Court of Appeal for Ontario

Date: 2017-12-19 Docket: C63643

Judges: Strathy C.J.O., Juriansz and Huscroft JJ.A.

Between

Quest Management Services Inc. and Quest Management Systems Inc. Plaintiffs

and

Quest Management Systems, a division of 1281068 Ontario Inc. and Eileen Shewen Defendants (Respondents)

and

Peter Merrill Third Party (Appellant)

Counsel

David A. Schatzker, for the appellant

Bayo Odutola, for respondents

Heard

December 6, 2017

Appeal

On appeal from the order of Justice Kofi N. Barnes of the Superior Court of Justice, dated March 24, 2017, with reasons reported at 2017 ONSC 2537.

Reasons for Decision

[1] The motion judge awarded costs against Peter Merrill ("Merrill"), a non-party, the sole shareholder, president and director of Quest Management Systems Inc. ("Quest"), a plaintiff in this action. He did so because he found that the plaintiffs' action was an abuse of process and that Quest had provided a "fraudulent" undertaking to the court on its application for an interlocutory injunction.

[2] In relation to the abuse of process ground, he relied on his conclusion, in an earlier motion, that the application for an injunction was a fishing expedition, in order to cross-examine the defendants to see whether there were grounds for injunctive relief.

[3] He also relied on an order of another judge, on a motion under Rule 2.1.01, dismissing the action as frivolous, vexatious and an abuse of process. That motion was not opposed by the plaintiffs, no evidence was adduced, and no order was sought for costs against Merrill at the time.

[4] In relation to the "fraudulent" ground, the motion judge relied on an affidavit sworn by Merrill on behalf of Quest, on the application for an interlocutory injunction, giving the usual undertaking to damages on behalf of Quest. On the motion giving rise to this appeal, the respondents had filed evidence, consisting of Quest's tax returns for the years ending December 31, 2013 and 2014. They argued that the tax returns demonstrated that Quest did not have sufficient assets to honour the undertaking. There was no other pertinent material filed on the motion.

[5] The motion judge found that the evidence established that Merrill was the sole shareholder and president of Quest, that Quest had suffered losses of approximately $36,000 in 2013 and $25,000 in 2012, had negative shareholder equity for the three years 2012-2014 and had assets of less than $800.

[6] He found that the undertaking given by Merrill on behalf of Quest was a fraudulent misrepresentation as to Quest's means to satisfy a damage award and justified an award of costs against Merrill personally in order to prevent the administration of justice from being brought into disrepute.

[7] The motion was argued on October 20, 2016, prior to the release of this court's decision in 1318847 Ontario Limited v. Laval Tool & Mould Ltd., 2017 ONCA 184, 134 O.R. (3d) 641, on March 3, 2017. It does not appear that Laval Tool came to the attention of the motion judge before he released his reasons in this matter.

[8] There was no evidence before the motion judge to establish that Merrill engaged in an abuse of process in commencing the action. There was no basis to award costs against Merrill simply because he was the president and sole shareholder of Quest.

[9] Nor did the evidence in relation to the undertaking rise to the very high level of establishing that the undertaking itself was "fraudulent". The motion for an injunction was dismissed. The undertaking was never called upon. It was never demonstrated that the plaintiffs could not honour the undertaking if called upon to do so.

[10] This court's observations at para. 77 of Laval Tool are apposite. Costs may be ordered against a non-party principal of a corporation in exceptional circumstances (including fraud or gross misconduct in the instigation or conduct of litigation) if the principal commits an abuse of process. But costs should not be awarded simply because the principal directed the operations of the corporation. There was no evidence in this case of the requisite "exceptional circumstances", and the motion judge erred in principle in awarding costs against the appellant.

[11] For these reasons, the appeal is allowed and the order of the motion judge is set aside, as is the order with respect to costs of the motion. The costs of this appeal are fixed at $5,000, inclusive of disbursements and all applicable taxes, payable by the respondents.

"G.R. Strathy C.J.O."

"R.G. Juriansz J.A."

"Grant Huscroft J.A."