Wilkings et al. v. The Velocity Group Inc. et al. Driver for a Day Inc. et al. v. Wilkings et al. [Indexed as: Wilkings v. Velocity Group Inc.]
89 O.R. (3d) 751
Ontario Superior Court of Justice,
Divisional Court,
Kitely, Cumming and Shaw JJ.
March 25, 2008
Civil procedure -- Costs -- Security for costs -- Counterclaim by defendant not insulating initiating plaintiff in main action from order for security for costs.
One individual and three corporate plaintiffs brought an action alleging breach of contract, economic torts, defamation and oppression. Two of the 13 appellant defendants counterclaimed against the corporate plaintiffs. The appellant defendants brought a motion for an order compelling the corporate plaintiffs to post security for costs of the underlying action on the basis that they had insufficient assets in Ontario. The motion was dismissed. Those defendants appealed.
Held, the appeal should be allowed.
The corporate plaintiffs did not have immunity from posting security for costs under s. 249(3) of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 ("OBCA") as they were not "complainants" within the meaning of s. 245 of the OBCA. The oppression claim in the statement of claim was, at most, skeletal and ephemeral.
A plaintiff is not protected from posting security for costs by the fact that a defendant has raised a counterclaim. The existence of a counterclaim raising the same issues as the defence to the initiating plaintiff's claim is a relevant fact to be considered in the exercise of discretion when considering whether to order security [page752] for costs against the plaintiff by counterclaim. However, the fact of a counterclaim should not be a relevant factor for consideration by the court in exercising discretion in respect of a motion for security for costs against an initiating plaintiff in the main action. The motion judge also erred in relying on the fact that the defence to the counterclaim was closely related to the statement of claim in the main action. Assuming that such a close relationship did, in fact, exist, it was not a relevant factor in determining whether or not the initiating plaintiffs should post security for costs.
APPEAL from an order of Spence J., of the Superior Court of Justice, dated April 12, 2007, dismissing a motion for security for costs.
Cases referred to ICC International Computer Consulting & Leasing Ltd. v. ICC Internationale Computers & Consulting GmbH, 1989 9525 (FC), [1989] O.J. No. 70, 33 C.P.C. (2d) 40, 13 A.C.W.S. (3d) 341 (H.C.J.); U.S. Benefits Corp. v. Ingle Wright Benefits Inc., [2000] O.J. No. 170, 47 C.P.C. (4th) 143, 94 A.C.W.S. (3d) 244 (S.C.J.), consd Other cases referred to Abdalla v. Skalin, [2004] O.J. No. 2981, [2004] O.T.C. 618, 132 A.C.W.S. (3d) 236 (S.C.J.); Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 2002 SCC 33, 211 D.L.R. (4th) 577, 286 N.R. 1, [2002] 7 W.W.R. 1, J.E. 2002-617, 219 Sask. R. 1, 10 C.C.L.T. (3d) 157, 30 M.P.L.R. (3d) 1, 112 A.C.W.S. (3d) 991; Hubbell Special Products Inc. v. Carroll Healthcare Inc., 2005 377 (ON SC), [2005] O.J. No. 49, [2005] O.T.C. 9, 10 C.P.C. (6th) 10, 136 A.C.W.S. (3d) 229 (S.C.J.); J.I. Case Canada, a Division of Tenneco Canada Inc. v. Gowland's Recreation and Farm Ltd., [1998] O.J. No. 323, 56 O.T.C. 42, 17 C.P.C. (4th) 337 (Gen. Div.); Mapleson v. Masini (1879), 5 Q.B.D. 144 (Div. Ct.); Pondwood Realty Inc. v. Piller Investments Ltd., [1999] O.J. No. 275, 85 O.T.C. 365, 85 A.C.W.S. (3d) 513 (Gen. Div.); Toronto-Dominion Bank v. Szilagyi Farms Ltd. (1998), 1988 4745 (ON CA), 65 O.R. (2d) 433, [1988] O.J. No. 1223, 29 O.A.C. 357, 28 C.P.C. (2d) 23, 11 A.C.W.S. (3d) 116 (C.A.) Statutes referred to Business Corporations Act, R.S.O. 1990, c. B.16, ss. 245, 248, 249, Part XVII Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 56.01
Jonathan Kulathungam, for plaintiffs/respondents and defendants by counterclaim. Richard Macklin, for all defendants/appellants except The Velocity Group Inc. and plaintiffs by counterclaim.
The judgment of the court was delivered by
CUMMING J.: -- The Appeal
[1] The appellant defendants (being all defendants other than The Velocity Group Inc. ("Velocity")) appeal, with leave, from the order of Spence J., dated April 12, 2007, dismissing their motion [page753] to compel the three corporate plaintiff respondents to post security for costs for the underlying action on the basis that there was evidence the three corporate plaintiffs had insufficient assets in Ontario.
[2] Rule 56.01(1)(d) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 provides the court with discretion to make an order for security for costs in certain situations including where there is "good reason to believe that the plaintiff [corporation] . . . has insufficient assets in Ontario to pay the costs of the defendant . . .".
[3] The appeal raises an issue of first impression for this court, namely, whether a counterclaim by a defendant must or may insulate an initiating plaintiff of the main action from a motion by the defendant for an order that the initiating plaintiff be ordered to post security for costs pursuant to rule 56.01(1).
[4] The standard of review is one of correctness. The issue relates to the interpretation of the applicable legal principles, which is a pure question of law. See Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, at para. 8. Background
[5] All of the pleadings are unduly and unnecessarily complex and confusing given the scattergun approach to allegations and the multiplicity of parties, often unclearly described, in different roles.
[6] There are three corporate plaintiffs and one individual plaintiff, Michael Wilkings, to the underlying main action (the "Wilkings action"). These four plaintiffs bring a claim alleging breach of contract, economic torts, defamation and oppression in respect of a business association with the defendants for a six-month period in 2005. The plaintiff Wilkings claims $7 million in damages.
[7] Two of the 13 appellant defendants have defended and initiated a counterclaim. The three corporate plaintiffs in the Wilkings action are three of the eight defendants to the counterclaim brought by Driver For A Day Inc. ("DFAD") and Formula Kartways Inc. ("Kartways") ("plaintiffs by counterclaim"). The Decision Appealed From
The issue related to s. 249(3) of the Ontario Business Corporations Act
[8] The corporate plaintiffs advanced two bases before the motion judge, Spence J., as to why an order should not be granted requiring them to post security for costs. [page754]
[9] First, the corporate plaintiffs (defendants by counterclaim) argue that they have immunity from posting security for costs because of s. 249(3) of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 ("OBCA"). Section 249(3) provides that a "complainant is not required to give security for costs in any application made or action brought . . ." for the remedy for oppression under s. 248.
[10] We agree with the finding of the motion judge that on the limited record before him the corporate plaintiffs could not be considered "complainants" within the meaning of s. 245 of the OBCA. The motion judge noted that the only possible route for the corporate plaintiffs to possibly gain the status of "complainants" was through asking the court to so exercise its discretion under s. 245(c), however"[n]o proceeding had been taken for that purpose".
[11] Indeed, para. 32 of the statement of claim alleges oppression only in respect of the actions of the defendants in respect of the individual plaintiff although the general prayer for relief (para. 2(e)) asks for a declaration of oppression in respect of all plaintiffs. The specific allegations in the statement of claim made by the corporate plaintiffs (paras. 2(f), 20 and 21) assert only that the corporate plaintiffs advanced moneys with the consequence that the defendants are indebted to the corporate plaintiffs as creditors. That is, a fair reading of the statement of claim as a whole would not support a finding that the corporate plaintiffs have brought an action for oppression under Part XVII of the OBCA.
[12] The benefit of s. 249(3) cannot, of course, properly be invoked merely by a plaintiff claiming "oppression" when the core nature of the action involves a separate, discrete and distinctive issue (Abdalla v. Skalin, [2004] O.J. No. 2981, [2004] O.T.C. 618 (S.C.J.), at para. 8).
[13] It is apparent in the case at hand, as discussed above, that any claim by the corporate plaintiffs based upon "oppression" under Part XVII of the OBCA is at most skeletal and ephemeral in the statement of claim. The plaintiffs allege breach of contract, breach of trust, unlawful interference with economic and contractual relations, conspiracy, and loss of business opportunity as well as oppression. In our view, the core nature of the action advanced by the corporate plaintiffs involves separate, discrete and distinctive issues apart from their very skeletal claim of oppression. The statement of claim simply employs the word "oppression" within a general potpourri of asserted causes of action.
[14] In our view, the motion judge was correct in finding that s. 249(3) of the OBCA does not apply, and hence, a motion for [page755] security for costs by the defendants is not barred because of that provision.
The issue arising because of a counterclaim
[15] The motion judge dismissed the appellant defendants' (plaintiffs by counterclaim) motion for security for costs. There is some uncertainty as to the reasons of the motion judge in doing so. There are two possible ratios to his decision. In our view, with respect, either ratio is incorrect and constitutes an error in law.
[16] First, his decision appears to suggest that a plaintiff will be protected from posting security for costs any time a defendant raises a counterclaim. He stated that
The decisive consideration on this motion is the issue created by the fact that the Defendants have made a counterclaim against the Plaintiffs[.] . . . . .
In any event, the fact that the Defendants have made a counterclaim against the Plaintiffs which the Plaintiffs have defended against introduces an issue which is decisive for this motion.
[17] If this is the ratio to the decision of the motion judge then, with respect, in our view his decision is incorrect in law. Indeed, the unfair consequence to such an approach is that a defendant would have to choose between seeking an order for security for costs and initiating a counterclaim.
[18] The motion judge relied upon the decision in ICC International Computer Consulting & Leasing Ltd. v. ICC Internationale Computers & Consulting GmbH, 1989 9525 (FC), [1989] O.J. No. 70, 33 C.P.C. (2d) 40 (H.C.J.), at p. 43 C.P.C. ("ICC").
[19] At p. 43 C.P.C., Anderson J. stated:
It is trite to state that an order for security for costs is discretionary. No party should have to give security for costs as a condition of defending itself: see Toronto- Dominion Bank v. Szilagyi Farms Ltd. (1988), 1988 4745 (ON CA), 65 O.R. (2d) 433 (C.A.). The discretion may be exercised against a defendant, plaintiff by counterclaim . . . .[I]t would appear that the discretion is not exercised to make an order against a plaintiff by counterclaim, the subject matter of which is closely related to the plaintiffs' alleged cause of action.
[20] In our view, ICC stands for the proposition that the nature of a counterclaim may be considered as one factor determining whether security is to be posted by the plaintiff of the counterclaim and if so, the amount thereof. More generally, it iterates the fundamental principle that no party should have to give security for costs as a condition of defending itself. However, the existence of the counterclaim does not in itself automatically prevent a defendant/plaintiff by counterclaim from obtaining an order for security for costs against the plaintiff to the main action. [page756]
[21] In Toronto-Dominion Bank v. Szilagyi Farms Ltd. (1998), 1988 4745 (ON CA), 65 O.R. (2d) 433, [1988] O.J. No. 1223 (C.A.), Morden J.A. in Chambers noted that a defendant cannot be obliged to give security for costs. He referred to the reasoning of Field J. in Mapleson v. Masini (1879), 5 Q.B.D. 144 (Div. Ct.), at pp. 147, 148, that a defendant/plaintiff by counterclaim "ought not to be called upon to give security for costs" where the defendant [plaintiff by counterclaim] counterclaims "for damages arising out of the same transaction". That is, the counterclaim in substance is seen as a reiteration of the defence to the claim in the underlying main action.
[22] Anderson J. in ICC was speaking of a motion seeking security for costs against a plaintiff by counterclaim. More recently, J.I. Case Canada, a Division of Tenneco Canada Inc. v. Gowland's Recreation and Farm Ltd., [1998] O.J. No. 323, 56 O.T.C. 42 (Gen. Div.) involved a like situation. These cases are in contrast to the case at hand inasmuch as a plaintiff by counterclaim is not in the same position as an initiating plaintiff in the underlying main action.
[23] The existence of a counterclaim raising the same issues as the defence to the initiating plaintiff's claim is a relevant fact to be considered in the exercise of discretion when considering whether to order security for costs against the plaintiff by counterclaim. See ICC, supra.
[24] However, the fact of a counterclaim should not be a relevant factor for consideration by the court in exercising discretion in respect of a motion for security for costs against an initiating plaintiff in the main action.
[25] We agree with the statement of Master Polika in U.S. Benefits Corp. v. Ingle Wright Benefits Inc., [2000] O.J. No. 170, 47 C.P.C. (4th) 143 (S.C.J.), at para. 7:
[I]f there was no counterclaim advanced, a foreign plaintiff, absent any special factors, is required to post security for costs. The plaintiff . . . is deemed to know that security for costs . . . could be sought . . . [and] that a counterclaim could be advanced . . . . For the purposes of the Rules . . . there are two actions . . . [T]he only derogation from the basic principle, that a foreign plaintiff absent special factors is required to post security, would be that any security ordered does not include costs in respect of the [initiating plaintiff defending the] counterclaim. To include such costs would be to require security to be posted [by the defendant by counterclaim] as a condition of defending itself . . . .
[26] Hence, where "the majority of the counterclaim is the equivalent of a defence to the plaintiff's claim . . ." security for costs can be required to be posted by the initiating plaintiff. Hubbell Special Products Inc. v. Carroll Healthcare Inc., 2005 377 (ON SC), [2005] O.J. No. 49, [2005] O.T.C. 9 (S.C.J.), at para. 14. [page757] See also Pondwood Realty Inc. v. Piller Investments Ltd., [1999] O.J. No. 275, 85 O.T.C. 365 (Gen. Div.), at para. 29.
[27] The corporate plaintiffs in the Wilkings action have the right to defend the counterclaim brought against them. They cannot, of course, be required as defendants to post security as a condition of defending the counterclaim.
[28] The corporate plaintiffs argue that if the issues in their defence of the counterclaim are the same issues which arise in advancing their own claim in the main action then that factor may properly be considered in determining a motion that they provide security for costs in respect of their claim as plaintiffs in the main action. We disagree. Rule 56.01(1) as it relates to an initiating plaintiff posting security for costs should not be impacted by the fact of a counterclaim and even if the counterclaim raises the same issues as set forth in the initiating plaintiffs' claim.
[29] In summary, a defendant has the right to defend without having to post security for costs. It is only a plaintiff who may be required to post security. Likewise, a defendant to a counterclaim cannot be required to post security to mount its defence to the counterclaim. A plaintiff by counterclaim can be required to post security. It is a relevant factor in exercising discretion as to whether a plaintiff by counterclaim is required to post security to consider whether or not the counterclaim is in substance a reiteration of the plaintiff by counterclaim's defence to the main action. If it is, the court may exercise its discretion to deny the motion by the defendant by counterclaim that the plaintiff by counterclaim post security for costs or qualify the amount of security to otherwise be posted. Any initiating plaintiff required to post security cannot be required to include in the security posted any amount for costs related to being a defendant to a counterclaim.
[30] Second, the motion judge found that the "the defence [to the counterclaim] is closely related to" the statement of claim and this may have been the ratio for his decision.
[31] The motion judge stated:
By making the counterclaim, the Defendants have effectively called on the [corporate] Plaintiffs to defend if they wish to, and [they have] . . . . Their defence is closely related to their [the corporate plaintiffs] statement of claim as is reflected in their Reply and Defence to Counterclaim at paras. 53 and 97. It appears to me that the principle in ICC is applicable here. It is fair and it should be followed.
[32] We disagree. In our view, this finding constitutes an error in law. If the counterclaim raises issues that are closely related to [page758] the defence of the main action then that would be a relevant factor in a consideration as to whether the plaintiffs by counterclaim should be required to post security for costs if such a motion were before the court. However, in our view, it is not a relevant factor in determining whether or not the initiating plaintiffs should post security for costs.
[33] For the purpose of this analysis we have assumed, as the motion judge found, that the defence to the counterclaim is closely related to the corporate plaintiffs' statement of claim.
[34] However, although it does not change our reasoning or the result, we point out that in fact there is arguably a significant disconnect between the corporate plaintiffs' claim in the main action and their defence to the counterclaim. As well, there is also some disconnect as between the named parties to the various pleadings.
[35] The corporate plaintiffs (together with the individual plaintiff) in their statement of claim (paras. 1(a) and (b), 27, 28 and 34) claim damages for breach of contract, breach of trust, unlawful interference with economic and contractual relations, conspiracy, oppression, loss of business opportunity and for slander and defamation. The corporate plaintiffs also allege (paras. 20 and 21 of their statement of claim) that there is a creditor-debtor relationship between them and the defendants and they ask (para. 1(f)) for an order that the defendants repay the debts. In contrast, as will be seen, the three corporate plaintiffs have a limited role as defendants to the counterclaim brought by Kartways and DFAD.
[36] The 13 defendants to the main action who have filed the statement of defence under consideration (i.e., the statement of defence of all defendants save Velocity) make a general denial in their defence and also (paras. 9, 10, 11 and 19) claim misappropriation of moneys by Wilkings and his family from Kartways and DFAD. In their capacity as the two plaintiffs by counterclaim (para. 29), Kartways and DFAD repeat these allegations, claiming fraudulent misappropriation, deceit, breach of contract, breach of fiduciary duty, oppression, misappropriation of corporate opportunity, seek the return of corporate records and seek injunctive relief as well as general, aggravated and punitive damages. However, the two plaintiffs by counterclaim, Kartways and DFAD, state (para. 50) they have joined as defendants to the counterclaim the three corporate plaintiffs simply on account of them being in receipt of moneys allegedly misappropriated by Wilkings and his family and in support of an equitable tracing order. [page759]
[37] The reply and defence to the counterclaim repeats (para. 53) the allegations of the statement of claim, denies (para. 45) any misappropriation of funds and reiterates the allegation of the statement of claim that there was an agreed-upon business plan which was derailed because of a dispute within the family who owned the corporate defendants to the main action.
[38] Thus, there are 13 defendants to the main action who move for security for costs against the three corporate plaintiffs. Only two of these 13 defendants, Kartways and DFAD, are plaintiffs by counterclaim. The counterclaim asserts a scattergun blast of claims against seven defendants (including as defendants to the counterclaim the three corporate plaintiffs of the main action). However, the three corporate plaintiffs as defendants in the counterclaim have a very limited role, being included simply in support of an equitable tracing order in respect of the alleged misappropriated funds by the four individual defendants to the counterclaim. Disposition
[39] For the reasons given, the appeal is allowed. With respect, in our view, the motion judge was in error in his interpretation of the law in respect of the motion before him. He erred in the principle of law that was applicable. For the reasons given, his order is set aside.
[40] It is apparent the motion judge concluded that the appellant defendants "have shown good reason to believe there are insufficient assets" on the part of the corporate plaintiffs and would have made an order for security for costs but for his erroneous finding of the impact of the counterclaim. We agree with this conclusion given our finding that an order for security for costs against the corporate plaintiffs is to be granted.
[41] The estimated costs by the appellant defendants to the completion of the trial are $360,000. The appellant defendants seek an installment security order in the amount of $40,000 to the completion of discoveries.
[42] Notwithstanding that the statement of claim makes a scattergun approach of alleged claims on behalf of all the plaintiffs, a careful reading of the pleadings suggests the three corporate plaintiffs in reality probably have at most a claim for moneys loaned and not repaid. (This may have been why the motion judge referred to the defence to the counterclaim as being closely related to the corporate plaintiffs' claim in the main action.) The point is, in reality it seems probable that it is the individual plaintiff who is the main plaintiff party. [page760]
[43] Bearing in mind the lesser role played by the three corporate plaintiffs, an installment security order is granted against the three corporate plaintiffs in the amount of $20,000 to the completion of discoveries, with the appellant defendants to have the right to revisit the issue at the conclusion of discoveries.
[44] An order will issue in accordance with these reasons.
[45] Submissions were made as to costs depending upon the outcome. The parties agreed to the following disposition in respect of costs (with one exception) if we were to allow the appeal. We fix costs payable to the moving party appellant defendants for the hearing of the motion before the motion judge on a partial indemnity scale of total fees of $14,000 plus disbursements as in the bill of costs plus applicable GST, payable by the corporate plaintiffs on a joint and several basis in any event of the cause after trial. We fix costs in respect of the successful "leave to appeal" motion payable to the appellant defendants at $2,000 inclusive of GST and all disbursements, payable in any event of the cause after trial on a joint and several basis by the three corporate plaintiffs. Notwithstanding the submissions of counsel in respect of the quantum of costs to be awarded in respect of the successful appeal, we have fixed a lower quantum because, in our view, considering all the circumstances, the lower quantum awarded is reasonable and fair. We fix costs in respect of the successful appeal at $7,500 inclusive of GST and all disbursements, payable in any event of the cause after trial to the appellant defendants on a joint and several basis by the three corporate plaintiffs.
Appeal allowed.