COURT FILE NO.: 54652/13 (St. Catharines)
DATE: 2021-12-16
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 November 9 to 26, 2021
SUPPLEMENTAL ENDORSEMENT
Costs and prejudgment interest
I. Introduction
[1] This endorsement is supplemental to Reasons for Judgment dated August 3, 2021 (reported at 2021 ONSC 5195) and Costs Endorsement dated October 19, 2021 (reported at 2021 ONSC 6746) for this action.
[2] Counsel representing the plaintiff company and the third parties Anthony Continelli and Grace Continelli has requested clarification of certain aspects of my above decisions. As a result, I invited the parties to provide further written submissions with respect to prejudgment interest and the indemnification of costs. The following is my decision on these issues.
II. Prejudgment interest
[3] In the Statement of Claim dated August 30, 2013, the plaintiff company (by way of derivative action brought by Anthony Continelli) claimed prejudgment interest and postjudgment interest, in each case in accordance with the Courts of Justice Act, R.S.O. 1990, c. C.43. In the parties’ written closing submissions after the conclusion of the trial evidence, there were no submissions relating to interest on any amount awarded. As set out in the Reasons for Judgment, I awarded the plaintiff $87,048.57 against the defendants Ned Nadime Nassif and Diane Nassif as damages for breach of fiduciary duty but made no reference to prejudgment or postjudgment interest.
[4] Subsequent to the issuance of the Costs Endorsement, counsel for the plaintiff company and the Continellis (“plaintiff’s counsel”) sought direction with respect to including an award of prejudgment interest in the formal judgment, which has not yet been taken out. The defendants have no objection in principle to including an award of prejudgment interest in the judgment, but the parties do not agree on how interest should be calculated.
[5] Subject to certain exceptions, a person who is entitled to an order for the payment of money is entitled to claim and have included in the order an award of interest at the prescribed prejudgment interest rate, calculated from the date the cause of action arose to the date of the order: Courts of Justice Act, ss. 127 and 128. For the period after the order date, money owing under the order accrues at the prescribed postjudgment interest rate, subject to certain exceptions: ss. 127 and 129. Where the court considers it just to do so, interest may be calculated at a different rate or disallowed in whole or part: s. 130.
[6] I agree with the parties that the judgment should include an award of prejudgment interest, as claimed in the Statement of Claim. In counsel’s written submissions, they agree that prejudgment interest should begin to run on May 14, 2014, the date that the derivative action was regularized by the nunc pro tunc court order issued on that date. I agree that this date is the appropriate commencement date in the circumstances of this case.
[7] The prescribed prejudgment rate, determined by reference to the commencement date of May 14, 2014, would be 1.3 per cent. In his submissions, defendants’ counsel submits that a different rate should apply, arguing that it would be appropriate to take the arithmetical average of the quarterly prescribed rates from May 2014 to the present time, which he calculates as 1.16 per cent. He also argues that this rate should continue to apply beyond the date of the Reasons for Judgment until the formal judgment is taken out (rather than the higher postjudgment interest rate, currently two per cent), suggesting that plaintiff’s counsel unduly delayed in providing him with a draft order after the issuing of the Costs Endorsement on October 19, 2021.
[8] I disagree. I see no justification for imposing an interest rate that is different from the prescribed rate or that extends beyond the effective date of the order for payment.
[9] As provided in s. 130 of the Courts of Justice Act, I have the discretion to impose an interest rate different from the prescribed prejudgment interest rate if the circumstances provide a sufficient reason to do so. I see no evidentiary basis to justify a different rate. Taking an arithmetic average of the quarterly prescribed rates, by itself, is not sufficient for this purpose. As well, I do not agree that there has been undue delay in this case that would justify postponing the effective date for postjudgment interest beyond the effective date of the payment order, in this case August 3, 2021.
[10] Accordingly, the judgment will provide that the plaintiff is entitled to prejudgment interest at the prescribed rate commencing May 14, 2014 and continuing until August 3, 2021, with postjudgment interest being payable thereafter at the prescribed rate until the date of payment.
III Indemnification of costs
[11] By way of background, in the costs submissions the parties made prior to issuance of the Costs Endorsement, plaintiff’s counsel sought full indemnity costs against the defendants in the approximate amount of $270,000, including disbursements and tax. In doing so, he relied on s. 247 of the Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”) as providing the court with the authority to require the corporation to pay reasonable legal fees and other costs of the “complainant” bringing a derivative action (s. 247(d)) and to require that any amount found payable by a defendant be paid to a security holder instead of the corporation (s. 247(c)). He also relied on previous case law, indicating that a complainant bringing a derivative action had a prima facie entitlement to be indemnified for the reasonable costs of pursuing the action: see Wallersteiner v. Moir (No. 2), [1975] 1 All E.R. 849 (C.A.); Turner v. Mailhot (1985), 55 O.R. (2d) 561 (H.C.), at p. 567; Jordan Inc. v. Jordan Engineering Inc. (2004), 2004 CanLII 5863 (ON SC), 48 B.L.R. (3d) 115 (Ont. S.C.), at p. 127; and Toronto Harbour Commissioners v. Disero (1991), 1991 CanLII 7086 (ON SC), 5 O.R. (3d) 585 (Gen. Div.), at p. 587. As well, he relied on the legal principles relating to determination of costs for civil proceedings generally, as set out in r. 57.01(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, and applicable case law.
[12] In the Costs Endorsement, at para. 11, I acknowledged that a successful complainant bringing a derivative action has a prima facie entitlement to a costs award in their favour but indicated that such an entitlement does not necessarily translate into a full or substantial indemnity costs award. I instead awarded $125,000 in partial indemnity costs, noting that I did so even though there was a prima facie case for denying costs in their entirety under r. 76.13 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, since the amount recovered was less than the $100,000 threshold then applicable to commence an action under r. 76: see Costs Endorsement, at paras. 14, 15 and 23. Contrary to the defendants’ prior costs submissions, the costs award was made in favour of the Continellis as well the plaintiff company, noting their success in prosecuting the derivative action and defending the third party action. In doing so, I also referred to the absence of information as to how legal expenses had been funded to date: at para. 24.
[13] In plaintiff’s counsel’s initial letter seeking clarification of my decision, he expressed the view (contested by defendants’ counsel) that the partial indemnity award set out in the Costs Endorsement did not preclude the Continellis from recovering the full amount of their legal costs from the plaintiff company. I responded by inviting further written submissions.
[14] In doing so, I directed counsel’s attention to the requirement in ss. 136(4.1) and 136(5) of the OBCA for court approval of the indemnification of expenses incurred by a director or officer in connection with a derivative action, noting that the effect of those provisions had not been addressed in the parties’ prior costs submissions or the Costs Endorsement. Under s. 136(4.1) of the OBCA, a corporation may, with court approval (upon application under s 136(5)), indemnify a director or officer of the corporation against expenses reasonably incurred in respect of a derivative action to which the director or officer is made a party because of the individual’s association with the corporation. However, a corporation is not permitted to indemnify the director or officer unless the individual acted honestly and in good faith with a view to the best interests of the corporation: see ss. 136(3) and 136(5).
[15] In my directions to counsel, I also suggested that their submissions should refer to any relevant case law, noting that Radke v. Machel, [2000] O.J. No. 4114 (S.C.) grappled with similar issues, although in a different context. In addition, I invited plaintiff’s counsel to consider addressing the information gap referred to in the Costs Endorsement, at para. 24, relating to the funding of legal expenses to bring the derivative action.
[16] In his supplemental written submissions, plaintiff’s counsel clarified that the legal costs to bring the derivative action had been fully funded by the Continellis personally in the approximate amount of $270,000, which included disbursements of approximately $73,000. He then outlined what he considered to be the resulting inequity if the Continellis are required to personally cover the $145,000 balance of the legal costs beyond the $125,000 in partial indemnity costs awarded in the Costs Endorsement. As a 50 per cent shareholder of the plaintiff company, Mr. Continelli’s notional share of the plaintiff’s $87,000 damages award would be $43,500, leaving the Continellis with a deficit of $101,500 in pursuing a successful derivative action. Plaintiff’s counsel also noted that if the Continellis are able to recover the $145,000 balance of the legal fees from the plaintiff company, Mr. Continelli as a 50 per cent shareholder would effectively be paying half that amount, reducing (but not eliminating) the Continellis’ deficit for the action by $72,500 to $29,000.
[17] In support of his position, plaintiff’s counsel reviewed the case law I previously referred to in the Costs Endorsement. He also addressed the Radtke case, which I agree is distinguishable and of no real assistance in this case. However, he did not address the requirement in ss. 136(4.1) and 136(5) of the OBCA for court approval for indemnification of expenses incurred in connection with a derivative action by a director or officer who is made a party to the action.
[18] In the defendants’ responding supplemental submissions, the defendants argued that plaintiff’s counsel has not raised any sufficient basis for indemnifying the plaintiff company and the Continellis beyond the partial indemnity costs award set out in the Costs Endorsement. He also proposed that since the Costs Endorsement provides for the costs award to be payable to the plaintiff company and the Continellis, the $125,000 partial indemnity should be allocated one-third to the plaintiff company and two-thirds to the Continellis. If that proposal were adopted, the defendant Ned Nassif, as a 50 per cent shareholder of the plaintiff company, would be notionally entitled to a one-sixth share ($20,833) of the costs award. The Continellis’ deficit for the action would increase by the same amount, to a total of over $122,000.
[19] For the reasons below, I have concluded that further indemnification of legal expenses, as requested by plaintiff’s counsel, is not justified in this case. Therefore, except to the limited extent indicated further below, I see no reason to vary the costs award set out in the previous Costs Endorsement.
[20] In essence, plaintiff’s counsel is arguing that it is unfair for the Continellis to be out of pocket over $100,000 after the successful prosecution of the derivative action. According to plaintiff’s counsel, that unfairness would be rectified by applying the principles relating to the indemnification of costs for derivative actions, as set out in s. 247 of the OBCA and applicable case law. While the situation is indeed unfortunate for the Continellis and may be considered unfair, I consider the result to be consistent with legal principles relating to the assessment of costs for civil proceedings generally, including derivative actions.
[21] As the opening words of r. 57.01(1) indicate, “the result of the proceeding” is one of the fundamental considerations that the court takes into account in exercising its discretion to determine costs. Consistent with that consideration, the system for determining costs for civil proceedings in Ontario is sometimes referred to as a “loser pays” system. The reality is that it is not unusual for the “winners” to receive little or no benefit from the litigation, even if the court finds in their favour and awards them costs. Like the opposing losing parties, the winners often end up paying a significant price for their “day in court”, not only financially but also taking into account the disruption to their lives and the emotional upheaval that participation in litigation often involves. For that reason, parties to civil litigation are repeatedly offered the court’s assistance, both formally (in mandated pre-trial conferences) and informally, to attempt to settle the matters in issue, rather than assuming the risk involved in an adjudicated outcome. Parties (and counsel) who fail to avail themselves of those opportunities do so at their financial peril. This is especially true today since civil litigation is often unavoidably delayed by the necessity (in the continuing health emergency) to allocate scarce judicial resources to the backlog of higher-priority matters in the sphere of criminal law and child protection.
[22] Those observations are particularly apt in this case, where the “winner” achieved only a modest degree of success. Following a 16-day trial (interrupted for a year by the COVID-19 health emergency) and written submissions, plaintiff ended up recovering less than the threshold amount for a simplified action, providing presumptive grounds for denying costs entirely. While the plaintiff managed to avoid the latter result in this case, I do not consider it reasonable for the party prosecuting the action to expect to receive what arguably amounts to a full or substantial indemnity costs award in circumstances in which it would not be granted in the normal course in civil litigation.
[23] What plaintiff’s counsel is saying in essence is that s. 247 of the OBCA provides a door to entitlement to an enhanced costs award for those prosecuting a successful derivative action that would not be available to the successful parties in other civil litigation. The court clearly has the authority to make such an order, but as noted in the Costs Endorsement, at para. 11, the prima facie entitlement to a legal costs reimbursement implicit in s. 247 of the OBCA does not necessarily translate into an entitlement to a full or substantial indemnity costs award. Among other things, to the extent that s. 247 refers to the payment of legal costs, it provides for the payment of “reasonable” legal expenses. Similar language is used in s. 136(4.1) of the OBCA, permitting the corporation to indemnify a director or officer for expenses “reasonably incurred” by that individual in connection with a derivative action. In the circumstances of this case, a full or partial indemnity costs award is not a reasonable outcome, nor is it consistent with principle of proportionality: see Costs Endorsement, at para. 22.
[24] That being said, there is one aspect of the costs award set out in the Costs Endorsement that merits further consideration. As noted above, the costs award was made jointly in favour of the plaintiff company and the Continellis. I considered it appropriate to do so, since the previous written submissions of plaintiff’s counsel did not address the source of funds for legal expenses incurred to date, to the extent they had been paid. The supplementary written submissions since received from plaintiff’s counsel make it clear that the legal expenses incurred in prosecuting the action were entirely funded by the Continellis personally.
[25] The costs award previously granted was intended to defray the legal costs of prosecuting (not defending) the derivative action. The Continellis incurred those costs, not the plaintiff company or the defendants. Even under the terms of the costs award as set out in the Costs Endorsement, the Continellis should be entitled to payment from the Nassifs of the full amount of the $125,000 costs award. Otherwise, the defendants would indirectly benefit from payment of a portion of that amount to the plaintiff company, given Mr. Nassif’s 50 per cent shareholding.
[26] Accordingly, I am confirming the award of partial indemnity costs in the fixed amount of $125,000 including disbursements and HST, as set out in the Costs Endorsement, except that to avoid ambiguity, the costs award shall be payable to the third parties Anthony Continelli and Grace Continelli jointly and not to the plaintiff company.
[27] For greater certainty, the Continellis are not entitled to indemnity from the plaintiff company for any further amount for legal costs in connection with prosecuting the derivative action or defending the third party claim.
R. A. Lococo J.
Date: December 16, 2021