2017 ONSC 403, 2017 ONSC 403

CITATION : Phoenix Interactive Design Inc. v. Alterinvest II Fund L.P., 2017 ONSC 403 COURT FILE NO.: 676/15 DATE: 2017/01/17 SUPERIOR COURT OF JUSTICE – ONTARIO RE: PHOENIX INTERACTIVE DESIGN INC., and 1932780 ONTARIO INC. (Applicants) - and - ALTERINVEST II FUND L.P. BY ITS GENERAL PARTNER, BUSINESS DEVELOPMENT BANK OF CANADA (Respondent) BEFORE: Justice J. N. Morissette COUNSEL: Raymond F. Leach and Michael A. Polvere, for the Applicants George Benchetrit and Michael Kril-Mascarin, for the Respondent HEARD: January 12, 2017 ENDORSEMENT ON COSTS [ 1 ] The applicants seek costs of slightly over $200,000.

The respondent seeks its costs of approximately $160,000. [ 2 ] The applicants sought a number of heads of declaratory relief, in essence asking this court to deny the respondent BDC any amount owing under a contractually agreed upon bonus provision. The applicants submitted that the interest rate sought was criminal under s. 347 of the Criminal Code , that the bonus was unconscionable, or that the bonus was ultra vires of the BDC’s objects. The respondent BDC claimed the applicants owed it a bonus and the only issue was quantum. [ 3 ] The court found that the applicants did in fact owe a bonus to the respondent.

As a result, the respondents submit that they were successful in defending the relief sought by the applicants. I agree. [ 4 ] Once that determination was made, the issue became what constituted “net proceeds of sale”, in order to determine the quantum of the bonus. The bank sought a bonus payable by the applicants of over $890,000 while the applicants’ expert calculated the bonus to be $242,550. [ 5 ] The judgment of this court determined the quantum of the bonus to be $242,550.

On that issue, the applicants were clearly successful. [ 6 ] Accordingly, BDC was successful in establishing that a bonus was owing, but the applicants were successful in reducing the amount of the bonus claimed by approximately 73 percent. [ 7 ] Unfortunately, no offers to settle were exchanged. [ 8 ] Given that the applicants maintained that the bonus provisions were unenforceable or illegal, BDC had no alternative but to seek redress.

As already noted, BDC is entitled to a cost award because of its success. [ 9 ] Having said that, once the bonus provision was found to be enforceable, the respondent maintained a position contrary to that of its own expert, about what constituted “net proceeds of sale”, in respect to the reasonableness of the “certified indebtedness” of $55,000,000 which appeared to be the major amount at issue. [ 10 ] This court accepted the applicant’s expert opinion on the issue, resulting in the applicant achieving complete success on this issue.

Accordingly, the applicants are entitled to an award of costs as well. [ 11 ] Accordingly, this court will reduce the award of cost owing to BDC due to the success of the applicants in reducing the amount owing under the bonus provision. [ 12 ] The question is by how much? [ 13 ] First the scale upon which costs ought to be ordered must be determined.

[ 14 ] Counsel for BDC submits that the contractual rate of “solicitor/client” costs or as now known as “full indemnity”is the appropriate scale. Counsel for the applicants submits that it would be unfair to allow “solicitor/client” scale of costs given the objects of the BDC.

It also stresses the circumstances of the case: the borrowed $2,250,000.00, which was repaid in full plus an additional $1,210,000.00 in interest, royalties and fees. [1] [ 15 ] The jurisprudence on this issue has long been established to favour the following proposition. “Provided it is expressed in clear and unambiguous terms, an indemnity by a borrower to pay the costs of the lender incurred in connection with enforcing the loan document and any security therefor will prima facie be enforced, subject, however, to the discretion of the courts to refuse to do so in respect of costs of or incidental to a judicial proceeding where it would be inequitable in light of all the surrounding circumstances”. [2] [ 16 ] Accordingly, where there is a contractual right to costs, the court will usually recognize it.

However, the agreement of the parties cannot exclude the court’s discretion; it is open to the court to exercise its discretion contrary to the agreement.

The court may refuse to enforce the contractual right where there is good reason for doing so. [3] [ 17 ] Accordingly, a contractual provision for the recovery of costs on a specified scale ought to be enforced unless there are special circumstances, such as improper conduct by the claiming party, or where the imposition of solicitor and client costs would be unfair or unduly onerous in the particular circumstances. [4] Even where there are no disqualifying circumstances, the court nevertheless has the obligation to police the amount claimed, to ensure that it is no more than is appropriate and properly recoverable. [5] [ 18 ] In this case, there is no reason to deviate from the “full indemnity” scale for the respondents.

Had the applicants accepted its obligation to pay a bonus but simply disagreed on the amount, the respondents might not be entitled to their full costs. [ 19 ] The contractual “full indemnity” scale yields a claim of $164,407.66 from the respondent. The applicants are not taking issue with the amount per se except to ask this court to exercise its discretion in not ordering “full indemnity” costs. The applicants are claiming “partial indemnity” costs in the amount of $204,040.23.

In my view the amount is somewhat inflated. [ 20 ] It is apparent from a review of the parties’ bills of costs, that a substantial component of their respective claims is the experts’ fees. [ 21 ] I have considered the criteria set out in Rule 57. In my view, the fairest way to allocate costs is to divide each of the parties’ claims in half to reflect their divided success.

In doing so, I discount the applicants’ partial indemnity costs by 27% which results in an award that is close enough for a complete set-off. [ 22 ] Accordingly, in exercising this court’s discretion, I order no costs and each party shall bear their own costs. Interest: [ 23 ] The respondents claim interest on the amount of the judgment in accordance with the Courts of Justice Act . [ 24 ] The loan agreement does not provide for interest on the bonus.

The application does not plead a claim for interest, nor is the money paid into court subject to any interest accruing to the parties. [6] [ 25 ] For these reasons, no interest is ordered. [ 26 ] As agreed upon by the parties, Ms. Kyle A. MacDonald remains personally liable under the judgment of this court inclusive of this costs order. _______________________ Justice J. N. Morissette Date: January 17, 2017

[2] Wilfred M. Estey, Legal Opinions in Commercial Transactions , 3rd ed. (Markham: LexisNexis Canada, 2013) at para. 4.118.