2287913 Ontario Inc. v. ERSP International Enterprises Ltd., 2017 ONSC 5621

CITATION: 2287913 Ontario Inc. v. ERSP International Enterprises Ltd., 2017 ONSC 5621

COURT FILE NO.: CV-11-437362

MOTION HEARD: 20170525 and 20170529

REASONS RELEASED: 20170606

COSTS ENDORSEMENT RELEASED: 20170905

SUPERIOR COURT OF JUSTICE – ONTARIO

BETWEEN:

2287913 ONTARIO INC., TREBAR HOLDINGS INC., 2234406 ONTARIO INC. and ARCTIC SPAS OAKVILLE INC.

Plaintiffs/Defendants by Counterclaim

• and-

ERSP INTERNATIONAL ENTERPRISES LTD., BREAK THROUGH ENTERPRISES LTD., KELLNER CONSULTING LTD., LIQUID LOGIC LTD., ECHO SOLUTIONS INCOPORATED, PARADISE BAY SPA 7 TUB WAREHOUSE INC., SPA LOGIC INC., BLUE FALLS MANUFACTURING LTD., ARCTIC SPAS INC., JOHN KEIRSTEAD, JAMES KEIRSTEAD, DARCY AMENDT, DENNIS KELLNER and BRENT MACKLIN

Defendants/Plaintiffs by Counterclaim

BEFORE: MASTER M.P. McGRAW

COUNSEL: H.R. Bennett and J. Figliomeni Emails: hrbennett@rickettsharris.com and jfigliomeni@rickettsharris.com -for the Plaintiffs/Defendants by Counterclaim

A.M. Fischer and A.L. Sherrard Emails: allyson-fischer@hicksmorley.com and amy-sherrard@hicksmorley.com -for the Defendants/Plaintiffs by Counterclaim

COSTS ENDORSEMENT RELEASED: September 5, 2017

Costs Endorsement

I. Background

[1] This was a two-day motion by the the plaintiffs/defendants by counterclaim (collectively, the “Plaintiffs”) pursuant to Rules 31.06 and 31.07(4) to compel the defendants/plaintiffs by counterclaim (collectively, the “Defendants”) to answer undertakings, questions taken under advisement and refusals. My Reasons For Endorsement are available at 2287913 Ontario Inc. v. ERSP International Enterprises Inc., 2017 ONSC 3499.

[2] The Plaintiffs’ motions to compel the Defendants to serve a further and better affidavit of documents pursuant to Rule 30.03(5) and for certain Defendants to re-attend on examination for discovery pursuant to Rule 31.03(1) were essentially resolved by agreement during the motion.

[3] I have convened 6 telephone case conferences in this matter, 4 prior to the motion. At the first case conference, the Plaintiffs’ motion related to approximately 55-60 undertakings, under advisements and refusals. By the return of the motion, the number of disputed questions had been reduced to 27. The Defendants have brought a motion compelling answers to undertakings and refusals which has also been addressed at the case conferences and is currently scheduled to proceed before me on September 29, 2017.

[4] This is an action by the Plaintiffs for general damages of $10,000,000 and punitive damages of $1,000,000 for, among other things, breach of contract, fraudulent misrepresentation, conspiracy, breach of fiduciary duty and breach of duty of good faith and fair dealing arising from a terminated dealership agreement between the plaintiff Arctic Spas Oakville Inc. and the defendant Blue Falls Manufacturing Ltd. for the sale of Arctic Spa hot tubs and related accessories.

[5] The Defendants claim damages of $7,000,000 for breach of the dealership agreement and a related licensing agreement and trade-mark and copyright infringement and punitive damages of $500,000 as a result of the Plaintiffs’ alleged breach of the exclusivity provisions of the dealership agreement and alleged fraudulent or improper warranty claims.

[6] This action has been bogged down by documentary production and related disputes. Over 2,000 documents have already been produced on a piecemeal basis with the parties seeking additional documents numbering in the tens of thousands and over 100,000 additional documents are possibly relevant or available for production. These disputes have resulted in 18 court attendances in addition to the current motion and case conferences.

II. The Law and Analysis

[7] Section 131(1) of the Courts of Justice Act (Ontario) states:

“Subject 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.”

[8] Rule 57.01(1) of the Rules of Civil Procedure provides as follows:

“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.”

[9] Costs rules are designed to advance five purposes in the administration of justice: (1) to indemnify successful litigants for the costs of litigation, although not necessarily completely; (2) to facilitate access to justice, including access for impecunious litigants; (3) to discourage frivolous claims and defences; (4) to discourage the sanctioning of inappropriate behaviour by litigants in their conduct of the proceedings; and (5) to encourage settlements (394 Lakeshore Oakville Holdings Inc. v. Misek, 2010 ONSC 7238 at para. 10; Deonath v. Iqbal, 2017 ONSC 3672 at para. 20).

[10] The principle that costs follow the event should only be departed from for very good reasons such as misconduct of the party, miscarriage in procedure, or oppressive or vexatious conduct of proceedings (1318706 Ontario Ltd. v. Niagara (Regional Municipality) (2005), 2005 CanLII 16071 (ON CA), 75 O.R. (3d) 405 (C.A.); 394 Lakeshore at para. 14). In determining costs, the overriding principles are fairness and reasonableness (Boucher v. Public Accountants Council for the Province of Ontario, (2004) 2004 CanLII 14579 (ON CA), 71 O.R. (3d) 291 (C.A.); Deonath at para. 21)

[11] The most general rule is that costs on a partial indemnity scale should follow the event (394 Lakeshore at para. 12). Costs on a substantial indemnity scale or on a full (complete) indemnity scale are reserved for rare and exceptional cases, where the conduct of the party against whom costs are ordered is reprehensible or where there are other special circumstances that justify costs on the higher scale (394 Lakeshore at para. 17). The situations in which costs on a substantial indemnity basis are awarded are rare, one of which is where one party to the litigation has behaved in an abusive manner, brought proceedings wholly devoid of merit, and unnecessarily run up the costs of the litigation, having regard to Rules 57.01(e) and (f) with respect to the conduct of any party and the steps taken (Standard Life Assurance Co. v. Elliot, 2007 CanLII 18579 (ON SC), [2007] O.J. No. 2031 (S.C.J.) at paras. 9-10)

[12] As the Court of Appeal stated in Davies v. Clarington (Municipality), 2009 ONCA 722 at paragraph 45 “a distinction must be made between hard-fought litigation that turns out to have been misguided, on the one hand, and malicious counter-productive conduct, on the other.” Where there is no improper conduct, abuse of the court process or wrongdoing, a rebuke from the court is not warranted (Davies at paras. 45-46).

[13] This exercise of the court’s discretion on costs necessarily engages Rule 1.04(1) which provides that the Rules of Civil Procedure shall be liberally construed to secure the just, most expeditious and least expensive determination of every civil proceeding on its merits. Further, Rule 1.04(1.1) requires the court to make orders and give directions, including costs awards, that are proportionate to the importance and complexity of the issues, and to the amount involved, in the proceeding (Deonath at para. 21).

[14] The 27 disputed questions were divided into 3 groups: Group 1 related to the Defendants’ allegations of fraudulent and improper warranty claims by the Plaintiffs; Group 2 was with respect to alleged profits earned by the Plaintiffs and damages incurred by the Defendants as a result of alleged trade-mark and copyright infringement by the Plaintiffs; and Group 3 related to questions refused by the Defendants largely on the basis of relevance. While Group 3 contained 20 of the 27 questions, the majority of the motion time and submissions was consumed by Group 1. The Plaintiffs were substantially successful on Groups 1 and 2 and success was divided on Group 3.

[15] With respect to Group 1, considerable time and effort was expended by both parties simply trying to identify what documents had already been produced by the Defendants. The Plaintiffs alleged that the Defendants had not complied with previous agreements and court orders to produce all relevant documentation with respect to the alleged false warranty claims. However, the Plaintiffs’ made a proposal prior to the motion, repeated during submissions which would require the Defendants to first advise of the identity of 18 allegedly fraudulent or false warranty claims which the Defendants had previously identified internally; the Plaintiffs would then produce the relevant service records for these 18 warranty claims; and the Defendants would use these service records to produce documents relevant only to the 18 warranty claims.

[16] The Defendants rejected this proposal and continued to take the position that given overlapping issues with their own proposed motion, they first required all of the Plaintiffs’ service log information and an adjournment until their own motion so that the issues could be heard together. Significant effort was expended at the first two case conferences trying to determine if both motions could proceed together in a timely, efficient and proportionate manner. However, the Defendants’ motion was not ready to proceed and in any event, Justice Myers, in directing that I case manage this matter, directed the Plaintiffs’ motion to proceed regardless of the status of the Defendants’ motion. I denied the Defendants’ adjournment request and ordered that Group 1 would be satisfied by the parties complying with the Plaintiffs’ proposal which I concluded was proportionate, efficient and relatively inexpensive.

[17] With respect to Group 2, the Defendants’ had not answered outstanding undertakings to identify what productions they rely on for their damage claims for alleged trade-mark and copyright infringement including post-termination advertising and marketing. Similar to Group 1, the Defendants took the position that because of overlap, they first required documents from the Plaintiffs including details of distribution lists for advertising and written customer communications.

[18] I ordered that, consistent with what the Defendants had already agreed to do, and in furtherance of proportionality and efficiency, the Defendants identify what documents, based on productions to date, they rely upon with respect to their allegations of profits earned by the Plaintiffs and damages incurred by the Defendants with respect to the Plaintiffs’ alleged trade-mark and copyright infringement. Consistent with proportionality and the piecemeal production in this matter, further questions can be asked on re-attendance on discovery and further productions made on an ongoing basis.

[19] With respect to the 20 questions comprising Group 3, some of these questions were resolved by discussion and agreements during the motion. Ultimately, the Defendants were required to make further efforts with respect to 10 questions.

[20] The Plaintiffs submit that they are entitled to costs in the amount of $35,000 which they state is 70% of their $50,000 actual full indemnity amount. The Plaintiffs’ Costs Outline dated June 30, 2017 provides for $34,605.39 (full indemnity basis); $23,915.59 (substantial indemnity basis); and $19,774.14 (partial indemnity basis). The Defendants submit that the parties should bear their own costs or, in the alternative, that the Defendants should pay $5,000. In their Costs Outline dated June 30, 2017, the Defendants indicated that, if successful, that, if successful, they would seek $42,980.89 on a substantial indemnity basis or $28,798.82 on a partial indemnity basis.

[21] In my view, having regard to all of the factors and circumstances set out above, there is no basis to depart from the general principle that costs should follow the event and it is fair and reasonable that the Defendants pay costs of this motion. The Plaintiffs were largely successful, particularly with respect to Group 1, the questions which consumed the majority of the time and resources. Rather than accepting the Defendants’ reasonable and proportionate proposal, the Defendants attempted to shift the burden to the Plaintiffs notwithstanding their existing production obligations and agreements which may in fact have been broader. This refusal to accept the Plaintiffs’ proposal made the motion longer and more complex. Similarly, with respect to Group 2, the Defendants could have complied with their undertakings by identifying documents based on the current state of productions.

[22] With respect to scale, I am not satisfied that the present case constitutes the kind of rare, special and/or exceptional circumstances justifying costs on a substantial or full indemnity scale, as the Plaintiffs seem to be seeking. While it was not reasonable or proportionate for the Defendants to resist their existing obligations and agreements and proceed as they did with respect to Groups 1 and 2, I cannot conclude that the Defendants acted in a way that was improper, abusive or reprehensible or is the kind of conduct which would attract a rebuke from the court in the form of costs on a higher scale.

[23] In arriving at this conclusion, I am mindful of the significant and frequently shifting production issues in this action and the fact that it took both parties significant time and effort even after the motion had commenced to simply identify what documents and information had been produced in satisfaction of Group 1. In any event, given that the Plaintiffs are now seeking 70% of their full indemnity costs, in my view, the scale of the costs award is less important than the quantum.

[24] I disagree with the quantum proposed by both parties. The Plaintiffs submit that $35,000, representing 70% of their full indemnity costs, is fair and reasonable and reflective of their success on the motion and the reasonable expectations of the Defendants. However, in their Costs Outline, the Plaintiffs indicated that they would claim $34,605.39 on a full indemnity basis and $19,774.14 on a partial indemnity basis. While I disagree with the Defendants that $5,000 is fair and reasonable, to award $35,000 would be to essentially grant costs on what the Defendants could have reasonably expected on a full indemnity basis.

[25] In my view, an amount which is fair, reasonable and proportionate, and reflective of the Defendants’ reasonable expectations is $25,000.00. This is less than the partial indemnity amount which the Defendants set out in their Costs Outline but in my view, is a more accurate reflection of the Plaintiff’s actual partial indemnity costs. It also takes into consideration the Defendants’ failure to agree to the Plaintiff’s proposal in Group 1; their failure to take reasonable steps on Group 2; the parties’ divided success on Group 3; and the conduct of both parties in narrowing the issues and the number of disputed questions in advance of the motion. Given that the Plaintiffs offer of $25,000.00 to resolve the costs of this motion was not accepted, I would add $1,000 with respect to the Plaintiffs’ costs of preparing their costs submissions.

[26] Therefore, based on all of the factors, considerations and circumstances above, I conclude that what is fair, reasonable and proportionate and consistent with Rule 1.04 is that the Defendants shall pay costs of this motion fixed in the amount of $26,000.00 to the Plaintiffs within 60 days.

Released: September 5, 2017

Master M.P. McGraw