Court File and Parties

Citation: Expoed Inc. v. Anaca Technologies Ltd., 2017 ONSC 6513 Court File No.: CV-13-10292-00CL Date: 2017-10-30

Ontario Superior Court of Justice (Commercial List)

Between: Expoed Inc., Plaintiff -and- Anaca Technologies Ltd., Defendant

Before: F.L. Myers J.

Counsel: Matt W. Mullholland, counsel for the plaintiff Alan B. Merski and Saeed Teebi, counsel for the defendant

Read: October 30, 2017

Costs Endorsement

[1] The defendant was entirely successful at trial. It seeks costs calculated on a substantial indemnity basis because the plaintiff made unsubstantiated allegations that the defendant committed fraud and engaged in dishonesty. The defendant also says that the plaintiff took steps to lengthen the proceedings and that costs should be assessed on a punitive basis for that reason as well.

[2] In response to the defendant’s request for punitive costs, the plaintiff relies on the instructive decision of Strathy J. (as he then was) in Nazarinia Holdings Inc. v. 2049080 Ontario Inc., 2010 ONSC 2559. In that case, Strathy J. set out the basic approach in assessing enhanced costs in these cases as follows:

[10] I start with the proposition that substantial indemnity costs are very much the exception and should only be awarded in "rare and exceptional cases to mark the court's disapproval of the conduct of the party in the litigation": Hunt v. TD Securities Inc. (2003), 66 O.R. (3d) 481, [2003] O.J. No. 3245 (C.A.) at para. 123. The conduct in question must be "reprehensible, scandalous or outrageous": Young v. Young, [1993] 4 S.C.R. 3, at para. 250; United States of America v. Yemec (2007), 85 O.R. (3d) 751, [2007] O.J. No. 2066 (Div. Ct.) at para. 30.

[11] I also note that it is not every case of unsuccessful allegations of fraud that will result in an award of substantial indemnity costs. In Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, [2004] 1 S.C.R. 303, [2003] S.C.J. No. 72, Arbour J., after referring to Young v. Young, stated at para. 26:

An unsuccessful attempt to prove fraud or dishonesty on a balance of probabilities does not lead inexorably to the conclusion that the unsuccessful party should be held liable for solicitor-and-client costs, since not all such attempts will be correctly considered to amount to "reprehensible, scandalous or outrageous conduct". However, allegations of fraud and dishonesty are serious and potentially very damaging to those accused of deception. When, as here, a party makes such allegations unsuccessfully at trial and with access to information sufficient to conclude that the other party was merely negligent and neither dishonest nor fraudulent (as Wilkins J. found), costs on a solicitor-and-client scale are appropriate: see, generally, M. M. Orkin, The Law of Costs (2nd ed. (loose-leaf)), at para. 219.

[12] I respectfully adopt the observations of Lax J. in Manning v. Epp, [2006] O.J. No. 4239 (S.C.J.) at paras. 7 - 9:

Costs on the higher scale can be awarded as a form of chastisement and as a mark of the court's disapproval of a litigant's conduct. This is intended to punish as well as to deter others from engaging in similar conduct. Unproved allegations of fraud frequently attract awards on the higher scale. Unproved allegations of breach of trust, conspiracy, misrepresentation, breach of fiduciary duty, and the like, may also attract this kind of award: Beaver Lumber Co. v. 222044 Ontario Ltd. (1997), 5 C.P.C. (4th) 253 (Ont. Gen. Div.) at p. 256.

Cost sanctions are imposed for these kinds of unproved allegations because they are rooted in assertions of dishonesty and deceit and go to the heart of a person's integrity: Bargman v. Rooney (1999), 30 C.P.C. (4th) 259 (Ont. Gen. Div.) at pp. 268-269; Dyer v. Mekinda Snyder Partnership Inc. (1998), 40 O.R. (3d) 180 (Gen. Div.) and see cases referred to at pp. 184-185. Where serious allegations of dishonest or illegal acts are made, but are so inadequately pleaded that they are not permitted to go forward, costs consequences should likewise follow. These allegations have stood in the public record and over the heads of the defendants. The plaintiffs admitted that the allegations were akin to or as serious as fraud. The allegations were made against public officials in the course of carrying out their public duties. To strike recklessly at the integrity of a person occupying a position of public trust is a serious matter.

The task for the court is to punish and deter unwarranted allegations and egregious conduct, but without discouraging the tenacious pursuit and advancement of serious claims of impropriety in a proper case. This was not a serious claim of impropriety. Essentially, the plaintiffs sought to recover damages in respect of a solicitor's retainer in which they had no prospective economic interest and made unsupported allegations of illegal conduct on the part of the Mayor and his co-defendants. The allegations were designed to harm and embarrass. It is appropriate to award costs to the Epp defendants on a substantial indemnity scale.

[3] In assessing the costs in Nazarinia Holdings Strathy J. considered that the defendant made a fraud allegation in its factum so as to keep its options open for trial. It also reported the alleged fraud to the police. But it failed to put evidence forward to prove the fraud at trial. Strathy J. awarded punitive costs on a substantial indemnity basis in that case.

[4] I agree that not every unsubstantiated allegation of fraud need inexorably lead to a punitive costs award. On the other hand, a party that makes an allegation of fraud ought to reasonably expect a punitive costs award if the party fails to prove its allegation. Arbour J. found unsubstantiated allegations of fraud amounted to sufficiently reprehensible conduct to attract a punitive costs award where the defendant had access to information to know that the other party was merely negligent and was not dishonest. Lax J. found that allegations that are not seriously made and advanced but were made for an ulterior purpose attract punitive costs. Lax J. started with the proposition that unsubstantiated allegations of fraud should attract punitive costs but distinguished those cases from cases in which a party tenaciously pursues serious claims of dishonesty in a proper case. The latter would not attract a punitive costs award where the allegations were reasonably based.

[5] In this case, the plaintiff was using the civil trial process to try to end its very long term deal with the defendant. Rather than waiting years for payments over time as it agreed, the plaintiff tried several times to accelerate the underlying indebtedness so as to get paid out and be done with the defendant. Its offer to settle dated September 22, 2017 did the same thing.

[6] At trial, the plaintiff relied on a smorgasbord of offerings from trivial allegations of late payments, allegations of breaches of a security agreement divorced from breach of the underlying indebtedness, to superficial evidence that two computer programmes had common functionality because both had generic attributes like password protected sign-in protocols or both allowed information to be saved – disembodied entirely from what the pieces of software were actually intended to do. In addition, the plaintiff pleaded that the defendant induced it to enter into its agreement with the defendant by making false representations that it knew to be untrue when made. The plaintiff also pleaded a breach of the duty of good faith.

[7] In counsel’s opening address, Mr. Mulholland repeated and expanded on the allegation of fraudulent misrepresentation as pleaded and he invoked the duty not to be dishonest identified by the Supreme Court of Canada in Bhasin v. Hrynew, [2014] 3 SCR 494, 2014 SCC 71. At the court’s request, the plaintiff clarified that it was intending to advance allegations of fraud and deliberate dishonesty as part of its case. The defendant made it clear that it would respond appropriately, i.e. now, if the allegations went unproven.

[8] As I noted in the Reasons for Judgment, the plaintiff made no effort whatsoever to prove that the defendant made any fraudulent misrepresentation. It adduced no evidence that the defendant made any pre-contractual misrepresentation that induced it to enter into its deal or that any such pre-contractual representation had been wrong or untruthful (let alone knowingly so). In addition, while it accused the defendant of ongoing delays and lack of cooperation, the allegation under Bhasin added nothing to the contractual provisions already in place requiring good faith negotiation. Apart from simply speculating that the defendant was deliberately unhelpful, the plaintiff did not prove any lack of good faith either in the defendant’s internal documents or on the witness stand. Despite the rule in Browne v. Dunn, the essential allegations of deliberate wrongdoing were not put the defendant’s CEO in cross-examination.

[9] In all, the plaintiff’s claim was a scatter gun of allegations hoping that something would stick and lead to an early end to the parties’ dealings. The case was entirely about finding an exit for the plaintiff to an unhappy relationship. To that end, it was willing to make a broad swath of allegations including that the defendant engaged in deliberate dishonesty. Yet there was one thing that the plaintiff was not willing to do. It would not make an offer on economic terms that the defendant found attractive. Presumably, on its own economic analysis of its options, the plaintiff found the cost and risks of trial more attractive than the option of making an offer at a quantum that the defendant might accept.

[10] The plaintiff is a sophisticated business with a sophisticated owner. It made choices with legal advice knowing the risks including the enhanced risk of making and not proving allegations of serious, deliberate dishonesty.

[11] In all, I do not find that the invocation of Bhasin caused an extra dollar to be spent or engaged issues of true dishonesty. It was gilding the lily perhaps. Nor do I find that the plaintiff unreasonably extended the proceedings by backing off of allegations before or at trial. That is to be encouraged. As pre-trial preparation costs are rightly included in the parties’ bills of costs, there is compensation for those issues.

[12] If the plaintiff had a serious basis to allege deliberate wrongdoing by the defendant, it ought to have proven its claim or at least tried to do so. The allegation was in the statement of claim and therefore was public. Despite its counsel’s reiteration of the allegation in the opening statement, it did not mention any pre-contractual representation or misrepresentation in its case at all. Its allegations of dishonesty were all based on the plaintiff’s witness attributing ongoing ill-motive to the defendant without an iota of proof of a lie or dishonesty. The only collateral motive on display at the trial was the plaintiff’s zeal to use the proceedings to escape its deal on its own terms and despite whatever damage might be inflicted on former partners, employees, and the defendant en passant.

[13] I agree with Lax J. that it is important that the court not dissuade serious cases of wrongdoing. On the other hand, parties know and ought to know that due diligence and sober second thought is rightly required before deceit should be alleged. The risk of punitive costs exists precisely because the making of serious allegations can have most serious consequences for the defendant. Moreover, in litigation such allegations are protected by absolute privilege and cannot be made the subject of a claim for defamation. As is usually the case, with privilege comes responsibility.

[14] This was not a case involving a plaintiff with grounds to make serious allegations of dishonestly that it just could not quite make out at trial. It was not a close call at trial based on a weighing of competing evidence. The plaintiff made whatever allegations it could think of without much regard to whether they were strong legally or factually. Yet for its most serious allegations, it actually gave the least evidence and air time at the trial. In my view, making allegations of this type without a hint of evidence or even any effort to try to bring evidence forward to support them is reprehensible litigation conduct that readily justifies punitive cost sanctions based on the precedent decisions discussed above.

[15] The plaintiff argues that the quantum of costs claimed is too high. Costs must be reasonable. Not only should they be reasonable as between lawyer and client, but the amount should also be within a range that the party paying ought reasonably expect.

[16] The defendant seeks costs on a substantial indemnity basis of $456,560.11 inclusive of disbursements and taxes. Counsels’ hourly rates and hours spent both appear to be reasonable to me. Moreover, in its pre-trial offer to settle, the plaintiff sought costs of $400,000. That is an amount that is much closer to the amount claimed by the defendant than it is to the amount that the plaintiff now says it ought to be ordered to pay. The plaintiff says that its offer of $400,000 included pre-litigation disbursements for which it seeks recovery as costs. I am not sure that the court ought to hear an argument based on a party claiming that it tried to include recovery of what are essentially damages under the rubric of counsel’s costs. However, even if that is so, that still shows that the plaintiff thought that the recovery for “costs” in the action was reasonably claimed at the $400,000 figure.

[17] Given that Mr. Merskey is ten years senior to Mr. Mulholland with commensurately higher rates, the defendant’s claim of costs of $456,560.11, calculated on a substantial indemnity basis, are well within the range that the plaintiff ought to reasonably have expected to pay if it made unsubstantiated allegations of fraud and dishonesty.

[18] The court orders that the plaintiff pay costs to the defendant of $456,560.11 forthwith.

F.L. Myers J.

Date: October 30, 2017