Court File and Parties

COURT FILE NO.: CV-08-7749-00CL DATE: 20131120

SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST

RE: Klaus-Peter König, Plaintiff AND: Antoin Hobza, John Douglas Laine, Kim H. Dobson, John Anthony Chisholm and also known as Jack Chisholm, TJK Enterprises Limited and 1669051 Nova Scotia Limited, Defendants

BEFORE: L.A. Pattillo J.

COUNSEL: R. Flom and R. Trifts, for the Plaintiff S. E. Batner and B. Gray, for the Defendants

Costs ENDORSEMENT

Introduction

[1] On May 10, 2013, I released reasons for judgment awarding the plaintiff, Klaus-Peter König (“König”) damages of $250,000 plus pre-judgment interest in accordance with the Courts of Justice Act (the “Act”) in respect of his oppression claim against the Defendants Antoin Hobza, John Douglas Laine, Kim H. Dobson and 1669051 Nova Scotia Limited (“East West”)(collectively the “Defendants”). I dismissed the balance of König’s claims against the Defendants and his action against the defendants John Anthony Chisholm (“Chisholm”) and TJK Enterprises Limited (“TJK”) in its entirety.

[2] At the conclusion of my reasons, I encouraged the parties to discuss and agree on costs. Unfortunately that has not happened and I have now received detailed submissions from both König and the Defendants.

[3] König was successful in his claim and is entitled to his costs of the action against Hobza, Laine, Dobson and East West. No claim for costs has been made on behalf of Chisholm and TJK nor should there be. All Defendants were represented by the same counsel and König’s claims against those Defendants would not have given rise to any increased costs in respect of their defence. Further, Chisholm took no part in the trial.

[4] König claims prejudgment interest of $65,499 and costs on a substantial indemnity basis in the total amount of $552,139.26, including taxes. In the alternative, König seeks partial indemnity costs totaling $440,760.15, including taxes. König also seeks the return of monies paid into court by East West on his behalf as security for costs pursuant to the Order of Morawetz J. dated October 28, 2009.

[5] The Defendants submit that, having regard to my reasons for judgment, König has not exceeded their offer to settle delivered nine days before trial and accordingly, pursuant to Rule 49, König is only entitled to partial indemnity costs to the date of their offer and they are entitled to partial indemnity costs thereafter which they claim totals $127,616.56 including taxes. They further submit that when their partial indemnity costs are netted against König’s, they are only required to pay him costs of $36,969.62. In the event their offer is not applicable, the Defendants submit that König should only be entitled to partial indemnity costs which at the most should be no more than $150,000 inclusive of disbursements and taxes. Finally, the Defendants submit that the monies in court as security for König’s costs should remain in court pending determination of their appeal from my judgment.

Prejudgment Interest

[6] König claims prejudgment interest of $65,499 based on a calculation prepared by Steve Ranot at Marmer Penner Inc. Mr. Ranot presented König’s damage claim at trial. The calculation applies an annual interest rate to the cumulative total in each year of the excess/deficit of excess compensation, after tax, for each year from 1993 to 2007. For the period from 2008 to May 13, 2013, the annual interest rate is applied to the total excess compensation received by the Defendants, after tax. The interest rate, which appears to be the average of the interest rate for the four quarters in each year, varies from 6.125% in 1993 to 4.575% in 2007 and 1.300% in 2012 and 2013. Mr. Ranot then multiplies the total accumulated prejudgment interest ($534,684) by 12.25%, König’s share percentage in East West to notionally arrive at his share of the prejudgment interest which is $65,499.

[7] In my view, Mr. Ranot’s approach to the calculation of prejudgment interest is not appropriate and I decline to follow it. I awarded prejudgment interest in accordance with the Act. Section 128 (1) of the Act provides, in part, that prejudgment interest is calculated “from the date the cause of action arose to the date of the order.” The oppression in this case did not arise in 1993. It arose as a result of the cumulative effect of the excess compensation the Defendants received from 1993 to 2007 and their conduct towards König in relation thereto. It is therefore not appropriate to calculate prejudgment interest for each of the years in question. In my view, the cause of action arose in March 2007 when König was provided with a breakdown of the Managing Directors remuneration for the entire period. That disclosure was when König first obtained knowledge of the total compensation the Defendants had received in each year during the period from 1993 to 2007.

[8] The prejudgment interest rate is determined based on when the action is commenced (s. 127(1) of the Act). It is not a different rate for each year as Mr. Ranot has applied it. König’s action was commenced by statement of claim dated September 25, 2008. The applicable pre-judgment interest rate at that date is 3.3% per annum. Accordingly, from the end of March 2007 to May 10, 2013, the date of my judgment, there are 2,203 days (two leap years). At 3.3% per annum, the award of $250,000 generates $8,250 per year in interest or $22.60 a day. For 2,203 days, the amount of prejudgment interest is $49,793.83.

Scale of Costs

[9] Substantial indemnity costs (formerly solicitor and client costs) are not awarded unless there is some form of “reprehensible, scandalous or outrageous conduct” on the part of the party against whom costs are to be assessed. See: Davies v. Clarington (Municipality) (2009), 100 O.R. (3d) 66, 2009 ONCA 722 (C.A.) and cases referred to therein.

[10] König relies on Arthur v. Signum Communications Limited et al., [1991] O.J. No. 86 in support of his submission that he is entitled to substantial indemnity costs. In Signum, Austin J., as he then was, stated that a finding of oppression, by definition, “almost always provides some foundation for an award of costs above and beyond the party and party scale.”

[11] Subsequent cases have noted and I agree that Signum does not establish that solicitor and client costs (now substantial indemnity) will automatically follow a finding of oppression.

[12] The oppression remedy applicable in this case is set out in s. 5 of Schedule 3 of the Companies Act, R.S.N.S., 1989, c.81, as amended. It requires conduct that is oppressive, unfairly prejudices or unfairly disregards the interests of the claimant. As noted in my reasons for judgment (para. 104), the prohibited conduct encompasses a wide range of conduct extending from abusive behavior at one end to unfair conduct at the other. As was pointed out by Rutherford J. in Harmer v. McNeely Engineering Consultants Ltd., [1997] O.J. No. 4886 (S.C.J.) at para. 9, oppression remedy cases do not attract substantial indemnity costs in every case. Rather, the oppressive conduct must reach the level of conduct required to attract the higher cost sanction.

[13] In reaching my decision that the Defendants conduct in awarding themselves excess compensation during the period 1993 to 2007, coupled with their conduct towards König was oppressive and unfairly prejudicial, I found that there was a pattern of non-disclosure and wrong information provided by East West and Hobza to König from the beginning of their relationship (para. 87 and following). While I found that beginning in 1993, East West failed to provide König with proper financial information to be able to determine what the Defendants’ compensation was, I was not prepared to find on the evidence that the Defendants deliberately withheld such information in the mid-1990’s. That was not the case, however, beginning in 2005. The Defendants were aware that König was concerned about their compensation. Beginning with Hobza’s angry response in early 2005 to König’s December 23, 2004 email that stated the Defendants’ compensation “is not your business!”, the Defendants and particularly Hobza, along with East West’s lawyer McDonald, deliberately took steps to prevent König from receiving information about their salaries. This included providing misinformation. As I said (paragraph 96), Hobza and East West through their lawyer were “circling the wagons.”

[14] In my view, the Defendants’ conduct towards König in protecting their compensation when viewed in light of his involvement with East West from the beginning and the amount of the excess compensation they received was egregious. I consider that it was both outrageous and reprehensible. Rather than set their salaries in a fair way and either retain any excess monies in East West or dividend it out to all the shareholders, they improperly paid it to themselves. As I noted, because they were also shareholders of East West, the excess compensation was effectively a dividend they paid to themselves to the exclusion of König who was also a shareholder. When König raised the issue, rather than deal with it, they refused to address it. They forced König to retain legal counsel and ultimately start an action to recover from them monies that they improperly received.

[15] While it was mainly Hobza and East West’s lawyer, McDonald, who dealt with König, given the way in which the Defendants ran East West, there is no question that the other Defendants knew exactly what was happening and either agreed or acquiesced in such conduct.

[16] Although substantial indemnity costs are to be awarded only in cases where the opposite party’s conduct is egregious, as I have said, in my view the Defendants’ conduct towards König in relation to their compensation reached that level. It is sufficient to justify an award of substantial indemnity costs in this case. König is therefore entitled to his costs of the action on a substantial indemnity basis, subject to consideration of the Defendants’ offer to settle.

Offers To Settle

[17] In the period leading up to the commencement of the trial on Monday June 4, 2012, the Defendants made three offers to settle, the last two in accordance with Rule 49. On each occasion König responded with a counter-offer. None of the offers were accepted. König did not achieve a judgment “as favourable or more favourable” than the terms of his offer.

[18] The Defendants’ last offer was made on Saturday, May 26, 2012, and provided, among other things, that the Defendants would pay König $300,000 inclusive of interest plus partial indemnity costs and disbursements to be agreed or assessed (the “Offer”). The Offer remained open until one minute after the commencement of the trial.

[19] The Defendants submit that König obtained a judgment “as favourable or less favourable” than the terms of the Offer (Rule 49.10(2)) and accordingly, he is only entitled to partial indemnity costs to the date of the Offer and they are entitled to partial indemnity costs thereafter. In the alternative, in the event that the timing of the Offer or the amount awarded in the judgment may not be as favourable or less favourable than the Offer, it is so close to the judgment that the court should exercise its discretion pursuant to Rule 49.13 to give effect to the cost consequences of Rule 49.

[20] König submits that that the Offer does not engage the costs consequences of Rule 49. Although it was served nine calendar days before trial, in accordance with computation of time provisions in the Rules, it was actually served four days before trial.

[21] In my view, the Offer does not fail based on short service. The requirement in Rule 49.10 that the offer be served at least seven days before commencement of the hearing is there to ensure that the receiving party has sufficient time to properly consider it. Given the earlier offers which were exchanged and the actual days between service of the Offer and the commencement of the trial, König had more than enough time to properly consider the Offer before the trial started.

[22] The amount of the judgment ($250,000) and prejudgment interest as I have determined it ($49,793.83) together total less than the Offer amount of $300,000. But that does not, in itself, resolve the issue of whether Rule 49.10(2) applies. In comparing the terms of an offer to the terms of a judgment, all of the terms of the offer must be considered, including the provision for costs: Rooney (Litigation Guardian of) v. Graham (2001), 53 O.R. (3d) 685 (C.A.).

[23] While König obtained a monetary amount for damages and prejudgment interest which was less than $300,000, the Offer provided for partial indemnity costs to the date of its acceptance. As I have found, however, König is entitled to substantial indemnity costs of the action. The Defendants’ conduct which gives rise to the higher cost award occurred prior to the commencement of the action and therefore the higher cost scale should have been included as part of the Offer. Given the Offer was made on the eve of trial, the difference between partial indemnity and substantial indemnity costs was significant from a monetary perspective. In my view, therefore, the judgment was more favourable than the Offer and accordingly, the Defendants cannot rely on the cost consequences of Rule 49.

Quantum

[24] As noted at the outset, König’s Bill of Costs claims substantial indemnity costs totaling $552,139.26, made up of fees of $257,020, counsel fee of $140,000, disbursements of $103,082.43 and $52,036.83 in taxes.

[25] It is clear from König’s Bill of Costs that the substantial indemnity costs claimed are derived from the actual rates charged by König’s counsel during the course of the litigation. Substantial indemnity costs are not full indemnity costs (see: Rule 57.01(4)). Substantial indemnity costs are defined in Rule 1.03 as “costs awarded in an amount that is 1.5 times what would otherwise be awarded in accordance with Part I of Tariff A”. Part I of the Tariff provides in the main that fees shall be determined in accordance with section 131 of the Act and the factors set out in Rule 57.01(1).

[26] Nor does an award of substantial indemnity costs grant a blank cheque for all of the costs incurred by a party in an action. The costs, although awarded on the higher scale, must still be fair and reasonable having regard to the factors set out in rule 57.01(1).

[27] I intend to approach the assessment of König’s substantial indemnity costs by first determining his partial indemnity costs in accordance with Rule 57.01(1) and the principal set out in Boucher v. Public Accountants Council for the Province of Ontario (2004), 71 O.R. (3d) 291 (C.A.) and then multiplying the partial indemnity costs by 1.5. See: Hanis v. University of Western Ontario, [2006] O.J. No. 2763 (S.C.J.) at para. 46; 680195 Ontario Ltd. (c.o.b. Stoneybrook Auto Service) v. 2169728 Ontario Ltd., [2010] O.J. No. 3072 (S.C.J.) at paras. 8 to 10.

[28] König claims partial indemnity fees of $440,760.15, made up of fees of $186,455, counsel fee of $112,000, disbursements of $103,082.43 and $39,223.38 for taxes. The Defendants submit König should be awarded at the most $150,000 in partial indemnity costs.

[29] In support of their position, the Defendants submit that the costs claimed by König are “grossly excessive.” They submit that the amount claimed is disproportionate to the amount recovered; the time spent by König’s counsel was excessive; the partial indemnity rate for Mr. Trifts is too high based on his years at the bar and his actual hourly rate; the counsel fees for trial are excessive and the file was not staffed in a cost effective manner. The Defendants also submit that over $30,000 of the disbursements claimed were unnecessary. The Defendants have calculated König’s partial indemnity costs in accordance with their submissions. On that basis, they submit König’s partial indemnity costs should be $277,216.11, made up of fees (including counsel fees) of $189,117.50, taxes of $20,571.68 and disbursements of $67,526.93, including taxes.

[30] In order to arrive at their position that König should be awarded at the most $150,000, the Defendants further submit that König’s costs claim should be reduced because his refusal to settle the action before trial amounted to “unreasonable conduct” and the issues raised by König during the trial lengthened the time of trial by 50%. I do not agree. First, I do not consider König’s refusal to accept the Defendants’ offer to have been unreasonable such that it should give rise to a reduction in his costs. The cost consequences of offers to settle are determined by Rule 49. I am also of the view that the fact König was unsuccessful in some of his claims does not affect his entitlement to costs. Chisholm and TJK (a shareholder of East West) were necessary parties and as I noted in the judgment, König’s action was first and foremost an oppression action in which he was successful. The balance of the claims, which were dismissed, sought similar relief and in my view did not unduly lengthen the trial.

[31] I agree, however, with the Defendants submission that the time spent for trial preparation including legal research and books of authority, preparation of a joint book of documents and reviewing the Defendants book of authorities which totals more than 290 hours is excessive having regard to the issues in the action and the amount in issue. I also have difficulty with the counsel fees claimed. As the Defendants point out, the counsel fees sought for both counsel at trial total $8,000 a day. That amount is in excess of their full indemnity rates for an eight-hour day. I also agree that the hourly rate claimed for Mr. Trifts is too high having regard to his years at the bar and his actual hourly rate. The appropriate partial indemnity hourly rate for Mr. Trifts should be $250 an hour prior to the pre-trial and $275 thereafter.

[32] The Defendants submit that Mr. Flom should have delegated many of the administrative tasks to Mr. Trifts who was involved in the action from the outset and who had a lesser hourly rate. While perhaps some of the tasks could have been delegated, items such as dealing with the experts and preparing the witnesses could not. Mr. Flom was lead counsel. I also recognize that Mr. Flom is a sole practitioner and it is not always as easy or practicable to delegate administrative tasks as it may be in a large firm.

[33] Having regard to the above comments, and taking into account the issues in the action and the amount recovered, it is my view that König’s partial indemnity costs, including taxes, should be assessed at $230,000.

[34] König claims $103,506.66 in disbursements, including taxes. The Defendants take issue with the amount of $25,738.78 for the expert on Nova Scotia law, $2,064.17 for Mr. Dube’s supplementary report which was not admitted at trial and $2,704.76 for work done by a Nova Scotia firm for which no report was ever served. I agree that these costs are not recoverable. The expert on Nova Scotia law prepared a detailed report dealing with the law but ended up mainly testifying about the prejudgment interest rate. In my view, his evidence was not necessary particularly in relation to the oppression remedy given the Nova Scotia statute is identical to both the Canada Business Corporations Act and the Ontario Business Corporations Act. Nor should the Defendants have to pay for Mr. Dube’s supplementary report or the other Nova Scotia law firm’s account. Mr. Dube never testified in respect of his supplementary report and there was never any report served from the Nova Scotia firm. I was provided with no indication as to why they were retained and what they did.

[35] Multiplying $230,000 by 1.5 equals $345,000. To account for the fact the taxes portion would not increase by a factor of 1.5, I reduce the $345,000 by $5,000 to arrive at substantial indemnity fees, inclusive of taxes of $340,000. To that must be added disbursements of $73,000 for a total of $413,000 in substantial indemnity costs. In my view, an award of substantial indemnity costs of $413,000 is fair and reasonable having regard to the factors set out in Rule 57.01(1) and, given the Defendants’ assessments of König’s partial indemnity costs, cannot be said to be beyond their reasonable expectations.

Security for Costs

[36] By order dated October 28, 2009, Morawetz J. required that the monies remaining to be paid to König on account of the sale of East West’s assets totaling $101,094.59 be paid into court by East West as security for the Defendants costs of the action. König requests that the monies plus accumulated interest be paid out to him or as he may direct. The Defendants submit that such an order should not be made at this time as they have appealed the judgment and the money should continue to stand as security for their costs in the event they are successful on appeal.

[37] König was successful at trial and entitled to costs from the Defendants. Accordingly König is entitled to have his money paid as security for the Defendants costs of the trial returned to him. Any order for security for costs in respect of an appeal should be made by a judge of the Court of Appeal. As a result, the Accountant is directed to pay out to König or to whoever he may direct, the monies deposited on his behalf with the court pursuant to Morawetz J.’s October 28, 2009 order plus any accumulated interest thereon, 15 days from the date of these reasons. If the Defendants are so inclined, they can seek an order for security for costs in the interim from the Court of Appeal.

Conclusion

[38] For the reasons set out herein, König is entitled to prejudgment interest in the amount of $49,793.83 and substantial indemnity costs of the action in the amount of $413,000 inclusive of disbursements and taxes. In addition, König is entitled, 15 days from today’s date, in the absence of any further order to the contrary, to payment out of court of the monies paid in on his behalf as security for costs of the trial in accordance with the order of Morawetz J. dated October 28, 2009.

L. A. Pattillo J.

Released: November 20, 2013