Court File and Parties

COURT FILE NO.: 91307/15 DATE: 2016-04-22 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Complete Packaging Systems Inc., Plaintiff AND: David Beetham and Christopher Beetham, Defendants

BEFORE: J.E. Ferguson J.

COUNSEL: John W. Montgomery, Counsel, for the Plaintiff John E.F. Gibson, Counsel, for Christopher Beetham Ara Basmadjian, Counsel, for David Beetham

HEARD: April 7, 2016

Endorsement

[1] This is a motion by the defendants Christopher Beetham (“Chris”) and David Beetham (“David”) for an order awarding costs in respect of this action, which has been discontinued by the plaintiff, Complete Packaging Systems Inc. (“CPS”). Costs of a discontinued action are wholly within the discretion of the court and there is no presumption that the defendants are entitled to costs.

[2] The law of costs is designed to advance five purposes in the administration of justice:

“(i) to indemnify successful litigants for the costs of litigation, although not completely; (ii) to facilitate access to justice, including access for impecunious litigants; (iii) to discourage frivolous claims and defences; (iv) to discourage the sanctioning of inappropriate behaviour by litigants in their conduct of the proceedings; and (v) to encourage settlements.”

394 Lakeshore Oakville Holdings Inc. v. Misek, 2010 ONSC 7238, 195 ACWS (3d) 959, 2010 CarswellOnt 9939 at para. 10.

[3] Rule 23.05(1) of the Rules of Civil Procedure (the “Rules”) provides that “[i]f all or part of an action is discontinued, any party to the action may, within thirty days after the action is discontinued, make a motion respecting the costs of the action.”

[4] Under section 131(1) of the Courts of Justice Act, “[s]ubject to the provisions of an Act or rules of court, the costs of and incidental to a proceeding or a step in a proceeding are in the discretion of the court, and the court may determine by whom and to what extent the costs shall be paid.”

[5] The former version of Rule 23.05 exposed the plaintiff to the payment of costs on discontinuance. In that context, where a plaintiff discontinued, the defendant was prima facie entitled to the costs of the action unless the court ordered otherwise. In order to be relieved of costs on a presumptive basis, the plaintiff had to satisfy the court that:

(a) the material filed discloses a bona fide cause of action; (b) the action was not frivolous or vexatious; and (c) the plaintiff was justified in commencing a lawsuit.

Although the presumption no longer operates and the general principles of Rule 57.01 apply, the factors set out in the three-part test are still considered as relevant to the court’s analysis of costs on discontinuance.

1623242 Ontario Inc. v. Great Lakes Copper Inc., 2016 ONSC 1002 [Great Lakes] at para. 63. Marupov v. Metron Construction Inc., 2013 ONSC 609, 226 ACWS (3d) 952, 2013 CarswellOnt 1869 [Marupov] at para. 33. Paul M. Perell & John W. Morden, The Law of Civil Procedure in Ontario, 2d ed (Markham, ON: LexisNexis Canada Inc., 2014) at pgs. 479-480.

[6] CPS was co-founded by David in 2003. CPS carries on business as a seller and distributer of cargo securement products. David was a shareholder of CPS until early 2015 and was party to a Shareholders’ Agreement which included a “shotgun” buy/sell provision.

[7] Chris was a sales representative of CPS starting in January 2012. He is also David’s brother.

[8] On November 14, 2014, one of the principal shareholders of CPS, Darren Burden (“Darren”), delivered a buy/sell notice for the purchase of all of David’s shares. David and Darren agreed to terms of the sale and the transaction was completed on January 9, 2015. As part of the transaction, David ceased to have any role with CPS and executed a non-competition and non‑solicitation agreement.

[9] On January 9, 2015, ten days after the transaction was completed, David suffered a serious eye injury that required hospitalization and surgery. On the same day, Chris’ employment was terminated by CPS.

Operative Note dictated by Dr. Robert G. Devenyi dated January 26, 2015, Exhibit “F” to the Affidavit of Joanne Donohue sworn March 18, 2016, Motion Record of David Beetham, Tab 2F at pg. 87. Operative Note dictated by Dr. Robert G. Devenyi dated February 9, 2015, Exhibit “F” to the Affidavit of Joanne Donohue sworn March 18, 2016, Motion Record of David Beetham, Tab 2F at pg. 88.

[10] Chris was not satisfied with the termination terms proposed by CPS and threatened litigation if his separation terms could not be resolved. Before Chris started his claim for wrongful dismissal, CPS commenced this action on April 13, 2015 against both Chris and David alleging, among other things, that David had breached his contractual and fiduciary obligations to CPS after his departure from CPS, and that Chris “knowingly assisted, and conspired with, David” in his efforts. CPS sought damages of $1,000,000 and injunctive relief.

[11] Chris was not restricted in any way from working in the cargo securement field. However, beginning in early February 2015, it is alleged that information started to come to Darren’s attention, from suppliers, former suppliers, and customers of CPS, that David and Chris were making contact with them to discuss the purchase, sale and storage of cargo securement products.

[12] Between the time that this action was commenced and June 2015, it is alleged that Darren continued to receive information about further efforts by David to engage in the purchase, storage and sale of cargo securement products, apparently on behalf of Chris or in support of the enterprise in which Chris was engaged. It is important to this costs decision that no affidavits were produced from the individuals who were providing this information to Darren. The only evidence is hearsay evidence through Darren.

[13] As of autumn 2015, CPS had apparently been able to minimize or control its alleged losses, and no further evidence came to light regarding additional activity by David alone or in support of Chris. CPS discontinued this action.

[14] The defendants are seeking their costs of the action on the basis that the material filed on the motion does not disclose a bona fide cause of action, was frivolous or vexatious and that CPS was not justified in commencing the lawsuit. Chris’s position is that he essentially got dragged along in this litigation on the basis of absolutely no evidence. Further Chris was not restricted in any way from working in that industry.

[15] By letter dated May 8, 2015, Kate Broer (counsel to David) wrote to Mr. Montgomery and advised that David had suffered a serious eye injury shortly following the closing of the transaction and that he had been recovering from his injury during the time period in which it was alleged that he had engaged in the alleged wrongful activities set out in the statement of claim. Ms. Broer advised Mr. Montgomery as follows:

Although Mr. Beetham has incurred legal costs and expense associated with the service of your client’s claim and the requirement to prepare this response, he is, nevertheless, prepared to agree to an immediate dismissal of the action against him at this juncture without costs. Should he be required to file a Defence, your client may expect to receive a formal Rule 49 Offer and Mr. Beetham will rely both on that Offer and this letter to recover to his costs in the proceedings in the future on a full indemnity basis.

[16] On May 14, 2015, Ms. Broer again wrote to Mr. Montgomery inquiring as to whether CPS would agree to dismiss its claim against David on a without-costs basis. Ms. Broer wrote:

[…] the spurious allegations that your client has made against Mr. Beetham in its Statement of Claim are without merit. Our client wishes to continue focusing on his recovery and remains willing to consent to a without-costs dismissal at this stage in order to avoid the distraction associated with responding to your client’s claim.

[17] On May 20, 2015, Chris served his statement of defence.

[18] David’s statement of defence was served on July 13, 2015 together with an Offer to Settle based on a dismissal of the claim as against him. The Offer to Settle included the following term:

This Offer to Settle is made without costs for a period of seven days following service, after which this Offer to Settle may still be accepted provided that the Plaintiff shall pay David Beetham’s costs from the date of this Offer to Settle to the date of acceptance, as agreed upon or assessed.

Offer to Settle dated July 13, 2015 at para. 2, Exhibit “D” to the Affidavit of Joanne Donohue sworn March 18, 2016, Motion Record of David Beetham, Tab 2D at pg. 43.

[19] By letter dated August 17, 2015, Mr. Montgomery wrote again to Ms. Broer stating that CPS’ investigation of the facts and activities of David yielded “concrete evidence” that David had breached the Non-Competition Agreement, but that CPS had determined that injunctive relief was not then warranted.

[20] By letter dated August 18, 2015, Ms. Broer wrote to Mr. Montgomery indicating that David was awaiting productions and evidence referenced in his August 17, 2015 letter.

[21] David served his Affidavit of Documents and productions on September 24, 2015.

[22] On October 6, 2015, CPS served its Affidavit of Documents and productions.

[23] On October 20, 2015, Chris served his Affidavit of Documents and productions.

[24] None of the individuals who Darren purports gave him the information about David’s possible breaches filed affidavits. That evidence is put forward as hearsay evidence.

[25] Darren was examined for discovery on behalf of CPS on November 4, 2015 and made the following admissions:

(a) CPS’ action against David is unsubstantiated and speculative.

[Ms. Broer] Q. So just so we’re clear, sorry, just that I finish that thought before we move on. As far as you understand it in fact, none, none of those suppliers is actually working with Mr. David Beetham in -- at this juncture? [Mr. Burden] A. Correct.

Transcript from the Examination for Discovery of Darren Burden held November 4, 2015 at pg. 133, q. 618, Exhibit “H” to the Affidavit of Joanne Donohue sworn March 18, 2016, Motion Record of David Beetham, Tab 2H at pg. 274.

Q. […] So tell me about your discussions you had with David Bailey [a salesperson at a supplier of CPS], or where you say you found out or learned information that led you to conclude that Mr. David Beetham had breached his obligations under his Agreements with CPS? A. When I arrived from my sales call, I was advised that, at that time, that David told me just verbally that he and Dave talk three or four times every week. Q. Okay. And in -- is it your position in this litigation that a, that Mr. Beetham is precluded from having any kind of discussion with David Bailey? A. No. Q. […] So the fact that they spoke three or four times a week is not, in and of itself, a breach of the obligations? A. No. Q. Okay. All right. So they spoke three to four times a week. Okay. What else is it that you learned from Mr. David Bailey that led you to conclude that Mr. David Beetham had breached his obligations? A. We didn’t chat much so I would say that would -- nothing.

Transcript from the Examination for Discovery of Darren Burden held November 4, 2015 at pgs. 135-136, q. 631-634, Exhibit “H” to the Affidavit of Joanne Donohue sworn March 18, 2016, Motion Record of David Beetham, Tab 2H at pgs. 276-277.

Q. All right. So, just so that I am clear, it’s, it’s the three to four times a week telephone call with Mr. Bailey, and the telephone call you described that Mr. Roy [a manager of a customer of CPS] had recounted to you, that you say form the basis for, and in fact, is the entire evidence that you currently have, for breaches by Mr. David Beetham of his obligations under “A” and “B” [of the Non-Competition Agreement]? A. From customers, yes. Q. Customers, right. And you’ve already told me about suppliers? A. Correct. Q. All right. Tell me in what other way, other than with respect to customers or suppliers, you say Mr. David Beetham has breached his obligations in “A” and “B” of his non-solicit and non-compete agreement? A. I don’t -- there’s nothing. Q. That’s it? Can I ask you Mr. Burden, why are we sitting in this room? A. Yeah. We felt with the things we could see transpiring within suppliers, that we believe that it’s not about what has occurred to this point, it’s about over the next 15 months approximately where things are going.

Transcript from the Examination for Discovery of Darren Burden held November 4, 2015 at pgs. 138-139, q. 642-645, Exhibit “H” to the Affidavit of Joanne Donohue sworn March 18, 2016, Motion Record of David Beetham, Tab 2H at pgs. 279-280.

MS. BROER: So I want to know, in what way, sitting here today, has my client, Mr. David Beetham, breached his obligations under this Agreement, because that’s what this lawsuit is about. You don’t get to start claims because you think something might happen in the future. THE DEPONENT: We put the claim together based on the conversation. Is it, is it one, is it ten, is it, is it -- what’s the specific number of where the claims would need to be or the discussions would have to be, in order to enforce the …

Transcript from the Examination for Discovery of Darren Burden held November 4, 2015 at pg. 140-141, q. 650, Exhibit “H” to the Affidavit of Joanne Donohue sworn March 18, 2016, Motion Record of David Beetham, Tab 2H at pgs. 281-282.

Q. What else do you say that Mr. Beetham has done that is in breach of the obligations under this Agreement, which you assert he has breached in your lawsuit? A. Again, I assert that phone calls to suppliers, both current and our other relationships along with customers that, that is the basis for the, for the claim.

Transcript from the Examination for Discovery of Darren Burden held November 4, 2015 at pg. 142, q. 651, Exhibit “H” to the Affidavit of Joanne Donohue sworn March 18, 2016, Motion Record of David Beetham, Tab 2H at pg. 283.

(b) Darren understood that litigation is a very expensive proposition.

Q. But you’ve told me about all the feedback you’ve had from suppliers and customers. You just told me you have. You understand litigation’s a very expensive proposition, sir? A. Yes.

Transcript from the Examination for Discovery of Darren Burden held November 4, 2015 at pg. 139, q. 648, Exhibit “H” to the Affidavit of Joanne Donohue sworn March 18, 2016, Motion Record of David Beetham, Tab 2H at pg. 280.

(c) Darren understood that CPS was exposed to David’s costs if it brought a lawsuit that it could not support.

Q. You understand that you’re exposed to my client’s costs if you bring a lawsuit that you can’t support? Do you understand that? A. Yes.

Transcript from the Examination for Discovery of Darren Burden held November 4, 2015 at pg. 139-140, q. 649, Exhibit “H” to the Affidavit of Joanne Donohue sworn March 18, 2016, Motion Record of David Beetham, Tab 2H at pgs. 280-281.

[26] I agree that CPS commenced the claim without justification and on the basis of speculation and unsubstantiated allegations against both David and Chris.

[27] The CPS action was not bona fide; was frivolous and vexatious; and was not justified in the circumstances. The timing of the CPS action suggests that it was started for the improper purpose of discouraging Chris’s wrongful dismissal action. Further despite the fact that CPS knew the facts alleged in support of the CPS action took place in a period when David was attending to serious medical issues which had left him confined to his home.

[28] Further, despite David’s requests for evidence from CPS, CPS’ assertion that its “investigations have yielded concrete evidence” that David breached his contractual and other obligations to CPS never materialized. On the contrary, Darren’s evidence on discovery was speculative and confirmed that there was no evidence of any breach by David.

[29] In exercising its discretion to award costs, the court is to be guided by the factors set out in Rule 57.01(1) of the Rules of Civil Procedure:

In exercising its discretion under section 131 of the Courts of Justice Act to award costs, the court may consider, in addition to the result in the proceeding and any offer to settle or to contribute made in writing,

(0.a) the principle of indemnity, including, where applicable, the experience of the lawyer for the party entitled to the costs as well as the rates charged and the hours spent by that lawyer; (a) the amount claimed and the amount recovered in the proceeding; (b) the apportionment of liability; (c) the complexity of the proceeding; (d) the importance of the issues; (e) the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding; (f) whether any step in the proceeding was, (i) improper, vexatious or unnecessary, or (ii) taken through negligence, mistake or excessive caution; (g) a party’s denial of or refusal to admit anything that should have been admitted; (h) whether it is appropriate to award any costs or more than one set of costs where a party, (i) commenced separate proceedings for claims that should have been made in one proceeding, or (ii) in defending a proceeding separated unnecessarily from another party in the same interest or defended by a different lawyer; and (i) any other matter relevant to the question of costs.

[30] In Boucher v. Public Accountants Council (Ontario), the Court of Appeal for Ontario held that “[o]verall […] the objective is to fix an amount that is fair and reasonable for the unsuccessful party to pay in the particular proceeding, rather than an amount fixed by the actual costs incurred by the successful litigant.”

Boucher v. Public Accountants Council (Ontario) (2004), , 71 OR (3d) 291, 188 OAC 201, 2004 CarswellOnt 2521 at para. 26.

[31] In light of the case law and the factors set out in Rule 57.01(1), David and Chris are entitled to their costs, which are fair and reasonable in all the circumstances, particularly with respect to the reasonable expectations of CPS and the following compelling facts:

(a) CPS sued David and Chris for $1,000,000; (b) the issues were clearly important to David and Chris. The damages claimed against David threatened to wipe out almost two thirds of the proceeds he had received for the sale of his shares to Darren only a few months before the CPS action was started; (c) CPS made serious and unsubstantiated allegations against David and Chris, which questioned their integrity and good character; (d) CPS threatened an injunction motion and never brought one; (e) CPS persisted in its allegations despite repeated offers from David and Chris to avoid litigation; and (f) CPS refused to relent when it knew that it had no evidence to support its speculative allegations against David and Chris.

[32] On discovery, Darren admitted that the CPS action was speculative and “not about what has occurred to this point.” In Marupov v. Metron Construction Inc., the Ontario Superior Court of Justice established that “[w]hen a plaintiff commences an action against a defendant in case their investigation may lead to the liability of that defendant but then elects to discontinue that claim, the defendants can be considered as having been successful in the action even though there has been no adjudication on the merits.”

Marupov, supra at para. 34.

[33] Costs on a substantial indemnity scale are appropriate in cases where the conduct of the party against whom costs is ordered is reprehensible or where there are other special circumstances that justify costs on the higher scale. Costs may be awarded on a substantial indemnity scale after discontinuance where, in particular, a party makes unproven allegations that impugn the integrity or good reputation of his or her opponent, such as the appropriation of confidential information or breach of fiduciary duty.

Mele v. Thorne Riddell (1997), , 32 OR (3d) 674, 26 OTC 119, 1997 CarswellOnt 206 at paras. 7-8. Thoughtcorp Systems Inc. v. Tanju (2009), 177 ACWS (3d) 55, 2009 CarswellOnt 2450 at paras. 19-22.

[34] The conduct of CPS is worthy of sanction. CPS made serious and unsubstantiated allegations against David and Chris, which questioned their integrity, including that:

a) David breached his obligations under the Non-Competition Agreement; b) David breached his fiduciary obligations to CPS; c) David disclosed confidential information about CPS to its distributor in Atlantic Canada; and d) Chris knowingly assisted, and conspired with, David in the breach of his fiduciary and contractual duties to CPS.

[35] Fees and disbursements being sought by David are $43,125.47 partial indemnity and substantial indemnity of $63,782.10. It is appropriate that due to the conduct of CPS that it pay all inclusive costs of $50,000 to David.

[36] Fees and disbursements being sought by Chris are $15,136.40 for partial indemnity and $16,190.13 for substantial indemnity. Partial indemnity is generally 2/3rds of substantial indemnity. Again it is appropriate that due to the conduct of CPS that it pay the all-inclusive costs of $14,000 to Chris.

J.E. Ferguson J. Date: April 22, 2016