HSBC Bank Canada v. Lourenco, 2012 ABQB 648

Court of Queen ’ s Bench of Alberta Citation: HSBC Bank Canada v. Lourenco, 2012 ABQB 648 Date: 20121022 Docket: 0303 09090 Registry: Edmonton

Between: HSBC Bank Canada Plaintiff - and - Jose J. Lourenco, Onita Blankenfeldt, Administrator of the Estate of Hannu Juhani Salokangas, Also Known As Hannu Salokangas Defendants - and - Allan Smith Plaintiff by Counterclaim - and - HSBC Bank Canada and Barry Taitinger Defendants by Counterclaim - and - Barry Taitinger Third Party

_______________________________________________________ Reasons for Judgment on Costs of the Honourable Madam Justice J.H. Goss _______________________________________________________ Introduction [ 1 ] Following the decision on the merits in this matter, the parties appeared before the Court to argue costs issues. [ 2 ] HSBC had alleged at trial that Triple J Armature Inc. (Triple

J) committed a breach of trust by depositing its receivables to a CIBC account, claiming damages of $255,180.40. HSBC had also alleged that one of the directors, Jose J. Lourenco (Lourenco), falsely represented to HSBC that he was the owner of a $20,000 Guaranteed Investment Certificate (GIC) issued by TD Canada Trust and pledged as security. [ 3 ] HSBC was successful in establishing its causes of action. HSBC’s total claim was for over $460,000. Although initially the subject of dispute, Lourenco confirmed at trial that he did not take issue with Triple J’s obligation to pay four small business loans.

Damages in the amount of $20,000 were awarded in favour of HSBC for deceit in relation to the GIC. HSBC claimed against Lourenco and Salokangas damages of $255,180.40 in relation to deposit of receivables into the CIBC account. However, the Court awarded only $3,729 to HSBC in that respect, representing the actual loss which it found resulted from the receivables having been deposited into the CIBC account. Parties ’ Positions [ 4 ] HSBC argued that it is entitled to solicitor client costs pursuant to Clause 19 in the Security Over Cash, Credit Balances and Deposit Instrument (the “ Pledge ” ) and Clause 4.1.11(

f) in the General Security Agreement (the “ GSA ” ) between HSBC and Triple J.

HSBC submits that both documents were referred to in the pleadings and it was clear that HSBC was relying on those contracts as the basis for the lawsuit. [ 5 ] HSBC further submits that because the Court found that Lourenco and Salokangas, although strangers to the trust, were personally liable as constructive trustees who assisted with knowledge in a dishonest and fraudulent design on the part of Triple J, those costs are due and payable on a solicitor client basis by Lourenco, Salokangas and Triple J. [ 6 ] Counsel for the defendants argues that HSBC did not expressly plead facts giving rise to a cause of action under the costs provisions of the two contracts, and therefore HSBC cannot rely on those clauses.

There was no other notice to the defendants that the covenants would be relied upon until the morning of the costs hearing. [ 7 ] The defendants also argue that the findings of the Court regarding the basis for liability (false representation by Lourenco regarding ownership of the GIC and breach of trust by Triple

J) are not specific to “ enforcement ” of the Pledge or “ preservation of the Collateral and the confirmation, perfection and enforcement ” of the GSA and other security held. It was an action for fraud and damages, not for debt or for recovery of the GIC. [ 8 ] The defendants further submit that this was not a case of theft. Laurenco had a certain understanding of what was allowable in the circumstances. The Court found that to be unreasonable. He did not hide anything, and HSBC allowed the company to continue operating for three months after it began depositing receivables to the CIBC account, before HSBC called in receivables. Triple J was the

fiduciary; Laurenco was not an express trustee or fiduciary. Lourenco received no personal benefit. [ 9 ] The defendants argue that the matter would have been settled very early on if they had known that such a limited amount was at stake. The defendants note that even under Column 1, estimated party-party costs would be in the range of $15,000 to $20,000 which is between 63% and 84 % of the amount of the judgment.

HSBC ’ s total claim was for over $460,000; it recovered less than $25,000 in damages. [ 10 ] Finally, defendants ’ counsel notes that Salokangas was not implicated in the GIC issue at all, nor was he a signatory to the Pledge, and argues therefore that his estate should be liable for only a portion of the costs awarded. Issues [ 11 ] The following issues must be determined: 1. Are the cost-related provisions in the GSA and Pledge sufficiently clear to support a claim for solicitor client costs? 2. Did the defendants receive sufficient notice that the cost covenants would be relied upon by HSBC? 3.

What is the appropriate costs award in this case? 4. Should costs be allocated between the defendants? 1. Are the cost-related provisions in the GSA and Pledge sufficiently clear to support a claim for solicitor client costs? Contractual Provisions [ 12 ] Clause 19 of the Pledge provides: 19. The undersigned shall pay all costs, charges and expenses including solicitors costs, charges and expenses which may be incurred by the Bank in connection with this Agreement and its enforcement. [ 13 ] Clause 4.1.11(

f) of the GSA provides: 4.1 The Debtor covenants and agrees that at all times while this General Security Agreement remains in effect the Debtor will: 4.1.11 forthwith pay all costs, charges, expenses and legal fees and disbursements (on a solicitor and his own client basis) which may be incurred by the Bank in: (

f) all other actions and proceedings taken in connection with the preservation of the Collateral and the confirmation, perfection and enforcement of this General Security Agreement and of any other security held by the Bank as security for the Obligations...

Law [14] Clear and unambiguous wording is needed in order to impose solicitor client costs through contract: Civil ProcedureEncyclopedia, p 72-92 and cases cited therein.

There are a number of Alberta cases considering specific wording in costs covenants. [15] In Zero Stores (Sask) Ltd v KAH Investments Ltd (1983), 1983 ABCA 56 , 44 AR 30, [1983] AJ No 788 the Court of Appeal considered the following clause in a loan and pledge agreement: The Borrower will pay to the Lender as soon as incurred, all costs and expenses, including reasonable legal fees, related or incidental tothe care, holding, retaking, preparation for sale, selling or collection or realization upon the Empire Shares or any of them or relating orincidental to establishment or preservation or enforcement of the rights of the Lender hereunder, and obtaining legal advice with regard toany of the foregoing.

The Court held that the clause was sufficiently clear to establish that solicitor client costs were to apply; since there was no item in thetariff of party and party costs allowing for legal advice, this could only refer to an item in a solicitor and client bill.

The Court rejectedthe argument that the right to legal costs was restricted to the realization upon or enforcement in relation to the Empire shares, holdingthat it applied to enforcement of any of the rights under the loan agreement. [16] In Bank of Nova Scotia v Romaine (1988), (AB KB), 89 AR 304 (QB), Master Funduk held that thefollowing wording sufficed: All costs, charges and expenses which may be incurred ... in any other proceeding taken to realize the said indebtedness interest or othermoneys hereby secured or in instituting ... any suits, actions or proceedings ... shall be a charge on the said lands in favour of the Bank. ...

He held that it was not necessary to use the terms “solicitor and client costs”, or “indemnity” in a costs covenant, in order to be entitled tosolicitor client costs. [17] In Canada Deposit Insurance Corporation v Canadian Commercial Bank, 1999 ABQB 266, 243 AR 168, Wachowich A.C.J.(as he then was) adopted the reasoning of Master Funduk in Bank of Nova Scotia that requiring a specific phrase like “solicitor and clientcosts” is overly formalistic, and the intention of the parties is to be gathered from the words they used.

The clause in question provided: Western shall as well pay, on demand, all reasonable losses, costs and expenses, if any (including counsel fees and disbursements), fromtime to time incurred by CCB in connection with the perfection of the Security, the Additional Security or the preservation of any rightsof any other party hereto or the enforcement of, or legal advice in respect of the rights of CCB under this Agreement and any otherdocuments provided for or contemplated hereunder, including, without limitation, all losses, costs and expenses incurred by CCB as aresult of any failure by any other party hereto to perform or observe its obligations contained in this Agreement. [emphases added indecision] Wachowich A.C.J. noted that there was specific reference to legal advice, as well as wording anticipating that any expenses and costsassociated with enforcing the legal rights of CCB would be paid by Western.

He concluded, based on the reasonable meaning of thewords in the context in which the contract was drafted, that CCB was entitled to costs "necessary for the proper presentation of the case"on a solicitor client-basis. [18] However, in an earlier decision in the same matter, Canada Deposit Insurance Corporation v Canadian Commercial Bank(1989), (AB KB), 95 AR 1, [1989] AJ No 29, Wachowich J. (as he then was) considered a clause which stipulatedthat a guarantor would pay:

...each item of indebtedness hereby guaranteed, interest thereon, and all costs, charges and expenses which may be incurred by you inrespect of any indebtedness of the Customer hereby guaranteed or in enforcing this guarantee against the Guarantor ...

He concluded that the above language did not clearly and unequivocally establish the banks' right in that case to costs on a solicitor andclient basis. [19] In Bank of Montreal v Yacyshen, [1993] AJ No 1163 (QB), Master Funduk refused to grant solicitor and client costs wherethe covenant provided: You will pay all reasonable expenses including legal expenses which the Bank incurs in protecting or collecting your loan.

On appeal ((1993), (AB KB), 139 AR 270, [1993] AJ No 80), Wilson J. held that the Master did not err in hisconclusion. [20] In West Edmonton Mall Ltd v McDonald's Restaurants of Canada Ltd (1993), (AB KB), 13 Alta LR (3d)307 (QB), aff'd (1995), 1995 ABCA 503 , 178 AR 127 (CA), Bielby J. found that the words "recovery of all expenses includingreasonable legal fees" did not support an award of solicitor client costs. In upholding her decision, the Court of Appeal commented: 23 Lawyers have for many years been used to the phrases "party and party costs" and "costs on a solicitor-client basis".

They are wellknown and clear. To use words such as "all expenses including reasonable legal fees", or anything similar, is to use much muddierlanguage. What is "reasonable" depends on the taxing officer; and he does not know what is reasonable until he is told whether to tax ona party-party or solicitor-client basis. The reference to "all expenses" is a clue, but only a clue, and does not remove all ambiguity. Thistrial judge thought there was not a clear enough covenant for solicitor-client fees. And again it was the Mall's printed contract. Wecannot disagree in these circumstances.

Other words might mean something else in context, and can await a different lawsuit someday. [21] Topolniski J. in National Courier Services Ltd v RHK Hydraulic Cylinder Services Inc, 2005 ABQB 856, 390 AR 158 heldthat the following wording was ambiguous: ...

The Tenant agrees to indemnify and hold the Landlord harmless from and against any and all claims, losses, costs, damages, liabilities,civil fines and penalties, criminal fines and penalties, expenses (including attorney fees), cleanup costs or other injury resulting from orarising out of the Tenant's (including employees, contractors and agents) failure to comply with the foregoing. [22] In 383501 Alberta Ltd (cob Val Brig Equipment Sales) v Rangeland Truck & Crane Ltd, 2009 ABQB 87, 67 CPC (6th) 358, abill of sale provided: The Purchaser, in the event of default indemnifies the Vendor for all legal and court costs.

Langston J. (on appeal from Provincial Court) reviewed the existing law on the

interpretation of costs covenants and held that the trialjudge had not erred in finding the wording to be lacking in clarity and therefore insufficient to establish a right to solicitor client costs. Analysis [23] Clause 4.1.11 of the GSA specifies that “legal fees and disbursements (on a solicitor and his own client basis)” are to be paidby the Debtor. This language is clear and unambiguous. Such costs are payable for any action or proceeding “...taken in connectionwith...the confirmation, perfection and enforcement of this General Security Agreement and of any other security held by the Bank as

security for the Obligations......”. This is sufficiently clear to support a claim for solicitor client costs in relation to a claim for knowinglyassisting in breach of trust by Triple J so as to hinder the intent of the GSA. [24] Clause 19 of the Pledge provides for the payment of “all costs, charges and expenses including solicitors costs, charges andexpenses which may be incurred by the Bank in connection with this Agreement and its enforcement”. This clause does not specify thatthe solicitors’ costs, charges and expenses are on a solicitor client basis, nor is there anything else in the clause to allow the

interpretationas anything other than party and party costs. Costs on a solicitor client basis must be clearly and unequivocally provided for if a party isto be contractually entitled to costs at this greater level.

That is not the case here, and accordingly the Bank is not contractually entitled tocosts on a solicitor client basis under the Pledge. [25] However, I am satisfied that the pledge of the GIC falls within the definition of “any other security” referenced in Clause4.1.11 of the GSA held by the Bank as security for the Obligations Secured thereunder as defined in Clause 2.1 of the GSA. [26] I conclude that subject to the analysis below, the Bank is entitled to its costs from Triple J in this action on a solicitor andclient basis based on Clause 4.1.11 of the GSA. [27] It is further argued that Lourenco and Salokangas, both directors of Triple J, should also be held personally liable for solicitorclient costs together with Triple J.

They were strangers to the trust but were found to have knowingly assisted and directed Triple J in thefraudulent and dishonest breach of trust sufficient to ground personal liability. I find that personal liability includes liability to pay thecosts. It is also sufficient to fix them, by virtue of their relationship with Triple J, with responsibility for these costs: Kerr & RichardSports Inc v Fulton (1992), (AB KB), 10 CPC (3d) 382 (Alta QB). 2. Did the defendants receive sufficient notice that the cost covenants would be relied upon by HSBC?

Pleadings [28] The Amended Amended Statement of Claim filed on May 19, 2011 refers to the GSA and Pledge as follows: 1. The Plaintiff is a secured creditor of Triple J... by virtue of a loan...secured by a ...GSA... ... 3. By the GSA Triple J granted to the Plaintiff a security interest in all book accounts, book debts, accounts, debts and choses inaction... 4.

By the GSA Triple J acknowledged that any payments received by Triple J on account of the Book Debts shall be received andheld by Triple J in trust for the Plaintiff and shall be turned over to the Plaintiff upon request. ... 6. ...The purpose of Lourenco and Salokangas in causing Triple J to open the CIBC Account was to prevent the Plaintiff fromreceiving the money deposited in the CIBC Account, and Lourenco and Salokangas thereby caused Triple J to breach the provisions ofthe GSA. 7. Lourenco and Salokangas caused or induced Triple J to breach the provisions of the GSA by depositing Book Debts... into the

CIBC Account... ... 9. The Plaintiff was induced to make the Loan to Triple J in reliance in part on ...the “ Pledge Agreement ” ... 10. Lourenco falsely and fraudulently represented and warranted to the Plaintiff that he legally and beneficially owned the Instrument and that the Pledge Agreement had been duly authorized, executed and delivered by Lourenco to the Bank. 11. Alternatively, when the Bank sought to enforce the Pledge Agreement Lourenco falsely and fraudulently represented to TD Bank that he was not the owner of the Instrument... 12.

As a result of the wrongful actions of the Defendants the Plaintiff has suffered loss and damage as set out in the prayer for relief. ... WHEREFORE THE PLAINTIFF CLAIMS: ...(

e) costs on a solicitor and client basis. Law [ 29 ] Former Rule 120 provided: 120 In any pleading costs need not be claimed and it is not necessary to ask for general or other relief, both of which may always be given to the same extent as if they had been asked for. [ 30 ] The Rules now provide: 13.6(2) A pleading must state any of the following matters that are relevant: (

c) the remedy claimed, including... (iv) costs, including any known special costs.

(3) A pleading must also include a statement of any matter on which a party intends to rely that may take another party by surprise... ... 13.8(2) A general or other remedy claimed by a party need not be claimed in a pleading.

[31] The law is to the effect that where a contract is sufficiently clear, the courts will generally enforce express covenants forsolicitor client costs, unless there is misconduct or harshness: Manufacturers Life Insurance Co v Toronto Dominion Bank (1988), 1988ABCA 351 , 92 AR 92, [1989] 1 WWR 474 (CA). Mason J. discussed this general principle in 369413 Alberta Ltd vPocklington (2000), 1999 ABQB 936 , 79 Alta LR (3d) 222, [2000] AJ No 410 (QB): 50 Contractual provisions as to costs are considered in Orkin's The Law of Costs, 2d. ed. (Aurora: Canada Law Book, 1999) at para.219.1.1.

In the context of a mortgagee defending its security, contractual solicitor-client costs are common, and "a contractual right to[such] costs ... should generally be ordered". Orkin also points out, however, that "the right is always subject to the court's discretion, andcosts on the lower scale may be ordered". The court may refuse to enforce the contractual right where there are good reasons - thesuccessful party has engaged in inequitable conduct, or the case presents special circumstances which makes the imposition ofsolicitor-client costs unfair or unduly onerous: Bossé v.

Mastercraft Group Inc., (ON CA), [1995] O.J. No. 884 (C.A.)at para. 65; see also C.D.I.C. v. Canadian Commercial Bank (1989), 1989 ABCA 150 , 68 Alta.

L.R. (2d) 194 (C.A.) at 203-04. [32] However, there is some uncertainty in the case law regarding the requirement that a party specifically plead such a covenant.In Laurentian Bank of Canada v Ellacott, 1998 ABCA 382, 228 AR 63, the Court of Appeal held that a party seeking solicitor clientcosts based on a covenant to pay them must actually plead the covenant: 23 The statement of claim on the guarantee does ask for costs "on a Solicitor and Client and Party and Party basis". But there is norecital of any covenant in any document to pay such costs.

So it sounds like a plea for solicitor-client costs is in the court's discretion,which would require misconduct of some kind. Of course no misconduct is suggested here. Counsel for the bank does not ask to amendher pleading, for obvious and very sound tactical reasons. Since Rule 106 and the basic principles of pleading require an averment of acovenant to succeed on it, we cannot say that the trial judge was wrong to give twice column 5 instead of solicitor-client costs. See to the same effect Marianayagam v BM

(2000) NWTCA 2. [33] In Alberta Treasury Branches v Weatherlok Canada Ltd, 2011 ABCA 314 the Court of Appeal considered a covenant forsolicitor client costs in the context of a default judgment. The Court noted that the statement of claim did recite the terms of the note andloan agreements between the Treasury Branches and the borrower. In particular, the statement of claim recited that the borrowercovenanted to pay "legal costs as between a solicitor and his own client on a full indemnity basis".

It also recited that the guarantorsguaranteed the whole indebtedness including "all costs, charges and expenses which may be incurred by the plaintiff in recovering anyindebtedness . . .". The Court did not address what the result would have been if the covenant had not been specifically pled. [34] In Alberta Permit Pro v Booth, 2008 ABQB 167, Read J. reviewed the law on pleading covenants for solicitor client costs,including the decisions in Laurentian and Marianayagam: 23 ...Rule 120, of the Alberta Rules of Court (Alta.

Reg. 390/1968) on its face seems to indicate that costs need never be plead: 120 In any pleading costs need not be claimed and it is not necessary to ask for general or other relief, both of which may always begiven to the same extent as if they had been asked for. 24 There are two contradictory lines of Alberta jurisprudence which deal with the issue of whether solicitor client costs should beawarded if not pled.

In one, the courts appear to require that in the case of solicitor and client costs, a party that seeks to assert a covenantor agreement that requires payment of party and party costs must also plead that covenant or agreement. In the second line ofjurisprudence, any costs, including solicitor and client costs, never need to be plead as a consequence of Rule 120. [35] Read J. summarized the Court of Appeal’s decisions in Laurentian Bank and Marianayagam, noting that neither LaurentianBank nor Marianayagam appeared to have been cited in any other judgments.

She continued: 29 A second line of jurisprudence appears to emerge from application of Rule 120. Read literally, the Rule seems to indicate that one

never needs to plead costs and it, too, seems to have undergone relatively little judicial consideration and application. 30 In Alnashmi v. Arabi, 2000 ABQB 320, 80 Alta. L.R. (3d) 366, Johnstone J. considered an application that a plaintiff paysolicitor-client costs because he had perpetuated a fraud on the court. The pleadings did not include a claim for solicitor-client costs.After reviewing case law interpreting Rule 120, Johnstone J. ordered the plaintiff to pay party and party costs on a solicitor and clientbasis, principally on the basis of Rule 120.

She noted an overall consistent application of a broad rule that a failure to plead costs does notprohibit award of costs. Laurentian Bank of Canada v. Ellacott, supra is not referenced. 31 In a brief oral judgment a unanimous Court of Appeal panel in Guaranty Trust Co. of Canada v. Richer Right of Way Clearing Ltd.,[1988] A.J. No. 848 (Alta. C.A.) states: Solicitor-client costs were provided for in the loan documents executed by the appellants. Beyond that the award of solicitor-client costsfollowing the trial was not opposed by the appellants' trial counsel.

Again we will not interfere on the simple objection thatsolicitor-client costs were not prayed in the statement of claim. 32 This case stands in apparent contrast to the later case of Laurentian Bank of Canada v. Ellacott, supra but Guaranty Trust was notmentioned in Laurentian Bank. Again, the trial judgment in Guaranty Trust does not appear to have been reported. 33 A third case on point is Wynn v. Tse, [1981] A.J. No. 469 (Q.B.) where Master Funduk noted there was likely no requirement toamend a statement of claim to include a claim for solicitor-client costs derived from a covenant in a mortgage.

He based his conclusionon Century 21 Real Estate Ltd. v. Reykdal Inv. Ltd. (1979), (AB KB), 100 D.L.R. (3d) 750, 9 Alta. L.R. (2d) 209(Alta. S.C.T.D.) where Laycraft J. stated: Other and general relief is sought by the prayer for relief, though by Rule 120 of the Supreme Court Rules, such a prayer is not required:the Court may give general or other relief whether or not it has been asked for. Moreover, the Court is required by s. 32(c)(

i) of theJudicature Act, R.S.A. 1970, c. 193, to grant every remedy to which the parties may be entitled by the pleadings. 34 While it does not involve costs on a solicitor and client basis, the Court of Appeal made a similar statement in Saballoy Inc. v.Techno Genia SA (1993), 16 C.P.C. (3d) 333 at 335, 39 A.C.W.S. (3d) 253 (Alta. C.A.): It is true that the respondent's notice of motion did not ask for costs, but it is doubtful that that is necessary: cf. R. 120.

In any event, thechambers judge who ordered a better affidavit of documents expressly postponed the question of costs, and so the appellant had amplenotice that the respondent sought costs. The Court's principal focus was whether the parties had proper notice of the claimed costs. 35 In V.A.H. v. Lynch (1998), 1998 ABQB 1020 , 238 A.R. 201 (Q.B.), Rooke J. also noted that because of Rule 120, it is notmandatory to plead costs. However, again, he focuses on the function of pleadings to give notice of such a claim.

At page 216, he states: Unlike some pleadings (limitations, fraud, etc.) that are mandatory, I have no knowledge of any rule that makes a pleading mandatory foran award of costs - indeed, Rule 120 is to the contrary. Costs are always in the discretion of the Court, in the absence of some statutory orcommon law principle. More important, the purpose of a pleadings in this regard would be to give notice to the Plaintiff that she facedthe risk of costs if she was successful. She was specifically aware of such a risk from the pleadings ... 36 In 369413 Alberta Ltd. v. Pocklington, [1998] A.J.

No. 1164, 1998 ABQB 860, Lee J. allowed a party to assert a covenant torequire solicitor and client costs found in a collateral security agreement, though party and party costs on a solicitor and client basis hadnot been claimed in the relevant pleadings, nor the covenant disclosed in those pleadings. No mention was made of Rule 120.

37 In

summary, this line of cases concludes that there is no absolute rule requiring that costs be plead. Many apply Rule 120 but others do not specifically mention this Rule. [ 36 ] Read J. observed that these two lines of cases appeared to be inconsistent and were not easily reconciled. She proposed a possible rationale for reconciling Laurentian Bank and Marianayagam with the other line of cases as being that pleading costs is a means, but not the only one, of giving notice to the other party in order to avoid surprise.

She rejected the argument that solicitor client costs must specifically be pled, so long as no surprise would result. Late introduction of the argument in Marianayagam created a surprise to the other side. She cited relevant circumstances as including the relative sophistication of the parties and the negotiating power of the parties in settling the terms of the agreement. She cited Laurentian as an example of a situation where a financial institution attempts to enforce a boilerplate term in a mortgage.

She distinguished the case before her in which two experienced businessmen, each supported by legal counsel, negotiated and entered into a contract of sale that was then re-examined and scrutinized in a series of no less than three amendments.

She concluded that the knowledge of parties of the agreements they had reached, taken together with the counterclaim for “ ... costs of the Counterclaim to be taxed on a solicitor and own client basis" provided fair notice to the plaintiffs. [ 37 ] Moen J. adopted the principle espoused in Alberta Permit Pro in Brown v Silvera , 2010 ABQB 224 that only effective notice, rather than a formal pleading, is required for solicitor-client costs.

In finding that effective or fair notice was given to Brown in that case, she relied on the fact that the contract containing the indemnification provision was drafted by Brown's counsel on his instructions and signed by both parties who received legal advice from their lawyers.

Brown was an experienced businessman, and was aware of the concept of solicitor client costs as he claimed them in both his statement of claim and his statement of defence to counterclaim. [ 38 ] Langston J. in 383501 Alberta Ltd (cob Val Brig Equipment Sales) v Rangeland Truck & Crane Ltd noted at para 18 that while costs need not be pled there is a line of authority that suggests that notice should be given, presumably in the pleadings, of a party's intention to seek solicitor client costs.

He opined that while this view is not universally held, it demonstrates that an application for costs which is beyond the norm will attract heightened judicial attention. Analysis [ 39 ] HSBC relies on the fact that solicitor client costs were included in the prayer for relief in its Statement of Claim. Furthermore, the Pledge and the GSA were entered as exhibits at trial.

The intent to rely on covenants in those documents, some of which provide for the payment of costs, was sufficiently clear. [ 40 ] Counsel for the defendants in this case indicated that he had no notice that the covenants in question would be relied upon until the morning of the costs hearing.

It was argued that the defendants would not presume that the request for solicitor client costs in the prayer for relief was based on the covenants as the successful claims were not claims in debt or for enforcement of security, but for breach of trust and false representation. [ 41 ] Counsel for the defendants submits that Laurentian applies. Read J. noted that the Alberta Court of Appeal in Laurentian did not refer to Rule 120.

However, Read J. did not discuss the impact of Rule 106 which was relied on in Laurentian : 106 The effect of any document...referred to in the pleadings shall, if material, be briefly stated and the precise words of the document or conversation need not be stated except insofar as those words are themselves material. [ 42 ] The current Rule 13.6 provides that a pleading must include a statement of any matter on which a party intends to rely that may take another party by surprise.

This may need to include any covenants in an agreement upon which a party would seek to rely for special types of costs if not doing so may take another party by surprise. Costs, including any known special costs, must now be included in the remedy claimed. Such specific direction did not exist under the old rules where costs did not need to be claimed.

[ 43 ] The element of surprise is the key consideration in determining whether a statement or matter must be pled. A party must not take another party by surprise. This has also been the concern expressed in some of the case law prior to the changes in the rules. Notice must be given of the intent to seek costs if otherwise there would be surprise. Clearly now, it must be included in the remedy claimed. The greater question is whether the specific covenant upon which a party intends to rely for solicitor client costs must be referenced in the pleadings.

In my view, the relevant facts must be recited in the pleadings if a party would otherwise be caught by surprise. To consider whether there would be surprise the court must look at the sophistication of the parties and their negotiating power. [ 44 ] In this action, solicitor client costs were included in the prayer for relief in the Statement of Claim. The basis for the claimed entitlement to such costs, a covenant under the GSA, was not specifically pled, although the GSA as a whole was pled and entered as an exhibit at trial. A similar situation existed in Laurentian .

In Laurentian the Court of Appeal found that without recital of a covenant as the basis for payment of solicitor client costs in the pleadings, the plea for such costs only in the prayer for relief meant that the award of such costs was in the court ’ s discretion. The Court based its conclusion on Rule 106 and the basic principle of pleading that requires a covenant to be formally asserted to succeed on it. [ 45 ] The Laurentian decision, together with many others, were considered by Read J. in Alberta Permit Pro .

To reconcile the contradictory lines of Alberta jurisprudence particularly at the Court of Appeal level, the need to give notice to the other side in order to avoid surprise was determined to be key. Pleadings must provide a

summary of the facts on which the action will proceed. A party should not be able to suddenly assert a legal right to solicitor client costs where to do so would catch the other side by surprise.

However, where no surprise would result from a party to an action not specifically referencing or repeating a covenant or agreement to pay costs on a solicitor and client basis, then reference to the relevant provisions is unnecessary. [ 46 ] Late introduction of an argument for solicitor client costs pursuant to a covenant to pay such costs within a proceeding has been found to cause surprise to the other side and is prejudicial. This would particularly apply to unsophisticated litigants inexperienced and unfamiliar with legal proceedings, documents and terminology.

This principle would also apply where the clause requiring payment of such costs is included in a standard form agreement and the party sought to be made liable had no input into the negotiation of the terms of that agreement. In such a case, the requirement may be unfamiliar to the party and a surprise occurs when such costs are later claimed. An example of this is where a financial institution attempts to enforce a boilerplate term in a mortgage such as occurred in Laurentian . [ 47 ] In this case Lourenco was a professional engineer and a VP Engineering with a company in Edmonton.

Salokangas was also a professional engineer. The two had worked together on a project involving the regional design, construction and start up of a plant in Edmonton. In considering the purchase of Triple J, they looked at five years of books and accounting records and determined that the company was solid. Both were shareholders and directors of LTI Group of Companies which purchased Triple J. Lourenco became the President of Triple J and Salokangas was his right hand man. At one point, when concerns arose with one of the Directors of Triple J, Lourenco arranged for a forensic review.

In May 2002, Lourenco became actively involved in the operations of Triple J, monitoring receivables and payables and dealing directly with the Bank on behalf of Triple J. [ 48 ] When the GSA was executed by Lourenco, as President, together with the Vice-President of Triple J, legal counsel was not present nor were legal counsel consulted. Triple J had legal counsel by May 2002 according to Lourenco’ s evidence at trial. [ 49 ] I am satisfied that neither Lourenco nor Salokangas was naive or unsophisticated. They were both professional men in relatively responsible positions. Both were experienced businessmen.

From May 2002, legal counsel were involved in assisting Triple J. I find that it would be a bit of a stretch to conclude that these parties did not understand the terms of the GSA which had been executed on behalf of Triple J. [ 50 ] I also note that the defendants claimed costs on an indemnity basis in the Amended Amended Statement of Defence filed in May 2011.

From this I conclude that the defendants were aware of the various levels at which costs can be awarded. [ 51 ] As stated in Alberta Permit Pro , to apply as a strict rule that solicitor client costs when claimed under an agreement will never be ordered unless the specific provision of the agreement is pled would be to adopt an extremely formalistic approach to evaluation and application of the substance of pleadings. In my view, such an approach is not inconsistent with Laurentian which confirmed the courts’ discretion on costs even where a party is caught by surprise.

A covenant which is not expressly pled may in some cases not mandate a particular result, but all of the circumstances in a case may be taken into account by a courts in exercising its discretion on costs.

[ 52 ] The key is whether a claim for such costs would be a surprise. In this case, I am satisfied that the parties were sophisticated businessmen, assisted by legal counsel in their ongoing dealings as directors and officers of Triple J.

It cannot have been a surprise to them that the GSA contained a clause requiring the payment all costs, charges, expenses and legal fees and disbursements (on a solicitor and his own client basis) for enforcement of the GSA and of any other security held by the Bank, and that the Bank intended to rely upon that clause after having pled solicitor client costs as part of their relief in the Statement of Claim. Again, the law generally holds that where parties have agreed to pay costs on a solicitor and client basis, that agreement should generally be acknowledged, accepted and applied by the courts .

There are strong policy reasons to enforce a covenant between the parties regarding liability to pay costs on a solicitor client basis when steps must be taken to recover under the agreement.

Given the circumstances of the case, I decline to exercise my discretion so as to deny HSBC entitlement to such increased costs specifically agreed to in the GSA by sophisticated businessmen and specifically requested in the prayer for relief in the Statement of Claim. [ 53 ] I am further satisfied that this claim for knowingly assisting in breach of trust by Triple J so as to hinder the intent of the GSA and enforcement of the GIC, falls within the intent of Clause 4.1.11(

f) of the GSA . [ 54 ] As for the defendants ’ argument that the matter would have been settled if they had known that such a limited amount was at stake, it was open to the defendants to make a formal offer to settle. There was no evidence before the Court of any offer to settle. [ 55 ] In its prayer for relief, HSBC requests “costs on a solicitor and client basis” and not on a solicitor and his own client basis.

Therefore, costs are limited to a solicitor and client basis in this litigation. [ 56 ] In the event that I am wrong in this conclusion, I will address the appropriate costs in the absence of the covenant. 3. What is the appropriate costs award in this case? Law [ 57 ] The general rule is that costs follow the event, and the Court is, of course, at liberty to impose solicitor client costs in certain situations even in the absence of a covenant to that effect. [ 58 ] Rule 10.29(1)(

a) provides that the Court has general discretion under Rule 10.31 to depart from the general rule that a successful party is entitled to costs paid forthwith by the unsuccessful party. [ 59 ] Rule 10.33(1) sets out the considerations in making costs award: (

a) the result of the action and the degree of success of each party; (

b) the amount claimed and the amount recovered; (

c) the importance of the issues; (

d) the complexity of the action; (

e) the apportionment of liability; (

f) the conduct of a party that tended to shorten the action;

(

f) the conduct of a party that tended to shorten the action; (

g) any other matter related to the question of reasonable and proper costs that the Court considers appropriate. [60] Rule 10.33(2) provides that in deciding whether to impose, deny or vary an amount in a costs award, the Court may considerall or any of the following: (

a) the conduct of a party that was unnecessary or that unnecessarily lengthened or delayed the action or any stage or step of theaction; (

b) a party’s denial of or refusal to admit anything that should have been admitted; (

c) whether a party started separate actions for claims that should have been filed in one action or whether a party unnecessarilyseparated that party’s defence from that of another party; (

d) whether any application, proceeding or step in an action was unnecessary, improper or a mistake; (

e) an irregularity in a commencement document, pleading, affidavit, notice, prescribed form or document; (

f) a contravention of or non-compliance with these rules or an order; (

g) whether a party has engaged in misconduct. [61] Hutchinson J.’s decision in Jackson v Trimac Industries Ltd (1993), (AB KB), 138 AR 161, [1993] AJ No218 is often cited for the list of circumstances justifying solicitor client costs.

More recently, Rooke J. in Meads v Meads, 2012 ABQB571 at para 597 summarized the factors in support of solicitor client costs awards, including: - where the conduct of a party has been reprehensible, scandalous or outrageous - to satisfy the objectives of deterrence and punishment that would otherwise be served by a punitive damage award - there was no reasonable basis on which to commence, or continue, litigation - a proceeding was based on groundless allegations and is a type of conduct that should be discouraged - justice can only be done by a complete indemnification for costs - the plaintiff did something to hinder, delay or confuse the litigation, there was no serious issue of fact or law which requiredlengthy, expensive proceedings, where the positively misconducting party was "contemptuous" of the aggrieved party in forcing thataggrieved party to exhaust legal proceedings to obtain that which was obviously his

- a party attempted to deceive the court and defeat justice - the defendants were guilty of positive misconduct, and others should be deterred from like conduct - the positive misconduct of the party which gave rise to the action was blatant and calculated to deliberately harm the other party. [ 62 ] In Polar Ice Express Inc. v. Artic Glacier Inc. , 2009 ABCA 20 at para 21 , the Court of Appeal held that solicitor client costs for misconduct must relate to conduct during the suit, not the pre-suit conduct which is the subject of the suit.

The Court added at para 22 in obiter that trusts or a fiduciary relationship might be an exception. [ 63 ] In HSBC Bank Canada v 1100336 Alberta Ltd (cob Incredible Electronics Wholesale) , 2012 ABQB 27 , Marshall J. considered whether solicitor client costs could be awarded for pre-suit conduct where breach of trust or fiduciary duty is established. Marshall J. reviewed case law, noting that Polar Ice left this issue unresolved.

Marshall J. concluded in any event that the pre-trial breaches of trust and fiduciary relationship in that case were not severe enough to attract solicitor client costs. [ 64 ] See, to similar effect, Evans v The Sports Corporation , 2011 ABQB 616 at paras 35 and 36 . Analysis [ 65 ] HSBC did not rely on misconduct during the litigation as a basis for solicitor client costs. However, it argues that solicitor client costs can be awarded for pre-suit conduct on the basis of the finding of a breach of trust by Triple J.

Lourenco and Salokangas were strangers to the trust but were found to have knowingly assisted and directed Triple J in the fraudulent and dishonest breach of trust. [ 66 ] As indicated by Marshall J. in HSBC Bank Canada v 1100336 Alberta Ltd , the case law is unclear on whether solicitor client costs can be awarded for pre-trial conduct, even in cases of breach of trust or fiduciary duties.

He declined to award them in that case because fraud could not be imputed to all defendants, there was no misconduct during the litigation, and the pre-suit breaches of trust and fiduciary relationship were not serious enough to attract this form of punishment or deterrence. [ 67 ] I would not characterize the fraudulent and dishonest breach of trust as "extreme conduct" if there were the ability to assess fraudulent and dishonest conduct on a spectrum of bad to worse to extreme. I do not find the breaches of trust serious enough to warrant solicitor client costs. 4.

Should costs be allocated between the defendants? Law [ 68 ] Rule 10.31(3)(

c) and (

d) provide that in making a costs award under 10.31(1)(a), the Court may order one party to pay to another party all or part of the reasonable and proper costs with respect to a particular issue or part of an action or a percentage of assessed costs. Analysis

[69] The Rules provide a wide discretion to the courts on costs issues. There have been occasions when courts have allocated costsas between defendants where the circumstances were deemed to justify such an order.

See, for example, in Angle v LaPierre, 2006ABQB 380, 392 AR 74, Kucher v Seaboard Life Assurance Co (1997), (AB KB), 208 AR 1, [1997] AJ No 599,Clackson J. allocated costs in accordance with the time expended in relation to the plaintiff’s claim against each defendant. [70] Salokangas was not a party to or signatory of the Pledge, nor was he involved in the false representation relating to the GIC.Both Lourenco and Salokangas were found to have knowingly assisted and directed Triple J in the fraudulent and dishonest breach oftrust under the GSA.

I am satisfied that Lourenco and Salokangas had differing involvement in and for this litigation and that costsshould be allocated as between them. [71] In suggesting that Salokangas should not be responsible for the entire costs, counsel for Lourenco referenced an agreementbetween Lourenco and Salokangas apportioning 75% of the costs to Lourenco and 25% to the Estate of Salokangas. I am satisfied thatsuch apportionment is appropriate and so order.

Conclusion [72] Costs shall be paid on a solicitor client basis apportioned between the defendants, 75% to be paid by Lourenco and 25% to bepaid by the Estate of Salokangas. Heard on the 27th day of September, 2012. Dated at the City of Edmonton, Alberta this 19th day of October, 2012. J.H. Goss J.C.Q.B.A. Appearances: Carmen L. Plante for the Plaintiff Richard Drewry Darin McKinley for the Defendants