The Ontario Superior Court of Justice’s decision in Clark v. Cen-Ta Real Estate Ltd et al provides useful guidance on how courts may approach costs in the context of derivative proceedings, particularly at the leave stage. While the applicant was successful in obtaining leave to bring a derivative action, the Court ultimately declined to award costs immediately, instead reserving the issue to the trial judge.

This decision highlights the nuanced and discretionary nature of cost awards in corporate litigation, especially where proceedings overlap with other claims, such as oppression remedies and where the merits of the underlying allegations remain unproven.

Leave Granted for Derivative Action

The applicant, a significant minority shareholder in two corporations, sought and obtained leave under section 246 of the Ontario Business Corporations Act (OBCA) to commence a derivative action. The proposed claim alleged that the respondent directors breached their fiduciary duties and duties of care by awarding themselves excessive compensation and fees.

The derivative action aimed to recover funds paid improperly to the directors and to establish limits on future compensation. At the same time, the applicant was already pursuing an oppression remedy based on substantially similar conduct, seeking damages and a buy-out of his shares.

This overlap between the derivative claim and the oppression proceeding became a central consideration in the Court’s analysis of costs.

The Costs Dispute

After granting leave, the Court invited submissions on costs. The applicant sought partial indemnity costs of approximately $33,700 against the respondent directors, arguing that:

• He was the successful party on the leave application;
• The corporations should not bear the burden of costs, as they were not active participants; and
• The directors’ conduct gave rise to prima facie breaches of fiduciary duty.

The respondents took a different position, submitting that:

• There had been divided success on the application;
• There were findings critical of the applicant’s own conduct; and
• Costs should either be reduced, denied, or deferred to the outcome of the derivative action.

This disagreement framed the central issue: whether costs should be awarded immediately following a successful leave application or reserved pending the ultimate resolution of the dispute.

Discretion and Fairness in Costs Awards

The Court reiterated that costs are governed by section 131 of the Courts of Justice Act, which grants broad discretion to award costs on a principled basis. The guiding principle is that cost awards must be fair and reasonable in light of all the circumstances.

Rule 57.01 of the Rules of Civil Procedure sets out a non-exhaustive list of factors to consider, including:

• The result in the proceeding;
• The amount claimed and recovered;
• The conduct of the parties; and
• The complexity and importance of the issues.

Importantly, even a successful party is not automatically entitled to costs. Courts may depart from the usual rule where fairness requires it.

Success at the Leave Stage: Not the End of the Analysis

Although the applicant succeeded in obtaining leave to commence a derivative action, the Court emphasized that success alone does not determine the outcome on costs.

The leave stage in a derivative action is preliminary. It involves assessing whether there is a prima facie case and whether the proposed action is in the corporation’s best interests—not determining liability.

As the Court noted, the allegations against the directors had not yet been proven, and the directors were not yet formally defendants in the derivative proceeding.

This distinction is critical. A costs award at this stage could prematurely penalize parties before the merits of the case are fully adjudicated.

Overlap with Oppression Remedy

One of the most significant considerations in the Court’s reasoning was the substantial overlap between the derivative action and the existing oppression proceeding.

The Court observed that:

• Both proceedings involved similar core allegations;
• There was a risk of duplication; and
• The matters would likely be heard together.

This overlap created uncertainty about how costs should ultimately be allocated between the proceedings. Awarding costs at the leave stage could result in inefficiencies or unfairness once the full litigation picture becomes clear.

Conduct of the Parties: A Balancing Exercise

The Court also considered the parties’ conduct, including findings that the applicant continued to receive compensation from the corporations despite not providing services for a period.

This factor weighed against a straightforward costs award in the applicant’s favour. Courts routinely consider whether a party’s conduct has contributed to the dispute or affected the fairness of awarding costs.

The respondents also argued that the applicant’s proposed claim included intrusive remedies—such as court-imposed limits on director compensation—which the Court viewed with some skepticism at the leave stage.

Taken together, these considerations reinforced the need for a cautious and balanced approach.

The Role of the Corporations in Derivative Proceedings

Another complicating factor was the role of the corporations themselves.

Derivative actions are brought on behalf of the corporation, meaning that the corporation is both:

• A beneficiary of the action; and
• A party to the proceeding.

In this case, the Court had already ordered that the costs of the derivative action be shared between the applicant and the corporations.

This raised a practical concern: if the corporations were required to pay costs at the leave stage, the applicant—being a shareholder—would indirectly bear part of that burden.

The Court acknowledged the tension between compensating a successful applicant and avoiding undue financial impact on the corporations.

Costs Reserved to the Trial Judge

In light of all these factors, the Court declined to award costs at the leave stage and instead reserved the issue to the trial judge.

The Court reasoned that the trial judge would be in a better position to:

• Assess the full scope of the litigation;
• Evaluate the conduct of the parties throughout the proceedings; and
• Determine a fair and reasonable allocation of costs in context.

This approach reflects a broader judicial preference to defer cost determinations where the procedural posture is preliminary and the ultimate outcome remains uncertain.

The Importance of Fairness in Derivative Actions

The decision in Clark v. Cen-Ta Real Estate Ltd et al reinforces that costs in corporate litigation are not determined by rigid rules but by a flexible, fairness-driven analysis.

By reserving costs to the trial judge, the Court prioritized a holistic assessment of the proceedings over a narrow focus on interim success. This approach reflects a broader trend in complex litigation, in which courts seek to ensure that cost awards align with the outcome and the parties’ overall conduct.

Milosevic & Associates: Strategic Guidance for Toronto Commercial Litigation Disputes

The experienced commercial litigation team at Milosevic & Associates advises shareholders, directors, and corporations in derivative proceedings, oppression remedies, corporate governance, and other complex disputes.

If you are involved in a corporate dispute or considering legal action, contact the firm online or call (416) 916-1387 to discuss your options. Early legal advice can help you protect your interests, manage risk, and position your case for a successful outcome.