Court File and Parties

COURT FILE NO.: CV-19-612952 DATE: 2019-10-07 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: TORONTO PARKING AUTOHRITY, Plaintiff AND: BSAR (EGLINTON) LTD., BSAR (EGLINTON) LP, TAREK SOBHI and TYLER HERSHBERG, Defendants

BEFORE: Sossin J.

COUNSEL: Milton Davis and Hailey Abramsky, Counsel for the Plaintiff David Taub, Counsel for the Defendants

HEARD: September 16, 2019

REASONS FOR JUDGMENT

OVERVIEW

[1] This case raises the question of when employees of a corporation may be held personally liable for inducing the corporation to breach its contract with another party.

[2] The plaintiff, the Toronto Parking Authority (“TPA”), has brought an action against BSAR (Eglinton) Ltd. (“BSAR”), BSAR (Eglinton) LP (the “corporate defendants”) as well as Tarek Sobhi (“Sobhi”) and Tyler Hershberg (“Hershberg”) (the “individual defendants”) (collectively, the “defendants”).

[3] The litigation arises from an alleged breach of contract by the defendants with respect to the retail component of a real estate and condominium development project.

[4] Under an agreement of purchase and sale (“APS”) dated September 22, 2010, the TPA agreed to sell a property at 935 Eglinton Avenue West to BSAR. The individual defendants are the principals of BSAR and signed the APS.

[5] The sale was completed in December, 2013. Under the terms of the APS, the TPA retained a right to purchase the retail component of the project. The TPA decided to exercise this right in November, 2018. At that time, however, the TPA learned that the corporate defendants had sold the retail component to a third party and this transfer was registered in October, 2018.

[6] The plaintiff issued a statement of claim on January 21, 2019, claiming $7 million against the defendants for breach of contract. The claim was amended on March 25, 2019 in order to add BSAR (Eglinton) LP as a corporate entity liable for the obligations of BSAR (the “amended statement of claim”).

[7] This motion is brought by the individual defendants to strike the claim against them under Rule 21.01(1)(b) of the Rules of Civil Procedure, R.R.O. 1990, Reg 194 (the “Rules of Civil Procedure”), without leave to amend, for failing to disclose a reasonable cause of action. Specifically, the plaintiff seeks to strike paragraphs 1(b), 9, 19, 20, the second to last paragraph of paragraph 6, and the first sentence of paragraph 21 of the amended statement of claim.

[8] This motion does not affect the action against the corporate defendants or the other paragraphs in the amended statement of claim.

[9] The TPA brings a cross-motion to amend their statement of claim in the event that the individual defendants’ motion to strike is successful.

ANALYSIS

[10] Rule 21.01 of the Rules of Civil Procedure provides:

RULE 21 Determination of an Issue Before Trial

Where Available

To Any Party on a Question of Law

21.01 (1) A party may move before a judge,

(a) for the determination, before trial, of a question of law raised by a pleading in an action where the determination of the question may dispose of all or part of the action, substantially shorten the trial or result in a substantial saving of costs; or

(b) to strike out a pleading on the ground that it discloses no reasonable cause of action or defence,

and the judge may make an order or grant judgment accordingly. R.R.O. 1990, Reg. 194, r. 21.01 (1).

[11] In R. v. Imperial Tobacco Canada Ltd. 2011 SCC 42(“Imperial Tobacco”), at para. 17, the Supreme Court confirmed that the test under Rule 21.01(1)(b) to strike a pleading is whether the moving party can establish that it is “plain and obvious” that the responding party’s claim or defence cannot succeed.

[12] For purposes of the Rule 21 analysis, the motions judge must assume all facts alleged by the responding party’s pleadings are true, as long as they are not manifestly incapable of proof.

[13] Additionally, no evidence can be accepted on a Rule 21 motion, nor can a party rely on what evidence proffered at some future date might or might not show.

[14] The individual defendants argue that the amended statement of claim alleges only that Sobhi and Hershberg induced BSAR to breach its contract with the TPA, and therefore that it is plain and obvious that the claim against the individual defendants can succeed.

[15] The individual defendants rely on the Ontario case law, which provides that individuals who direct corporations cannot be held liable for the action of the corporation unless they engage in conduct which is itself tortious. In Scotia McLeod v. Peoples Jewellers Ltd., 1995 CanLII 1301 (ON CA), (1995), 26 OR (3d) 481 (C.A.), Finlayson J.A. set out this threshold in the following terms:

The decided cases in which employees and officers of companies have been found personally liable for actions ostensibly carried out under a corporate name are fact- specific. In the absence of findings of fraud, deceit, dishonesty or want of authority on the part of employees or officers, they are also rare. Those cases in which the corporate veil has been pierced usually involve transactions where the use of the corporate structure was a sham from the outset or was an afterthought to a deal which had gone sour. There is also a considerable body of case-law wherein injured parties to actions for breach of contract have attempted to extend liability to the principals of the company by pleading that the principals were privy to the tort of inducing breach of contract between the company and the plaintiff: see Ontario Store Fixtures Inc. v. Mmmuffins Inc. (1989), 1989 CanLII 4229 (ON SC), 70 O.R. (2d) 42 (H.C.J.), and the cases referred to therein. Additionally there have been attempts by injured parties to attach liability to the principals of failed businesses through insolvency litigation. In every case, however, the facts giving rise to personal liability were specifically pleaded. Absent allegations which fit within the categories described above, officers or employees of limited companies are protected from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own.

None of the conduct alleged against the respondent directors falls within the broad categories I have outlined above. Their exposure, if there is any, is narrowly focused on their formal decision-making in the name of Peoples. A corporation may be liable for contracts that its directors or officers have caused it to sign, or for representations those officers or directors have made in its name, but this is because a corporation can only operate through human agency, that is, through its so- called "directing mind". Considering that a corporation is an inanimate piece of legal machinery incapable of thought or action, the court can only determine its legal liability by assessing the conduct of those who caused the company to act in the way that it did. This does not mean, however, that if the actions of the directing minds are found wanting, that personal liability will flow through the corporation to those who caused it to act as it did. To hold the directors of Peoples personally liable, there must be some activity on their part that takes them out of the role of directing minds of the corporation. In this case, there are no such allegations. (Emphasis added.)

[16] The individual defendants rely on Colistro v. Tbay Tel, 2010 ONSC 2306 (“Colistro”) at para. 45, in which certain allegations pleaded against individual defendants were struck by this Court as they did not allege fraud, deceit, dishonesty, lack of authority or bad faith against any of the individual defendants.

[17] The individual defendants argue that the allegations in the TPA’s amended statement of claim focus on BSAR’s breach of contract, and that inducing breach of contract is not separately tortious conduct capable of justifying liability against the individual defendants.

[18] In Simkeslak Investments Ltd. v. Kolter Yonge L.P. Ltd. 2009 CarswellOnt 1243. [2009] O.J. No. 982 (“Simkeslak”), D.M. Brown J. (as he then was) reviewed the circumstances under which courts will fix personal liability on directors, officers or employees of a corporation. One of the principles he identified was that “directors of a company are not liable for inducing a corporation to breach its contract when they are performing bona fide functions as corporate officer.” (at para. 8(e))

[19] In Simkeslak, D.M. Brown J. struck the claim against an officer of the corporate defendant as failing to plead that the individual defendant had a separate interest involved in the transaction involving a limited partnership’s property. He stated (at para. 10):

As to the claims that Mr. Julien induced Kolter to breach duties it owed the plaintiffs or that he conspired to injure the plaintiffs, the Claim lacks any tangible precision of the separate or tortious acts of Mr. Julien about which the plaintiffs complain. Paragraphs 43 and 44 are devoid of particulars of such conduct, and the response to the demand for particulars offers no assistance. … The Claim does not plead the type of conduct necessary to support a separate claim against an officer of a corporation, and I therefore dismiss the plaintiffs’ claims against Mr. Julien.

[20] The principle that a corporate employee is not personally liable when acting bona fide within the scope of the employee’s authority was first recognized in Said v. Butt, [1920] 3 K.B. 497, and has been adopted in Ontario as a governing principle for situations in which individuals induce a company for which they are an officer or director to breach a contract with a third party. In ADGA Systems International Ltd. v. Valcome Ltd., (1999) 1999 CanLII 1527 (ON CA), 43 OR (3d) 101 (C.A.) (“ADGA”) at para. 14, the Ontario Court of Appeal quoted with approval the following passage from Said v. Butt, at 506:

… [I]f a servant acting bona fide within the scope of his authority procures or causes the breach of a contract between his employer and a third person, he does not thereby become liable to an action of tort at the suit of the person whose contract has thereby been broken…

[21] The Canadian case law thus is clear that officers and directors of a corporation may be held personally liable for their tortious conduct, but not where that conduct was simply to direct the corporate entity to breach a contract. In ADGA, The Court of Appeal characterized this distinction and the rule in Said v. Butt as follows (at para. 15):

The exception also assures that officers and directors, in the process of carrying on business, are capable of directing that a contract of employment be terminated or that a business contract not be performed on the assumed basis that the company's best interest is to pay the damages for failure to perform. By carving out the exception for these policy reasons, the court has emphasized and left intact the general liability of any individual for personal conduct.

[22] The TPA argues that this motion is ill-conceived and that the amended statement of claim pleads all the necessary allegations which, if proven, establish liability against the individual defendants.

[23] The TPA accepts that the rule in Said v. Butt as applied in cases such as ADGA governs, but argues that its claim does not seek to impose liability on the individual defendants simply for inducing BSAR to breach the APS, and therefore may be distinguished from Colistro, Simkeslak and other cases relied on by the individual defendants.

[24] Specifically, the TPA submits that its pleadings allege the individual defendants engaged in separately tortious conduct when they induced BSAR to breach the APS with TPA in bad faith, and with the intent of harming TPA’s economic interests by way of an actionable wrong against the TPA, and thereby caused the TPA to suffer an economic loss. in paragraphs 18-21 of the amended statement of claim. Those paragraphs make the following allegations:

18. BSAR’s sale of the Retail Component of DMQ was a bad faith breach of the APS

19. Further, Sobhi and Hershberg wilfully induced and caused BSAR to sell the Retail Component to DMQ in breach of its contract with TPA.

20. In addition, or in the further alternative, Sobhi and Hershberg intended to cause damage to TPA by causing the sale of the Retail Component of the DMQ. Their conduct in selling the Retail Component in complete disregard to BSAR’s contractual obligation to sell it to TPA amounts to an unlawful interference with TPA’s economic interest.

21. As a result of BSAR’s breach of the APS, and Sobhi’s and Hershberg’s inducing breach of contract by unlawful means, the TPA has sustained damages. It has lost the increased value of the Retail Component, the benefit of the lease thereof, and other related damages.

[25] While a motion to strike should not prevent a claim from being heard where the alleged legal wrong is in flux, that is not the case here. Even read generously, in my view, the case law makes clear that allegations against individual corporate officers and directors need to go beyond mere bald allegations that the individual defendants induced BSAR to breach its contract with TPA in bad faith.

[26] Without any particulars of the alleged bad faith, or basis for the interests of the individual defendants as separate from the corporation’s interest, the amended statement of claim in this case fits within the framework set out in ADGA and Simkeslak for when claims against individual corporate employees should be struck under Rule 21.

[27] The TPA argues that particulars are not necessary as the breach in this case was so flagrant that it must have involved tortious activity by the individual defendants.

[28] The nature or extent of the corporation’s breach, however, does not in itself lead to separate liability on the part of the officers and directors of the corporation.

[29] For these reasons, the motion to strike the pleadings in the amended statement of claim against the individual defendants is granted.

[30] The TPA submits that in the event the motion to strike is granted, the TPA should be granted leave to amend the amended statement of claim to include additional allegations against the individual defendants. The proposed amended paragraphs include the following new allegations:

9. Sobhi and Hershberg were and are the principals and guiding minds of BSAR. They are businessmen and residents of Toronto. At all times in relation to their tortious conduct as described below, they were acting personally, in their own interests and on their own behalf, independent of their roles as principals and guiding minds of BSAR, and not on behalf of BSAR.

10. Further Sobhi and Hershberg wilfully induced and caused BSAR to sell the Retail Component of DMQ in breach of its contract with TPA. They then diverted the proceeds sale to themselves personally or in such manner as would distance the sale proceeds from BSAR, thereby stripping BSAR of its assets, contrary to BSAR’s interest and for their personal benefit.

11. In addition, or in the further alternative, Sobhi and Hershberg intended to cause damage to TPA by causing the sale of the Retail Component of the DMQ, and then stripping BSAR of its assets for their own personal benefit. Their conduct in selling the Retail Component in complete disregard to BSAR’s contractual obligation to sell it to TPA amounts to an unlawful interference with TPA’s economic interest.

12. In inducing BSAR to breach the APS with TPA, in their unlawful interference with TPA’s economic interest, and in stripping BSAR of its assets, Sobhi and Hershberg were acting in and were motivated by their own personal interests, which were independent of and inconsistent with those of BSAR’s. Their tortious conduct was independent of their roles as the principals and guiding minds of BSAR, and independent of BSAR’s unlawful bad faith breach of the APS. Sobhi and Hershberg are thus personally liable to TPA for their torts. (Amended portions underlined.)

[31] The individual defendants oppose deciding the motion to amend at the same time as the motion to strike the pleadings against the individual defendants in the existing amended statement of claim, as the cross-motion to amend was brought on short notice, and the defendants have not had an opportunity to assess the proposed amendments to determine if they also could be subject to a motion to strike.

[32] The defendants also oppose the cross-motion to amend the pleadings on the basis that the individual defendants have been added to the action only for tactical purposes, so that the plaintiff may gain leverage over the defendants for a more favourable settlement, and this motivation likely applies to the amended pleadings as well.

[33] Rule 26.01 of the Rules of Civil Procedure provides that, “On motion at any stage of an action the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.”

[34] As the Court of Appeal has confirmed, Rule 26.01 requires the Court to grant leave to amend at any stage of the proceeding unless the responding party would suffer non-compensable prejudice; the amended pleadings are scandalous, frivolous, vexatious or an abuse of the Court’s process; or the pleading discloses no reasonable cause of action; see 1588444 Ontario Ltd. v. State Farm Fire and Casualty Company, 2017 ONCA 42, at para. 25.

[35] A motion to amend pleadings also may be denied where it is clear that the plaintiff’s case could not be improved by further amendment, or where there are no additional material facts which could support the allegations; Khursheed v. Venedig Capital SAS, 2019 ONSC 5190.

[36] I find that there is no indication of prejudice to the defendants which would justify denying the TPA’s motion to amend its claim, nor is this a context where it is clear that no further amendment could improve TPA’s claim against the individual defendants. Further, a tactical advantage, even if a motivation behind a motion to amend pleadings, does not rise to an abuse of process in these circumstances.

[37] That said, granting this motion to amend the claim is not equivalent to a finding that the amended pleadings satisfy the requirements for personal liability set out in ADGA and related case law. This issue was not fully argued, given the lack of sufficient notice to the individual defendants. Therefore, granting TPA’s motion to amend under Rule 26 does not preclude the individual defendants from raising further objections to the pleadings.

[38] For the reasons set out above, both the motion by the individual defendants to strike the claim against them, and the cross-motion by the plaintiff to amend the claim against the individual defendants, are granted.

[39] In light of the outcome of these motions, TPA shall serve a fresh as amended statement of claim within 30 days of this judgment.

[40] While the outcome of these motions has been mixed, in light of the success of the individual defendants on the motion to strike the claim against them under Rule 21, and the short notice for TPA’s cross-motion to further amend the amended statement of claim under Rule 26, I award costs in the amount of $10,000, all inclusive, payable by TPA to the individual defendants within 30 days of this judgment.

Sossin J.

Released: October 7, 2019