SUPERIOR COURT OF JUSTICE - ONTARIO

2014 ONSC 5134

COURT FILE NO.: 457/10
DATE: 2014-09-05

RE: Palmerston Grain, A Partnership and C & M Seeds Manufacturing Inc. (Plaintiffs)

• and –

Royal Bank of Canada (Defendant)

BEFORE: Justice A. K. Mitchell

COUNSEL:
T. Corbett, for the Plaintiffs
M. Koehnen and C. Adamson, for the Defendant

HEARD: June 13, 2014

E N D O R S E M E N T

[1] Two motions are before the court. The first motion is brought by the defendant, Royal Bank of Canada (“RBC”). RBC seeks an order compelling the plaintiffs to conduct electronic discovery in accordance with the draft discovery plan filed by RBC[^1].

[2] The second motion is brought by the plaintiffs, Palmerston Grain, A Partnership (“Palmerston”) and C & M Seeds Manufacturing Inc. (“C & M”) seeking similar relief and in particular, an order requiring RBC to complete phase 2 of the discovery plan as previously ordered, compelling RBC to produce Richard Hall (“Hall”) for discovery[^2] and amending the timetable embodied in the order of Bryant J. dated August 9, 2013 (the “Bryant Order”).

[3] Both parties agree that the timetable contained in the Bryant Order, given the passage of time and pending a release of this decision, requires amendment.

[4] The plaintiffs issued this claim on February 19, 2010 (served August 16, 2010).

[5] RBC served its statement of defence on January 4, 2011.

[6] The litigation then stalled for a period of time due to health issues faced by plaintiffs’ counsel in 2011/12.

[7] At a status hearing before Rady J. in late November, 2012, the parties agreed to a two-phase discovery process and a timetable for the completion of the balance of the steps in the litigation. This litigation timetable, including the timetable for the two-stage discovery process as agreed by the parties, was embodied in the terms of the order of Rady J. dated November 14, 2012 (the “Rady Order”).

[8] In regards to the two-stage discovery process, the Rady Order contained the following provisions:

1. Phase 1 of Documentary Production to be exchanged by December 15, 2012;

2. Phase 2 of Documentary Production, constituting consultation on e-discovery to take place by January 11, 2013, and completion of e-discovery productions to take place by February 28, 2013.

[9] On July 31, 2013, the plaintiffs returned to court asking for an order compelling RBC to comply with Phase 1 documentary production. At the same time, RBC asked the court to direct the parties to meet to discuss search terms relating to e-discovery and if agreement could not be reached, permitting the parties to file a motion to resolve the dispute regarding e-discovery.

[10] On August 9, 2013, Bryant J. released his decision on the motion and found that the timetable embodied in the Rady Order was the “discovery plan” and no further direction of the court was necessary as the parties had previously reached an agreement to which they were bound. Bryant J. ordered that RBC comply with Phase 1 and amended the litigation timetable to extend the dates for completion of the various steps.

[11] That portion of the plaintiffs’ motion seeking Hall’s attendance at examination for discovery was originally before Grace J. on March 25. 2014. RBC opposed the relief sought on the basis that the plaintiffs had failed to comply with the terms of the amended production timetable contained in the Bryant Order.

[12] Grace J. adjourned the plaintiffs’ motion to the special appointment hearing of RBC’s motion (being the motion before me returnable on June 13, 2014). Grace J. decided the requested relief was premature since documentary production had not been completed in the face of the ongoing dispute between the parties regarding the scope of Phase 2 discovery.

[13] With respect to the issue of e-discovery, Grace J. made the following comments:

6. The Consent Litigation Timetable dated November 5, 2012 which was the foundation for Rady J.’s November 14, 2012 order spoke of ‘Phase 1 of documentary production’ and ‘Phase 2 of documentary production’.

7. Unfortunately, the words ‘Phase 1 and Phase 2’ were undefined.

8. I say unfortunately because the parties and their counsel appear to have had very different views of what they encompassed as evidenced by the scope of the production they undertook in Phase 1 - and now again in Phase 2.

9. That difference led to the motion before Bryant J. concerning Phase 1. While he found that RBC had failed to comply with Rady J.’s order, the phrases ‘Phase 1’ and ‘Phase 2’ continued to be undefined and undescribed…

10. It is my hope that the presiding justice will address the apparent reason for the continuing debate – the use of a phrase – ‘Phase 2’ – without definition or description. Clearly and for the benefit of the parties and this court, its boundaries need to be circumscribed.

[14] My task on this motion is to determine the scope of Phase 2 documentary production.

Background Facts

[15] Palmerston is an inland grain terminal carrying on business in Ontario. CM is a related company carrying on shared business activities with Palmerston. The plaintiffs’ business involves the buying and selling of grain.

[16] To manage the risk of fluctuating grain prices between the time of purchase and the time of sale, the plaintiffs “hedge” against this risk by purchasing, through a broker, futures contracts.

[17] The broker is required by law to maintain sufficient money in the broker’s margin account to address the exposure of the broker under these futures contracts.

[18] That is, the broker for the plaintiffs was required to maintain funds on account sufficient to buy commodities futures to match the obligations the broker had incurred to sell commodities futures on behalf of the plaintiffs.

[19] In a rising market (price to buy is greater than price agreed to sell) the broker’s margin account must be funded further by the plaintiffs. That is, the plaintiffs are required to deposit/top up the broker’s account from time to time.

[20] RBC was the banker for the plaintiffs.

[21] In 2007 the plaintiffs were expanding their business and needed increased working capital.

[22] The Palmerston facilities were comprised of:

(a) a $19MM revolving demand facility (reducing to $10MM by February 1, 2008); and

(b) a $5MM non-revolving term facility due on November 30, 2007 amended to $14MM due December 31, 2007.

[23] The CM facilities were comprised of:

(a) a $2.5 MM revolving demand facility (reducing to $1.5 MM by December 16, 2007); and

(b) a $534,000 non-revolving term facility payable over 45 months.

[24] The facilities were subject to an inventory margin formula.

[25] In 2007, the facilities were transferred from RBC to RBC asset-based lending group (“RBC ABL”).

[26] As at October 19, 2007, the available credit under the Palmerston facilities (subject to margining) was $33MM.

[27] In late November 2007, RBC permitted additional credit to be taken by the plaintiffs despite the facilities being out of margin.

[28] Following November, 2007, the line revolved from a low of $25MM to a high of $32.5MM.

[29] In December 2007 the volatility of the commodities market led to increased margin demands in order to maintain hedging.

[30] On December 5, 2007, RBC advised Palmerston that it was out of margin and demanded the plaintiffs refinance the facilities by no later than December 12, 2007 (subsequently extended to December 31, 2007).

[31] Negotiations of new facilities and discussions between RBC and the plaintiffs continued into 2008.

[32] In January 2008, the Palmerston facilities remained out of margin and were drawn down by $30MM. On February 26, 2008, the loans were transferred to RBC’s special loans group and RBC refused to advance any further funds to fund margin calls.

[33] Being unable to fund the margin calls, the plaintiffs sold their futures contracts and were no longer “hedged” against grain price volatility.

[34] The market moved downward and as a result of its unhedged position, Palmerston suffered losses. Ultimately, RBC made available $2.8MM to Palmerston to cover its margin shortfall; however, by that time Palmerston was unable to recover its “hedged” position.

[35] The plaintiffs obtained new financing on July 15, 2008 and terminated its borrowing relationship with RBC on that date.

[36] This litigation ensued.

Analysis

[37] The plaintiffs argue that the discovery plan agreed by the parties is contained in the Rady Order and was confirmed by Bryant J. Therefore, RBC’s motion is an attempt to re-litigate the issues that were before Bryant J and is a “collateral attack” on the Bryant Order. The plaintiffs point to largely the same discovery plan having been placed before Bryant J. in July 2013 and not adopted by the court.

[38] For reasons discussed in the Bryant Order, Bryant J. found that the “discovery plan” consisted of paragraphs 1 and 2 of the Rady Order and refused to allow RBC to re-negotiate its terms and, furthermore, refused to consider the proposed draft discovery plan.

[39] The first issue to be decided is whether or not paragraphs 1 and 2 of the Rady Order constitute a “discovery plan” for purposes of satisfying the parties’ obligations under the Rules of Civil Procedure (the “Rules”)?

[40] The starting point is rule 30. Rule 30.02 requires each party to disclose every document relevant to any matter in issue in an action that is or has been in the possession, control or power of the party and to produce same subject to any claim of privilege.

[41] Rule 29.1.03(1) requires parties seeking to obtain evidence under rule 30, to agree to a discovery plan.

[42] Rule 29.1.03(3) requires that any discovery plan be in writing and must include:

(a) the intended scope of documentary discovery under rule 30.02, taking into account relevance, costs and the importance and complexity of the issues in the particular action;

(b) dates for the service of each party’s affidavit of documents under rule 30.03;

(c) information respecting the timing, costs and manner of the production of documents by the parties and any other persons;

(d) the names of persons intended to be produced for oral examination for discovery under Rule 31 and information respecting the timing and length of the examinations; and

(e) any other information intended to result in the expeditious and cost-effective completion of the discovery process in a manner that is proportionate to the importance and complexity of the action.

[43] With respect to the specific issue of e-discovery, rule 29.1.03(4) requires the parties to consult with one another and have regard to the document titled “The Sedona Canada Principles Addressing Electronic Discovery” developed by and available from The Sedona Conference (the “Sedona Principles”)[^3].

[44] The Sedona Principles consist of 12 principles which may be summarized as follows:

1. Electronically stored information is discoverable.

2. In any proceeding, the parties should ensure that steps taken in the discovery process are proportionate, taking into account (i) the nature and scope of the litigation, including the importance and complexity of the issues, interest and amounts at stake; (ii) the relevance of the available electronically stored information; (iii) its importance to the court’s adjudication in a given case; and (iv) the costs, burden and delay that may be imposed on the parties to deal with electronically stored information.

3. As soon as litigation is reasonably anticipated, parties must consider their obligation to take reasonable and good faith steps to preserve potentially relevant electronically stored information.

4. Counsel and parties should meet and confer as soon as practicable, and on an ongoing basis, regarding the identification, preservation, collection, review and production of electronically stored information.

5. The parties should be prepared to produce relevant electronically stored information that is reasonably accessible in terms of cost and burden.

6. A party should not be required, absent agreement or a court order based on demonstrated need and relevance to search for or collect deleted or residual electronically stored information.

7. A party may satisfy its obligation to preserve, collect, review and produce electronically stored information in good faith by using electronic tools and processes such as data sampling, searching or by using selection criteria to collect potentially relevant electronically stored information.

8. Parties should agree as early as possible in the litigation process on the format in which electronically stored information will be produced. Parties should also agree on the format, content and organization of information to be exchanged in any required list of documents as part of the discovery process.

9. During the discovery process parties should agree to or, if necessary, seek judicial direction on measures to protect privileges, privacy, trade secrets and other confidential information relating to the production of electronic documents and data.

10. During the discovery process, parties should anticipate and respect the rules of the forum in which the litigation takes place, while appreciating the impact any decisions may have in related actions in other forums.

11. Sanctions should be considered by the court where a party will be materially prejudiced by another party’s failure to meet any obligation to preserve, collect, review or produce electronically stored information. The party in default may avoid sanctions if it demonstrates the failure was not intentional or reckless.

12. The reasonable costs of preserving, collecting and reviewing electronically stored information will generally be borne by the party producing it. In limited circumstances, it may be appropriate for the parties to arrive at a different allocation of costs on an interim basis, by either agreement or court order.

[45] Parties are required to comply with the Sedona Principles and failing to do so is a breach of the rules.[^4]

[46] There is agreement among the parties that documentary production will necessarily involve e-discovery. Accordingly, the Sedona Principles apply and the parties must comply with these principles.

[47] The plaintiffs refuse to consider further the Sedona Principles, citing sections of the Bryant Order which uphold the Rady Order as comprising the discovery plan.

[48] With all due respect to Bryant J., the two-stage documentary discovery process contained in the Rady Order cannot and does not constitute a “discovery plan” as required by rule 29.1.03(1). The timetable does not contain the content required by rule 29.1.03(3).

[49] At best, the timetable set forth in the Rady Order contains the parties’ agreement as to the timing related to the discovery process including the timing relative to consultation on e-discovery issues for purposes of arriving at an agreement on the contents of a “discovery plan” required by rule 29.1.03(3). An agreement was never reached.

[50] As noted by Grace J., to date the defining and describing of the scope of Phase 1 and Phase 2 of Documentary Production has neither been agreed by the parties nor addressed by the court.

[51] That must be done in order to move this litigation forward.[^5]

[52] Counsel has advised that both the plaintiffs and the defendant are in compliance with Phase 1 documentary production although the parties disagree as to the intended nature and scope of Phase 1 documentary production.

[53] On the one hand, the plaintiffs say that Phase 1 was intended to encompass the core documents (whether stored electronically or in a paper file) directly relevant to the events and decisions in February/March 2008 and a representative sampling of relevant documents which inform those events and decisions. Phase 2 in the process was intended to “fill in the gaps” identified by Phase 1 documentary production.

[54] On the other hand, RBC says that Phase 1 was intended to encompass only traditional paper production of relevant documents. Phase 2 was directed to e-discovery of all relevant documents stored in electronic form.

[55] The parties have reached an impasse with respect to the scope of Phase 2 documentary production. More specifically, the parties have reached an impasse as to the scope of the discovery plan insofar as it relates to e-discovery.

[56] Since the parties have been unable to agree on a discovery plan regarding e-discovery, the court must provide its direction and guidance to the parties on the scope of e-discovery having regard to the Sedona Principles.

[57] Due to the confusion as to whether or not a “discovery plan” had been agreed on by the parties, no meeting was convened for purposes of discussing the “identification, preservation, collection, review and production of electronically stored information”.

[58] There would be no useful purpose served to dismissing the motion and directing the parties to meet and confer as required by principle 4 with the hope that an agreement might be reached without the court’s intervention. Too much time has passed and too much money spent on unsuccessfully negotiating a discovery plan to this point in the proceedings. My task on this motion is to determine the scope of Phase 2 documentary production and in performing that task it will be necessary to approve a discovery plan.

[59] The next issue to be decided is whether the proposed discovery plan is reasonable?

[60] In determining the scope of Phase 2 and the reasonableness of RBC’s proposed discovery plan, I must have regard to principles of relevancy and proportionality. Principle 2 embodies the parties’ obligation to consider relevancy and proportionality.

[61] A party’s obligation to produce a document is triggered once it is established that the document is relevant to any matter in issue and is not subject to privilege. The requirement that a document be relevant to a matter in issue is a precondition to its disclosure and production regardless of the manner in which the document is stored – whether in electronic or paper form.

[62] The issues identified in the pleadings will dictate the relevance of the proposed scope of e-discovery.

[63] The plaintiffs are of the view there is only one issue in this action, namely, whether or not RBC provided reasonable notice to the plaintiffs before refusing to advance monies to allow the plaintiffs to meet their margin calls. The plaintiffs allege that RBC owed them a duty of good faith and a fiduciary duty and breached those duties.

[64] The plaintiffs claim in excess of $8 million for damages suffered including punitive damages.

[65] The plaintiffs rely on both the written agreements between the parties and the conduct of RBC during the relevant time to support their claim.

[66] RBC relies entirely on the express terms of the various loan agreements and related documents and the plaintiffs’ alleged breach of these terms as a complete defence to the claim.

[67] This is not simply a breach of contract case. The plaintiffs rely on RBC’s conduct to support their claim for damages.

[68] The “matters in issue in the action” extend far beyond the terms of the written contracts. In order to properly answer the allegations of breach of fiduciary duty and breach of its duty of good faith, and properly answer the plaintiffs’ claim for punitive damages, the scope of discovery, including e-discovery, to which is RBC is entitled, is broadened.

[69] RBC is entitled to production of documents – in electronic form or otherwise - relating to the plaintiffs’ policies and protocol for hedging, its decision making processes, and their internal communications during the relevant time period relating to financing of the margin call, refinancing efforts, and the like.

[70] In the context of considering the appropriateness of a judge being assigned to manage the litigation pursuant to rule 37.15, Grace J. commented that “this action is complex and involves complicated procedural and substantive issues”. I agree. The amount of the claim is significant. Accordingly, RBC’s proposed scope of e-discovery is proportional to the complexity of the issues and the amount at stake.

[71] I find the scope of discovery for each of the parties set forth in section 3 of the proposed discovery plan to be reasonable save and except that the obligation of the plaintiffs to produce documents evidencing the search criteria used in searching for relevant documents produced in Phase 1, specified in paragraph 2. of section 3, is dependent on the existence of such search criteria. Mr. Corbett advises that no such criteria exist. I simply note that the plaintiffs cannot produce something which does not exist.

[72] Schedule 1 attempts to address the issues raised by the plaintiffs in Mr. Corbett’s e-mail communication of January 15, 2014.[^6] Should Schedule 1 not fully address those specific concerns it shall be amended to include the searches of the requested custodian(s) using the refined search terms requested by Mr. Corbett.

[73] The search parameters contained in section 3 and Schedule 1 may require refinement as the e-discovery process unfolds. I am heartened by the progress of the parties in refining the search terms made just days prior to argument of these motions. I am confident the parties will be able to iron out any kinks in the discovery plan once the process of e-discovery is underway.

[74] I remind the parties that the obligation of the parties to abide by the Sedona Principles is extant for so long as the discovery process continues.

Order

[75] As noted above, my task on this motion was to determine the scope of Phase 2 documentary production. The reasonable scope of Phase 2 is delineated in the proposed discovery plan (subject to my amendments) filed by RBC.

[76] Order to go approving the proposed discovery plan submitted by RBC on the hearing of the motion, subject to Schedule 1 being amended to include the requests for e-discovery of the plaintiffs contained in Mr. Corbett`s e-mail of January 15, 2014.

[77] All terms of the discovery plan as approved may be amended with the written agreement of the parties.

[78] The amended timetable contained in the Bryant Order shall be further amended to extend the dates for completing the steps identified therein to such later dates as the parties may agree. If the parties cannot agree within 30 days, I am prepared to hear further submissions on this issue and a date may be arranged through the trial coordinator. Alternatively, the judge assigned to hear all further motions in this action pursuant to rule 37.15 may decide the issue on a date arranged, once again, through the trial coordinator.

[79] The plaintiffs’ motion is dismissed as the issues raised on that motion were either resolved in advance of the hearing or dealt with as part of RBC’s motion.

[80] Should the parties be unable to agree, I am prepared to consider submissions regarding costs of these motions and the parties are permitted to file brief written submissions not exceeding five double spaced pages in length within 15 days of the date hereof failing which there shall be no costs of the motions to either party.

“Justice A. K. Mitchell”

Justice A. K. Mitchell

DATE: September 5, 2014

[^1]: Factum of the Moving Party, Royal Bank of Canada, Tab “C”. Subsequently amended and filed by RBC on the return of the motion on June 13, 2014.

[^2]: This relief was first requested in January 2014. RBC has since agreed to produce Hall for discovery.

[^3]: Available at http://www.canlii.org/en/info/sedonacanada/2008principles_en.pdf.

[^4]: Harris v. ATC Aviation Technical Consultants, 2014 CarswellOnt 4709 (Ont. S.C.J.)

[^5]: Where the parties cannot agree on a discovery plan, the Court has the authority to impose one: Siemens Canada Ltd. v. Sapient Canada Inc., 2014 ONSC 2314.

[^6]: Affidavit of Kelly Webster sworn January 24, 2014, Plaintiffs’ Motion Record, Tab B, Exhibit 24.