Smithies Holdings Inc. v. RCV Holdings Ltd.

2016 BCSC 396 Smithies Holdings Inc. v. RCV Holdings Ltd.

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Smithies Holdings Inc. v. RCV Holdings Ltd., 2016 BCSC 396 Date: 20160308 Docket: S125995 Registry: Vancouver Between: Smithies Holdings Inc. E.M. Smithies Investments Inc. 0704824 B.C. Ltd. Plaintiffs And RCV Holdings Ltd. Defendant - and - Docket: S123328 Registry: Vancouver Between: Smithies Holdings Inc. E.M. Smithies Investments Inc. 0704824 B.C. Ltd. Plaintiffs And RCV Holdings Ltd. Linnell Taylor Lipman & Associates Ltd. Ian Pritchard Defendants And Smithies Holdings Inc. E.M. Smithies Investments Inc. 0704824 B.C. Ltd. Spearpoint Holdings Ltd. Defendants by Counterclaim Before: The Honourable Mr. Justice Butler Costs Ruling Counsel for the Plaintiffs and Defendants by Counterclaim: Ronald Josephson David Adams, A/S Counsel for the Defendant RCV Holdings Ltd.: Francis Lamer Place and Date of Trial/Hearing: Vancouver, B.C. July 9 and 10, 2015 Place and Date of Judgment: Vancouver, B.C. March 8, 2016 [1] The parties bring this application for costs following a hard-fought three-week trial. The two actions arose out of a dispute between three parties who established a joint venture to acquire lands (the "Lands") near Calgary, Alberta. After several years of working together, serious differences arose between them about the extent to which they should pursue development, and the defendant, RCV Holdings Ltd. ("RCV") decided

to withdraw from the joint venture. The litigation required the court to interpret the joint venture agreement (the "JV Agreement") and to determine a process to value the interest of RCV in the joint venture. My reasons for judgment are indexed as Smithies Holdings Inc. v. RCV Holdings Ltd., 2014 BCSC 1688 (the "Reasons"). [2] RCV takes the position on this application that it was successful at trial and seeks an order for special costs. The plaintiffs say they were successful at trial and are entitled to costs. [3] The positions of the parties raise two issues: who was the successful party and what scale of costs should be ordered. For the reasons that follow, I find that RCV was the successful party and is entitled to special costs. Position of RCV [4] RCV says there is no doubt it was the successful party in the litigation. The plaintiffs commenced both actions in order to obtain specific performance of the JV Agreement to buy out RCV. The question as to whether the provisions of the JV Agreement could be relied upon by the plaintiffs to acquire that interest was the central issue before the court. RCV succeeded in establishing that the plaintiffs breached their fiduciary duties and acted deceitfully in their dealings with RCV about an attempt by Greenfield Development Ltd to purchase the Lands. RCV says it was successful with regard to all of the highly contentious

findings of fact that had to be made by the court. In addition, it was successful in establishing that it suffered a loss of opportunity. [5] With regard to the scale of costs, RCV says special costs should be awarded because of the reprehensible conduct of the plaintiffs during the litigation. In addition, it says this is one of the exceptional cases where special costs should be awarded because of the pre-litigation conduct of the plaintiffs. [6] The conduct during the litigation which is relied upon by RCV is the plaintiffs' failure to disclose information about the Greenfield letter of intent (the "LOI"), their deceit during the early stages of the litigation and the tendering of intentionally false or misleading evidence by Mr. Smithies. [7] Special costs are generally awarded for the type of behaviour characterized by the causes of action which RCV advanced: breach of fiduciary duty, actionable nondisclosure, and deceit. No party should be put to legal expense to expose such wrongs. RCV says there is no doubt that the plaintiffs' pre-litigation conduct was reprehensible and deserves rebuke. In the first action, the plaintiffs sought to enforce values determined by the Pritchard appraisal, in spite of the wrongful conduct they knew they had committed. That action was only abandoned when they realized that their failure to disclose the LOI tainted the valuation process. In

the second action, the plaintiffs sought to enforce the JV Agreement while maintaining a denial of their own wrongdoing throughout. In the circumstances of this case, the remedy granted by the court does not provide adequate compensation in relation to the reprehensible pre-litigation conduct such that this is an appropriate case to award special costs. Position of the Plaintiffs [8] The plaintiffs say they were the successful party for two reasons. First, RCV was unsuccessful in proving a fundamental breach of the JV Agreement by the plaintiffs. RCV sought that remedy throughout the proceedings and the question as to remedy was extremely important to the plaintiffs as they wanted to retain their interest in the joint venture and acquire RCV's interest. Second, while the plaintiffs were unsuccessful in their claim for an order for specific performance of the valuation provisions in the JV Agreement, they successfully opposed RCV's claim that the lands should be sold. The court accepted the plaintiffs' alternative submission that the lands should be valued by way of a modified court ordered valuation process. [9] Should the court conclude that RCV was substantially successful, the plaintiffs say it should only be entitled to costs at Scale B. Special costs should only be awarded where the court finds reprehensible conduct of a party in the course of the litigation. The

plaintiffs emphasize that judicial restraint should be exercised when considering an award of special costs. It is only reprehensible conduct which can be characterized as egregious that should attract special costs. Here, the only basis for awarding special costs is the non-disclosure of the LOI. However, that took place prior to the litigation and is not, in and of itself, a basis for an award of special costs. Indeed, the court concluded that the breaches of fiduciary duty committed by the plaintiffs were not sufficient to establish a fundamental breach of the JV Agreement. Further, the adverse finding of credibility made against Mr. Smithies is not an adequate basis for a special costs award.

1. Which party was successful? [10] At para. 40 of the Reasons, I set out the four issues which I considered. I found in RCV's favour on issues 1 to 3. The seriously disputed issues of fact which had to be resolved formed the basis for my decisions on those issues. The vast majority of those factual disputes were resolved in RCV's favour. I concluded the plaintiffs breached the JV Agreement and that they were in breach of the fiduciary duties owed to their joint venture partner. The primary relief sought by the plaintiffs was specific performance of the JV Agreement. At paras. 87 and 109 of the Reasons, I set out the inequitable conduct of the plaintiffs and found that they could not succeed with that claim having come to court with unclean hands. [11] Given the findings made on the first three issues, the final question was the nature of the remedy; how was RCV's interest in the joint venture to be valued? While RCV did not succeed in obtaining an order that the Lands be sold, it cannot be said that the plaintiffs succeeded on the remedy issue. While I did accept, in substance, their submission regarding a process for an alternate form of appraisal of the Lands for the purpose of valuation, this was a minor issue. Their submission in that regard was made for the first time during final argument. More importantly, I concluded at paras. 122-124, that RCV established

circumstances sufficient to support a claim for loss of opportunity, even though I could not value that loss. In other words, RCV was also substantially successful on the difficult issue as to remedy. [12] The plaintiffs' suggestion that they were successful at trial is without merit. Whether I examine success based on the number of issues won, the amount of trial time spent on those issues, or the importance of those issues to the litigation, RCV was clearly the successful party and is entitled to costs.

2. Is RCV entitled to special costs? [13] The starting point for any analysis of special costs is, of course, the decision in Garcia v. Crestbrook Forest Industries Ltd. (1994), [1995] 9 B.C.L.R. (3d) 242 (C.A.). The sole standard for the awarding of special costs is that the conduct in question properly be categorized as "reprehensible". That term encompasses a wide variety of conduct including that which is outrageous and "milder forms of misconduct deserving of reproof or rebuke": para. 17. [14] Recently in Westsea Construction Ltd. v. 0759553 B.C. Ltd., 2013 BCSC 1352, Gropper J. undertook a thorough review of cases and at para. 73 conveniently summarized the principles for awarding special costs: [73] a) the court must exercise restraint in awarding specials costs; b) the party seeking special costs must demonstrate exceptional circumstances to justify a special costs order; c) simply because the legal concept of "reprehensibility" captures different kinds of misconduct does not mean that all forms of misconduct are encompassed by this term; d) reprehensibility will likely be found in circumstances where there is evidence of improper motive, abuse of the court's process, misleading the court and persistent breaches of the rules of professional conduct and the rules of court that prejudice the applicant; e) special costs can be ordered against parties and non-parties alike;

and f) the successful litigant is entitled to costs in accordance with the general rule that costs follow the event. Special costs are not awarded to a successful party as a "bonus" or further compensation for that success. [15] Here, RCV relies on misconduct of the plaintiffs which occurred primarily prior to the litigation. It argues that some of the plaintiffs' conduct during the litigation was also reprehensible. I will focus my analysis on the pre-litigation conduct. As I will explain, I find that the misconduct in the course of the litigation, while deserving of rebuke, may not, by itself, have supported an order for special costs. Nevertheless, I conclude that this is an appropriate case to award special costs due to the nature of the pre-litigation misconduct. [16] The authorities do not establish a rigid rule that would prohibit an award of special costs for pre-litigation conduct, however such an award is usually reserved for misconduct in the course of the litigation: Dockside Brewing Co. Ltd. v. Strata Plan LMS 3837, 2007 BCCA 183 at para.

90. In Sun Life Assurance Co. v. Ritchie, 2000 BCCA 231 at para. 54, Lambert J.A. left open the possibility of special costs awards for pre-litigation conduct in exceptional circumstances: [54] Special costs are usually awarded only in relation to misconduct in the course of the litigation itself. However, there may arise circumstances where special costs may be awarded because of reprehensible conduct giving rise to the litigation, particularly where the fruits of the litigation do not provide any appropriate compensation in relation to the reprehensible conduct. [17] In Evergreen Building Ltd. v. IBI Leaseholds Ltd., 2009 BCCA 275, the court confirmed that the state of the law regarding special costs for pre-litigation conduct remains as set out in Dockside Brewing. The decision of Garson J. (as she then was) in Adtronics Signs Ltd. et al. v. Sicon Group Inc., et al. (re costs), 2005 BCSC 440, predates Dockside Brewing, but is consistent with the principles set out in that case. At para. 21, Garson J. summarized the proper approach to take when deciding if a party is entitled to special costs as a result of pre-litigation conduct: [21] From the cases I have referred to, I conclude the following enquiries are relevant for purposes of determining if a party is entitled to special costs for conduct before the litigation: · Is the nature of the impugned conduct properly

characterized as reprehensible? · Did, or could, the aggrieved party claim punitive or aggravated damages? · Does the reprehensible conduct form the whole or substantially the whole of the basis of the cause of action? An example might be a claim based on fraud or deceit. · Conversely, is the dispute between the parties largely one in which the cause of action would not give rise to a claim for special costs. An example might be a claim for breach of contract. Or could it be said that the entirety of the cause of action between the parties is coloured by the reprehensible or unconscionable conduct of the wrongdoer? [Emphasis in original.] [18] Making those enquiries in this case, I come to the following conclusions. First, the conduct of the plaintiffs can properly be characterized as reprehensible. Their failure to keep RCV informed about the negotiations with Greenfield and to advise regarding the LOI was deceitful, in breach of their fiduciary duties, and breached the terms of the JV Agreement. The nature and extent of the wrongful conduct is such that it is deserving of rebuke. [19] The answer to the second question is that RCV, the aggrieved party, did not claim punitive or aggravated damages. In the circumstances of this case, it could not have done so. Accordingly, RCV will not receive any remedy in the form of compensation for the plaintiffs' misconduct. [20] Special

costs should not be awarded if it would result in double compensation for the recipient. The requirement is met in this case; special costs will not result in double compensation. At para. 114 of the Reasons, I noted that in spite of the wrongful actions of the plaintiffs, the common venture was intact and the amount to be received by RCV as a result of the judgment will simply reflect its interest in the joint venture. No additional amount was awarded to compensate RCV for the plaintiffs' misconduct: [114] The plaintiffs embarked on a course of conduct which was in breach of their fiduciary obligation of full disclosure. They wrongfully attempted to manipulate the appraisal process. By doing so, they attempted to establish an appraisal value of the RCV interest which was understated. Even though these actions were wrongful, the common venture was still intact. The Lands remained an asset of the JV. They had appreciated in value significantly since the commencement of the JV through the work and planning of the Joint Venturers. The Lands continue to have significant value which was not affected in any way by the plaintiffs' actions. RCV continued to be entitled to its 20% interest in the equity in the Lands. [Emphasis added.] [21] Both parties came to court seeking an order which would determine the process to value RCV's interest in the joint venture. Whether I had ordered

that the valuation take place in accordance with the provisions of the JV Agreement, by way of sale of the property, or a modified appraisal procedure, the fruits of the litigation would provide no compensation to RCV for the wrongful conduct of the plaintiffs. [22] The most interesting question is the extent to which the reprehensible conduct was the basis of the cause of action. In Evergreen Building, the court summarized the law at para. 30: [30] there does not appear to be any authority in the many decided cases that goes so far as to countenance an award of special costs in respect of conduct outside the litigation that does not found a cause of action. In my view, that is the effect of the judge's costs award here. [23] The plaintiffs say this was not a claim based on fraud or deceit and that their conduct did not found a cause of action. The actions were brought to determine the price at which and the process by which the plaintiffs could acquire the RCV interest. That is certainly correct; the parties came to the court to resolve those issues. However, while there was no claim in fraud or deceit, the determination of the issues before the court depended entirely on the findings I made regarding the wrongful actions of the plaintiffs. In other words, substantially the whole of the case before the court was concerned with the plaintiffs' misconduct. To put it another way,

the entirety of the dispute between the parties at trial was coloured by the reprehensible conduct of the plaintiffs. [24] In Mohl v. The University of British Columbia, 2006 BCCA 70, in the context of cause of action estoppel, the court accepted the definition of cause of action as set out by Diplock L.J. in Letang v. Cooper, [1965] 1 Q.B. 232 at 242-43 (Eng. C.A.): "A cause of action is simply a factual situation the existence of which entitles one person to obtain from the court a remedy against another person" (Mohl at para. 24). Applying that definition to the circumstances of this case, the pre-litigation misconduct of the plaintiffs was the factual situation which entitled RCV to obtain the relief ordered. Accordingly, I am satisfied that this is an appropriate case in which to order special costs based on pre-litigation conduct. [25] Finally, and as I have indicated, the nature of the misconduct during the litigation was likely not sufficient in itself to support an order for special costs. The failure to disclose the LOI to RCV and the broader failure of the plaintiffs as joint venture partners to provide any information to RCV for a period of time in late 2011 and early 2012, continued for a short period of time after the first action was commenced. The plaintiffs appreciated that their actions tainted the Pritchard appraisal and so did not pursue that action. After

the second action was commenced, proper disclosure of information was made to RCV in the course of the litigation. Accordingly, the plaintiffs can say that the misconduct regarding disclosure was not a significant issue in the litigation, even though the first action has continued because of RCV's counterclaim. [26] RCV argues that Mr. Smithies intentionally misled the court. Many cases have awarded special costs for that kind of misconduct in the course of litigation. Some of these decisions are summarized at paras. 65-72 in Westsea Construction. However, in Grewal v. Sandhu, 2012 BCCA 26, the court cautioned at para. 107 that " special costs are not awarded based on the acceptance or rejection of testimony. If it were otherwise, instead of being an extraordinary measure, special costs could be imposed whenever credibility was in issue." [27] My conclusions about Mr. Smithies' reliability as a witness are set out at para. 37 of the Reasons: [37] I must comment more generally on Mr. Smithies' credibility. He was not a credible witness. His evidence was motivated by his personal position, belief or bias. He was not an objective observer or reporter. I find that I must reject his evidence when it is in conflict with the evidence of others. A dramatic example of his preconceived bias is his conviction that Mr. Vandekerkhove was behind the Greenfield offer in an attempt to subvert

the appraisal. He maintained that belief throughout trial in the absence of a single shred of evidence. In his dealings with Mr. Vandekerkhove he simply reached a point where he had no ability to observe and rationally assess the events which were transpiring. [28] As the plaintiffs argue, I did not conclude that Mr. Smithies intentionally misled the court. Rather, I examined his credibility and concluded that some of his evidence about the circumstances which took place in 2012 and his dealings with Mr. Vandekerkhove had no basis in fact or logic. The evidence he gave about his motivation for actions was highly questionable. My conclusion that his evidence was motivated by "his personal position, belief or bias" is another way of stating that Mr. Smithies ought to have known that his evidence was false or misleading. In other words, while I did not find an intention to mislead the court, I did find something akin to wilful disregard for his oath as a witness. [29] Even if my conclusions on Mr. Smithies' credibility are insufficient by themselves to support an award of special costs, they serve to confirm my conclusion regarding the plaintiffs' pre-litigation conduct. [30] In summary, RCV is entitled to costs which are to be assessed as special costs. "Butler J."