



COURT OF APPEAL FOR ONTARIO

CITATION: Ottawa Community Housing Corporation v. Foustanellas (Argos Carpets), 2015 ONCA 276

DATE: 20150421

DOCKET: C56782

Cronk, Pepall and Benotto JJ.A.

BETWEEN

Ottawa Community Housing Corporation

Plaintiff (Respondent)

and

Peter Foustanellas, o/a Argos Carpets
, David Grimes,

Litigation
    Administrator for the Estate of Robert Grimes,

o/a
    Argos Carpets and
Argos Carpets Ltd.

Defendants (
Appellants
)

Gary G. Boyd, for the appellants

Joseph Y. Obagi and Elizabeth A. Quigley, for the
    respondent

Heard: February 17, 2015

On appeal from the judgment of Justice Douglas J.A. Rutherford
    of the Superior Court of Justice, dated February 12, 2013, with reasons
    reported at 2013 ONSC 973 and 2013 ONSC 5443.

Cronk J.A.:

[1]

This appeal arises from a dispute concerning the supply and installation
    of carpets and under pads in various residential housing units in Ottawa.  At
    issue is the trial judges holding of the carpeting contractor and its
    principal liable in fraud, and his assessment of compensatory and punitive
    damages and costs in favour of the owner of the units.

Background in Brief

[2]

The respondent, Ottawa Community Housing Corporation (OCHC), is a not-for-profit
    organization that provides subsidized social housing for low-income individuals
    in Ottawa.  The appellant, Peter Foustanellas, is the sole shareholder, president
    and director of the corporate appellant, Argos Carpets Ltd. (ACL), a
    carpeting contractor.  Robert Grimes, now deceased, was a former employee of
    ACL.

[3]

In mid-July 2004, OCHC invited competitive tenders for a one-year
    contract concerning the supply and installation of carpets and under pads in some
    of its housing units.  It eventually accepted the lowest of five tenders, a bid
    submitted by Argos Carpets (Argos) and signed by Grimes.  Argos successful
    bid, as calculated and approved by Foustanellas, contemplated a 10  15% profit
    margin for Argos.

[4]

The contract between OCHC and Argos (the Carpet Contract)
[1]
provided for a fixed charge per installed square yard of carpet and under pad,
    with no extra charge for wastage.  It also set out certain quality criteria and
    other specifications for the product and services Argos was to provide.

[5]

Neither the original Carpet Contract nor subsequent renewal contracts identified
    ACL as a party to the contractual arrangements with OCHC.

[6]

Over time, OCHC became suspicious that Argos was inflating the quantities
    of installed carpet and under pad identified in its invoices, suggesting significant
    overbilling of OCHC.  It therefore undertook a series of investigations, eventually
    concluding that Argos had engaged in systemic overbilling for carpet and under pad
    allegedly supplied and installed in OCHC units.  OCHC also concluded that, in
    many instances, the carpets furnished and the installations carried out by
    Argos were substandard, falling below the quality criteria and other specifications
    set out in the Carpet Contract.

[7]

Accordingly, in late May 2006, OCHC invoked clauses 1.6.1 and 1.6.3 of
    the Carpet Contract, described below, and provided notice that it was
    withdrawing the remaining work under the Carpet Contract from Argos.  It also withheld
    $141,724.55 in payments allegedly owing to Argos for work performed.

[8]

Litigation ensued.  ACL commenced an action against OCHC for amounts
    allegedly owing under the Carpet Contract, together with damages for wrongful
    termination and breach of contract, amongst other relief.  OCHC, in turn, sued Foustanellas,
    Grimes, Argos and ACL for damages for breach of contract and fraudulent and/or
    negligent misrepresentation, as well as punitive and exemplary damages.  The
    two actions were eventually consolidated and heard together.   OCHC was the
    plaintiff and Foustanellas, Argos, Grimes and ACL (collectively, the
    defendants) were the defendants in the consolidated action.  ACL was the named
    plaintiff, and OCHC the named defendant, by counterclaim.

Trial Judges Decision

[9]

Grimes was Argos main contact with OCHC in relation to the Carpet
    Contract.  Unfortunately, he died prior to trial.  For the purpose of the
    trial, David Grimes was added as a party defendant in his capacity as Litigation
    Administrator for Robert Grimes Estate (the Estate).

[10]

OCHC
    relied on parts of Grimes discovery evidence, which was read in at trial
    pursuant to leave granted under rule 31.11(6) of the
Rules of Civil
    Procedure
.  On his examination-for-discovery, Grimes testified that, from
    day one of the Carpet Contract, the invoices tendered to OCHC were falsely inflated
    to generate a profit margin in the range of 25  40% for Argos, as opposed to
    the 10  15% contemplated by the Carpet Contract.  According to Grimes: i) the
    falsification of the invoices was readily apparent on inspection of the
    original copies of the invoices; ii) Foustanellas examined each and every
    invoice sent to OCHC; iii) Foustanellas wanted to be sure that OCHC did not
    have its own measurements of the units that Argos was carpeting, so that OCHC
    could not determine that Argos invoices had been inflated; iv) he had been
    instructed not to disclose carpet measurements to clients; v) Foustanellas had
    instructed him to increase the mark-up on OCHC invoices in retaliation for
    OCHCs decision to install hardwood, rather than carpet, in some of the units;
    vi) an OCHC invoice showing less than a 30  35% profit margin for Argos
    wouldnt get past [Foustanellas]; and vii) Foustanellas knew that Argos was
    not complying with the Carpet Contract.

[11]

Foustanellas
    denied any knowledge of the falsified invoices.  He testified at trial that he
    left all the details of business with OCHC to Grimes and an assistant, and he
    learned of the billing improprieties only when OCHC terminated the Carpet
    Contract.

[12]

The
    trial judge rejected Foustanellas evidence virtually in its entirety.  He made
    the following key findings:

i)

since OCHC was unaware of ACLs involvement in the Carpet Contract, both
    Foustanellas and Grimes were personally liable as agents of an undisclosed
    principal, together with ACL, for any amounts owing to OCHC for breach of the
    Carpet Contract (at para. 39);

ii)

clause 1.6.3 of the Carpet Contract was neither a penalty clause nor a
    liquidated damages provision.  Rather, it relieved OCHC of the obligation of
    making further payments to Argos once the clause was properly invoked (at
    paras. 69  70);

iii)

the
    evidence overwhelmingly established that Argos breached its contract with OCHC
    by engaging in a deliberate and intentional course of falsified invoicing and
    a pervasive course of supply of sub-standard carpet product and of sub-standard
    installation (at para. 72);

iv)

Argos
    false invoicing scheme constituted fraud.  Both Grimes and Foustanellas knew
    about and were acquiescent or directly involved in carrying out the fraudulent
    scheme that resulted in overcharges to OCHC (at paras. 75, 86  87);

v)

the
    amount of the overcharges was $282,069.10, exclusive of adjustments on account
    of wastage and quality issues (at paras. 45 and 88);

vi)

OCHC
    was entitled to a 25% reduction in the total cost of carpet supplied because Argos,
    contrary to the terms of the Carpet Contract, included charges for wastage in
    its invoices to OCHC (at paras. 51 and 89);

vii)

OCHC was
    entitled to a further 20% reduction in the amount otherwise owed to Argos under
    the Carpet Contract on account of Argos delivery and installation of substandard
    quality carpet and under pad (at paras. 63 and 90); and

viii)

after applying the 25%
    wastage and 20% quality adjustments referenced above, the total amount of
    OCHCs overpayment to Argos was $633,844.65 (at para. 91).

[13]

Based
    on these findings, the trial judge held all the defendants liable to OCHC, on a
    joint and several basis, for compensatory damages in the total amount of
    $633,844.65.  He calculated this amount as follows:



i)

$282,069.10

-

for inflated quantities of
          carpet and under pad invoiced to OCHC



ii)

$206,842.36

-

for improper wastage
          charges, and



iii)

$144,933.19

-

for substandard quality
          carpets, under pad and installations.



[14]

The
    trial judge awarded the damages under items i) and ii), above, on account of
    the defendants fraudulent conduct, and the damages under item iii), above, for
    breach of contract.

[15]

The
    trial judge also awarded OCHC punitive damages, in the amount of $250,000, as
    against all the defendants on a joint and several basis by reason of the
    fraudulent scheme that he found they had perpetrated against OCHC.

[16]

In
    connection with the counterclaim, the trial judge awarded ACL damages in the
    amount of $141,724.55 for outstanding payments owed to ACL.  He directed that
    this amount be set off against any amounts recovered by OCHC from ACL.

[17]

Finally,
    the trial judge awarded OCHC its costs of the trial, on a full indemnity basis,
    in the amount of $630,475.47, payable by the defendants on a joint and several
    basis.

Issues on Appeal

[18]

Foustanellas
    and ACL appeal to this court from the trial judgment.  The Estate took no part
    in the appeal.

[19]

The
    appellants acknowledge OCHC was fraudulently overbilled in the amount of
    $282,069.10 by reason of the falsification of Argos invoices.  However, they
    maintain that Grimes was responsible for the falsified invoices, and that Foustanellas
    and ACL neither knew about nor were parties to the fraud.  Thus, the appellants
    say, the trial judge erred by finding that they participated or acquiesced in
    the fraudulent overbilling.

[20]

The
    appellants also argue: i) clause 1.6.3 of the Carpet Contract operated to limit
    the amount of damages recoverable by OCHC; ii) to the knowledge of OCHC, ACL
    alone among the defendants was the contracting party under the Carpet Contract;
    iii) the trial judge erred in reducing the amount owed to ACL under the Carpet
    Contract on account of wastage and quality issues; and iv) the trial judge
    further erred by awarding OCHC punitive damages, as well as its costs of the
    trial on a full indemnity basis.

[21]

The
    issues on appeal may therefore be framed as follows:

1)

Did
    the trial judge err by holding clause 1.6.3 of the Carpet Contract was neither
    a penalty nor a liquidated damages provision?

2)

Did
    the trial judge err by holding the appellants were parties to the fraud
    perpetrated on OCHC?

3)

Did
    the trial judge err by holding OCHC was unaware of ACLs involvement in the Carpet
    Contract?

4)

Did
    the trial judge err in reducing the amount otherwise owing to Argos under the
    Carpet Contract on account of wastage and quality deficiencies?

5)

Did
    the trial judge err in his assessment of punitive damages?

6)

Did
    the trial judge err by awarding OCHC its trial costs on a full indemnity basis?

Analysis

(1)     Clause 1.6.3 of the Carpet
    Contract

[22]

The
    appellants argue clause 1.6.3 of the Carpet Contract constitutes a penalty or
    liquidated damages provision, the effect of which is to limit the amount of any
    recovery by OCHC of damages for breach of, or other wrongdoing associated with,
    the Carpet Contract to an amount equal to the total sum outstanding and owed to
    Argos at the date of termination of the Carpet Contract.

[23]

Clause
    1.6.3 of the Carpet Contract provides:

Except in the case of insolvency, where any or all of the work
    has been taken out of the hands of the Contractor, the Contractor will not be
    entitled to any further payment, including payments then due and payable but
    not paid.

The obligation of the Owner
    to make payments will cease, and the Contractor will be liable upon demand to
    pay the Owner an amount equal to all the losses and damages incurred by the
    Owner for the non-completion of the work.

[24]

Clause
    1.6.3 must be read together with clause 1.6.1 of the Carpet Contract.  The
    latter provision states:

1.6     TAKING
    WORK OUT OF THE HANDS OF THE CONTRACTOR

.1  If the Contractor:

.1  has
    delayed in commencing or is in default in the completion of the work or any
    portion of the work, within the contract commencement and completion dates;

.2  is
    in default of diligently executing the work or any portion of the work to the
    satisfaction of the Owner, and the Owner has given notice of the default to the
    Contractor, and the notice of default has required the Contractor to put an end
    to the default or delay, and the default or delay continues for past the time
    specified in [the]

notice

after

the notice was communicated;

.3
    fails to comply with any reasonable order he may receive from the Owner or
    shall persist in any course in violation of any of the provisions of this
    contract;

.4
    has received from the Owner three written notices of default during the term of
    the contract;

.5
    has made an assignment of the Contract without the required consent of the
    Owner;

.6  shall
    submit a bid that is subsequently found to contain false or misleading
    information;

.7
    shall become bankrupt or insolvent, or compound with his creditors, or commit
    any act of insolvency;

.8  has
    substituted any material or equipment other than specified without the required
    consent of the Owner;

or for any other reason which the
    Owner deems proper, then in each and any such case, the Owner has the full
    right and power to take the whole operation, or any part of the operation out
    of the hands of the Contractor.

[25]

Clause
    1.6.1 thus permits the Owner (OCHC) to terminate the contract on the
    happening of certain events by taking all or some of the work provided for under
    the Carpet Contract out of the hands of the Contractor (Argos).  If this
    occurs for reasons other than the insolvency of the contractor, the owner is
    then entitled to invoke clause 1.6.3 of the Carpet Contract.

[26]

That
    is what transpired in this case.  After discovering the overbilling by Argos,
    OCHC provided formal notice under clause 1.6.1 that it was taking the remaining
    work under the Carpet Contract out of Argos hands, thereby terminating the
    contract.  There is no suggestion OCHC improperly invoked clause 1.6.1.  Having
    provided proper notice under clause 1.6.1, OCHC thereby also became entitled to
    rely on clause 1.6.3.

[27]

The
    contest on appeal, as at trial, concerns the proper interpretation and effect
    of clause 1.6.3.  The trial judge turned his mind to this issue and rejected
    the appellants interpretation of clause 1.6.3, described above.  He held, at
    paras. 69 and 70:

In my view, clause 1.6.3 is neither a penalty clause nor
    is it a liquidated damages provision.  No particular amount is fixed or
    stipulated.  The amount of money that OCHC might owe Argos Carpets on jobs
    completed under the contract at any given time could vary widely.  As it
    happens, at the time OCHC terminated the contract, just over $45,000 was
    payable on unpaid invoices submitted for contract installations.

Not only would a penalty or liquidated damages provision
    of that modest amount be a most doubtful probability in a business contract of
    such proportions, more compelling in my view, is that at any given time, the
    amount in play could be much larger or smaller, depending on the vagaries of
    the work.  The fact that no specified or stipulated amount is set in clause
    1.6.3 makes its characterization as a penalty clause or liquidated damage
    clause untenable.  I do not see that provision as capping or limiting what
    damages OCHC would be entitled to prove and recover.  It is, at best, to use
    Mr. Obagis words during argument, a stop the bleeding provision.  It
    relieved OCHC of having to make further payments under the contract once OCHC
    had taken the work out of the hands of Argos Carpets and terminated the
    contract.

[28]

A
    trial judges interpretation of a contractual provision is entitled to
    substantial deference by a reviewing court:
Sattva Capital Corp. v. Creston
    Moly Corp.
, 2014 SCC 53, 373 D.L.R. (4th) 393.  In this case, therefore,
    deference is owed to the trial judges interpretation of clause 1.6.3.

[29]

As
    I will explain, I agree with the trial judges interpretation of clause 1.6.3, substantially
    for the reasons articulated by him.

[30]

I
    would describe the effects of clause 1.6.3, once triggered, as twofold.  First,
    it relieves the owner (OCHC) from any obligation to make payments to the
    contractor, including in respect of unpaid receivables, pending determination
    of the owners losses and damages arising from the contractors non-compliance
    with the Carpet Contract.  Secondly, it establishes the contractors (Argos)
    liability to the owner (OCHC) for an amount equal to the owners losses and
    damages occasioned by the contractors non-completion of the work provided for
    under the Carpet Contract.

[31]

Thus,
    properly read, clause 1.6.3 functions as a stop payment provision.  It is designed
    to halt the owners contractual obligation to make any payments to the
    contractor pending determination of the owners losses and damages arising from
    the contractors breach of contract.

[32]

In
    my opinion, the trial judge correctly held that clause 1.6.3 is neither a
    penalty nor a liquidated damages clause as those clauses are recognized under
    the established case law.

[33]

The
    authorities relied on by the appellants themselves compel this interpretive
    conclusion.  For example, in
Canadian General Electric Co. v. Canadian
    Rubber Co.
(1915), 52 S.C.R. 349, cited by the appellants, Sir Charles
    Fitzpatrick C.J. noted, at p. 351: A penalty is the payment of a stipulated
    sum on breach of the contract, irrespective of the damage sustained.  The
    essence of liquidated damages is a genuine covenanted pre-estimate of damage. 
    In
Elsley v.

J.G. Collins Insurance Agencies Ltd.
, [1978] 2
    S.C.R. 916, Dickson J. (as he then was), writing for a unanimous Supreme Court,
    explained that, where liquidated damages are stipulated in a contract, the
    injured party may elect to take the sum stipulated without regard to his or her
    actual loss.  Where, however, the stipulated sum is properly to be seen as a
    penalty, the injured party may only recover proven damages and the amount
    recoverable may not exceed the sum stipulated: at p. 938.

[34]

Under
    these authorities, the critical common element is that both penalty and
    liquidated damages clauses specify a stipulated sum agreed on by the parties at
    the time of contract formation.

[35]

Clause
    1.6.3 of the Carpet Contract makes no mention of a stipulated or agreed sum
    recoverable on breach, whether as a penalty or otherwise.  In other words, it does
    not stipulate a sum, whether as the amount payable on breach or as the maximum
    amount recoverable upon proof of actual damage arising from a contractual
    breach.  Instead, the clause contemplates that, on breach of the Carpet
    Contract by the contractor, the owners damages and losses require assessment
    and the owner may cease payments to the contractor pending quantification of
    those damages and losses.  As the trial judge aptly observed, at para. 69 of
    his reasons, the amount of the owners losses and damages on jobs completed
    under the contract at any given time could vary widely.  Further, the fact that
    the amount of outstanding invoices owed to the contractor may eventually be set
    off against the quantified amount of the owners losses and damages does not
    convert clause 1.6.3 into a penalty or liquidated damages provision.

[36]

Accordingly,
    I would not give effect to this ground of appeal.

(2) and (3) 
    Trial Judges Factual Findings

[37]

The appellants also contest two of the trial judges central findings of
    fact.  They argue that he erred by holding: i) OCHC was unaware that ACL, a
    corporate entity, was a party to the Carpet Contract; and ii) the appellants,
    in particular Foustanellas, were parties to the fraud perpetrated on OCHC.

(i)      Lack of knowledge of
    ACLs involvement

[38]

The
    issue whether OCHC knew the Carpet Contract was with ACL, rather than an
    unincorporated entity, was important to the parties at trial because, if OCHC had
    knowingly contracted with ACL, then its recourse for the recovery of any
    damages awarded to it for breach of contract would have been confined, as a
    matter of law, to ACL.  In other words, no recourse for damages for breach of
    contract would have been available as against Foustanellas in his personal
    capacity or as against the Estate.

[39]

The
    trial judge explicitly addressed the appellants claim that OCHC was aware of
    ACLs involvement in the Carpet Contract.  He rejected this claim, finding, at
    para. 35, that the fact that Argos business, in reality, was the business of
    ACL was never brought home or made clear to OCHC.

[40]

In
    so finding, the trial judge recognized that certain insurance certificates, required
    under the Carpet Contract, identified ACL as the relevant insured.  However, he
    accepted OCHCs evidence that these documents would not have come to the
    attention of OCHC senior management.  He further found, at paras. 35  36: i)
    Argos original bid, the Carpet Contract (including the subsequent renewal
    contracts) and the numerous invoices submitted to OCHC referred only to Argos
    Carpets; ii) Argos mode of performance under the Carpet Contract did not
    identify or suggest any involvement by ACL; and iii) the evidence at trial was
    bereft of anything that would [have led] OCHC to know it was doing business
    with a corporate entity.

[41]

These
    findings were open to the trial judge on this evidentiary record.  Absent
    palpable and overriding error, which has not been demonstrated, they are fatal
    to the appellants attack on the trial judges finding that OCHC was unaware
    that Argos business was that of ACL.

[42]

Moreover,
    the trial judge found as a fact, at para. 39, that Foustanellas and Grimes
    acted throughout their dealings with OCHC as the agents of an undisclosed
    principal  ACL.
[2]
Consequently, neither individual could be shielded from personal liability on
    the basis that OCHC knowingly contracted with ACL.  In respect of the damages
    awarded to OCHC for breach of contract ($144,933.19), the trial judge also
    held, and the parties appear to have accepted at trial, that OCHC was obliged
    to elect whether to pursue recovery against the individual defendants or their
    undisclosed principal.

[43]

In
    the event, OCHC elected to seek recovery of its damages for breach of contract
    as against ACL alone.  No such election was required for the damages awarded in
    respect of the defendants fraudulent conduct.  The appellants abandoned any
    challenge to the trial judges ruling regarding the ambit of OCHCs necessary
    election at a post-trial hearing before the trial judge.

[44]

In
    all these circumstances, the appellants challenge to the trial judges finding
    on this issue is unsustainable.

(ii)     Appellants
    liability for fraud

[45]

I
    reach a similar conclusion regarding the trial judges impugned finding the
    appellants were parties to the fraud against OCHC.

[46]

The
    appellants make three submissions in support of their attack on this critical
    finding.  First, they argue the trial judge erred by refusing to allow
    Foustanellas cross-examination to proceed through an interpreter.  According
    to the appellants, this error infected the trial judges assessment of
    Foustanellas credibility, on which the finding of fraud against him was based.

[47]

I
    would reject this argument.  The trial transcripts do not support the claim
    that Foustanellas was denied the assistance of an interpreter during his trial
    testimony, that the trial judge misapprehended the substance of his evidence,
    or that the trial transcripts are incomplete or inaccurate in any material way.

[48]

Foustanellas
    is from Greece and Greek is his first language.  About two hours of his
    examination-in-chief at trial were conducted without the aid of a
    Greek-speaking interpreter.  The transcripts indicate that, on that day, the
    trial judge expressed difficulty understanding some of Foustanellas responses
    to questions posed by Foustanellas counsel.

[49]

However,
    the transcripts also reveal: i) throughout the balance of Foustanellas trial
    testimony, including his cross-examination, an interpreter present in the
    courtroom was available to assist him as needed; ii) the trial judge expressly
    ruled the interpreter was to be available to Foustanellas during his
    cross-examination, at Foustanellas option; iii) Foustanellas expressed the
    desire to testify in English, as he had throughout his examination-for-discovery;
    iv) at no point during Foustanellas cross-examination did his counsel object or
    express any concerns about his clients comprehension of the questions posed; v)
    the trial judge concluded Foustanellas did not suffer from problems
    comprehending the English language but noted, rather, he sometimes spoke with a
    heavy accent; vi) the trial judge also confirmed he would intervene if he
    experienced any difficulty in understanding Foustanellas testimony; and vii)
    Foustanellas did not profess an inability to understand the English language,
    or request the assistance of the interpreter during his cross-examination.

[50]

In
    these circumstances, no prejudice to Foustanellas having been demonstrated, I
    would reject any suggestion that trial fairness was compromised by
    Foustanellas failure to testify with the aid of an interpreter at trial, or that
    the trial judges evaluation of his credibility was tainted on this basis.  In
    my opinion, the record belies these contentions.

[51]

Second,
    the appellants submit, in effect, that the trial judge erred by placing undue
    weight on Grimes discovery evidence that Foustanellas and, through him, ACL,
    were aware of the falsified invoices delivered to OCHC.  I disagree.

[52]

The
    trial judge rejected Foustanellas evidence he was unaware of the falsification
    of the invoices delivered to OCHC.  He accepted Grimes discovery testimony
    that Foustanellas was complicit in the fraudulent overbilling scheme.  This was
    the trial judges call to make.

[53]

The
    trial judge provided detailed reasons (12 paragraphs) for his rejection of
    Foustanellas denial of any knowledge of the fraudulent invoices and his
    attempt to shift sole responsibility for the scheme onto Grimes.  He cited
    numerous examples of inconsistencies and contradictions in Foustanellas
    evidence in support of his conclusion that Foustanellas denial was
    implausible (at para. 81) and impossible to believe (at para. 86).

[54]

Further,
    the trial judges finding the appellants were parties to the fraudulent
    invoicing scheme was also supported by the evidence at trial that Foustanellas:
    i) structured Argos original bid so as to generate a 10  15% profit margin,
    whereas the invoices delivered to OCHC provided for a profit margin of 25  40%
    for Argos; ii) conducted weekly sales staff meetings, on a one-to-one basis,
    including weekly meetings with Grimes and his assistant; iii) reviewed all the
    invoices sent to OCHC prior to their delivery (unless he was absent from the
    office, in which case his dispatcher would review the invoices); iv) believed
    that he would be bankrupt if the invoice amounts contemplated by the Carpet
    Contract were in fact billed to OCHC; v) never called Grimes or his assistant
    to account after the falsified invoices were discovered, instead continuing to
    employ them and, in Grimes case, compensating him above the level of his
    earned commissions in the year the fraud was discovered; and vi) maintained
    throughout that Argos was justified in overbilling OCHC.

[55]

In
    light of this evidence, in my view, the appellants fall far short of
    establishing that the trial judges finding, at paras. 86  87, that
    Foustanellas was well aware of and acquiescent in the falsely inflated
    invoicing scheme is tainted by any palpable, let alone overriding, error.

[56]

Finally,
    the appellants argue the finding of fraud against ACL cannot stand because
    Grimes and his assistant acted without the authority of ACL and beyond the
    scope of their employment duties.  Again, I disagree.

[57]

This
    argument founders on the trial judges finding Foustanellas both knew of and
    sanctioned the fraud against OCHC.  There was no evidence Foustanellas objected
    at any point to Grimes activities.  To the contrary, the evidence indicated he
    approved the falsified invoices and insisted on a return to Argos under the
    Carpet Contract in excess of that agreed upon by the parties.  Furthermore, the
    trial judge made no finding that the actions of Grimes and his assistant were
    unauthorized or exceeded the scope of their authority.  The trial judge held that
    both Grimes and Foustanellas acted throughout as the agents of their
    undisclosed principal, ACL.  The trial judges findings are therefore
    dispositive of this ground of appeal.

(4)     Reductions
    for Wastage and Quality Deficiencies

[58]

The
    appellants also challenge the trial judges holdings that the amount otherwise
    owing to Argos under the Carpet Contract should be reduced by 25% on account of
    improper billing for wastage and 20% by reason of the provision of substandard
    quality carpet, under pad and installations.  It is unnecessary to review the
    appellants submissions on these issues in detail.  The following
    considerations defeat this ground of appeal.

(i)      Wastage reduction

[59]

First,
    the price schedule set out under the Carpet Contract clearly delineated the
    unit price for items and services to be billed to OCHC.  The Carpet Contract
    permitted Argos to charge OCHC for the amount of carpet and under pad actually
    installed in OCHC units, at a stipulated price per installed square yard.  Neither
    the price schedule nor the other terms of the Carpet Contract provided for any
    charges on account of carpet or under pad wastage on installation.

[60]

Second,
    I did not understand the appellants to challenge the legitimacy of a reduction
    in the amount owing to Argos on account of the improper billing of OCHC for
    wastage.  Rather, they argue the percentage reduction allowed by the trial
    judge was unjustified and a lower percentage reduction was appropriate.  I
    would not accede to this argument.

[61]

The
    appellants rely on Foustanellas discovery evidence, read-in as part of OCHCs
    evidence at trial, that wastage on Argos carpeting installation jobs was
    generally in the range of 10  15%.  They also submit the evidence of the
    amount of carpet and under pad shipped by Argos during the currency of the
    Carpet Contract established that 12.88% more carpet than under pad was
    delivered to OCHC.  This, they contend, was the only objective evidence at
    trial of the amount of carpet wasted or discarded in the OCHC installations.

[62]

However,
    there was evidence at trial, led by the appellants themselves, supporting the
    wastage discount employed by the trial judge.  The trial judge noted that it
    was not possible, on the evidence before him, to ascertain the precise amount
    of carpeting and under pad wastage on Argos installations at the OCHC units. 
    But the appellants called Bill Damianakos, the president and owner of an ACL
    competitor, as a witness at trial.  His testimony regarding the usual amount of
    wastage in comparable OCHC residential units undercut Foustanellas discovery
    evidence on this issue.

[63]

Damianakos
    testified that his company, Adelphia Floor Surfaces Limited, had installed
    carpet in OCHC residential units after OCHC terminated its relationship with
    Foustanellas and ACL in 2006. Damianakos evidence was that, in his experience,
    the installation of carpeting in OCHC residential units could result in wastage
    of between 20%  40%.  The trial judge, as he was entitled to do, accepted
    Damianakos independent testimony and, based on it, employed 25% as a
    reasonable approximation of the wastage experienced with ACLs installations in
    the OCHC units.  This was a conservative estimate, based on the lower end of
    the wastage range identified by Damianakos.  The appellants can scarcely be
    heard to complain about the trial judges acceptance of relevant evidence that
    they elected to adduce at trial.

[64]

In
    the end, the trial judges assignment of weight to the evidence and his
    appreciation of the evidence as a whole attract great deference from this
    court.  I see no reversible error in his choice of a 25% reduction on account
    of wastage.

(ii)     Quality
    reduction

[65]

I also do not accept the appellants submission the trial judge erred by
    allowing a 20% reduction in the amount otherwise owed to Argos under the Carpet
    Contract due to Argos provision of substandard quality product and
    installations.

[66]

As
    part of its investigations into Argos compliance with the Carpet Contract, OCHC
    retained a carpet expert, Daniel W. Bernazzani, to undertake an evaluation of
    the carpet and under pad supplied and installed by Argos.  Bernazzani examined
    22 OCHC units, made detailed notes of his observations of the carpet, its
    appearance and mode of installation in each unit, and tested available samples
    of carpet and under pad.

[67]

At
    trial, OCHC relied on Bernazzanis assessment of the quality of the work
    performed and materials supplied by Argos.  Bernazzani identified a litany of
    quality deficiencies and inconsistencies in the product supplied and installed
    by Argos in the OCHC units.  He offered the opinion that the quality of the
    carpet, under pad and installation work at the examined units was of
    substantially lesser quality than that specified, leading to what he viewed as
    an anticipated 30  40% diminution in the normal life expectancy of the product
    furnished by Argos.

[68]

Contrary
    to the appellants submission before this court, the trial judge held, at para.
    59, that the selection of the units examined by Bernazzani was fair and random
    and sufficient to support a broader inference concerning the overall quality of
    the work performed and materials utilized by Argos.  This finding was also open
    to the trial judge on the whole of the evidence.

[69]

The
    trial judge also took account of reasonable wear and tear on the product
    installed in the OCHC units, as well as the negative effect on the life
    expectancy of the OCHC carpets arising from the usage characteristics of OCHC
    tenants.  Having regard to these factors, as well as Bernazzanis opinion
    evidence, the trial judge selected 20% as a fair percentage reduction on account
    of quality deficiencies in the Argos product and installations.

[70]

I
    regard the trial judges consideration of this issue as fair and thorough.  He
    addressed all the available evidence regarding the quality frailties in the Argos
    product and installations at the OCHC units, including Bernazzanis expert testimony. 
    His assignment of weight to this evidence was squarely within his domain.

[71]

Moreover,
    the 20% reduction for quality deficiencies allowed by the trial judge fell well
    below the
minimum
reduction in the life expectancy of the OCHC carpets
    (30%) identified by Bernazzani as flowing from the inferior quality of the
    goods Argos had supplied and the installation services it had performed.  On
    this issue, as on the wastage issue, the trial judges conservative approach can
    only have benefitted the appellants.

[72]

In
    my view, this ground of appeal fails.

(5)     Punitive Damages Award

[73]

The
    trial judge awarded punitive damages based on his findings that the appellants,
    together with Grimes, participated and acquiesced in an intentional and
    deliberate scheme, over a significant period of time, to defraud OCHC and
    induce it to pay more for the carpet installations than was called for under
    the Carpet Contract.  On the trial judges findings, to effect their wrongful
    scheme, the defendants falsified more than 1,000 invoices delivered to OCHC.

[74]

The
    appellants do not challenge the quantum of the punitive damages awarded by the
    trial judge.  Rather, they submit the trial judge erred by awarding any
    punitive damages at all.  They say an award of this type was irrational, unwarranted,
    and disproportionate in the circumstances of this case.

[75]

I
    disagree.  I see no error in the trial judges approach to the question whether
    an award of punitive damages was warranted in this case, or in his application
    of the governing principles concerning such an award to the facts as he found
    them.

[76]

The
    trial judges reasons confirm that he was alert to the principles governing the
    decision to award punitive damages and the quantification of the proper amount
    of such an award.  He expressly referred, at para. 92, to the Supreme Courts
    affirmation in
Whiten v. Pilot Insurance Co.
, 2002 SCC 18, [2002] 1 S.C.R.
    595, at paras. 36  37 (citing
Hill v. Church of Scientology of Toronto
,
    [1995] 2 S.C.R. 1130), that punitive damages are limited to misconduct that
    represents a marked departure from ordinary standards of decent behaviour"
    and that such awards are intended to punish the defendant, rather than
    compensate a plaintiff.  Further, the trial judges reasons reveal he
    appreciated the distinction between compensatory and punitive damages, as well
    as the discrete objectives of the latter: punishment, deterrence and
    denunciation.

[77]

The
    trial judge recognized, at paras. 94  95, that a punitive damages award must
    be the product of reason and rationality and proportionate in the
    circumstances: see
Whiten
, at paras. 108  126.  He held, at paras. 96
    and 99  101:

I assess the defendants, individually and collectively, as
    bearing a high degree of blameworthiness for their fraudulent falsification of
    the amounts of carpeting installed at OCHC and the corresponding overcharging. 
    It was an intentional scheme, covered up under false invoices, and carried out
    over a significant period.

An award of punitive damages must rationally relate to the
    amount fraudulently taken or the cost of the harm inflicted, without appearing
    to be a tariff or mere license fee, but without being overly punitive.

A punitive award should certainly deter Argos Carpets and any
    other trader from fraud in its trading transactions to the detriment of its
    trading partners.  It should be borne in mind that not only did Argos Carpets
    specifically harm OCHC, its unreasonably low bids kept its competitors from
    trading with OCHC and injured competition in the marketplace as well. General
    deterrence, as well as specific deterrence, must be part of the dimensions of
    proportionality.

In regard to the fifth and sixth
Whiten
aspects of an
    awards proportionality, there is nothing in the evidence to suggest that
    beyond the bounds of this judgment there will be any other civil or criminal
    penalties inflicted on the defendants for their misconduct.  I see the
    advantage gained by them through their misconduct as financial profit, on a
    significant scale, by virtue of conducting business on the basis of a
    competitive bidding process that the defendants abused.

[78]

The
    trial judge concluded that punitive damages are justified in this case.  In my
    opinion, on this record, his conclusion is unassailable.  No request for the
    reassessment of the quantum of the trial judges punitive damages award having
    been made, I would uphold the award, subject to the considerations next
    discussed.

[79]

Two
    other issues arise concerning the trial judges punitive damages ruling.  First,
    the trial judge held all the defendants liable for punitive damages on a joint
    and several basis.  With respect, the trial judge erred by awarding punitive
    damages on this basis.  Punitive damages arise from the misconduct of the
    particular defendant against whom they are awarded.  Joint and several
    responsibility for such an award therefore cannot be imposed:
Hill
, at
    para. 195.  See also, in the context of Quebec civil law,
Cinar Corporation
    v. Robinson
, 2013 SCC 73, [2013] 3 S.C.R. 1168, at paras. 120  132, in
    particular, at para. 127.   Consequently, the trial judges assignment of joint
    and several responsibility for the punitive damages he awarded cannot stand.

[80]

In
    light of this conclusion, a second issue arises: how should liability for
    payment of the punitive damages awarded by the trial judge be allocated?

[81]

During
    oral argument, OCHC took the position that, as between Foustanellas and ACL,
    Foustanellas should be fixed with liability for the full amount of the punitive
    damages award.  The appellants did not object to this proposal, nor did they
    argue that the quantum of the award should be reduced on the ground the trial
    judge also held the Estate liable for punitive damages.

[82]

On
    the trial judges findings, it is clear a high degree of moral blameworthiness
    attaches to Foustanellas for the serious fraudulent activity established by
    OCHC at trial.  It is undisputed that Foustanellas is both the sole owner and
    the directing mind of ACL.  For the purpose of the fraud against OCHC, no
    distinction need be drawn between the acts of ACL and those of Foustanellas. 
    ACL was directed and controlled by Foustanellas.  ACL was merely the conduit through
    which the fraudulent activities were channelled.  In these circumstances, I
    agree with OCHCs submission that Foustanellas should remain liable for the
    punitive damages assessed by the trial judge.

[83]

The
    trial judges award of punitive damages as against the Estate poses an
    additional difficulty, however.  As mentioned earlier, the Estate is not a
    party to this appeal.  It has not challenged its liability for punitive damages
    or the other amounts awarded against it by the trial judge.  Indeed, the court
    was informed that, apart from a brief attendance by counsel for the Estate
    during the first two days of this 29-day trial, the Estate did not participate
    at trial.

[84]

None
    of the parties to this appeal raised the question whether an award of punitive
    damages may be made against the estate of a deceased individual for wrongful
    conduct of the deceased during his or her lifetime.  In their factum, the
    appellants simply submitted: [N]o retribution or deterrence will be achieved
    by an award of punitive damages as against [the Estate].  The finding that [Grimes]
    conduct amounted to a fraud is  adequate denunciation.  Subsequently, during
    oral argument, the appellants reversed their position, without explanation,
    arguing that the Estate must bear most of the responsibility for the punitive
    damages award, or at least as much as that borne by Foustanellas.  OCHC said
    only that some percentage of the punitive damages award should be allocated to the
    Estate.  It did not suggest a particular percentage or a rationale for
    allocating the award as between Foustanellas and the Estate.

[85]

The
    question whether, under Ontario law, an award of punitive damages may be made
    against, rather than in favour of, a deceaseds estate appears to be a matter
    of first impression for this court.
[3]
Following the appeal hearing, the court invited further submissions from the
    parties on this question.

[86]

In
    their supplementary submissions, the appellants argued that this court should
    hold that punitive damages cannot be awarded against the estate of a deceased person,
    as a matter of law.  OCHC, relying on
de Montigny v. Brossard (Succession)
,
    2010 SCC 51, [2010] 3 S.C.R. 64, which involved an award of punitive damages
    under the law of Quebec, maintained that punitive damages may and should be
    awarded against an estate where the award can be said to serve a rational
    purpose.

[87]

Having
    considered the entirety of the parties submissions, I conclude that it is
    unnecessary to resolve this important issue in this case.  I say this for the
    following reasons.

[88]

Punitive
    damages are intended to achieve the objectives of retribution (punishment),
    specific and general deterrence, and denunciation:
Whiten
, at para.
    94.  I would reject the proposition that none of these objectives can be met by
    an award against the Estate.  General, as well as specific, deterrence is a relevant
    consideration in determining whether an award of punitive damages is rational,
    proportionate, and warranted in a given case.  It does not necessarily follow
    that the social utility of an award of punitive damages is defeated by the
    death of the wrongdoer:
de Montigny
, at para. 50.

[89]

That
    said, in the circumstances of this case, I see no need to punish or deter the
    Estate beneficiaries for Grimes wrongful conduct when the objectives of
    punitive damages  including general deterrence  can readily be met by an
    award against Foustanellas.  I again emphasize that Foustanellas was the
    driving force behind the fraudulent scheme.  As the trial judge put it, at
    para. 84 of his reasons, he was the boss and ruled the roost.  I also take
    account of the appellants own position on this issue, detailed in their
    original factum and in their supplementary submissions to this court, that no
    punitive damages should be awarded against the Estate.

[90]

In
    all these circumstances, it is my view the punitive damages award as against
    the Estate should be set aside.  For the reasons given, such an award is
    unnecessary and would serve no rational purpose that cannot otherwise be
    satisfied by maintaining the trial judges award of punitive damages as against
    Foustanellas alone.  I do not read OCHCs supplementary submissions as arguing
    vigorously to the contrary.

(6)     Costs Award

[91]

On
    the disposition of this appeal that I propose, the appellants challenge to the
    trial judgment fails in all respects.  I note that neither at trial nor before
    this court, did the Estate seek relief from an adverse costs award.  I
    therefore see no basis for appellate interference with the trial judges ruling
    that OCHC is entitled to its costs of the trial as against all the defendants.

[92]

That
    leaves only the question of the scale of costs awarded to OCHC.  The appellants
    argue the trial judge erred by awarding costs in favour of OCHC on a full
    indemnity basis given that OCHC itself, as well as Argos, ignored many of the
    terms of the Carpet Contract.

[93]

A
    reviewing court may interfere with a trial judges discretionary costs award only
    where the award is plainly wrong, or based on an error of principle:
Hamilton
    v. Open Window Bakery
, 2004 SCC 9, [2004] 1 S.C.R. 303.  In my view, the
    appellants have failed to establish either basis for appellate intervention in
    this case.

[94]

There
    is no doubt that the costs awarded by the trial judge for this lengthy trial ($630,475.47)
    are significant.  However, the trial judge provided clear and detailed reasons
    for his costs disposition, including his ruling that full indemnity costs were
    warranted.  In so doing, he considered the applicable principles regarding the
    awarding of elevated costs.  He recognized such costs should be awarded only in
    limited circumstances involving reprehensible conduct: at paras. 14  15.  He
    noted, at para. 20, that the defendants engaged in a course of fraudulent
    conduct involving inordinate and blatant wrong-doing; that OCHC, the victim
    of the fraud, is a public housing corporation; and that ACLs success on its
    counterclaim, which OCHC conceded, was relatively minor.  To this, I would add
    that the defendants misconduct continued after the expiry of the original
    Carpet Contract.  When renewal contracts were entered into and approved by
    Foustanellas, the delivery of falsified invoices to OCHC continued until OCHC
    discovered the fraud of its own accord.

[95]

Having
    regard to these factors, it was open to the trial judge to award costs on the
    full indemnity scale.  I see no reversible error in his discretionary ruling on
    this issue.  His award is neither plainly wrong nor infected by an error of
    principle.

Disposition

[96]

Accordingly,
    for the reasons given, I would set aside the trial judges award of punitive
    damages as against ACL and the Estate.  In all other respects, I would dismiss
    the appeal.

[97]

OCHC
    was successful on appeal in respect of all issues raised by the appellants.  I
    would therefore award OCHC its costs of the appeal, fixed in the agreed total
    amount of $45,000, inclusive of disbursements and H.S.T.

Released:

APR 21 2015                                    E.A.
    Cronk J.A.

EAC                                                 I
    agree S.E. Pepall J.A.

I
    agree M.L. Benotto J.A.





[1]
Argos bid formed the basis of four separate contracts between Argos and OCHC,
    each pertaining to one of four OCHC housing districts.  The relevant terms of
    the contracts were identical.  The contracts and associated renewal contracts
    are referred to in these reasons, collectively, as the Carpet Contract.



[2]
I note that Foustanellas own counsel argued that ACL was an undisclosed
    principal.  Before trial, Foustanellas and Grimes moved to have OCHCs action
    dismissed as against them on the basis that ACL was an undisclosed principal
    and OCHC had already elected to sue ACL, thus relieving the appellants, as
    agents, of liability.  The trial judge dismissed their motion: 2010 ONSC 4370.



[3]
I do not read this courts decision in
Plester v. Wawanesa Mutual Insurance
    Co.
(2006), 213 O.A.C. 241, 269 D.L.R. (4th) 624, leave to appeal to
    S.C.C. refused, [2006] S.C.C.A. No. 315, as determinative of this issue.


