SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-10-396672
DATE: 20120224

RE: Pickering et al. v. Asquith

BEFORE: Master Glustein

COUNSEL:
Syed Ali Ahmed for the plaintiffs

Andrew J. MacDonald for the defendant

HEARD: February 21, 2012

REASONS FOR DECISION

[ 1 ] The defendant, Neil Asquith (“Asquith”) brings this motion for security for costs in the amount of $68,500 from the plaintiffs Steven Pickering (“Pickering”), 2180650 Ontario Inc. (“218”), and Donnington Park Motors Ltd. (“Donnington”) (collectively, “the plaintiffs”) pursuant to Rule 56.01(1) (c) of the Rules of Civil Procedure , R.R.O. 1990, Reg. 194 (the “ Rules ”). For the reasons discussed below, I dismiss the motion.

[ 2 ] On October 30, 2008, Asquith issued a notice of application against the plaintiffs (as respondents) and another respondent, Peter Yeung (the “Application”). Asquith sought an order in the Application to enforce a Share Purchase Agreement dated June 24, 2008 (the “SPA”), pursuant to which Pickering [1] agreed to purchase Asquith’s shares in Donnington.

[ 3 ] The Application was settled by a consent judgment between Asquith and the plaintiffs dated December 12, 2008 (the “Consent Judgment”), pursuant to which Pickering became the owner of Donnington [2] by the terms of the Consent Judgment ordering that the plaintiffs pay Asquith $110,446.57 and that all of the respondents jointly pay costs in the amount of $15,000.

[ 4 ] The plaintiffs only paid a small part of the costs ordered in the Consent Judgment. [3] The balance of the costs remains unpaid.

[ 5 ] Asquith relies on Rule 56.01(1) (c) and seeks security for costs since the costs ordered against the plaintiffs pursuant to the Consent Judgment remain unpaid in part.

[ 6 ] However, the analysis on a motion for security for costs is not limited to a determination of whether the requirements under Rule 56.01(1)(a) to (e) have been met. In the present case, the analysis is not limited to whether the costs ordered under the Consent Judgment remain unpaid.

[ 7 ] Rule 56.01(1) provides the court with discretion not to make an order for security for costs even if the factors under the Rule are met. In particular, the court “may” make an order for security for costs but is not required to do so.

[ 8 ] Once the defendant shows that it appears that one of the factors under Rule 56.01(1) exists, the court will then inquire into all factors which may assist in determining the justice of the case ( Lee v. Toronto Housing Co. , [2011] O.J. No. 3372 (S.C.J. – Mast.) at para. 11 ). The court has a “wide discretion which should ultimately be exercised prudently, reasonably and in the interests of justice” ( Paul v. General Magnaplate Corp. , [1996] O.J. No. 4105 (Gen. Div.) ).

[ 9 ] The merits of the case are a factor for the court to consider when exercising discretion. Justice Kiteley stated the governing principle in Padnos v. Luminart Inc. , 1996 ON SC , [1996] O.J. No. 4549 (Gen. Div.) (“ Padnos ”) as follows:

Merits have a role in any application under rule 56.01, albeit in a continuum; for example, rule 56.01(1) (a) would be at the low end and rule 56.01(1) (e) would be at the high end.

[ 10 ] Neither party provided any authority as to the role of the merits under Rule 56.01(1) (c). The plaintiffs submitted that the merits should be fully canvassed and that security for costs should not be ordered if the plaintiffs could establish that their case was not frivolous and vexatious, as under Rule 56.01(1)(e). Asquith submitted that the merits should have a limited role and that security for costs should be ordered unless the responding parties could establish an “overwhelming” or “strong” case, as under Rule 56.01(1)(a). I find that both positions are too extreme.

[ 11 ] To allow the plaintiffs to avoid security for costs under Rule 56.01(1)(c) simply by establishing that their case is not frivolous and vexatious would shift the role of merits to the very highest under the continuum contemplated in Padnos , i.e. the role under Rule 56.01(1) (e) which requires the court to consider the merits in detail if the court concludes that the action is frivolous and vexatious.

[ 12 ] However, the requirement that a defendant establish that a claim is frivolous and vexatious is an explicit requirement to obtain security for costs under Rule 56.01(1)(e), so the defendant must meet the extremely high threshold of establishing that a case is devoid of merit [4] and as such the court must review the evidence in considerable detail if that conclusion is to be reached. Given that the “frivolous and vexatious” requirement is stated as a component of Rule 56.01(1) (e), the plaintiffs’ position effectively incorporates the same statutory language into Rule 56.01(1) (c) which does not contain that requirement.

[ 13 ] Conversely, Asquith’s position that the role of the merits is at its lowest under Rule 56.01(1) (c) is inconsistent with the other subheadings under Rule 56.01(1) . If a party is a non-resident and there is no reciprocal enforcement legislation, then concerns about an inability to collect costs is at its highest under Rule 56.01(1)(a), and as such if security for costs is not to be ordered, the court must be satisfied on the strongest evidence of the merits of the case. In those circumstances, it is logical that the role of the merits would be at the lowest threshold and that conversely the standard for the plaintiff to establish the strength of the case would be at its highest threshold.

[ 14 ] However, a failure to pay an outstanding costs order does not engender the same level of concern about an inability to collect costs as collection from a non-resident with no reciprocal enforcement legislation, although it does raise some concern on the ability to collect a costs award. Consequently, the merits of a claim have a greater role under Rule 56.01(1) (c) than when the court considers whether an order for security for costs is just under Rule 56.01(1)(a), and conversely the plaintiff would have a lower threshold under Rule 56.01(1)(c) to establish the merits of the case.

[ 15 ] Neither party provided any case law as to the strength of the merits that a court ought to consider when determining whether security for costs is a “just” order under Rule 56.01(1)(c). I find that the importance of the merits falls within the continuum between Rule 56.01(1)(a) and (e), and slightly closer to Rule 56.01(1)(a) given that some concerns about collection of costs arise from a failure to pay a costs order.

[ 16 ] Consequently, I find that if the plaintiff on a Rule 56.01(1) (c) motion can establish a good likelihood of success on its claim based on the evidence, the court can consider the merits in determining whether it is just to order security for costs.

[ 17 ] I now review the merits of the plaintiffs’ case on the evidence before me.

[ 18 ] Pursuant to article 3.01 of the SPA, Asquith “represents and warrants” that “[Donnington] does not have any outstanding indebtedness or any liabilities or obligations (whether accrued, contingent or otherwise) …other than those reflected, disclosed on, provided for, or reserved against in the Financial Statements and Balance Sheet” (article 3.01(g)) [5] .

[ 19 ] Pursuant to a Statutory Declaration signed by Asquith and dated June 30, 2008 (the “Statutory Declaration”), Asquith represented that:

(i) “I am the sole shareholder and director of [Donnington]”;

(ii) “I have reviewed with my lawyer … the [SPA]”; and

(iii) “I confirm that all the statements, representations and warranties contained in the [SPA] are true and correct to the best of my knowledge”.

[ 20 ] In the present case, Pickering swore an affidavit in which he stated:

(i) “The present claim was initiated to set aside the [Consent] Judgment because, after I took control of Donnington, I discovered that specific representations and warranties made by Asquith in the SPA were false”;

(ii) “Specifically, I found that Asquith had fraudulently concealed and failed to disclose various outstanding liabilities, indebtedness, litigation and other obligations of Donnington’s that existed prior to June 30, 2008 or incurred by Asquith after June 30, 2008 before the [Consent] Judgment …These undisclosed liabilities are contrary to Schedule 3.01 (g) and (q) of the SPA where Asquith represented and warranted that there were no undisclosed liabilities or pending/in progress litigation against or relating to Donnington”;

(iii) “A partial summary of the concealed and undisclosed liabilities and obligations (principal amounts as of the date of the amended claim) of Donnington” is set out in detail and totals “approximately $100,000”;

(iv) “I discovered most of these outstanding liabilities in November and December 2009 when our bookkeeper conducted a review of Donnington’s file folders left by Asquith at Donnington’s premises and when various claims against Donnington began to surface”; and

(v) “Had I known of these undisclosed liabilities and obligations I and 218 would never have consented to the [Consent] Judgment naming me as the sole shareholder of Donnington. The value of these liabilities is far greater than the value of Donnington’s assets or business.”

[ 21 ] In his cross-examination, Pickering stated that “I did make an arrangement with my accountant for Mr. Asquith and Ms. Asquith to provide the financial documents to my accountant” and that “My accountant was on the premises and the documents were not provided”. Pickering’s evidence is that it was “very unlikely” that the inquiry was made after the Consent Judgment, “because Ms. Asquith was no longer there after that”.

[ 22 ] Asquith chose to file no evidence to respond to the allegations of undisclosed liabilities. Instead, Asquith relies on (i) his cross-examination of Pickering to submit that the facts are neutral at best and (ii) a legal argument that the SPA cannot be relevant to the plaintiffs’ action to set aside the Consent Judgment, to submit that the legal merits of the case are neutral at best.

[ 23 ] Consequently, Asquith submits that the neutral legal and factual merits do not support the plaintiffs’ submission that the merits of their case ought to be considered as a factor in the court’s discretion. I do not agree with Asquith’s submission.

[ 24 ] First, the transcript of Pickering’s cross-examination only demonstrates, at best, that (i) Pickering was on the premises of Donnington between June 2008 (when the SPA was to close) and December 2008 (when the parties entered into the Consent Judgment) and (ii) Pickering may have relied on Mr. Yeung with respect to reviewing financial information.

[ 25 ] However, the cross-examination transcript does not show that any of the documents reflecting the allegedly undisclosed liabilities were available for Pickering’s review. Asquith filed no evidence as to whether the allegedly undisclosed liabilities were disclosed. Further, even if the documents were available, a vendor cannot breach a warranty that there are no undisclosed liabilities simply by providing a purchaser with the “opportunity to uncover the lie” ( 1018429 Ontario Inc. v. FEA Investments Ltd. , 1999 ON CA , [1999] O.J. No. 3562 (C.A.) at para. 19 ).

[ 26 ] Consequently, the court is left with uncontested evidence that there was a breach of the warranty in the SPA and that the undisclosed liabilities total approximately $100,000, an amount which (on the uncontested evidence before me) is “far greater” than the value of Donnington’s business. On the basis of the evidence before me on the motion, I find that there is a good likelihood of success for Pickering to set aside the Consent Judgment.

[ 27 ] I also reject Asquith’s argument that the SPA cannot be relevant to Pickering’s action to set aside the Consent Judgment. In the notice of application dated October 30, 2008, which was the basis for the Consent Judgment, Asquith sought an order “declaring that the Share Purchase Agreement dated June 30, 2008 (the “SPA”) is valid and enforceable”. The Consent Judgment was dated December 12, 2008, and arose because Pickering agreed to purchase Donnington in the face of litigation seeking an order that he comply with the SPA. On the evidence before me, there is a “good likelihood” that Pickering will satisfy the court that his decision to enter into the Consent Judgment and purchase Donnington six weeks after the Application was issued was based on the warranties and representations of Asquith in the SPA.

[ 28 ] In the face of the detailed evidence filed by Pickering, it was not sufficient for Asquith to rely on the pleadings in which he denies all of the above allegations. While a motion for security for costs is not intended to become a motion for summary judgment, the settled law is that the court must consider the merits of the action as a factor to render a just result, and the failure to file responding evidence may lead the court to conclude that the plaintiff’s case has the appropriate strength of merits such that posting security for costs is unjust. This is what happened on the evidence in this case.

[ 29 ] For the above reasons, I dismiss the motion. Both counsel agreed that costs in the amount of $5,000 were reasonable given the motion records, cross-examination, factums, briefs of authorities, and research required. I agree with counsel and fix costs at $5,000, payable by Asquith to the plaintiffs within 30 days of this order.

[ 30 ] I thank counsel for their thorough written and oral submissions which were of great assistance to the court.

Master Benjamin Glustein

DATE: February 24, 2012

[1] (through one of his corporate entities to be determined)

[2] (although the uncontested evidence from the plaintiffs is that Asquith has not “transferred the issued shares of Donnington to [Pickering], or delivered Donnington’s minute book including the articles of incorporation, by-laws, resolutions, registers and share certificates”)

[3] There was some dispute as to whether the plaintiffs paid $1,000 (as Asquith submits and is supported by the evidence before me) or $3,000 (as the plaintiffs submit). The issue is not relevant to these reasons as in any event, the costs order was only paid in part.

[4] (conversely, the lowest threshold for the plaintiff on the merits of the case)

[5] Asquith also represented that “there is no suit, action, litigation, grievance, arbitration proceeding …in progress, pending or, to the best of the knowledge, information and belief (after due enquiry) of the Vendor, threatened against or relating to [Donnington] …” (article 3.01(q)), but there is no evidence that any outstanding litigation was not disclosed.