Legal Blog

Non-Party Costs

A corporate lien claimant registers a claim for lien, commences its action to perfect that lien, and then fights that action over the next three years. You post a lien bond to vacate the lien from title and defend the lien action, incurring significant legal costs in the course of the battle. Can you do anything to put yourself in a position to recover some of those costs – assuming that you are ultimately successful at trial?

The easy answer is to obtain security for costs. However, this is not so easily done. You have to prove that the lien claimant has insufficient assets in Ontario to pay a costs award. If your lien claimant is still carrying on business, with none of the indicia that the corporation is in financial trouble, you will have no evidence on which to base a motion for security for costs. Conversely, you may discover, just before trial, that the claimant has financial problems and, by that time, it is too late to bring the motion – which, to be successful, must be brought in a timely manner before significant costs are incurred.

You are successful at trial, but by this time you know or strongly suspect that your lien claimant has no assets to satisfy a costs award or has gone bankrupt. Do you have a remedy? Maybe. As always, it depends on the facts. These facts, with a twist, were on display in Deep Foundations Contractors Inc. v. B. Gottardo Construction Ltd., a 2016 decision of the Ontario Superior Court of Justice.

Dispute

A sub registered a $470,000 claim for lien on a Crosslinx project in 2009. The general bonded off the lien and counterclaimed for $2,500,000 for alleged delay. The trial was scheduled for hearing at the January 2014 sittings. In September 2013, the sub produced an expert’s preliminary report and requested financial statements and documents, which, its expert stated, was needed to properly analyse the general’s delay claim.

It seems that the general had not produced an expert report of its own because, in November 2013, the general advised that it would be retaining an expert to prepare a delay claim. This required the scheduled 2014 trial to be adjourned.

The sub was not pleased. Four years after registering its lien, it was still nowhere near trial. It brought a motion returnable in December 2013 for judgment on its lien, leaving the dispute over the counterclaim to be tried at a later date. The general did not fully oppose the motion. The sub obtained an order for payment of its entire claim plus interest at 4% per year, without prejudice to the sub’s right at trial to claim interest at 2% per month. Costs of the lien action were also to be determined at the trial. Finally, the general’s expert report was to be served by February 7, 2014, with any documents on which the general’s expert relied to be served within 7 days after service of the report.

Ultimately, that judgment was paid, but only after the sub called upon the lien bond that had been filed to vacate the sub’s claim for lien.

Merry-go-round

The general produced its expert’s report in February 2014; however, it was apparent from that report and the sub’s own expert that the general needed to provide financial documents to support its claims, but had not done so.

From that point, there was a motion, cross examinations, and an order for financial production. Even after admitting that it had a duty to produce at least some of the requested financial documents, and being subject to an order for other financial documents, the general failed to produce any financial documents.

This continued for another year and a half when, finally, the sub obtained an order dismissing the general’s counterclaim as a result of the general’s breach of the order for production of financial documents.

The judge who dismissed the counterclaim and who, unfortunately for the general, was also the judge who had made the order for production, was then tasked with determining the costs to be awarded to the sub on its motions for judgment on its claim and for the dismissal of the counterclaim.

By this time, the general had been assigned into bankruptcy and it was apparent that a costs order against the general would be useless. Accordingly, the sub sought costs against the principal of the general.

Authority

Judges have authority to award costs against a non-party in a construction lien matter under appropriate circumstances. Under section 131(1) of the Courts of Justice Act, a court is given a general jurisdiction to determine “by whom and to what extent the costs shall be paid.” Under section 86(1) of the Construction Lien Act, a court is given discretion to order costs; the section goes on to note that the costs order may be made against a party or a person who represented a party (i) if the person knowingly participated in the preservation or perfection of a lien where it is clear that the claim was without foundation or for a grossly excessive amount or (ii) the person prejudiced or delayed the conduct of the action.

The judge noted that the general’s principal did not “represent” the general in the proceedings; he was merely the principal or directing mind of the general as it related to the proceedings, the production of financial documentation, and compliance with the prior order. However, the judge held that the particularised portion of section 86(1) did not eliminate the court’s general jurisdiction and discretion to award costs even when the criteria in the particularised portion of section 86(1) were not met. In effect, the judge interpreted section 86(1) as giving the court a general costs jurisdiction with examples as to how that jurisdiction should be exercised.

The judge first referred to previous jurisprudence, which held that a court had authority, derived from its inherent jurisdiction, to prevent an abuse of process by awarding costs against a non-party who is proved to be the real person controlling the litigation, but who has put forward a “man of straw” to avoid liability for costs. The Gottardo case, however, was not a situation in which the principal put forward the general as a man of straw. The principal had no right to make a claim for delay; only the general had that right.

Regardless of the failure of the straw man grounds, the judge noted that, whether under section 86(1) of the Construction Lien Act or the Courts of Justice Act, he had jurisdiction to award costs against the principal.

Award

The judge found that the principal controlled the litigation, at least to the extent of the non-disclosure of the financial documents and the general’s disobedience of the judge’s production order. He noted that a corporate veil could be pierced to find a principal liable if the principal directed a wrongful thing to be done or if the principal completely dominated and controlled the corporation and used it as a shield for fraudulent or improper conduct.

The judge held that the principal’s actions in wilfully disregarding the production order was to deliberately cause the general to do a “wrongful thing” or engage in “improper conduct” entitling the judge to disregard the separate legal corporate entity for the purpose of assessing responsibility for costs. He held that it would be “unfair, unjust and contrary to the principles of equity to permit an individual who caused a corporation to disregard and wilfully disobey a court order and then hide behind the “separate corporate entity” to avoid personal liability (for) the costs caused directly by his or her actions.”

The judge then found that the actions of the general and the principal were reprehensible and ordered full indemnity costs, which he assessed at approximately $44,000.

 

Image courtesy of mensatic.

Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.