Court File and Parties

COURT FILE NO.: CV-09-375015-00A1

DATE: 2014/07/31

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: IMVESCOR RESTAURANTS INC, Plaintiff, Moving Party

AND:

4287975 CANADA INC. et al , Defendants, Responding Parties

AND:

SARA-MAMMAS CORPORATION INC. et al. Third Parties

BEFORE: MASTER RONNA M. BROTT

COUNSEL:
D. Murdoch and K. Esaw, Counsel for the Plaintiff/Defendant by Counterclaim, Imvescor

D. Altshuller, Counsel for the Defendants/Plaintiff by Counterclaim 4287975 Canada Inc.

T. Hill and A. Mahdavian, Counsel for the Third Parties

HEARD: March 5, 2014

ENDORSEMENT

[1] The Third Parties, Sara-Mammas Corporation Inc./Corporation Sara-Mammas Inc., Paul Sara, Peter Mammas, Lawrence Mammas (“Sara-Mammas”) and the Plaintiff/Defendant by Counterclaim Imvescor Restaurants Inc. (“Imvescor”) seek an Order that the Defendants/Plaintiff by Counterclaim, 4287975 Canada Inc. (“428”) pay into court security for costs.

[2] 428, a franchisee of the Baton Rouge Restaurant Company (“BRRC”) executed a franchise agreement on February 17, 2006 with BRRC. In December 2006 BRRC sold the franchise chain to Mikes Restaurants which subsequently changed its name to Imvescor who became the successor franchisor. Sara-Mammas is a successor to BRRC which was created following the sale of the franchise. The Third Parties Paul Sara, Peter Mammas and Lawrence Mammas were the principals of BRRC and they are the principals of Sara-Mammas.

[3] On May 28, 2008 428 initiated an Application against BRRC and Imvescor, seeking declaratory relief that it was entitled to rescind the franchise agreement on the basis of, inter alia, non-disclosure. 428 brought a Rule 22 motion by way of Special Case to determine if it had the right to rescind the franchise agreement and on or about August 18, 2008 the motion was dismissed. Costs were later ordered payable by 428 in the amount of $9900 in favour of BRRC and $7950 in favour of Imvescor.

[4] On September 15, 2008, 428 appealed the decision to the Court of Appeal. On April 16, 2009 the Court of Appeal dismissed the appeal and ordered costs payable to BRRC in the amount of $8500 and to Imvescor in the amount of $12500.

[5] In the Fall of 2009, 428 sought leave to appeal to the Supreme Court of Canada and that leave application was dismissed with costs.

[6] None of the costs orders have been paid. Other than the motions above, the Application has been dormant.

[7] On March 23, 2009 Imvescor commenced the within action against 428 for, inter alia, breach of the franchise agreement. On March 17, 2010, 428 defended the action and counterclaimed against Imvescor seeking declaratory relief for alleged non-disclosure by BRRC and alternatively, seeking damages arising from alleged misrepresentations by BRRC.

[8] On June 11, 2010 Imvescor defended the counterclaim and on August 15, 2012 it commenced Third Party proceedings against Sara-Mammas. The Third Parties delivered their Defence to the Counterclaim of 428 and their Statement of Defence to the Third Party Claim.

[9] Other than the exchange of pleadings, no steps have been taken in the action.

THE LAW

Security for Costs

[10] In determining whether security for costs should be granted the court will conduct a two-step inquiry. The applicable portions of Rule 56.01(1) of the Rules of Civil Procedure on this motion provide:

56.01(1) 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,

(b) the plaintiff or applicant has another proceeding for the same relief pending in Ontario or elsewhere;

(c) the defendant or respondent has an order against the plaintiff or applicant for costs in the same or another proceeding that remains unpaid in whole or in part;

[11] The initial onus is on the defendant to satisfy the Court that it appears there is a good reason to believe that the matter comes within one of the circumstances enumerated in Rule 56.01.

[12] At the second stage of the inquiry the onus shifts to the plaintiff and the plaintiff must establish that an order for security would be unjust. The second stage is ‘clearly permissive and requires the exercise of discretion which can take into account a multitude of factors.” (Coastline Corp. v. Canaccord Capital Corp. [2009] O.J. No. 1790 (S.C.J.), https://www.canlii.org/en/on/onsc/doc/2009/2009canlii21758/2009canlii21758.html). The court exercises a broad discretion in making an order that is just. The court’s analysis is to focus on the pleadings and the evidence filed on the motion.

Third Parties’ and Defendant by Counterclaim’s Rights to seek Security for Costs

[13] Rule 1.03 defines proceeding to include an action, and also defines an action to include a proceeding commenced by counterclaim or third party claim. Consequently a third party defendant and/or defendant by counterclaim can seek security for costs, provided that the court determines it is just to do so.

[14] By virtue of Rule 29.05 (1) and 29.13 a Third Party to a counterclaim may defend the counterclaim and it may raise any defence open to the defendant to the counterclaim. Accordingly, as is the case here, while the rule regarding security for costs speaks only to “defendants and respondents”, third parties to counterclaims are entitled to seek costs from plaintiffs by counterclaim.

[15] On this motion, Sara-Mammas as Third Party and Imvescor as defendant by counterclaim seek security for costs from 428, the defendant/plaintiff by counterclaim. The moving parties submit that both 56.01(1)(b) and (c) would apply to the facts of these proceedings.

Third Parties’ (Sara-Mammas et al.) Entitlement to Security for Costs

[16] As a plaintiff is not directly responsible for joining a third party, the ordinary rule of thumb is that an unsuccessful plaintiff will not be called upon to pay costs (and/or security for costs) of a third party. However, there are exceptions where fairness dictates that a third party may receive costs from an unsuccessful plaintiff. In Milina v Bartsch [1985] B.C.J. No. 2789(S.C.), https://www.canlii.org/en/bc/bcsc/doc/1985/1985canlii454/1985canlii454.html, McLachlin J. (as she then was), stated that “should a third party demonstrate that one or more of the following exceptions is applicable, a court may order a plaintiff to post security for a third party’s costs:

1. Where the main issue litigated was between the plaintiff and the third party.

2. Where the third party was brought or kept in the matter by reason of the act or neglect of the plaintiff.

3. Where the case involves a string of contracts in substantially the same terms for the sale of goods.

4. Where the third party proceedings follow naturally and inevitably upon the institution of the plaintiff’s action, in the sense that the defendant had no real alternative but to join the third party.

[17] The court must consider the likelihood that Sara-Mammas will be able to convince a trial judge that any of these exceptional circumstances apply.

[18] With respect to the first exception, courts have clarified that where the contest is ultimately between the plaintiff and the third party, a plaintiff may be ordered to post security under this exception. In other words, where the third party’s actions, or inactions, will ultimately dictate the outcome of the action (including a counterclaim) , a third party will fall under the first exception. (Guarantee Co. of North America v. Resource Funding Ltd., [2009] O.J. No. 3279 (S.C.J.)). In my view, the main issue is whether 428 is liable to Imvescor, while the third party claim is an indemnification claim. The issue of indemnification as between Sara-Mammas and Imvescor is different from the issue of the franchise agreement, which is the subject matter of the main action. As Sara-Mammas’ defence to the third party claim concerns issues other than circumstances involving 428, it is accordingly not applicable.

[19] Sara Mammas submits that exceptions 2 and 4 apply. With respect to the second exception Sara-Mammas submits that given the allegations contained in the counterclaim, the dispute is really the issue of non-disclosure by BRRC to 428. In its view, if BRRC is successful, then it would be entitled to costs. Sara-Mammas also notes that 428 commenced the Application against both Imvescor and BRRC. As well, 428 requests in the counterclaim that the Application be tried with the defence.

[20] In my view, the Third party claim is entirely an indemnification claim and 428 is not a party. The defence of Sara-Mammas deals with issues outside of circumstances involving 428. The Third party was not brought in by reason of the act or neglect of 428 and therefore the second exception does not apply.

[21] With respect to the last exception, the third party proceedings do not flow from the franchise agreement. There was no requirement for 428 to sue Sara-Mammas but it is understandable that Imvescor seeks contribution and indemnity from Sara-Mammas, in the event that 428 is found liable. That claim for contribution and indemnity does not translate into “the defendant having no alternative but to join the third party”.

[22] As none of the exceptions apply, Sara-Mamma’s motion for security for costs against 428 is dismissed.

Is the defendant by counterclaim, Imvescor, entitled to security for costs?

[23] The relief sought in the Application commenced by 428 is almost identical to the relief sought in the Counterclaim advanced by 428. 428 sought to resolve the Application by way of a Rule 22 special case motion. 428 was unsuccessful in the first instance and on appeal. Leave to the Supreme Court was denied. If 428 were to proceed with a full hearing of the Application, they would be required to pay the outstanding costs orders. 428 is now attempting to assert those same issues by way of counterclaim. In my view, Rule 56.01(1)(b) has been met.

[24] Furthermore, there is an outstanding costs order of over $40,000.00 against 428 in favour of Imvescor and Sara-Mammas. Whether that costs order arises in the context of this or another proceeding, the defendant by counterclaim is permitted to rely on that fact to satisfy the requirement of Rule 56.01(1)(c). In this case it is notable that the costs orders that 428 has failed to pay are not only in respect of another proceeding but are in relation to a proceeding wherein 428 is seeking almost identical relief.

[25] As the Counterclaim clearly falls within two of the enumerated categories in Rule 56.01, the onus therefore shifts to 428 to prove that it is not just for the court to make such an order.

[26] 428 relies on the following issues in support of their submission that an order for security for costs would be unjust.

(A) delay;

(B) the intertwined nature of the defence and counterclaim; and

(C) a meritorious defence and counterclaim.

(A) Delay

[27] Other than an exchange of pleadings there has been no activity in this action. Imvescor submits that the delay in this action is irrelevant to this motion and urges the court to look only at the progress of the counterclaim. At paragraph 13 of the counterclaim, 428 requests that the counterclaim be heard before the main action. From June 2010 to present, 428 has done nothing to move forward either the Application or the counterclaim, so 428 is remiss in attempting to rely on delay by Imvescor.

[28] Furthermore, as stated in Livent Inc. (Receiver and Manager of ) v Deloitte & Touche [2011] O.J. No. 1660 at paragraph 80, “a corporate plaintiff seeking to avoid posting any security by virtue of delay must demonstrate at least some prejudice.” 428 has put forth no evidence of any prejudice and therefore has failed to demonstrate that they suffered any prejudice as a result of alleged delay.

(B) Defence and Counterclaim are Intertwined

[29] 428 submits that security for costs should not be ordered against a defendant/plaintiff by counterclaim where the defence and counterclaim plead the same allegations and arising out of the same facts and circumstances. Nonetheless, 428 pleads that the counterclaim should be heard before the Imvescor claim.

[30] 428 asserts that the principal allegations in the counterclaim flow directly from the Statement of Defence as they arise out of the same facts and circumstances. 428 asserts that the Application dealt only with the discreet issue of timing whereas the sufficiency of disclosure which is very much still in issue.

[31] In Toronto-Dominion Bank v Szilagyi Farms Ltd. et al., [1988] 65 O.R. (2d) 433, https://www.canlii.org/en/on/onca/doc/1988/1988canlii4745/1988canlii4745.html, the Ontario Court of Appeal held that a plaintiff by counterclaim should only be ordered to post security for costs where the counterclaim makes allegations wholly independent of the initial claim and defence.

[32] In my view, the defence and counterclaim are independent of one another. 428 is the entity which, in May 2008, commenced the Application – while the franchise agreement was still in play. Now 428 is attempting to get a second chance by way of counterclaim and at the same time is seeking to avoid security for costs when they have failed to pay costs ordered within the Application proceedings. Furthermore 428 has provided no explanation for the non-payment of costs on the Application. For 428 to now try to argue that a security for costs order is unjust seems clearly unfair to the moving party and precisely the principle behind Rule 56.01(1)( c). A security for costs order will not prevent 428 from defending the action.

(C) Meritorious Defence and Counterclaim

[33] 428 submits that the disclosure document that it produced in January 2013 will lead to 428 having a high probability of success it its defence and counterclaim. The merits of an action is but one factor to consider when determining whether to award security for costs.

[34] Master Glustein in Coastline, supra states that a court must examine the potential financial hardship of the responding party. 428 has lead no evidence of financial difficulty or insufficiency of assets. Therefore, based on precedent, it is not necessary that the court look deeply into the merits. Further, I am not prepared to give an undue amount of weight to this factor when in my view, the outstanding costs orders in the related Application were ordered against the very party now seeking to avoid an order for security for costs.

CONCLUSION

[35] For reasons outlined above, Sara-Mammas’ motion for security for costs is dismissed with costs. 428 shall post security for costs incurred to date and for prospective costs in favour of Imvescor. Security for costs shall be paid on an installment basis. The first installment shall be for costs in the amount of $50,000.00 plus HST plus disbursements through the completion of examinations for discovery of all parties.

Costs

[36] Counsel shall, within 30 days, attempt to agree on the issue of costs of this motion. If they are unable to agree, then counsel for the moving parties shall deliver brief (1-2 pages) written costs submissions together with a Costs Outline to counsel for the responding party (and to the court) within 45 days and the responding party shall respond (by brief 1 - 2 page written submissions and a costs outline ) within 15 days thereafter. Reply costs submissions require leave.

(original signed)

MASTER RONNA M. BROTT

Date: July 31, 2014.