The last-minute withdrawal of fraud allegations after years of litigation has led to a substantial indemnity costs award granted by the Ontario Superior Court of Justice.
The ruling is a warning from the bench for lawyers to be cautious when pursuing such allegations without full evidentiary support, says Milton Davis, lead representative for Great Lakes Copper, and partner with Fogler Rubinoff LLP.
In 1623242 Ontario Inc. v. Great Lakes Copper Inc., Superior Court Justice David Price gave leave to the plaintiffs 162 Ontario Inc. [162] to discontinue its fraud claim.
Price also ordered a substantial indemnity award against 162 of $516,395.23, and ruled the plaintiffs cannot attempt to re-litigate the fraud claims.
“It’s long been my belief a lawyer, never mind a client, has duty to the court to not start a fraud claim without having at least a prima facie case,” says Davis.
“It’s a cautionary tale about alleging fraud; litigants should think twice before making strong allegations of fraud if they can’t sustain them, and they should also think about the fact that if you can’t sustain them and you abandon them, the court is going to show its disapproval in costs.”
In 2005, 162 Ontario Inc. had purchased an industrial property in Fergus, Ont., from Wolverine Tube Canada Inc., a company that manufactures copper and alloy tubing.
The property had been contaminated by polychlorinated biphenyl, and it was purchased for a price of about $1.35 million.
162 Ontario Inc. paid $337,000 to Wolverine on closing and financed the rest of the purchase with a vendor take-back mortgage, which Wolverine later assigned to related companies, 3072452 Nova Scotia Company and Great Lakes Copper Inc.
At the time of the purchase, the property was contaminated by a series of transformers containing PCBs.
At some point after the purchase, the property was further contaminated when PCBs leaked into a nearby lake.
162 Ontario Inc. launched its fraud action against the three related companies in October 2012 for $10 million in damages, claiming it was not made aware of the contamination when it purchased the property and that the vendor’s intentional non-disclosure of the fact amounted to fraud.
Amended claims increased the damage claims to $110 million in 2014 and then reduced the claims to $5 million later the same year. Each claim alleged the defendants conspired to conceal the contamination.
The claims also alleged there were plans to acquire the property back from 162 Ontario Inc. by foreclosure and thereby pass off the costs of cleanup to 162 Ontario Inc.
The defendants, through Davis, argued that 162 Ontario Inc. was aware of the contamination at the time of purchase. They also argued that the purchase agreement provided for the purchase “as is” and that the purchase price was substantially lower than it would have been without the contamination.
According to Justice Price’s ruling, after four years of litigation, 162 Ontario Inc. produced records it had obtained by the Ministry of the Environment.
Davis argued that these records disclosed the fact that 162 Ontario Inc. knew about the contamination at least as recently as 2009, three years before commencing the fraud action, and argued the action was statute-barred.
During a case conference on Jan. 22, 2016 to set a trial date, 162 Ontario Inc.’s counsel, Gregory Govedaris, who had only taken on the role in October 2015, informed the court he had been instructed to discontinue the fraud action.
Govedaris did not reply to a request for comment prior to press time.
In response, Davis sought an order refusing the discontinuance and instead to dismiss the action and requested the court assess the defendants’ post-assessment costs on a full indemnity scale.
In his ruling on costs, Justice Price wrote: “The general rule is that costs follow the event and will be awarded on a partial indemnity scale. In special circumstances, costs may be awarded on a high scale, but those cases are exceptional and generally involve circumstances where one party to the litigation has behaved in an abusive manner, brought proceedings wholly devoid of merit and/or unnecessarily run up the costs of litigation.”
Justice Price wrote in his ruling that while he was not persuaded that the plaintiff intentionally misled the court, it failed to substantiate its claims and “it was arguably irresponsible of 162 to make those allegations based on the evidence available to it at the time.”
“A knowledge of the falsity of its allegations cannot reasonably [be] imputed to 162 based solely on the assertions that the defendant’s counsel made to its counsel at an early stage in the proceeding, before documentary productions and examinations for discovery,” Justice Price wrote.
“A dilemma arises when the plaintiff commences an action in which it alleges fraud and later withdraws the allegations or discontinues the action before a judgment is rendered,” said Justice Price, who continued in ruling for a costs award on a substantial indemnity scale.
“It can be inferred from the withdrawal of the allegations or discontinuance of the action that the allegations of fraud were unfounded. Because of this, the action rightly attracts an award of costs on a substantial indemnity scale until the allegations are withdrawn or the plaintiff discontinues the action.”
Darren Smith of Hummingbird Lawyers LLP, director of the firm’s civil litigation and alternative dispute resolution practices, says that in reviewing the case, it is a trend of the court to deal harshly with fraud allegations that are unsubstantiated.
“Parties really need to be careful of making allegations of fraud or other kinds of improper conduct without being able to substantiate them,” he says.
“Courts react quite negatively towards these types of allegations because they are often malicious in nature and they can do real harm to an organization or an individual,” says Smith.
“What the court has been saying is that it’s somewhat offensive to the court to have to sit through these kinds of proceedings, particularly when judicial resources are tight,” he adds.
“A lawyer is better to act out of an abundance of caution by not alleging the fraud initially; it doesn’t mean you can’t later. The really big takeaway from this is lawyers really have to act as a second sober thought for clients, and while we have an obligation to advocate on the best of our ability on their behalf, it doesn’t mean we do so recklessly. And it’s my opinion we do so when we allow them to go headlong into this kind of an action when they’re making unfounded allegations.”
The ruling is a warning from the bench for lawyers to be cautious when pursuing such allegations without full evidentiary support, says Milton Davis, lead representative for Great Lakes Copper, and partner with Fogler Rubinoff LLP. In 1623242 Ontario Inc. v. Great Lakes Copper Inc., Superior Court Justice David Price gave leave to the plaintiffs 162 Ontario Inc. [162] to discontinue its fraud claim.
Price also ordered a substantial indemnity award against 162 of $516,395.23, and ruled the plaintiffs cannot attempt to re-litigate the fraud claims.
“It’s long been my belief a lawyer, never mind a client, has duty to the court to not start a fraud claim without having at least a prima facie case,” says Davis.
“It’s a cautionary tale about alleging fraud; litigants should think twice before making strong allegations of fraud if they can’t sustain them, and they should also think about the fact that if you can’t sustain them and you abandon them, the court is going to show its disapproval in costs.”
In 2005, 162 Ontario Inc. had purchased an industrial property in Fergus, Ont., from Wolverine Tube Canada Inc., a company that manufactures copper and alloy tubing.
The property had been contaminated by polychlorinated biphenyl, and it was purchased for a price of about $1.35 million.
162 Ontario Inc. paid $337,000 to Wolverine on closing and financed the rest of the purchase with a vendor take-back mortgage, which Wolverine later assigned to related companies, 3072452 Nova Scotia Company and Great Lakes Copper Inc.
At the time of the purchase, the property was contaminated by a series of transformers containing PCBs.
At some point after the purchase, the property was further contaminated when PCBs leaked into a nearby lake.
162 Ontario Inc. launched its fraud action against the three related companies in October 2012 for $10 million in damages, claiming it was not made aware of the contamination when it purchased the property and that the vendor’s intentional non-disclosure of the fact amounted to fraud.
Amended claims increased the damage claims to $110 million in 2014 and then reduced the claims to $5 million later the same year. Each claim alleged the defendants conspired to conceal the contamination.
The claims also alleged there were plans to acquire the property back from 162 Ontario Inc. by foreclosure and thereby pass off the costs of cleanup to 162 Ontario Inc.
The defendants, through Davis, argued that 162 Ontario Inc. was aware of the contamination at the time of purchase. They also argued that the purchase agreement provided for the purchase “as is” and that the purchase price was substantially lower than it would have been without the contamination.
According to Justice Price’s ruling, after four years of litigation, 162 Ontario Inc. produced records it had obtained by the Ministry of the Environment.
Davis argued that these records disclosed the fact that 162 Ontario Inc. knew about the contamination at least as recently as 2009, three years before commencing the fraud action, and argued the action was statute-barred.
During a case conference on Jan. 22, 2016 to set a trial date, 162 Ontario Inc.’s counsel, Gregory Govedaris, who had only taken on the role in October 2015, informed the court he had been instructed to discontinue the fraud action.
Govedaris did not reply to a request for comment prior to press time.
In response, Davis sought an order refusing the discontinuance and instead to dismiss the action and requested the court assess the defendants’ post-assessment costs on a full indemnity scale.
In his ruling on costs, Justice Price wrote: “The general rule is that costs follow the event and will be awarded on a partial indemnity scale. In special circumstances, costs may be awarded on a high scale, but those cases are exceptional and generally involve circumstances where one party to the litigation has behaved in an abusive manner, brought proceedings wholly devoid of merit and/or unnecessarily run up the costs of litigation.”
Justice Price wrote in his ruling that while he was not persuaded that the plaintiff intentionally misled the court, it failed to substantiate its claims and “it was arguably irresponsible of 162 to make those allegations based on the evidence available to it at the time.”
“A knowledge of the falsity of its allegations cannot reasonably [be] imputed to 162 based solely on the assertions that the defendant’s counsel made to its counsel at an early stage in the proceeding, before documentary productions and examinations for discovery,” Justice Price wrote.
“A dilemma arises when the plaintiff commences an action in which it alleges fraud and later withdraws the allegations or discontinues the action before a judgment is rendered,” said Justice Price, who continued in ruling for a costs award on a substantial indemnity scale.
“It can be inferred from the withdrawal of the allegations or discontinuance of the action that the allegations of fraud were unfounded. Because of this, the action rightly attracts an award of costs on a substantial indemnity scale until the allegations are withdrawn or the plaintiff discontinues the action.”
Darren Smith of Hummingbird Lawyers LLP, director of the firm’s civil litigation and alternative dispute resolution practices, says that in reviewing the case, it is a trend of the court to deal harshly with fraud allegations that are unsubstantiated.
“Parties really need to be careful of making allegations of fraud or other kinds of improper conduct without being able to substantiate them,” he says.
“Courts react quite negatively towards these types of allegations because they are often malicious in nature and they can do real harm to an organization or an individual,” says Smith.
“What the court has been saying is that it’s somewhat offensive to the court to have to sit through these kinds of proceedings, particularly when judicial resources are tight,” he adds.
“A lawyer is better to act out of an abundance of caution by not alleging the fraud initially; it doesn’t mean you can’t later. The really big takeaway from this is lawyers really have to act as a second sober thought for clients, and while we have an obligation to advocate on the best of our ability on their behalf, it doesn’t mean we do so recklessly. And it’s my opinion we do so when we allow them to go headlong into this kind of an action when they’re making unfounded allegations.”
