COURT FILE NO.: CV-09-377591

MOTION HEARD: April 14, 2015

SUPERIOR COURT OF JUSTICE – ONTARIO

Re: DELTA INVESTMENTS CORPORATION, DEAN STARK and WILLIAM ASHLEY LTD. Plaintiffs

v.

HSBC SECURITIES (CANADA) INC. and ROBERT KRIZMANICH Defendants

BEFORE: Master Lou Ann M. Pope

APPEARANCES: Martin Mendelzon, Groia & Company, for moving plaintiffs and third parties Fax: 416-203-9231

Rebecca Wise, Torys LLP, for moving defendants Fax: 416-865-7380

REASONS FOR ENDORSEMENT

[1] There are two motions before the Court. The defendants seek an order that the plaintiffs and third parties provide further and better answers to the questions posed to them in writing during their examination for discovery. The plaintiffs and third parties seek an order to compel the defendant, Robert Krizmanich (“Krizmanich”) and Lawrence Hopkinson (“Hopkinson”), a representative of the defendant, HSBC Securities (Canada) Inc., to provide answers to questions which were refused during their examinations for discovery.

[2] In this action, it is allege negligence, breach of fiduciary duty and breach of contract arising out of the defendants’ failure to select suitable investment product vehicles that were consistent with the investment objectives and risk tolerance of the plaintiffs which resulted in significant damages to the plaintiffs.

[3] Rule 31.06(1) requires a person who is examined for discovery to answer “any proper question relevant to any matter in issue in the action.”

[4] Rule 34.15 sets out the sanctions a court may order for refusing to answer a proper question.

Plaintiffs’ Motion

[5] The questions refused by Krizmanich and Hopkinson are divided into four groups which are addressed below.

1. Krizmanich’s qualifications, skills and experience:

Refusals 1 and 2 by Krizmanich

[6] The plaintiffs allege that Krizmanich owed a duty of care to the plaintiffs and that he breached that duty of care.

[7] It is alleged that he was at all material times a Vice President of HSBC Securities (Canada) Inc. (“HSBC Securities”), employed as a stock broker and financial advisor. The plaintiffs also allege that he was a “highly qualified investment advisor, uniquely equipped to discharge his fiduciary obligations with the highest standard of care for client who are willing to rely upon his special knowledge and skill . . . .” (Statement of Claim, paragraph 6). The defendants deny Krizmanich owed a duty of care to the plaintiffs and that the plaintiff, Dean Stark (“Stark”), represented to the defendants that he was a sophisticated investor. (Statement of Defence, paragraph 5)

[8] On the issue of fiduciary relationship, the court in Newman v. T.D. Securities Inc., (2007) 463 (ON SC), at para. 7, held that the relationship between an investment broker and his client is not, in and of itself, a fiduciary relationship but one that is dependent on the particular facts. The court further cited five factors which a court should consider in order to decide the extent of the duty of care owned by an investment advisor to his client. One of those factors is the degree of trust and confidence placed in the advisor’s skill and judgment.

[9] In my view, questions that relate to Krizmanich’s qualifications, skills and experience are relevant to the issue of whether there was a fiduciary duty owed by him to the plaintiffs. Further, the plaintiffs raised the issue of fiduciary duty and Krizmanich’s qualifications and experience in the statement of claim. Moreover, it will be necessary for the trier of fact to hear evidence about Krizmanich’s skills and experience in order to make a finding on the issue of fiduciary relationship.

[10] For those reasons, Krizmanich improperly refused to answer questions 1 and 2 on the Refusals Chart. Those questions shall be answered by him.

2. Krizmanich’s relationship with the Bank (ie. defendants’ knowledge of the Banks’s requirements)

Refusal 3 by Krizmanich

Refusals 1 and 5 by Hopkinson

[11] HSBC Bank Canada (“Bank”) is not a party to this action; however, the Bank is referred to frequently throughout the pleadings because the plaintiffs allege that the Bank and HSBC Securities assigned Krizmanich to handle the plaintiffs’ investments.

[12] The plaintiffs allege that the Bank approached the plaintiff, Dean Stark (“Stark”), in late 2006 because the Bank wanted to do business with Stark and his businesses (“plaintiff corporations”). It is common ground that the Bank had certain requirements that had to be met by the plaintiffs in order to approve and advance the subject loan, including ongoing requirements throughout the term of the loan, the terms of which were covered in numerous Facility Letters.

[13] The plaintiffs submit that the basis for the questions in this category relate to all the issues in this action and that the questions are probative of Krizmanich’s relationship with the Bank and his knowledge of the Banks’s requirements with respect to the plaintiffs’ investments.

[14] It is alleged in the statement of claim that the defendants were aware of the Bank’s requirements and the plaintiffs’ banking arrangement. In their Reply and Defence To Counterclaim, at paragraph 6, the plaintiffs also allege that the defendants were aware that all investments made in the plaintiffs’ accounts would be looked to by the Bank as security for the pledge of assets pursuant to the plaintiffs’ banking facilities and therefore had to be managed in a conservative fashion.

[15] However, it is my view that refusal 3 by Krizmanich regarding the percentage of his clients in 2007 and 2008 that were referrals from the Bank, is not relevant to any of the issues in this proceeding nor is the question probative of any of the allegations in the statement of claim.

[16] For the same reasons, it is my view that refusal 5 by Hopkinson is not relevant to any issues in the action.

[17] Regarding refusal one by Hopkinson, the basis of the refusal was twofold. The question is a legal question which will be decided by the trier of fact. Secondly, the question is irrelevant in light of the principles of vicarious liability.

[18] The plaintiffs rely on the Divisional Court’s decision in Six Nations of the Grand River Bank v. Canada (Attorney General), 2000 CarswellOnt 1342, [2000] O.J. No. 1431, on a motion for particulars, for the proposition that it is a proper question to ask the position taken by a party on a legal issue. The court canvassed rule 31.06(1) which, at the time, required the examined party to answer any proper question “related to any matter in issue in the action.” (emphasis) This rule was subsequently amended and it now requires a person who is examined for discovery to answer “any proper question relevant to any matter in issue in the action.” (emphasis) The wording of the new rule has been held to narrow the scope of discovery from the prior rule.

[19] The Divisional Court ruled that on a plain reading of rule 31.06(1), the word “matter” is wide enough to include both a question of fact and the actual position taken by a party on a legal issue. It was further held at paragraph 10 that since the rule with respect to the scope of discovery also refers to “any matter” at issue, it follows that there is a right to discovery with respect to “matters” relevant to the lawsuit, and not just “facts.” Citing the policy underlying the rules which is to encourage full and frank disclosure prior to trial so as to minimize costs and expedite the just resolution of claims, the court ruled that the impugned question which related to the party’s legal position in respect of an issue of law was a proper question. As such, the court ruled that an examined party is merely being asked to state what the party’s current legal position is and if that position changes, he is required to advise the opposing party, as would be the case for any other questions on discovery. (paragraph 14)

[20] Here, Mr. Hopkinson was asked whether it is HSBC Securities’ position that, although Krizmanich and Mr. Silva may have had knowledge that the Bank wanted a security interest over the margin accounts, HSBC Securities did not have that information. The plaintiffs rephrased this question as “whether knowledge acquired by HSBC Securities’ employees equates to knowledge of HSBC Securities”.

[21] I agree that the question involves a question of law as rephrased by the plaintiffs. As held by the Divisional Court in Six Nations, supra., it is a proper question on discovery to ask a party’s current legal position in respect of an issue of law. In my view, the question as rephrased by the plaintiffs is a proper question. Therefore, refusal one by Hopkinson was an improper refusal and it must be answered.

3. Suitability of the defendants’ advice regarding Salida, Sprott and Star Hedge accounts

Refusals 5 and 8 by Krizmanich

Refusals 2, 3, 4 by Hopkinson

[22] One of the issues in this proceeding is the suitability of the defendants’ advice to the plaintiffs given their preferences and needs. In my view, it is not an issue whether the Salida, Sprott and Star Hedge accounts were suitable for Krizmanich’s wife. His wife’s needs and preferences would be different than the plaintiffs. Similarly, Krizmanich’s personal financial situation is not relevant to any matter in issue. Therefore, refusals 5 and 8 by Krizmanich were proper refusals.

[23] Refusals 2, 3, and 4 by Hopkinson are also not relevant to any matter in issue. One of the issues in this proceeding is the defendants’ investment advice to the plaintiff (emphasis), not the amount of fees HSBC Securities may have received from these funds in respect of all clients who invested in the funds. Therefore, refusals 2, 3, and 4 by Hopkinson were proper refusals.

4. Miscellaneous

Refusals 6 and 7 by Krizmanich

[24] Refusal 6 was a proper refusal. The question poses a hypothetical scenario to Krizmanich which has no basis in the pleadings or prior questions. The account application form signed by Stark set out that Delta’s estimated net equity was $500,000, not zero.

[25] Refusal 7 was also a proper refusal. The plaintiffs had closed the Delta accounts at HSBC Securities by March 2009 and had commenced this action. The plaintiffs questioned Krizmanich at his discovery and he testified as to his recollection of what transpired with the Delta accounts during the period in issue. In my view, it is not relevant to any matter in issue any discussions Krizmanich may have had with anyone at the Bank about the Delta accounts after the accounts were closed. This question appears to be a fishing expedition and not probative of the issue regarding suitability of the investment advice as submitted by the plaintiffs.

Defendants’ Motion

[26] Stark was examined for discovery for five days on behalf of the plaintiffs and third parties. At the conclusion on the fifth day, the parties agreed that any specific questions relating to the pleadings could be made in writing. The defendants provided some written sixty-three questions. The plaintiffs answered some of the questions; however, refused to answer many of them on the basis that the answers had been given and, secondly, that the questions are essentially a request for particulars which is not appropriate at this stage of the action. The plaintiffs contend that the refused questions seek particulars of the allegations in the statement of claim and request the evidence in support of the allegations.

[27] As it is the plaintiffs’ position that the defendants’ questions are a request for particulars, I refer to rule 25.10 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, which states:

Where a party demands particulars of an allegation in the pleading of an opposite party, and the opposite party fails to supply them within seven days, the court may order particulars to be delivered within a specified time. (emphasis)

[28] The defendants submit that the purposes of examinations for discovery are to enable parties to know the case which they will have to meet at trial, to prevent the element of surprise, and to obtain admissions or other information which will reduce the expense of preparing for and participating in the action. (Gemini Group Automated Distribution Systems Inc. v. PWA Corp., 1993 CarswellOnt 456 (Ct. of App), at para. 22)

[29] The questions refused by the plaintiffs are grouped into four general categories which are addressed below. Counsel agreed that relevancy of the questions is not in issue. They further agreed to seek a ruling from the court based on the category only and not on each question.

1. Damages

[30] Paragraph one of the statement of claim states that the plaintiffs claim damages in an amount “in excess of $15,000,000 for negligence, breach of fiduciary duty and breach of contract”. They also claim consequential damages in an amount “to be assessed prior to or at trial”, and punitive damages in the amount of $1,000,000. (emphasis) In addition, the following excerpts from the statement of claim relate to the damages claimed:

a) Paragraph 34: “The Defendants’ failure to manage the account in a way that corresponded with the Defendants obligations and pledges to the Bank caused significant decline in value in excess of $7,000,000.00”. (emphasis)

b) Paragraph 44: “The Plaintiffs’ state that . . . they have suffered substantial business and other economic losses as a result of the investment and other losses described above. Delta and Stark have lost in excess of $7,000,000.00 in the investment accounts at HSBC Securities”. (emphasis)

c) Paragraph 47: “The full consequences and damages caused by the negligence and breach of Krizmanich and HSBC Securities on the corporation are yet to be fully determined”. (emphasis)

d) Paragraph 49: “The Defendants were aware or ought to have been aware that their improper conduct would cause and did cause significant losses and damages beyond the investment losses for the Plaintiffs”. (emphasis)

e) Paragraph 50: “Full particulars of the damages are not yet known, but will be provided in advance of trial”. (emphasis)

[31] The defendants’ questions were to provide all facts and particulars of all damages and losses claimed including (a) the exact amounts claimed under each head of damage . . ., (b) the transactions from which the damages and loss flow and the amount of loss attributable to each transaction, and (c) what exact damages are claimed.

[32] The plaintiffs contend that answers to the subject questions were given during the discovery; however, the transcripts of the examinations were not filed on this motion, nor did the plaintiffs provide the answers they say had been given to the written questions. Therefore, I conclude that there is no evidence before this court that these questions were answered by the plaintiffs.

[33] I will now address the plaintiffs’ second basis for refusal to answer; that is, that the questions are essentially a request for particulars which is not appropriate at this stage of the action.

[34] Firstly, rule 25.10 refers to a party demanding particulars of an “allegation” in a pleading. A motion for particulars is normally made before the close of pleadings, for example when a defendant feels an allegation in the statement of claim has insufficient facts upon which to properly prepare its defence.

[35] In Concept Plastics Ltd. v. Haynes, 2009 CarswellOnt 1534, 176 A.C.W.C. (3d) 654, the defendants brought a motion for particulars in an action brought under the simplified procedure rule when, at the time, examinations for discovery were not permitted and prior to delivering their affidavit of documents. The defendants sought particulars of the nature of the plaintiff’s claim to pierce the corporate veil and make the defendants personally liable. The defendants brought the motion on the basis that they did not know what documents should be included in their affidavit of documents. The court held that upon reading the statement of claim, it was impossible to know exactly the material facts that would be relied on by the plaintiff in support of the claim against the defendants. (para. 10)

[36] At paragraph 12 of the decision, the court stated that there were very few cases which dealt with post pleading particulars. It stated further:

The reason is that if the Defendant had enough information to plead in response to the Statement of Claim, then the Defendant presumably had enough information to identify the issues, the relevant facts to support the claim and plead responding facts. Therefore, one would expect the Defendant to be in a position to recognize which documents are relevant to the issues identified by the pleadings when preparing its Affidavit of Documents.

[37] That court addressed the issue of whether there is any basis in law to order particulars during the discovery process. It stated that one of the functions of particulars was to define the issues to be dealt with at trial. The court referred to Fairbairn v. Sage (1924), 56 O.L.R. 462 (App. Div.) where the court drew a distinction between particulars for the purpose of pleadings and particulars for the purpose of preparation for trial. It was ultimately accepted that the court has discretion to order particulars after discovery in a complex case to enable a party to prepare for trial. In Concept Plastics, supra., it was determined that the particulars sought would focus the litigation which was in the interests of both parties, it would do justice to both parties, and it would enable the court to better know the real issued to be tried.

[38] Firstly, this motion is not a post-discovery motion for particulars. Unlike the Concept Plastics, supra., action where examinations for discovery were not permitted and the defendants had not produced their affidavit of documents, examinations have been held in this action and affidavits of documents exchanged. This action is at the discovery stage. As stated above, some of the prime purposes of examinations for discovery are to enable parties to know the case which they will have to meet at trial, to prevent the element of surprise, and to obtain admissions or other information will reduce the expenses of preparing for and participating in the action.

[39] Secondly, I do not view the defendants’ questions as a request for particulars in the sense of rule 25.10 being a demand for particulars of an allegation in a pleading. In my view, the defendants have not asked for particulars of an allegation in the statement of claim. The plain meaning of the word “allegation” is an accusation against a person of a specific act. Here, the defendants have already responded to the plaintiffs’ allegations in the statement of claim of negligence, breach of fiduciary duty and breach of contract in their statement of defence. However, at the discovery stage, the defendants are entitled to enquire about the plaintiffs’ case to enable them to know the case they will have to meet at trial.

[40] That, in my view, is precisely what the defendants herein are asking of the plaintiffs – ie. what are the exact amounts claimed under each head of damages, the transactions from which the damages flow, the amount of damage attributable to each transaction and what damages are claimed by which plaintiff. The fact of the vagueness of the plaintiffs’ claim for damages, as set out above, fortifies even more the validity of the defendants’ questions. The only facts the defendants know about the claim for damages at this stage are that they are “in excess of $15,000,000”, that consequential damages are in an amount “to be assessed prior to or at trial”, losses “in excess of $7,000,000 in the investment accounts”, that damages are “yet to be fully determined”, loss “beyond the investment losses”, and that “full particulars of damages will be provided in advance of trial”.

[41] The plaintiffs submit that it is improper to ask for particulars after the close of pleadings, yet on the other hand, they also take the position that the questions regarding their damages are improper at this stage. If the defendants are not entitled to ask these questions at the discovery stage, when can they ask?

[42] As stated by Master Hawkins in Lafontaine-Rish Medical Group Ltd. v. Global TV News Inc., 2004 CarswellOnt 657, at para. 25:

Mr. Froom is correct in saying that some types of damages, such as injury to reputation and punitive or exemplary damages, are not capable of precise mathematical calculation and are in the discretion of the judge or jury as the case may be, the claim for loss of business and any claim for out-of-pocket expenses are capable of mathematical calculation to a greater or lesser degree. The question should be answered to that extent . . . . This is not a question restricted to an expert’s opinion. The plaintiffs are not entitled to defer answering this question until the last day for serving an expert’s report simply because the plaintiffs may engage expert assistance in preparing an answer.

[43] The Master’s analysis can be applied here. The claim for investment losses is capable of precise mathematical calculation. They will not be in the discretion of the judge or jury at trial. The plaintiffs will be required to prove the amount sought for those damages at trial. The losses claimed in paragraph 49 of the statement of claim of “losses and damages beyond the investment losses” are vague; therefore, the exact amount of that claim must be produced. Further, the plaintiffs herein are not entitled to defer answering this question until the last day for serving an expert’s report simply because they may engage expert assistance in preparing an answer.

[44] For the above reasons, I find that the questions relating to damages as set out in the defendants’ refusals and undertakings chart were improperly refused and must be answered.

2. Relationship between the parties

[45] Paragraph 10 of the statement of claim pleads that both Delta and Stark were clients of HSBC Securities and Krizmanich. In my view, this is a statement of a material fact which the plaintiff intends to rely on to prove an allegation made in the statement of claim. It is not an allegation. Further, the statement is a question of fact which must be capable of proof. It is not question of law. There is no legal issue here as the plaintiff made a clear statement. Therefore, the refusal was improper and must be answered by the plaintiffs.

3. Loan Arrangements with Bank

[46] In the statement of claim, the plaintiffs allege throughout that the defendants knew of the plaintiffs’ loan arrangements with the Bank and their obligations under the loans.

[47] All of the questions in this category relate specifically to statements of fact or allegations made in the statement of claim. For example, question 5 relates to the statement in paragraph 12 that “[b]oth the Bank and Krizmanich were involved in discussions about the Corporation’s banking arrangements . . . .” This is denied by the defendants in their pleading. The defendants enquired about the basis for that statement, particularly, that Krizmanich was involved in the discussions.

[48] The plaintiffs pled specifically several times throughout the statement of claim that HSBC Securities had knowledge of the banking arrangements that the plaintiffs had with the Bank. There are further allegations that there was an agreement between the Bank, the defendants and the plaintiffs. (paras. 18 and 26) Those pleadings are made to support the allegations of negligence, breach of fiduciary duty and breach of contract.

[49] In my view, the defendants are entitled to know the facts that support the above statements and allegations. For example, given the statement that Krizmanich was involved in discussions about the corporation’s banking arrangements, there must be some factual basis for making that statement. It may be that Stark took notes at meetings or he is relying on his recollection that Krizmanich attended meetings where the banking arrangements were discussed. That is merely what the defendants are seeking – the factual basis for the statement.

[50] Therefore, it is my view that the questions in this category were improperly refused and must be answered.

4. Investments at HSBC Securities

[51] Throughout the statement of claim it is alleged that the Delta investments were unsuitable and they ought to have been invested in more conservative investments.

[52] In my view, these are allegations that must be proven by the plaintiffs at trial. In other words, the plaintiffs have the onus to prove on a balance of probabilities that the investments recommended by the defendants were unsuitable for them in all of the circumstances. As stated earlier in these reasons, the plaintiffs pled specifically that, for example, there was an agreement between the Bank and the parties that the Delta investments were to be “managed conservatively”. (paras. 18 and 25) “Managed conservatively” is a rather ambiguous phrase. Further, “suitable investments” is equally an ambiguous phrase. (paras. 27 and 28) The statement of claim contains the opposite wording, such as “non-conservative” and “unsuitable” (para. 28 and 33), also ambiguous words. How is the defendant to know what the plaintiffs mean when they make allegations that investments were to be conservative, or that investments were not conservative. They are entitled to know, with clarity, so they know the case they are to meet and to properly prepare for trial, what investments were non conservative or unsuitable.

[53] Having reviewed all the questions in this category, it is my view that they are all based on specific allegations or statements of fact in the statement of claim and the Reply and Defence to Counterclaim. The defendants are entitled to know the factual basis for each allegation, except for the question regarding allegations of a duty of care at paragraph 27. This is a legal question which is an issue to be determined at trial and need not be answered. The balance of the questions in this category were improperly refused by the plaintiffs and shall be answered.

Both Motions

[54] The parties who were ordered to answer questions refused at their respective examination for discovery shall do so within 60 days of the date these Reasons are released.

Costs

[55] Regarding the plaintiffs’ motion, there was a divided result; therefore, both parties should bear the costs.

[56] Regarding the defendants’ motion, the defendants were primarily successful, except on one minor point. Therefore, the defendants ought to be entitled to costs of their motion on a partial indemnity basis fixed at $3,500, payable within 30 days.

June 18, 2015 (original signed)

Lou Ann M. Pope