Executive Summary: Key Legal and Evidentiary Issues

• Justification for commencing and later discontinuing the condominium construction-deficiency action while the Tarion/ONHWPA warranty process was ongoing, including application of the “justified action test” under Rule 23.05(1).
• Scope and sufficiency of the pleaded construction deficiencies, given the availability of the performance audit, PATS, and Warranty Assessment Report, and whether the claim was frivolous, vexatious, or a bona fide cause of action.
• Impact of the Plaintiff’s delay in discontinuing the action after Tarion-confirmed completion of warranty work, and how that delay informed a partial indemnity costs award under Rule 57.01(1) and s. 131(1) of the Courts of Justice Act.
• Reasonableness of the Defendants’ Defence, Counterclaim, and Third Party Claim against contractors as rights-preserving steps in light of potential contribution and indemnity exposure.
• Characterization of performance bond premiums (as damages versus costs/disbursements) and whether they could properly be recovered on a Rule 23.05(1) costs motion.
• Determination of an appropriate fixed quantum of costs for the main action and Third Party Claim, while denying enhanced (substantial or full indemnity) costs and rejecting reimbursement of bond premiums.

Factual background and parties

This case arises from the construction of the Emerald Park residential condominium project on Bogert Avenue in Toronto. The Plaintiff, Toronto Standard Condominium Corporation No. 2501 (TSCC 2501), is the condominium corporation created upon registration of the declaration in December 2015 under the Condominium Act (Ontario), and is responsible for operating the building and its facilities. The Defendant Emerald Park (2010) Inc. (2010) was the developer and Declarant of the project, while the remaining Defendants—Emerald Park Inc., Bazis Inc., 2145785 Ontario Inc., Metropia (Emerald Park) GP Corporation, and Metropia Inc.—were investors. These Defendants did not themselves provide construction services or materials, but 2010 contracted with various contractors to supply construction services and materials for the project. As this was a new residential condominium project, it fell under the Ontario New Home Warranties Plan Act (ONHWPA). Tarion Warranty Corporation, responsible for administering the statutory warranty scheme, required 2010 to post a substantial performance bond in the amount of $11,300,000 to secure completion and performance of the project. The bond amount was later increased to $11,480,000 and then returned to the original amount, with annual premiums of $12,999 payable during its life. The Plaintiff retained an engineer, as required under s. 44 of the Condominium Act, to conduct a performance audit to identify construction deficiencies. On November 15, 2016, that engineer delivered a series of reports comprising a performance audit, together with Tarion’s Builder Bulletin tracking summaries (PATS), which were submitted to Tarion in support of the condominium’s warranty claims.

Commencement of the civil action and warranty process

TSCC 2501 commenced its civil action by Notice of Action on December 18, 2017 and Statement of Claim on January 17, 2018. It claimed approximately $2.6 million against the developer and related Defendants for alleged construction deficiencies on theories including breach of contract and negligence, and a further $2.5 million against Tarion under its warranty obligations. When Plaintiff’s counsel served the claim on the Defendants in June 2018, the covering letter expressly stated that the claim was issued mainly to preserve limitation rights while the parties proceeded through the Tarion warranty process. The Plaintiff told the Defendants that it did not require a Statement of Defence at that time and, in fact, discouraged the delivery of a defence during the pendency of the warranty dispute process. The Plaintiff cited Justice Cunningham’s 2015 Review of Tarion and ONHWPA, which had highlighted the problem of condominium corporations having to issue litigation simply to protect limitation periods while engaging the statutory warranty regime. In line with this approach, the Plaintiff pleaded the existence of the performance audit and the PATS in its Statement of Claim and relied on the parallel track recognized in Court of Appeal authorities allowing condominium corporations to both pursue the statutory warranty route and commence a civil action in respect of construction deficiencies.

Defences, counterclaims and third party proceedings

Despite the Plaintiff’s indication that it did not require a Defence during the warranty process, the Defendants served a Defence and Counterclaim in December 2019. In their Counterclaim, the Defendants sought $350,000 for alleged equipment and systems repairs or, in the alternative, unjust enrichment for remedial work they claimed to have undertaken, plus $100,000 for alleged misappropriation of an engineering report they had commissioned. At roughly the same time, the Defendants commenced a Third Party Claim against various contractors, seeking contribution and indemnity in respect of the alleged construction deficiencies. They advised the Third Parties that they did not require formal Defences, but several Notices of Intent to Defend were nonetheless filed. Tarion, for its part, did not deliver a Defence. The court later accepted that, given the contractors’ role in performing the construction work that was at the heart of both the civil action and the statutory warranty claims, it was reasonable for the Defendants to issue a Third Party Claim to preserve contribution and indemnity rights in the event the main claim proceeded.

Tarion conciliation, Warranty Assessment Report, and completion of remedial work

While the civil proceeding remained at the pleadings stage, the Plaintiff, Defendants, and Tarion engaged in the conciliation and mediation processes available under ONHWPA. That process culminated on March 30, 2020, when Tarion issued a Warranty Assessment Report (WAR) identifying construction deficiencies and specifying the statutory warranty work that the developer, 2010, was required to complete. The Tarion-directed remedial work was completed by July 2021. On August 4, 2021, the Plaintiff’s property manager confirmed with Tarion by email that the warranty work had been completed. After that point, Defendants’ counsel repeatedly contacted Tarion seeking return of the performance bond for cancellation, and also urged Plaintiff’s counsel to abandon its civil claims and discontinue the action so that Tarion would be in a position to release the bond. However, the Plaintiff took no effective step in the civil proceeding until February 12, 2024, when it finally served a Notice of Discontinuance. On March 7, 2024, following discontinuance, Tarion released the bond for cancellation.

The Rule 23.05(1) motion for costs and bond premiums

After the discontinuance, the developer and associated Defendants brought a motion under Rule 23.05(1) for their costs of the main action and the Third Party Claim, and also sought reimbursement of the performance bond premiums they had paid for the period between August 1, 2021 and March 7, 2024. Their primary claim was for costs in the amount of $107,263.08 on a full indemnity basis, with alternatives of $88,900.58 on a substantial indemnity basis and $61,356.83 on a partial indemnity basis. Separately, they sought $33,233.50 representing bond premiums incurred after Tarion-confirmed completion of the warranty work. The court was therefore required to analyze, first, whether the Plaintiff had satisfied the “justified action test” derived from Digiuseppe v. Todd and restated in Great Lakes Copper—namely whether the materials disclosed a bona fide cause of action, whether the action was frivolous or vexatious, and whether the Plaintiff was justified in commencing the lawsuit. Second, the court had to consider the broader costs discretion under s. 131(1) of the Courts of Justice Act and Rule 57.01(1), including the reasonableness of the parties’ conduct and the impact of the Plaintiff’s delay in discontinuance after completion of the warranty work.

Application of the justified action test and general costs principles

Associate Justice McGraw held that the Plaintiff satisfied the justified action test. The court accepted that the Plaintiff had brought the action to preserve limitation rights while it pursued the Tarion warranty process and that this practice was consistent with appellate guidance permitting claimants to use both the statutory warranty mechanism and civil litigation in tandem. The action was anchored in the performance audit, the PATS, and ultimately the WAR, all of which identified real construction deficiencies requiring remediation, and the claim was therefore neither frivolous nor vexatious. The court rejected the Defendants’ argument that the broadly drafted Statement of Claim, allegedly used as a placeholder, undermined the bona fide nature of the claim. The Defendants had access to the audit and PATS, had themselves participated in the Tarion process (including providing a Vendors’ Response in the PATS), and could have demanded particulars if they genuinely believed the claim was insufficiently particularized. Against that backdrop, and given that at least some particulars were available through the audit and Tarion process, the court declined to characterize the action as abusive or unjustified at the outset. At the same time, the court emphasized that satisfying the justified action test did not automatically immunize the Plaintiff from all costs consequences on discontinuance. Rule 23.05(1) motions must also be assessed against the more general framework in Rule 57.01(1) and s. 131(1), which direct the court to impose fair and reasonable costs in light of the parties’ conduct and the specific factual context. Costs on a substantial or full indemnity basis are reserved for rare cases involving egregious, reprehensible conduct or clearly vexatious proceedings, and nothing in the Plaintiff’s conduct met that threshold.

Delay in discontinuing after warranty completion and impact on costs

The fact that Tarion-confirmed warranty work was completed and acknowledged by August 4, 2021, yet the Plaintiff did not discontinue until February 12, 2024, played a central role in the court’s costs analysis. The Plaintiff had expressly stated that the civil action was launched to preserve its rights while the warranty process played out. Once that process was complete and the deficiencies resolved, the court found there was a reasonable expectation that the action would be brought to an end relatively promptly, absent a clear indication that the Plaintiff intended to pursue civil remedies beyond those achieved through Tarion. The approximately two-and-a-half-year delay in discontinuing unnecessarily prolonged the action’s life on the court’s docket and forced the Defendants to incur ongoing legal costs. In these circumstances, the court concluded that fairness and reasonableness under Rule 57.01(1) favored some cost recovery for the Defendants, with particular emphasis on the post–August 4, 2021 period. The court also accepted that the Defendants were entitled to some costs from the issuance of their Defence and Counterclaim, but on a scale and quantum consistent with the idea that both sides were primarily seeking to preserve rights rather than to advance the litigation aggressively during the warranty process. Similarly, as the Third Party Claim against the contractors was a reasonable rights-preserving step in light of potential contribution and indemnity exposure, the court held that a portion of the Defendants’ Third Party costs ought to be compensated as well.

Performance bond premiums and their characterization

The Defendants’ additional claim related to the premiums on the Tarion-required performance bond during the period after warranty completion. They argued that if the Plaintiff had discontinued the action promptly upon confirmation of completed warranty work, Tarion would have released the bond earlier and the Defendants would not have incurred those extra premiums. The court refused to award this amount. It held that the performance bond arose from the ONHWPA statutory scheme and was not created by, or incidental to, the civil action itself. As such, the premiums were not properly characterized as “costs of the proceeding” or as disbursements recoverable on a Rule 23.05(1) or Rule 57.01(1) costs motion. To the extent those premiums might be recoverable at all, they would be better viewed as a form of damages, which cannot be awarded on a costs motion confined to procedural relief after discontinuance. The court also noted that it was Tarion’s independent decision to retain the bond until discontinuance, and there was no principled basis to pass the financial consequences of that decision directly onto the Plaintiff as a matter of costs.

Outcome and monetary order

In the result, Associate Justice McGraw held that while the Plaintiff was justified in bringing the action and had advanced a bona fide, non-frivolous claim, it could not escape all costs consequences arising from its prolonged failure to discontinue after warranty completion. Balancing the justified action test with the broader principles under Rule 57.01(1) and s. 131(1), the court fixed the Defendants’ recoverable costs of both the main action and the Third Party Claim at $25,000 on a partial indemnity basis, payable by the Plaintiff within 30 days. The motion for reimbursement of the performance bond premiums was dismissed outright. The Defendants were therefore the successful party on the costs and bond-motion issues, but their recovery was limited to a single combined costs award of $25,000, with no damages and no additional amount granted for bond premiums.