ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 05-21137
DATE: 2012/01/25
BETWEEN:
HAMILTON HEALTH SCIENCES CORPORATION
Plaintiff
– and –
RESOURCE ENVIRONMENTAL ASSOCIATES LIMITED, TOTAL ENVIRONMENTAL SERVICES CONTRACTING LTD., WATERBOROUGH GROUP LIMITED, JOHN MURPHY, SANDRA MURPHY, ALEX SAFRONSKY, VINCENT GERMANESE, 926215 ONTARIO INC., DENNIS MOFFETT, ROBERT WILLIAM MACGREGOR, SAFETY EXPRESS LTD., GLOBAL ENCASEMENT INC. AND GEORGE KEEFE
Defendants
Ross Earnshaw, for the Plaintiff
Donald E. Crabbe, for the Defendants, Waterborough Group Limited, Sandra Murphy, Alex Safronsky, Vincent Germanese, Global Encasement Inc.
Michael M. Buccioni, for the Defendant, Safety Express Ltd.
HEARD: September 16, 2010
HEARD: December 9, 2011
RULING ON A MOTION TO STRIKE PURSUANT TO RULE 21.01(1)
WHITTEN, J.
[ 1 ] Donald Crabbe, counsel for the defendants, Waterborough Group Limited, Sandra Murphy, Alex Safronsky, Vincent Germanese, Global Encasement Inc. and George Keefe, has moved pursuant to Rule 21.01(1)(b) of the Rules of Procedure to determine questions of law and strike out certain portion of the plaintiff’s statement of Claim. Mr. Michael Buccioni for the defendant, Safety Express, joins in the relief sought.
[ 2 ] The focus of this application is on various allegations of participation in a “civil conspiracy” by the above defendants, in which they allegedly both breached contractual and fiduciary duties owed to the plaintiff. The application is approached by:
Describing the scope of Rule 21.01(1)(b) which invariably leads to a consideration of the power of a court to consider the possibility of allowing amendments pursuant to Rule 26.01,
isolating the elements of the tort of civil conspiracy in order to have a backdrop to the evaluation of the pleadings in question, and
Setting out the nature of the misappropriation of funds embued with trust, and finally
The application of what is distilled in (1) (2) and (3) to the pleadings in question.
RULE 21.01(1)
[ 3 ] Rule 21.01(1)(b) allows a party to move “to strike out a pleading on the ground it discloses no reasonable cause of action. (Emphasis mine). As Borins, J. A. stated in Dawson v. Rexcraft Storage and Warehouse Inc . 1998 4831 (ON CA) , [1998] O.J. No.3240 (O.C.A.) “The essence of the defendant’s motion is that the wrong described in the Statement of Claim is not recognized as a violation of the plaintiff’s legal rights, with the result that the court would be unable to grant a remedy, even if the plaintiff proved all the facts alleged. Thus to permit the plaintiff to litigate the claim through discovery and trial would be a waste of both the parties and court’s time.” (ref. Para 8).
[ 4 ] Therefore, according to His Honour, the motions judge considers whether a claim is “legally sufficient” or “substantially adequate”. In this exercise the Judge; assumes the allegations as proven unless they are patently ridiculous or incapable of proof. Takes a generous approach to the Statement of Claim as a whole, construing in the most favourable fashion for the plaintiff, and determines whether it is “plain and obvious” that the plaintiff will not be successful. It should be noted that the threshold for sustaining a pleading is not high. (Ibid, para 9) Ref. Williams v. Canada (A. G.) 2009 ONCA 378 () , [2009] O.J. No. 1819, Hunt v. Carey Inc. 1990 90 (SCC) , [1990] 2 S.C.R. 959. MacKinnon v. Ontario Municipal Employees Retirement Board 2007 ONCA 874 () , [2007] O.J. No. 4860 (Gillese J.A.)
[ 5 ] In Hunt v. Carey , Justice Wilson explained how the “plain and obvious test” would not exclude novel or complex factual or legal scenarios. Her Honour spoke of the certainty of an action failing “because it contains a radical defect.” (ref. para 27).
[ 6 ] A radical defect would be the absence of a necessary element of a recognized cause of action. This is a lacking that will not be remedied by allegations based on assumptions and speculation. Ref. Deep v. Ontario [2004] O.J. No. 2734 (S.C.J. affirmed [2005] O.J. No. 1294 (O.C.A.) .
RULE 26 AMENDMENTS OF PLEADINGS
[ 7 ] This rule sets out the general powers of a court to allow amendments to pleadings. There may be terms imposed to maintain fairness. That power will not be exercised if there would be non-compensateable prejudice to the other side. Equally so, amendments will not be allowed if it is clearly impossible that the claim would succeed. The threshold to be met by the party moving for the right to amend is the absence of prejudice and that costs or an adjournment would adequately compensate the responding party.
THE TORT OF CIVIL CONSPIRACY
[ 8 ] Justice Estey in Canada Cement LaFarge Ltd. v. B.C. Lightweight Aggregate Total 1983 23 (SCC) , [1983] 1 S.C.R. 452 defined the two means by which this tort could be committed.
(1) Whether the means used by the defendants are lawful or unlawful, the predominant purpose of the defendant’s conduct is to cause injury to the plaintiff, or
(2) Where the conduct of the defendants is unlawful, the conduct is directed towards the plaintiff (alone or together with others) and the defendants should know in the circumstances that injury to the plaintiff is likely to and does result.”
[ 9 ] Justice Estey proceeded to note that in situation (2) “It is not necessary that the predominant purpose be to cause injury to the plaintiff but in the prevailing circumstances it must be a constructive intent derived from the fact that the defendants should have known that injury to the plaintiff would ensue. In both situations, however, there must be actual damage suffered by the plaintiff.” (ref. p.174)
[ 10 ] A rephrasing of the elements of the second means (oft referred to as the unlawful conduct conspiracy) was made by Goudge J. A. in Agribrands Purina Canada Inc. v. Kasamekas [2011] ONCA 460. Justice Goudge enumerated the following as essential elements:
“(a) they act in combination, that is, in concert by arrangement or with a common design;
(b) the conduct is unlawful;
(c) the conduct is directed towards the respondents,
(d) the appellant should know that in the circumstances injury to the respondents is likely to result and
(e) their conduct causes injury to the respondents.”
[ 11 ] Having established the necessary elements; how does that translate out into an actual pleading? In Robinson v Medtronic Inc. 2009 56746 (ON SC) , [2009] O.J. No. 4366 Perell, J. Of the Superior Court surveyed the case law in which the pleadings were attacked.
[ 12 ] With the predominant purpose conspiracy,
(1) the conspirators have to be identified;
(2) the nature of the predominant purpose is set out,
(3) the acts in furtherance of the agreement are described and
(4) the fact of the injury to the plaintiff is established.
[ 13 ] Similarly, with the unlawful conduct conspiracy,
(1) the conspirators are identified,
(2) the unlawful acts are described
(3) The knowledge or imputed knowledge as to the likelihood of injury to the plaintiff is set out and
(4) the result of the conspirator’s acting in accordance with their unlawful act, being harm to the plaintiff, is stated.
[ 14 ] Obviously, not every commercial transaction which somehow injures a party would constitute a form of civil conspiracy. Parties are entitled to advance their own economic interests. Ref. Moldaver, J. A. (as he then was) in Harris v. Glaxo Smith Kline Inc . 2010 ONCA 872 () , [2010] O.J. No. 5546.
[ 15 ] What may appear suspicious, and have a particular odour, may not necessarily be proof of either form of a conspiracy.
THE MISAPPROPRIATION OF FUNDS EMBUED WITH A TRUST
[ 16 ] This heading initially used in this judgment is more succinctly referred to as “knowing receipt”. This concept basically requires that “strangers” or third parties in the sense of those outside of a base commercial transaction receive funds which are derived from that event in circumstances such as that one of the original contractors would be entitled to have an interest in those funds. In a way the funds become tainted by the latter entitlement. This is what writers such as S. Gardiner in “Knowing Assistance and Knowing Receipt. Taking Stock” (1996) 112 L.Q.R. 56 describe as leading to a “restitutionary liability.”
[ 17 ] In Citadel General Assurance Co. v. Lloyds Bank of Canada [1999] 3 S.C.R.C. 805, Justice LaForest distinguishes between “knowing assistance cases” and “knowing receipt”. The latter being “concerned with the receipt of trust property for one’s own benefit.” A lower standard of knowledge is required of the recipient, who is enriched at the plaintiff’s expense. Consequently, constructive knowledge suffices as a basis of restitutionary liability. That knowledge establishes the “unjust” or “unjustified” nature of the recipient’s enrichment. This sense of “unjustness” is not a product of morality “but flows directly from the finding that there was a breach of a legally recognized duty for which the courts will grant relief.” Relief flows if the recipient of such funds knows of facts that objectively would require that he or she should have enquired as to the possible misappropriation of trust property. It is this failure to face this necessity that causes the enrichment to be “unjust”. (ref. Ibid, p. 48 to 49).
[ 18 ] So, again, from a pleading point of view, the pleader would have to set out:
(1) Receipt of funds for enrichment by a “stranger/Third Party”;
(2) That the funds are subject to a trust in favour of another in the sense of an entitlement on the part of that other entity; and
(3) The recipient is or should be aware, given what he or she knows, that the origin of the funds received merits an inquiry on their part as to this possible entitlement referred to in (2), and
(4) The “stranger” failed to enquire and was enriched.
ANALYSIS
[ 19 ] The “conspiracy” advanced in the Statement of claim against the various defendants, is based on allegations of breach of contract and financial duties owed to the plaintiff by John Murphy (Murphy) as an Officer and controlling shareholder in Resource Environmental Associated Limited (REA) and Total Environmental Services Contracting Ltd. (TOTAL). Of the two corporations, the former is described as providing consulting services on environmental issues and the latter provides environmental remediation services. Murphy had provided consulting services to the plaintiff hospital on environmental issues and projects. He provided these services through the corporation REA. Murphy is also a Director and has a controlling interest in Waterborough Group Limited.
[ 20 ] An issue arose with respect to the encasement of asbestos at various locations in the hospital. Basically what is alleged is that Murphy, through a variety of companies, manipulated/inflated the price of the encasement products such that the plaintiff paid more or would pay more than it would normally. It is suggested that companies controlled or used by Murphy each received a “slice” or share of the mark up of the encasement product. REA, Murphy’s company was the consultant to the plaintiff and the project manager during the encasement exercise.
[ 21 ] Waterborough Group Limited (Waterborough), Safety Express Ltd., Global Encasement Inc. (GLOBAL) are all companies who distributed products used to encase asbestos.
[ 22 ] Sandra Murphy is the spouse of Murphy and a director of REA. Safronsky is an employee of REA and a director of TOTAL. Keefe is a principal of GLOBAL.
[ 23 ] The plaintiff pleads that Murphy and REA have both contractual fiduciary duties to the plaintiff. There was a contract between the plaintiff and TOTAL.
[ 24 ] The contract between the plaintiff and REA to encase the asbestos was assigned to TOTAL, a company incorporated by Murphy.
[ 25 ] GLOBAL, an American company produced the encasement product. Waterborough had the exclusive Canadian distribution rights of this product. TOTAL recommended this product. Waterborough, it is alleged, sold the product to be used in the project at a mark up (which would have probably happened whoever owned GLOBAL - that is fairly standard commercial practice). The mark up is the “rub”. This is the loss the plaintiff alleges it experienced and is a breach of the contractual and financial duties of Murphy and originally REA.
[ 26 ] The plaintiffs allege that Sandra Murphy by virtue of her being married to Murphy, and Safronsky and Germanese by virtue of their employment and directorship are all participants in the “conspiracy”. It is alleged that all the defendants should have known any mark up would be a breach of the contractual and fiduciary responsibilities of Murphy, REA, and TOTAL. This is all stated without any reference to what they actually did, i.e., steps in furtherance of the conspiracy. Also what is the “predominant purpose” or “unlawful conduct”. Certainly no suggestion is pled that whatever agreement existed was with the intention of causing harm to the plaintiff or was unlawful conduct.
[ 27 ] The allegation with respect to Safety Express is that Waterborough sold Safety the product it distributed in Canada for GLOBAL and Safety, in turn, sold it to TOTAL. At each step there was a mark up. There is absolutely no suggestion of there being any connection between Safety and any of the other defendants. It is rather broadly pled that Safety should have known that Murphy was up to no good.
[ 28 ] All in all, the pleadings of civil conspiracy are deficient of the essential elements of either species of civil conspiracy. The pleadings amount to speculation and theorizing that because some of the parties were related, directed each other or worked with each other, that they were participants in a conspiracy with respect to mark ups which, as mentioned above, are far from rare in the marketplace. The Plaintiff hospital is understandably angry with Murphy, REA and TOTAL as to paying more than what was out there pricewise, but there is a dearth of facts pled to establish a concerted effort sufficient to constitute a “conspiracy”.
[ 29 ] The same comments can be made with respect to the allegations of “knowing receipt”. There is no suggestion that Safety, for example, had the knowledge or should have had the knowledge to make enquiries as to the nature of the payment for its product. The others, if they knew of the relationship between the plaintiff and Murphy and his companies would they necessarily have thought they should have enquired about the payments made for their product? Hardly. At the risk of repetition, a mark up between various handlers of products is not an inherently suspicious activity.
[ 30 ] These questions are all posed without addressing the absence of any substantial allegations that would justify an inference of trust in whatever money the hospital paid.
CONCLUSION
[ 31 ] For all of the above, the court finds the Statement of Claim lacking in pleading the essential elements of civil conspiracy or “knowingly received” on the part of the moving defendants. Accordingly, those elements of the Statement of Claim are struck. Having said that, the association between the parties represented by Mr. Crabbe are mildly suspicious and there is an element of the smell of a “fast one”.
[ 32 ] An amendment at this stage of the proceeding is possible without prejudice to the right of the moving defendants, such that their waste of time and resources to this point could be compensated by the imposition of costs. Therefore the plaintiff shall have 30 days to amend its pleadings to address the deficiencies referred to above if it desires.
[ 33 ] The defendant shall have 30 days from the receipt of the amended Statement of Claim to serve and file any responding pleadings (if desired).
[ 34 ] The pleadings against Safety Express are singularly deficient. The case of civil conspiracy or knowing receipt appears to be impossible to plead or succeed against this defendant. Accordingly, the claim against this defendant is struck in its entirety without leave to amend.
[ 35 ] As to costs, if counsel cannot agree as to the quantum and level, cost submissions of not more than six pages, independent of the bill of Costs are to be exchanged within 60 days and submitted to the court by the 75 th day from the receipt of this judgment.
WHITTEN, J.
Date: January 25, 2012
COURT FILE NO.: 05-21137
DATE: 2012/01/25
ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: HAMILTON HEALTH SCIENCES CORPORATION Plaintiff – and – RESOURCE ENVIRONMENTAL ASSOCIATES LIMITED, TOTAL ENVIRONMENTAL SERVICES CONTRACTING LTD., WATERBOROUGH GROUP LIMITED, JOHN MURPHY, SANDRA MURPHY, ALEX SAFRONSKY, VINCENT GERMANESE, 926215 ONTARIO INC., DENNIS MOFFETT, ROBERT WILLIAM MACGREGOR, SAFETY EXPRESS LTD., GLOBAL ENCASEMENT INC. AND GEORGE KEEFE Defendants RULING ON A MOTION TO STRIKE PURSUANT TO RULE 21.01(1) WHITTEN J. ACRW:ad
Released: January 25, 2012