CITATION: The Hearing Clinic (Niagara Falls) Inc. et. al. v. 866073 Ontario Limited et. al. 2016 ONSC 4509
DIVISIONAL COURT FILE NO: DC-15-679
DATE: 20160802
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
GORDON R.S.J., THEN AND FREGEAU JJ.
BETWEEN:
THE HEARING CLINIC (NIAGARA FALLS) INC.
Appellant
– and –
STEFAN FRIDRIKSSON and CAROL KLASSEN
Co-Appellants
– and –
866073 ONTARIO LIMITED, TERRY LEWIS and DEE LEWIS
Respondents
Malte von Anrep, Kristi J. Collins and Civita M. Gauley, counsel for the Appellant and Co-Appellants.
Valerie A. Edwards, Nicholas F. Ferguson and Harry Korosis, counsel for the Respondents.
HEARD: May 30 and 31, 2016
R. D. GORDON, R.S.J.
Overview
[1] The Appellant, the Hearing Clinic (Niagara Falls) Inc., (the “Hearing Clinic”) purchased an audiology practice from the Respondent 866073 Ontario Limited of which the Respondents Terry Lewis and Dee Lewis are the directors and officers. Following completion of the sale, the Appellants sued the Respondents for Breach of Contract and Fraudulent Misrepresentation.
[2] The trial of the Appellant’s claim took 72 days over three years. The trial judge issued his decision on October 7, 2014 and awarded the Appellants $432.20 in damages for five breaches of contract. The trial judge dismissed the claims of fraudulent misrepresentation. In a subsequent decision he ordered the payment of costs of $1,001,094 against the Appellants Stefan Fridriksson and Carol Klassen who were not parties to the main action.
[3] The Appellants appeal the trial judge’s decisions on three grounds: (1) That there was a reasonable apprehension of bias on the part of the trial judge; (2) That the trial judge erred in failing to find liability and assess damages for certain claims; and (3) That the trial judge erred in ordering non-parties to pay costs.
[4] The Appellants ask that the trial judgment and costs order be set aside and that a new trial be ordered. Alternatively, they seek an order granting judgment in favour of the Hearing Clinic for $329,256 and that the costs order be set aside.
Jurisdiction
[5] This court’s jurisdiction to hear the appeal related to the trial decision of the trial judge is found in Section 19 of the Courts of Justice Act. It provides that an appeal lies to the Divisional Court from a final order of a Superior Court of Justice for a single payment of not more than $50,000 exclusive of costs.
[6] In relation to the costs appeal, the Divisional Court’s jurisdiction is established by section 133(b) of the Courts of Justice Act and Rule 61.03(7) of the Rules of Civil Procedure. Leave to appeal is required and was not contested by the Respondents.
Standard of Review
[7] In Housen v. Nikolaisen, 2002 SCC 33, 2002] 2 S.C.R. 235, the Supreme Court of Canada set out the following standards of review applicable to appeals from judges’ orders:
For questions of law the standard of review is correctness;
For questions of fact the standard of review is palpable and overriding error (in part because a trial judge is in a privileged position to assess a witness’s credibility);
For questions of mixed fact and law the standard of review runs on a spectrum. Where there is an extricable legal principle the standard of review is correctness. However, the standard of review is palpable and overriding error with respect to applying the correct legal principles to the evidence.
[8] With respect to costs an appellate court should interfere with a costs order only if the judge awarding the costs made an error in principle or the award was plainly wrong [see Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, [2004] 1 S.C.R. 303].
The Issue of Reasonable Apprehension of Bias
[9] The Ontario Court of Appeal provided the following concise summary of the law pertaining to reasonable apprehension of bias in the case of Marchand (Litigation Guardian of) v. Public General Hospital Society of Chatham, 2000 16946 (ON CA), [2000] O.J. No. 4428:
Courts should be held to the highest standards of impartiality.
Impartiality reflects a state of mind in which the judge is disinterested in the outcome and is open to persuasion by the evidence and submissions. In contrast, bias reflects a state of mind that is closed or predisposed to a particular result on material issues.
Fairness and impartiality must be both subjectively present and objectively demonstrated to the informed and reasonable observer. If the words or actions of the presiding judge give rise to a reasonable apprehension of bias to the informed and reasonable observer, this will render the trial unfair.
The test for bias contains a twofold objective standard: the person considering the alleged bias must be reasonable and informed; and the apprehension of bias must itself be reasonable.
The party alleging bias has the onus of proving it on the balance of probabilities.
Prejudgment of the merits, prejudgment of credibility, excessive and one-sided interventions with counsel or in the examination of witnesses and reasons themselves may show bias. The court must decide whether the relevant considerations taken together give rise to a reasonable apprehension of bias.
The threshold for a finding of actual or apprehended bias is high. Courts presume that judges will carry out their oath of office. Thus, to make out an allegation of judicial bias requires cogent evidence. Suspicion is not enough. The threshold is high because a finding of bias calls into question not just the personal integrity of the judge but the integrity of the entire administration of justice.
Nonetheless, if the judge’s words or conduct give rise to a reasonable apprehension of bias, it colours the entire trial and cannot be cured by the correctness of the subsequent decision. Therefore, on appeal, a finding of actual or apprehended bias will ordinarily result in a new trial.
[10] That judges enjoy a presumption of impartiality was confirmed by the Supreme Court of Canada in Wewaykum Indian Bank v. Canada 2003 SCC 45, [2003] 2 S.C.R. 259.
[11] The Appellants pointed to four main factors in support of their position: (1) The trial judge’s interjections and independent questioning of Mr. Fridriksson during the trial; (2) a heightened evidentiary burden placed upon on the Appellants that he did not place upon the Respondents when weighing credibility and assessing the evidence; (3) reasons for decision that were excessively sarcastic and contemptuous of Mr. Fridriksson; and (4) the trial judge’s significant order of costs against Mr. Fridriksson and Ms. Klassen, who were not parties to the litigation. It was the position of the Appellants that a consideration of all of these factors together give rise to a reasonable apprehension of bias.
[12] We would concede that these factors, viewed in isolation, raise some cause for concern. However, the proper assessment of bias requires consideration not just of those factors and circumstances of concern to the Appellants but of all the circumstances surrounding the trial. It requires an understanding that judges, as they hear testimony from witnesses, cannot help but form initial impressions about the veracity of that testimony and that to do so is perfectly acceptable. What is unacceptable is to allow those initial impressions to predispose the judge to a particular result before all of the evidence is heard. The trial judge is obliged to keep an open mind.
Interventions of the Trial Judge
[13] The Appellants cited seven interventions by the judge they felt were inappropriate. This, over a trial that spanned 72 days.
[14] In our view, neither the number nor the content of these interventions provide any significant evidence of bias, particularly when we consider that the trial judge made similar interventions during the evidence of the Respondent Dee Lewis. His interventions denote an understandable frustration and exasperation with the parties rather than any bias towards them.
Heightened Evidentiary Burden
[15] The Appellants argued that the trial judge treated the parties’ evidence differently when weighing credibility thereby tainting his findings.
[16] A trial judge is entitled to accept all, some or none of the testimony of a given witness and is expected to explain why. This does not mean that he or she is expected to recite every alleged frailty in the evidence of each witness.
[17] A fair reading of the trial decision reveals that the trial judge subjected the evidence of all parties to significant scrutiny. There was not a witness whose evidence he accepted without reservation. In each instance in which he made a finding of credibility there was an explanation given.
[18] There is nothing in the way he analyzed the credibility of the parties that leads to an apprehension of bias.
The Reasons for Judgment
[19] In our view many of the terms used by the judge to describe Mr. Fridriksson were inappropriate and ill-advised. There is nothing untoward about finding a litigant to be wholly unbelievable or to have fabricated evidence, indeed it is a judge’s duty to make such findings when they are warranted. However, that duty should not be taken as a license to insult and belittle a litigant.
[20] That said, it is our view that the colourful language used by the trial judge in this instance does not reflect bias against Mr. Fridriksson. What it reflects is the trial judge’s strong finding with respect to credibility based upon all of the evidence adduced at trial. In this regard it is worth noting that Mr. Fridriksson was not the sole target of the trial judge’s remarks and that he made similarly cutting comments about the Respondent Ms. Lewis.
The Costs Award
[21] That the trial judge ordered costs against Mr. Fridriksson and Ms. Klassen personally is not indicative of bias. It is indicative of his view, made after a full and complete trial and having received lengthy submissions on the issue, that their conduct both in bringing the action and the manner in which it was conducted, warranted the censure of the court. It in no way indicates a state of mind closed or predisposed to the result reached at trial.
[22] One issue with respect to costs that does cause us some concern is the letter of November 20, 2014 authored by the trial judge’s secretary and addressed to counsel. It reads in part as follows: “Justice Quinn has been looking forward to the issue in subsection X.b. ever since Mr. Fridriksson jousted with Mr. Korosis on who was the tenant at 6800 Morrison, insisting that it was he and his wife and not the corporation (see para. [151] of Reasons).” Subsection X.b. was a proposal by the Respondents to make submissions for the assessment of personal costs against Mr. Fridriksson and Ms. Klassen. There were several pieces of correspondence between the office of the trial judge and counsel on the issue of costs. Most were authored by the secretary but were clearly completed on the instruction of the trial judge. There is no reason to believe any differently with respect to this letter.
[23] On its face, this letter indicates that the trial judge was looking forward to the argument with respect to personal costs against the Appellants from a point in time when Mr. Fridriksson had not yet finished testifying. From this one might reasonably perceive that he had closed his mind to the plaintiff’s case before all of the evidence had been lead. However, this is but one factor for consideration.
Other Factors
[24] The theory of the Appellants is that because of a personal dislike or animus towards Mr. Fridriksson, the trial judge was unable to be impartial. However, there are several indicators in the trial that his impartiality continued unabated.
[25] To begin with, after Mr. Fridriksson had completed his evidence the Appellant sought and obtained an amendment to the statement of claim to plead an additional fraudulent misrepresentation. When addressing the issue of costs relative to that issue, the trial judge awarded costs to the Respondent of $30,000, all-inclusive, and payable forthwith. However, he ordered that the costs be held in trust by either law firm pending completion of the trial and then paid to the defendants, set off or returned to the plaintiff, depending on the final judgment. The in-trust requirement reflected the fact that fraud was being alleged against the defendants and that, if proved, it would be inappropriate to have the costs order stand. This indicates that even after Mr. Fridriksson left the witness box, the trial judge had an open mind concerning the Appellant’s allegations of fraud.
[26] Secondly, the trial judge made several findings in favour of the Appellant based upon the evidence of other witnesses called at trial. For example, on the issue of Dee Lewis’s knowledge that a former employee had and was using a patient list of the clinic, he accepted the evidence of the Appellant’s witness Ginette Galati over that of Dee Lewis even though Ms. Galati’s evidence had been effectively impeached on another issue.
[27] Thirdly, the trial judge made positive observations about other witnesses called by the Appellants and accepted their testimony either in whole or in part. For example, he referred to Ms. Galati as a “likeable and believable witness” and the accountant Mr. Bowley as a “decent and honourable man”.
[28] Fourthly, the trial judge made certain findings of fact in favour of the Appellants and upon which he found the Respondents to have been in breach of contract.
Conclusion
[29] A consideration of the entire record leaves us of the view that, notwithstanding the letter of November 20, 2014, the trial judge kept an open mind in his determination of the parties’ dispute and that a reasonable and informed person would not have a reasonable apprehension of bias on his part.
Findings of Liability and Assessment of Damages
[30] The Appellants raised three main issues of concern with respect to the trial judge’s findings of liability and assessment of damages: (1) That he failed to consider the Respondent’s knowledge of and failure to advise of an ex-employee’s retention of a patient list in the context of a breach of contract (the Patient List Issue); (2) He erred in dismissing evidence regarding the Respondent’s failure to operate the business in the ordinary course (The Ordinary Course Issue); and (3) He erred in failing to find liability and assess damages for inflated earnings (The Inflated Earnings Issue).
The Patient List Issue
[31] The trial judge made findings of fact that Donna Bradley and Linda Fraser improperly possessed a list of a least some of the patients of the Hearing Clinic, that Donna Bradley was soliciting the business of those patients and that Terry and Dee Lewis were aware of this at least two months before the closing of the sale to the Appellants. He found the Respondents to be in breach of their duty to disclose this information and that they intended the Appellants to act on that non-disclosure. However, the trial judge was satisfied on all of the evidence that the Appellants would have purchased the business for the same price in any event and that reliance was not proved. In addition, he found there was no evidence of damages having been sustained due to Ms. Bradley possessing a list of patients or her solicitation of them.
[32] The Appellants argued on appeal that although the trial judge’s reasoning on the tort of fraudulent misrepresentation may have been correct, he failed to adequately address those same impugned activities in the context of breach of contract of which reliance is not an essential element. They further argued that there was some evidence from which a measure of damages could be made and the trial judge erred by failing to assess their damages based on this evidence.
[33] We agree in part. We agree that the trial judge did not adequately address the Respondent’s liability in the context of breach of contract. His narrow focus on the applicability of the specific wording of paragraph 9 of the Statement of Claim ignored paragraph 10 of the Claim which states, in part: “…in the Agreement the Defendants represented that no one else possessed a client list. It subsequently discovered that two prior employees of the clinic have possession of the patient list and are contacting patients as they became eligible for services from the Workers Safety Insurance Board and the Ontario Adaptive Devices Program causing economic losses to the Plaintiff in an amount to be determined.”
[34] Paragraph 9(xi) of the Agreement of Purchase and Sale contained a representation by the Vendor that since December 31, 2005 it had not become aware of any event which was likely to result in a material change in the operation, activities or earning of the business or its relationships with its patients. The Vendor’s knowledge that an ex-employee was in possession of a patient list and was soliciting patients would surely fall within this provision.
[35] The cause of action was pleaded, the representation was in the agreement of purchase and sale and a factual finding was made that the representation had been breached. Accordingly, we agree with the Appellants that the corporate Respondent was liable for damages for this breach of contract.
[36] However, we are also of the view that the trial judge was correct in his determination that there was no evidence upon which he could establish damages. The only evidence the Appellants can point to in support of a damages award is a letter authored by Raymond Slattery and filed as an exhibit at trial. Mr. Slattery was counsel for Ellesmere Hearing Centre Ltd. Ellesmere Hearing Centre Ltd. was the competing hearing clinic joined by Donna Bradley following her departure from the Respondent. The letter was given in answer to an undertaking made during discoveries in an action between the Appellant and Ellesmere Hearing Centre Ltd. that was subsequently consolidated with these proceedings and then settled. The letter says: “Please find attached a copy of a list of clients that our clients have identified as having previously been clients of the Lewis clinic.” The list sets out 179 names.
[37] Quite aside from the issue of the admissibility of this letter for the purposes of establishing the truth of its contents, it does little to advance the quantification of damages in light of the other evidence (and lack of evidence) on this point at trial. Specifically, Mr. Fridriksson admitted in cross examination that Ms. Bradley had advertised widely after leaving The Hearing Clinic and that many of her former patients may have contacted her because they liked her, were familiar with her, were comfortable with her and had a longstanding relationship with her. The trial judge was left with no means of determining who, of the 179 names, had left due to improper solicitation by Ms. Bradley and who had sought her out in response to her advertisements. Furthermore, the evidence at trial established that sales by the Appellant post-closing met the pre-closing projections of the Appellant’s accountant that were the basis upon which the business was purchased. Finally, there was no evidence before the court of the value of a patient. Even had it been established that there was a decrease in patients due to Ms. Bradley’s solicitation activities, and even if the precise number of patients that were lost could be determined, there was no evidence led by which to determine what loss resulted to the Appellant.
The Ordinary Course Issue
[38] The Appellant argued that the trial judge failed to consider and apply the evidence in support of its claims that the Respondents failed to operate the business in the ordinary course between the date of signing the purchase agreement and the date of the closing. The claims were basically two: First, that the Respondents had, in the eight days prior to closing, billed WSIB for work yet to be performed (work that would essentially be done by the Appellants post-closing); and second, that the Respondents allowed Ms. Bradley to charge for services relating to the prescription of hearing aids without the supervision of an audiologist, thereby skewing the financial information upon which the Appellants based the purchase price.
[39] In our view the trial judge properly considered and dismissed these claims. The issue of billings to WSIB (for which there was a counterclaim by the Respondents as well) was disposed of by the joint waiver of these claims communicated by counsel to the court during trial.
[40] With respect to Ms. Bradley’s involvement in the prescription of hearing aids without the supervision of an audiologist, the trial judge found that he was unable to make a determination of whether she acted outside the bounds of her profession without expert evidence from either the governing body or some other source. He was entitled to make that finding. In any event there was again no evidence before the court upon which damages as a result of the alleged breach could be assessed.
The Inflated Earnings Issue
[41] The Appellants argued that the trial judge erred in failing to consider that the Appellant relied on earnings calculations provided by the Respondents that were misrepresented because they failed to include deductions for management reimbursement and thereby overstated the profitability of the Hearing Clinic.
[42] In our view, the trial judge specifically considered this issue and was correct when he found (based upon Mr. Fridriksson’s own testimony) that the Appellants did not rely on the earnings calculations provided by the Respondents, had in fact relied upon income forecasts prepared by his own accountant, and then met or exceeded those very income forecasts upon which he had relied. As the trial judge indicated in paragraph 640 of his reasons: “The total sales for the Niagara Falls Clinic in 2005 (the last full year of operation by the defendants) were $910,021. In 2007, the first full year of operation by the Plaintiff, the sales totaled $930,687. Does anyone see a winnable law suit in those numbers?”
Conclusion
[43] There is no basis to interfere with the final determination of damages owing to the Appellants.
The Award of Costs Against the Non-Parties
[44] In a strongly-worded and persuasive costs decision, the trial judge held the personal Appellants jointly and severally responsible for payment of costs in excess of $1 million.
[45] At the hearing of this appeal, the Respondents made a similarly persuasive argument that the court not only has inherent jurisdiction to award costs against a third party where there has been a fraud upon the court, but a responsibility to do so. They repeated the comment of the trial judge: “If not now, when?” and outlined a body of jurisprudence in British Columbia culminating in a statement by the British Columbia Court of Appeal that the court does have jurisdiction to order costs against a non-party but that such an award is unusual and exceptional and should only be made in special circumstances such as where the non-party has engaged in fraudulent conduct, an abuse of process or gross misconduct in the commencement and/or conduct of the litigation, or when the non-party is the “real litigant” [see Perez v. Galambos (c.o.b. Galambos & Co.) 2008 BCCA 382, [2008] B.C.J. 1845].
[46] We have two difficulties with the decision of the trial judge.
[47] The first is that the Ontario Court of Appeal in the case of Rockwell Developments Ltd. v. Newtonbrook Plaza Ltd. 1972 531 (ON CA), [1972] 3 O.R. 199 held that the predecessor to section 131.(1) of the Courts of Justice Act, R.S.O. 1990 C. 43, s. 131(1) , which was couched in near identical terms, allowed the Court to determine only by which of the parties to the proceeding costs should be paid, and that the Court does not have jurisdiction to order a non-party to pay costs in a proceeding except in cases where a man of straw is put forward by those actually litigating in an effort to avoid costs.
[48] This principle was restated by the Court of Appeal in Television Real Estate Ltd. v. Rogers Cable T.V. Ltd., 1997 999 (ON CA), [1997] O.J. 1944, when it cited Rockwell for the proposition that the phrase “by whom…costs shall be paid” has been judicially interpreted to mean “by which of the parties to the proceedings before the court or judge” and that the only exception arises when it is established to the satisfaction of the court that: (1) the non-party had status to bring the action themselves; (2) the named plaintiff was not the true plaintiff and (3) the named plaintiff was a “man of straw” put forward to protect the non-parties and insulate them from an adverse costs award.
[49] In Television Real Estate, the judge who awarded costs against the non-parties in the first instance found that they had caused their corporation to proceed with litigation “based upon a manufactured version of events in disregard of the hard facts, and motivated only by anger…”. Notwithstanding this, the Court of Appeal commented as follows:
I appreciate that trial judges can become frustrated by having to preside over lengthy trials which ultimately turn out to have little substance to them. But, on the other hand, this case could not be resolved without a trial because the principals had an unshakeable, if unfounded, belief that the corporation that they controlled and that was their business vehicle had been cheated. The fact that their outrage blinded their judgment cost them as well as the corporate defendant.
[50] The second difficulty we have is that even if we were prepared to ignore these clear statements from our Court of Appeal, there is a real issue of whether the conduct of the Appellants in this case rose to the level of misconduct required for the imposition of costs against a non-party. Although lying under oath and fabricating notes to shore up one’s evidence is clearly deserving of censure, this was not an action conceived in bad faith or based on fictitious circumstances. That there was at least some merit to the Appellant’s claim is evidenced by the trial judge’s findings of five breaches of contract, and our finding of yet another. Indeed, with proper evidence of damages the recovery of the Appellants may have been much more than nominal. We question whether an action in which the Plaintiff meets with some success can fall into those unusual and exceptional circumstances in which third party costs might be ordered.
[51] In our view, it was not open for the trial judge to confine the application of Rockwell to its facts. It is a case that has informed the arena of non-party costs in Ontario for over 40 years and was, in conjunction with Television Real Estate, a binding statement of the law by our Court of Appeal. Accordingly, we grant this aspect of the appeal and order that the costs award be binding only as against the Corporate Appellant.
Conclusion
[52] The appeal of the judgment of the trial judge is dismissed. The appeal of the costs order of the trial judge is allowed to the extent that the costs shall be payable by the Hearing Clinic and not Mr. Fridriksson and Ms. Klassen personally.
[53] In the event the parties are unable to agree on the costs of the appeal they shall make written submissions on the following terms: (a) The Appellants shall deliver their written submissions, limited to five pages plus attachments, within 45 days. (b) The Respondents shall deliver their written submissions, limited to five pages plus attachment, within 30
days thereafter. (c) The Appellants shall deliver their reply submissions limited to two pages within 15 days thereafter.
Mr. Justice R. D. Gordon, R.S.J.
Mr. Justice E. F. Then
Mr. Justice J. S. Fregeau
Released: August 2, 2016
CITATION: The Hearing Clinic (Niagara Falls) Inc. et. al. v. 866073 Ontario Limited et. al. 2016 ONSC 4509
DIVISIONAL COURT FILE NO: DC-15-679
DATE: 20160802
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
GORDON R.S.J., THEN AND FREGEAU JJ.
BETWEEN:
THE HEARING CLINIC (NIAGARA FALLS) INC.
Appellant
– and –
STEFAN FRIDRIKSSON and CAROL KLASSEN
Co-Appellants
– and –
866073 ONTARIO LIMITED, TERRY LEWIS and DEE LEWIS
Respondents
REASONS FOR JUDGMENT
Released: August 2, 2016