Executive Summary: Key Legal and Evidentiary Issues

• Costs following a dismissed application to vary a refusal of leave to appeal an arbitration award were addressed between an insolvent corporate general partner and its limited partnership counterparty.

• The court considered whether it could, and should, order non-party costs against a director who had obtained leave to pursue a derivative proceeding on the company’s behalf.

• Arguments focused on whether the director was the “real litigant” and whether pursuing an appeal funded by him, knowing the company was insolvent, justified a personal costs order.

• Prior derivative leave decisions, including findings that the director acted in good faith and in the company’s best interests, were central to rejecting any suggestion of abuse of process or misconduct.

• The court applied the “special circumstances” test for non-party costs, emphasizing the absence of fraud, abuse of process, or gross misconduct, and declined to extend liability beyond the corporate party.

• Ultimately, costs of the leave and variation applications were awarded only against the applicant company, with no personal costs ordered against the director, and no specific monetary amount was fixed in the reasons.

Facts and background

Seylynn (North Shore) Phase II GP Ltd. was the general partner under a partnership agreement with Seylynn (North Shore) Properties Phase II Limited Partnership for the development of residential lands in North Vancouver known as the Seylynn Gardens Project (the Phase II Project). The company’s directors and owners were Mr. Abo Taheri and Mr. Abbasali Hosseini. Their dispute centred on Phase II GP’s entitlement to management fees, including the period after it was removed as general partner in March 2021. A similar partnership structure existed for an earlier development, the Seylynn Village Project (the Phase I Project), where Seylynn (North Shore) MP Ltd. acted as general partner and the same two individuals were directors. Disputes over management fees arose there as well.

Derivative proceedings and arbitration

Because of a breakdown between the two directors, Mr. Taheri obtained leave to commence derivative proceedings on behalf of Seylynn I GP in the Phase I Project and, separately, on behalf of Phase II GP in the Phase II Project to recover management fees. In the Phase I leave decision, the court found that he had made reasonable efforts to engage his co-director, that the co-director was in a conflict of interest, that Mr. Taheri had the stronger good-faith position, that the derivative claim was in the company’s best interests, and that the claim had a reasonable prospect of success. Importantly, he also agreed to indemnify the company for any adverse costs. For the Phase II Project, a later order granted derivative leave without opposition, again on terms that Mr. Taheri would indemnify Phase II GP for any costs ordered against it in the derivative proceeding. Both partnership agreements contained arbitration clauses, so the derivative claims proceeded by arbitration. In the Phase II arbitration underpinning this appeal, the tribunal dismissed Phase II GP’s claims, allowed Phase II LP’s counterclaim for management fees, and ordered Phase II GP to pay Phase II LP’s costs on an indemnity basis.

Applications for leave to appeal and variation

Phase II GP applied for leave to appeal the arbitration award under the Arbitration Act, arguing that extricable questions of law arose from the tribunal’s decision. A justice in chambers refused leave. Phase II GP then applied to the Court of Appeal to vary that refusal. In its earlier reasons, the court dismissed the variation application, holding that Phase II GP had not identified an extricable question of law as required by the statute. Following that dismissal, the parties were invited to make further submissions on costs, leading to the supplementary reasons at issue here.

Dispute over costs and non-party liability

As the successful party on the leave and variation applications, Seylynn (North Shore) Properties Phase II Limited Partnership sought its costs. However, Phase II GP was insolvent, raising concern about recovery. Phase II LP therefore asked the court to order that one of Phase II GP’s directors, Mr. Taheri, personally pay its costs of both the leave application and the variation application. Phase II LP argued that he was the real litigant, that he personally funded the proceedings for personal gain, and that he took the position there was nothing to indemnify because the company could not itself pay costs. Phase II GP raised a preliminary objection that the court lacked jurisdiction to order costs against a non-party in an appeal from an arbitration panel under the Arbitration Act. In the alternative, it argued that this was not an appropriate case for non-party costs. It emphasized that derivative leave had been granted on the basis that the claims were in the company’s best interests, that Phase II GP’s insolvency was known from the outset, and that the indemnity ordered in the derivative leave proceeding ran only in favour of the company, not the respondent partnership. It was also noted that Mr. Hosseini had filed a petition in the Supreme Court seeking derivative leave to enforce the costs indemnity against Mr. Taheri.

The court’s analysis on non-party costs

The court found it unnecessary to decide the jurisdictional issue; even assuming it had power to order costs against a non-party, it would not do so on these facts. Drawing on authorities such as Perez v. Galambos and Interclaim Holdings Ltd. v. Down, the court reaffirmed that non-party costs are unusual and exceptional, reserved for special circumstances such as fraud, abuse of process, gross misconduct in the conduct of litigation, or where the non-party is truly the real litigant in a way that justifies a departure from the ordinary rule. The court concluded there was no allegation and no evidence of fraudulent conduct or abuse of process by Mr. Taheri. While he plainly stood to gain personally, he had been granted derivative leave precisely because he was acting in good faith and in the best interests of the company when the other director would not authorize a claim. All participants knew that Phase II GP was insolvent, and a derivative proceeding was the only vehicle through which he could advance the management-fee claim. The court rejected any suggestion that he had improperly shielded himself behind a defunct company or engaged in maintenance or champerty. It also noted that the derivative leave order required him to indemnify Phase II GP, not the respondent partnership, and that the Supreme Court was the proper forum to determine whether he must honour that indemnity. Finally, the court held that Phase II GP’s application for leave to appeal raised arguable points and could not fairly be described as meritless or abusive.

Outcome and costs

In the result, the court ordered that Seylynn (North Shore) Phase II GP Ltd. must pay Seylynn (North Shore) Properties Phase II Limited Partnership’s costs of both the leave application and the application to vary, in line with the ordinary rule that the unsuccessful party bears costs. The court declined to make any personal costs order against the non-party director, leaving any enforcement of his indemnity to separate proceedings in the Supreme Court. The respondent partnership is therefore the successful party in this supplementary decision, and while costs were clearly awarded in its favour, the judgment does not specify the exact monetary amount of those costs.