Court File and Parties

COURT FILE NO.: CV-14-10635-00CL DATE: 2020-02-04 SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST

RE: Extreme Venture Partners Fund I LP, EVP GP Inc., Ravinder Kumar Sharma, Imran Bashir, and Kenneth Teslia, Plaintiffs/Defendants by Counterclaim

AND: Amar Varma, Sundeep Madra, Varma Holdco Inc., Madra Holdco Inc., Chamath Palihapitiya, El Investco 1 Inc., Extreme Venture Partners Annex Fund I LP, EVP GP Annex Fund I Inc., Cassels Brock & Blackwell LLP, and Seven Hills Group LLC, Defendants/Plaintiffs by Counterclaim

BEFORE: Conway J.

COUNSEL: Won J. Kim, Megan B. McPhee and Aris Gyamfi, for the Plaintiffs/Defendants by Counterclaim Ira Nishisato, Katherine J. Menear and Katie Archibald, for the Defendants/Plaintiffs by Counterclaim, Amar Varma, Sundeep Madra, Varma Holdco Inc., Madra Holdco Inc., Extreme Venture Partners Annex Fund I LP and EVP GP Annex Fund I Inc. David E. Lederman, Daniel Cappe and Larissa Fulop, for the Defendants Chamath Palihapitiya and El Investco 1 Inc.

HEARD: In writing

Reasons for decision (RE: COSTS)

[1] After a five-week trial, I granted judgment in favour of the plaintiffs: Extreme Venture Partners Fund I LP v. Varma, 2019 ONSC 2907, 94 B.L.R. (5th) 38 (the "Reasons"). As used in this Endorsement, defined terms have the meanings ascribed to them in the Reasons. All currency references are to Canadian dollars, unless otherwise noted.

[2] In the Annex Fund Claim, I held that Amar, Sunny, Varma Holdco and Madra Holdco (the "Varma/Madra Defendants") established and operated the Annex Fund in breach of their fiduciary or contractual duties. Although Fund I did not prove that it was entitled to compensatory damages, I ordered each of Amar and Sunny to pay $250,000 in punitive damages to Fund I. I dismissed the Varma/Madra Defendants' Counterclaim against the plaintiffs.

[3] In the Xtreme Labs Claim, I held that the Varma/Madra Defendants, together with Chamath and El Investco (the "Palihapitiya Defendants") were liable for breach of fiduciary duty, breach of contract, knowing assistance in breach of fiduciary duty, inducing breach of contract and/or conspiracy in acquiring Xtreme Labs at a discounted price. I further held that the defendants concealed the existence of the equity interest in Hatch Labs and Tinder and appropriated the value of that asset for themselves. I awarded USD$3.36 million in damages to Fund I, Ray and Imran and USD$12.33 million in disgorgement of profits to Fund I.

[4] In the Reasons, I stated that if the parties were unable to agree on costs, I would receive written submissions. I have now received and reviewed the parties' submissions.[^1]

Parties' Positions on Costs

[5] The plaintiffs seek costs from the defendants in the amount of $6,281,439 on a substantial indemnity basis or, in the alternative, $4,366,338 on a partial indemnity basis – in each case inclusive of taxes and $536,812 in disbursements. In addition, the plaintiffs seek substantial indemnity costs of $32,151 from the Varma/Madra Defendants in respect of the Counterclaim.

[6] The Varma/Madra Defendants submit that an appropriate costs award against them is $850,000 on a partial indemnity basis or, in the alternative, $1,200,000 on a substantial indemnity basis. They submit that the plaintiffs should not receive any costs for the Counterclaim.

[7] The Palihapitiya Defendants submit that an appropriate award against them is $550,000 on a partial indemnity basis or, in the alternative, $750,000 on a substantial indemnity basis.

Scale of Costs

[8] The plaintiffs submit that substantial indemnity costs are warranted for the entire action on the basis of the defendants' dishonest conduct that gave rise to the action, their dishonest testimony at trial, and their aggressive conduct in the litigation.[^2] The plaintiffs further submit that they are entitled to substantial indemnity costs for the period after December 31, 2018, the date they served their Rule 49 settlement offer.

[9] I am not persuaded that substantial indemnity costs should be awarded in this case. Awards on this scale are very rarely granted, for example where there has been "reprehensible, scandalous or outrageous conduct."[^3]

[10] I have considered the defendants' litigation conduct. While this was hard fought litigation, the stakes were high. The plaintiffs asserted nine causes of action, including breach of fiduciary duty and conspiracy, and sought to recover over $68 million from the defendants. Both sides pursued their claims or defences vigorously and took whatever steps were available to them. I do not find that there was anything sufficiently untoward in the defendants' conduct of the litigation to call for the sanction of this court through an award of substantial indemnity costs.

[11] The defendants argue that it is only the conduct during litigation that can give rise to substantial indemnity costs, not the wrongful conduct that gave rise to the litigation. I do not read the case law in Ontario so restrictively. Several cases have recognized that in some cases pre-litigation conduct may be one factor to consider in determining whether to award substantial indemnity costs.[^4] However, the cases caution that this scale of costs should not be used to compensate a party twice for the same wrongdoing.[^5]

[12] In the case at bar, I have already awarded $500,000 in punitive damages to signal the court's reprobation of Amar and Sunny's conduct in the Annex Fund Claim. On the Xtreme Labs Claim, the defendants' conduct has already been adequately recognized and addressed through an award of USD$3.36 million in damages and equitable relief of USD$12.33 million in disgorgement of profits. I am not prepared to award substantial indemnity costs in addition to the relief granted.

[13] The plaintiffs' Rule 49 settlement offer does not attract substantial indemnity costs for the period after December 31, 2018. The offer was for $26 million inclusive of interest and costs. As costs are in the discretion of the court, it would have been difficult for the defendants to meaningfully assess the offer to determine whether or not to accept it or proceed to trial. Further, the plaintiffs' submission that they beat their offer of $26 million presupposes that they are entirely successful and indeed exceed their claim for partial indemnity costs. At trial, the plaintiffs were awarded USD$15,690,000 plus $500,000 in punitive damages. At the present exchange rate and including prejudgment interest, the total is $21,604,713. Even if the plaintiffs receive the full amount that they are claiming in partial indemnity costs ($4,366,338), they still would not exceed their offer.

[14] I conclude that partial indemnity is the appropriate scale of costs in this case.[^6]

Quantum of Costs

[15] As noted, the plaintiffs seek costs on a partial indemnity basis in the amount of $4,366,338, inclusive of disbursements and taxes. In my view, that is excessive and beyond the reasonable expectations of the defendants.

[16] There is no question that the defendants could reasonably have expected that the plaintiffs would incur significant costs in pursuing this action. Indeed, in a security for costs motion brought by the defendants in 2015, Justice Hainey ordered the corporate plaintiffs to preserve in their accounts a total of $1 million to cover all defendants' costs to the conclusion of discoveries. This amount was later increased to $2.2 million to include the Varma/Madra Defendants' pre-trial and trial costs (it did not include those of the Palihapitiya Defendants).

[17] The Varma/Madra Defendants have not produced their own bill of costs to support their claim that the costs exceed their reasonable expectations. A court is entitled to infer that an unsuccessful party that does not produce evidence of its own costs devoted as much or more time to the litigation as the successful party did in pursuing them.[^7] While the Palihapitiya Defendants did provide a bill of costs for $889,711 on a partial indemnity basis, they used the rates set by the Information for the Profession, Appendix B. The Court of Appeal has recognized that these rates are now out of date and that amounts calculated at 55-60% of a reasonable actual rate might more appropriately reflect partial indemnity, particularly in the context of two sophisticated litigants well aware of the stakes.[^8]

[18] However, while the defendants could have expected a significant costs award against them, I do not accept that they could reasonably have expected one of the magnitude sought by the plaintiffs.

[19] The plaintiffs submitted a detailed bill of costs, broken down into the various stages of the litigation (the "Bill of Costs").[^9] I have reviewed the Bill of Costs and find it problematic in several respects. For example:

(a) The hourly rates in the Bill of Costs for the pleadings stage are higher than those in the dockets produced for that stage of the proceeding. For example, Mr. Kim's hourly rate is $890 in the Bill of Costs but $700 in the dockets.

(b) The plaintiffs claim 606.65 hours to prepare for and draft the statement of claim; 251.2 hours to draft an amended statement of claim; and 152.9 hours to review the statements of defence and draft a reply. Seven or eight timekeepers worked on each of those stages. The total partial indemnity fees claimed for the pleadings alone is over $305,000.

(c) The plaintiffs claim $773,899 for over 3,200 hours of trial preparation. They claim another $704,100 for 3,100 hours of work conducted during the trial – on top of the time attending trial in court.

(d) The plaintiffs claim full-day attendances (for three lawyers) for 28 days of trial time. In fact, there were only 24 full days and four partial day attendances.

(e) The plaintiffs claim fees for attending discoveries of the defendants Seven Hills Group LLC and Cassels Brock & Blackwell LLP. The claim against Seven Hills was dismissed on a summary judgment motion and the action against Cassels Brock settled prior to trial. While the plaintiffs do not seek costs following those defendants' exit from the action, in my view the plaintiffs should not be entitled to claim any costs with respect to those defendants.

(f) The plaintiffs claim costs in preparing their two experts (Messrs. May and Ferguson) for trial as well as disbursements for the expert reports. At trial, Mr. May was qualified on a narrow issue of damages for the Annex Fund Claim. Mr. Ferguson testified on both the Annex Fund Claim and the Xtreme Labs Claim. I preferred the defendants' expert evidence on the Annex Fund Claim over that of Mr. Ferguson. I did not find either side's expert to be of much assistance on the Xtreme Labs Claim. I consider it appropriate to discount the expert fees and disbursements to reflect the limited value of their evidence.

(g) The plaintiffs claim fees in respect of various pre-trial motions and applications for which costs were already decided or which were not part of the action before me.[^10]

[20] The Bill of Costs includes $397,747 on a partial indemnity basis for the Palihapitiya Defendants' unsuccessful summary judgment motion, the costs of which were reserved to the trial judge. The Palihapitiya Defendants' partial indemnity costs (using the lower hourly rates from the Information to the Profession, Appendix B) were $93,004. This was a motion with significant consequences to the plaintiffs' claim for conspiracy as the action could have been dismissed against the Palihapitiya Defendants in its entirety. I consider a reasonable quantum for this motion to be $250,000.

[21] With respect to the other Rule 57 factors, I acknowledge that this was a complex claim that involved numerous factual and legal issues. It required significant effort on the part of the plaintiffs to prove a conspiracy among the defendants on the Xtreme Labs Claim. It was extremely important to the parties given the nature of the allegations and the amounts at issue.

[22] However, I have also considered comparable awards in other cases.[^11] The plaintiffs have not put forward any cases in which partial indemnity costs of over $4 million have been awarded for a trial of this length. The defendants point out that full indemnity costs of $4,766,679 were awarded following a 90-day trial in Envoy Relocation Services Inc. v. Canada (Attorney General)[^12] and $5,478,005 in partial indemnity costs (of which $1,466,940 was disbursements) were awarded following a 41-day trial in Trillium Motor World Ltd. v. General Motors of Canada Limited.[^13]

[23] The overriding principle in awarding costs is to fix an amount that is fair and reasonable for the unsuccessful party to pay in the particular proceeding, rather than an amount fixed by the actual costs incurred by the successful litigant: Boucher et al. v. Public Accountants Council for the Province of Ontario et al.[^14]

[24] Overall, taking into account the factors in Rule 57.01(1), I consider that a fair and reasonable costs award for the action is $2,200,000, inclusive of disbursements and taxes, and I exercise my discretion under s. 131 of the Courts of Justice Act, R.S.O. 1990, c. C-43 accordingly.

[25] With respect to the Counterclaim, the Varma/Madra Defendants submit that I should not award any costs of the Counterclaim as it was subsumed in the trial and impossible to separate out. I disagree. The Varma/Madra Defendants brought a separate Counterclaim that involved discrete issues from those in the trial. They were unsuccessful and the plaintiffs are entitled to their costs. I consider partial indemnity costs of $20,000 to be reasonable for the Varma/Madra Defendants to pay for the Counterclaim.

Apportionment and Payment

[26] As noted, there were two claims at trial – the Annex Fund Claim and the Xtreme Labs Claim – as well as the Counterclaim. The allegations of wrongdoing in the Annex Fund Claim were on the part of the Varma/Madra Defendants and not the Palihapitiya Defendants. My findings of liability were only with respect to the Varma/Madra Defendants and only those defendants are responsible for the costs of the Annex Fund Claim. The Counterclaim was brought by the Varma/Madra Defendants and they are solely responsible for the costs of the Counterclaim.

[27] With respect to the Xtreme Labs Claim, the findings of misconduct applied to the Varma/Madra Defendants and the Palihapitiya Defendants. I found that the defendants worked together and conspired with one another to purchase Xtreme Labs at a discounted price. The damage and disgorgement awards were made on a joint and several basis. Since the defendants' conduct was completely intertwined, they should all be responsible for the Xtreme Labs Claim costs and pay them on a joint and several basis (except for the costs of the summary judgment motion, which shall be paid by the Palihapitiya Defendants alone).

[28] The plaintiffs have not broken down their costs as between the two claims so it falls to this court to make an equitable allocation of the costs. In my view, significantly more than half of the time at trial was attributable to the Xtreme Labs Claim. That claim was the more factually complex one. It involved the defendants' acquisition of Xtreme Labs and their carveout and subsequent sale of Hatch Labs/Tinder. It was the more challenging claim to prove since it was a conspiracy case in which the plaintiffs were not privy to the meetings and discussions of the defendants.

[29] I am therefore allocating 25% of the costs award to the Annex Fund Claim ($550,000) and 75% to the Xtreme Labs Claim ($1,650,000). The $250,000 for the summary judgment motion is deducted from the latter amount and payable by the Palihapitiya Defendants. The balance of $1,400,000 is payable by both sets of defendants on a joint and several basis.

[30] Costs of the Annex Fund Claim shall be payable to Fund I, to whom the punitive damages are payable as set out in the Reasons. Costs of the Counterclaim shall be payable to the plaintiffs.

[31] Costs of the summary judgment motion shall be payable to the plaintiffs. The remaining costs of the Xtreme Labs Claim shall be payable to Fund I, Ray and Imran, who recovered damage and/or disgorgement awards as set out in the Reasons.

Decision on Costs

[32] To summarize, costs of the action are payable as follows:

(a) The Varma/Madra Defendants shall pay costs of $550,000 to Fund I, on a partial indemnity basis, for the Annex Fund Claim;

(b) The Varma/Madra Defendants shall pay costs of $20,000 to the plaintiffs, on a partial indemnity basis, for the Counterclaim;

(c) The Palihapitiya Defendants shall pay costs of $250,000 to the plaintiffs, on a partial indemnity basis, for the summary judgment motion; and

(d) The Varma/Madra Defendants and the Palihapitiya Defendants shall pay costs of $1,400,000 to Fund I, Ray and Imran, on a partial indemnity basis, for the Xtreme Labs Claim, on a joint and several basis.

[33] All amounts are inclusive of disbursements and taxes.

Conway J.

Date: February 4, 2020

[^1]: After receiving the plaintiffs' submissions on June 5, 2019, the defendants' counsel sought further disclosure with respect to the costs claimed by the plaintiffs. At subsequent case conferences, I directed plaintiffs' counsel to provide copies of their dockets for the pleadings stage and a description of the fee agreement with their clients. The Varma/Madra Defendants brought a motion for further disclosure on December 13, 2019, which I dismissed. I directed the defendants to deliver their costs submissions by January 16, 2020 with the plaintiffs' reply by January 24, 2020.

[^2]: The plaintiffs refer to the defendants' refusals on discovery, refusals to make admissions and failure to make meaningful settlement offers. The plaintiffs further submit that the Varma/Madra Defendants tried to exert pressure on the plaintiffs while the trial was ongoing by taking steps with respect to the distribution of the Uken proceeds and bringing a contempt motion with respect to a previous security for costs order.

[^3]: Quebec (Attorney General) v. Lacombe, 2010 SCC 38, [2010] 2 S.C.R. 453, at para. 67, citing Young v. Young, 1993 34 (SCC), [1993] 4 S.C.R. 3, at p. 134.

[^4]: Oz Optics Ltd. v. Timbercon Inc., 2012 ONCA 735, at para. 16; McBride Metal Fabricating Corp. v. H & W Sales Co. (2002), 2002 41899 (ON CA), 59 O.R. (3d) 97 (C.A.), at para. 39; Hunt v. TD Securities Inc. (2003), 2003 3649 (ON CA), 66 O.R. (3d) 481 (C.A.), at para. 123; Grillo v. D'Angela, 2009 CarswellOnt 455 (S.C.), at para. 20.

[^5]: Hunt v. TD Securities Inc., at paras. 130-131; Panapers Inc. v. 1260539 Ontario Ltd., 2007 ONCA 3, at para. 5; Gerula v. Flores (1995), 1995 1096 (ON CA), 126 D.L.R. (4th) 506, at p. 527 (Ont. C.A.).

[^6]: The plaintiffs admit that adverse credibility findings are generally not sufficient to warrant substantial indemnity costs: Hunt v. TD Securities Inc., at para. 147.

[^7]: Andersen v. St. Jude Medical, Inc (2006), 2006 85158 (ON SCDC), 264 D.L.R. (4th) 557, at para. 27 (Ont. Div. Ct.).

[^8]: Inter-Leasing, Inc. v. Ontario (Minister of Revenue), 2014 ONCA 683, at para. 5.

[^9]: The defendants sought copies of the plaintiffs' dockets to evidence the time and hourly rates set out in the Bill of Costs. I ordered that dockets be produced for the pleadings stage. When it became apparent that the plaintiffs had a fee arrangement with their clients, I ordered plaintiffs' counsel to provide a brief description of that arrangement. Ms. McPhee's letter of October 24, 2019 described the arrangement as "30% of the amounts (including damages and interest but excluding costs and disbursements) recovered by the Plaintiffs under any judgment or settlement in their favor". I note that pursuant to s. 20.1(1) of the Solicitors Act, R.S.O. 1990, c. S.15, the court shall not reduce the amount of costs only because a solicitor is being compensated in accordance with a contingency fee agreement. I am satisfied that I can fairly determine costs on the basis of the Bill of Costs and evidence before me.

[^10]: This includes the Varma/Madra Defendants' motion to strike, which was withdrawn when the plaintiffs amended their statement of claim. The plaintiffs sought costs thrown away, which was denied by the court. The costs of motions for security for costs were either decided or not sought or awarded. The costs of refusals motions were already decided. Applications to inspect Fund I's books and records were not part of this action and were ultimately resolved on agreed terms.

[^11]: Davies v. Clarington (Municipality), 2009 ONCA 722, 100 O.R. (3d) 66, at para. 51, citing Murano v. Bank of Montreal (1998), 1998 5633 (ON CA), 41 O.R. (3d) 222 (C.A.), at p. 249.

[^12]: 2013 ONSC 2622.

[^13]: 2016 ONSC 1725, 35 C.B.R. (6th) 126. In that case, the costs award was in favour of a defendant that had successfully resisted the plaintiffs' claim.

[^14]: (2004), 2004 14579 (ON CA), 71 O.R. (3d) 291 (C.A.).