Court File and Parties

COURT FILE NO.: CV-12-449387

DATE: 20210113

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: KINGSABBEY INVESTMENTS LTD, Plaintiff

AND:

HVAC DESIGNS LTD., ENERGY SAVINGS PRODUCTS LTD., TEMP-MIZER CANMADA LTD., AND BRENMAR HEATING & AIR CONDITIONING LTD., Defendants

BEFORE: Stinson J.

COUNSEL: Alfred Esterbauer, for the plaintiff, Kingsabbey Investments Ltd., responding party Miriam Tepperman, for the defendant, Energy Savings Products Ltd., moving party No submissions on behalf of other parties

HEARD at Toronto via Videoconference: November 26, 2020

REASONS FOR DECISION

[1] These reasons concern a motion brought by the defendant Energy Savings Products Ltd. (ESPL).

Background

[2] This case concerns a claim for damages arising from allegedly defective heating, ventilation and air conditioning (HVAC) systems that were designed, supplied and installed by the defendants (including ESPL), at a condominium townhouse project in Toronto. The builder of the project was Watermark Designs Ltd., an affiliate of the plaintiff Kingsabbey. Both were subsidiaries of the same parent corporation, The Georgian Corporation, sometimes known as the Georgian Group.

[3] Watermark was a sole purpose corporation, created to construct the townhouse project. The project was completed in 2009. It lost money, in part due to the problems with the HVAC systems. Watermark commenced this action in 2012. It made a bankruptcy filing on August 28, 2014. Before that event, on June 30, 2014, Watermark assigned its rights under this action to Kingsabbey.

[4] Under the provisions of Rule 11 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (which govern the transfer of an interest in a proceeding) where one party’s interest is transmitted to another, the action is stayed until an Order to Continue is obtained. Despite that requirement, Watermark’s/Kingsabbey’s then-lawyer (who had represented Watermark and who had prepared the assignment document – not current counsel) did not obtain an Order to Continue until August 2, 2016, more than two years later.

[5] According to the lawyer’s evidence, he overlooked the requirement for an Order to Continue, through error. He states that he did not attribute much significance to the assignment because Watermark and Kingsabbey were related companies, the same Georgian Corporation personnel would be the relevant witnesses, and the evidence and documentary production would be the same.

[6] In essence, up until the summer of 2016, he continued to prosecute the action, purportedly in the name of Watermark, as if nothing had changed. In July 2014, he served an affidavit of documents (that had been sworn by a representative of Watermark prior to the assignment); he requested production from the other parties; he scheduled examinations for discovery; in March 2015, he served a Response to a Request to Admit, purportedly on behalf of Watermark; in March 2016, he examined a representative of the defendant HVAC Designs for discovery and he produced an individual who purported to be a representative of Watermark, as the plaintiff’s witness on its examination for discovery.

[7] In the spring of 2016, ESPL brought a motion for security for costs against Watermark, the party still named as the plaintiff in the action. Up until this time the defendants were unaware of either the assignment to Kingsabbey or the Watermark bankruptcy.

[8] According to the evidence of Watermark’s/Kingsabbey’s then-lawyer, only at this point did he advert to the need for a Rule 11 Order to Continue. Conscious of the fact that the bankruptcy had occurred within 60 days of the assignment of the cause of action, he decided to contact Watermark’s trustee in bankruptcy, to enquire whether the trustee was interested in the asset represented by the Watermark litigation. Upon receiving a negative response, he applied for an Order to Continue by way of an over-the-counter motion, without notice to the other parties to this action.

[9] The Order to Continue was issued by the Registrar on August 2, 2016 and was served two days later. As a result, the ESPL motion for security for costs, that had been returnable on August 16, 2016 was adjourned. The motion was ultimately withdrawn and Kingsabbey was ordered to pay costs thrown away in the amount of $7,000. That amount was paid. The next formal step in the proceeding was this motion.

The scope of this motion

[10] In its notice of motion dated March 2, 2018, ESPL sought “a finding by way of summary judgment that the Plaintiff carried out an abuse of process" and “an Order that the action be dismissed with prejudice as a sanction". The notice of motion listed alternative relief, including striking out the statement of claim on the grounds it did not disclose a cause of action benefiting the listed plaintiff, Kingsabbey, an order striking the Order to Continue, and other alternative relief, including past costs and security for costs.

[11] The factum filed by ESPL did not address all the relief sought in the notice of motion. The responding factum of Kingsabbey questioned whether some of the issues raised either in the notice of motion or in the ESPL factum were appropriate for resolution at this stage of the proceeding or in this forum.

[12] Considering the foregoing, at the outset of argument I asked counsel for ESPL to clarify the intended scope of the motion so that the submissions of both counsel could be focused on the issues that the court was being asked to decide. In response, counsel for ESPL advised that, on the motion before me:

(a) ESPL is not seeking an order for security for costs;

(b) ESPL is not seeking an adjudication of the question whether Kingsabbey was entitled to advance the cause of action pleaded in the statement of claim;

(c) ESPL is not asking for a finding that the assignment from Watermark to Kingsabbey was a fraudulent conveyance;

(d) ESPL is not asking for a finding that the assignment was invalid as a transfer of the bear chose in action.

[13] Rather, the finding sought by ESPL is that Kingsabbey has committed an abuse of process. Based on that assertion, ESPL asks the court to impose the sanction of a stay of proceedings.

Positions of the parties

[14] ESPL argues that Kingsabbey/Watermark intentionally kept the assignment and bankruptcy secret for more than two years. During that time, the litigation was purportedly conducted by Watermark as a masquerade for Kingsabbey. ESPL submits that this intentional conduct prevented it from asserting its rights as a creditor of Watermark in the bankruptcy. It argues that the two-year non-disclosure prevented it from making a request, on a timely basis, to Watermark’s trustee in bankruptcy to take steps to set aside the assignment, so that ESPL could acquire the rights to the action and settle it. As a consequence, ESPL has been prejudiced, such that a stay of proceedings is warranted.

[15] Kingsabbey submits that there is no merit to ESPL’s position. The failure to disclose the assignment and obtain an Order to Continue on a timely basis was entirely due to the inadvertence of Watermark’s/Kingsabbey’s then-lawyer. The non-disclosure was unintentional and in no way a ploy by the plaintiff or its lawyer. It argues that it is inappropriate to sanction a party for an inadvertent error by counsel that has caused no prejudice to the opposing side. It is incorrect and speculative to suggest that ESPL was prejudiced by the lawyer’s mistake. ESPL has been fully compensated for any costs thrown away by means of the costs award made when its motion for security for costs was withdrawn. Kingsabbey therefore submits that there has been no abuse of process and no sanction is warranted.

Analysis

[16] I will address at the outset the assertion by ESPL that the non-disclosure of the assignment from Watermark to Kingsabbey and the bankruptcy of Watermark was intentional. ESPL also asserts that the delay in obtaining the Order to Continue was intentional as well. For the following reasons, I find they were not. Rather, I find that these omissions were the product of an error on the part of the responsible lawyer and in no way were the result of any design or intention on the part of the client(s).

[17] ESPL complains that numerous steps in the litigation were purportedly taken on the name and on behalf of Watermark, after a time when the undisclosed assignment to Kingsabbey was in place. These included: delivery of an affidavit of documents and supplementary productions; responding to a Demand for Particulars and a Request to Admit; producing a representative of Watermark to be examined for discovery on behalf of the plaintiff, despite the cause of action having been assigned to Kingsabbey; and purportedly corresponding with the parties to the action for more than two years in the name of Watermark. All the while, Kingsabbey and its lawyer were aware that Watermark no longer had any interest in the lawsuit.

[18] Although those facts are accurate, ESPL was unable to point to any evidence that either Watermark or Kingsabbey, or any of its principals or lawyers, carried out any of these activities with the intent of misleading the court or the other parties to the litigation. Rather, the unchallenged evidence of the lawyer is that he was not familiar with the requirement to obtain a Rule 11 Order to Continue in the context of an assignment of a cause of action, such as was made by Watermark to Kingsabbey. He conceded it was his mistake. From his perspective, it was not a significant event because he was still dealing with the same individuals at the Georgian Group and prosecuting the same action on their behalf. That is why he continued with the prosecution of the action as he did.

[19] While in retrospect the lawyer’s error is apparent, his explanation for it makes sense. Moreover, it is illogical that the lawyer would either carry out or seek to hide these underlying events for an improper purpose. Were he to do so, the lawyer would risk a sanction for unprofessional conduct by the Law Society. There is no ready reason why the lawyer would do that to aid an arm’s-length client such as this.

[20] There is no evidence that the client(s) had any part in the decision not to disclose the assignment or the bankruptcy or to delay obtaining the Order to Continue or that they were even aware of these omissions. To the contrary, the evidence is to the effect that the client(s) relied on the lawyer to take all procedural steps in relation to the conduct of the litigation, including obtaining the Order to Continue. Given the nature of the litigation, this is unsurprising. The evidence of the lawyer is consistent with that of the client(s): he didn’t advise the client(s) prior to mid-March 2016 that an Order to Continue was required.

[21] There is also no evidence that Kingsabbey had anything to gain through a delay in obtaining an Order to Continue or that it intentionally delayed undertaking any necessary procedural steps. This is not a situation where an assignment or other procedural step was taken to avoid a potential motion for security for costs or for other tactical reasons.

[22] The ESPL motion for security for costs was not initiated until almost two years after the assignment from Watermark to Kingsabbey, so the two events are unconnected. The delayed disclosure of the assignment and the late procurement of the Order to Continue resulted in an adverse order for costs when the previous motion for security for costs was withdrawn. Thus, a sanction for the consequences of this omission has already been imposed.

[23] Based on the evidence, I find as a fact that the reason for the delay in obtaining the Order to Continue and the disclosure of the bankruptcy of Watermark was inadvertence and oversight by the lawyer and no improper, intentional or calculated reason.

[24] I turn next to the subject of prejudice.

[25] As I understand its position, ESPL claims it has been prejudiced in two ways by the delay in obtaining the Order to Continue and the failure of Watermark/Kingsabbey to disclose the assignment and Watermark’s bankruptcy in a timely fashion.

[26] In the first instance, ESPL submits that it has been engaged for the past 6 years in defending a claim asserted by Watermark, an entity that assigned away its claim in June 2014 and has been bankrupt since August 2014. In effect, ESPL has been fighting a phantom, and as a result it has been prejudiced from a procedural perspective. For the reasons below, I do not accept that submission.

[27] As I concluded above, the delay and the non-disclosure were inadvertent omissions on the part of the responsible lawyer. The steps that were taken in advancing the litigation in the name of Watermark, however, were the very steps that would have been taken in the name of Kingsabbey had the Order to Continue been procured when it should have, in mid-2014. Save for mentioning and disclosing the transition from Watermark to Kingsabbey and the assignment itself, the same documents would have been produced; the same responses would have been provided to the Request to Admit; the same witness would have been produced for examination for discovery.

[28] This is not a case like Aecon Buildings v. Stephenson Engineering Limited, 2010 ONCA 898, in which the existence of a Mary Carter agreement was not disclosed for a significant length of time. The nondisclosure was critical, since it meant that the third and fourth parties were unaware that the landscape of the action had dramatically changed: the defendant would no longer be vigorously defending the action, but rather was being used as a tool to assist the plaintiff in recovering against the third parties. In the result, the court found that the lack of timely disclosure was a serious abuse of the court's process and sanctioned Aecon by staying the action as a penalty for failing to immediately disclose the Mary Carter agreement.

[29] By contrast, in the present case, the assignment of the cause of action did not "change the landscape of the litigation". Rather, it merely substituted one plaintiff (a related corporation) for another, advancing the same claim in the same fashion as before. The causes of action, the relevant documents, the evidence required to be led in the proceeding, and the value of steps taken in the action before the Order to Continue all remain of benefit to the parties and need not be duplicated. Unlike the situation in Aecon, there is no unfairness or prejudice that has been caused to ESPL or any other party.

[30] One step that might have unfolded differently is ESPL’s motion for security for costs. The late procurement of the Order to Continue derailed that process. As a consequence, an adverse order for costs was made against and paid by Watermark/Kingsabbey. At present, now that the proceeding has been regularized, nothing prevents ESPL from bringing a fresh motion for security for costs as against Kingsabbey.

[31] I therefore conclude that, from a purely procedural perspective, ESPL has suffered no prejudice.

[32] The second fashion in which ESPL submits it was prejudiced is that the two-year non-disclosure prevented it from making a request, on a timely basis, to Watermark’s trustee in bankruptcy to take steps to set aside the assignment. Had it been able to do so in 2014, the argument continues, ESPL could have acquired the rights to the action and settled it. For the following reasons, I do not accept that ESPL was prejudiced as it asserts.

[33] It is uncontested that Watermark did not, when it made its bankruptcy filing on August 28, 2014, disclose to its trustee in bankruptcy or its creditors the assignment of its rights in this action to Kingsabbey on June 30, 2014. It was not until the spring of 2016 that the trustee in bankruptcy was made aware of the assignment and that it had been made less than 60 days before the bankruptcy, thus making it susceptible to challenge. Despite receiving that information, however, the trustee in bankruptcy advised that he was not interested in the litigation and would not seek to challenge the assignment.

[34] It is further uncontested that ESPL had no knowledge of the assignment or the bankruptcy of Watermark until early August of 2016, when it received a copy of the Order to Continue. That is the first occasion upon which ESPL could consider the impact of these events and potential steps it might take as a result.

[35] ESPL’s lawyer promptly contacted the trustee in bankruptcy to discuss the situation. He informed the trustee that ESPL had an interest in the litigation and wanted to negotiate the purchase of the cause of action. On August 25, 2016, he wrote to the trustee and made a formal offer to purchase the cause of action for $10,000 “if the purported assignment can be set aside and the action transferred to [his] client”. According to the evidence of ESPL’s lawyer, the trustee never responded.

[36] There is no evidence, however, that ESPL took any further steps either to pursue the matter with the trustee or to seek the intervention of the court to compel the trustee to act. There is likewise no evidence that, armed with the knowledge that it had at the time (i.e. in August 2016), ESPL was in any way impeded from advancing whatever interest it claims to have had.

[37] Assuming (without deciding) that ESPL had standing as a creditor of Watermark (grounded, as it argues, on its status as a defendant in this litigation with a potential claim for costs), based on the evidence before me, nothing transpired between August 2014 and August 2016 that prevented ESPL from pursuing in August 2016 the rights it had in August 2014 as an alleged creditor in Watermark’s bankruptcy.

[38] In August 2016, ESPL attempted to persuade the trustee in bankruptcy to take steps to set aside the assignment, just as it might have done in 2014. When no response was received in 2016, it failed to follow up. In August 2016, in the face of the trustee’s non-response, ESPL could have brought a court application to assert its rights as a creditor and to compel action on the part of the trustee to deal with the assignment issue, just as it might have done in 2014. It did not do so. To that extent, by reason of its failure to pursue steps that were within its power, ESPL is the author of its own misfortune.

[39] If ESPL had pursued these options in 2016 or subsequently, we would know today what the outcome was. Specifically, we would know whether the non-disclosure in 2014 of the assignment and the bankruptcy somehow prevented ESPL from accomplishing its goal of obtaining an assignment of the cause of action and then settling this action on terms favourable to it. In the face of ESPL’s failure to take these steps, it is mere speculation to conclude that the non-disclosure had any adverse impact on it or its rights. The mere fact that the other defendants may have become insolvent over the period of delay is irrelevant because it has no bearing on this issue.

[40] As the moving party, ESPL has the onus of establishing the factual basis upon which it rests its claim for relief. However, it has failed to proffer sufficient evidence to persuade me that it lost any rights of value by reason of the delay in disclosure by Watermark/Kingsabbey. In the absence of such evidence, no cause-and-effect relationship has been shown and ESPL has failed to discharge its onus. I therefore find as a fact that ESPL was not prejudiced in the fashion it asserts.

Conclusion and Disposition

[41] For the foregoing reasons, I find as follows:

(a) the delay in disclosure of the assignment and the bankruptcy of Watermark was unintentional and does not support ESPL’s complaint of abuse of process; and

(b) ESPL suffered no prejudice arising from the delay in disclosure.

[42] Based on these findings I conclude that there is no basis to impose the sanction of a stay of proceedings. ESPL’s motion is therefore dismissed.

Costs

[43] Both sides submitted Costs Outlines, each premised on them achieving success on the motion before me. Considering the plaintiff was the successful party, and in the absence of any reason to depart from the usual practice of awarding costs to the successful party on a motion, the plaintiff is entitled to an award of costs.

[44] In relation to the appropriate scale of costs, no grounds were advanced, nor any submission made by the plaintiff to depart from the normal practice of awarding costs on a partial indemnity scale. Even if such a request had been made, I do not consider this to be a rare and exceptional case where a punitive costs award on a substantial indemnity basis would be warranted. I would therefore fix the plaintiff’s costs on a partial indemnity scale.

[45] In relation to quantum, the Costs Outline of the plaintiff seeks fees before HST of $25,507 on a substantial indemnity basis and $18,062.70 on a partial indemnity basis (a factor of approximately 70% of substantial indemnity costs). This compares to the Costs Outline of ESPL which seeks fees before HST of $25,844.13, without expressly stating whether the calculation is premised on a partial or substantial indemnity scale. That sum is based on a stated hourly rate for senior counsel for ESPL of $275 (for a lawyer with 17 years’ experience) as compared to a $350 substantial indemnity hourly rate for senior counsel for the plaintiff (for a lawyer with 41 years’ experience). I therefore infer that the ESPL fees are calculated on a substantial indemnity scale. Applying the same 70% ratio used by the plaintiff, means that, calculated on a partial indemnity basis, the ESPL claim for fees equates to $18,090.89 on a partial indemnity scale.

[46] Thus, the parties’ costs claims each seek an almost identical amount for fees: $18,062.70 versus $18,090.89. As their Costs Outlines reflect, each side prepared extensively and invested comparable resources. ESPL must have anticipated the quantum of costs that it could reasonably expect to pay. The motion was important for both sides, since it would have disposed of the claim, without a determination on the merits. Overall, the impact of the applicable factors under Rule 57.01(1) is virtually the same for each side. If anything, the overbroad scope of the notice of motion and the relief described in ESPL’s factum caused the costs to be higher than they might otherwise have been.

[47] In consideration of the foregoing, I would fix the plaintiff’s fees at $18,000. To that sum I would add HST of $2,340 and disbursements as claimed of $1,431.86, for a total costs award payable by ESPL to the plaintiff of $21,771.86. That sum shall be paid within 30 days of the date of release of these Reasons for Decision.

Stinson J.

Date: January 13, 2021