Unproven allegations of fraud and increased costs

In Roussy v Savage, the British Columbia Supreme Court dismissed the plaintiff’s claims of fraud and breach of fiduciary duty. In considering costs, the defendant sought increased costs. The law in Canada is consistent in this matter: where a plaintiff alleges a defendant has engaged in dishonest conduct (such as fraud), the court may order increased costs against the plaintiff when those claims are not proven. However, the result of increased costs in favour of the defendant is not automatic, and the court will carefully analyze the particular circumstances, including the conduct of both the plaintiff and the defendant.

The Roussy v Savage decision to deny increased costs on the basis of fraud is noteworthy, not because of its consideration of the law, but on its factual application of that law. As is the ordinary case, the court assessed the plaintiff’s knowledge of any potential dishonest conduct at each step of the litigation, to determine whether the plaintiff’s conduct in bringing the claim was reprehensible or deserving of rebuke. However, it is noteworthy the court also considered how the defendant’s conduct affected the plaintiff’s knowledge and suspicions of fraudulent conduct in order to determine whether it was reasonable for the plaintiff to continue with the claims.

In finding there was a prima facie case for fraud at the outset of the litigation, the court noted that:

• The plaintiff believed the failure of the company, owned by both the plaintiff and defendant, was due to poor management by the defendant, who ran the company’s day-to-day operations;
• The company had poor accounting records, which complicated the litigation and the plaintiff’s assessment of its financial situation;
• Financial statements prepared by Deloitte were significantly different than the company’s internal income statements;
• The defendant’s children, who were company employees, had homes apparently of greater value than their salaries would permit. The defendant was constructing a large home at the outset of the litigation.

The court found that steps taken by the plaintiff to move the matter to trial were justified, noting in particular the defendant’s conduct:

• The defendant’s pleading denied facts that the plaintiff knew to be true;
• The defendant’s disclosure was late, heavily redacted, and failed to comply with orders for disclosure;
• At examinations for discovery, the defendant was difficult and not forthcoming about relevant business activity (which ultimately became a major issue at trial);
• Because of the defendant’s conduct with regard to discoveries, the plaintiff engaged a certified fraud examiner to complete a report, which confirmed the defendant had engaged in fraud. At the time of the first trial dates, that expert report was the only one available;
• The key evidence upon which the case ultimately turned came from the defendant’s witness, and had not been presented to the plaintiff until that witness took the stand.

After balancing these factors, the court dismissed the defendant’s claim for special costs.

Takeaway

This decision is a reminder that disproving allegations of dishonest conduct does not guarantee the defendant an award of special or increased costs. Courts will assess the conduct of both parties throughout the litigation to determine whether the plaintiff acted in a manner that was not reprehensible or deserving of rebuke. Defendants will not benefit in an increased costs application where their own conduct contributed to the plaintiff’s continued pursuit of the claim.