Adrian Peel Architect Inc. v. Al Soorty, Zoran Cocov and Lagoon City Holdings Inc.

COURT FILE NO.: 06-CV-324996PD2

DATE: 20131025

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Adrian Peel Architect Inc., Plaintiff

- and -

Al Soorty, Zoran Cocov and Lagoon City Holdings Inc., Defendants

BEFORE: Justice Carole J. Brown

COUNSEL: James R. Smith, for the appellant (defendants/plaintiff by counterclaim)

Megan Marrie, for the respondent (defendant by counterclaim)

HEARD: July 17, 2013

ENDORSEMENT

[1] This is an appeal by the defendant, plaintiff by counterclaim, Lagoon City Holdings Inc. ("Lagoon City" or "the appellant"), from the Order of Master Abrams released March 19, 2012 granting the plaintiff, defendant by counterclaim, Adrian Peel Architect Inc. ("the Architect") leave to bring a motion for security for costs after the matter was set down for trial and ordering the appellant, Lagoon City, to post security for costs in the sum of $115,000.

The Action

[2] On January 29, 2006, this action for damages for breach of contract and unjust enrichment was commenced by Adrian Peel Architect Inc. ("the Architect"), who was retained by the defendants in 2005 to develop land owned by Lagoon City in the Lake Simcoe area for development of a hotel/condominium/resort complex. The action was, in essence, for architectural fees unpaid in the amount of $62,563.58, plus interest, taxes and costs.

[3] On January 30, 2007, the defendants delivered a Statement of Defence and Counterclaim alleging that the Architect was, among other things, negligent in the provision of its architectural services. The counterclaim includes the claim for disgorgement of fees paid to the Architect in the amount of $30,000 and also seeks damages for lost profits on the sale of the land development project in the amount of $4,950,000. The counterclaim further claims for consequential losses, and for other claims which, the Architect argues, are prohibited pursuant to the agreement for services.

The Facts

[4] In 2005, the defendants retained the Architect to develop land owned by Lagoon City in the Lake Simcoe area as a major hotel/condominium/resort destination. Subsequently, the relationship between the parties broke down. It is the position of the defendant that this was due to the negligence and breach of contract of the Architect, while the plaintiff alleges that it was due to issues regarding the regulatory authorities and the defendants’ other consultants.

[5] The defendants eventually sold the lands for a net profit of 2,500,000.

[6] In March of 2009, the Statement of Defence and Counterclaim was amended by Lagoon City, which amended the amount of damages sought in the counterclaim from $1 million to $5 million. A third-party action was commenced by the Architect in response to Lagoon City's counterclaim on January 23, 2009. No examinations for discovery have been held in the third-party action.

[7] Following examinations for discovery of the defendants in December of 2009 and of the plaintiff Architect on May 18, 2010, the main action was set down for trial in August of 2010. No pretrial or trial date has, as yet, been set. The undertakings of the defendants were answered October 31, 2011.

[8] In May of 2010, an Order was granted removing counsel for the defendants from the record. Despite the Order for removal from the record, requiring the corporate defendant to retain new counsel or obtain leave to be represented by non-counsel, new counsel was not retained until October of 2010. Shortly thereafter, plaintiff's counsel attempted to set the motion for security for costs down.

[9] While the Corporation Documents List and Corporate Profile Report for Lagoon City indicate that it is an active Corporation, no documents have been filed since December 13, 2008, when Lagoon City's 2008 Annual Return was filed. At examinations for discovery of the defendant, Zoran Cocov, in December 2009, Mr. Cocov testified that Lagoon City existed but was inactive and had no assets at that time. This was further reiterated in Mr. Cocov's Affidavit sworn November 1, 2011, after the action was set down for trial and after the defendants' undertakings were answered on October 31, 2011.

[10] The motion was heard on November 14, 2011 and the Master’s decision released on March 19, 2012.

The Law

Standard of Review

[11] Appellate interference by this Court is warranted "only if the Master made an error of law or exercised his or her discretion on the wrong principles or misapprehended the evidence such that that there is a palpable and overriding error. When the Master has erred in law, the standard is correctness.": Zeitoun v. Economical Insurance Group (2008), 2008 CanLII 20996 (ON SCDC), 91 O. R. (3d) 131.

[12] Moreover, an appeal from a decision of the Master is not a re-hearing. On questions of fact and mixed fact and law, deference applies and the role of the reviewing court is limited. The appellate court cannot substitute its interpretation of the facts or reweigh the evidence simply because it takes a different view of the evidence from that of the Master: Wellwood v. Ontario Provincial Police et al, 2010 ONCA 386.

Rule 56.01: Security for Costs

[13] An order for security for costs is discretionary.

[14] Pursuant to Rule 56.01, 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 the plaintiff or applicant is, inter alia, 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] Under the Rule, the defendant is required to establish that it has good reason to believe that the plaintiff does not have sufficient assets in Ontario to pay the costs of the defendant. The defendant is not required to prove that such is the case. When the defendant has shown that there is good reason to so believe, an order for security for costs should then be granted: Warren Industrial Feldspar Co. Ltd. v. Union Carbide Canada Ltd., et. al. (1985), 50 O. R. (2d) 213, at paras. 23 and 24; RCVM Enterprises Ltd. v. International Harvester Canada Ltd, et al. (1985), 50 O. R. (2 d) 508. The onus then shifts to the plaintiff to establish either that it has sufficient assets in Ontario to pay the costs, or that it is impecunious and justice demands that it be allowed to proceed with the action nonetheless: Warren Industrial Feldspar Co., supra; 855191 Ontario Limited v. Turner, supra, at para 3.

[16] The application of Rule 56.01 involves shifting the onus between the parties. There is a two-step inquiry. First, the defendant must show that it appears that one of the six factors set out in the Rules exists. Secondly, if this onus is met, the court may make an order as to security for costs "as is just". In the second stage, an inquiry into all factors which may assist in determining the justice of the case is undertaken. Determining whether it is "just" to make in order for security for costs is not an onerous threshold. A balancing is essential with due regard to the purposes of affording defendants a reasonable measure of protection for the costs but also with regard to the potential impact on the plaintiff.

[17] The court has always exercised broad discretion in deciding whether security for costs is just in the circumstances. In interpreting the words "as is just," if the claim is not devoid of merit, impecuniosity may be a persuasive factor in tipping the scales in favour of not ordering security for costs. However, where the plaintiff seeks to rely on impecuniosity, the onus then falls on that party to show that it is impecunious. In the situation of the Corporation, it must show "impecuniosity", namely that it does not have sufficient assets itself, but must also show that it cannot raise the security for costs from its shareholders and associates. Impecuniosity as applicable here is different from having insufficient assets. Insufficient assets relate to the possibility that the defendant, if successful, would not be able to recover costs, while impecuniosity would prevent the Corporation from proceeding. Failure to establish impecuniosity is not, of itself, fatal to establishing financial hardship.

[18] Orders for security for costs are not, and cannot be, final.

[19] Where the matter is set down for trial, leave of the court is required to initiate or continue a motion: Rule 48.01(1). The decision to grant leave is discretionary, and is dependent on the circumstances. The relevant test is as set forth in Tanner v. Clarke, [1999] O. J. No. 581. As outlined herein, two lines of cases existed. One line held that there should be a substantial and unexpected change in circumstance prerequisite to granting leave to proceed with a motion after the matter had been set down for trial. The other, now dominant, held that there is more flexibility, and that a test involving substantial, unexpected change was too restrictive, such that the exercise of discretion in the leave application is dependent on the circumstances of the case: 855191 Ontario Limited v. Turner [2011] O. J. No. 668; and see Gloucester Organization Inc. et al v. Canadian Newsletter Management Inc. (1995), 21 O. 753. R. (3d)

Analysis

Whether the Appeal Was Brought beyond the Time Required by the Rules

[20] It is the position of the respondent, Lagoon City, that the appellant failed to commence this appeal within the time required by the Rules of Civil Procedure. It maintains that the appeal was from an interlocutory order made by a Master, and that the Notice of Appeal must be served within seven days of the date of the Order appealed from. In this case, the Master's decision was released on March 19, 2012. The Notice of Appeal was filed on June 20, 2012. The appellant maintains that this is a final order, not an interlocutory order, and that it is not out of time with respect to the Notice of Appeal. Alternatively, it argues that an extension of time for bringing the appeal should be granted.

[21] The Master's Order for security for costs is not a final order, as it does not finally dispose of the issues in this action, or finally determine the proceeding. In this case, the motion for security for costs is interlocutory. The Defendants are out of time for bringing their appeal. Even were I to grant an extension of time for service of the Notice of Appeal, I find, for the reasons below, that the Master made no errors, and I dismiss the appeal.

The Issues Raised on Appeal

[22] The appellant submits that the Master erred in law in permitting the plaintiff to bring its motion although the matter was set down for trial, that the Master erred in ordering that security for costs be posted and further erred in the quantum of the security for costs ordered. The appellant argues that the errors were as follows:

1. The Master erred in granting leave as there was no change in circumstances to warrant such. In this regard, the appellants argue that the Master erred in disregarding the delay in bringing the motion for security for costs. Further, they argue that the Master erred in failing to consider that the action was set down with knowledge that the defendant had no assets and was not carrying on business.

2. The Master erred in exercising her discretion in ordering that security for costs be posted. In this regard, the appellants argue that the Master erred in not finding the defence and counterclaim linked and that the Master erred in relying on Wilkings.

3. The Master erred in the quantum of security for costs ordered.

[23] I will deal with each of these issues seriatim.

1. Rule 48.04 (1): Leave to Bring the Motion

[24] The appellant argues that the Master erred in granting leave to bring the motion for security for costs after the matter had been set down for trial. The appellant argues that in granting leave, the Master failed to consider the lengthy delay in bringing the motion and failed to consider that there was no change in circumstances after the matter was set down for trial.

[25] The respondent argues that the decision to grant leave pursuant to Rule 48.04 (1) is a discretionary one that is dependent on the circumstances of the case. They argue that a motion for security for costs can be brought at any time and, indeed, that Rule 56.07 contemplates more than one motion for security for costs in an action. They refer me to instances where the court has granted leave to bring a motion for security for costs after an action has been set down for trial: 855191 Ontario Ltd. v. Turner, supra.

[26] The law in this regard is set forth, above.

[27] The Master, in the decision under appeal, held as follows:

"The first question I must answer is whether I ought to permit Adrian Peel to bring a motion for security for costs, in that it set down the main action in August/10. I answer that question in the affirmative.

"… [A] motion for security for costs can be brought at any time" (855191 Ontario Ltd. v Turner, [2011] O. J. No. 668 (S. C. J.)). Here, Adrian Peel is represented by two different counsel: one for the main action and one for the counterclaim. The evidence of Mr. Cocov on discovery, notwithstanding, Adrian Peel had in hand documentation indicating that Lagoon City was an active corporation. Adrian Peel also knew that Lagoon City sold the project land for profit after the litigation was commenced and before the discoveries were conducted herein. It was not unreasonable for counsel for Adrian Peel on the counterclaim to have waited until discovery transcripts were in hand (March 2010) and positions were formally taken with respect to questions posed that dealt with the financial viability of Lagoon City."

"It was also not unreasonable for Adrian Peel to have refrained from bringing this motion during the few months in the fall of 2010 that Lagoon City was without legal representation and the status of the litigation was unknown. In May/10, original counsel for the defendants removed himself from the record; and, it wasn't until October/10 that new counsel went on the record. Steps were taken to schedule this motion as early as February/11.

Then too and in any event, while Mr. Cocov, on behalf of Lagoon City, alleges prejudice, there is no evidence of prejudice. I don't think that the delay before February/11 is fatal to the motion; and counsel have agreed that any delay after February/11 will not be construed against Adrian Peel. "

[28] I find that the Master properly considered the issues involved in determining whether to grant leave to bring the motion for security for costs. I do not find there to have been any error in law, nor any exercise of discretion on the wrong principles or on misapprehended evidence. I do not find there to be any error which would require or permit this Court's intervention.

2. The Order for Security for Costs

[29] The appellants' position is that the Master erred in exercising her discretion in ordering that security for costs be posted. In this regard, the appellants argue that the Master erred in not finding the defence and counterclaim linked and that the Master erred in relying on Wilkings.

[30] The appellant argues that the defence and counterclaim are so inextricably intertwined that an Order requiring the Company to provide security for costs would amount to a requirement that it give security for defending itself, which should not be permitted. The defendant argues that the Master erred in ordering security for costs in the circumstances.

[31] The appellant further argued that bringing this motion after such a long delay and after the matter had been set down for trial was prejudicial to the defendants. The defendants' position is that its claim is meritorious and that it should not be deprived of the opportunity to proceed with it. It argues that Lagoon City has no assets and no means to post security. In this regard, it relies on Kawkabah Corp. v. Second Cup Ltd., 2005 CanLII 35683 (ON SCDC), 16 C.P C. (6th) 178. Lagoon City submits that it should not be required to post security for costs with respect to its counterclaim which, it argues, is based on the same facts and circumstances as its defence. In this regard, it relies on Better Business Bureau of Metropolitan Toronto Inc. v. Tuz, 28 (4th) 334; J.I. Case Canada, a Division of Tenneco Canada Inc. v. Gowlands Recreation and Farm Ltd., 17 CPC (4th) 337.

[32] The respondent submits that the Master appropriately exercised discretion in ordering that security for costs be posted, that there was good reason to believe that the plaintiff had insufficient assets in Ontario, that the appellant failed to demonstrate impecuniosity or to show why justice demanded that it be allowed to proceed without posting security for costs, and that the counterclaim was separate and distinct from the statement of defence, as it could not be said that the claim for lost profits arose from Lagoon City's defence in failing to pay the Architect's fees. The respondent submits that the Master correctly applied the law concerning security for costs to the facts in issue.

[33] The Master found that security for costs should be posted. In doing so, her analysis and application of the law was as follows:

Rule 56.01(1)(d) provides the court with discretion to make an Order for security for costs in situations where "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…".

An Order for security for costs may be made against a defendant who is the plaintiff by counterclaim in relation to the costs associated with the counterclaim. That said, the court must consider whether the main action and counterclaim are inextricably linked: no defendant should have to post security in order to defend itself. [J. I. Case Canada] v. Gowlan's Recreation and Farm Ltd., [1998] O. J. No. 323 (O. C. J.).

Lagoon City has said that it will be unable to pay/has insufficient assets to defray Adrian Peel's costs of the counterclaim, if a costs award is made. Adrian Peel is thus prima facie entitled to an Order for security for costs. The onus shifts to Lagoon City to show that it is impecunious and that an injustice would result if it were not permitted to prosecute its claims.

[34] The Master went on to analyze the evidence, finding that there was no evidence to support the assertion of impecuniosity, and that Lagoon City had failed to substantiate the said assertion. With respect to Lagoon City's assertion that its principals were unable to fund an award of costs, the Master observed that there was no evidence in support of that assertion either. With respect to the latter assertion, the Master analyzed the evidence regarding the principals, and concluded, "I am not satisfied, on the record before me, that Lagoon City could not look to its principals for funding or otherwise raise monies, if security for costs is ordered.”

[35] The Master continued her analysis as follows:

"With impecuniosity having been claimed but not established, I must now look at the issue of whether, in all of the circumstances, is in the interest of justice that security be ordered posted.”

[36] The Master considered the argument of Lagoon City that its defence and counterclaim were one and the same: inextricably linked, and that to order security for costs in respect of its defence would not be appropriate. The Master observed that "while… part of the counterclaim is for disgorgement of monies paid to Adrian Peel by Lagoon City, $4,950,000 of Lagoon City's $5 million claim is for lost profits on the sale of the project lands.

[37] With respect to the appellants' argument that the defence and counterclaim were one and the same, and that security should not be ordered, she held as follows:

I cannot say that the counterclaim is, in substance, a "reiteration" of the plaintiff by counterclaim's defence to the main action given what is at issue in the counterclaim. To suggest, as Mr. Cocov has, that the counterclaim is tantamount to "… Lagoon City… incidentally ask[ing] for damages which arise out of the same transaction [as Adrian Peel's unpaid fees claim]" is far too simplistic an analysis. Only a small part of the counterclaim is incidental to the defence – i.e. that portion of the counterclaim that seeks "… disgorgement" of monies paid to Adrian Peel. This is so, notwithstanding Lagoon City's repetition and reliance upon the allegations contained in its defence (in its capacity as plaintiff by counterclaim).

The issues addressed by me, above, also go to the merits. Assuming, for a moment, the relevance of the issue of the merits (and I am not certain that they are relevant given that I am not persuaded that Lagoon City is impecunious and that an injustice would result if Lagoon City were not allowed to proceed with its counterclaim), I cannot say that the merits are other than a neutral, at best. Section 6.3 and 6.4 of the agreement between Lagoon City and Adrian Peel, by way of example, raise real issues as to the merits of the counterclaim.

There is no question but that in certain circumstances, "[a] plaintiff by counterclaim can be required to post security" (Wilkings v. Velocity Group Inc. supra, at para 29). Given what I find to be a disconnect between the claims asserted by Adrian Peel and its defences to the counterclaim asserted against it by Lagoon City, given that I do not accept that the pleas in the statement of defence of Messrs. Soorty and Cocov and Lagoon City are inextricably linked to claims made by Lagoon City in its counterclaim, given that Lagoon City has acknowledged having insufficient assets to defray a costs award but has failed to establish impecuniosity, given that the merits are such that they do not militate against an Order for security for costs, and given that Mr. Cocov's assertion that an order requiring Lagoon City to post security would deprive Lagoon City of its ability to continue with its counterclaim is no more than a bald assertion that is not substantiated by any evidence, I am ordering security posted.

[38] The Master has carefully considered the issues involved and the two-stage test for determining whether security for costs should be ordered. The Master concluded that there was, based on the evidence before her, good reason to believe that the plaintiff by counterclaim did not have sufficient assets in Ontario to pay the costs of the defendant by counterclaim, that the plaintiff by counterclaim had failed to establish impecuniosity or an inability on the part of the principals of the Company to pay the security for costs, and that it was just in all of the circumstances that security for costs be ordered. The Master considered whether the counterclaim was inextricably linked to the defence, such that to order security for costs would, in essence, require the plaintiff by counterclaim to pay security for costs with respect to its defence, and concluded that the counterclaim sought damages for matters not linked to the defence. Having read the pleadings, I am in agreement with the Master.

[39] On the basis of the foregoing analysis, there are no errors in the decision of the Master which would require intervention by this appellate court.

3. Quantum of Security Ordered to be Posted

[40] It was the position of the appellant that the Master’s Order for security for costs in the amount of $115,000 was based on the plaintiff's draft bill of costs, which the defendant argues was excessive and included time for the entire trial and not just the counterclaim. Moreover, the appellant argued that there was no substantiation of the respondents’ statement that it had incurred approximately $75,000 in defence of the counterclaim.

[41] The position of the respondent was that the quantum ordered to be posted by the Master, which is in the court's discretion, was appropriate and proportionate, given the issues raised and the quantum of relief sought in the counterclaim, namely $5 million.

[42] The court has the discretion as to the quantum of costs to be posted. In ordering $115,000, the Master considered the counterclaim; the issues of liability and damages involved; and the quantum of relief sought in the counterclaim. In this regard, the Master found that "the counterclaim is a substantial one giving rise to a panoply of liability and damages issues" and further held that "while it is true that part of the counterclaim is for disgorgement of money paid to Adrian Peel by Lagoon City, $4,950,000 of Lagoon City's $5,000,000.00 claim is for lost profits on the sale of the project lands". I note that the Master did not order costs in the full amount sought by the Architect.

[43] I find no error in the exercise of the Master's discretion in ordering the quantum of security for costs. There is no basis for this Court's interfering with the Order of the Master as regards quantum.

[44] Accordingly, I dismiss this appeal and uphold the decision of the Master released March 19, 2012.

Costs

[45] I would urge the parties to agree upon costs, failing which I would invite the parties to provide any costs submissions in writing, to be limited to three pages, including the costs outline. The submissions may be forwarded to my attention, through Judges’ Administration at 361 University Avenue, within thirty days of the release of this Endorsement.

Carole J. Brown J.

Date: October 25, 2013