COURT FILE NO.: CV-05-0880 DATE: 20210618

ONTARIO SUPERIOR COURT OF JUSTICE

B E T W E E N:

TOM JARVIS Plaintiff by Counterclaim

-and-

1350369 ONTARIO INC., GRAYDON DAVID CRAGG, G.B. CRAGG INSURANCE BROKER LIMITED and JOHN DOE Defendants by Counterclaim

A N D B E T W E E N:

DARREN O'HALLORAN Plaintiff by Counterclaim

-and-

1350369 ONTARIO INC., GRAYDON DAVID CRAGG, G.B. CRAGG INSURANCE BROKER LIMITED and JOHN DOE Defendants by Counterclaim

A N D B E T W E E N:

SEAN QUINN Plaintiff by Counterclaim

-and-

1350369 ONTARIO INC., GRAYDON DAVID CRAGG, G.B. CRAGG INSURANCE BROKER LIMITED and JOHN DOE Defendants by Counterclaim

A N D B E T W E E N:

WENDY BREDIN Plaintiff by Counterclaim

-and-

1350369 ONTARIO INC., GRAYDON DAVID CRAGG, G.B. CRAGG INSURANCE BROKER LIMITED and JOHN DOE Defendants by Counterclaim

A N D B E T W E E N:

JENNIFER RACHO Plaintiff by Counterclaim

-and-

1350369 ONTARIO INC., GRAYDON DAVID CRAGG, G.B. CRAGG INSURANCE BROKER LIMITED and JOHN DOE Defendants by Counterclaim

Judith L. Turner, for the Plaintiffs by Counterclaim Scott R. Fairley, for the Defendants by Counterclaim Scott R. Fairley, for the Defendants by Counterclaim

EBERHARD J.

[1] This bifurcated trial was heard November 27, 28, December 1, 2, 3, 4 and 5, 2014 and by written submissions; and March 23, 26, 30, 31 and April 1, 2021 followed by written submissions as to costs. A 12 day trial itself suggests a range of reasonable costs, bearing in mind that such an event inevitably is the tip of an iceberg of time in pre-litigation negotiation, a change in lawyering from solicitors to litigation focussed barristers, research and document preparation, gathering the evidence and retaining experts to give it meaning, ongoing negotiation, conventional motions and pre-trial appearances, much of the latter warning that the cost of litigation may soon become the tail that wags the dog.

[2] So it is in the present case where judgment and interest, 16 years after the events in question, comes to $309,801.29 and the successful parties claim for partial (at 70%), substantial (at 85%) and full indemnity costs amount to $129,681.74, $157,470.69 and $185,259.64 respectively.

[3] I am asked to fix costs, not assess them. I do not intend a line by line investigation of the comparative time spent by counsel in preparation for pre-trial. Nor do I intend a comparison of the disbursements for the Plaintiff’s expert as against one of the Defendants’ experts for different types of analysis while the disbursement for the other Defendant expert with a comparable method is not disclosed.

[4] My approach to costs arguments about offers was predicted in my Reasons for Decision on Quantum of Damages ("Part Two"):[^1]

[60] I note that Tom Jarvis’s offers in 2005 were for immediate payment. This would be significant if the offers he made were sufficient for the value of the assets he was purchasing. That could not really be known, since no acceptable value was ever reached by negotiations. Regrettably the offers put forward by either side in the 2005 negotiations cannot be assessed as reasonable or unreasonable until my determination is made in this trial.

[61] That said, I have reviewed the correspondence of July and August 2005. How the offers exchanged compare to my ultimate finding will carry some consequence, I suppose, when costs are considered but I will say that the reprehensible deceit of the Defendants which featured strongly in my findings of liability do not continue into my assessment of the negotiations between Graydon Cragg and Tom Jarvis, joined by Darren O' Halloran. I find Tom Jarvis did put forth offers in sincere attempt to negotiate a purchase price and attempted to explain his logic. Graydon Cragg negotiated in his typical, big picture manner. I have not forgotten the improper pressure Mr. Quinn later introduced, but essentially Tom Jarvis and Graydon Cragg just could not come to a deal and, permission from Dundee having been granted for the Defendants to continue under the Dundee umbrella because Graydon Cragg told them a resolution was forthcoming, the urgency of negotiations bogged down. For 16 years.

[5] I also made comment about punitive damages, that the Defendants rely on in relation to elevated costs for conduct, in my Reasons for Decision on Liability ("Part One"):[^2]

Punitive Damages

[323] David Velanoff, who has seen much, thought this departure was the worst he has seen. He described the conduct as unfair and unprofessional. I agree. The commercial context of the conduct however, means that the wrong suffered was an economic one. Graydon Cragg was deprived of an asset he had and must be compensated. The nature of the loss does not shock the community in the sense that cases such as Whiten do. I decline to order punitive damages.

[6] The issues for me to determine in this costs decision are whether the costs claimed are justified by the Bills of Costs; and, whether there should be enhanced costs based on: offers made at the outset; litigation conduct; the nature of the Defendants’ liability; and, finally, whether Mr Quinn is liable for any portion of the costs where liability was found but no damages sought against him.

[7] I decline to consider the Plaintiff’s submissions regarding financial consequences to Mr. Cragg at the end of the business venture, such as the loss of opportunity to take tax advantage of a capital loss and moving costs incurred. These are not topics for costs and were not part of the claims for damages raised in the trial. Although the Plaintiff put some evidence before me in the costs submissions, it would also be procedurally unfair to expect the Defendants to respond.

[8] I find that the Bills of Costs presented by the Plaintiff, for the purposes of fixing costs are within the range one would expect for a trial lasting 12 days and out of court activity over 16 years. As in many statements of the time expended, there are elements of duplication, and exploration of paths not pursued but of the overcharges suggested by the Defendants, namely comparable pre-trial preparation, 70% rather than 65-66% conventionally applied, tax calculations not used, higher expert disbursement. I see nothing glaring to require drastic reduction.

[9] I find there is reason for enhanced costs.

[10] I find that neither the Plaintiff nor Defendants are assisted by the "offers" they put forward.

[11] The requirements in Rule 49.10 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 are clear:

Plaintiff’s Offer

49.10 (1) Where an offer to settle,

(a) is made by a plaintiff at least seven days before the commencement of the hearing;

(b) is not withdrawn and does not expire before the commencement of the hearing; and

(c) is not accepted by the defendant,

and the plaintiff obtains a judgment as favourable or more favourable than the terms of the offer to settle, the plaintiff is entitled to partial indemnity costs to the date the offer to settle was served and substantial indemnity costs from that date, unless the court orders otherwise.

Defendant’s Offer

(2) Where an offer to settle,

(a) is made by a defendant at least seven days before the commencement of the hearing;

(b) is not withdrawn and does not expire before the commencement of the hearing; and

(c) is not accepted by the plaintiff,

and the plaintiff obtains a judgment as favourable as or less favourable than the terms of the offer to settle, the plaintiff is entitled to partial indemnity costs to the date the offer was served and the defendant is entitled to partial indemnity costs from that date, unless the court orders otherwise.

[12] Aside from not meeting Rule 49.10(2) requirements, the Defendants never came close to the trial result so there is no basis for asserting that they made efforts to settle that could have obviated the need for trial or Part Two of the trial.

[13] Similarly, the Plaintiff’s offers were really part of the negotiation process that predated the litigation and do not fall within Rule 49.10(1).

[14] However, having observed in my Reasons for Decision on Quantum of Damages that reasonableness of positions taken could only be assessed once my decision as to value was rendered (see paragraph 4 supra), it is fascinating to see now that by exchange of letters between counsel the Plaintiff, as of September 13, 2005, counter offered to accept $150,000 for the book of business with no non-competition agreement, or $220,000 if a non-competition agreement was required by the Defendants. Since the result of the trial was a valuation of $218,850 with no non-competition clause in place, this position taken by the Plaintiff to avoid the necessity of litigation can now be seen as exceptionally reasonable.

[15] Aside from the impact of non-Rule 49 offers, the parties’ costs submissions debated whether the Plaintiff or the Defendants refused to admit facts that lengthened the trial or ran up costs unnecessarily as contemplated in Rule 57.01(1)(e) and (g), which reads:

57.01 (1) In exercising its discretion under section 131 of the Courts of Justice Act to award costs, the court may consider, in addition to the result in the proceeding and any offer to settle or to contribute made in writing,

(e) the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding;

(g) a party’s denial of or refusal to admit anything that should have been admitted;

[16] The Defendants suggest that Mr. Cragg’s statements that he paid for everything are false. However, it was easily demonstrated that the Defendants paid many expenses from their 80% split of the commissions and that this was evidence the Defendants would have lead anyway to support their position as to how the business operated. Further they allege that Mr. Cragg falsely claimed he had never taken a dime from 1350369 Ontario Inc. requiring a break in the proceedings for the Defendants to produce cheques written to Mr. or Mrs. Cragg or the related company.

[17] In fact, that cross-examination fell flat and there was no finding that Mr. Cragg’s statement was false. To the contrary, I found:[^3]

[40] Graydon Cragg was presented with numerous cheques payable to him, his wife or G.B. Cragg Insurance in an apparent strategy to suggest that these cheques, some in substantial amounts, benefit him, his wife or his related company. However, after review of his banking records, Graydon Cragg stated that all of these cheques were by way of reimbursement for amounts paid into or for the enterprise when there was insufficient cash flow to meet expenses. This explanation was not challenged or otherwise disproved.

[41] Still I am wary because I have found in Part One of this trial that Graydon Cragg has a tendency to make grand statements that could oversimplify the reality of payments he made for the enterprise.

[42] I find that share value, as stated by Mr. Rickert to be between -$3230 (rounded up to zero) and $4920 (rounded up to $5000), corroborates the assertion that Graydon Cragg received no compensation from the enterprise.

[43] Further, the examination of 1350369 Ontario Inc.’s balance sheets from 2003 to 2005, if it demonstrates anything, is consistent with the notion that Graydon Cragg or his related companies were owed by 1350369 Ontario Inc. for payments made on behalf of 1350369 Ontario Inc. The books of 1350369 Ontario Inc. show minimal assets but growing debt.

[44] I therefore confidently find that Graydon Cragg received nothing in return for what he put into the enterprise. This is significant in the assessment of damages because Graydon Cragg did not attempt to prove the quantum of his investment into the enterprise, despite the fact that he funded its start up in 1999, paid for the Hewmac book, and paid salaries to Mr. Jarvis and Mr. O'Halloran. Additionally, by 2002 he complained that Mr. Jarvis was taking more in draws than his combined salary and commissions available yielded so, as an incentive, agreed to the 20/80 revenue split so that Mr. Jarvis could manage the operations and increase his income (as well as Darren O'Halloran’s) if they grew the business.

[18] On the other hand, the entirety of Part Two of the bifurcated trial was based on the refusal of the Defendants to acknowledge the business enterprise and instead instructed their experts to calculate the value of 1350369 Ontario Inc. based on a 20% interest.

[19] The costs submissions assert that this was an available argument based on paragraphs 328-330 of my Reasons for Decision after Part One of the trial:[^4]

[328] That having been said, I find that damages equate with the value of the business Graydon Cragg was deprived of by the conduct of the financial advisers. This determination has two distinct stages:

(a) The first is to evaluate the business on July 13, 2005 immediately before Tom Jarvis left. That establishes a figure for what loss of the business cost Graydon Cragg and 1350369 Ontario Inc. in total.

(b) The second is to determine a reduction from damages to restore that loss of the totality, an amount that never belonged to Graydon Cragg alone because of the nature of the joint venture agreed upon in 1999 between Tom Jarvis and Graydon Cragg.

[329] For further guidance, another way to view this reduction is mentioned at paragraph 110. Tom Jarvis and Darren O'Halloran could have left the business without taking files or clients. Graydon Cragg would have a business he could not operate. Even immediate substitution of other financial advisors would result in attrition that the business evaluator must consider. This contingency would impact the value of the business first calculated under subparagraph 327a) unless it is taken into account in subparagraph 327 b) as I have directed.

[330] I recognize that Tom Jarvis never actually did buy into the business. I recognize that Tom Jarvis did not advance any sort of trust claim. However, I cannot find that Graydon Cragg should be awarded damages for the full value of the business when he and Tom Jarvis had agreed from the outset that they were building a business together.

[20] I do not accept that those paragraphs bear the Defendants’ interpretation. Throughout Part One Reasons I soundly rejected the Defendants’ position and found it necessary to repeat my rejection in Part Two using phrases such as "false premise" and "delusion". It was frankly astonishing to read the Defendants’ expert reports based on a premise I had thoroughly rejected in Part One of the trial, and that when those experts testified, they knew nothing of my findings. That surely qualifies as a refusal to admit facts (because they had already been found) and conduct that tended to lengthen the trial.

[21] Finally, on the issue of enhanced costs, I return to the conduct that generated the litigation. As noted in paragraph 5, supra, I declined to order punitive costs in this commercial context. However, I made a finding in the same paragraph:

David Velanoff, who has seen much, thought this departure was the worst he has seen. He described the conduct as unfair and unprofessional. I agree.

[22] I need not repeat here my findings about the deceitful conduct of the individuals Jarvis, O’Halloran and Quinn. They are clear in Part One of my Reasons for Decision.

[23] The Plaintiff cites authority for the proposition that elevated costs may be ordered for reprehensible conduct giving rise to the cause of action.[^5]

The jurisprudential framework

The first issue is whether the trial judge erred in relying on the February 2005 offer as justification for an elevated costs award. This court, following the principle established by the Supreme Court, has repeatedly said that elevated costs are warranted in only two circumstances. The first involves the operation of an offer to settle under rule 49.10, where substantial indemnity costs are explicitly authorized. The second is where the losing party has engaged in behaviour worthy of sanction.

In Young v. Young, 1993 CanLII 34 (SCC), [1993] 4 S.C.R. 3, [1993] S.C.J. No. 112, at p. 134 S.C.R., McLachlin J. described the circumstances when elevated costs are warranted as "only where there has been reprehensible, scandalous or outrageous conduct on the part of one of the parties".

The same principle was expanded upon in Mortimer v. Cameron (1994), 1994 CanLII 10998 (ON CA), 17 O.R. (3d) 1, [1994] O.J. No. 277 (C.A.), at p. 23 O.R., where Robins J.A., speaking for the court, set out the restricted circumstances in which a higher costs scale is appropriate with reference to Orkin, at para. 219.

An award of costs on the solicitor-and-client scale, it has been said, is ordered only in rare and exceptional cases to mark the court's disapproval of the conduct of a party in the litigation. The principle guiding the decision to award solicitor-and-client costs has been enunciated thus:

[S]olicitor-and-client costs should not be awarded unless there is some form of reprehensible conduct, either in the circumstances giving rise to the cause of action, or in the proceedings, which makes such costs desirable as a form of chastisement.

[24] If especially egregious, conduct may elevate the sanction to full indemnity costs.[^6]

While we would not interfere with the costs award made by the motion judge, we would express a cautionary note on this issue. In this case, the motion judge awarded costs on a full indemnity basis. There is a significant and important distinction between full indemnity costs and substantial indemnity costs. An award of costs on an elevated scale is justified in only very narrow circumstances – where an offer to settle is engaged or where the losing party has engaged in behaviour worthy of sanction: Davies v. Clarington (Municipality) (2009), 2009 ONCA 722, 100 O.R. (3d) 66 (C.A.) at para. 28. Substantial indemnity costs is the elevated scale of costs normally resorted to when the court wishes to express its disapproval of the conduct of a party to the litigation. It follows that conduct worthy of sanction would have to be especially egregious to justify the highest scale of full indemnity costs.

[25] I exercise that necessary caution in considering the impact of my finding, based on the evidence of a reliable witness steeped in the commercial circumstances in which the conduct occurred as "the worst he has seen".

[26] Having reviewed the reasonableness of positions taken in the context of my finding of value, the conduct of the Defendants which tended to lengthen unnecessarily the duration of the proceedings and the availability of costs as a rebuke for reprehensible conduct, I return to the Plaintiff’s claims of partial (at 70%), substantial (at 85%) and full indemnity costs amounting to $129,681.74, $157,470.69 and $185,259.64 respectively.

[27] I fix costs payable to the Plaintiff at $160,000 all in.

[28] That leaves the question of which Defendants are liable for those costs.

[29] It is unusual that after a finding of liability against Mr. Quinn, the Plaintiff chose not to lead evidence of damages arising from that liability, but specifically notified of the intention to claim costs against him.

[30] Neither counsel cited precedent for such a circumstance. Counsel for the Defendants, now asserting that Mr. Quinn should not pay costs, argues only against the interest of his co-Defendants. It was submitted that Mr. Quinn is a successful party in the litigation.

[31] Mr. Quinn was neither a fiduciary nor an employee and as such is to be distinguished from Mr. Jarvis and Mr. O’Halloran.

[32] Where he joined them was in planning their collective departure from the relationship with Mr. Cragg in a deceitful manner and then, on his own, adding a thuggish element to the negotiations by threatening a litigation attack on Mr. Cragg’s character. I have no quarrel with using evidence of past conduct in an attempt to confront a witness’ credibility. The thuggishness comes from the tactic to scare Mr. Cragg away from the litigation.

[33] The Plaintiff achieved a declaration of liability against Mr. Quinn but that was not pled.

[34] The Defendant Sean Quinn brought his own counterclaim for $5,000,000 damages against Mr. Cragg et al., as did the others. That counterclaim was not live at the trial so, in some sense Mr. Cragg achieved success against Mr. Quinn in not having to face that counterclaim at trial.

[35] I find that, in fact, Mr. Quinn conspired with Jarvis and O’Halloran which resulted in damages to Mr. Cragg, but I have not been provided with a pathway at law to hold him jointly, and/or severally liable for costs.

[36] That leaves Mr. Jarvis and Mr. O’Halloran jointly and severally liable for the damages and for the costs.

[37] They can let Mr. Quinn know whether they think that is a fair result.

[38] Judgment to issue finding Mr. Jarvis and Mr. O’Halloran jointly and severally liable for costs of $160,000 payable to the Plaintiff.

EBERHARD J.

Date: June 18, 2021

[^1]: Jarvis v. 1350369 Ontario Inc., 2020 ONSC 2886, at para. 60-61. [^2]: 1350369 Ontario Inc. v. O’Halloran, 2015 ONSC 2770, at para. 323. [^3]: Jarvis v. 1350369 Ontario Inc., supra, at paras. 40-44. [^4]: 1350369 Ontario Inc. v. O’Halloran, supra, at paras. 328-330. [^5]: Davies v. Clarington (Municipality), 2009 ONCA 722, at paras. 28-30. [^6]: Net Connect Installation Inc. v. Mobile Zone Inc., 2017 ONCA 766, at para. 8.