Court File and Parties

COURT FILE NO.: CV-18-00596316

DATE: 20190109

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: GERARD LEE and 2505805 ONTARIO INC., Plaintiffs

AND:

LALU CANADA INC., 2504637 ONTARIO INC., 2504805 ONTARIO INC., 2504639 ONTARIO INC., HZC CAPITAL INC., YANFENG ("KEVIN") FAN, LEI (“ERIC”) GUO and CHENG (“CHENNY”) MING, Defendants

BEFORE: Pollak J.

COUNSEL: Ian C. Matthews and Breanna Needham, for the Plaintiffs

M. Michael Title and Patricia Virc, for the Defendants

HEARD: August 30, 2018 and October 25, 2018

ENDORSEMENT

[1] This is a motion brought by the Plaintiff, 2505805 Ontario Inc. (the “Consultant”), to “enforce a contractual indemnification provision” (the “Indemnity”) in a consulting agreement (the “Agreement”) for the payment of legal fees to be paid to the Consultant.

[2] In this action, the Consultant and the Defendants Lalu Canada Inc., 2504637 Ontario Inc., 2504805 Ontario Inc., 2504639 Ontario Inc. (collectively, the "Companies"), as well as HZC Capital Inc., Yangeng Fan, Lei Guo and Chen Ming, entered into the Agreement. The Agreement provides that if there is a dispute between the parties regarding payments owing to the Consultant, the Companies will pay all reasonable legal fees and expenses as incurred by the Consultant relating to the dispute.

[3] In this action, the Corporate Plaintiff Claims it is entitled to:

(a) a declaration that the Companies breached the Agreement;

(b) damages for breach of the Agreement; and

(c) an interim, interlocutory and final order under s. 4.2(2) of the Agreement that the Defendants pay the reasonable legal fees of both Plaintiffs in connection with this Action on a monthly basis, such payments to continue until this Action results in a non-appealable judgment on its merits.

[4] The Defendants plead that the Agreement was terminated on the grounds of fraud, gross negligence and wilful misconduct of the Consultant. The Plaintiffs have stated they are not filing their reply until they have had the opportunity to serve a motion to strike certain paragraphs of the Statement of Defence. At the time of the hearing of this motion, no motion to strike has been filed with the court.

[5] The Companies object to this motion as substantial relief is being brought before the close of pleadings. The Consultant has not made any submissions with respect to this argument. I agree that it is not proper and is unfair for the Consultant to do so.

[6] The relief sought in this motion is for an order declaring that pursuant to the Agreement, the Companies are obliged to indemnify the consultant for all reasonable legal fees and expenses incurred in this action; that the parties follow the proposed funding protocol, and that the Consultant shall be paid for referenced costs incurred.

[7] Specifically, the Consultant submits that this Court should order that:

(a) “The Consultant is entitled to indemnification and advance payment by the Companies of its reasonable legal fees and expenses under section 4.2(2) of the Consulting Agreement, in connection with disputes arising out of the termination of Mr. Lee's role with the Companies and, by necessary implication, the early termination of the Consulting Agreement;

(b) The Protocol attached as Exhibit "A" to the Moving Party's Notice of Motion be implemented and followed by the Consultant and the Companies; and

(c) Costs of this motion.”

[8] The motion is brought pursuant to s. 97 of the Courts of Justice Act, R.S.O. 1990, c. C.43 (the “CJA”), and Rules 1.05, 37, 57.01 and 57.03 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. The Consultant also relies on this Court’s inherent jurisdiction and s. 101 of the CJA.

[9] The Companies argue that this motion is not properly brought under any of the Rules or the CJA provisions relied on by the Consultant, as the relief sought is in effect a partial summary judgment of the Action. It is also argued that any advance funding of a corporate officer’s costs must be approved by this court in accordance with the applicable business corporations statutes and case law.

[10] The Companies rely on the provisions of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the “CBCA”), and of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”), which they submit relieve the Companies from their contractual obligations pursuant to the Agreement.

[11] When asked by the Court, what the nature and legal foundations are for the relief sought, the Consultant advised:

“(a) The Consultant is asking the Court to give effect to the advance costs provision in the Consulting Agreement - a provision which, by its very nature of being about costs to be paid to the Consultant in advance of a final non-appealable judgment on the merits, must self-evidently be determined prior to a judgment on the merits of the underlying dispute between the Consultant and the Lalu Companies;

(b) The request is for an order that the Consultant submits will be interlocutory in nature, in the sense that resolution of this motion will not finally determine any of the real, substantive issues between the parties in the underlying litigation. In this lawsuit, the main issue of substance is whether the Consulting Agreement was properly terminated by the Lalu Companies for fraud, gross negligence or wilful misconduct; and,

(c) This Court is being asked to grant an order that is in the nature of an interlocutory mandatory order, which it is empowered to do by section 101 of the Courts of Justice Act. However, it is not the typical mandatory order, in that the Court of Appeal for Ontario has observed in Cytrynbaum v. Look Communications that a request to give effect to an advance costs provision "does not require proof of irreparable harm nor does it turn on the balance of convenience”.”

[12] The Consultant states that the issue on this motion is whether the Indemnity should be given effect and enforced by this Court, on this motion.

[13] It is submitted that the Agreement, properly interpreted, requires the advance payment of reasonable legal fees and expenses by the Companies to the Consultant even where the early termination provision of the Agreement is used by the Companies alleging fraud, gross negligence or willful misconduct by the Consultant. The Court must then consider whether there is any basis to disregard the contractual bargain reached by the parties. Do the business corporations statutes apply on this motion.

[14] The Plaintiffs submit that the Court can decide this Motion on the basis of the pleadings, evidence and submissions. They dispute that they ask for partial judgment on the main issue in the Action which they submit is whether the Agreement was properly terminated for fraud, gross negligence or willful misconduct of the Consultant. Rather, they ask the Court to make a final determination about whether the advance costs provision should be given immediate effect. They submit that such is not the same as asking for a final order because such order enforcing the advance costs provision in the Agreement would be interlocutory, not final. They submit that the burden shifts to the Companies to show why the Agreement should not be honoured as written.

[15] The Consultant argues that the Companies' “formalistic arguments” about how this motion has been constituted should not be accepted. This Court is a court of inherent jurisdiction. I do not agree that the issues raised by the Defendants on this motion are “formalistic”. Rather, I am of the view that such issues are relevant on the Court’s finding on whether the relief requested should be granted.

[16] The Companies emphasize that all of the jurisprudence relied on by the Plaintiffs in their Book of Authorities is consideration of indemnity claims brought under either s. 124 of the CBCA or s. 136 of the OBCA, contain provisions applying to the indemnification of legal costs for corporate officers and directors, and, including advance funding orders.

[17] Pursuant to the legislation, corporations "may" agree to indemnify or advance costs provided that an individual "acted honestly and in good faith" and in the best interests of the corporation.

[18] On a plain language reading of either the CBCA or OBCA provisions, those provisions apply only to "individual[s]".

[19] The parties agree that Mr. Lee controls the Consultant and that it provided CEO services on a non-exclusive basis to the Companies.

[20] The Consultant is a corporation. The Indemnity in the Agreement applies to the Consultant and not its principal. As Mr. Lee controls the Consultant, the Defendants argue that the Indemnity provided to the Consultant should be governed by either of the CBCA or OBCA.

[21] There is a separate corporate identity of the Consultant. Mr. Lee controls the Consultant. I find that the indemnity provisions in the CBCA and the OBCA have no application on this motion. The party entitled to the Indemnity in the Agreement is the Consultant. The Consultant is not an individual but a corporation, that did not serve as an officer or director of the Companies. The indemnity provisions of the CBCA and OBCA are limited to individuals, and to officers and directors. The legislation therefore does not apply in this case. On the basis of the express language in the Agreement and on the basis of the jurisprudence, I am of the view that it does not apply.

[22] As previously noted, the Statement of Claim requests in paragraph 3(c) the same relief that is being sought on this motion. As well, the Consultant claims a declaration that the Companies breached the Agreement. At the trial of this action it will be necessary for the Court to interpret the same provisions of the Agreement that the Court is being asked to interpret on this motion. I agree with the submissions of the Companies that the relief sought is in effect a partial summary judgment. As well, the motion brought can also be characterized as a request for the Court to issue a mandatory injunction ordering the Companies to comply with their obligations pursuant to the Agreement. The Consultant was not able to offer this Court any jurisprudence wherein the Court issued the relief sought on this motion, other than the applications brought pursuant to the corporate statutes, which statutes the Consultant has submitted are not applicable in this case and which the Court has found do not apply in this case.

[23] Our Court of Appeal has set out its serious concerns with respect to motions for partial summary judgment. In this regard the Court refers to the recent case of Butera v. Chown, Cairns LLP, 2017 ONCA 783 at paras. 22-38.

[24] I find that many of the concerns raised by the Court of Appeal are applicable in this case – the most important concern being that the Court is asked to grant the same relief that is requested, in part, in the Statement of Claim. For that reason alone, I dismiss this motion. As well, it appears, as I have already stated, that the Consultant seeks a mandatory injunction, without complying with any of the requirements for the granting of such relief. On that basis as well, this motion must be dismissed. The Consultant has not provided this Court with any jurisprudence to support its position that it does not have to comply with either the requirements of a mandatory injunction or the granting of a partial summary judgment. Rather the Consultant seeks to have the Court adjudicate on some of the claims made in the Action without a trial of the action.

Costs

[25] If the parties are unable to agree on costs, they may make brief written submissions to me no longer than three pages in length. The Defendant’s submissions are to be delivered by 12:00 p.m. on January 18, 2019, and the Plaintiff’s submissions are to be delivered by 12:00 p.m. on January 25, 2019. Any reply submissions are to be delivered by 12:00 p.m. on January 31, 2019.

[26] Submissions are to be delivered to Room 170, 361 University Avenue or via email to my assistant. After January 22, 2019, if no submissions are submitted for costs, the matter will be considered at an end and the file returned to the motions office.

Pollak J.

Date: January 9, 2019