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When a corporation is a party to litigation, the risk of a finding of liability or an award of costs generally does not follow the directors or corporate principals in their personal capacity. Corporate officers are commonly shielded from personal liability in corporate actions. However, this protection is not absolute, and courts have jurisdiction to award costs against a non-party when they engage in an abuse of process or their conduct amounts to litigation misfeasance.

Court Identifies History of Litigation Misfeasance

Gupta v. 2075750 Ontario Inc. arose from a failed real estate transaction. Manish Gupta entered into an Agreement of Purchase and Sale to acquire a property from 2075750 Ontario Inc. (“207 Ontario”), with the sale originally scheduled to close in July 2012. When the transaction did not close, Mr. Gupta partnered with Ashywn Singh of EB Investments, and a new closing date was set for January 17, 2013. The transaction did not close for the second time and neither party tendered on the other. The plaintiffs had paid a deposit of $200,000 to be held in trust which was to be returned if the transaction did not close, unless the failure to close was the plaintiff’s fault. The plaintiffs commenced litigation, with the court evaluating whether or not the plaintiffs had been willing and able to close the purchase.

The defendant 207 Ontario sought forfeiture of the deposit to itself and suggested that the plaintiffs were in dispute amongst themselves and were not willing and able to close. If the transaction had failed to close due to the plaintiff’s conduct, 207 Ontario would be entitled to retain the deposit. However, it was noted that the behaviour of the plaintiffs made it impossible for the Court to adjudicate the issue of who was responsible for the failure to close by breaching their discovery obligations.

Breach of Discovery Rules was Serious

The Court accepted that Mr. Gupta and Mr. Singh repeatedly breached their discovery and production obligations which concealed evidence of a dispute between them in January 2013 at the time of the scheduled closing. Mr. Gupta failed to deliver an affidavit of documents, while the affidavit of documents provided by Mr. Singh failed to list any correspondence between him and Mr. Gupta for the month of January 2013. The omissions initially deprived 207 Ontario of the opportunity to learn of the dispute between the two. During the February 2015 discovery, Mr. Gupta also refused to answer any questions about a possible disagreement between himself and Mr. Singh. Mr. Gupta’s lawyer stated that any issues between the two were unrelated to the closing of the real estate transaction. That answer was false and misleading. The continued refusal to produce emails exchanged between Gupta and Singh forced 207 Ontario to bring a motion to compel them to do so.

Justice Sloan found that much of the delay in the proceedings could be attributed to Gupta and Singh which contributed to the loss of key evidence. Documents, emails, and text messages that were exchanged in the lead-up to the closing were deleted and lost, and memories had faded over the intervening six years. As well, the Court later learned of an undisclosed prior action where EB Investments had commenced litigation against Mr. Gupta in February 2013 in which Mr. Singh alleged that the transaction failed because Mr. Gupta refused to cooperate with him.

For Justice Sloan, this amounted to a blatant disregard for the rules and was damaging evidence against Gupta and Singh, removing any doubt about their modus operandi during the litigation. He concluded that there was a significant dispute between the two in January 2013 but the documents that would confirm what was happing were lost. He drew a negative inference that the documents would not have shown they were willing and able to close the transaction, and that there was a strong argument they did not close due to a break down in their relationship.

Court has Jurisdiction to Impose Liability on “Controlling Mind” of Corporation

Courts have inherent jurisdiction to make a cost order against a director, officer, or shareholder of a corporation when that party has engaged in abusive litigation conduct as the directing mind of a corporation. The Court had already determined in the 2019 decision that EB Investments had engaged in abusive litigation conduct and that Mr. Singh was the directing mind of EB Investments. His abuse of Ontario’s civil justice system continued with his concealment of the related action in which he was opposed to Mr. Gupta. For Justice Sloan, these abuses brought the administration of justice into disrepute, inflated the costs of litigation, and added costs to taxpayers who publicly fund the civil justice system. Those actions were denounced, with Mr. Singh found jointly and severally liable with the other plaintiffs for the costs of the entire action as well as unpaid costs from the previous 2019 motion.

The Judge in Gupta looked to an earlier case 1318847 Ontario Ltd. v. Laval Tool & Mould Ltd. where the Ontario Court of Appeal acknowledged that situations of misconduct, vexatious conduct, or conduct by a non-party that undermines the fair administration of justice could amount to an abuse of process warranting a costs award. The court did indicate that costs against non-parties should be ordered in exceptional circumstances and not just because the individual directed the operations of a company. However, the cases show that courts will sanction directors or officers whose actions undermine the proper use of the civil justice system.

Contact Milosevic Fiske LLP in Toronto for Experienced Commercial Litigation Advocacy

The Toronto lawyers at Milosevic Fiske LLP are skilled litigators who regularly guide clients through complex commercial matters including commercial real estate litigation. Our team has extensive experience and expertise advocating for our clients’ rights. Call us at 416-916-1387 or contact us online to schedule a consultation.