SUPERIOR COURT OF JUSTICE - ONTARIO

Court File No.: 12-53627
Date: July 16th, 2013

RE: 1414614 ONTARIO INC. et. al. , Plaintiffs

AND:

INTERNATIONAL CLOTHIERS INC., Defendants

BEFORE: MASTER MACLEOD

COUNSEL:
Jonathan M. Richardson, for the Plaintiffs

Jeffrey A. Kaufman , for the Defendants

Kelly Hart for the defendant added by counterclaim, Geoffrey L. Moore

HEARD: May 27th, 2013

ENDORSEMENT

[1] This litigation concerns early termination of a commercial lease. The parties are having issues with their documentary production which have given rise to these motions.

[2] In simplest terms, each party believes it should have greater access to the financial information of the other but resists disclosing its own. Given the nature of the litigation and the way in which the issues are defined by the pleadings, this difficulty should have been readily foreseen. The fact that the parties failed to put a protocol in place to deal with it represents a failure of discovery planning.

[3] The plaintiff is the landlord of a retail and office development known as the Ottawa Train Yards. The defendant is a manufacturer, importer and retailer of clothing and at one time occupied retail space in the shopping centre. The parties had entered into a 10 year lease of a unit measuring approximately 5,000 square feet. The store was apparently not very successful and, according to the pleadings, it lost money each month it remained in operation.

[4] The parties entered into three rental deferral agreements. By the terms of the agreements, the tenant paid only 50% of the minimum monthly rent which was then to be added to the rent and repaid in the second five years of the lease. The plaintiff also agreed to use its best efforts to find a replacement tenant for the space. In February of 2011 the tenant underpaid the rent but without the benefit of a deferral agreement and thus went into default. In January of 2012 the tenant abandoned the premises.

[5] The landlord has sued for the balance owing under the lease including the deferred rent. The tenant has defended and counterclaimed. It is the tenant’s position that the landlord failed to use its best efforts to find an alternative tenant and therefore failed in its duty to mitigate but also breached its agreement with the tenant. The defendant therefore seeks damages for losses incurred in continuing to operate its retail store when there should have been other tenants available to take over the space. The defendant has also added the rental agent as a party to the counterclaim.

[6] For purposes of this motion the litigation involves two central questions. Firstly, did the landlord use its best efforts to find a replacement tenant? Secondly, did the tenant suffer damages as a consequence of remaining in the space? This has given rise to the demands for further and better affidavits of documents including the specific disclosure argued on the motion.

[7] When the motion was launched the plaintiff landlord sought a number of items of disclosure or particulars from defendant tenant. Several of those demands have now been addressed by undertakings including an undertaking to deliver an expert report. In particular the tenant has now provided particulars and has agreed to provide the accounting ledger for the store in question. The latter will apparently show revenue and expenses for the location for the fiscal years ending January 31, 2010, 2011 and 2012.

[8] The tenant has agreed to produce this accounting ledger within 60 days but resists the demand for broader disclosure concerning the finances of International Clothiers as a whole. The plaintiff landlord however insists that it requires access to the financial statements for International Clothiers Inc. from August 8, 2007 to June 30, 2012. It seeks this information to understand comparative operating expenses and revenues from other stores operated by the defendant, the overall financial circumstances of the corporation, tax losses, carry forwards, allowances for depreciation, bad debts and the like. This is resisted and was the primary focus of argument.

[9] Similarly the tenant seeks broader disclosure from the landlord in aid of its allegation that the landlord did not use its best efforts to re-let the demised premises. In particular the tenant wants production of the rent rolls for the Ottawa Train Yards. This will show what other tenants took up space in the development during the time in question, the amount of space leased to those tenants and the rental rates. The tenant also seeks production of any lease entered into with any tenant for a similar amount of space during the time in question.

[10] I have no doubt that the information each party seeks from the other is commercially sensitive and can understand the reluctance to disclose it. I also have no doubt that production of the financial statements for International Clothiers Inc. as a whole or the entire rent roll for the Ottawa Train Yards will contain a great deal of information that is not relevant or probative. Neither confidentiality of information on the one hand nor the mere fact that sensitive and irrelevant information will be disclosed as a side effect of production on the other is valid basis for refusing to make required disclosure.

[11] On a simple test of relevance, the information sought by each party is relevant to the issues in dispute. The tenant may seek to treat the store in question as a watertight centre of profit or loss but it is not a stand alone corporate entity. It is International Clothiers Inc. which was the tenant and is the defendant and plaintiff by counterclaim. Its overall profit and loss as a corporation will be relevant.

[12] Similarly, given the theory of the tenant that the landlord did not vigorously pursue new tenants for the space and preferred to lease up other vacant space, the leasing history for the project will be relevant. The rental rolls are the most precise record of what was leased when, the amount of space leased by each tenant and the amount of rent collected. This information is relevant to the case as pleaded.

[13] Both parties have sworn affidavits in which they seek to provide subsets of the information sought by the other or to show why it would not be relevant. But neither party is required to accept that evidence at face value and they are certainly not required to accept the other party’s theory of the appropriate manner of calculating damages or proving or disproving liability.

[14] I therefore grant the motion brought by each party and I order each of them to make more complete disclosure to the other. In particular, the tenant is to produce its financial statements and the landlord is to produce its rent rolls. As I will come to in a moment, counsel are certainly encouraged to agree to narrower and modified disclosure but if they cannot agree they are to produce the complete and unredacted information in accordance with this order. As each party has therefore been successful on its own motion, it would not be appropriate to award costs. Counsel for the defendant added by counterclaim attended on the motion and supported the position of the landlord with respect to the tenant’s disclosure but did not file materials nor resist the motion by the tenant for disclosure by the landlord.

[15] Strictly speaking that disposes of the motions but it seems appropriate to give some further direction in an effort to head off further disputes that are readily foreseeable and also to provide guidance in similar cases.

[16] I observe that my order is neither finely focused nor precise because the motion was argued solely on the basis of relevance. There were no proposals before the court in respect of confidentiality orders, redactions or exclusions from the information sought by the other. There were no reports from experts stating what information the expert required access to and why. I did have the negative opinion letter from Mr. Macaulay stating that the landlord did not need access to the information Mr. Dent requested in his affidavit but that is not the kind of evidence I am talking about.

[17] There was also no evidence by which I could apply a proportionality analysis. This does not relieve the parties from doing so. In particular they have an ongoing obligation of consultation. Through that process counsel may agree on more limited or focused disclosure and it may be entirely appropriate to do so. Neither party benefits from over production because both parties must then incur costs in reviewing the documents and of course each will be seeking to recover those costs from the other in the eventual disposition of the litigation.

[18] These motions were originally at least motions about pre-discovery production. As always in these cases the parties were presented with a somewhat circular problem of whether to move for further production in advance of discovery or to proceed to discovery, cross examine on production and seek undertakings. A similar circular problem exists with expert reports. The parties can wait to see what expert reports are presented and what source data the expert reviewed and they can then obtain a report from their own experts stating what information the expert requires to challenge that opinion or to develop their own This is the traditional approach which almost guarantees expense, delay, motion activity and further rounds of discovery.

[19] Now we have Rule 29.1 and 29.2 which require the parties to engage in initial and ongoing discovery planning in which they are obligated to apply the test of proportionality. These planning rules were introduced along with a narrowing of the production and discovery obligation from “relating to” (the semblance of relevance test) to “relevant to” (the simple relevance test). The objective of these changes was not find ways to block access to relevant information but to require counsel to fully and frankly discuss the evidentiary needs of the case and to devise a focused and perhaps a staged plan for production and discovery.

[20] This obligation does not disappear just because the parties have obtained a ruling from the court. Rule 29.1.04 requires the discovery plan to be updated on an ongoing basis. Counsel are therefore directed to meet and confer within the next 30 days to attempt to negotiate a revised discovery plan.

[21] I am conscious of the fact that production of the financial statements and the rent rolls will only be tools to permit the parties to make further more specific production requests or to ask questions about those documents at discovery. Thus the production of these documents will result in production that is simultaneously overly broad but not sufficiently deep or detailed. Knowing this counsel may be able to avoid multiple steps if they can each make focused and targeted production requests. Indeed, because this case essentially involves competing accounting exercises, it might be very useful to involve their accounting experts directly in the planning meeting. If counsel were to meet with each other with their accounting experts they might perhaps be able to agree on the specific disclosure required for efficient discovery, mediation and trial preparation and avoid the need for further motions.

[22] Similarly it has been traditional to conduct discovery on the underlying facts (perhaps guided by experts) and only later to prepare and exchange expert reports. In my experience, counsel attempting to audit financial information through a discovery process in which they are inevitably asking questions of a person who may not have detailed knowledge of the source documents behind the high level financial information is a recipe for protracted discovery disputes. It may be far more efficient to give the accounting experts access to the source information they require and to exchange damage (and mitigation) calculations in advance of discoveries. These and other creative options may be far more useful than cataloguing documents in Schedules A and B to an affidavit of documents and then extracting further productions through undertakings at discovery.

[23] In summary, the court orders as follows:

a. Unless otherwise agreed each party is to provide an updated affidavit of documents within 60 days including all additional production the parties have agreed to in advance of the motion.

b. Unless otherwise agreed the additional production to be made by the plaintiff will include its rent rolls for the relevant period of time and the additional production to be made by the defendant will include its financial statements for the period in question.

c. Within 30 days, counsel are to meet and confer in a good faith effort to update the discovery plan and they are encouraged to involve their respective accounting experts in the planning process. The objective of this exercise should be agreement on streamlined efficient and targeted production and discovery and to minimize the need for further rounds of discovery or further court intervention.

d. The parties are also directed to agree on a schedule for exchange of expert reports. The parties are encouraged to consider exchange of expert reports in advance of discovery.

e. There will be no costs of these motions.

July 16, 2013

Master MacLeod