Unique Labeling Inc., c.o.b. International Private Beverage v. GCAN Insurance Company et al.

[Indexed as: Unique Labeling Inc. v. GCAN Insurance Co.]

98 O.R. (3d) 233

Court of Appeal for Ontario,

Weiler J.A. (in Chambers)

July 24, 2009

Civil procedure -- Costs -- Security for costs -- Defendants' pre-trial motion for security for costs dismissed -- Master finding that plaintiff was impecunious but that its action was not without merit -- Plaintiff unsuccessful at trial and appealing -- Defendants seeking security for costs of appeal -- Issue of security for costs not res judicata -- Order for security for costs granted.

The plaintiff obtained a judgment in Oregon. When it was unsuccessful in collecting on that judgment, it brought an action in Ontario against the insurers of the defendants in the Oregon action pursuant to s. 132(1) of the Insurance Act, R.S.O. 1990, c. I.8. The Ontario defendants moved for security for costs. The Master dismissed the motion, finding that the plaintiff was impecunious, but that its action was not without merit. The plaintiff was unsuccessful at trial. It appealed. The defendants brought a motion for security for costs of the appeal. The plaintiff submitted that the issue of security for costs was res judicata.

Held, the motion should be granted.

The issue of security for costs was not res judicata. A motion for security for costs prior to trial comes at a very preliminary stage where the likelihood of the outcome is difficult to assess. The situation is different once the trial has concluded. At that point, a judge who has had the benefit of hearing all of the evidence has made a decision and given reasons for his findings. Based on the trial judge's assessment of the evidence in this case, the defendants had an Ontario judgment in their favour. In order for the plaintiff to have its day in court, the defendants had already put out considerable time and money. It did not necessarily follow that they ought to be called on to invest more time and money without the possibility of recovering any of their costs in the event that the appeal was unsuccessful. The plaintiff was a foreign corporation with insufficient assets in Ontario to pay a costs award. It failed to establish that it would be without funds to prosecute the appeal if it was req uired to post security for costs.

MOTION for security for costs.

Cases referred to ABI Biotechnology Inc. v. Apotex Inc., 1995 CanLII 16103 (MB CA), [1995] M.J. No. 294, [1995] 8 W.W.R. 562, 102 Man. R. (2d) 108, 33 C.B.R. (3d) 307, 41 C.P.C. (3d) 394, 56 A.C.W.S. (3d) 799 (C.A.); Coastline Corp. v. Canaccord Capital Corp., 2009 CanLII 21758 (ON SC), [2009] O.J. No. 1790 (S.C.J.); Smith Bus Lines Ltd. v. Bank of Montreal (1987), 1987 CanLII 4190 (ON SC), 61 O.R. (2d) 688, [1987] O.J. No. 1197, 20 C.P.C. (2d) 38 (H.C.J.) [page234]

Statutes referred to Insurance Act, R.S.O. 1990, c. I.8, s. 132, (1)

Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rules 56.01, (1) (a), (d), 61.06 [as am.], (1)(b) [as am.]

Authorities referred to Archibald, Hon. Jus. Todd L., and Christan Vernon, "The End of the Action at its Beginning: The Relationship between Security for Costs Motions and the Insolvent Corporate Plaintiff" in Hon. Jus. Todd L. Archibald & Hon. Jus. Randall Scott Echlin, eds., Annual Review of Civil Litigation, 2009 (Toronto: Carswell, 2009)

Donald J. Ross and Christopher Stanek, for appellant. James G. Norton and Marian Van Hoek, for respondent GCAN Insurance Company. Marcus B. Snowden and Fabia Wong, for respondent Economical Mutual Insurance Company.

[1] WEILER J.A. (in Chambers): -- The respondents, Gerling Canada Insurance Company ("GCAN") and Economical Mutual Insurance Company ("Economical"), seek an order requiring the appellant, Unique Labeling Inc. ("Unique") to post the total amount of $490,627.16 as security for costs prior to continuing with its appeal, pursuant to rule 61.06 [of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194]. This sum includes $88,944.45 in appeal costs, outstanding costs from the trial of $395,532.19 and $6,150.52 of interest on those trial costs. The respondents argue that there is good reason to believe that Unique has insufficient assets in Ontario to pay the costs of the appeal, and thus an order for security for costs is appropriate. For the reasons given below, I grant the respondents' motion, and order Unique to post security for costs in the amount of $120,000.

Facts

[2] Unique is an American company that supplied bottled spring, carbonated and flavoured water products to the Kroger Company ("Kroger"), a grocery retailer in Oregon. The plastic bottles used by Unique were supplied by Triumbari Containers Ltd. ("TCL"), a Canadian company operated by Dominic Triumbari ("Triumbari"). The assembly of Unique's products took place in Ontario, at the Cynar Dry Company ("Cynar") bottling facility.

[3] In early 2001, Kroger terminated its business relationship with Unique due to contaminants found in the bottled water, [page235] such as sand and bacteria. Unique sued TCL, Triumbari and Cynar in Oregon, claiming they were responsible for the contaminations and thus liable for the losses Unique suffered as a result. The suit was successful, and an Oregon jury found TCL, Triumbari and Cynar liable in the amount of US$1,449,792 for negligence, breach of contract and breach of express and implied warranties. That judgment remains largely unsatisfied.

[4] GCAN and Economical insure TCL and its officers, which includes Triumbari. Cynar is insured by the ING Insurance Company of Canada ("ING"). When the appellant was unsuccessful in collecting on its judgment, it brought an action against GCAN, Economical and ING in Ontario, seeking to recover from them the amounts owed to it by TCL, Triumbari and Cynar, pursuant to s. 132(1) of the Insurance Act, R.S.O. 1990, c. I.8 (the "Act"). That section reads as follows:

132(1) Where a person incurs a liability for injury or damage to the person or property of another, and is insured against such liability, and fails to satisfy a judgment awarding damages against the person in respect of the person's liability, and an execution against the person in respect thereof remains unsatisfied, the person entitled to the damages may recover by action against the insurer in the amount of the judgment up to the face value of the policy, but subject to the same equities as the insurer would have if the judgment had been satisfied.

[5] That action was dismissed. The trial judge found that Unique could not make use of s. 132(1) of the Act, as that section only applies where the damages were awarded "for injury or damage to the person or property of another". The trial judge found that the Oregon award was solely for economic loss, rather than damage to property. He further found that, as any alleged contamination occurred while the bottled water products were in the possession of TCL or Cynar, the contamination did not occur to the "property of another". Unique settled with ING after the trial, but is appealing the trial judge's decision in respect of GCAN and Economic. Finally, the trial judge also held that the Economical and ING policies did not cover losses of the sort at issue in the trial.

[6] The respondents argue that there are two bases on which Unique should be ordered to post security for costs. First, pursuant to rule 56.01(1)(a), they submit that Unique is ordinarily resident within Oregon, rather than Ontario. Second, pursuant to rule 56.01(1)(d), the respondents argue that there is good reason to believe that Unique has insufficient assets in Ontario to pay the respondents' costs in the appeal. The respondents allege that Unique last actively conducted business in 2004 and has no assets other than this lawsuit. Rule 61.06(1)(b), which deals with security for costs of an appeal, provides that any basis for [page236] ordering security for costs under rule 56.01 also serves as a basis for ordering security for costs under rule 61.06.

[7] In support of their motion, the respondents note that Unique was ordered to post security for costs to ING prior to the underlying trial in the amount of $75,000. This sum was provided by Mr. Suh, a friend of the principals of Unique, and Dawson & Dawson, Unique's U.S. counsel. Unique has a contingency fee agreement with Dawson & Dawson, and the respondents submit that Dawson & Dawson thus has an interest in the litigation. After ING successfully received a security for costs award before trial, the respondents brought a motion to receive the same. This motion was denied. The respondents submit that this was because they neglected to cross-examine Unique, with the result that the Master accepted Unique's claim that the subsequent security for costs orders would prevent it from carrying on with the litigation.

[8] In anticipation of Unique's claim that it is impecunious, and that an order to post security for costs would prevent it from proceeding with the appeal, the respondents submit that there is no credible evidence that Unique's principals, Lance and Jeffrey McClelland, either do not have access to funds or that an injustice would result if Unique were not allowed to proceed with the action.

[9] Before dealing with these issues, I must deal with Unique's primary submission that the issue of security for costs is res judicata.

Issues

I. Is the issue of security for costs res judicata?

[10] Unique submits that the issue of security for costs is res judicata because Economical and GCAN's motion for security for costs prior to trial was dismissed. In dismissing that motion, the Master held that Unique was impecunious but that its action was not without merit. That decision was not appealed.

[11] There is no doubt that res judicata can apply to an interlocutory order. Unique submits that the issue of security for costs has been decided between the same parties on an interlocutory motion, and is res judicata because an appeal is not a new proceeding.

[12] None of the authorities submitted by Unique in support of its position were directly on point, nor were they of much assistance by analogy. This may be because the circumstances respecting a motion for security for costs before and after a trial are not the same. A motion for security for costs prior to trial is normally heard after pleadings have been closed, and often before any form of discovery has taken place. It comes at a very preliminary stage [page237] where the likelihood of the outcome is much more difficult to assess. Thus, prior to trial, the merits of the action have a role to play, but the analysis is based primarily on the pleadings, evidence filed on the motion and, where available, to selected portions of the examination for discovery: Coastline Corp. v. Canaccord Capital Corp., 2009 CanLII 21758 (ON SC), [2009] O.J. No. 1790 (S.C.J.), at paras. 7(v), (vi) and (vii). In this case, Unique also had the advantage of a foreign judgment based on a jury verdict in its favour.

[13] The situation is different once the trial has concluded. At this point, a judge who has had the benefit of hearing all of the evidence has made a decision and given extensive reasons for his findings. Those findings are entitled to deference by an appellate court in the absence of any palpable and overriding error. Based on the trial judge's assessment of the evidence in this case, GCAN and Economical have an Ontario judgment in their favour. GCAN and Economical were respectively awarded $185,532.19 and $210,000 in trial costs inclusive of GST. Thus, in order for Unique to have its day in court, GCAN and Economical have already put out considerable time and money. It does not necessarily follow that they ought to be called on to invest more time and money without the possibility of recovering any of their costs in the event that Unique's appeal is unsuccessful. Unique's submission that the motion for security for costs pending the hearing of its appeal is res judicata is dismissed.

II. The supplementary affidavit

[14] After GCAN and Economical delivered their motion record and Unique had delivered its motion record in response, GCAN and Economical conducted cross-examinations in writing and received the answers on July 13, 2009. GCAN and Economical's facta and books of authorities needed to be served and filed with this court on July 13, 2009. On the morning of July 16, 2009, Unique sent a supplementary affidavit of Lance McClelland by fax to counsel for GCAN and Economical. No explanation for the late delivery of the affidavit was proffered. GCAN and Economical opposed its admission on the basis that Unique was trying to repair the inadequacies in its case pointed out in the facta of GCAN and Economical. The supplementary affidavit elaborates on statements made in earlier affidavits respecting the financial situation of Lance McClelland and his brother Jeffrey, and is relevant evidence.

[15] I exercised my discretion and admitted the supplementary affidavit, at the same time offering an adjournment to counsel for GCAN and Economical if they wished to cross-examine on it. They declined. [page238]

III. Is Unique without access to funds to prosecute its appeal?

[16] There is no issue that Unique is a foreign corporation with insufficient assets in Ontario to pay a costs award. Inasmuch as Unique asserts that it will be without funds to prosecute its appeal if it is required to post security for costs, it bears the burden of establishing this impecuniosity. Unique is required to show that its principal shareholders, Lance and Jeffrey McLelland, who stand to benefit from any award in Unique's favour, cannot post security for costs and have no internal or external access to funds. Complete financial disclosure is required with supporting documentation.

[17] Lance McLelland's supplementary affidavit, filed on behalf of himself and his brother, deposes that they each have about a 10 per cent interest in Giumarra and Associates Beverage Company ("Giumarra") through their respective partial ownership interests in Synergy Group LLC ("Synergy"), one of the partners in Giumarra. Giumarra posted a loss last year. Other than the bald statement that Synergy has no other business than as a partner in Giumarra, no information as to Synergy's financial condition is disclosed. The extent of the McLellands' interest in Synergy is not disclosed. The balance sheet of Giumarra shows that Synergy contributed $1,123,795 in capital to Giumarra in 2008, several months after the motion for security for costs brought before trial.

[18] In light of the lack of information provided to this court regarding the McLellands' interest in Synergy or Synergy's financial condition, I find that Unique has not discharged its burden of establishing that it does not have access to the means to post security for costs.

[19] In view of my conclusion, it is not necessary for me to deal with the argument of GCAN and Economical that Dawson & Dawson should be required to post security for costs. In any event, I note that the answer given in cross-examination as to whether the McLellands could access funds from Dawson & Dawson to post security for costs was that the firm had declined to provide these funds.

IV. Will injustice result?

[20] If the corporate plaintiff fails to discharge its evidentiary burden of showing it has no access to funds to post security for costs, Ontario courts do not appear to inquire into the merits of the appeal or consider other factors: see Smith Bus Lines Ltd. v. Bank of Montreal (1987), 1987 CanLII 4190 (ON SC), 61 O.R. (2d) 688, [1987] O.J. No. 1197 (H.C.J.) ("Smith"), at p. 706 O.R.; The Honourable Mr. Justice [page239] Todd L. Archibald and Christian Vernon, "The End of the Action at its Beginning: The Relationship between Security for Costs Motions and the Insolvent Corporate Plaintiff" in The Honourable Mr. Justice Todd L. Archibald and The Honourable Mr. Justice Randall Scott Echlin, eds., Annual Review of Civil Litigation, 2009 (Toronto: Carswell, 2009) (forthcoming), at s. G.6. This approach was specifically not followed by the Manitoba Court of Appeal in ABI Biotechnology Inc. v. Apotex Inc., 1995 CanLII 16103 (MB CA), [1995] M.J. No. 294, 41 C.P.C. (3d) 394 (C.A.), at para. 19, where other relevant factor s were considered, such as the merits of the case, the purposes of the application for security for costs, the size and nature of the corporation and the hardships to the plaintiffs if security was ordered. However, in ABI Biotechnology Inc. v. Apotex Inc., 2000 CanLII 27027 (MB CA), [2000] M.J. No. 14, [2000] 3 W.W.R. 217 (Man. C.A.) ("Apotex No. 2"), leave to appeal to S.C.C. refused [2000] S.C.C.A. No. 113, the Manitoba Court of Appeal broke with its earlier decision and adopted the same approach to this issue as the Ontario courts have taken.

[21] In Apotex No. 2, the record indicated that at least some of the shareholders of the responding party had sufficient assets to allow the responding party to abide by an order for security for costs if one were made. In Smith, the court noted that there was no evidence of impecuniosity, either on the part of the responding company or its shareholders. This case is different, as Unique's principal shareholders have sworn that they lack the assets to post security for costs, but have failed to provide sufficient information to discharge their evidentiary onus on this point. The possibility exists that Unique's principal shareholders are in fact unable to post security for costs.

[22] Security for costs orders are to be made "as is just". Even where the responding party is found to be impecunious, justice may require that party to post some security for costs. Given the aforementioned evidentiary problem in this case, and out of an abundance of caution, I propose to make some brief comment on the merits of the appeal as well as the other factors, although it is not strictly necessary for me to do so.

[23] The first ground of appeal in the Notice of Appeal is that "the trial judge erred in failing to consider the proper legal test required with respect to s. 132 of the Insurance Act". My understanding of this ground is that it raises a question of mixed fact and law. Other grounds of appeal in paras. 2-13 allege evidentiary and factual errors on the part of the trial judge. As a result of these alleged errors, para. 14 challenges four factual findings on the part of the trial judge and one legal error of interpretation respecting the exclusion clause in the insurance contract of TCL. [page240] Thus, Unique will have a high hurdle in respect of a number of the grounds of appeal it has alleged. Given the grounds of appeal, if Unique is successful on appeal, a new trial may be required.

[24] The jury awarded US$149,792 for past losses. The bulk of the award, $1,300,000, was for loss of future profits. On the basis of expert opinion regarding Oregon law, the trial judge held, at paras. 190-91 of his reasons, that these amounts were for pure economic loss and liability did not arise from property damage. At trial, the parties agreed that s. 132(1) of the Act does not extend to pure economic loss. The trial judge also decided the coverage issue against Unique. The appeal appears to be weak.

[25] Unique is now inactive, and is not in bankruptcy proceedings. The sizes of Giumarra and Synergy are unknown. For the reasons I have indicated, I am not satisfied that Unique has discharged its burden of showing it has no access to funds. I also note that Unique was able to post $75,000 in security for costs prior to trial after ING's successful motion. The evidence does not demonstrate to me that Unique would suffer hardship if required to post security for costs.

[26] Orders for security for costs on an appeal are only to be made "as is just". However, having regard to all of the factors indicated, I am of the opinion that no injustice will result from requiring Unique to post security for costs. Accordingly, the respondents are entitled to such an order.

V. The amount to be posted for security for costs

[27] Rule 61.06 enables me to "make such order for security for costs of the proceeding and of the appeal as is just".

[28] Unique submits that, as any cost order is stayed pending appeal, it ought not to have to post any security for the costs of the trial. That submission ignores the plain wording of rule 61.06. Often, however, the court will exercise its discretion and only order that costs respecting the appeal or part of the costs of the trial be posted as security.

[29] Having regard to the estimated costs of the appeal, and to the factors discussed above, I order that Unique post security for costs in the amount of $60,000 in favour of each of GCAN and Economical within 30 days of this date if it wishes to pursue its appeal. Unique shall have 30 days from this date to perfect its appeal. The amounts required as security for costs must therefore be posted before Unique's appeal is perfected.

[30] If the parties are unable to agree, they may make submissions in writing respecting the costs of this motion.

Motion granted.