PROVINCE OF PRINCE EDWARD ISLAND IN THE SUPREME COURT - TRIAL DIVISION (SMALL CLAIMS SECTION) MRSB CHARTERED ACCOUNTANTS

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1 PROVINCE OF PRINCE EDWARD ISLAND IN THE SUPREME COURT - TRIAL DIVISION (SMALL CLAIMS SECTION) Citation: MRSB v. Cardinal & Ors PESCTD 16 Date: Docket: S1-SC Registry: Charlottetown BETWEEN: AND: MRSB CHARTERED ACCOUNTANTS (PLAINTIFF) CARDINAL PACKAGING LIMITED, CARDINAL MANUFACTURING INC. DENNIS ARSENAULT, PAUL LEBLANC, WAYNE LINKLETTER AND KEVIN GALLANT (DEFENDANTS) Appearances: BEFORE: The Honourable Justice Benjamin B. Taylor Robert I. S. MacGregor, solicitor for the plaintiff Stephen D.G. McKnight, Q.C., solicitor for the defendants Cardinal Manufacturing Inc., Wayne Linkletter and Kevin Gallant Place and Date of Hearing Charlottetown, Prince Edward Island February 17, 2006 Place and Date of Decision Charlottetown, Prince Edward Island March 27, 2006

2 Citation: MRSB v. Cardinal & Ors PESCTD 16 S1-SC BETWEEN: MRSB CHARTERED ACCOUNTANTS (PLAINTIFF) AND: CARDINAL PACKAGING LIMITED, CARDINAL MANUFACTURING INC. DENNIS ARSENAULT, PAUL LEBLANC, WAYNE LINKLETTER AND KEVIN GALLANT Prince Edward Island Supreme Court - Trial Division (Small Claims Section) Before: Taylor J. Date Heard: February 17, 2006 Date of Decision: March 27, 2006 [8 Pages] CIVIL PROCEDURE - Costs - Small Claims Award of costs to penalize unreasonable behaviour discretion under Supreme Court Act re costs. (DEFENDANTS) Cases Considered: Twaits v. Monk, [2000] O.J. No (C.A.); Corfax Benefit Systems Ltd. v. Fiducie Desjardines Inc., [1997] 37 O.R. (3d) 50 (Gen. Div.); Bargman v. Rooney, [1998] O.J. No (Gen. Div.); Goulin v. Goulin (1995), 26 O.R. (3d) 472 (Gen. Div.); Capital City Shopping Centre Ltd. v Ontario Inc., [2000] O.J. No (S.C.J.); Murano v. Bank of Montreal, [1995] O.J. No (Gen. Div.); Lawyers Professional Indemnity Co. v. Geto Investments Ltd., [2001] O.J. No (Ont. S.C.J.); Mele v. Thorne Riddell (1997), 32 O.R. (3d) 674 (Ont. Ct. Gen. Div.); Goulin v. Goulin (1995), 26 O.R. (3d) 472 (Ont. Ct. Gen. Div.); Molnar (c.o.b. Molnar Painting and Decorating) v. Langille, [2003] O.J. No. 846 (Sm. Cl. Ct.); Biggins v. Boran et al., [2005] O.J. No (Sm. Cl. Ct.); Jones v. LTL Contracting Ltd. et al., [1995] O.J. No (Sm. Cl. Ct.), affirmed [1995] O.J. No (Gen. Div.); Kakamin v. Hasan, [2005] O.J. No (Sm. Cl. Ct.); Om v. Insurance Corp. of British Columbia, [1999] B.C.J. No (Sm. Cl. Ct.); Anton, Campion, MacDonald & Phillips v. Rowat, [1996] Y.J. No. 130 (Sm. Cl. Ct.); Newfoundland Association of Public Employees v. Drake, [1996] N.J. No. 170 (Sm. Cl. Ct.); Ron Robinson Ltd. v. Canadian Indemnity Co. (1984), 45 O.R. (2d) 124 (Div.

3 ii - Court); Santesso Bros. Iron Works Ltd. v. Forte Construction Corp., [1999] O.J. No (Sm. Cl. Ct.) Statutes Referred to: Supreme Court Act, R.S.P.E.I. 1988, Cap. S-10, s. 53; Courts of Justice Act, R.S.O. c. C.43, s. 29 Rules Considered: Rules of Court, Province of Prince Edward Island 1996, Rule 57, 19.02, 1.02(1). Robert I. S. MacGregor, solicitor for the plaintiff Stephen D.G. McKnight, Q.C., solicitor for the defendants Cardinal Manufacturing Inc., Wayne Linkletter and Kevin Gallant

4 Taylor J.: [1] This is a motion by the defendants Cardinal Manufacturing Inc., Wayne Linkletter and Kevin Gallant for costs against the plaintiff on a full indemnity basis following the plaintiff s discontinuance of the action, and for an order fixing the amount of costs. For the reasons set out below, I award these three defendants their costs of this action and this motion on a substantial indemnity basis. PART ONE Background [2] The plaintiff accounting firm brought a small claims action in January 2004 against the six defendants for recovery of fees owing for accounting work done for the defendant Cardinal Packaging Limited while Cardinal Packaging Limited was on the verge of insolvency in The actual fees were $8,729.72, but the plaintiff decreased the amount to $8,000 so as to come within the small claims limit. Eventually, Cardinal Packaging Limited did become insolvent and after actions by creditors, many of its assets ended up in the hands of Cardinal Manufacturing Inc. In its claim, the plaintiff stated, Cardinal Packaging Limited underwent a corporate reorganization wherein its assets were transferred to Cardinal Manufacturing Inc. while preserving its liabilities...to defeat Cardinal Packaging Limited s creditors. The plaintiff claimed Cardinal Manufacturing Inc. benefited from the plaintiff s work by fraudulently receiving assets of Cardinal Packaging Limited, including investments obtained by the plaintiff for Cardinal Packaging Limited, while the other four defendants, who were directors of one or both corporate defendants at one time or another, acted fraudulently, deceitfully, and in bad faith with the intention of defeating the creditors of Cardinal Packaging Limited. In fact, though, the asset transfer to Cardinal Packaging Limited had been an arms length sale for good consideration by a principal creditor of Cardinal Packaging Limited, and the plaintiff had no grounds whatsoever to claim against Cardinal Manufacturing Inc., Linkletter and Gallant. [3] Cardinal Packaging Limited, Dennis Arsenault and Paul Leblanc either were not served or did not defend, and the plaintiff did not take judgment against them. Wayne Linkletter, Kevin Gallant and Cardinal Manufacturing Inc. filed statements of defence and were all represented by the same counsel. (In this decision, any reference hereunder to defendants means Linkletter, Gallant and Cardinal Manufacturing Inc., not Arsenault, Leblanc or Cardinal Packaging Limited.) When these three defendants mounted a vigorous defence, the plaintiff essentially stopped prosecuting the action but did not discontinue against the defendants. The defendants forced the matter towards trial; it was scheduled for trial on January 7, 2005, but adjourned at the last minute at the request of the plaintiff. On November

5 Page: 2 21, 2005, following a pre-trial conference, the plaintiff discontinued the action in its entirety and Jenkins J. gave an order granting the plaintiff leave to discontinue, subject to the right of the defendants to seek costs. [4] In this motion, the defendants assert the plaintiff should pay their full costs of defending the action. The defendants claim the sum of $25, for legal fees and taxes, plus $ for disbursements, for a total of $25, PART TWO Outline of Issues 1. Can the Small Claims Section of the Trial Division of the Supreme Court of Prince Edward Island award costs on a substantial indemnity or partial indemnity basis, and if so, what type of costs should be awarded in this case? 2. Quantum of costs awarded. PART THREE - Analysis Issue One - Can the Small Claims Section of the Trial Division of the Supreme Court of Prince Edward Island award costs on a substantial indemnity or partial indemnity basis, and if so, what type of costs should be awarded in this case? [5] The Court s power to award costs is governed by s. 53 of the Supreme Court Act, R.S.P.E.I. 1988, Cap. S-10, which states in part: 53. (1) Subject to the express provisions of any statute, the costs of and incidental to all proceedings authorized to be taken in court or before a judge are in the discretion of the court or judge, and the court or judge has full power to determine by whom and by what extent the costs shall be paid. [6] Rule 57 of the Rules of Court, Province of Prince Edward Island 1996, provides some factors the Court may consider in awarding costs, but s-s (4) states: (4) Nothing in this rule or Rules to affects the authority of the court under section 53 of the Supreme Court Act...

6 Page: 3 (c) to award all or part of the costs on a substantial indemnity basis; (d) to award costs in an amount that represents full indemnity. [7] Although s (4)(d) refers to full indemnity, our courts award costs on either a partial indemnity or a substantial indemnity basis, replacing the traditional party and party or solicitor-client basis. In practise, substantial indemnity is intended to represent full costs, at least according to the scale deemed appropriate. [8] Our Small Claims Rule contains different costs provisions. Rule of the Small Claims Rule states: Limit An award of costs in the Small Claims Section, other than disbursements, shall not exceed 15 percent of the amount claimed or of the value of the property sought to be recovered unless the court considers it necessary in the interests of justice to penalize a party, counsel or agent for unreasonable behaviour in the proceeding. [9] Ontario has a similar provision to our Rule 19.02, but it is contained in the Courts of Justice Act, R.S.O. c. C.43 at s. 29. A provision in a statute prevails over a Rule of Court. Section 29 of the Ontario Courts of Justice Act dictates the limits of small claims costs in that province, but although our Small Claims Rule has the same wording as Ontario s s. 29, our Rule does not override s. 53(1) of our Supreme Court Act. Notwithstanding the use of shall, Small Claims Rule is just a factor to be considered by the Court; it does not reduce or otherwise affect the authority of the Court under s. 53(1) of the Supreme Court Act. Costs awarded to sanction misconduct [10] Trial or Appeal Division courts may award substantial indemnity costs in an appropriate case. Other than cases dealing with settlement offers, the circumstances giving rise to such an award are exceptional, and generally have to do with unacceptable conduct by a party. It is unacceptable for plaintiffs to make totally unsupported allegations of fraud or deceit against defendants. Courts award substantial indemnity costs against such plaintiffs to punish the plaintiffs reprehensible conduct in making the allegations, discourage other plaintiffs from making false and harmful assertions about a defendant s character, and compensate the defendants for the expense incurred in answering the baseless attack on the defendants integrity (Twaits v. Monk, [2000] O.J. No (C.A.) at paragraphs two

7 Page: 4 to five; Corfax Benefit Systems Ltd. v. Fiducie Desjardines Inc., [1997] 37 O.R. (3d) 50 (Gen. Div.), page 10 of 10; Bargman v. Rooney, [1998] O.J. No (Gen. Div.) at paragraphs 15 to 19 and paragraph 33; Goulin v. Goulin (1995), 26 O.R. (3d) 472 (Gen. Div.) at pages 475 to 476; Capital City Shopping Centre Ltd. v Ontario Inc., [2000] O.J. No (S.C.J.) at paragraphs five to seven; Murano v. Bank of Montreal, [1995] O.J. No (Gen. Div.). [11] As with all cost factors, there are areas of grey: the clearer the allegation of fraud, and the more blatant and obvious the plaintiff s inability to prove fraud, the more certain an award of substantial indemnity costs (Twaits v. Monk). In this case, both the allegation of fraud and the complete lack of proof or foundation for the allegation could not be clearer. The plaintiff offers no shred of evidence, and no suggestion why the allegation was made. [12] Costs sanctions against asserting fraud may apply to actions discontinued prior to trial (Lawyers Professional Indemnity Co. v. Geto Investments Ltd., [2001] O.J. No (Ont. S.C.J.) at paragraph 27; Mele v. Thorne Riddell (1997), 32 O.R. (3d) 674 (Ont. Ct. Gen. Div.) at page 678; Goulin v. Goulin (1995), 26 O.R. (3d) 472 (Ont. Ct. Gen. Div.) at paragraphs 475 to 476). In Mele v. Thorne Riddell, Dambrot J. stated at page 678:...a significant part of the harm caused by unfounded allegations of wrongdoing by a plaintiff is the harm done to the reputation of the defendant. As long as the allegation remains part of the public record, that harm continues. Finally, on this point, if the plaintiffs knew some time ago that no foundation for these allegations existed, then it seems to me that they compounded the harm caused by their recklessness by leaving the allegations publicly uncorrected. [13] Although the present case neither went to trial nor attracted media attention, the defendants have advanced uncontradicted evidence they suffered harm to their reputation and possibly financial harm, since the Atlantic Canada Opportunities Agency somehow learned of the publicly filed allegations and declined to do business with certain of the defendants until the allegations were cleared up. Costs sanctions in Small Claims Court [14] A small claims court may consider it necessary in the interests of justice to penalize a party, counsel or agent for unreasonable behaviour in the proceedings. Illustrations of unreasonable behaviour are: 1) False and hurtful allegations, in particular: a) a bizarre and ridiculous claim by the plaintiff containing false and vicious allegations the defendant was dishonest and had committed a

8 Page: 5 fraud (Molnar (c.o.b. Molnar Painting and Decorating) v. Langille, [2003] O.J. No. 846 (Sm. Cl. Ct.); at paragraphs 25, 36 and 34 b) in a claim the plaintiff brought...to punish and make life unpleasant for his enemies rather than to obtain compensation for a wrong, the plaintiff falsely alleged criminal misappropriation against one defendant (Biggins v. Boran et al., [2005] O.J. No (Sm. Cl. Ct.) at paragraph 20); 2) Failure to accept a reasonable offer (Jones v. LTL Contracting Ltd. et al., [1995] O.J. No (Sm. Cl. Ct.), affirmed [1995] O.J. No (Gen. Div.); Kakamin v. Hasan, [2005] O.J. No (Sm. Cl. Ct.) at paragraph 10). [15] Failure to accept an offer as good as or better than the court award commonly triggers cost consequences in general division trials, and in general division trials it does not matter whether the failure to accept the offer was reasonable or unreasonable; the retrospective recognition the offer should have been accepted is all that is necessary. In order to trigger costs in small claims court under Rule 19.02, however, it appears the offer must be both one that in hindsight should have been accepted, and also an offer which was so obviously a good offer at the time it was made, it was unreasonable behaviour not to take it. Conclusion re defendants right to costs [16] The plaintiff accused the defendants of fraud, deceit and acting in bad faith. The plaintiff has not offered any evidence to support these accusations, and I find the plaintiff s allegations were utterly false. This was only a small claims action, but by impugning the character of the defendants, the plaintiff put a lot more in play than $8,000. [17] The plaintiff asserts there was no unreasonable behaviour by the plaintiff from the time the action was started until it was discontinued. In Biggins v. Boran, at paragraph nine, Searle D.J. interpreted the phrase in the proceeding, in unreasonable behaviour in the proceeding, to include the commencement of a proceeding. I agree with this interpretation. [18] I find it necessary to penalize the plaintiff for unreasonable behaviour in the proceeding. The unreasonable behaviour consisted of 1) making baseless allegations of fraud, deceit, and bad faith about the defendants which damaged their reputations; and 2) maintaining these allegations by leaving them in the public record from January 2004 until November 2005, long after the plaintiff had to know there was no foundation for the allegations. As discussed below, the penalty for unreasonable behaviour may take the following forms: 1) costs to penalize the plaintiff for unreasonable behaviour in the proceeding; or 2) substantial indemnity costs pursuant

9 Page: 6 to s. 53 of the Supreme Court Act; or 3) some of both. Issue Two - Quantum of costs awarded [19] A plaintiff who makes an unwarranted allegation of fraud in a Supreme Court Trial Division claim risks having to pay substantial indemnity costs. In the Small Claims section, the policy is to keep costs awards to a minimum so as not to bar impecunious litigants from coming to court, but Small Claims Rule and the general discretion of the court under s. 53 of the Supreme Court Act allow the court to award more than usual costs in exceptional cases. [20] I believe the quantum of costs which would serve to penalize the plaintiff for its unreasonable behaviour would be in the neighbourhood of $8,000. Such an amount would serve as a significant financial penalty for bringing a claim for $8,000 based on allegations which were both false and hurtful, and would also serve as a cautionary tale to discourage other plaintiffs from making like allegations. However, an award of $8,000 costs would not compensate the defendants for the costs they reasonably incurred, and I believe the award in this case related to those costs. [21] I can find no authority ruling costs under Rule of the Small Costs Rules may be used both to award costs which penalize the plaintiff, and also an additional amount so as to arrive at a total which compensates the defendants for their actual costs. Such an interpretation appears possible, but an alternative route in this province would be under s. 53 of the Supreme Court Act. [22] Accordingly, under s. 53 of the Supreme Court Act, I turn to consideration of what costs would be reasonable in this case. The $25, claimed by the defendants is a very large figure for a case with no discoveries, no motions other than this costs motion, and no trial. Too large, I would say. By comparison, although a number of the small claims cases referred to above involved trials of more than a day or two in length, and defendants represented by counsel, none resulted in awards on the scale requested by the defendants. The highest costs were in Jones v. LTL Contracting, where the decision followed a trial of several days involving a number of experts. One defendant received $6,715.13, another received $11, [23] The defendants submit this was an extremely complex proceeding requiring much detailed analysis. In my view, the straightforwardness and simplicity of the defence are what make the plaintiff s conduct so unreasonable. As I understand it, defence counsel laid out the defence in a telephone call to plaintiff s counsel at the outset, and asserts the call should have persuaded the plaintiff to discontinue forthwith. If so, the defence cannot have been so very complicated. On the other

10 Page: 7 hand, if the case was extremely complex, so that it was difficult to show the defendants did not act fraudulently, the complexity of the case would argue against a finding of unreasonable behaviour by the plaintiff. [24] The plaintiff asserts it made an offer to the defendants which would have resolved the matter, and this offer should be taken into account. The plaintiff offered to discontinue the action, apologize to the defendants and pay a small amount for costs in full settlement. The defendants did not accept, and the plaintiff has not apologized. This offer does not affect costs: the offer was not as good as or better than the results the defendants will achieve from this motion, namely, increased costs of the action, discontinuance of the action and, instead of the apology the plaintiff used as a bargaining chip, a statement by the court the plaintiff s claim was baseless. [25] At the hearing of this motion, I asked why the defendants did not bring a summary judgment motion. Defendants counsel said he was not sure he could. Some small claims courts allow summary judgment motions (see Om v. Insurance Corp. of British Columbia, [1999] B.C.J. No (Sm. Cl. Ct.); Anton, Campion, MacDonald & Phillips v. Rowat, [1996] Y.J. No. 130 (Sm. Cl. Ct.); Newfoundland Association of Public Employees v. Drake, [1996] N.J. No. 170 (Sm. Cl. Ct.). The summary judgment procedure may not be available in our Small Claims Court. Rule 1.02(1) of the Rules of Court states...only Rule 74 applies to proceedings in the Small Claims Section of the Trial Division. The Rule 74 rules contain no provision for a summary judgment motion, and I expect this is because the Small Claims Court Rules were themselves intended to provide for...the summary disposition after a trial of small claims, with a minimum of pre-trial proceedings. Ron Robinson Ltd. v. Canadian Indemnity Co. (1984), 45 O.R. (2d) 124 (Div. Court); Santesso Bros. Iron Works Ltd. v. Forte Construction Corp., [1999] O.J. No (Sm. Cl. Ct.). Nevertheless, other Rules of Court procedures not set out in Rule 74 have been used in our Small Claims Court. Given the defendants costs and concerns in this case, a summary judgment motion might have been a good idea: even if the Court ultimately ruled the summary judgment procedure was not available in our Small Claims Court, the motion could have brought the litigation to a head much sooner. However, I will not penalize the defendants for failure to bring a motion when the viability of the motion has not been determined in this Court. [26] Taxing costs requires consideration of the particulars of the costs and any conduct by the defendants which may have complicated or lengthened the proceedings. I note the defendants filed three statements of defence when one would have done, and likewise, three pre-trial conference memoranda. I note almost $7,000 in fees were charged before the defences were filed, and some, perhaps a lot, of this time was spent exploring the possibility of a defamation action against the defendant.

11 Page: 8 [27] The costs claimed by the defendants should be reduced to reflect these unnecessary actions before substantial indemnity costs are awarded based on the remainder. Conclusion [28] This was a significant case for the defendants, they were represented by competent counsel, and they were completely successful. On the other hand, I conclude the quantum of costs incurred by the defendants in this case is the result of an excess of caution, and beyond what would be reasonable for the defence as I understand it. I believe $15,000 would be the upper limit for substantial indemnity costs in a case such as this. Accordingly, I award the defendants Cardinal Manufacturing Inc., Wayne Linkletter, and Kevin Gallant costs of this motion and action on a substantial indemnity basis, which I fix at $15,000 plus taxes of $2,655, plus disbursements of $328.97, for a total of $17, March 27, 2006 J.