Court File and Parties

COURT FILE NO.: 56453/16 DATE: 2017/02/24

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

2311888 Ontario Inc. and Pride Homes by Fred Hendriks Inc. J. Leigh Daboll, for the Plaintiffs Plaintiffs

• and -

Nancy Ross and Frederick Ross a.k.a. Fred Ross John K. Lefurgey, for the Defendants Defendants

HEARD: February 21, 2017

CORRECTED DECISION – March 22, 2017

Counsel for the Plaintiffs has been corrected to indicate J. Leigh Daboll and Counsel for the Defendants has been corrected to indicate John K. Lefurgey. No changes to the content have been made.

The Honourable Justice J. R. Henderson

Endorsement on Motion

[1] This is a motion brought by the defendants (individually called “Nancy” and “Fred”) pursuant to Rule 56.01(1)(d) for an order that the two plaintiffs (individually called “2311” and “Pride Homes”) provide security for costs. The defendants allege that a security for costs order should be made because the plaintiffs are corporations with insufficient assets in Ontario to pay the costs of the defendants.

[2] The plaintiffs submit that the request for security for costs should be dismissed. The plaintiffs allege that they have been seriously financially compromised by the conduct of the defendants; that they have a meritorious claim against the defendants; that they are impecunious; and that an onerous security for costs order would compromise their ability to proceed with this claim.

The Background Facts

[3] In the fall of 2011 the defendants were looking to retain a builder/project manager for the construction of a residential home in Niagara-on-the-Lake. They were introduced to Fred Hendriks, the principal of Pride Homes, and thereafter engaged in negotiations with Fred Hendriks to retain the services of Pride Homes.

[4] Several draft contract documents were prepared by Pride Homes, reviewed by the defendants, and amended by the parties. The parties negotiated two separate contracts, namely a building contract and a management contract. There is no dispute that the defendants intended to act as their own general contractor and that the defendants would make all final decisions as to the work and services for the construction.

[5] The building contract listed the work and services required to complete the construction of the defendants’ home for a cost that was eventually estimated at $1,582,376.71. The management contract provided terms for the project management of the construction of the home. All draft management contracts provided that Pride Homes would be the project manager and that the remuneration would be a flat fee of $215,000 plus H.S.T.

[6] 2311 was not named in any of the draft documents prior to January 2012. In fact, 2311 was first incorporated on January 4, 2012, for the purpose of being the corporation responsible for the project management of the construction.

[7] On January 26, 2012, the final draft management contract was prepared by Fred Hendriks and signed by Nancy. The signed management contract provided that 2311 was the project manager for the construction, and that there would be a flat fee of $215,000 plus H.S.T.

[8] However, the management contract that was signed on January 26, 2012, also included a clause that is at the heart of this litigation (hereinafter called “the 15% clause”). The 15% clause read,

...any additional work or value beyond the scope of the “Budget Costs” document or value in access [sic] of $1,582,376.71 before HST will be subject to 15% additional fee for “Project Management.”

[9] The defendants claim that there had never been any discussion with respect to a 15% clause and that the plaintiffs inserted this clause into the final draft of the management contract without the knowledge of the defendants and without bringing it to the attention of the defendants.

[10] The home was constructed throughout the course of 2012 and 2013. The defendants took possession in early 2014. Thereafter, there have been significant problems related to the construction of the home, most of which are now being addressed by Tarion Warranty Corp.

[11] The defendants have paid all of the contractors who provided work, materials, and services for the construction of the home. The defendants have also paid the sum of $215,000 plus H.S.T. to 2311 as the flat fee for the project management of the construction.

[12] In this lawsuit, the plaintiffs claim that the work and services for the construction of the home exceeded the “Budget Costs” of the home by approximately $700,000. Therefore, the plaintiffs claim that the defendants owe 15% of the excess costs to 2311 for project management. Pride Homes also brings a small claim for approximately $6,000.

[13] The defendants allege that the 15% clause is invalid because the plaintiffs misrepresented the nature of the project management fee and because the plaintiffs inserted this clause into the management contract without bringing it to the attention of the defendants. The defendants also allege that the 15% clause is unenforceable as its meaning is unclear. Furthermore, in this litigation the defendants also bring a counterclaim for the cost of repairing some of the deficiencies.

The Law

[14] Rule 56.01(1)(d) reads as follows:

The court, on motion by the defendant or respondent in a proceeding, may make such order for security for costs as is just where it appears that,

(d) the plaintiff or applicant is a corporation or a nominal plaintiff or applicant, and there is good reason to believe that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent;

[15] Rule 56.01 is clearly discretionary. It provides that a judge may make an order “as is just”. This discretion requires the judge to take into account a multitude of factors, including the circumstances of the plaintiff, the impecuniosity of the plaintiff, the merits of the claim, and the possible injustice of denying a plaintiff the opportunity of having his case adjudicated. See the case of Chachula v. Baillie (2004) , 69 O.R. (3d) 175 at paras. 12-14.

[16] The present state of the law with respect to security for costs is nicely summarized in two decisions, namely the decision of Master Glustein in Coastline Corp. v. Canaccord Capital Corp. , [2009] O.J. No. 1790 at para. 7, and the decision of Master Muir in the case of 2179548 Ontario Inc. v. 2467925 Ontario Inc. , [2017] O.J. No. 246 at para. 8.

[17] In summary, the proper way to analyze a motion for security for costs is as follows:

(i) The initial onus is on the defendant to satisfy the court that it appears there is good reason to believe that the matter comes within one of the circumstances enumerated in Rule 56.01. See Hallum v. Canadian Memorial Chiropractic College (1989) , 70 O.R. (2d) 119 at p. 123;

(ii) Once the first part of the test is satisfied, the onus is on the plaintiff to establish that an order for security for costs would be unjust. See Chachula at para. 10, and Uribe v. Sanchez (2006), 33 C.P.C. (6 th ) 94 at para. 4;

(iii) The plaintiff can meet the onus by demonstrating that:

(a) the plaintiff has appropriate or sufficient assets in Ontario or in a reciprocating jurisdiction to satisfy any order of costs made in the litigation;

(b) the plaintiff is impecunious and the plaintiff’s claim is not plainly devoid of merit (See Pitkeathly v. 1059288 Ontario Inc. , [2004] O.J. No. 4125 at para. 10); or

(c) if the plaintiff cannot establish that it is impecunious, but the plaintiff does not have sufficient assets to meet a costs order, the plaintiff must satisfy the court that the plaintiff’s claim has a good chance of success on the merits. See Bruno Appliance and Furniture Inc. v. Cassels Brock & Blackwell LLP , [2012] O.J. No. 3620 at paras. 41-46.

[18] Regarding impecuniosity, if the plaintiffs wish to rely upon their own impecuniosity, the plaintiffs must provide evidence of their financial circumstances with “robust particularity”. There must be no unanswered material questions. See the case of Morton v. Canada (Attorney General) , 75 O.R. (3d) 63 at para. 32.

[19] Furthermore, the evidentiary threshold for impecuniosity is high, and bald statements unsupported by detail are not sufficient. The threshold can only be reached by tendering complete and accurate disclosure of the plaintiff’s income, assets, expenses, liabilities, and borrowing ability, with supporting documentation for each category. See the Uribe case at para. 12.

[20] Still further, a corporate plaintiff who claims impecuniosity must demonstrate that it cannot raise security for costs from its shareholders and associates, i.e. it must demonstrate that its principals do not have sufficient assets. See the case of Smith Bus Lines Ltd. v. Bank of Montreal (1987) , 61 O.R. (2d) 688 at para. 43.

Analysis

[21] I find that the defendants have proved that there is a good reason to believe that the plaintiffs fall within the circumstances set out in Rule 56.01(1)(d).

[22] 2311 is a corporation that appears to have been incorporated solely for the purpose of this construction project. There is some evidence that 2311 engaged in some work in 2016, but the total sales for 2311 in 2016 amounted to approximately $5,300, with total expenses of approximately $14,000. 2311 has no apparent assets.

[23] Pride Homes is a corporation with a longer history than 2311. Fred Hendriks and Cindy Hendriks are the only two directors and shareholders of Pride Homes. Pride Homes has been a party to numerous building contracts. However, Pride Homes is currently in financial difficulty.

[24] In May 2016, Pride Homes filed a Proposal through BDO Canada Limited under the Bankruptcy and Insolvency Act , R.S.C., 1985, c. B-3. In the Proposal, Pride Homes discloses assets of approximately $134,000 (most of which are accounts receivable), and liabilities of approximately $659,000 (including unsecured creditors’ claims of approximately $526,000).

[25] In consideration of the information provided in the Proposal, I find that Pride Homes has insufficient assets in Ontario to pay the costs of the defendants. Therefore, the onus shifts to the plaintiffs in this case to prove that a security for costs order would be unjust.

[26] The primary position of the plaintiffs is that the plaintiffs are impecunious. Counsel for the plaintiffs submits because the plaintiffs do not have sufficient assets in Ontario to pay costs, then the plaintiffs must be impecunious. With respect, that submission conflates two separate concepts. Once the defendants have established that the plaintiffs do not have sufficient assets in Ontario to pay costs, then, if the plaintiffs rely on impecuniosity, the onus is on the plaintiffs to prove impecuniosity.

[27] In order to prove impecuniosity in this case, the plaintiffs must provide robust financial disclosure such that there are no unanswered questions with respect to the plaintiffs' financial circumstances, including the ability of the plaintiffs to raise money or borrow money. This requires the plaintiffs to produce complete and accurate disclosure of the plaintiffs’ income, assets, expenses, liabilities, and borrowing abilities.

[28] In the present case, the plaintiffs have not provided the requisite disclosure. I have no financial disclosure with respect to 2311. Regarding Pride Homes, in addition to the Proposal, I have a three-page year-end financial statement for the year ending February 28, 2015 (that financial statement also includes figures for the year ending in 2014). Further, I have a one-page balance sheet as of September 30, 2016, and a one-page income statement for the nine months ending September 30, 2016. I have not been provided with any supporting or explanatory documentation for any of these financial statements. In my view, this disclosure is not enough to provide a complete and accurate picture of the financial circumstances of Pride Homes.

[29] Moreover, I have no information as to the financial circumstances of Fred Hendriks and Cindy Hendriks, the two shareholders of Pride Homes. It is obvious that shareholders have an economic interest in the wellbeing of any corporation. Therefore, on a motion for security for costs, a court must consider whether the shareholders of a plaintiff corporation have the ability to lend money to the corporation in order to permit the corporation to proceed with the litigation. Without complete disclosure as to the financial circumstances of the shareholders, I must find that the plaintiffs cannot prove impecuniosity. In that respect, see the case of Canasian Sales Corp. v. Colson , [2013] O.J. No. 1017 at para. 35.

[30] Accordingly, I find that the plaintiffs cannot prove that 2311 or Pride Homes are impecunious.

[31] Further, in the alternative, if the plaintiffs are impecunious, I do not accept that the impecuniosity has been caused by the conduct of the defendants. I acknowledge that 2311 would likely have more assets if the defendants had paid a further fee to 2311, but I note that the plaintiffs in fact paid $215,000 to 2311 as the flat fee for project management. That amount represents by far the most significant payment ever received by 2311. There is a dispute as to whether any further fee is payable pursuant to the 15% clause, but there is no obligation on the defendants to pay the disputed amount prior to a court determining the issue.

[32] With respect to Pride Homes, the only claim Pride Homes is making against the defendants is in the amount of about $6,000. Therefore, non-payment by the defendants of this amount can hardly be seen as conduct that caused Pride Homes to become impecunious.

[33] Therefore, to succeed in their defence of this motion, the plaintiffs must prove that the claim has a good chance of success on the merits. In my view, the plaintiffs can prove that the plaintiffs’ claim is not devoid of merit, but the plaintiffs cannot meet the higher standard of proving that the claim has a good chance of success.

[34] There are significant legal and factual issues in this proceeding. I accept that the fact that the plaintiffs rely upon a signed contract that includes the 15% clause will be a factor in favour of the plaintiffs. However, the ultimate decision will depend upon the trial judge’s assessment of the evidence regarding the negotiation of the management contract. This will involve an assessment of the credibility of Fred Hendriks and both the defendants, as well as careful scrutiny of the draft documents, emails, and other correspondence between the parties.

[35] Further, the fact that the 15% clause was only inserted into the last draft of the management contract, and the late incorporation of 2311, are factors that favour the defendants. I also accept that if the 15% clause is found to be part of the management contract, there will be a legal argument as to the meaning of this clause. This will involve the application of the contra proferentem rule.

[36] Overall, I find that the merits of the plaintiffs’ claim do not meet the higher threshold of a claim that has a good chance of success. Therefore, I find that the defendants are entitled to an order for security for costs.

[37] Regarding quantum, in my view it is not appropriate to order security for costs for the entire proceeding at this stage, but rather there should be an order for security for costs up to the completion of the examinations for discovery.

[38] I find that the solicitor/client fees from the commencement of this proceeding until the estimated end of examinations for discovery will be in the range of $30,000 plus H.S.T. This equates to partial indemnity fees of $18,000 plus H.S.T., in the total amount of $20,340. This amount should be posted as security for costs at this point.

Conclusion

[39] For these reasons, it is ordered that the plaintiffs pay into court as security for costs the sum of $20,340 on or before April 15, 2017. This amount represents security for costs up until the completion of all examinations for discovery without prejudice to the defendants bringing another motion for security thereafter.

[40] If there are any issues arising out of this decision, including costs, I direct that the party seeking relief shall deliver written submissions to the trial coordinator at St. Catharines within 14 days of the release of this decision with responding submissions to be delivered within 10 days thereafter. If no submissions are received within this timeframe, the parties will be deemed to have settled all of the remaining issues as between themselves.

J. R. Henderson J. Released: February 24, 2017