Court File and Parties

COURT FILE NO.: 54652/13 (St. Catharines)

DATE: 20211019

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 563815 ONTARIO INC., Plaintiff

AND:

NED NADIME NASSIF and DIANE NASSIF, Defendants

AND:

ANTHONY CONTINELLI and GRACE CONTINELLI, Third Parties

BEFORE: The Honourable Mr. Justice R. A. Lococo

COUNSEL: Bruce A. Macdonald, for the Plaintiff and the Third Parties

Duncan M. Macfarlane, Q.C., for the Defendants

HEARD: By written submissions dated August 24 to 31, 2021

ENDORSEMENT – costs

I. Introduction

[1] The third party Anthony Continelli and the defendant Ned Nadime Nassif are directors, officers and equal shareholders of the plaintiff 563815 Ontario Inc., a privately-held real estate investment company. Mr. Continelli brought a derivative action on behalf of the plaintiff against Mr. Nassif and his wife Diane Nassif, alleging the misappropriation of corporate funds. As set out in Reasons for Judgment dated August 3, 2021 (reported at 2021 ONSC 5195), after a 16-day trial, the plaintiff was awarded damages of $87,048.57 for breach of fiduciary duty. The defendants’ third party action against Mr. Continelli and his wife Grace Continelli was dismissed. Costs were left to be determined based on written submissions.

[2] The issue of costs was also addressed in the consent order dated May 15, 2014, under s. 246 of the Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”), which provided Mr. Continelli with leave nunc pro tunc to commence and prosecute the derivative action. In that order, the court reserved to the trial judge the costs of the action and the motion, providing the authority (without limitation) to order Mr. Continelli to indemnify the plaintiff with respect to any costs payable to the defendants in the action.

II. Parties’ positions

[3] In their costs submissions, the plaintiff and the third parties (collectively, the “Continelli parties”) claim full indemnity costs of $269,849.87 from the defendants, consisting of $196,912.67 for legal fees and $72,937.20 in disbursements (in each case including HST). The amount claimed for disbursements includes $59,655.45 (including HST) payable for the services of an expert valuation witness with respect to the quantification of economic loss.

[4] The Continelli parties submit that as the successful parties, they should be awarded costs. They say that full indemnity costs are justified in this case for reasons that include the following: (i) their prima facie entitlement to be indemnified for the reasonable costs of pursuing the derivative action: see Turner v. Mailhot (1985), 55 O.R. (2d) 561 (H.C.), at p. 567; Jordan Inc. v. Jordan Engineering Inc. (2004), 2004 5863 (ON SC), 48 B.L.R. (3d) 115 (Ont. S.C.), at p. 127; and Toronto Harbour Commissioners v. Disero (1991), 1991 7086 (ON SC), 5 O.R. (3d) 585 (Gen. Div.), at p. 587; (ii) the nature of the wrongful conduct of the defendants, who were found to have breached their fiduciary duty by misappropriating corporate funds: see 6071376 Canada Inc. v. 3966305 Canada Inc., 2019 ONSC 3947, 147 O.R. (3d) 564, at para. 69, and Hurontario Property Development Corporation v. Pinewood Business Interiors Inc., 2011 ONSC 5476, 108 O.R. (3d) 359 (Div. Ct.), at paras. 52-57 (in which the successful plaintiffs were awarded substantial but not full indemnity costs); (iii) the Continelli parties’ efforts to resolve the matters in issue without litigation, which were frustrated by the defendants’ position that they owed nothing to the plaintiff; and (iv) the defendants’ failure to preserve and produce their own rental records, which would have facilitated determination of rental losses.

[5] Citing in particular the latter consideration, the Continelli parties also submit that it was reasonable to commence the action under the ordinary procedure (rather than under the simplified procedure in r. 76 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194), even though the amount ultimately awarded was below the $100,000 threshold that applied under r. 76 when the action was commenced: see rr. 76.13(2), (3) and (11). On that basis, they submit that they should not be denied their costs in this case: see r. 76.13(3)(b)(i).

[6] In response, the defendants acknowledge that costs should follow the event in this case, resulting in a costs award against the defendants. They suggest that the costs award should be payable to the plaintiff only, since the plaintiff has the benefit of the amount awarded in the judgment.

[7] The defendants also argue that costs should be calculated on a reduced partial indemnity basis. They say that in determining the amount of the costs award, the relevant considerations include the following: (i) the prima facie case for denying the Continelli parties costs in their entirety under r. 76.13; (ii) Mr. Continelli’s failure to obtain the court’s leave under s. 246 of the OBCA before commencing the derivative action in the plaintiff’s name, which was rectified (with the defendants’ cooperation) under the consent nunc pro tunc order; (iii) the Continelli parties’ failure to commission an expert financial report until well after the pre-trial conference, at variance with the timing requirements in r. 53.03(1); (iv) amendment of the plaintiff’s statement of claim shortly before the pre-trial conference, which unreasonably increased the amount claimed by $600,000 to $787,000; and (v) application of the principle of proportionality, given the relatively modest amount awarded ($87,048.57) when compared to the amount claimed in the original claim ($187,000), the amended claim ($787,000) and in closing submissions ($225,000 to $260,000).

III. Legal principles

[8] As a general rule in civil proceedings, determination of costs is in the court’s discretion: Courts of Justice Act, R.S.O. 1990, c. C.43, s. 131. In exercising its discretion, the court may consider the result in the proceeding and any written offer to settle as well as the other considerations set out in r. 57.01. Generally speaking, consistent with previous case law, the successful party has a reasonable expectation of being awarded costs in the absence of special circumstances: see Bell Canada v. Olympia & York Developments Ltd. (1994), 1994 239 (ON CA), 17 O.R. (3d) 135 (C.A.), at p. 142.

[9] The same principles apply to the determination of costs in a derivative action, subject to further direction provided in s. 247 of the OBCA, given the nature of a derivative action.

[10] Under s. 247, the court has the authority to make any order it thinks fit, including (i) an order requiring the corporation to pay reasonable legal fees and any other costs reasonably incurred by the complainant (s. 247(d)), and (ii) an order directing that any amount adjudged payable by a defendant be paid to past and present security holders rather than the corporation (s. 247(c)).

[11] The court therefore has the authority to order a defendant or the corporation to indemnify a complainant for reasonable legal fees and disbursements incurred. Consistent with Bell Canada, at p. 142, Jordan, at p. 127, and Toronto Harbour Commissioners, at p. 587, I agree that a successful complainant has what may be described as a prima facie entitlement to a costs award in its favour. However, such an entitlement does not necessarily translate into a full or substantial indemnity costs award, as the Continelli parties seem to suggest.

[12] Costs are normally awarded on a partial indemnity basis, with two limited exceptions when “elevated costs” (being either substantial or full indemnity costs) are warranted, as set out in Davies v. Clarington (Municipality), 2009 ONCA 722, 100 O.R. (3d) 66, at para. 28:

This 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.

[13] In Young v. Young, 1993 34 (SCC), [1993] 4 S.C.R. 3, at p. 134, McLachlin J. (as she then was) described the circumstances in which elevated costs are warranted as “only where there has been reprehensible, scandalous or outrageous conduct on the part of one of the parties.” In a similar vein, the Ontario Court of Appeal has indicated that except where r. 49.10(1) applies, elevated costs based on a party’s conduct should be awarded only in a “rare and exceptional case”, based on “egregious or reprehensible conduct that warrants sanction”: see Foulis v. Robinson (1978), 1978 1307 (ON CA), 21 O.R. (2d) 769 (C.A.), at p. 776; Mortimer v. Cameron (1994), 1994 10998 (ON CA), 17 O.R. (3d) 1 (C.A.), at pp. 22-23; and McBride Metal Fabricating Corp. v. H & W Sales Co. (2002), 2002 41899 (ON CA), 59 O.R. (3d) 97 (C.A.), at paras. 37-38.

V. Analysis and conclusion

[14] Applying the foregoing principles, I have concluded that a costs award should be made in favour of the Continelli parties, determined on a partial indemnity basis.

[15] On the preliminary issue of whether costs should be denied for recovering less than the r. 76 threshold, I agree with the Continelli parties that it was reasonable to have commenced the action under the ordinary procedure. Based on the evidence available to them at the time the action was commenced and thereafter up to the time of trial, the Continelli parties faced a challenging forensic task to determine the extent to which corporate funds were missing and whether the defendants were the responsible parties. In making those determinations, they were hampered to some extent by the defendants’ failure to preserve and produce their own rental records, which were eventually made available to the Continelli parties only in part, from a third party source. In these circumstances, it would not be just or reasonable to deny costs for failure to recover more than the r. 76 threshold amount, which was missed by less than $13,000.

[16] Turning to the scale of the costs award, no r. 49 offers to settle were drawn to my attention to justify a substantial costs award. Therefore, consistent with previous case law, a costs award beyond the level of partial indemnity costs would only be justified based on the defendants’ “reprehensible, scandalous or outrageous conduct”.

[17] As the Continelli parties noted in their submissions, elevated costs have been awarded in previous cases involving misappropriation of corporate funds. For example, in Hurontario Property, the trial judge awarded the successful party substantial indemnity costs throughout in an oppression case. The trial judge found that in a concerted act, the appellants carried out a corporate “looting” by defalcating the entire profits from a joint venture. In these circumstances, the Divisional Court on appeal did not interfere with the trial judge’s elevated costs award, finding that the trial judge was justified in finding that the appellants’ conduct was “reprehensible, scandalous and outrageous”: see Hurontario Property, at para. 57.

[18] On the evidence before me at the trial in this case, there was no difficulty reaching the conclusion that the defendants breached their fiduciary duty to the plaintiff by misappropriating corporate funds. Their misconduct was compounded by their failure to preserve and produce their rental records, as indicated above. However, in all the circumstances, I am not persuaded that their conduct rose to the level of justifying an enhanced level of costs based on reprehensible, scandalous or outrageous conduct.

[19] While each case turns on its own facts, I note that the extent of the defendants’ defalcation in this case appears to fall far short of the appellants’ conduct in Hurontario Property. The defendants’ failure to preserve and produce their records was an additional relevant factor, but there was no finding that the defendants deliberately destroyed evidence in order to cover their tracks (as opposing counsel suggested), nor was there a sufficient evidentiary basis to justify making that finding. When considering the defendants’ conduct, I also took into account the manner in which parties conducted the action, including the defendants’ cooperation in rectifying on consent the irregular commencement of a derivative action without the leave of the court.

[20] Turning now to the quantum of costs, on examining the Continelli parties’ bill of costs, I did not consider the calculation of full recovery legal fees (approximately $197,000 including HST) to be unreasonable on its face, given the action’s long duration and a 16-day trial (interrupted by the COVID-19 health emergency). The Continelli parties did not provide a suggested amount for partial indemnity costs, but it appears (on an arithmetic basis) that the amount of the full indemnity costs claimed would translate into partial indemnity legal fees in excess of $100,000 plus HST and disbursements.

[21] While defendants’ counsel questioned (with some justification) some individual time charges in the bill of costs, he took particular exception to the charge of nearly $60,000 (out of total disbursements of approximately $73,000) payable for the services of the plaintiff’s valuation expert, which included two expert reports that became trial exhibits. Once again, I did not find that particular charge unreasonable on its face, given the scope of the task the valuator was required to undertake. As well, in the second (rebuttal) report, the valuator was required to consider and revise his previous conclusions by considering the defendants’ own rental records, part of which had come into the Continelli parties’ possession from a third party after the first expert report was prepared.

[22] In any case, as noted by the Ontario Court of Appeal in Boucher v. Public Accountants Council for the Province of Ontario (2004), 2004 14579 (ON CA), 71 O.R. (3d) 291 (C.A.), at para. 26, when fixing costs, the calculation of hours and time rates is only one factor to be taken into account. The overall objective 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.” In doing so, the reasonable expectations of the unsuccessful party would be a relevant factor, consistent with Boucher, at paras. 37-38, and r. 57.01(1)(0.b). Also relevant, as the defendants argued, is the principle of proportionality in relation to “the importance and complexity of the issues, and to the amount, involved in the proceeding”, which ultimately resulted in an award of $87,048.57 in damages, far less than the amount claimed for damages during the action, and less than the amount claimed for costs (even on a partial indemnity basis): see r. 1.04(1.1); see also r. 57.01(a).

[23] Taking into account the above considerations, I would fix the Continelli parties’ costs at $125,000 including disbursements and HST, payable by the defendants to the Continelli parties within 60 days.

[24] In doing so, I have not adopted the defendants’ position that the costs award should be in favour of the plaintiff only. I have no information as to the extent to which legal fees and disbursements to date have been funded by the plaintiff or the Continellis personally. In all the circumstances, I consider it appropriate to award costs to the Continelli parties (rather than only the plaintiff), who together were successful in prosecuting the derivative action and defending the third party action.

R. A. Lococo J.

Date: October 19, 2021