Unfounded fraud claim ‘deserves rebuke’ but not special costs award: BC Court of Appeal

A party’s act of fabricating evidence and advancing an unfounded fraud claim “deserves rebuke” but not a punitive award of special costs, the BC Court of Appeal has found.

An award of special costs was challenged in AM Gold Inc. v. Kaizen Discovery Inc., 2022 BCCA 284. AMG Gold Inc. is a publicly traded company engaged in the exploration, development, and acquisition of mineral properties. In 2014, Vancouver-based mining company, Kaizen Discovery Inc. expressed its intention to acquire AMG’s flagship asset, the Pinaya mining project in Peru. The parties entered into a non-disclosure agreement (NDA) with respect to the possible acquisition. The acquisition ultimately closed in October 2015.

Two years later, AMG filed an action against Kaizen, alleging that Kaizen had failed to disclose material information or had made misrepresentations with respect to its projects and corporate affairs. It also alleged that Kaizen had breached the NDA and committed the tort of trespass by taking soil and water samples from Pinaya shortly before executing the acquisition agreement without consent.

The trial judge ruled in favor of Kaizen, finding that Kaizen had not breached its disclosure obligations and that Kaizen had not fraudulently or negligently misrepresented anything. The judge also ruled that Kaizen had not breached the NDA by visiting Pinaya and taking soil and water samples because AMG’s CEO, John Fiorino, was informed in advance of the visits. The judge concluded that the conduct of AMG and John Fiorino warranted an award of special costs because they had advanced a meritless claim, and that Fiorino gave false testimony with an intention to mislead the court.

Special costs punitive in nature

AMG appealed, challenging the award of special costs. The appeal court noted that special costs are not compensatory but are punitive in nature, and they are typically awarded to address conduct in the court during litigation that is deserving of censure and rebuke. The appeal court referred to existing jurisprudence, which states that the standard for the award of special costs is that the conduct in question must be “reprehensible.”

The judge anchored the award of special costs on two grounds – it was not reasonable for AMG to continue advancing the claim that an arguable cause of fraud existed, and Fiorino knowingly gave false testimony with the intention to mislead the court on a matter central to the litigation.

Fraud claim

AMG’s fraud allegations were grounded in its claim of contractual misrepresentation against Kaizen. The trial judge acknowledged that the circumstances relied upon by AMG to advance its claim of fraud could have warranted an investigation. However, the judge found that it was not reasonable for AMG to hold the view at the time of the trial that an arguable case of fraud continued to exist.

The appeal court noted that the trial judge made no actual findings about the alleged misrepresentations because the judge had decided that they were not material. She did not make any findings that AMG’s claims were unfounded, reckless, or malicious. She never resolved the merits of the misrepresentation claims, nor did she rule that AMG acted improperly in making its misrepresentation claims.

According to the appeal court, an unsuccessful attempt to prove fraud or dishonesty on a balance of probabilities alone did not justify special costs. As the appeal court found, the trial judge committed an error in finding that AMG advanced meritless claims of fraud that were wholly without foundation. AMG’s decision to take those claims to trial did not warrant rebuke in the form of an order for special costs.

Dishonest testimony

The trial judge also awarded special costs based on her finding that AMG’s CEO, John Fiorino, knowingly gave false testimony with the intention to mislead the court on a matter central to the litigation, and in particular that his evidence with respect to the Pinaya claim was fabricated.

However, according to the appeal court, the judge committed a mistake in awarding special costs on the basis of Fiorino’s dishonest testimony. “Dishonest testimony alone is not sufficient to warrant an order for special costs. There must be something more egregious in the impugned conduct for it to be considered reprehensible,” the court said.

The court further said that whether evidence was fabricated was only the beginning of the analysis.  False evidence with an intention to mislead will only lead to an award of special costs if it was given on an issue that was central to the matter before the court and which, if accepted, would “drive the opposing party from the judgment seat.”

Notwithstanding the judge’s finding that the evidence was fabricated, the appeal court concluded that the evidence which was deemed fabricated by the trial judge was not central to the matter before the court.

The court accepted the judge’s findings of fabrication, as well as her finding that AMG’s conduct in advancing new allegations at trial without notice was improper. The court ultimately ruled that given these findings, AMG’s conduct is deserving of rebuke, but not to an extent that an award of special costs was warranted.