COURT FILE NO.: 07-CV-008908 CM
MOTION HEARD: 20120716
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Single Source Contracting Services Inc., Plaintiff
and:
Valiant Machine & Tool Inc., Defendant
BEFORE: Master Pope
COUNSEL:
Matthew R. Todd, Counsel, for the Plaintiff
Bryce A. Chandler, Counsel, for the Defendant
HEARD: July 16, 2012
REASONS FOR DECISION
1The defendant seeks an order that the plaintiff pay security for costs pursuant to rule 56.01(1) (d) of the Rules of Civil Procedure , R.R.O. 1990, Reg. 194.
Background Facts
2In its statement of claim issued April 2, 2007, the plaintiff (“Single Source”) seeks recovery of monies due under a contract for services (“Service Agreement”), entered into on November 28, 2003 with the defendant (“Valiant”). In addition to breach of contract, Single Source claims damages for intentional interference with economic relations, breach of fiduciary duties, loss of reputation, loss of future earnings and conspiracy. The subject contract involved the provision of maintenance services including electrical, plumbing, welding, HVAC and related services to various facilities owned by Valiant.
3It is Valiant’s position that it has paid all amounts invoiced by Single Source and has complied with any and all requirements pursuant to the purchase orders and agreements between the parties.
4The central issue in this action is whether the original Service Agreement was replaced with one or more revised agreements, as alleged by Valiant, whereby Single Source would no longer receive an annual fee but would be paid based on the actual costs of services performed.
5On January 4, 2012, the defendant served this motion for security for costs relying on the affidavit of Tony N. Sauro, Chief Financial Officer of Valiant, sworn December 20, 2011. Valiant also served its factum and brief of authorities on January 3, 2012.
6On March 5, 2012, Single Source served its responding material opposing the motion relying on the affidavit of Paul Robinson (“Robinson”), operations manager of Single Source.
7No reply material was delivered by Valiant in response to Robinson’s affidavit.
8On March 16, 2012, the parties agreed that Valiant’s motion would be argued on July 16, 2012.
9Cross-examinations on the affidavits filed on the motion were completed on May 22, 2012.
10On July 5, 2012, 11 days before the hearing of this motion, Valiant served and filed a supplementary moving party’s motion record. The supplementary motion record contains an eight-page, 15 paragraph affidavit of Leonard Solcz (“Solcz”), sworn July 3, 2012, which includes two exhibits; namely, the transcripts of cross-examination of Robinson and a copy of Purchase Order # 1011-020337, Revision 1, dated 2003/11/28.
11Following service of the supplementary motion record, counsel for the parties communicated wherein counsel for Single Source advised that he was opposed to Valiant filing the affidavit of Solcz for use on this motion. Thereafter, counsel for Valiant offered to make Solcz available for cross-examination of his affidavit at Valiant’s cost, to pay the cost of the transcript and that Valiant would be seeking leave to file the affidavit at the hearing of the motion.
12On July 10, 2012, Single Source served its factum and brief of authorities.
13At the hearing of this motion on July 16, 2012, Valiant sought leave of the court to file the affidavit of Solcz because it was filed after cross-examinations were completed. Also at the hearing, the parties consented to the defendant filing a Document Brief. The document brief contains two cases that involve the issue of leave under rule 39.02(2), as well as three letters between counsel regarding the use of the affidavit on this motion which were referred to above.
Relevant Provisions of the Rules
14The following Rules of Civil Procedure apply to Valiant’s request for leave to file the affidavit of Solcz for use on this motion:
39.02(2) A party who has cross-examined on an affidavit delivered by an adverse party shall not subsequently deliver an affidavit for use at the hearing or conduct an examination under rule 39.03 without leave or consent, and the court shall grant leave, on such terms as are just, where it is satisfied that the party ought to be permitted to respond to any matter raised on the cross-examination with evidence in the form of an affidavit or a transcript of an examination conducted under rule 30.03.
1.04 These rules shall be liberally construed to secure the just, most expeditious and least expensive determination of every civil proceeding on its merits.
Case Law
15The purpose of rule 39.02(2) is to ensure that opposing parties know the case advanced by the moving party prior to cross-examinations. [1]
16In referring to the Divisional Court’s decision in First Capital Realty Inc. v. Centrecorp Management Services Ltd. , (2009), 258 O.A.C. 76 , Leitch J. in Knowles set out the criteria to consider on a motion under rule 39.02(2), as follows:
Is the evidence relevant?
Does the evidence respond to a matter raised on the cross-examinations, not necessarily raised for the first time?
Would granting leave to file the evidence result in non-compensable prejudice that could not be addressed by imposing costs, terms, or an adjournment?
Did the moving party provide a reasonable or adequate explanation for why the evidence was not included at the outset?
17Further, the Divisional Court, at para. 14, commented that the court shall take a flexible, contextual approach in assessing the criteria relevant to rule 39.02(2) having regard to the overriding principle outlined in rule 1.04; that is, that the rules are to be interpreted liberally to ensure a just, timely resolution of the dispute. An overly rigid interpretation could lead to unfairness by punishing a litigant for an oversight of counsel.
The Evidence of Leonard Solcz
18At para. 14 of Solcz’s affidavit, he states as follows:
In paragraph 29 of the Affidavit of Paul Robinson, sworn March 5, 2012, found in the Responding Party’s Motion Record, Paul Robinson states:
“I was specifically advised by Len Solcz, after having met with him and Solcz Sr. to keep billing the whole amount against the initial purchase order and Service Agreement to provide a salary for me. Despite what Len told me, I only billed for time actually spent out of respect for Solcz Sr. However, that does not change the fact that the Service Agreement was never cancelled and formerly revised.” [Emphasis by the court.] [2]
19At para. 15 of his affidavit, Solcz denies having made any such statement as alleged by Robinson. Solcz further states:
Paul Robinson was told that the agreement was being amended to a time and materials contract, and he verbally agreed to this change. A revised purchase order was sent by Valiant and received by Single Source Contracting Services Inc.
Positions of the Parties
20It is Valiant’s position that it did not reply to Robinson’ statement before cross-examinations were completed because it was not relevant to the issues on the security for costs motion notwithstanding that it was Valiant’s position that the statement was untrue. It contends, however, that it became necessary to respond after Robinson made several contradictory statements at his cross-examination. In other words, Robinson’s evidence is that the Service Agreement was “never cancelled and formally revised.” However, his evidence on cross-examination was that Single Source received the revised purchase order, Robinson agreed that the revised purchase order superseded the original purchase order and that the new purchase order was a time and material contract.
21Valiant further contends that the allegations contained in the statement of claim relate to a simple contract dispute; therefore, even in the face of Robinson’s statement, the issue on the motion for security for costs will be for the court to determine whether the allegation of breach of contract has sufficient merit such that security for costs are unnecessary.
22Single Source argues that leave ought not to be granted to Valiant because its evidence is clear as set out in Robinson’s affidavit, particularly at paras. 15, 28 and 29. Paragraph 29 was reproduced above. Paragraphs 15 and 28 are as follows:
Mr. Sauro had no direct involvement with the Plaintiff or I when it came to the Service Agreement. All of the dealings, with the exception of the actual execution of the Service Agreement were between myself and Solcz Sr., Len Solcz and to a lesser extent Mike Moore.
As I stated earlier, the amount set forth in the Service Agreement was intended to be a salary for me. I acknowledge that in 2005 and 2006 the plaintiff began to invoice the defendant on a time and material basis at the request of Solcz Sr. at [a] meeting which included Solcz Sr., Len Solcz and myself. The amounts billed on a time and material basis were for employees of the Plaintiff other than me initially.
23Essentially, Robinson’s evidence is that the agreement was originally intended to provide him a salary and that the original terms of the agreement were later modified by Valiant to be a time and material contract for employees other than Robinson. His evidence is that he was advised by Solcz to continue to bill against the Service Agreement to generate a salary for himself.
24As such, it is Single Source’s position that there is no change in the evidence from Robinson’s affidavit to his cross-examination evidence.
25It is further argued by Single Source that Robinson’s evidence regarding the conversation with Solcz was properly not pled in the statement of claim as it is evidence which is not permitted in pleadings.
26In my view, Solcz’s evidence is relevant to the issue of the merits of this action which the court may consider in the context of the security for costs motion. However, I do not view his evidence as highly relevant as there are clearly significant issues regarding the revised purchase orders and whether they constitute legal and binding replacement contracts. Further, Solcz’s evidence clearly responds to a matter raised on the cross-examination; however, it was raised for the first time in Robinson’s affidavit.
27The granting of leave to file the evidence will not result in non-compensable prejudice that could not be addressed by imposing costs, terms or an adjournment. Counsel for Single Source did not seek an adjournment of this motion to cross-examine Solcz in the event leave is granted and the motion for security for costs was argued on the date scheduled.
28Lastly, I am not satisfied with Valiant’s explanation why Solcz’s evidence was not included at the outset. Robinson clearly put into issue at paragraphs 28 and 29 of his affidavit how the revised purchase orders were made by Valiant, discussions with the Solczs regarding future billing practices and Solcz’s instructions to him. That evidence, in my view, goes to the heart of the issue regarding the validity of the revised purchase orders, which is one of the central issues in this action. In other words, it goes to the merits of this action which is a factor to be considered by a court on a security for costs motion. Further, I am not persuaded that Robinson’s evidence is contradictory. I view his affidavit evidence as the explanation of events that gave rise to the revised purchase orders and the subsequent discussions and instructions from Solcz.
29For the above reasons, I decline leave to Valiant to file Solcz’s affidavit. To do so would fail to uphold the purpose of rule 39.02(2) to ensure that opposing parties know the case advanced by the moving party prior to cross-examinations. Considering the criteria from a contextual approach, Solcz’s evidence, in my view, simply fortifies the fact that there are significant issues in this action that will require findings of facts by the trier of fact that do not meaningfully impact on the issues in this motion.
Motion for Security for Costs
30Valiant relies on rule 56.01(1) (d) for an order that Single Source pay security for costs. That subrule provides that the court may make such order for security for costs as is just where it appears that the plaintiff is a corporation and there is good reason to believe that the plaintiff has insufficient assets in Ontario to pay the costs of the defendant.
31The courts have established a two-step inquiry when considering whether to order security for costs.
32Initially, the onus is on the defendant to demonstrate that the plaintiff falls into one of the subrules of 56.01(1). The onus is not a heavy one. The defendant need only demonstrate that there is a “good reason to believe” that the plaintiff has insufficient assets in Ontario to pay the costs of the defendant. Only if the defendant succeeds with the first stage does the inquiry move to the second stage.
33At the second stage the onus shifts to the plaintiff. The plaintiff can either demonstrate that it is impecunious and request that the court make such order as is just in the circumstances or prove that they have sufficient assets in Ontario to pay a costs order.
34If the plaintiff claims to be impecunious, where the plaintiff is a private corporation, the court will require cogent evidence that both the corporation and its shareholders cannot sell assets, borrow or otherwise raise the necessary funds to post security for costs. Evidence of impecuniosity must be set out with robust particularity, with full and frank disclosure of the financial circumstances of the plaintiff and its principals. In order to find impecuniosity, the court must be convinced on the basis of cogent evidence that the plaintiff corporation, its shareholders and any other persons who would be the beneficiaries of the action if it succeeded are unable to post security. [3]
35At the second stage, the merits of the case remain a relevant factor. If it is found that the responding party is impecunious, the court must exercise discretion as to whether an order for security for costs would be “just” in all of the circumstances. An inquiry into all factors must be taken including the merits of the case, balancing the interests of the parties, review of the financial circumstances of the plaintiff and the effect of an order. Regarding the merits of the case, if it is found that the plaintiff is impecunious, the plaintiff has a low evidentiary burden to establish that the claim is not plainly devoid of merit in order to avoid a security for costs order. Conversely, if after an inquiry it is found that the plaintiff is not impecunious, the plaintiff has a high burden to establish that its claim has a good chance of success in order to avoid a security for costs order. [4]
Step 1 - Single Source’s Ability to Pay Valiant’s Costs
36The statement of claim states that Single Source is a corporation incorporated pursuant to the laws of the Province of Ontario and carrying on business as an electrical and mechanical contractor throughout Ontario with its head office in Windsor.
37Single Source entered into the Service Agreement which commenced on September 1, 2003 and continued without a fixed termination date. The contract was accompanied by a purchase order issued by Valiant. The contract contained a term that Single Source would be paid an annual service fee of $187,500 at a monthly rate of $15,625. It also contained a time and material term whereby Valiant would pay for labour provided by employees of Single Source. A further term was that the purchase order may be cancelled on thirty days written notice by either party without penalty.
38In its statement of defence Valiant states that the initial purchase order was cancelled and replaced with a new contract whereby all billings were to be based on time and materials and further that the annual service fee of $187,500 was removed and no longer payable. Further revisions were made in 2004 and 2006. Under the revised contract, it is pled that Single Source was paid on a time and material basis for the work it performed.
39Single Source gave written notice on December 11, 2006 that it was terminating the contract.
40Valiant’s position is that there is good reason to believe that Single Source has insufficient assets to pay for Valiant’s costs of this action given outstanding writs of execution against Single Source. Further, it argues that there is no evidence put forth by Single Source that its shareholders have the ability to post security for costs.
41The following is the evidence with respect to Single Source’s ability to pay Valiant’s costs.
42Robinson was the operations manager for Single Source and the primary point of contact between Single Source and Valiant. Robinson is not a shareholder, officer or director of Single Source. Robinson’s brother, Andrew Robinson (“Andrew”), is the sole shareholder. Single Source was incorporated at the suggestion of Michael Solcz Sr. (“Solcz Sr.”)
43Prior to commencing operation of Single Source in 2003, Robinson owned and operated Miar Electric Ltd. and Miar Industrial Services Group Inc. (“Miar”). Miar was forced to close and Robinson made an assignment in bankruptcy in 2002 after Miar was not paid for a job it was completing for Nemak (Ford). Robinson claims at that time he was offered a job by Solcz Sr. Following negotiations and given the result of a family dispute Robinson had with his wife, it was agreed that Robinson would work as an independent contractor to Valiant. Andrew agreed to incorporate Single Source because Robinson was not in a position to do so given his recent bankruptcy and ongoing issues with Miar.
44The purpose of the Service Agreement in the first instance was to provide Robinson with a salary.
45Single Source commenced another action against Valiant claiming that Valiant failed to pay accounts of $1,742,658.97 which arose as a result of work completed by Single Source at the Format Industries factory in 2006. Single Source continues to pursue this action with examinations for discovery and mediation having been scheduled. In that action it is alleged that Valiant assisted John Gosselin (“Gosselin”), a key employee of Single Source, while still employed with Single Source, to set up a competing business to quote the same work as Single Source. Ultimately, Gosselin was awarded work that was to be completed by Single Source.
46Single Source’s evidence is that by the Fall of 2006 virtually all of the work was being done for Valiant and that Valiant knew that its failure to pay the $1,742,658.97 it owed, coupled with its decision to assist Gosselin, would cripple Single Source financially.
47Single Source has not operated since 2007. Its only assets are the receivables from Valiant.
48Single Source admits that its debts are significant. It disputes however that it is liable for the debts of Miar.
49Single Source owes Canada Revenue Agency (“CRA”) $622,933.44 at February 17, 2012, including interest and penalties, which it states was incurred because of Valiant’s failure to pay the amounts owed in the related action.
50Andrew was employed with Black and McDonald working as an electrician in Quebec at the time Robinson’s affidavit was sworn on March 5, 2012. He earned $43.35 per hour. He supports his wife who does not work and two children, ages 7 and 4. Andrew’s wages are garnished by CRA of 35% of each pay cheque. He has paid $30,749.02 at March 2, 1012. Andrew lost his home in Windsor this past summer and he now rents. Robinson states that Andrew has no available funds to provide to Single Source to support this lawsuit.
51Single Source produced the last completed financial statement for the year 2008. The company continues to file tax returns. The 2010 corporate tax return shows losses of $644,469.
52In addition to the debt owing to CRA, there is further evidence of debts of Single Source as follows:
Single Source was sued in 2007 by the International Association of Bridge, Structural Ornamental and Reinforcing Iron Workers, Local 700, claiming $172,793.70 for unpaid wages;
Debt owing to Centerline Equipment Rentals for $40,260.86;
$260,224.11 owing to the Millwright Regional Council of Ontario;
Seven writs of execution, including three in favour of CRA.
53The writs of execution, not including those in favour of CRA, total approximately $339,922 plus interest.
54I am satisfied that Valiant has met its onus and; therefore, I find that there is good reason to believe that Single Source has insufficient assets to pay Valiant’s costs of this action if successful.
Step 2 – Impecuniosity or Sufficient Assets
55Single Source submits that it is impecunious given the above-noted debts, that Andrew has no available funds to provide to it to support this lawsuit and that any order for security for costs will terminate this action.
56Valiant submits that Single Source has not met its onus of establishing that it is impecunious due to a lack of evidence.
57The law requires that “[i]n order to find impecuniosity, the court must be convinced on the basis of cogent evidence that the plaintiff corporation, its shareholders and any other persons who would be the beneficiaries of the action if it succeeded are unable to post security” [5] (my emphasis).
58Single Source filed no evidence from Andrew, the company’s sole shareholder. The evidence of Andrew’s financial situation, as set forth in Robinson’s affidavit, is lacking regarding Andrew’s assets, such as savings, copies of his income tax returns, and evidence regarding his ability to sell assets to pay a security for costs order.
59Evidence regarding Robinson’s ability to pay a cost order is, in my view, essential in opposing this motion. He was the principal of Single Source and its operations manager overseeing the day to day operations of the company. It appears that he was, and will be, the sole beneficiary of this action if successful. There is no evidence whatsoever of Robinson’s current financial situation, including his source of income, assets, debts, and his ability to sell assets to pay a costs order. None of the debts or claims set out in Valiant’s material are against Robinson personally. Presumably, Robinson’s debts were extinguished with the bankruptcy in 2002; however, that was ten years ago. If he was debt free in 2002 and earned an income through Single Source until 2007 when it ceased operations, what is his source of income since then and why does he not have the ability to pay some security for costs?
60Robinson must own property, or he did in 2005, as appears that he was making mortgage payments to the Toronto-Dominion Bank. (See Exhibit “A” to Robinson’s affidavit) If he owns property, can he borrow against that security to pay security for costs?
61Moreover, it is Robinson’s evidence that he gave financial assistance to the Solcz children. He states that he lent money to Solcz for the purchase of a snowmobile and a motorcycle; and, he gave money to Michael Solcz Jr. to cover gambling debts. The exhibits to his affidavit appear to demonstrate payments from 2001 through 2006. There is a copy of a Toronto-Dominion Bank draft dated January 31, 2006 in the amount of $18,000 payable to Thunder Road Harley Davidson. There is simply no explanation why Robinson was able to lend large sums of money to the Solcz children yet he is unable to pay security for costs.
62The evidence regarding Robinson’s financial assistance to the Solcz children raises serious questions regarding his ability to pay security for costs. It is troubling, to say the least, the lack of evidence regarding Robinson’s financial circumstances.
63In conclusion, I am satisfied that Single Source has no assets other than this lawsuit and the related action and, further, that the company is unable to pay a security for costs order. It follows then that the company would have insufficient assets to pay any cost order at trial if the plaintiff is unsuccessful. However, I have grave concerns regarding the obvious lack of evidence as noted above. That evidence was solely within the plaintiff’s knowledge and ability to put before the court and it chose not to do so. Thus the evidence is unclear whether Andrew, its sole shareholder, and Robinson, its principal, singly or together, could not pay security for costs on behalf of the company should such an order be made to allow this action to proceed to trial.
64I find that there is a lack of evidence on Single Source’s part and the evidence presented is far from cogent.
65For the reasons set out above, I am unable to find that Single Source is impecunious.
66The inquiry now moves to the next step.
67Where impecuniosity has not been found, a closer scrutiny of the merits of the case is warranted; a legitimate factor in determining whether or not it would be just to require security for costs is whether the claim has a good chance of success [6] .
68Single Source has a high burden to establish that its claim has a good chance of success in order to avoid a security for costs order given that impecuniosity has not been found.
69In my view, there is a serious issue regarding Valiant’s actions when it issued, in particular, the first revised purchase order that effectively altered one of the major terms of the contract; that is, the remuneration term. Single Source alleged that it did not agree to the revision in advance, or at all, nor did any representative of the company acknowledge its acceptance of the change in writing. It alleged that Valiant placed a photocopy of the signature page from the Service Agreement to the back of the revised agreement to make it appear that Single Source accepted the revised terms. Further, there is an issue whether Valiant gave proper notice of the cancellation of the initial contract as the agreement provided for thirty days written notice. The determination of these issues will require findings of fact after all of the evidence is presented at trial. As such, in my view, there is a serious risk to Valiant that the trier of fact will find that the subsequent revised purchase orders are not legal and binding on Single Source and the fact that it changed its billing practice may not be found to be valid acceptance in law.
70For the foregoing reasons, I am satisfied that Single Source has a meritorious claim which has a good chance of success.
Conclusion
71In summary, my findings, as set out above, are that there is good reason to believe that Single Source has insufficient assets to pay the costs of the defendant; however, it has a meritorious claim which has a good chance of success. Nevertheless, I was unable to find that Single Source is impecunious due to a lack of evidence.
72I must now balance the interests of the parties given these findings.
73I am cognizant of the plaintiff’s interest to see this action proceed to trial. Robinson’s evidence is that he will pay the debts of Single Source if successful. On the other hand, it would be unfair to Valiant to have to bear the legal costs to complete the balance of the steps in this action including trial with no security for its costs in the event that the plaintiff is unsuccessful and no chance of recovering those costs from the company.
74Given my findings, in my view the most just order is that the plaintiff pay security for costs.
75The quantum of security recognizes my view that this action has a good chance of success, while at the same time providing security for costs in the event it fails at trial in an amount that estimates the plaintiff’s chances of success.
76Rule 56.04 requires that I determine the amount and form of security and the time for paying into court or otherwise giving the required security.
77The parties presented no evidence with respect to the costs incurred to date and the estimated cost to complete a trial.
78The plaintiff shall pay the following sums at the following times:
(a) $5,000 payable by February 15, 2013;
(b) $2,500 payable within 10 days of completion of the pre-trial conference and this action being scheduled for trial;
(c) $2,500 payable no later than 30 days before the Monday of the week the trial is scheduled to commence.
79All of the above payments shall be held in trust by plaintiff’s counsel, Renaud Todd, LLP, as security for costs to the credit of this action until further order of this court, and the plaintiff shall produce to the defence proof of such payment forthwith after the payment has been made.
Costs of this Motion
80Valiant seeks its costs of this motion. Neither party served and filed costs outlines after the hearing of the motion. Given its success, Valiant is entitled to its partial indemnity costs of this motion, not including costs related to its request for leave to file the supplementary moving party’s motion record. Having been successful opposing that request for leave, Single Source shall be entitled to its costs relating to that issue.
81If the parties cannot agree on costs, then Valiant shall serve and file a costs outline and short written submissions of no less than two pages double spaced within ten days of the date of this order and Single Source may respond within ten days thereafter.
Original signed “ Master Pope ”
Master Lou Ann M. Pope
Date: November 2, 2012
1Knowles v. Arctic Glacier , 2011 ONSC 682 at para. 47 [“ Knowles ”].
2The correct word is “formally” as set out in para. 29 of the affidavit of Robinson.
3CIT Financial Ltd. v. Seller Industries Inc. , [2006] O.J. No. 3596 (S.C.) [“ CIT ”] ; Service Maintenance Inc. v. 1544860 Ontario Inc. , 2010 ONSC 4545 , at para. 7 [“ Service ”]; Georgian Windpower Corp. v. Stelco Inc. , 2007 80128 (ON Master), at para. 26 , aff’d 2008 22919 (ON. S.C.) , aff’d 2008 ONCA 542 [“ Georgian ”].
4Zeitoun v. Economical Insurance Group (2009), 2009 ONCA 415 , 96 O.R. (3d) 639 (C.A.) [“ Zeitoun ”]; Cigar500.com Inc. v. Ashton Distributors Inc. , 2009 46451 (ON SC) , [2009] O.J. No. 3680 (S.C.J.); Service , at paras. 3-9 ; and John Wink Ltd. v. Sico Inc. (1987), 1987 4299 (ON SC) , 57 O.R. (2d) 705 (H.C.J.).
5CIT ; Service , at para. 7 ; and Georgian , at para. 26 .
6Zeitoun , at para. 50 .