount of any recovery by OCHC of damages for breach of, or other wrongdoing associated with, the carpet contract to an amount equal to the total sum outstanding and owed to Argos at the date of termination of the carpet contract.
[23] Clause 1.6.3 of the carpet contract provides:
Except in the case of insolvency, where any or all of the work has been taken out of the hands of the Contractor, the Contractor will not be entitled to any further payment, including payments then due and payable but not paid. The obligation of the Owner to make payments will cease, and the Contractor will be liable upon demand to pay the Owner an amount equal to all the losses and damages incurred by the Owner for the non-completion of the work.
[24] Clause 1.6.3 must be read together with clause 1.6.1 of the carpet contract. The latter provision states:
1.6 TAKING WORK OUT OF THE HANDS OF THE CONTRACTOR
1 If the Contractor:
.1 has delayed in commencing or is in default in the completion of the work or any portion of the work, within the contract commencement and completion dates; [page547]
.2 is in default of diligently executing the work or any portion of the work to the satisfaction of the Owner, and the Owner has given notice of the default to the Contractor, and the notice of default has required the Contractor to put an end to the default or delay, and the default or delay continues for past the time specified in [the] notice after the notice was communicated;
.3 fails to comply with any reasonable order he may receive from the Owner or shall persist in any course in violation of any of the provisions of this contract;
.4 has received from the Owner three written notices of default during the term of the contract;
.5 has made an assignment of the Contract without the required consent of the Owner;
.6 shall submit a bid that is subsequently found to contain false or misleading information;
.7 shall become bankrupt or insolvent, or compound with his creditors, or commit any act of insolvency;
.8 has substituted any material or equipment other than specified without the required consent of the Owner;
or for any other reason which the Owner deems proper, then in each and any such case, the Owner has the full right and power to take the whole operation, or any part of the operation out of the hands of the Contractor.
[25] Clause 1.6.1 thus permits the "Owner" (OCHC) to terminate the contract on the happening of certain events by taking all or some of the work provided for under the carpet contract "out of the hands of the Contractor" (Argos). If this occurs for reasons other than the insolvency of the contractor, the owner is then entitled to invoke clause 1.6.3 of the carpet contract.
[26] That is what transpired in this case. After discovering the overbilling by Argos, OCHC provided formal notice under clause 1.6.1 that it was taking the remaining work under the carpet contract out of Argos' hands, thereby terminating the contract. There is no suggestion OCHC improperly invoked clause 1.6.1. Having provided proper notice under clause 1.6.1, OCHC thereby also became entitled to rely on clause 1.6.3.
[27] The contest on appeal, as at trial, concerns the proper interpretation and effect of clause 1.6.3. The trial judge turned his mind to this issue and rejected the appellants' interpretation of clause 1.6.3, described above. He held, at paras. 69 and 70:
In my view, clause 1.6.3 is neither a penalty clause nor is it a liquidated damages provision. No particular amount is fixed or stipulated. The amount of money that OCHC might owe Argos Carpets on jobs completed under the contract at any given time could vary widely. As it happens, at the time OCHC terminated the contract, just over $45,000 was payable on unpaid invoices submitted for contract installations. [page548]
Not only would a penalty or liquidated damages provision of that modest amount be a most doubtful probability in a business contract of such proportions, more compelling in my view, is that at any given time, the amount in play could be much larger or smaller, depending on the vagaries of the work. The fact that no specified or stipulated amount is set in clause 1.6.3 makes its characterization as a penalty clause or liquidated damage clause untenable. I do not see that provision as capping or limiting what damages OCHC would be entitled to prove and recover. It is, at best, to use Mr. Obagi's words during argument, a "stop the bleeding" provision. It relieved OCHC of having to make further payments under the contract once OCHC had taken the work out of the hands of Argos Carpets and terminated the contract.
[28] A trial judge's interpretation of a contractual provision is entitled to substantial deference by a reviewing court: Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, [2014] S.C.J. No. 53, 2014 SCC 53, 373 D.L.R. (4th) 393. In this case, therefore, deference is owed to the trial judge's interpretation of clause 1.6.3.
[29] As I will explain, I agree with the trial judge's interpretation of clause 1.6.3, substantially for the reasons articulated by him.
[30] I would describe the effects of clause 1.6.3, once triggered, as twofold. First, it relieves the owner (OCHC) from any obligation to make payments to the contractor, including in respect of unpaid receivables, pending determination of the owner's losses and damages arising from the contractor's non-compliance with the carpet contract. Secondly, it establishes the contractor's (Argos') liability to the owner (OCHC) for an amount equal to the owner's losses and damages occasioned by the contractor's non-completion of the work provided for under the carpet contract.
[31] Thus, properly read, clause 1.6.3 functions as a "stop payment" provision. It is designed to halt the owner's contractual obligation to make any payments to the contractor pending determination of the owner's losses and damages arising from the contractor's breach of contract.
[32] In my opinion, the trial judge correctly held that clause 1.6.3 is neither a penalty nor a liquidated damages clause as those clauses are recognized under the established case law.
[33] The authorities relied on by the appellants themselves compel this interpretive conclusion. For example, in Canadian General Electric Co. v. Canadian Rubber Co. of Montreal (1915), 1915 45 (SCC), 52 S.C.R. 349, [1915] S.C.J. No. 58, cited by the appellants, Sir Charles Fitzpatrick C.J. noted, at p. 351 S.C.R.: "A penalty is the payment of a stipulated sum on breach of the contract, irrespective of the damage sustained. The essence of liquidated damages is a genuine covenanted pre-estimate of damage." [page549] In Elsley Estate v. J.G. Collins Insurance Agencies Ltd., 1978 7 (SCC), [1978] 2 S.C.R. 916, [1978] S.C.J. No. 47, Dickson J. (as he then was), writing for a unanimous Supreme Court, explained that, where liquidated damages are stipulated in a contract, the injured party may elect to take the sum stipulated without regard to his or her actual loss. Where, however, the stipulated sum is properly to be seen as a penalty, the injured party may only recover proven damages and the amount recoverable may not exceed the sum stipulated: at p. 938 S.C.R.
[34] Under these authorities, the critical common element is that both penalty and liquidated damages clauses specify a stipulated sum agreed on by the parties at the time of contract formation.
[35] Clause 1.6.3 of the carpet contract makes no mention of a stipulated or agreed sum recoverable on breach, whether as a penalty or otherwise. In other words, it does not stipulate a sum, whether as the amount payable on breach or as the maximum amount recoverable upon proof of actual damage arising from a contractual breach. Instead, the clause contemplates that, on breach of the carpet contract by the contractor, the owner's damages and losses require assessment and the owner may cease payments to the contractor pending quantification of those damages and losses. As the trial judge aptly observed, at para. 69 of his reasons, the amount of the owner's losses and damages "on jobs completed under the contract at any given time could vary widely". Further, the fact that the amount of outstanding invoices owed to the contractor may eventually be set off against the quantified amount of the owner's losses and damages does not convert clause 1.6.3 into a penalty or liquidated damages provision.
[36] Accordingly, I would not give effect to this ground of appeal.
(2) and (3) Trial judge's factual findings
[37] The appellants also contest two of the trial judge's central findings of fact. They argue that he erred by holding (i) OCHC was unaware that ACL, a corporate entity, was a party to the carpet contract; and (ii) the appellants, in particular Foustanellas, were parties to the fraud perpetrated on OCHC.
(i) Lack of knowledge of ACL's involvement
[38] The issue whether OCHC knew the carpet contract was with ACL, rather than an unincorporated entity, was important to the parties at trial because, if OCHC had knowingly contracted with ACL, then its recourse for the recovery of any damages awarded to it for breach of contract would have been confined, [page550] as a matter of law, to ACL. In other words, no recourse for damages for breach of contract would have been available as against Foustanellas in his personal capacity or as against the estate.
[39] The trial judge explicitly addressed the appellants' claim that OCHC was aware of ACL's involvement in the carpet contract. He rejected this claim, finding, at para. 35, that the fact that Argos' business, in reality, was the business of ACL "was never brought home or made clear to OCHC".
[40] In so finding, the trial judge recognized that certain insurance certificates, required under the carpet contract, identified ACL as the relevant insured. However, he accepted OCHC's evidence that these documents would not have come to the attention of OCHC senior management. He further found, at paras. 35-36, (i) Argos' original bid, the carpet contract (including the subsequent renewal contracts) and the numerous invoices submitted to OCHC referred only to "Argos Carpets"; (ii) Argos' mode of performance under the carpet contract did not identify or suggest any involvement by ACL; and (iii) the evidence at trial was "bereft of anything that would [have led] OCHC to know it was doing business with a corporate entity".
[41] These findings were open to the trial judge on this evidentiary record. Absent palpable and overriding error, which has not been demonstrated, they are fatal to the appellants' attack on the trial judge's finding that OCHC was unaware that Argos' business was that of ACL.
[42] Moreover, the trial judge found as a fact, at para. 39, that Foustanellas and Grimes acted throughout their dealings with OCHC as the agents of an undisclosed principal -- ACL.2 Consequently, neither individual could be shielded from personal liability on the basis that OCHC knowingly contracted with ACL. In respect of the damages awarded to OCHC for breach of contract ($144,933.19), the trial judge also held, and the parties appear to have accepted at trial, that OCHC was obliged to elect whether to pursue recovery against the individual defendants or their undisclosed principal.
[43] In the event, OCHC elected to seek recovery of its damages for breach of contract as against ACL alone. No such election [page551] was required for the damages awarded in respect of the defendants' fraudulent conduct. The appellants abandoned any challenge to the trial judge's ruling regarding the ambit of OCHC's necessary election at a post-trial hearing before the trial judge.
[44] In all these circumstances, the appellants' challenge to the trial judge's finding on this issue is unsustainable.
(ii) Appellants' liability for fraud
[45] I reach a similar conclusion regarding the trial judge's impugned finding the appellants were parties to the fraud against OCHC.
[46] The appellants make three submissions in support of their attack on this critical finding. First, they argue the trial judge erred by refusing to allow Foustanellas' cross-examination to proceed through an interpreter. According to the appellants, this error infected the trial judge's assessment of Foustanellas' credibility, on which the finding of fraud against him was based.
[47] I would reject this argument. The trial transcripts do not support the claim that Foustanellas was denied the assistance of an interpreter during his trial testimony, that the trial judge misapprehended the substance of his evidence, or that the trial transcripts are incomplete or inaccurate in any material way.
[48] Foustanellas is from Greece and Greek is his first language. About two hours of his examination-in-chief at trial were conducted without the aid of a Greek-speaking interpreter. The transcripts indicate that, on that day, the trial judge expressed difficulty understanding some of Foustanellas' responses to questions posed by Foustanellas' counsel.
[49] However, the transcripts also reveal (i) throughout the balance of Foustanellas' trial testimony, including his cross-examination, an interpreter present in the courtroom was available to assist him as needed; (ii) the trial judge expressly ruled the interpreter was to be available to Foustanellas during his cross-examination, at Foustanellas' option; (iii) Foustanellas expressed the desire to testify in English, as he had throughout his examination-for-discovery; (iv) at no point during Foustanellas' cross-examination did his counsel object or express any concerns about his client's comprehension of the questions posed; (v) the trial judge concluded Foustanellas did not suffer from problems comprehending the English language but noted, rather, he sometimes spoke with a "heavy accent"; (vi) the trial judge also confirmed he would intervene if he experienced any difficulty in understanding Foustanellas' testimony; and (vii) Foustanellas did not profess an inability to understand the [page552] English language, or request the assistance of the interpreter during his cross-examination.
[50] In these circumstances, no prejudice to Foustanellas having been demonstrated, I would reject any suggestion that trial fairness was compromised by Foustanellas' failure to testify with the aid of an interpreter at trial, or that the trial judge's evaluation of his credibility was tainted on this basis. In my opinion, the record belies these contentions.
[51] Second, the appellants submit, in effect, that the trial judge erred by placing undue weight on Grimes' discovery evidence that Foustanellas and, through him, ACL, were aware of the falsified invoices delivered to OCHC. I disagree.
[52] The trial judge rejected Foustanellas' evidence he was unaware of the falsification of the invoices delivered to OCHC. He accepted Grimes' discovery testimony that Foustanellas was complicit in the fraudulent overbilling scheme. This was the trial judge's call to make.
[53] The trial judge provided detailed reasons (12 paragraphs) for his rejection of Foustanellas' denial of any knowledge of the fraudulent invoices and his attempt to shift sole responsibility for the scheme onto Grimes. He cited numerous examples of inconsistencies and contradictions in Foustanellas' evidence in support of his conclusion that Foustanellas' denial was "implausible" (at para. 81) and "impossible to believe" (at para. 86).
[54] Further, the trial judge's finding the appellants were parties to the fraudulent invoicing scheme was also supported by the evidence at trial that Foustanellas: (i) structured Argos' original bid so as to generate a 10-15 per cent profit margin, whereas the invoices delivered to OCHC provided for a profit margin of 25-40 per cent for Argos; (ii) conducted weekly sales staff meetings, on a one-to-one basis, including weekly meetings with Grimes and his assistant; (iii) reviewed all the invoices sent to OCHC prior to their delivery (unless he was absent from the office, in which case his dispatcher would review the invoices); (iv) believed that he would be "bankrupt" if the invoice amounts contemplated by the carpet contract were in fact billed to OCHC; (v) never called Grimes or his assistant to account after the falsified invoices were discovered, instead continuing to employ them and, in Grimes' case, compensating him above the level of his earned commissions in the year the fraud was discovered; and (vi) maintained throughout that Argos was justified in overbilling OCHC.
[55] In light of this evidence, in my view, the appellants fall far short of establishing that the trial judge's finding, at paras. 86-87, that Foustanellas was "well aware of and [page553] acquiescent in the falsely inflated invoicing scheme" is tainted by any palpable, let alone overriding, error.
[56] Finally, the appellants argue the finding of fraud against ACL cannot stand because Grimes and his assistant acted without the authority of ACL and beyond the scope of their employment duties. Again, I disagree.
[57] This argument founders on the trial judge's finding Foustanellas both knew of and sanctioned the fraud against OCHC. There was no evidence Foustanellas objected at any point to Grimes' activities. To the contrary, the evidence indicated he approved the falsified invoices and insisted on a return to Argos under the carpet contract in excess of that agreed upon by the parties. Furthermore, the trial judge made no finding that the actions of Grimes and his assistant were unauthorized or exceeded the scope of their authority. The trial judge held that both Grimes and Foustanellas acted throughout as the agents of their undisclosed principal, ACL. The trial judge's findings are therefore dispositive of this ground of appeal.
(4) Reductions for wastage and quality deficiencies
[58] The appellants also challenge the trial judge's holdings that the amount otherwise owing to Argos under the carpet contract should be reduced by 25 per cent on account of improper billing for wastage and 20 per cent by reason of the provision of substandard quality carpet, underpad and installations. It is unnecessary to review the appellants' submissions on these issues in detail. The following considerations defeat this ground of appeal.
(i) Wastage reduction
[59] First, the price schedule set out under the carpet contract clearly delineated the unit price for items and services to be billed to OCHC. The carpet contract permitted Argos to charge OCHC for the amount of carpet and under pad actually installed in OCHC units, at a stipulated price per installed square yard. Neither the price schedule nor the other terms of the carpet contract provided for any charges on account of carpet or under pad wastage on installation.
[60] Second, I did not understand the appellants to challenge the legitimacy of a reduction in the amount owing to Argos on account of the improper billing of OCHC for wastage. Rather, they argue the percentage reduction allowed by the trial judge was unjustified and a lower percentage reduction was appropriate. I would not accede to this argument. [page554]
[61] The appellants rely on Foustanellas' discovery evidence, read in as part of OCHC's evidence at trial, that wastage on Argos' carpeting installation jobs was generally in the range of 10-15 per cent. They also submit the evidence of the amount of carpet and underpad shipped by Argos during the currency of the carpet contract established that 12.88 per cent more carpet than underpad was delivered to OCHC. This, they contend, was the only objective evidence at trial of the amount of carpet wasted or discarded in the OCHC installations.
[62] However, there was evidence at trial, led by the appellants themselves, supporting the wastage discount employed by the trial judge. The trial judge noted that it was not possible, on the evidence before him, to ascertain the precise amount of carpeting and underpad wastage on Argos' installations at the OCHC units. But the appellants called Bill Damianakos, the president and owner of an ACL competitor, as a witness at trial. His testimony regarding the usual amount of wastage in comparable OCHC residential units undercut Foustanellas' discovery evidence on this issue.
[63] Damianakos testified that his company, Adelphia Floor Surfaces Limited, had installed carpet in OCHC residential units after OCHC terminated its relationship with Foustanellas and ACL in 2006. Damianakos' evidence was that, in his experience, the installation of carpeting in OCHC residential units could result in wastage of between 20-40 per cent. The trial judge, as he was entitled to do, accepted Damianakos' independent testimony and, based on it, employed 25 per cent as a reasonable approximation of the wastage experienced with ACL's installations in the OCHC units. This was a conservative estimate, based on the lower end of the wastage range identified by Damianakos. The appellants can scarcely be heard to complain about the trial judge's acceptance of relevant evidence that they elected to adduce at trial.
[64] In the end, the trial judge's assignment of weight to the evidence and his appreciation of the evidence as a whole attract great deference from this court. I see no reversible error in his choice of a 25 per cent reduction on account of wastage.
(ii) Quality reduction
[65] I also do not accept the appellants' submission the trial judge erred by allowing a 20 per cent reduction in the amount otherwise owed to Argos under the carpet contract due to Argos' provision of substandard quality product and installations.
[66] As part of its investigations into Argos' compliance with the carpet contract, OCHC retained a carpet expert, [page555] Daniel W. Bernazzani, to undertake an evaluation of the carpet and underpad supplied and installed by Argos. Bernazzani examined 22 OCHC units, made detailed notes of his observations of the carpet, its appearance and mode of installation in each unit, and tested available samples of carpet and underpad.
[67] At trial, OCHC relied on Bernazzani's assessment of the quality of the work performed and materials supplied by Argos. Bernazzani identified a litany of quality deficiencies and inconsistencies in the product supplied and installed by Argos in the OCHC units. He offered the opinion that the quality of the carpet, underpad and installation work at the examined units was "of substantially lesser quality than that specified", leading to what he viewed as an anticipated 30-40 per cent diminution in the normal life expectancy of the product furnished by Argos.
[68] Contrary to the appellants' submission before this court, the trial judge held, at para. 59, that the selection of the units examined by Bernazzani was "fair and random" and sufficient to support a broader inference concerning the overall quality of the work performed and materials utilized by Argos. This finding was also open to the trial judge on the whole of the evidence.
[69] The trial judge also took account of reasonable wear and tear on the product installed in the OCHC units, as well as the negative effect on the life expectancy of the OCHC carpets arising from the usage characteristics of OCHC tenants. Having regard to these factors, as well as Bernazzani's opinion evidence, the trial judge selected 20 per cent as a fair percentage reduction on account of quality deficiencies in the Argos product and installations.
[70] I regard the trial judge's consideration of this issue as fair and thorough. He addressed all the available evidence regarding the quality frailties in the Argos product and installations at the OCHC units, including Bernazzani's expert testimony. His assignment of weight to this evidence was squarely within his domain.
[71] Moreover, the 20 per cent reduction for quality deficiencies allowed by the trial judge fell well below the minimum reduction in the life expectancy of the OCHC carpets (30 per cent) identified by Bernazzani as flowing from the inferior quality of the goods Argos had supplied and the installation services it had performed. On this issue, as on the wastage issue, the trial judge's conservative approach can only have benefitted the appellants.
[72] In my view, this ground of appeal fails. [page556]
(5) Punitive damages award
[73] The trial judge awarded punitive damages based on his findings that the appellants, together with Grimes, participated and acquiesced in an intentional and deliberate scheme, over a significant period of time, to defraud OCHC and induce it to pay more for the carpet installations than was called for under the carpet contract. On the trial judge's findings, to effect their wrongful scheme, the defendants falsified more than 1,000 invoices delivered to OCHC.
[74] The appellants do not challenge the quantum of the punitive damages awarded by the trial judge. Rather, they submit the trial judge erred by awarding any punitive damages at all. They say an award of this type was irrational, unwarranted and disproportionate in the circumstances of this case.
[75] I disagree. I see no error in the trial judge's approach to the question whether an award of punitive damages was warranted in this case, or in his application of the governing principles concerning such an award to the facts as he found them.
[76] The trial judge's reasons confirm that he was alert to the principles governing the decision to award punitive damages and the quantification of the proper amount of such an award. He expressly referred, at para. 92, to the Supreme Court's affirmation in Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 595, [2002] S.C.J. No. 19, 2002 SCC 18, at paras. [36-37] (citing Hill v. Church of Scientology of Toronto (1995), 1995 59 (SCC), 24 O.R. (3d) 865, [1995] 2 S.C.R. 1130, [1995] S.C.J. No. 64), that punitive damages are limited to "misconduct that represents a marked departure from ordinary standards of decent behaviour" and that such awards are intended to punish the defendant, rather than compensate a plaintiff. Further, the trial judge's reasons reveal he appreciated the distinction between compensatory and punitive damages, as well as the discrete objectives of the latter: punishment, deterrence and denunciation.
[77] The trial judge recognized, at paras. 94-95, that a punitive damages award must be "the product of reason and rationality" and proportionate in the circumstances: see Whiten, at paras. [108-26]. He held, at paras. 96 and 99-101:
I assess the defendants, individually and collectively, as bearing a high degree of blameworthiness for their fraudulent falsification of the amounts of carpeting installed at OCHC and the corresponding overcharging. It was an intentional scheme, covered up under false invoices, and carried out over a significant period[.]
An award of punitive damages must rationally relate to the amount fraudulently taken or the cost of the harm inflicted, without appearing to be a tariff or mere license fee, but without being overly punitive. [page557]
A punitive award should certainly deter Argos Carpets and any other trader from fraud in its trading transactions to the detriment of its trading partners. It should be borne in mind that not only did Argos Carpets specifically harm OCHC, its unreasonably low bids kept its competitors from trading with OCHC and injured competition in the marketplace as well. General deterrence, as well as specific deterrence, must be part of the dimensions of proportionality.
In regard to the fifth and sixth Whiten aspects of an award's proportionality, there is nothing in the evidence to suggest that beyond the bounds of this judgment there will be any other civil or criminal penalties inflicted on the defendants for their misconduct. I see the advantage gained by them through their misconduct as financial profit, on a significant scale, by virtue of conducting business on the basis of a competitive bidding process that the defendants abused.
[78] The trial judge concluded that punitive damages are justified in this case. In my opinion, on this record, his conclusion is unassailable. No request for the reassessment of the quantum of the trial judge's punitive damages award having been made, I would uphold the award, subject to the considerations next discussed.
[79] Two other issues arise concerning the trial judge's punitive damages ruling. First, the trial judge held all the defendants liable for punitive damages on a joint and several basis. With respect, the trial judge erred by awarding punitive damages on this basis. Punitive damages arise from the misconduct of the particular defendant against whom they are awarded. Joint and several responsibility for such an award therefore cannot be imposed: Hill, at para. [195]. See, also, in the context of Quebec civil law, Cinar Corp. v. Robinson, [2013] 3 S.C.R. 1168, [2013] S.C.J. No. 73, 2013 SCC 73, at paras. [120-32], in particular, at para. 127. Consequently, the trial judge's assignment of joint and several responsibility for the punitive damages he awarded cannot stand.
[80] In light of this conclusion, a second issue arises: how should liability for payment of the punitive damages awarded by the trial judge be allocated?
[81] During oral argument, OCHC took the position that, as between Foustanellas and ACL, Foustanellas should be fixed with liability for the full amount of the punitive damages award. The appellants did not object to this proposal, nor did they argue that the quantum of the award should be reduced on the ground the trial judge also held the estate liable for punitive damages.
[82] On the trial judge's findings, it is clear a high degree of moral blameworthiness attaches to Foustanellas for the serious fraudulent activity established by OCHC at trial. It is undisputed that Foustanellas is both the sole owner and the directing mind of ACL. For the purpose of the fraud against OCHC, no distinction [page558] need be drawn between the "acts" of ACL and those of Foustanellas. ACL was directed and controlled by Foustanellas. ACL was merely the conduit through which the fraudulent activities were channelled. In these circumstances, I agree with OCHC's submission that Foustanellas should remain liable for the punitive damages assessed by the trial judge.
[83] The trial judge's award of punitive damages as against the estate poses an additional difficulty, however. As mentioned earlier, the estate is not a party to this appeal. It has not challenged its liability for punitive damages or the other amounts awarded against it by the trial judge. Indeed, the court was informed that, apart from a brief attendance by counsel for the estate during the first two days of this 29-day trial, the estate did not participate at trial.
[84] None of the parties to this appeal raised the question whether an award of punitive damages may be made against the estate of a deceased individual for wrongful conduct of the deceased during his or her lifetime. In their factum, the appellants simply submitted: "[N]o retribution or deterrence will be achieved by an award of punitive damages as against [the estate]. The finding that [Grimes'] conduct amounted to a fraud is . . . adequate denunciation." Subsequently, during oral argument, the appellants reversed their position, without explanation, arguing that the estate must bear most of the responsibility for the punitive damages award, or at least as much as that borne by Foustanellas. OCHC said only that some percentage of the punitive damages award should be allocated to the estate. It did not suggest a particular percentage or a rationale for allocating the award as between Foustanellas and the estate.
[85] The question whether, under Ontario law, an award of punitive damages may be made against, rather than in favour of, a deceased's estate appears to be a matter of first impression for this court.3 Following the appeal hearing, the court invited further submissions from the parties on this question.
[86] In their supplementary submissions, the appellants argued that this court should hold that punitive damages cannot be awarded against the estate of a deceased person, as a matter of law. OCHC, relying on de Montigny v. Brossard (Succession), [2010] 3 S.C.R. 64, [2010] S.C.J. No. 51, 2010 SCC 51, which [page559] involved an award of punitive damages under the law of Quebec, maintained that punitive damages may and should be awarded against an estate where the award can be said to serve a rational purpose.
[87] Having considered the entirety of the parties' submissions, I conclude that it is unnecessary to resolve this important issue in this case. I say this for the following reasons.
[88] Punitive damages are intended to achieve the objectives of retribution (punishment), specific and general deterrence, and denunciation: Whiten, at para. [94]. I would reject the proposition that none of these objectives can be met by an award against the estate. General, as well as specific, deterrence is a relevant consideration in determining whether an award of punitive damages is rational, proportionate and warranted in a given case. It does not necessarily follow that the social utility of an award of punitive damages is defeated by the death of the wrongdoer: de Montigny, at para. [50].
[89] That said, in the circumstances of this case, I see no need to punish or deter the estate beneficiaries for Grimes' wrongful conduct when the objectives of punitive damages -- including general deterrence -- can readily be met by an award against Foustanellas. I again emphasize that Foustanellas was the driving force behind the fraudulent scheme. As the trial judge put it, at para. 84 of his reasons, he was "the boss" and "ruled the roost". I also take account of the appellants' own position on this issue, detailed in their original factum and in their supplementary submissions to this court, that no punitive damages should be awarded against the estate.
[90] In all these circumstances, it is my view the punitive damages award as against the estate should be set aside. For the reasons given, such an award is unnecessary and would serve no rational purpose that cannot otherwise be satisfied by maintaining the trial judge's award of punitive damages as against Foustanellas alone. I do not read OCHC's supplementary submissions as arguing vigorously to the contrary.
(6) Costs award
[91] On the disposition of this appeal that I propose, the appellants' challenge to the trial judgment fails in all respects. I note that, neither at trial nor before this court, did the estate seek relief from an adverse costs award. I therefore see no basis for appellate interference with the trial judge's ruling that OCHC is entitled to its costs of the trial as against all the defendants.
[92] That leaves only the question of the scale of costs awarded to OCHC. The appellants argue the trial judge erred by awarding [page560] costs in favour of OCHC on a full indemnity basis given that OCHC itself, as well as Argos, ignored many of the terms of the carpet contract.
[93] A reviewing court may interfere with a trial judge's discretionary costs award only where the award is plainly wrong, or based on an error of principle: Hamilton v. Open Window Bakery, [2004] 1 S.C.R. 303, [2003] S.C.J. No. 72, 2004 SCC 9. In my view, the appellants have failed to establish either basis for appellate intervention in this case.
[94] There is no doubt that the costs awarded by the trial judge for this lengthy trial ($630,475.47) are significant. However, the trial judge provided clear and detailed reasons for his costs disposition, including his ruling that full indemnity costs were warranted. In so doing, he considered the applicable principles regarding the awarding of elevated costs. He recognized such costs should be awarded only in limited circumstances involving "reprehensible" conduct: [ 2013 ONSC 5443, [2013] O.J. No. 3850 (S.C.J.)], at paras. 14-15. He noted, at para. 20, that the defendants engaged in a course of fraudulent conduct involving "inordinate and blatant wrong-doing"; that OCHC, the victim of the fraud, is a public housing corporation; and that ACL's success on its counterclaim, which OCHC conceded, was relatively minor. To this, I would add that the defendants' misconduct continued after the expiry of the original carpet contract. When renewal contracts were entered into and approved by Foustanellas, the delivery of falsified invoices to OCHC continued until OCHC discovered the fraud of its own accord.
[95] Having regard to these factors, it was open to the trial judge to award costs on the full indemnity scale. I see no reversible error in his discretionary ruling on this issue. His award is neither plainly wrong nor infected by an error of principle.
Disposition
[96] Accordingly, for the reasons given, I would set aside the trial judge's award of punitive damages as against ACL and the estate. In all other respects, I would dismiss the appeal.
[97] OCHC was successful on appeal in respect of all issues raised by the appellants. I would therefore award OCHC its costs of the appeal, fixed in the agreed total amount of $45,000, inclusive of disbursements and HST.
Appeal allowed in part.
Notes
1 Argos' bid formed the basis of four separate contracts between Argos and OCHC, each pertaining to one of four OCHC housing districts. The relevant terms of the contracts were identical. The contracts and associated renewal contracts are referred to in these reasons, collectively, as the "carpet contract".
2 I note that Foustanellas' own counsel argued that ACL was an undisclosed principal. Before trial, Foustanellas and Grimes moved to have OCHC's action dismissed as against them on the basis that ACL was an undisclosed principal and OCHC had already elected to sue ACL, thus relieving the appellants, as agents, of liability. The trial judge dismissed their motion: Ottawa Community Housing Corp. v. Foustanellas, [2010] O.J. No. 3366, 2010 ONSC 4370 (S.C.J.).
3 I do not read this court's decision in Plester v. Wawanesa Mutual Insurance Co., 2006 17918 (ON CA), [2006] O.J. No. 2139, 213 O.A.C. 241, 269 D.L.R. (4th) 624 (C.A.), leave to appeal to S.C.C. refused [2006] S.C.C.A. No. 315, as determinative of this issue.
End of Document