NEWMARKET COURT FILE NO.: CV-13-114819-00

DATE: 20140328

ONTARIO
SUPERIOR COURT OF JUSTICE

BETWEEN:

Dean’s Standard Inc.
Plaintiff

– and –

Francois Hachem, Phoenik Group Inc., Westmont Hospitality Canada Limited, Innvest Real Estate Investment Trust and Choice Hotels Canada Inc.

Defendants

Douglas Christie, for the Plaintiff/Responding Party

James D. Bunting and Kristin J. Jeffery, for the Defendants/Moving Parties, Westmont Hospitality Canada Limited, Innvest Real Estate Investment Trust and Choice Hotels Canada Inc.

HEARD: February 21, 2014

REASONS FOR DECISION

DOUGLAS J.:

[1] The defendants, Westmont Hospitality Canada Limited, Innvest Real Estate Investment Trust and Choice Hotels Canada Inc. (hereinafter “Westmont”, “Innvest” and “Choice” respectively, or “the moving parties” collectively), move for:

(a) An order striking out and dismissing all, or alternatively, part of the plaintiff’s claims against the moving parties as disclosing no reasonable cause of action; and if unsuccessful in this regard,

(b) An order that the plaintiff provide security for costs of the moving parties in an amount to be determined.

Striking the Claim

[2] The moving parties’ position is summarized as follows:

(a) Westmont is a former customer of the plaintiff and does not owe the plaintiff any particular or special duty at law. The moving parties have been sued because Westmont retained a former business associate of the plaintiff to provide contractor services to them. It would be a substantial impediment to commerce if customers were not free to choose the services they wished to pay for. The moving parties have done no wrong to the plaintiff. The plaintiff’s complaint lies with its former business associate, Francois Hachem.

(b) A statement of claim in this action and response to particulars delivered by the plaintiff are unclear, leaving the moving parties guessing as to the basis for the claims made against them.

(c) The claim pleads relationships among the parties as follows:

(i) Beginning around 2006, Hachem worked at Dean’s Standard as its vice president of operations and senior project manager. In or about December 2011, Hachem left Dean’s Standard to engage in work on his own;

(ii) Westmont and Choice are private corporations carrying on business in the construction and operations of public inns, hotels and motels in Ontario and throughout Ontario. Innvest is an unincorporated real estate investment trust;

(iii) Dean’s Standard had been approached regarding the refurbishing of Comfort Inns properties. Dean’s Standard was asked to prepare mock-ups of three rooms, a lobby and breakfast room for Comfort Inn locations;

(iv) Hachem returned to Dean’s Standard seeking employment. Hachem was engaged as an independent contractor and made the project manager for the project with Comfort Inns;

(v) Subsequently, Hachem’s construction company secured contracts for work at certain Comfort Inn locations. The plaintiff alleges that Hachem secured these contracts through deceit and fraud. The plaintiff also claims Hachem owed, and breached fiduciary duties to the plaintiff and usurped a corporate opportunity belonging to the plaintiff; and,

(d) The claim seeks $20,000,000 in damages against Hachem, Hachem’s Company, Phoenik Group Inc., and the moving parties. The claim does not disclose the specific cause or causes of action alleged to give rise to the claim for damages against the moving parties. The claim treats the moving parties as a single entity on the basis that the moving parties carrying on business in partnership, even though it is clear on the face of the pleading that they are not operating a partnership business.

(e) The moving parties sought particulars and the plaintiff provided limited detail in response, excluding identification of the cause or causes of action upon which the claim for $20,000,000 in general damages is asserted against the moving parties.

(f) Pursuant to Rule 21.01(1)(b) of the Rules of Civil Procedure, the moving parties seek an order striking out the pleading, or portions of the pleading, on the basis that it discloses no reasonable cause of action.

(g) The moving parties assert that the claim fails to plead the material facts and essential elements for any possible relevant torts, including conversion, inducing breach of contract, deceit, fraud and knowing assistance.

(h) The moving parties further assert that the plaintiff is a service provider to the moving parties; that is, the moving parties are the customer. The customer is entitled to decide to whom it will sent its work. The customer is free to choose a service provider. Thus the claim does not disclose a recognized or reasonable cause of action.

(i) The moving parties further assert that if the statement of claim does disclose a reasonable cause of action, it does so in a materially deficient way by lumping all three moving parties together, even though they are three distinct entities, leaving the moving parties guessing as to the cause of action against them.

[3] The plaintiff (responding party) submits that the motion should be dismissed with costs for the following reasons:

(a) The statement of claim pleads sufficient facts and allegations to constitute a proper and appropriate pleading in accordance with Rule 25 of the Rules of Civil Procedure; and,

(b) Given the reliance by the moving parties on Rule 56.01 (security for costs), they have failed to make the prima facie evidentiary requirement to put the plaintiff to the proof of its financial means as the evidence tendered by the defendants is speculative, hearsay and insufficient to justify the relief sought in this aspect of the motion.

[4] The plaintiff’s position is summarized as follows:

(a) The plaintiff is a private Ontario corporation carrying on business as a designer and installer of furnishings and fixtures for commercial innkeepers throughout Canada;

(b) No evidence is admissible to address the issue of the adequacy of the statement of claim as pleaded;

(c) The moving parties have failed to provide particulars of the impugned paragraphs and the legal reasons for attacking them;

(d) The plaintiff is not obliged to plead and state any cause of action in its pleading. It merely has to adduce sufficient facts to support a cause of action recognized at law. The plaintiff has done so; and,

(e) In the event the court finds in favour of the moving parties on this motion, the plaintiff seeks leave to amend any particular paragraph.

[5] On a motion to strike the allegations are deemed to be true.

[6] The plaintiff has portrayed the moving parties, essentially as a “dupe”. Up to paragraph 26 of the statement of claim there is no cause of action disclosed against the moving parties.

[7] The statement of claim pleads all of the essential elements of the tort of “knowing assistance”. This was supplemented by paragraph 8 of the response to demand for particulars.

[8] It is not necessary to plead the specific cause of action, so long as the required elements are pleaded.

[9] The response to demand for particulars, at paragraph 4, referred to the tort of “inducing breach of contract” as cause of action.

Analysis

[10] Rule 21.01(1)(b) of the Rules provides that the court may strike out a pleading if, assuming that the facts as stated in the statement of claim are true, it is “plain and obvious” that the pleading discloses no reasonable cause of action. (See Louch v. Lagace [2009] OJ No. 3147 (S.C.J.)). A statement of claim may be defective because it has failed to allege the necessary elements of a claim that, if properly pleaded, would constitute a reasonable cause of action.

[11] In order to survive a motion to strike on the basis of failure to plead the necessary legal elements, a claim must, at minimum, plead the basic elements of a recognized cause of action pursuant to which an entitlement to damages is claimed. Vague allegations that make it impossible for an opposing party to reply should be struck. The court is permitted to strike out less than the entire pleading where the portion being struck is distinct. Pleadings must contain material facts. Rule 25.06 provides that every pleading must contain a concise statement of the material facts on which the party relies for the claim or defence. A party must plead all of the facts that it must prove to establish a cause of action that is legally complete. A pleading that shows a complete absence of material facts is considered frivolous and vexatious. Bare allegations should be struck as scandalous. (See Aristocrat Restaurants Ltd. v. Ontario, [2003] O.J. No. 5331 (S.C.J.)).

[12] A pleading is deficient where such completely fails to set out which of the defendants is or are alleged to have been involved in what aspects of the conduct that the plaintiff says constitutes the alleged tort. (See Aristocrat).

[13] The principles governing pleadings may be summarized as follows:

(a) The purpose of pleadings is to give notice of a case to be met, to define the matters in issue for the parties and for the court, and to provide a permanent record of the issues raised;

(b) The causes of action must be clearly identifiable from the facts pleaded and must be supported by facts that are material;

(c) Every pleading must contain a concise statement of the material facts on which the parties relies, but not the evidence by which those facts are to be proved; this includes pleading the material facts necessary to support the causes of action alleged;

(d) A party is entitled to plead any fact that is relevant to the issues or that can reasonably affect the determination of the issues, but it may not plead irrelevant, immaterial or argumentative facts or facts that are inserted only for colour;

(e) Allegations that are made only for the purpose of colour or to cast a party in a bad light, or that are bare allegations, are scandalous and will be struck;

(f) The court may strike part of a pleading, with or without leave to amend, on the grounds that it may prejudice or delay the trial of an action, it is scandalous, frivolous or vexatious, or it is an abuse of the process of the court;

(g) On a motion to strike under Rule 21.01(1) on the ground that it discloses no cause of action, it must be shown that it is plain, obvious and beyond doubt that the claim cannot succeed and the pleading must be read generously; allegations of fact, unless plainly ridiculous or incapable of proof, must be accepted as proven;

(h) Any fact that can affect the determination of rights between the parties can be pleaded, but the court will not permit facts to be alleged that are immaterial or irrelevant to the issues in the action; and,

(i) Allegations of fraud, misrepresentation, negligence and conspiracy must be pleaded with particularity. (See Cerqueira v. Ontario 2010 ONSC 3954, [2010] O.J. No. 3037 (S.C.J.)).

[14] There is nothing in the Rules which requires a claim to specifically identify a cause of action; rather, the law requires, as indicated above, that a pleading contain a concise statement of the material facts on which the party relies for the claim or defence, but not the evidence by which those facts are to be proved.

[15] Paragraph 29 of the statement of claim specifically identifies the tort of “knowing assistance” as against the moving parties in relation to breaches of fiduciary duty and misappropriation and conversion of the plaintiff’s property. Paragraph 29 further identifies the cause of action of inducing breach of contract (albeit in respect of “implied terms”). Paragraph 30 further identifies the cause of action as: “unlawful misappropriation and conversion of [the plaintiff’s] corporate opportunities, deceipt, fraud and breach of fiduciary duty.”

[16] Rule 25.06(8) of the Rules of Civil Procedure provides as follows:

Where fraud, misrepresentation, breach of trust, malice or intent is alleged, the pleadings shall contain full particulars, but knowledge may be alleged as a fact without pleading the circumstances from which it is to be inferred.

[17] In my view, the claim is materially deficient in failing to detail the allegations of fraud as against each of the individual moving parties.

[18] The plaintiff’s claim for fraud as against the moving parties shall be struck by deleting the word “fraud” from paragraph 30 of the statement of claim with leave to the plaintiff to amend within thirty days.

[19] The balance of relief sought on the motion to strike is dismissed, as in my view, the balance of the pleading complies with Rule 25.06 by including a concise statement of the material facts on which the plaintiff relies for the claim and a reasonable cause of action is disclosed except as set out above.

Security for Costs

[20] The moving parties seek security for costs pursuant to Rule 56.01(d) of the Rules of Civil Procedure.

[21] In this regard, they rely upon the affidavit of George Kosziwka (chief financial officer and corporate secretary of Westmont) sworn September 30, 2013, in which he deposes, inter alia:

4. In or around July 15, 2013, I read for the first time the Statement of Defence of Francois Hachem (“Hachem”) and Phoenik Group Inc. (“Phoenik”). Upon reading the Statement of Defence, I became concerned with Dean’s Standard’s financial situation and its ability to pay an award of costs in this action if so ordered.

5. Among other things, the Statement of Defence of Hachem and Phoenik contained allegations that in or around the spring of 2010, Dean’s Standard “was in deep financial trouble” and that it was “behind in paying rent and utilities”. Further, it states that in 2011 Dean’s Standard owed money to various trades people, including Hachem.

6. In light of these allegations and my concerns regarding Dean’s Standard’s financial situation, I requested a search of the Personal Property Security Registration (“PPSR”) System in respect of Dean’s Standard. The search, conducted on August 14, 2013, disclosed, among other claims, a Registered claim by the Minister of Finance. A copy of this search is attached to my affidavit as Exhibit G.

7. Based on my experience as the Chief Financial Officer and Corporate Secretary of Westmont and as a Chartered Accountant, I know that the Minister of Finance usually makes such a registration when the company is behind in paying taxes.

[22] The moving parties position on this issue is summarized as follows:

(a) While the debt owing to the Minister of Finance may only be for $8,145, there is concern that such a small debt remains unpaid and I ought to draw an inference that the plaintiff is incapable of paying this debt.

(b) A two part test applies in deciding whether to exercise its discretion to grant an order under Rule 56.01,

First, the defendant must show that it “appears” that one of the six factors set out cls. (a) through (f) of rule 56.01 exists. Secondly, if the defendant can clear the first hurdle, the court may make an order as to security for costs “as is just”. I take this second stage to require an inquiry into all factors which may assist in determining the justice of the case. I also take the discretion created by this second stage as permitting orders which range from an order requiring full security for costs and a lump sum payment to an order which provides that no security for costs need be posted.

(See Hallum v. Canadian Memorial Chiropractic College, [1989] O.J. No. 1399 (H.C.J.), https://www.canlii.org/en/on/onsc/doc/1989/1989canlii4354/1989canlii4354.html)

(c) Under Rule 56.01(d) the onus is initially on the moving parties to show there is good reason to believe the plaintiff has insufficient assets in Ontario to pay the costs of the action. Once this has been established, the onus shifts to the plaintiff to lead evidence establishing that security for costs should not be ordered. (See Marcon Custom Metals Inc. v. Arlat Metals Inc., [2003] O.J. No. 5028 (S.C.J.) and Treasure Traders International Co. v. Canadian Diamond Traders Inc., [2006] O.J. No. 1866 (S.C.J.)).

(d) At the first stage of the analysis the moving parties are not required to establish that the plaintiff has insufficient assets, as to do so would require the moving parties to do something that is uniquely within the plaintiff’s knowledge; rather, the moving parties need only meet the relatively light onus of establishing that there is good reason to believe the plaintiff has insufficient assets to pay for costs. (See Itan Transportation Services Inc. v. Canadian Office Products Ass. [1996] O.J. No.3225 (Gen. Div.) and Treasure Traders).

(e) The onus at the first stage of the analysis has been described as being a “lighter onus than proof on balance of probabilities, but requiring more than a hunch or speculation.” (See My Portfolio Analyzer Inc. v. Konverge Digital Solutions Corp., [2009] O.J. No. 937 (S.C.J.)).

[23] The plaintiff has provided no evidence in response to this motion and maintains that the moving parties have failed to meet the first part of the test above and thus no evidence from the plaintiff is required and the motion must fail.

Analysis

[24] The case of Coastline Corp. v. Canaccord Capital Corp., 2009 21758 (ON SC), [2009] O.J. No. 1790 (S.C.J.) provides a very useful summary of the legal principles applicable on a motion of this variety. Those principles are as follows:

(a) The initial onus is on the defendant to satisfy the court that it “appears” there is good reason to believe that the matter comes within one of the circumstances enumerated in Rule 56.01.

(b) Once the first part of the test is satisfied, “the onus is on the plaintiff to establish that an order for security would be unjust.”

(c) The second stage of the test “is clearly permissive and requires the exercise of discretion which can take into account a multitude of factors.” The court exercises a broad discretion in making an order that is just.

(d) The plaintiff can rebut the onus by either demonstrating that:

(i) The plaintiff has appropriate or sufficient assets to satisfy any order of costs;

(ii) The plaintiff is impecunious and justice demands that the plaintiff be permitted to continue with the action; or,

(iii) if the plaintiff cannot establish that it is impecunious, but the plaintiff does not have sufficient assets to pay the costs order, the plaintiff must meet a high threshold to satisfy the court of its chances of success;

(e) Merits have a role in any application under Rule 56.01, but on a continuum with Rule 56.01(1)(a) at the low end;

(f) The court on a security for costs motion is not required to embark on an analysis such as in a motion for summary judgment. The analysis is primarily on the pleadings with recourse to evidence filed on the motion, and in appropriate cases, to selective references to excerpts of the examination for discovery where it is available; and,

(g) If the case is complex or turns on credibility, it is generally not appropriate to make an assessment of the merits at the interlocutory stage. The assessment of the merits should be decisive only where the merits may be properly assessed on an interlocutory application and success or failure appears obvious.

[25] The plaintiff argues that the affidavit supporting the motion for security for costs is based on speculation. The plaintiff argues that there is no evidence of the nature of the debt allegedly owing to the Minister of Finance and whether it is legitimate or disputed by the plaintiff.

[26] The plaintiff relies upon several cases where the court declined to award security for costs, including City Commercial Realty (Canada) Ltd. v. Bakich, [2005] CarswellOnt 10512 (O.C.A.) in which the moving parties had not alleged that the plaintiff had failed to meet its liabilities, that it had shown any other indicia of insolvency or that it had demonstrated any instability, such as a temporary dissolution or failure to make appropriate corporate filings. Further, the moving parties had not led any evidence as to other relevant particulars about the company that would suggest an inadequacy of assets. In those circumstances, the court concluded the moving parties had not shown good reason to believe that the plaintiff had an insufficiency of assets and thus the evidentiary burden did not shift to the plaintiff to introduce evidence either to show that it had sufficient assets or that it was impecunious. The motion for security for costs was dismissed.

[27] In my view, the evidence before me amounts to little more than a vague possibility that the plaintiff is experiencing some financial difficulties. Without any evidence as to the asset position of the plaintiff, it is impossible to assess whether an $8,145 possible liability is of any significance to the plaintiff. In my view, the evidence falls short of the light burden on the moving parties in the first stage of the test noted above to establish there is good reason to believe that the plaintiffs may be unable to satisfy an award of costs. The circumstances of the case are analogous to those in City Commercial cited above.

[28] Therefore, the motion for security for costs fails.

[29] If the parties are unable to agree on costs, they shall submit written submissions, limited to no more than three pages, as follows:

(a) Moving parties by April 17, 2014;

(b) Responding party by May 2, 2014; and,

(c) Reply by the moving parties, if any, by May 9, 2014.

Justice P.A. Douglas

Released: March 28, 2014