Servus Credit Union Ltd. v. Waylan Mechanical Ltd., 2010 ABQB 276

Court of Queen ’ s Bench of Alberta Citation: Servus Credit Union Ltd. v. Waylan Mechanical Ltd., 2010 ABQB 276 Date: 20100423 Docket: 0514 00142 Registry: St. Paul Between: Servus Credit Union Ltd. Plaintiff (Defendant by Counterclaim) - and - Waylan Mechanical Ltd., Lorraine Alice Milford, Jerry Allan Milford, Corey John Milford, 3A Academy & Consulting Ltd. and Daughters Two Holdings Inc., formerly 625085 Saskatchewan Ltd. Defendants - and - 3A Academy & Consulting Ltd. and Daughters Two Holdings Inc., formerly 625085 Saskatchewan Ltd.

Plaintiffs by Counterclaim _______________________________________________________ Memorandum of Decision of the Honourable Madam Justice J.M. Ross _______________________________________________________

Introduction [1] In previous reasons, I found that Servus Credit Union Limited (formerly known as Common Wealth Credit Union Limited)(the “Credit Union”) was entitled to recover on two corporate guarantees (the “Guarantees”) provided by 3A Academy & Consulting Ltd.(“3A”) and Daughters Two Holdings Ltd. (“D2") (jointly, “the Guarantors”) with respect to monies owed to the Credit Union by WaylanMechanical Ltd. (“Waylan”). I also dismissed a counterclaim brought by 3A and D2 against the Credit Union. In this application, theparties seek my directions regarding costs.

For reasons that will be detailed below, I will deal separately with costs of the Credit Union’saction, and costs of the Guarantors’ counterclaim against the Credit Union.

Issue #1: Costs of the Credit Union’s Action Against the Guarantors [2] With regard to the costs relating to the Credit Union’s action against Waylan and the Guarantors, both parties rely on aprovision in the Guarantees: the Credit Union claims that it is entitled to solicitor/client costs under this provision and the Guarantorsclaim that the limitation of their liability in the provision applies to their liability for costs as well as their liability for the debts ofWaylen. Both the Credit Union and the Guarantors cite Royal Bank of Canada v.

Badger (1993), (AB KB), 12 Alta.L.R. (3d) 417, at para. 19 (Q.B.) as authority for the proposition that, where the parties to a contract have entered into an agreementregarding costs, issues of costs no longer depend on the court’s discretion. The court will respect the agreement made between the partiesabsent what the Credit Union characterizes as “special circumstances”. The case law refers to conduct in relation to the conduct of theproceeding that is vexatious or oppressive or would make enforcement of the contractual provision inequitable: Royal Bank of Canadav. Badger, at paras. 21-27; see also Bryan v.

Dean, [2007] A.J. No. 575, 2007 ABQB 351, at paras. 49-50; Capital City Savings andCredit Union Ltd. v. Aindow , (AB KB), [1989] A.J. No. 956, 100 A.R. 176 (Q.B.); and Northmount MortgageInvestment Corp. v. Banasek, [2004] A.J. No. 1582, 2004 ABQB 818. [3] The 3A Guarantee reads: 1.

In consideration of the Credit Union dealing with WAYLAN MECHANICAL LTD. (hereinafter referred to as the “Customer”).The undersigned and each of them, if more than one, hereby jointly and severally guarantee payment to the Credit Union for all presentand future debts and liabilities (direct or indirect, absolute or contingent, matured or otherwise), now or at any time and from time to timehereafter due or owing to the Credit Union by the Customer, including all costs (and in respect of legal costs on a solicitor and his ownclient basis) and disbursements incurred by the Credit Union in recovering or attempting to recover the said debts and liabilities fromeither the Customer or the undersigned including the enforcement of any security held by the Credit Union therefor.

Provided, however,that the liability of the undersigned, and of each of the undersigned herein is limited to THIRTY NINE THOUSAND THREEHUNDRED SEVENTY FIVE dollars ($39,375.00) with interest thereon from the date of demand of payment, at the rate(

s) agreedupon, between the Credit Union and the Customer. [4] The D2 Guarantee has the same wording, except that the amount of the limit is $48,125.00. [5] Judgment has already been granted against each of 3A and D2 for the full amount of the Guarantees plus interest. [6] The Credit Union relies on the reference to liability for “all costs (and in respect of legal costs on a solicitor and his ownclient basis) and disbursements incurred by the Credit Union in recovering or attempting to recover the said debts and liabilities fromeither the Customer or the undersigned”, and argues that both Guarantors are liable for solicitor/client costs as a result.

The Guarantorsdo not dispute this, but point out that the extent of their liability for any of the group of debts identified in the Guarantees is limited to thespecified amount plus interest (not plus interest and costs). The identified group of debts includes not only “debts and liabilities” owingby Waylen to the Credit Union, but also solicitor and client costs incurred by the Credit Union in “recovering or attempting to recover thesaid debts and liabilities from either the customer or the undersigned” (emphasis added).

As the Guarantors have already been foundliable for the full amount of the Guarantees plus interest, the limit on their liability precludes their additional liability under theGuarantees for solicitor and client costs. Further, as the parties to the Guarantees entered into an agreement regarding costs, the courtlacks discretion to impose costs. There has been no conduct on the part of the Guarantors that would make enforcement of the contract

inequitable, and the agreement as to the Guarantors’ limited liability for costs should be enforced. [ 7 ] The Credit Union responds with three arguments as to why the limit on liability in the Guarantees should be interpreted as not applicable to the Guarantors’ liability for costs. [ 8 ] First, the Credit Union argues that the nature of a guarantee is to guarantee the liability or obligation of another person, not one’s own obligation.

The limit on liability in the Guarantees should be read to apply only to the Guarantors’ obligation qua guarantors, in other words to their obligation to answer for Waylen’s obligations (including Waylen’s obligation for costs).

Their personal obligation for costs stands apart from that and is not subject to the limits in the Guarantees. [ 9 ] This argument does not take into account the clear language of the Guarantees, which stipulates that the Guarantors are liable not only for the “debts and liabilities” of Waylan, and not only for the solicitor and client costs incurred by the Credit Union in pursuing Waylan, but also for the solicitor and client costs incurred by the Credit Union in pursuing the Guarantors.

Further, the limit of the Guarantee in each case is expressly stated to be a “limit on the liability” of the Guarantor, not a limit on the liability of the Guarantor with respect of Waylen’s debts or obligations. The

interpretation proposed by the Credit Union is not consistent with the plain words of the Guarantees. [ 10 ] The Credit Union’s second argument is that the Guarantees, particularly the limit on liability, should be interpreted as applying to the Guarantors’ obligations at the time the cause of action under the Guarantees arose, when the Credit Union demanded payment from Waylen. The Credit Union did not refer to any rule of

interpretation that would support such an

interpretation of the Guarantees. The language of the Guarantees clearly contemplates that they apply to obligations arising after demand for payment. The obligation to pay interest continues after a demand for payment, and the obligation to pay legal costs would typically relate to costs incurred after a demand. Again, the

interpretation proposed by the Credit Union is not consistent with the language of the Guarantees. [ 11 ] Finally, the Credit Union argues that it would be absurd to interpret the Guarantees so as to shield the Guarantors from any liability for costs. The Credit Union submits that, at a minimum, the Guarantees are ambiguous as to whether the limit on liability applies to the Guarantors’ own liability for costs, and that in interpreting ambiguous language, the court should avoid an

interpretation which would lead to an absurdity. [ 12 ] The Guarantors respond that there is nothing absurd in this

interpretation: it is simply the deal that was reached between the parties. The Guarantors agreed to the Guarantees, but only to a limit, and beyond that limit it was agreed that they would have no further liability for debts or costs. The Guarantors submit that there is no ambiguity in the language, and, if there were, this should result in an

interpretation against the interests of the Credit Union as drafter of the documents, pursuant to the contra proferentum rule. [ 13 ] If there were ambiguity in the wording of the Guarantees, I agree with the Guarantors that the contra proferentum rule would apply. However, in my view there is no ambiguity. The Guarantees clearly define the liability of the Guarantors as including liability for the Credit Union’s legal costs, determined on a solicitor and own client basis. They also clearly limit the liability of the Guarantors to the specified amounts.

The Guarantees expressly provide that the Guarantors will be liable for interest above the specified limits; it would have been easy to include (as other forms of guarantee do) that the Guarantors would also incur liability for costs above the specified limits. This was not done. There is nothing absurd in an

interpretation that limits the Guarantors’ liability, including their liability for costs, to the specified amounts. It is not the contract that the Credit Union would prefer, and it may have been an oversight by the Credit Union not to include a provision that the Guarantors would be liable for both interest and costs above the specified limits. But a limit on liability was clearly part of the agreement between the parties, as was a definition of the scope of that limit. It is no more absurd to include costs within the scope of that limit, than it is to exclude interest.

The limit on liability is not inconsistent with the Guarantors’ obligations. Up to the agreed limit, the Guarantors were obliged to pay not only for the debts of Waylan but also for the Credit Union’s solicitor and client costs. [ 14 ] As noted earlier, the law supports enforcement of agreements regarding costs, subject to special circumstances. The Credit Union argues that ambiguity in the agreement is a special circumstance.

For the reasons already stated, I do not agree that there is ambiguity in the Guarantees, and therefore I do not need to consider whether this might constitute grounds to decline to enforce the agreement. The case law makes it clear that, had the Guarantors engaged in improper, oppressive or vexatious conduct in the conduct of the litigation, this could have created a basis for declining to enforce the limit on liability regarding costs.

The Credit Union has taken issue with some aspects the Guarantors’ conduct of the proceedings, including what the Credit Union describes as a “shotgun” defence, and some misunderstandings and difficulties that arose during the trial relating to disclosure of documents and the assumptions made by

an expert witness called by the Guarantors. While some of these factors may have increased the length or complexity of the litigation, and might be relevant to the court’s exercise of discretion as to an appropriate column of taxable costs, I have no hesitation in finding that they do not amount to improper, oppressive or vexatious conduct that would make enforcement of the agreement inequitable. [ 15 ] I conclude that the limit on liability in the Guarantees applies to the Guarantors’ liability for costs.

As the Guarantors have already been found liable for the full amount of the Guarantees plus interest, they have no further liability for costs (on either a solicitor and client or taxable basis) in relation to the Credit Union’s action. Issue #2: Costs of the Counterclaim [ 16 ] The provision in the Guarantees respecting costs applies to costs “incurred by the Credit Union in recovering or attempting to recover [Waylan’s] debts and liabilities from either [Waylan] or the [Guarantors]”. However, the proceedings before me were not limited to the action brought by the Credit Union against Waylan and the Guarantors.

There was also a counterclaim brought by the Guarantors against the Credit Union. The counterclaim was not limited to a claim by the Guarantors for set off against their liability to the Credit Union. Had it been, it would have been essentially a defence to the Credit Union’s action ( Alberta Rules of Court , Rule 93(2) requires “matters which might be pleaded by way of set-off” be pleaded by way of counterclaim).

But the Guarantors counterclaimed for their lost investments in Waylan, seeking judgment against the Credit Union for $325,000.00 or such other amount proven at trial, in addition to judgment for amounts owed by 3A and D2 to creditors of Waylan. Costs in respect of this independent claim are not within the scope of the parties’ agreement in the Guarantees, and the court’s discretion regarding costs is not displaced. [ 17 ] The counterclaim was entirely dismissed, and the Credit Union is entitled to costs.

There is no contractual basis for solicitor and client costs in this regard, and no other ground for an award of solicitor and client costs has been advanced. Taxable costs are awarded. I direct that these costs should be assessed under Column 5 of

Schedule C to the Rules of Court , rather than Column 3 (or possibly Column 4), which would apply based on the amount of the counterclaim. This direction is made on the basis that there were a very large number of allegations in the Statement of Defence, which were incorporated by reference in the counterclaim, many of which were not pursued at trial. These allegations undoubtedly made trial preparation, as well as the trial itself, lengthier and more difficult. [ 18 ] The taxing officer is directed to determine what portion of various steps taken by the parties related to the counterclaim.

Without limiting the taxing officer’s discretion in other respects, I direct the taxing officer that all costs related to the expert witnesses who testified at trial were incurred in relation to the counterclaim only. Issue #3: Effect of the Offer to Settle [ 19 ] On October 5, 2005, the Credit Union served on 3A and D2 Offers to Settle under Rule 170.

The Offers not having been accepted, the Credit Union sought double costs against the Guarantors for costs incurred subsequent to service of the Offers. [ 20 ] The Guarantors have submitted that the Credit Union is not entitled to costs as a result of the Offers for two reasons, both of which I accept. [ 21 ] First, Rule 174(2) provides that a plaintiff who receives additional costs as a result of an offer to settle, is entitled to “double the amount of costs (excluding disbursements) he would otherwise have recovered for all steps in relation to the claim after the service of the offer.” The Credit Union is entitled to $0.00 in costs because of the provisions of the Guarantees.

Doubling that amount is still $0.00. [ 22 ] Secondly, the Credit Union is only entitled to receive double costs under Rule 174(2) if it “recovers a judgment equal to or more favourable than the judgment offered.” The Credit Union Offers included a discount on the principal amount owing under the Guarantees, but called for interest payable at the rate provided in the Guarantees (the Credit Union’s prime rate plus 4.5% per annum), with interest calculated “to the date of payment or judgment”.

In the Judgment entered by the Credit Union after trial, there was no discount on the principal amount, but the interest calculation was based on a per diem rate as claimed in the Statement of Claim, rather

than the contractual rate. The result is that the total amount payable to the Credit Union calculated to the date of judgment (as stipulated in the Offers to Settle) is slightly less under the Judgment as compared with under the Offers to Settle. The amount payable by 3A under the Judgment is $54,452.40; while the amount payable calculated as per the Offer to Settle is $55,703.04. The amount payable by D2 under the Judgment is $66,546.49; the amount payable calculated as per the Offer to Settle is $68,080.94.

Calculated in this way, consistent with the wording of the Offers to Settle, the judgment recovered by the Credit Union was not equal to or more favourable that the judgment offered. Double costs are therefore not payable pursuant to Rule 174(2). Issue #4: Costs of the Pre-Trial Applications [ 23 ] There were a number of interlocutory applications prior to trial, and written and oral submissions in this application addressed the issue of costs in respect of those applications. Where Chambers justices made specific orders as to costs on previous applications, those orders govern.

Even if I have discretion to alter the costs so ordered (and no authority on this point was cited to me), I decline to do so.

My directions below relate to instances in which no specific costs order was made by the Chambers justice or master and instances in which the Chambers justice directed that the costs of the application (or of some portion of the application) should be dealt with by the trial judge. [ 24 ] In respect of all interlocutory applications for which costs are now awarded to the Credit Union, the taxing officer is directed to determine whether and to what extent the application related to the counterclaim or the main action.

If the application related to the main action only, the Credit Union is not entitled to costs, because of the limit on liability in the Guarantees. If the application related entirely or in part to the counterclaim, the Credit Union is entitled to all or an appropriate portion of the taxable costs.

On the other hand, the Guarantors’ entitlement to costs for interlocutory applications applies whether the applications related to the counterclaim or the main action, as the Guarantees did not address the Guarantors’ entitlement to, or the Credit Union’s liability for, costs of the litigation. [ 25 ] Where no specific costs direction was made in relation to an interlocutory application, the Credit Union argues that it is entitled to costs on the ground that costs of such applications should be ‘in the cause’.

The Guarantors argue that costs of such applications are, by default under the Rules of Court, to be paid to the party who succeeded on the application. [ 26 ] Rule 607 provides: Notwithstanding the final determination of an action, the costs of any interlocutory proceeding in that action, whether ex parte or otherwise, shall, unless otherwise ordered, be paid forthwith by the party who was unsuccessful on the interlocutory proceeding. [ 27 ] The Guarantors’ position is correct.

The default rule, which I would not depart from, is that the costs of interlocutory applications go to the party who succeeded on the application. The taxing officer is directed to determine entitlement to costs accordingly for applications where costs were neither addressed by the Chambers master or justice, nor reserved by them to be dealt with by the trial judge. [ 28 ] There were three pre-trial applications in relation to which the Chambers justices directed that costs or some aspect of costs should be dealt with by the trial judge. 1.

An application by the Credit Union for judgment against Waylan granted by Martin J. on June 7, 2006: The Order determined the amount owing by Waylan and another Defendant (Corey John Milford); ordered costs against those Defendants; provided that 3A and D2 should have costs against the Credit Union on a party and party basis for the examination of Larry Schmidt on his affidavit and preparing the affidavit of Jim Noyce; and provided further that: “Other issues of costs shall be in the discretion of the trial judge.

Each party will bear their own costs on the application.” Accompanying applications for Particulars and Contempt of Court were adjourned sine die. [ 29 ] Notwithstanding the Chambers justice’s direction that “other issues of costs shall be in the discretion of the trial judge”, the June 7, 2006 Order provided comprehensive directions respecting costs, except for the adjournments of the accompanying applications.

The application for Particulars was eventually dealt with by Chrumka J., and is addressed below. The application for contempt was not proceeded with. Both parties took the position before me that they should be entitled to costs of that application. The Credit Union argued that it was brought to enforce attendance by the Guarantors at examination for discovery; the Guarantors argued that it was brought improperly and was unnecessary for that purpose. I have determined that no costs should be awarded to either party in respect of the adjourned contempt application. 2.

An application by the Credit Union to strike portions of the Statement of Defence and Counterclaim, to compel answers to undertakings, for particulars, to compel answers from discovery questions and to appoint a case management judge. This application was dealt with in a written decision by Chrumka J. on February 6, 2008. The application for a case management judge was granted. The application to strike paragraphs of the pleadings was put over to be addressed by the trial judge. The Credit Union did not place this application before me during the trial.

The application to compel answers to undertakings did not proceed before Chrumka J. (apparently answers had been provided before the hearing of the application). The bulk of Chrumka J.’s rather extensive reasons dealt with the applications for particulars and to answer questions asked and objected to at examinations for discovery. The Guarantors were fully successful on those aspects of the application.

Chrumka J. indicated that “the question of costs was not addressed at the application” and therefore costs may be addressed at trial. [ 30 ] It is my view that the Guarantors were substantially successful before Chrumka J., and that there is no reason why the default rule that costs follow the event should not apply. The Guarantors are entitled to costs of this application. The application before Chrumka J. entitles the Guarantors to one set of costs, not separate costs for each aspect of the application (which seems to be the position taken by the Guarantors in their written submission).

However, taking into account the lengthy and complicated nature of the application, an increased level of taxable costs (under Column 5) is directed for this application only. 3. An application allowing Mr. Exner to be examined de bene esse granted by Yamauchi J. on October 4, 2008. The Order provided that costs of the application and the examination should be paid in the first instance by Mr. Exner, and thereafter costs were reserved to be disposed of by the trial judge. [ 31 ] The examination de bene esse did not proceed, and Mr. Exner testified at trial.

This does not mean the application was improperly brought. Mr. Exner was seriously ill; had his medical progress been less favourable, the order for de bene esse evidence might have been necessary. 3A and D2 are entitled to taxable costs for this application. Issue #5: Costs of Post-Trial Applications [ 32 ] Submissions were made regarding three post-trial matters. 1.

While the trial decision was under reserve, counsel for the Guarantors sent me an additional and unsolicited written argument arguing that an adverse inference should be drawn against the Credit Union because they did not call as a witness Larry Schmidt, their employee who was involved at the time of the signing of the Guarantees. Counsel for the Credit Union responded, taking exception to the method and timing of this submission. I did not find it necessary to take the submission into account, given my findings in relation to the Offer of Financing and the Guarantees. 2.

An application to settle the minutes of judgment. The Credit Union was successful on this application. 3. This application pertaining to costs. The Guarantors have been substantially, although not completely, successful on this application. [ 33 ] The Credit Union is entitled to costs in responding to the Guarantors’ post-trial written submission. This submission, in my view, related equally to the counterclaim and the main action, so the Credit Union is entitled to receive 50% of its costs (assessed under Column 5).

[ 34 ] The Credit Union is also entitled to costs at the same level (50% of Column 5) for the application to settle the minutes of judgment. [ 35 ] The Guarantors are entitled to taxable costs of this application. Heard on the 14 th day of April, 2010. Dated at the City of Edmonton, Alberta this 23 rd day of April, 2010. J.M. Ross J.C.Q.B.A. Appearances: Michael S. Hall for the Plaintiff (Defendant by Counterclaim) Greg D. Heinrichs, Q.C. for the Defendants (Plaintiffs by Counterclaim)