COURT FILE NO.: 309/04

DATE: 20041028

SUPERIOR COURT OF JUSTICE - ONTARIO

(Divisional Court)

RE: KAWKABAN CORPORATION Plaintiff

• and -

THE SECOND CUP LTD. and JOHN DELUTIS Defendants

BEFORE: Mr. Justice Kozak

COUNSEL: Anil Varma, for the Plaintiff Jody McCormick, for the Defendants

HEARD: October 27, 2004

ENDORSEMENT

KOZAK J.:

[1] This is a motion brought on behalf of the plaintiff for an order granting leave to appeal the order of Mr. Justice Sutherland dated May 28, 2004, that required the plaintiff to pay into court the sum of $175,000 as security for the defendants’ costs.

[2] The grounds being advanced are as follows:

(1) That there is good reason to doubt the correctness of the order and that the appeal involves matters that transcend the interests of the parties (See Rule 62.02(4)(b)); and

(2) That there is a conflicting decision by another judge or court in Ontario or elsewhere on the matter involved in the proposed appeal and it is in the opinion of the judge hearing the motion desirable that leave be granted (See Rule 62.02(4)(2)).

BACKGROUND

[3] The plaintiff Kawkaban Corporation with Paul Dahlin as its sole shareholder entered into a franchise agreement with the defendant The Second Cup Ltd. part-way through an existing lease. Negotiations between the landlord and the defendants were not productive and as a result the commercial lease terminated and the Franchise Agreement expired.

[4] As a result of the expiration of the Franchise Agreement and commercial lease the plaintiff commenced the herein action, seeking damages in the amount of $1,500,0000 for damages for breach of contract and negligent misrepresentation. The matter is scheduled to proceed to trial before a court composed of judge and jury for ten days.

[5] As a result of complying with undertakings, including its financial statements for the years 1997 to 2000, it was disclosed that the plaintiff’s operations produced a net loss in each of its fiscal years over the four-year period. Its consolidated deficit as at January 31, 2000 was $212,595, its cash position was $37, its assets totaled $2,435 and its liabilities were $214,930.

[6] The defendants brought a motion before Sutherland J. for security for costs. The plaintiff admitted that it did not have sufficient assets in Ontario to cover the defendants’ costs if they were successful. The only evidence before Sutherland J. as to the financial position of Mr. Dahlin the sole shareholder of the plaintiff company was the following statement in his affidavit:

If Kawkaban is required to post security for costs as requested it will be unable to do so and this action will not be able to proceed. I have made other long term financial commitments over the last year which preclude posting security for costs in this action at this late stage of the proceeding.

[7] The Motions Court judge allowed the defendant’s motion for security for costs and ordered the plaintiff to pay into court the following sums:

June 2, 2004 - $75,000 August 27, 2004 - $50,000 Sept. 24, 2004 - $50,000 TOTAL $175,000

[8] In brief reasons dated May 28, 2004 the Motions Court judge stated that there is an onus on the plaintiff to show that the plaintiff is impecunious as defined in Smith Bus Lines v. Bank of Montreal (1987), 61 O.R. (2d) 688 at pp. 704 and 705 and in the decisions there referred to. The plaintiff has not met that onus. Sutherland J. states that its assertions of inability to proceed and of inability of the plaintiff’s principle to provide security is a bald assertion giving no indication of the principal’s assets or liabilities or ability to borrow. Costs of the motion were awarded to the defendant in the amount of $3000.

[9] Under Rule 62.02(4)(b), plaintiff’s counsel argues that there is good reason to doubt the correctness of the order. In this regard, it was submitted that the Motions Court judge applied the wrong principles and/or misapprehended the facts in concluding that the plaintiff had not satisfied the onus of showing that the money for security for costs was not available from the moving party’s shareholder and in failing to consider the merits of the case and other relevant factors.

[10] Counsel for the defendants submitted that there is no good reason to doubt the correctness of the order under Rule 62.02(4)(b) in that the Motions judge properly exercised his discretion under Rule 56.01. In order to discharge its onus a plaintiff is required to lead evidence to demonstrate its impecuniosity and establish that it is unable to raise funds or post security. It is further contended that there was no need to review the merits because the plaintiff did not establish that it was impecunious.

[11] This court is of the view that it is debatable as to whether plaintiff’s evidence on the motion was sufficient to discharge its onus that it was impecunious. An issue as that which confronted Sutherland J. transcends the interests of the parties and requires clarification and development in the law as to the extent of the evidence required and whether the merits of the case and other factors should be considered even if there is a finding that the plaintiff is not impecunious.

[12] Under the provisions of Rule 62.02(4)(2), counsel for the plaintiff submits that the decision of Sutherland J. conflicts with the decision of the Divisional Court in Creekside v. Propco; the decision of Justice Nordheimer in Aviaco International Leasing Ltd. v. Boeing Canada Ltd. and the 1995 decision of the Manitoba Court of Appeal in ABI Biotechnology Inc. v. Apotex Inc.; which say that the discretionary order as to costs must be exercised by considering all matters which will assist the court in making an order that is just. For these reasons, it is desirable that leave be granted to clarify and develop this principle.

[13] Accordingly, it is the order of this court that leave be granted to the plaintiff to appeal the decision of Sutherland J. dated May 28, 2004 to the Divisional Court and that the said order be stayed pending the hearing of this appeal.

[14] Costs to the plaintiff to be fixed at $3,500.

[15] Order to issue accordingly.

KOZAK J.

DATE: 20041028