Court File and Parties

COURT FILE NO.: CV-15-523706 DATE: 2021-09-08 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 2364562 ONTARIO LTD. FAREEN MADHANI and FAIZ MADHANI, Plaintiffs AND: YOGURTWORLD ENTERPRISES INC. o/a MENCHIE'S FROZEN YOGURT, Defendant

BEFORE: Kimmel J.

COUNSEL: Alnaz I. Jiwa, for the Plaintiffs Geoffrey Hunnisett and Amanda Arella, for the Defendant

HEARD: February 16, 17, 18 and 19, 2021, with written closing submissions filed March 1 and 8, 2021, supplemented on May 11, 17 and 20, 2021 – Further written cost submissions dated August 13, 20 and 27, 2021

trial Costs ENDORSEMENT

[1] The plaintiffs commenced this action in March of 2015 seeking the return of the development fee they paid (in the amount of $75,000.00 plus HST, for a total of $84,750.00), based on claims for rescission and misrepresentation under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 and at common law, plus an additional $100,000.00 in aggravated, exemplary and punitive damages. Their statement of claim was amended to claim a further $50,000.00 for alleged breaches of the duty of good faith and fair dealing. The plaintiffs’ claims in excess of $100,000.00 were later abandoned (in August of 2015) so that the action could proceed under the Simplified Procedure of Rule 76 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. At trial, the plaintiffs sought the return of their development fee ($84,750.00) plus $15,250.00 in punitive damages.

[2] The plaintiffs’ claims were all dismissed following a four-day trial and subsequent written closing submissions, for reasons detailed in 2364562 Ontario Ltd. v. Yogurtworld Enterprises Inc., 2021 ONSC 5112, released July 23, 2021. The successful defendant seeks an award of its partial indemnity costs in the all inclusive amount of $145,670.00. The plaintiffs argue that this amount is not in proportion to the amounts at issue in the action and reflects excessive time and over-lawyering on the part of experienced counsel for the defendant. The plaintiffs suggest that an appropriate award of partial indemnity costs to the successful defendant would be $35,000.00 (inclusive of all fees, disbursements and taxes).

Entitlement to Costs

[3] As the successful party at trial, the defendant is entitled to its costs. The plaintiffs concede this.

Scale of Costs

[4] The defendant seeks costs on a partial indemnity scale. The plaintiffs agree that this is the appropriate scale of costs.

Quantum of Costs

[5] The parties disagree about the appropriate quantum of costs to be awarded to the defendant. The difference in their respective positions exceeds $100,000.00 ($145,670.00 vs $35,000.00).

[6] Costs are within the discretion of the court to award under s. 131 of the Court of Justice Act, R.S.O. 1990, c. C43. The factors to consider in the exercise of that discretion are set out in Rule 57.01(1) of the Rules of Civil Procedure:

a. The principle of indemnity under Rule 57.01(1)(0.a), including the experience of the lawyer for the party entitled to costs as well as the rates charged and the hours spent by that lawyer;

b. Under Rule 57.01(1)(0.b), the amount of costs that the unsuccessful party could reasonably expect to pay in relation to the step in the proceeding for which costs are being fixed;

c. The amount at issue in the proceeding (Rule 57.01(1)(a));

d. The complexity of the proceeding (Rule 57.01(1)(c));

e. The importance of the issues (Rule 57.01(1)(d));

f. The conduct of a party that unduly lengthened or complicated a proceeding (Rule 57.01(1)(e), (f) and (g); and

g. Any other matter relevant to the question of costs (Rule 57.01(1)(i)).

[7] The plaintiffs allege that the certified amount of partial indemnity costs in the defendant’s Bill of Costs is unreasonable and disproportionate.

a) The amount at issue, importance of the issues and outcome

[8] The amount at issue in this action was limited to $100,000.00 by virtue of the plaintiffs’ election, early on, to proceed under Rule 76. The claims were fairly typical for franchise litigation, based on alleged disclosure deficiencies/misrepresentations. However, the alleged deficiencies were broad, and included allegations of misrepresentation, breaches of the duty of good faith and fair dealing and frustration. They also raised questions of broader implication with respect to franchise agreements entered into before a franchise location has been identified. These were issues understandably important to the successful defendant.

b) Conduct of the defendant said to have unduly lengthened the proceeding

[9] The plaintiffs’ submissions regarding the defendant’s conduct in unduly lengthening the proceeding are not persuasive. The defendant is said to have demanded particulars and documents pertaining to the plaintiffs’ pleadings before defending. However, requesting particulars is a matter of right and the plaintiffs duly responded. If it was, as the plaintiffs say, a request for documents that eventually had to be produced in any event, it should not have materially impacted the costs of either party to produce/receive those same documents twice.

[10] The defendant is also said to have taken an unreasonable position regarding the mediation, necessitating a motion and other steps. The defendant was upfront with the plaintiffs that it remained steadfast in its position that it would succeed at trial and thus was not prepared to make a material settlement payment to the plaintiffs just to avoid the trial. That position was consistent with the two settlement offers that the defendant made prior to trial, which involved no (or a nominal) payment to the plaintiffs but included the offer to forego any recoverable legal fees and disbursements incurred if the plaintiffs’ dropped their claims. The plaintiffs were not willing to settle on that basis and it was they who decided that the mediation was not worthwhile.

[11] I do not find the defendant’s conduct to have unduly prolonged or lengthened the pre-trial proceedings. However, that does not end the court’s inquiry.

c) Proportionality and reasonable expectations

[12] It is commonly understood that the court is required to consider what is “fair and reasonable” in fixing costs, and is to do so with a view to balancing compensation of the successful party with the goal of fostering access to justice: see Boucher v. Public Accountants Council for the Province of Ontario (2004), 2004 CanLII 14579 (ON CA), 71 O.R. (3d) 291 (C.A.), at paras. 26, 37. Ultimately, the court is to order a fair and reasonable amount in the particular circumstances and need not be tied to the actual costs incurred. The expectations of the parties, including what was within the contemplation of the losing party, is also a relevant consideration: Boucher, at paras. 37-38. These principles are now embodied in Rules 57.01(1)(0.a) and (0.b).

[13] The plaintiffs’ Bill of Costs certified actual fees and disbursements of $57,875.51 and partial indemnity fees and disbursements of $38,331.03 (both inclusive of applicable taxes). The partial indemnity costs indicated in the plaintiffs’ Bill of Costs is one, but not the only, objective benchmark against which the reasonable expectations of the plaintiffs can be assessed. The fact that the defendant’s claimed partial indemnity costs are higher than the amounts indicated by the plaintiffs in their Bill of Costs does not mean that the higher amount was outside the realm of what the plaintiffs could reasonably and objectively have contemplated they might have to pay if they lost.

[14] It should have been expected by the plaintiffs that the defendant in a case such as this would respond to each and every allegation made, even if considered to be meritless. The defendant’s integrity was being challenged as was the entire premise of the defendant’s disclosure documents for all franchisees, whose franchise locations were not known when their franchise agreements were signed and for which costs necessarily had to be estimated. Further, an early settlement offer (made by the defendant on January 13, 2016, before trial preparation and trial costs were incurred) alerted the plaintiffs to the fact that the defendant’s actual costs had already exceeded $40,000.00. It would be objectively reasonable for the plaintiffs to have expected those costs to increase significantly as the action progressed through trial preparation and trial.

[15] That said, the gap between these indicia of expectations on the plaintiffs’ side and the partial indemnity costs now claimed by the defendant is still significant. Proportionality is the driving consideration in determining the quantum of costs in this case, having regard to the amount at issue relative to the quantum of partial indemnity costs claimed.

[16] While the court does not engage in a line by line review of the time spent by counsel, on an overall basis, assuming partial indemnity costs are typically approximately 60% of actual costs, it is reasonable for the court to infer that the actual fees corresponding with the time spent by defence counsel would have been over $200,000.00. This is approximately twice the maximum amount of the plaintiffs’ claimed damages in this simplified procedure case. Parties are entitled to fight cases on principle, and in this case the defendant did so successfully. But I consider the amount spent in legal fees to do so to have been disproportionate to what was at stake in this simplified procedure case. I am not prepared to award partial indemnity costs in the amount sought by the defendant, even taking into account the importance of the issues to the defendant.

[17] The cost limitations that now exist under Rule 76.12.1 (limiting costs to $50,000.00 and disbursements to $25,000.00, exclusive of taxes) do not apply to this action because the action was commenced, and continued under the simplified procedure long before these cost limitations came into effect on January 1, 2020. However, the proportionality that this subsequently enacted Rule embodies in simplified procedure cases is a relevant consideration. The plaintiffs cite many examples of cases pre-dating this Rule amendment in which costs awards against unsuccessful plaintiffs were curtailed on grounds of proportionality where the amounts at issue were less than the simplified procedure limit of $100,000.00.

[18] One example of such a case is Williams Distinctive Gems Inc. v. Advantex Dining Corporation, 2019 ONCA 702. In allowing the costs appeal, the Court of Appeal said at para 15:

This was an action under the simplified procedure. It is well established that the limited monetary ceiling for actions under the simplified rules translates into reduced costs orders: Trafalgar Industries of Canada Ltd. v. Pharmax Ltd. (2003), 2003 CanLII 40313 (ON SC), 64 O.R. (3d) 288 (S.C.), at paras. 5-7. ... It should have been within CIBC’s contemplation that its costs, if successful, would be limited and that it was required to exercise constraint in its expenditure of costs or risk not being compensated. The motion judge failed to advert to these factors in keeping with the principle of proportionality and awarded costs that were excessive and unreasonable.

[19] Determining a fair and reasonable and proportionate amount of costs is more art than science: see Marcus v. Cochrane, 2014 ONCA 207, at para. 16. That applies to determining the quantum of costs, regardless of the scale that is being applied (the fact that the Court of Appeal in that case overruled the trial judge’s decision to award full indemnity costs and awarded partial indemnity costs does not render the overarching principle any less applicable).

[20] A higher award of costs may be found to be proportionate and reasonable in cases where the losing party unnecessarily complicated matters and pursued baseless allegations. The defendant relies on Arctic Lawn, Landscaping & Construction Inc. v. Shakori, 2021 ONSC 5308, at paras. 1, 18-20, 29 and 33, and other cases, for this proposition. However, that was not this case. The plaintiffs did lose, and their claims did evolve to some extent, but I do not consider their approach to have been reprehensible so as to justify a costs award that is, in effect, punitive and that could have a chilling effect on the pursuit of legitimate claims by franchisees and give rise to concerns about access to justice; see Levita v. Crew, 2016 ONSC 89, at paras. 58-59.

d) Determination of costs payable

[21] I have considered the factors that are applicable in this case, including the outcome of the trial, the principle of indemnity (taking into account the experience and hourly rates of the lawyers and the time involved), the amount at issue, the complexity and importance of the issues and the conduct of the parties, including the defendant’s last settlement offer, which, if accepted, would have led to the defendant foregoing all of its costs before incurring the time and expense of the trial. I have also considered the amount of costs that the unsuccessful plaintiffs could reasonably have expected to pay in costs if they lost.

[22] In the exercise of my discretion under s. 131 of the Courts of Justice Act and Rule 57 of the Rules of Civil Procedure, I am awarding the defendant its partial indemnity costs of this action, fixed in the amount of $65,000.00, inclusive of all fees, disbursements and applicable taxes, and payable within 30 days of this endorsement.

[23] This costs endorsement is effective from the date it is made and is enforceable as an Order without any need for entry and filing.

Kimmel J.

Date: September 8, 2021