Court File and Parties

COURT FILE NO.: CV-24-00724921-0000 DATE: 2024-12-11

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Simcoe Drug Mart, Applicant AND: 2774543 Ontario Inc., Respondent

BEFORE: Justice John Callaghan

COUNSEL: Sarah J. Erskine and Rebecca Curcio, for the Applicant Saeedbhai Patel and Akhtar Ada, self-represented Shareholders of the Applicant Jayson Thomas, for the Respondent

HEARD: In Writing

COSTS ENDORSEMENT

[1] This is the costs endorsement in the above proceeding. An endorsement was issued on August 26, 2024 dismissing the requested injunction (the “Reasons”). The defined terms in the Reasons apply to this costs endorsement.

[2] The urgent injunction Application addressed a commercial tenancy. The Application was brought in the name of the tenant which, as Applicant, sought to set aside the termination of a Sublease by the Respondent landlord. The Application took place within the context of a dispute between the three shareholders of the Applicant. Saeedbhai Patel (“Saeed”) and Akhtar Ada (“Akhtar”), two of the three shareholders, authorized the retaining of counsel and the bringing of the injunction Application. The remaining shareholder, Tahir Majeed (“Tahir”) who also had a financial interest in the Respondent, was not consulted on the bringing of the Application and opposed the Application as a principal for the Respondent.

[3] The Respondent requests that Akhtar and Saeed, along with the Applicant, be responsible for the costs and that those costs should be fixed on a full or substantial indemnity scale.

[4] Given the Respondent’s request for costs against Akhtar and Saeed personally, I invited both to make submissions. One set of submissions were filed for both. In addition to submissions, Saeed filed an affidavit. Saeed did not file an affidavit on the Application.

[5] The affidavit from Saeed appears to seek to bolster the record on the Application. I will admit the affidavit for the limited purpose of the costs request only. Saeed’s conduct was in issue on the Application. Along with Akhtar, he was a promoter of the Application, he instructed the Applicant’s counsel, and he had every opportunity to file an affidavit to address the allegations raised. He chose not to file an affidavit for the Application proper and he cannot now ask this Court to revisit the findings in the Reasons based on his affidavit filed on the issue of costs. As evident from the Reasons , the absence of direct evidence from Saeed resulted in hearsay assertions in Akhtar’s evidence being excluded, resulting in certain findings in the Reasons being made against Akhtar and Saeed. To the extent Saeed’s affidavit takes issue with the findings addressed in the Reasons, the findings in the Reasons shall be determinative.

Who Should Be Responsible for Costs

[6] In the ordinary course, non-parties are not responsible for costs. There are two exceptions. There is the “person of straw” exception where the litigation was promoted by a party without financial resources to protect the true promoters of the litigation who have financial resources. The second exception is where the court feels compelled to rely on its inherent jurisdiction to prevent an abuse of the court’s process.

[7] The “person of straw’ test derives from section 131(1) of the Courts of Justice Act, RSO 1990, c C.43 (the “CJA”) which leaves costs in the discretion of the court, including “by whom and to what extent the costs shall be paid”. The test was set out in 1318847 Ontario Limited v. Laval Tool & Mould Ltd., 2017 ONCA 184, at paras. 59 and 61 as follows:

[59] Any assessment of whether it is appropriate to order non-party costs must begin by considering the court's statutory jurisdiction under s. 131(1) of the CJA. This provision limits the court's discretion to order costs against the named parties unless the "person of straw" test is satisfied.

[60] The "person of straw" test is satisfied if

(1) the non-party has status to bring the Application;

(2) the named party is not the true litigant; and

(3) the named party is a person of straw put forward to protect the true litigant from liability for costs.

[61] The proper inquiry under the test is whether the intention, purpose or motive of the non-party in putting the named party forward was to avoid liability for costs. The named party must have been "injected into the situation for the purpose of providing a costs screen" or "for the purpose of insulating a non-party from potential cost liability": see Double Hitch Enterprises Ltd. (Receiver of) v. National Hockey League, [1994] O.J. No. 1189 (Gen. Div.), at para. 2; and Truska v. Dziemianczuk, [2009] O.J. No. 1859 (S.C.J.), at para. 22, cited in Hazelwood v. Hazelwood, [2013] O.J. No. 122, 2013 ONSC 25 (S.C.J.), at para. 12.

[8] The Court of Appeal went on to comment that the test is a factual test, not evaluative. Either the three criteria are met or not. At para. 64, the Court said:

[64] The inquiry under the "person of straw" test is not an evaluative one -- it does not ask whether the non-party engaged in misconduct serious enough to amount to abuse of the court's processes. Rather, it is a factual inquiry that asks whether the party of record is only the "formal" or "ostensible" litigant and whether the non-party is the "real" or "substantial" litigant, controlling the proceedings and advancing the named party for the purpose of deflecting liability for costs. The aim is to determine whether the non-party, as a matter of fact, functions as if it were a "party" in relation to which the court has statutory jurisdiction to order costs under s. 131(1) of the CJA, but put someone else forward to avoid costs consequences.

[9] The first and second elements of the test ask whether the non-party ought to have been the litigant and conversely, whether the party to the proceeding was not a true litigant. In this case, the dispute was whether the Sublease had been terminated. The Applicant was the tenant and the contracting party to the Sublease. The Applicant was a proper party to the Application given the relief being sought. The non-party shareholders would not have been the proper parties. The shareholders did not have the contractual right to challenge the termination of the Sublease. The Applicant is the only party who had the right to the requested relief, being the affirmation of the Sublease. Accordingly, the “person of straw” test is not met in this case.

[10] In my view, the conduct of Akhtar and Saeed is better addressed utilizing the second test regarding abuse of process.

[11] Aside from the jurisdiction under section 131(1) of the CJA to assess costs against non-parties, which gives rise to the “person of straw” test, the court has the inherent jurisdiction to address abuses of process. The Court of Appeal in Laval Tool provided the following guidance on the use of inherent jurisdiction in awarding costs against non-parties:

[73] The Supreme Court has characterized abuse of process as "the bringing of proceedings that are unfair to the point that they are contrary to the interest of justice'", or "oppressive" or "vexatious" treatment that undermines "the public interest in a fair and just trial process and the proper administration of justice": Behn v. Moulton Contracting Ltd., [2013] 2 S.C.R. 227, [2013] S.C.J. No. 26, 2013 SCC 26, at para. 39.

[74] A non-party may engage in abuse of process and attract a costs order by, as was the case in Dallas/North, initiating proceedings through a nominal plaintiff in order to oppress the defendant. Another example is provided by the British Columbia case of Oasis Hotel, in which a non-party put forward a nominal plaintiff to employ the court's processes as an instrument to defraud the defendant.

[76] Situations of gross misconduct, vexatious conduct or conduct by a non-party that undermines the fair administration of justice other than those discussed above can be envisioned.

[77] Costs against non-parties who are directors, shareholders or principals of corporations may be ordered in exceptional circumstances if the non-party commits an abuse of process: see Harris Scientific Products Ltd. v. Araujo, supra, at para. 24; and Chapman Management & Consulting Services Ltd. v. Kernic Equipment Sales Ltd., supra, at para. 40. Such circumstances may include fraud or gross misconduct in the instigation or conduct of the litigation. But the injunction and authorities referred to in para. 63 of these reasons must be followed -- costs should not be awarded against corporate officers, directors or shareholders simply because they directed the operations of the company: see Kerr, at para. 14.

[12] In Davies v. Clarington (Municipality), 2023 ONCA 376, Justice Zarnett reviewed Laval Tool and made the following observations:

[59] Two points from Laval Tool are fundamental. First, the court’s inherent power to order costs against non-parties is discretionary. Second, because it derives from the court’s power to prevent its process from being abused, it focusses on conduct of the non-party in instigating or controlling the litigation in a manner that results in such abuse. The examples of non-party conduct that were referenced in Laval Tool as potentially deserving of a costs sanction against a non-party, and the actual disposition made by the court on the facts before it, reinforce this. They are all cases where the non-party was actively involved in the instigation or conduct of the litigation or actively asserted a significant degree of control over it, and thus brought about the abuse of process.

[13] As confirmed in Davies, the court has jurisdiction to award costs against a non-party in the circumstances where the process in being abused. Whether the process is being abused is a contextual question, dependent on the facts. The focus is on the non-party’s conduct in instigating or controlling the litigation. It is a flexible doctrine that has its aim to prevent the misuse of the court procedure, in a way that would be manifestly unfair to a party to the litigation: Behn v. Moulton Contracting Ltd., 2013 SCC 26, [2013] 2 SCR 227, at para. 40.

[14] Here the Respondent argues that Akhtar and Saeed did not have authority under the Unanimous Shareholders Agreement (“USA”) to commence the Application as it needed unanimous consent of all three shareholders to retain counsel. In this case, Akhtar and Saeed deliberately excluded Tahir. Akhtar and Saeed state that they were justified in retaining counsel and it is not a breach of the USA. The importance of this fact is that it was Akhtar and Saeed who authorized this Application. Whether it was a breach or not of the USA is not particularly germane to whether costs ought to be paid to the Respondent. First, this is a request for costs, not by Tahir, but the Respondent which was put to the expense of this Application. Second, the resolution of this costs award is not a forum to debate or determine the rights and obligations of the shareholders under the USA.

[15] As mentioned, the important fact is that Akhtar and Saeed authorised the commencement of this Application. They were the sole instigators and instructors of counsel for the Applicant. At the hearing, counsel for the Applicant on behalf of Akhtar and Saeed stated that they would provide the undertaking as to damages if the injunction was granted. This reflected the reality of the two of them being the promoters of the litigation. As noted in the Reasons, they did so in circumstances where they retained money owed to the Applicant, where it was conceded that the Applicant had no money and where the Applicant could not pay not only the Respondent but trade creditors. Akhtar and Saeed were clearly funding this litigation by retaining and paying counsel. Moreover, had they not withheld the Applicants’ funds, the Applicant would have had funds to pay the rent, making this Application unnecessary. Indeed, the testimony from Akhtar was that he and Saeed would remit the money back to the Applicant if the Applicant won the Application. I note that Saeed, having lost the Application, makes no mention in his affidavit whether he and Akhtar have returned or will return the funds owed to the Applicant. I can only conclude that the Applicant’s funds are being retained by Akhtar and Saeed. In doing so, Akhtar and Saeed not only deprived the Applicant of the funds to pay the rent but have also deprived the Applicant of the ability to pay any cost award to the Respondent.

[16] In the circumstances, I conclude that Akhtar and Saeed authorized and funded the commencement of this Application knowing the Applicant was insolvent while they retained the Applicant’s funds. In essence, they brought this Application in the name of the Applicant while depriving the Applicant of the means to either pay the rent or pay an award of costs. They retained unto themselves the right to repay the funds but only if the Application was a success. As stated in the Reasons, “they will only return the money to its rightful owner if they get their way on this Application”. In the circumstances of this case, the conduct of Akhtar and Saeed in commencing this litigation while withholding the funds from the Applicant amounts to gross misconduct .In my view, it is manifestly unfair and contrary to the interest of justice to allow Akhtar and Saeed to authorize an urgent Application while withholding money from the Applicant that either could have been used to make the Application unnecessary or could be used to pay a cost award.

[17] Accordingly, I find that the cost award shall be borne jointly and severely by the Applicant, Akhtar, and Saeed.

Costs

[18] In my view the costs should be assessed on a partial indemnity scale.

[19] The respondent seeks a higher scale. To achieve a higher award of costs there needs to be “ a clear finding of reprehensible conduct on the part of the party against which the cost award is being made”: Davies v. Clarington (Municipality) et al., 2009 ONCA 722, at para. 40.

[20] An increased cost award is one way a court sanctions egregious behaviour in the conduct of litigation. An award of increased cost is entirely discretionary, and it is highly dependent of the facts in each case. In my view, like an award of punitive of damages, the court should look to whether the conduct at issue has been otherwise sanctioned. In this case, I am satisfied that the conduct of Akhtar and Saeed in commencing the Application is sufficiently addressed by my order that they be responsible for the costs. I do not think that a further sanction is warranted by way of an increased cost award. Moreover, as it relates to the Applicant, it was a proper party and no sanction is deserving against it.

[21] Accordingly, I award costs on a partial indemnity scale.

[22] As to the amount, I have examined the hourly rate of the Respondent’s counsel billed to the client. While I find the rates reasonable, the respondent seeks a 65% recovery of the costs billed by counsel. Partial indemnity hourly rates are generally in the range of 55-60% of the client hourly rate, assuming the client hourly rate is reasonable: Inter-Leasing Inc. v. Ontario, 2014 ONCA 683, at para. 5. In this case, I accept the hourly rate by the lawyer is reasonable but would reduce the partial indemnity rate claimed to meet the mid-point of the rate approved in Inter-Leasing.

[23] The Respondent points out that due to the speed of this Application, senior counsel did more work than perhaps he would do otherwise. I accept that the speed of the litigation meant the file was top heavy. However, some modest adjustment is appropriate. Therefore, I set the fee at $25,000 plus HST of $3,250 and $1,155 for disbursements for a total of $29,405.

[24] I must now consider if this amount is reasonable in all the circumstances of the case. For its own reasons, the Applicant suggested the Respondent should be entitled to costs of $25,000. While I come at the calculation differently than the Applicant, the Applicant’s proposed amount confirms that the awarded amount is within the range of what an unsuccessful party in an Application such as this should reasonably expect to pay: see Boucher v. Public Accountants Council for the Province of Ontario, 2004 CanLII 14579 (ON CA).

Disposition

[25] The Applicant, Akhtar and Saeed will be jointly and severely responsible to the Respondent for costs of $29,405 plus post-judgment interest in accordance with the Courts of Justice Act.

Callaghan J.

Date: December 11, 2024