Can a “Non-Party” Director of a Corporation be held Personally Liable for litigation costs?

Where a corporation is a party to litigation, Courts will very rarely award the costs of the action against the non-party directors, shareholders or principals of the company. A recent decision of the Ontario Court of Appeal, 1318847 Ontario Ltd. v. Laval Tool & Mould Ltd., 2017 ONCA 184, however, expands the circumstances in which a non-party may be held personally liable for litigation costs. In Laval, the Court affirmed its inherent jurisdiction to award costs against a non-party who commits an abuse of process.

Facts

Laval involved two actions by the plaintiff corporation against the defendant Laval Tool & Mould Ltd. (“LTM”). LTM was a family business. The principal and shareholder  of the plaintiff corporation, Emmanuel, sought damages for alleged tax consulting services performed by him for LTM.

In the first action, the plaintiff corporation was the sole plaintiff. It sought damages against LTM for breach of contract and unjust enrichment allegedly arising out of the tax services Emmanuel provided. Emmanuel then commenced a second action against LTM, in which both he and the plaintiff corporation were plaintiffs. The second action alleged the same causes of action as the first. The two actions were tried together.

Ultimately, the trial judge dismissed both of the plaintiffs’ actions. Following trial, he asked the parties to make costs submissions, asking them to address LTM’s request that the costs of the first action, in which only the plaintiff corporation was a party, should be awarded against Emmanuel personally.

Following an analysis of the law governing non-party costs, which will be discussed below, the trial judge held that the plaintiff corporation was not put forward by Emmanuel as a “man of straw” to shield Emmanuel from the costs of the first action. That is, Emmanuel did not cause the plaintiff corporation to start the action so that he could avoid any personal liability for costs.

Accordingly, as the “man of straw” was the only applicable circumstance in the case law in which a non-party director could be held liable for costs, costs could not be awarded against Emmanuel personally in the first action.

The Court of Appeal reversed the trial judge’s decision. It held that in addition to the “man of straw” exception, the Court had an inherent jurisdiction to award costs against a non-party who committed an abuse of process.

In this case, Emmanuel put forward the plaintiff corporation in the first action on a “mistaken view that he could assert his personal claim against LTM through his corporation”.

Although his motive for putting the plaintiff corporation forward was not to shield himself personally from a costs award, Emmanuel nonetheless engaged in an abuse of the Court’s process. He caused the plaintiff corporation to “issue an invoice for tax services allegedly performed for LTM for the purpose of securing a tax advantage”.

The first action was “fictitious, as there was no evidence that [Emmanuel] or [the plaintiff corporation] ever performed tax services for LTM”. Emmanuel had no good reason for bringing his action in the corporation’s name, rather than in his own. The “effect was that LTM had to defend two equally fruitless proceedings and incur the costs of each by retaining separate counsel”. The litigation amounted to a waste of public and judicial resources. As Emmanuel’s conduct constituted an abuse of process, costs could be awarded against him personally as a non-party to the litigation.

The Law Before Laval

In order for the Court of Appeal  to decide whether it had inherent jurisdiction to award non-party costs, it had to come to terms  with two of its previous decisions, Rockwell Developments Ltd. v. Newtonbrook Plaza Ltd. (1972), 3 O.R. 199 (C.A.) and Television Real Estate Ltd. v. Rogers Cable T.V. Ltd, (1997) 34 (3d) 291.

In Rockwell and Television Real Estate, the Court of Appeal held that the Court had statutory jurisdiction under section 131 of the Courts of Justice Act to order non-party costs only if the non-party put forward a “man of straw” corporation to shield itself from costs.

Section 131 of the Courts of Justice Act confers statutory jurisdiction on the Court to award costs as follows:

Subject to the provisions of an Act or rules of court, the costs of and incidental to a proceeding or a step in a proceeding are in the discretion of the court, and the court may determine by whom and to what extend the costs shall be paid.

The Court in Rockwell held that the term “by whom” means “by which of the parties to the proceeding before the court or judge”. In other words, section 131 does not confer jurisdiction on the Court to award costs against anyone other than the parties to the litigation.

However, the Court in Rockwell and Television Real Estate recognized exceptions to this rule. Section 131 authorized costs awards against non-parties where the “man of straw” test was met. That is, if the non-party puts forward a corporate plaintiff as a “man of straw” to shield the non-party from a costs award, then the Court has the jurisdiction to award costs against the non-party under section 131. The rationale is that the non-party is in actuality the “party” driving the litigation. In such circumstances, section 131 authorizes costs against the person who is, in essence, the actual party advancing the litigation.

Apart from the “man of straw” exception, Ontario Courts also recognize their jurisdiction to award non-party costs under Rule 57.07 of the Rules of Civil Procedure against lawyers who engage in misconduct throughout the litigation.

Separate and apart from the “man of straw” and lawyer exceptions, however, the decisions in Rockwell and Television Real Estate precluded non-party costs awards under section 131 of the Courts of Justice Act.

The Court’s Inherent Jurisdiction to Prevent an Abuse of Process

Having considered the decisions in Rockwell and Television Real Estate, the Court of Appeal in Laval noted that these two decisions did not preclude the Court from exercising its inherent jurisdiction to award non-party costs in order to prevent an abuse of process.