Execution Before Judgment, The Lawyer’s Daily (July 11, 2019)

(this article originally appeared in the Lawyer’s Daily on July 11, 2019)

By Nikolay Y. Chsherbinin

It has long been the general rule in Canada that execution cannot be obtained prior to judgment and judgment cannot be recovered before trial. The term execution includes any order abrogating a defendant’s rights prior to a trial. Such orders, apart from certain exceptions, will not be granted. In a rare case, Falcon Motor Express Ltd v. Grewal, et al., 2019 ONSC 1529 (Falcon), the Ontario Superior Court of Justice addressed the difference between execution before judgment and an interim order under the oppression remedy s. 248 of the Ontario Business Corporations Act (OBCA).

In Falcon, a case of two feuding shareholders, the 50 per cent shareholders, Jarnail Sidhu, Falcon Motor Express Ltd. and Falcon Motor Freight Ltd. (Falcon Corporations), asked the court to grant an extraordinary relief requiring another shareholder, Arandeep Grewal, to immediately sell, transfer or surrender the 50 per cent of all shares he holds in Falcon Corporations without payment or security. In essence, they sought the interim injunction to enjoin Grewal from continuing to hold shares in Falcon Corporations in order to prevent further harm to their business and Jarnail’s shareholding.

Sidhu’s claim to acquire Grewal’s shares was premised on the legal argument that, as a shareholder, his interests have been oppressed, unfairly prejudiced or unfairly disregarded by Grewal because he breached the reasonable expectations regarding the operation of Falcon Corporations’ business and affairs while he was an officer or director.

Falcon Corporations’ claim to acquire Grewal’s shares was based on the wrong that it suffered due to Grewal’s alleged conduct, represented by Grewal’s diversion of $3.5 million in gas rebates, setting up a competing business, luring away of Falcon Corporations’ employees, soliciting their customers and, among others, exploiting Falcon Corporations’ presence for leasing and marketing purposes.

Curiously, in their fresh as amended statement of claim Sidhu and Falcon Corporations have not requested relief requiring Grewal to transfer shares to either of them. Instead, they made claims against Grewal for declaratory relief and, inter alia, for damages. Nevertheless, the court ultimately granted an interim order with specific terms.

The real issue for the court was how to protect Grewal’s interest if he exits as a shareholder prior to judgment, while at the same time providing Falcon Corporations with the ability to meet their proposed lenders’ requirement to exclude Grewal as a shareholder.

In deciding whether to grant the requested relief under s. 248(3) of the OBCA, the court explained that there is a difference between execution before judgment and an interim order, which is determined by the authority under which the order is made. If the court were to order that Grewal’s shares be transferred without terms, that would be a final order and therefore execution before judgment.

In practical terms it means that because the litigation was commenced by a statement of claim, granting an interim order without terms would amount to summary judgment. Subsection 248(3) of the OBCA expressly vests the court with the authority to make “any interim or final order it thinks fit …,” but its effect would also be final if made without terms.

On this point, the court opined that, in its view, the legislature intended to provide it with the power to make an order that includes one or more of the enumerated remedies along with ordering any other terms that would do justice between the parties. Therefore, the request that the court make an interim order, for example, for the transfer or surrender of shares under ss. 248(3) of the OBCA is “an important distinction,” because it serves as the means by which the court may tailor the appropriate interim relief to address the wrong complained about on such terms as it considers just.

Having underscored that Grewal owed his duties to Falcon Corporations and not to another shareholder (ie Sidhu), the court nevertheless concluded that a shareholder’s deliberate failure to act in good faith should be considered a valid ground to disentitle the offending shareholder from holding shares in the corporation. The court was of the view that the expectation of good faith between shareholders seems a logical extension of the good faith principle existing between contracting parties, which the Supreme Court of Canada recognized in Bhasin v. Hrynew, 2014 SCC 71.

In Bhasin, the top court explained that a duty of honesty means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forgo advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. Given that a remedy under the oppression section is focused on concepts of fairness and equity rather than on legal rights, the proposed extension of the duty of honest performance is a welcome development.

In Falcon, the court found that Grewal was an admitted defrauder and was of the view that he should not profit by his own misconduct. Ultimately, the court made an interim order for the purchase of Grewal’s shares on specific terms, which included a requirement for Sidhu to post security in the amount of $2 million, which shall be held in respect of those shares until further order.

Falcon reaffirms that the goal of a remedy under the oppression section is to rectify the oppressive conduct. It illustrates that courts will use the legislation to craft an appropriate remedy in circumstances where the rights of a party have been unfairly prejudiced. Even though there might be a high probability that a plaintiff could establish a defendant’s liability, the court would not grant an interim order under s. 248(3) of the OBCA without terms. A relief under the oppression section is not a motion for summary judgment in whole or in part, and not subject to characterization as execution before judgment.