2017 ONSC 6748

COURT FILE NO.: CV-15-524612 (TORONTO)

MOTION HEARD: 2017 09 11

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Concord Adex Inc., Concord Adex Properties Limited, C C Acquisition Corp., Concord Adex Investments Limited, Cityplace Developments Limited, Cityplace Developments Corp., Concord Adex Developments Corp. and Concord Panorama Limited

v.

20/20 Management Limited, Urban Renaissance Inc. and Toni Varone

BEFORE: MASTER R.A. MUIR

COUNSEL: Andrew Kalamut and Daniel Goudge for the plaintiffs/moving parties Emilio Bisceglia for defendants and the proposed defendants Felice Mete and Espedito Ariganello, responding parties Mark Veneziano and Ahmad Mozaffari for the proposed defendant Arash Beheshti, responding party

REASONS FOR DECISION

[1] This is a motion brought by the plaintiffs pursuant to Rules 5.04(2) and 26.01 of the Rules of Civil Procedure, RRO 1990, Reg. 194 (the “Rules”) for an order granting them leave to amend their statement of claim. The plaintiffs seek to make significant amendments to the statement of claim and wish to add three new defendants. The proposed new defendants are opposed.

BACKGROUND

[2] The plaintiffs are in the property development business focusing primarily on residential condominium projects. The projects that are the subject matter of this action are located in the greater Toronto area (the “Toronto Projects”).

[3] Beginning in 2006, the plaintiff Concord Adex Inc. (“Concord”) retained general contractors in connection with the Toronto Projects. The general contractors were responsible for all construction work, including rectifying any deficiencies.

[4] Ordinarily, a general contractor would be responsible for actually carrying out the deficiency work or arranging for it to be done by others at the contractor’s expense. However, beginning in 2010, Concord implemented a new model for dealing with deficiencies in connection with the Toronto Projects. Concord decided to retain the defendant Urban Renaissance Inc., which later became 20/20 Management Limited (collectively “Urban”), to perform the deficiency work. The cost of this deficiency work would be billed to Concord by Urban and Concord would later issue a back-charge to its general contractor.

[5] The plaintiffs allege that they always understood the arrangement with Urban provided that Urban would bill Concord for its actual labour and material costs plus a 10% mark-up for overhead and a further 5% mark-up for profit. It appears that there was no written umbrella agreement reflecting this arrangement. Concord would simply issue purchase orders and Urban would submit invoices.

[6] The proposed defendant Arash Beheshti (“Beheshti”) is a former officer of Concord. He was responsible for the Toronto Projects and the Urban contract at the relevant times.

[7] It appears that at some point in the spring of 2012 the controller for the plaintiff corporations, Wendy Shum (“Shum”) became aware that Urban had billed amounts to Concord in excess of the amounts Concord had recovered from its general contractors. It also appears that Concord understood at that time that it may not be in a position to ultimately recover all of the amounts charged for deficiency work, although the extent of this apparent shortfall remained unclear. It also appears that a significant portion of the shortfall identified in 2012 was actually in respect of work Concord would not be able to back-charge to its general contractors in any event, such as warranty work.

[8] Shum then retained KPMG to prepare a report to address the plaintiffs’ contract and procurement practices. KPMG delivered a draft report in June 2012 and a final report in October 2012, recommending various changes.

[9] Shum continued to monitor and report to management on the situation with Urban’s billings throughout 2013. It appears that at some point in late 2013 Beheshti advised Concord’s senior management that more than $2,000,000.00 of the deficiency work billed by Urban would not be recoverable from the general contractors and would have to be written off by Concord.

[10] It was at this point that the plaintiffs began to make additional inquiries and investigations into the arrangement with Urban, including hiring KPMG to look at the matter once again.

[11] Ultimately, Beheshti left Concord in September 2014 and Concord ended its relationship with Urban in November 2014.

[12] The plaintiffs commenced this action on March 24, 2015. They included Urban and its successor corporation as defendants. They also included Toni Varone (“Varone”) as a defendant. Varone was Concord’s main contact at Urban and an officer and director of Urban.

[13] The plaintiffs allege in their statement of claim that Urban overcharged for the work performed for the plaintiffs. They also allege that the invoices rendered by Urban were inaccurate and the work that was done was not performed in an efficient manner. The plaintiffs state that this alleged misconduct on the part of Urban resulted in significant overpayment to Urban. The plaintiffs seek the return of this alleged overpayment.

[14] With respect to Varone, the plaintiffs allege that he is personally liable to the plaintiffs for the overpayments. The plaintiffs allege that Varone acted outside of the scope of his duties and authority. They seek to pierce the corporate veil. The plaintiffs also allege that Varone acted in a manner that was oppressive to the plaintiffs and seek remedies pursuant to the Ontario Business Corporations Act, RSO 1990 c B.16 (the “OBCA”).

[15] On September 26, 2016, the plaintiffs served a notice of motion seeking leave to amend their statement of claim. Their motion record was served on December 16, 2016.

[16] The proposed amended statement of claim seeks to expand the claims being made by the plaintiffs in two ways. The first group of proposed amendments alleges that that Beheshti, Varone and the two proposed defendants Felice Mete (“Mete”) and Espedito Ariganello (“Ariganello”) conspired to inflate Urban’s billings to the plaintiffs and otherwise mislead the plaintiffs as to the true nature of the contractual arrangements between Urban and Concord. The second group of proposed amendments alleges that the proposed new defendants Mete and Ariganello are personally liable as officers and directors of Urban in the same fashion as Varone.

THE PARTIES’ POSITIONS

[17] The three proposed new defendants are opposed to the relief sought on this motion. Their main argument is that the claims the plaintiffs are now seeking to advance were discovered by the plaintiffs, or could have been discovered by the plaintiffs with the exercise of reasonable diligence, more than two years before the plaintiffs served their notice of motion in September 2016 or alternatively their motion record in December 2016. The proposed defendants argue that these proposed new claims are now statute barred.

[18] The proposed defendants Mete and Ariganello also take the position that the proposed claims as pleaded do not give rise to a cause of action and there is insufficient evidence to support the proposed claims.

[19] The plaintiffs submit that the two year limitation period set out in the Limitations Act, 2002, SO 2002, c 24, Sch B (the “Limitations Act”) has not yet expired based on the doctrine of discoverability and the proposed amended statement of claim is otherwise a proper form of pleading.

THE TEST ON A MOTION TO AMEND A PLEADING

[20] The law in relation to motions seeking leave to amend a pleading is well settled and was not seriously in dispute on this motion. The applicable principles are summarized in my decision in Greenwald v. Ridgevale Inc., 2016 ONSC 3031 (Master). At paragraph 21 of Greenwald I set out those factors as follows:

• the amendments must not result in prejudice;

• the amendments must be legally tenable;

• the amendments must comply with the rules of pleading;

• a motion to add a party must meet all of the requirements of a motion under Rule 26.01;

• the addition of the party should relate to the same transaction or occurrence;

• the addition of the party should not unduly delay or complicate the hearing;

• the addition of a party will not be permitted if it is shown to be an abuse of process.

[21] One of the factors the court must consider as part of the prejudice analysis is whether the proposed amendments seek to add a party after the expiry of a relevant limitation period.

[22] The relevant provisions of the Limitations Act provide as follows:

1. In this Act,

“claim” means a claim to remedy an injury, loss or damage that occurred as a result of an act or omission;

Basic limitation period

4. Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.

Discovery

5. (1) A claim is discovered on the earlier of,

(a) the day on which the person with the claim first knew,

(i) that the injury, loss or damage had occurred,

(ii) that the injury, loss or damage was caused by or contributed to by an act or omission,

(iii) that the act or omission was that of the person against whom the claim is made, and

(iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and

(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).

Presumption

(2) A person with a claim shall be presumed to have known of the matters referred to in clause (1) (a) on the day the act or omission on which the claim is based took place, unless the contrary is proved.

[23] Rule 5.04(2) provides as follows:

(2) Adding, Deleting or Substituting Parties - At any stage of a proceeding the court may by order add, delete or substitute a party or correct the name of a party incorrectly named, on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.

[24] The principles applicable to motions to add parties in circumstances such as those before the court on this motion are set out in the decisions of Master Dash in Wong v. Adler, 2004 CanLII 8228 (ON SC), [2004] OJ No. 1575 (SCJ – Master); affirmed, 2004 CanLII 73251 (ON SCDC), [2005] OJ No. 1400 (Div Ct) and Wakelin v. Gourley, 2005 CanLII 23123 (ON SC), [2005] OJ No. 2746 (SCJ – Master); affirmed, [2006] OJ No. 1442 (Div Ct).

[25] At paragraph 45 of Wong, Master Dash states as follows:

45 What is the approach a judge or master should take on a motion to add a defendant where the plaintiff wishes to plead that the limitation period has not yet expired because she did not know of and could not with due diligence have discovered the existence of that defendant? In my view, as is clearly implied in Zapfe, the motions court must examine the evidentiary record before it to determine if there is an issue of fact or of credibility on the discoverability allegation, which is a constituent element of the claim. If the court determines that there is such issue, the defendant should be added with leave to plead a limitations defence. If there is no such issue, as for example where the evidence before the motions court clearly indicates that the name of the tortfeasor and the essential facts that make up the cause of action against such tortfeasor, were actually known to the plaintiff or her solicitor more than two years before the motion to amend, the motion should be refused. If the issue is due diligence rather than actual knowledge, this is much more likely to involve issues of credibility requiring a trial or summary judgment motion, provided of course that the plaintiff gives a reasonable explanation on proper evidence as to why such information was not obtainable with due diligence. That is not to say that such motion could never be denied if the evidence is clear and uncontradicted that the plaintiff could have obtained the requisite information with due diligence such that there is no issue of fact or credibility.

[26] In Wakelin, at paragraphs 14 and 15, Master Dash discusses the nature of the evidence required on motions such as this:

14 The question is how much evidence must the plaintiff put in at the pleadings amendment stage to establish that the proposed defendants could not have been identified with due diligence within the limitation period? The short answer is: not very much. As stated by the Court of Appeal in Zapfe: "In most cases one would expect to find, as part of a solicitor's affidavit, a list of the attempts made by the solicitor to obtain information to substantiate the assertion that the party was reasonably diligent" and provide "an explanation for why she was unable to determine the facts."

15 Therefore, as long as the plaintiff puts in evidence as to steps taken to ascertain the identity of the tortfeasors and gives a reasonable explanation on proper evidence as to why such information was not obtainable with due diligence then that will be the end of the enquiry and the defendants will normally be added with leave to plead a limitations defence. This is not a high threshold. If the plaintiff fails to provide any reasonable explanation that could on a generous reading amount to due diligence the motion will be denied. If the plaintiff puts in evidence of steps taken but the proposed defendant also provides evidence of further reasonable steps that the plaintiff could have taken to ascertain the information within the limitation period then the court will have to consider whether the plaintiff's explanation clearly does not amount to due diligence. If there is any doubt whether the steps taken by the plaintiff could not amount to due diligence then this is an issue that must be resolved on a full evidentiary record at trial or on summary judgment. The strength of the plaintiff's case on due diligence and the opinion of the master or judge hearing the motion whether the plaintiff will succeed at trial on the limitations issue is of little or no concern on the motion to add the defendants. The only concern is whether a reasonable explanation as to due diligence has been provided such as to raise a triable issue.

[27] The approach taken by Master Dash has been approved by appellate courts. See Pepper v. Zellers Inc., 2006 CanLII 42355 (ON CA), [2006] OJ No. 5042 (CA) at paragraph 18 and Skrobacky (Litigation guardian of) v. Frymer, 2014 ONSC 4544 (Div Ct) at paragraph 12.

[28] It should also be noted that the Court of Appeal has held that the passing of a limitation period is fatal to a motion under Rule 5.04(2). See Joseph v. Paramount Canada's Wonderland, 2008 ONCA 469 at paragraphs 23 and 25. The former doctrine of special circumstances no longer applies.

ANALYSIS

[29] I have considered and applied these principles to the evidence before me on this motion. I have concluded that the plaintiffs should be granted leave to amend their statement of claim as requested in their notice of motion.

[30] The senior management of Concord first became aware that something may have been amiss with the Urban contracts when Shum learned in the spring of 2012 that a portion of Urban’s deficiency billings may not be fully recoverable from the general contractors. Shum then retained KPMG and continued to monitor the Urban situation and report to senior management.

[31] It appears that it was not until late 2013, however, that the plaintiffs determined the full amount of deficiency billings they would be unable to recover from the general contractors. After learning this, they followed up with an informal internal investigation and attempted to come to an understanding of why this had happened. This investigation involved meeting with Beheshti in February 2014 and asking him to come up with a plan to address the Urban receivable issue.

[32] The plaintiffs then retained the consulting firm KPMG once again to look into the plaintiffs’ system of internal controls and, in particular, in connection with the deficiency work being performed by Urban. KPMG made recommendations as to how the plaintiffs’ procedures could be improved. KPMG suggested that significant savings could have been achieved had the contract with Urban been better managed. There is nothing in the KPMG reports that suggests anything nefarious was going on with the Urban contracts or even that the Urban billings were improper or otherwise inflated.

[33] The principal of the plaintiff corporations, Terence Hui (“Hui”) met with Varone in August 2014. The parties have varying recollections of that meeting. Hui described it as simply an opportunity to meet Varone and to get to know a bit about his business. Varone says he was questioned about the particulars and cost of the plaintiffs’ agreement with Urban. Varone says he told Hui that all of the billings Urban submitted to Concord were proper. Varone also gave evidence on his cross-examination that he would have told Hui at that meeting that he had a professional business relationship with Beheshti.[^1]

[34] Further internal discussion then took place among the plaintiffs’ senior managers. It was determined that Beheshti should resign which he did at the end of September 2014. The plaintiffs’ relationship with Urban was terminated at the end of November 2014.

[35] Between October 2014 and March 2015, Concord management met with Varone and requested that he and Urban provide back-up documentation to support Urban’s billings. Concord wanted to conduct a forensic review of Urban’s records. It appears that Varone stopped responding to the plaintiffs’ requests in March 2015. This action was then started on March 24, 2015.

[36] In April 2016, while preparing for examinations for discovery, the plaintiffs’ chief financial officer, Dennis Au-Yeung met with Beheshti. The plaintiffs allege that it was at this time that the senior management of Concord first learned that the contractual arrangement with Urban was somewhat different than they had previously been told. Beheshti stated that the contracts provided for payment of a unit price for labour rather than Urban’s actual cost for labour. The plaintiffs’ evidence is that this raised additional concerns among Concord managers that they may have been misled by Beheshti, Urban and Urban’s principals. This event appears to have provided the ultimate motivation for the plaintiffs to seek leave to amend their statement of claim.

[37] In my view, this evidence demonstrates a significant level of diligence on the part of the plaintiffs in uncovering and pursuing their potential claims against the defendants and the proposed defendants. In 2012, after learning of the possibility that not all of Urban’s deficiency billings would be recoverable, the plaintiffs conducted internal reviews and retained an outside consultant.

[38] When the extent of the large uncollectable receivable was finally known in late 2013, the plaintiffs’ management followed up with Beheshti, the person in charge of the Urban account, seeking an explanation. They retained KPMG for a second time. They met with Urban. They made several requests of Urban for back-up documents.

[39] This activity occupied a period of approximately 15 months from the time of confirming the extent of the uncollectable receivable. I view these actions as an effort to understand how this happened and how such a situation could be avoided in the future. Certainly there is an element of suspicion present. It is clear that the plaintiffs had concerns and were actively seeking additional information from Urban to support its billings. When Urban was ultimately not forthcoming with that information, the plaintiffs then concluded that something more may be involved and commenced legal proceedings.

[40] In my view, it is also important to emphasize that conspiracy is very different from other more common causes of action. A conspiracy does not take place in public. It is secret by nature. Discovering the elements of a conspiracy is far more difficult than establishing the identity of an unidentified motorist or the possible occupier of a property for example.

[41] The evidentiary onus on a plaintiff on a motion of this nature is not very high. The plaintiffs have provided evidence of what they did to investigate the situation involving Urban. The plaintiffs were not sitting on their hands. They were making internal inquiries, retaining external experts and reaching out to Urban. They were assured by Urban that all of the billings were proper.

[42] The defendants placed particular reliance on four events in support of their argument that the plaintiffs’ discovered or ought to have discovered the new claims by September 2014 at the latest. These events were Beheshti’s resignation, Varone’s meeting with Hui, the delivery of the KPMG reports and the approval of the Urban invoices by the plaintiffs.

[43] I do not view Beheshti’s resignation as significant. The Urban arrangement had gone poorly for the plaintiffs. The plaintiffs and Beheshti then decided to part ways. I see nothing in those facts that would support the inference that something improper must have been going on. I also note that Beheshti did not provide any direct evidence in response to this motion.

[44] Even if Varone’s account of his meeting with Hui in August 2014 is accepted, I see nothing conclusive about that evidence. Hui was questioning the Urban billings but Varone assured him there was nothing improper. Varone’s position was that his relationship with Beheshti was strictly a business relationship. This evidence is ambiguous at best. In any event, it is not the role of the court to determine genuine issues credibility on a pleadings motion.

[45] The KPMG reports are similarly ambiguous when it comes to questioning the Urban billings. They set out concerns about the manner in which the plaintiffs managed their contract and procurement practices and how the Urban contracts were implemented and managed. They suggest that the billing arrangements may not have been entirely clear. They also state that some savings could have been realized with proper procedures. However, they do not state that the plaintiffs were overbilled by Urban or that the plaintiffs were being misled by Urban.

[46] It is true that Concord managers other than Beheshti regularly approved Urban invoicing based on a large number of supporting documents received from Urban. However, it appears from the evidence that these approvals mostly involved checking arithmetic. The evidence of the plaintiffs is that they relied on Beheshti’s assurances who was a trusted employee at the time and responsible for the Urban contract.

[47] With respect to all of these arguments it is important to emphasize that it is reasonable discoverability and not the mere possibility of discovery that triggers a limitation period. See Crombie Property Holdings Ltd. v. McColl-Frontenac Inc., 2017 ONCA 16 at paragraph 35; leave to appeal refused, 2017 SCCA No. 85. The proposed defendants appear to be holding the plaintiffs to a standard of perfection. That is simply not the test.

[48] I have therefore concluded that the plaintiffs’ evidence on this motion has, at the very least, raised a triable issue with respect to the question of due diligence such that any cause of action against Urban, or against Varone and the proposed new defendants, which claims flow from the claims against Urban, did not arise until March 2015 when Urban stopped responding to the plaintiffs’ requests for information. The plaintiffs’ notice of motion and motion record were served less than two years later. That is all the authorities require in the circumstances. Of course, the proposed defendants are free to plead a limitation defence and challenge the plaintiffs’ discovery of their claims at trial on a full evidentiary record.

[49] I am also satisfied that the proposed amendments are tenable insofar as they disclose a reasonable cause of action. In Tran v. University of Western Ontario, 2015 ONCA 295 at paragraph 21, the Court of Appeal affirmed that a statement of claim alleging conspiracy should contain the following elements:

(a) provide a description of the parties and their relationship with each other;

(b) plead an agreement between the parties and the objects of the alleged conspiracy;

(c) include a description of the overt acts done in furtherance of the conspiracy; and,

(d) make an allegation that the plaintiff has suffered damages as a result of the conspiracy.

[50] All of these elements can be found in the proposed amended statement of claim. The parties are clearly and specifically identified. The proposed pleading states that Beheshti acted in concert with Varone, Mete and Ariganello to overcharge the plaintiffs for the Urban work. This was done by concealing or misrepresenting the true facts regarding the Urban billings. The plaintiffs suffered damages as a result. These allegations are set out in paragraphs 39 to 47 of the proposed amended statement of claim.

[51] The proposed amendments also allege that Mete and Ariganello should be held personally liable as officers and directors of Urban. The plaintiffs allege that Mete and Ariganello were acting outside of the scope of their duties and authority as officers and directors of Urban in the same manner as Varone. The proposed pleading alleges that Mete and Ariganello directed Urban to inflate the cost and the number of hours of labour supplied to the Toronto Projects, diminish efficiencies and productivity and otherwise misrepresent the extent of the services supplied to the plaintiffs. The plaintiffs allege that Mete and Ariganello personally benefited from these actions. Finally, the plaintiffs allege that Mete and Ariganello acted in an oppressive manner that was prejudicial to the plaintiffs, contrary to the provisions of the OBCA. These allegations are found at paragraphs 27 to 38 of the proposed amended statement of claim. In my view, the proposed amendments disclose a reasonable cause of action in this respect as well. See Foy v. Royal Bank of Canada, [1995] OJ No. 1422 (GD) at paragraphs 30 to 32.

[52] It is also important to emphasize that when a court is considering a proposed pleading it must be read generously to allow for drafting deficiencies. It must be plain and obvious that the proposed amendments disclose no reasonable cause of action before they will be struck at the pleadings stage. See Tran at paragraph 16. In my view, the plaintiffs’ proposed amendments meet this test.

[53] The factum delivered by the defendants Mete and Ariganello placed significant emphasis on the lack of sufficient evidence in support of the merits of the plaintiffs’ proposed amendments. In my view, the merits of the proposed amendments are not a proper consideration on a motion to amend a pleading for the reasons I stated in Greenwald at paragraphs 30 to 35. The facts pleaded are to be taken as true and provable for the purposes of a motion to amend a pleading.

[54] Finally, I see no prejudice to the defendants or proposed defendants if these amendments are permitted at this time. The amendments arise from the same transactions and occurrences and involve similar questions of fact as the existing pleading. This action is at a relatively early stage. It has not been set down for trial. Only Varone has been examined for discovery. The amendments will not result in undue complication or delay. The defendants and proposed defendants have not put forward any evidence of prejudice.

ORDER

[55] I am therefore granting the relief requested by the plaintiffs. The plaintiffs are hereby granted leave to amend their statement of claim to add Beheshti, Mete and Ariganello as defendants in the form of the proposed amended statement of claim at Tab 2H of the plaintiffs’ motion record. The proposed new defendants shall have leave to plead a limitation defence.

COSTS

[56] If the parties are unable to agree on the issue of the costs of this motion, they shall provide the court with brief submissions in writing. The plaintiffs’ submissions shall be delivered by December 4, 2017. The proposed defendants shall deliver their submissions by December 15, 2017. Any reply submissions from the plaintiffs shall be delivered by December 22, 2017. These costs submissions may be sent directly to me by email.

Master R.A. Muir

DATE: 2017 11 10

[^1]: During the course of argument, Mr. Bisceglia objected to the plaintiffs making reference to certain personal email messages involving Varone, Beheshti and others. These email messages were produced for the first time at Varone’s cross-examination. Varone objected at the time but agreed to answer some questions regarding these emails pursuant to Rule 34.12(2). No motion was brought to obtain a ruling on this objection. Rule 34.12(2) requires that a ruling be obtained before the evidence is used at a hearing. Given that no motion was brought, it is my view that these email messages are not admissible evidence on this motion. They have not been considered by the court.