Court File and Parties

COURT FILE NO.: CV 16-17610-00 DATE: 2016 08 10 SUPERIOR COURT OF JUSTICE – ONTARIO

RE: CARL GORMAN, Applicant AND: WADE KOSOWAN, 8108706 CANADA LTD., 7880413 CANADA INC., 929045 CANADA LTD., 9123555 CANADA INC., 1646850 ONTARIO INC. AND 1551164 ONTARIO INC., Respondents

BEFORE: Trimble, J.

COUNSEL: D. Palmer, for the Applicant D. Bains, for the Respondents

HEARD: In Chambers

Costs Endorsement

[1] In my Endorsement of June 30, 2016, I stayed Mr. Gorman’s Application for oppression relief under the Canada Business Corporations Act and the Ontario Business Corporations Act, as more fully set out in the Notice of Application on the basis the arbitration clause in the Unanimous Shareholders’ Agreement (USA) requires that this dispute be arbitrated. I invited submissions as to costs. This is my decision as to costs of the Application.

Background

[2] Messr.s Gorman and Kosowan each carried on business in the transport and warehouse business. In 2012 they formed one business together and are now joint owners of a transportation and warehouse business through their equal shareholding in 8108706 Canada Ltd. (“810 Canada”). The business is operated primarily through 7880413, a wholly owned subsidiary of 810 Canada (“788 Canada”) but other corporations are also form part of the business venture.

[3] Mr. Kosowan, Mr. Gorman, 810 Canada and 788 Canada entered into the USA on April 8, 2012. While the USA was amended from time to time, the amendments are not important for the purpose of this motion.

[4] Messr.s Kosowan and Gorman also entered into an Entitlement Agreement dated April 8, 2012, which provided that Mr. Gorman was not yet the beneficial owner of the 50% of the shares in the Corporation but he could or would acquire the beneficial interest to those shares in time through "sweat equity" in the business venture.

[5] The parties had a dispute which began some time in 2014. The exact date is not clear. This dispute continued for a period of time until the end of February 2016.

[6] By letter dated February 25, 2016, Mr. Kosowan terminated Mr. Gorman’s employment with the Corporation for “falsified records”, “breach of good faith and fidelity”, fraud, taking monies, paying kick-backs to clients, corruption, and mismanagement.

[7] By letter dated February 25, 2016, Mr. Kosowan unilaterally provided a Notice of Default to Mr. Gorman alleging a variety of very significant breaches but, surprisingly, still permitted Mr. Gorman, if he wished, to pay Mr. Kosowan $4,000,000 to acquire Mr. Gorman’s beneficial interest in the 50% of the shares in the Corporation.

[8] On March 1, 2016 Mr. Kosowan issued a Notice that said that if Mr. Gorman entered the property of the Corporation, such actions would constitute trespassing.

[9] Attempts to resolve the dispute in March 2016 were unsuccessful. As a result, Mr. Gorman brought this Application. In response to the Application, Mr. Kosowan moved to stay the Application, citing protection of the arbitration clause.

[10] The Application was originally heard in the commercial triage court, by Ricchetti J. who ordered that Mr. Gorman be reinstated with the company. Since that date, there have been 4 appearances and 5 conference calls or in-person conferences, all related to compliance with Ricchetti, J.’s order, compliance with my order, procedural issues regarding the Application and stay motion, and the hearing of the stay motion. At each of these attendances the issues were hotly contested.

[11] At the argument of the stay motion, I asked counsel for the Respondents what attempts the Respondents, or any of them had made to invoke or activate the arbitration provision of the USA during the time between when the issues first arose with Mr. Gorman, and the time of the hearing of the stay application? Were there attempts to resolve the issues re Mr. Gorman? Did any of the Respondents involve solicitor Fram as contemplated by the USA’s arbitration clause? Had the Respondents made any attempt to engage an arbitrator, or had they suggested any to Mr. Gorman? Before the motion to stay, had they attempted to invoke the arbitration clause in any way?

[12] The answer, in short, was that aside from bringing their motion to stay Mr. Gorman’s Application, the Respondents had done nothing to invoke the arbitration clause. They had engaged only in ‘self-help’ of dismissing Mr. Gorman and excluding him from the various companies and their business.

The Position of the Parties

[13] The Respondents say that as successful litigants, they are entitled to their costs of the motion to stay, and costs for a part of the Application. They seek costs on a substantial indemnity basis, based on Nazarinia Holdings v. 2049080 Ont. Inc., 2010 ONSC 7238. They submit that the substantial costs to which they are entitled are $69,998.29. If they are entitled only to partial indemnity, they seek costs of $52,452.22. Mr. Kosowan says that because of the arbitration clause in the unanimous shareholder agreement, this court has no jurisdiction to grant the relief sought in the Application and Mr. Gorman knew that.

[14] Mr. Gorman says that the Respondents should have no costs notwithstanding that they were successful in the motion to stay the Application. Mr. Gorman says that the actions of the Respondents disentitle them to costs. The deliberately flaunted the USA arbitration clause in dealing with Mr. Gorman, then deliberately hid behind the arbitration clause only in response to Mr. Gorman’s Application.

Disposition

[15] The parties shall bear their own costs.

Analysis

[16] In assessing costs, I must consider the cases that have outlined broad principles with respect to costs under s. 131 of the Courts of Justice Act and Rule 57.01 of the Rules of Civil Procedure. Section 131 says that costs are discretionary. Rule 57.01(1) says:

57.01 (1) 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;

(0.b) the amount of costs that an unsuccessful party could reasonably expect to pay in relation to the step in the proceeding for which costs are being fixed;

(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. R.R.O. 1990, Reg. 194, r. 57.01 (1) ; O. Reg. 627/98, s. 6; O. Reg. 42/05, s. 4 (1); O. Reg. 575/07, s. 1.

[17] Rule 57.01(4) is also relevant, and provides:

(4) Nothing in this rule or rules 57.02 to 57.07 affects the authority of the court under section 131 of the Courts of Justice Act,

(a) to award or refuse costs in respect of a particular issue or part of a proceeding;

(b) to award a percentage of assessed costs or award assessed costs up to or from a particular stage of a proceeding;

(c) to award all or part of the costs on a substantial indemnity basis;

(d) to award costs in an amount that represents full indemnity; or

(e) to award costs to a party acting in person. R.R.O. 1990, Reg. 194, r. 57.01 (4) ; O. Reg. 284/01, s. 15 (2); O. Reg. 42/05, s. 4 (2); O. Reg. 8/07, s. 3.

[18] Costs awards have a number of purposes, four of which are to indemnify (partly) successful litigants, encourage settlement, correct behaviour of the parties and discourage frivolous or ill-founded litigation (see 394 Lakeshore Oakville Holdings Inc. v. Misek, 2010 ONSC 7238, at para. 10). Generally costs should follow the event (see Bell v. Olympia & York (1994), , 17 O.R. (3d) 135 (C.A.)) and be proportional to the issues in the action and the outcome, and be reasonable for the losing part to pay, all circumstances considered (see Boucher v. Public Accountants, (2004) , 71 O.R. (3d) 291 (C.A.) and Moon v. Sher et al., , [2004] OJ No 4651 (C.A.)).

[19] Conduct of the parties is also relevant, where it deserves sanction (see Davies v. Clarington (2009), 2009 ONCA 722, 100 O.R. (3d) 66 (C.A.)). The range of possible approaches to sanction “blameworthy” conduct includes reduction of or denial of costs to a successful litigant.

[20] In this case, neither party availed itself of the arbitration clause in the USA, as required.

[21] I have found that on the facts of this case, and for the purposes of the application of the arbitration clause only, Mr. Kosowan terminated Mr. Gorman’s employment with the Corporation(s) without regard to or employing the arbitration provision. There does not appear to have been any settlement discussion or resolution attempt as required by the arbitration clause.

[22] Despite submissions to the contrary by Mr. Kosowan's counsel, when Mr. Kosowan decided to terminate Mr. Gorman and ban him from the premises, there was no question there existed a dispute amongst the shareholders and Mr. Gorman's termination without utilizing the arbitration process appears to be contrary to the express arbitration provisions in the Memorandum of Agreement.

[23] I make no comment here (as I made no comment in my reasons of June 30) on whether Mr. Kosowan had a legitimate basis for his concerns regarding Mr. Gorman or that he felt justified in terminating Mr. Gorman. That will be decided at a later date. The important fact, which is not disputed, is that Mr. Kosowan did not trigger the arbitration provision. Instead, he chose to take unilateral steps to end the dispute by terminating Mr. Gorman and excluding Mr. Gorman from the Corporation and the business venture.

[24] It ought to have been as clear to Mr. Gorman as to Mr. Kosowan, that Kosowan’s unilateral actions triggered the arbitration provision. It ought to have been as clear to Mr. Kosowan as to Mr. Gorman that the issues Mr. Kosowan had with Mr. Gorman triggered the arbitration provision.

[25] In my June 30, 2016 Endorsement, I did not condone or reward Mr. Kosowan's unilateral actions and his disregarding the arbitration provisions. I said that whether he was justified in doing so was a question to be decided by the arbitrator. However, Mr. Kosowan’s conduct is relevant to the issue of costs.

[26] In this case, I order that each party shall bear his/their own costs.

[27] In the normal course, there is a prima facie entitlement in the winning party to his costs of the action or proceeding. Denying a successful litigant of his cost is within a judge’s discretion, provided it is exercised judicially, on proper material, and for reasons related to the subject matter of the action or the case. The court may consider conduct leading up to or contributing to the litigation (see Orkin, M. M. The Law of Costs (2d) (Canada Law Book, Toronto, May, 2015), Vol. 1., section 205, page 2-64.15).

[28] Justice Sandra Chapnik, in a family case, exercised her discretion and declined to award costs to either party in matrimonial proceedings where she found that the issues were most contentious and both parties were to blame. The order was upheld on appeal (see Salib v. Cross (1995), , 27 O.R. (3d) 255, 18 R.F.L. (4th) 218, [1995] O.J. No. 4147, 1995 CarswellOnt 683 (Ont. C.A.)).

[29] In denying both parties their costs, I consider the following factors:

a. This matter is hotly contested. Each side made allegations against the other of bad faith, fraud and other quasi criminal behaviour. From the affidavits filed in support of the motions and Application, the temperature in this litigation is very hot.

b. The approach of the parties was reflected by counsel. Each accused the other from time to time of not making timely reply to correspondence or of being impolite or discourteous in dealings with each other.

c. Both parties are to “blame” for the Application and the motion to stay. Mr. Gorman knew or ought to have known that the dispute between he and Mr. Kosowan fell within the arbitration provision. He is entitled to make an incorrect decision and to commence an appliction. He had an arguable basis for his position. However, he should suffer the consequences when he was proved wrong.

d. Mr. Kosowan’s conduct, in comparison to Mr. Gorman’s, is more blameworthy. Ricchetti, J. and I both found that Mr. Kosowan acted intentionally and unilaterally by acting against Mr. Gorman in a way that breached the USA. Mr. Kosowan, in responding to Mr. Gorman’s Application and motion to stay does not argue that he was procedurally correct in his dealing with Mr. Gorman. Rather, he says that he was justified in acting as he did. His actions set in motion the events that resulted in Mr. Gorman’s Application. Having set things in motion by self-help in breach of the arbitration provision in the USA, Mr. Kosowan then claimed protection of the arbitration provision.

Conclusion

[30] There shall be no costs of this motion.

Trimble, J. Date: August 10, 2016

COURT FILE NO.: CV 16-17610-00 DATE: 2016 08 10 ONTARIO SUPERIOR COURT OF JUSTICE RE: CARL GORMAN v. WADE KOSOWAN, 8108706 CANADA LTD., 7880413 CANADA INC., 929045 CANADA LTD., 9123555 CANADA INC., 1646850 ONTARIO INC. AND 1551164 ONTARIO INC. BEFORE: TRIMBLE, J. ENDORSEMENT TRIMBLE J. Released: August 10, 2016

Cited Cases and Legislation

Legislation:

• title: "Canada Business Corporations Act" url: "https://laws-lois.justice.gc.ca/eng/acts/c-44/"
• title: "Ontario Business Corporations Act" url: "https://www.ontario.ca/laws/statute/90b16"
• title: "Courts of Justice Act" url: "https://www.ontario.ca/laws/statute/90c43"
• title: "Rules of Civil Procedure, R.R.O. 1990, Reg. 194" url: "https://www.ontario.ca/laws/regulation/900194"

Case Law:

• title: "Nazarinia Holdings v. 2049080 Ont. Inc., 2010 ONSC 7238" url: "https://www.canlii.org/en/on/onsc/doc/2010/2010onsc7238/2010onsc7238.html"
• title: "394 Lakeshore Oakville Holdings Inc. v. Misek, 2010 ONSC 7238" url: "https://www.canlii.org/en/on/onsc/doc/2010/2010onsc7238/2010onsc7238.html"
• title: "Bell v. Olympia & York (1994)" url: "https://www.canlii.org/en/on/onca/doc/1994/1994canlii239/1994canlii239.html"
• title: "Boucher v. Public Accountants" url: "https://www.canlii.org/en/on/onca/doc/2004/2004canlii14579/2004canlii14579.html"
• title: "Moon v. Sher" url: "https://www.canlii.org/en/on/onca/doc/2004/2004canlii39005/2004canlii39005.html"
• title: "Davies v. Clarington, 2009 ONCA 722" url: "https://www.canlii.org/en/on/onca/doc/2009/2009onca722/2009onca722.html"
• title: "Salib v. Cross" url: "https://www.canlii.org/en/on/onca/doc/1995/1995canlii1140/1995canlii1140.html"