SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 11-CV-437362

MOTION HEARD: November 9, 2012, May 22 and
December 18, 2013, and August 13 and 15, 2014

Re: 2287913 Ontario Inc., Trebar Holding Inc.,
2234406 Ontario Inc. and Arctic Spas Oakville Inc.

Plaintiffs

v.

ERSP International Enterprises Ltd., Break Through
Enterprises Ltd., Kellner Consulting Ltd., Liquid Logic Ltd.,
Echo Solutions Incorporated, Paradise Bay Spa & Tub
Warehouse Inc., SPA Logic Inc., Blue Falls Manufacturing Ltd.,
Arctic Spas Inc., John Keirstead, James Keirstead, Darcy Amendt,
Dennis Kellner and Brent Macklin

Defendants

BEFORE: Master Thomas Hawkins

COUNSEL:
Ian R. Dick (on November 9, 2012 only)

Allyson M. Fischer and Mitchell R. Smith for moving defendants
F (416) 362-9680

H. Richard Bennett for responding plaintiffs
F (416) 364-1697

REASONS FOR DECISION

Nature of Motion

[1] This is a motion by the defendants for an order for security for the costs of the defendants in the sum of $263,516. The plaintiffs have opposed the motion.

[2] The motion has been brought on the basis of subrule 56.01(1)(d) and (e). This subrule provides in part as follows.

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,

(d) the plaintiff or applicant is 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;

(e) there is good reason to believe that the action or application is frivolous and vexatious and that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent; …

[3] As argued, very little time was spent on that part of the defendants’ motion based on subrule 56.01(1)(e). Both sides focused on the part of the defendants’ motion based on subrule 56.01(1)(d). That said, the affidavits filed by both sides dealt at considerable length with the subject of whether the plaintiffs’ action was or was not frivolous and vexatious.

[4] The motion has been a hard fought one. If the various motion materials were stacked one on top of the other, they would make a pile well over 30 centimeters high.

[5] On the evidence before me the plaintiffs were slow to respond to the defendants’ requests for financial disclosure from the plaintiffs. These requests for financial disclosure were proper because the amended statement contains a claim for damages for loss of profits.

[6] Some five letters which defence counsel sent plaintiffs’ counsel from May 28, 2012 to August 2, 2012 requesting disclosure of the plaintiffs’ financial circumstances were not substantively answered. They did not result in any disclosure of the financial circumstances of the plaintiffs. Finally, by letter dated August 21, 2012 defence counsel advised plaintiffs’ counsel that the defendants intended to bring a motion for security for costs on November 9, 2012.

[7] When the plaintiffs initially began making financial disclosure the information provided did not satisfy defence counsel. Most of the information was not current. The main plaintiff, Arctic Spas Oakville Inc., (“ASOI”), was losing money. The inventory and real property assests of the plaintiffs as disclosed were heavily encumbered by security interests in favour of lenders and an equipment lessor.

[8] Trevor Wasney, the president of ASOI, swore an affidavit in response to the defendants’ motion. When cross-examined on his affidavit, he was unable to answer many questions about the plaintiffs’ financial circumstances and the unaudited financial statements which were produced. Mr. Wasney said that the financial statements were prepared by the plaintiffs’ accountant, Fred Stille, who would know the answers. Initially, there was no affidavit from Mr. Stille.

[9] In November 2013, about one year after argument of this motion began, the plaintiffs served defence counsel with an affidavit from Mr. Stille sworn November 26, 2013. Plaintiffs’ counsel, Allyson Fischer, objected to parts of Mr. Stille’s affidavit which contained information that was available before argument of this motion began on November 9, 2012 and information that filled in weak spots or holes in the plaintiffs’ position which defence counsel had raised in argument on November 9, 2012. She did not object to those parts of Mr. Stille’s affidavit which contained more current financial information on the plaintiffs, which information was not available before November 9, 2012 because it was more current information.

[10] Subrule 39.01(3) sets out the deadline for service and filing of affidavits to be used in opposition to a motion. This subrule provides as follows.

All affidavits to be used at the hearing in opposition to a motion or application or in reply shall be served and filed with proof of service in the court office where the motion or application is to be heard at least four days before the hearing.

[11] I have a discretion under subrule 2.01(1)(a) and especially rule 2.03 to dispense with compliance with any rule of the Rules of Civil Procedure, including compliance with the deadline in subrule 39.01(3). Subrule 2.01(1) and rule 2.03 provide as follows.

2.01 (1) A failure to comply with these rules is an irregularity and does not render a proceeding or a step, document or order in a proceeding a nullity, and the court,

(a) may grant all necessary amendments or other relief, on such terms as are just, to secure the just determination of the real matters in dispute; …

2.03 The court may, only where and as necessary in the interest of justice, dispense with compliance with any rule at any time.

[12] Subrule 2.01 (1) gives me jurisdiction to grant “other relief” on terms. Rule 1.05 also gives me broader jurisdiction to impose terms when making an order. This rule provides as follows.

When making an order under these rules the court may impose such terms and give such directions as are just.

[13] I admitted Mr. Stille’s November 26, 2013 affidavit in its entirety, including those parts of the affidavit containing information available before November 9, 2012 because I felt that by so ruling, I was more likely to determine this motion on the basis of the real matters in dispute and the true facts.

[14] On May 22, 2014 the plaintiffs served defence counsel with a supplementary affidavit of Mr. Stille sworn May 21, 2014. This affidavit provided still more current financial information on the plaintiffs. This still more current financial information indicated that the plaintiffs’ financial health was much improved over what it had been in 2012 and earlier. As a result, the defendants withdrew this motion. I therefore made no order for security for costs.

[15] Argument on August 13 and 15, 2014 focused on which side should be awarded the costs of this motion.

[16] In my view, when this motion was first brought, the defendants were justified in moving for security for costs on the basis of subrule 56.01(1)(d). The defendants’ requests for information on the financial affairs of the plaintiffs, especially ASO1, initially went unanswered. When financial information was belatedly provided, it was not current. Mr. Wasney could not answer many questions about the financial statements produced. The financial information initially provided indicated that the financial health of the plaintiffs was poor. It was not until Mr. Stille began to provide affidavit evidence in November 2013 and, especially in May 2014, that it became clear that the financial situation of the plaintiffs had significantly improved and there was no longer good reason to believe that the plaintiffs had insufficient assets in Ontario to pay the costs of the defendants. At that point, the defendants withdrew their motion, except for their claim for the costs of the motion.

[17] Plaintiffs’ counsel points out, correctly, that the defendants’ motion was withdrawn in stages. The defendants initially withdraw the part of their motion based on subrule 56.01(1)(e). Practically no time was spent arguing this part of the defendants’ motion. The part of the defendants’ motion based on subrule 56.01(1)(d) was not withdrawn until much later, in May 2014. However by this time, the defendants had incurred substantial expense in bringing their motion for security for costs under subrule 56.01(1)(d).

[18] The following is another factor relevant to the issue of the costs of the defendants’ motion. The defendants took the position that Ms. Fischer could not argue the motion because she was a witness on the motion. This objection was based on the fact Ms. Fischer had written a letter about the profitability of the plaintiffs, which letter became an exhibit on the motion. Ms. Fischer took the position that she was not giving evidence on profitability. Nevertheless because of the position which the plaintiffs had taken, the defendants’ lawyers brought in Mr. Dick to argue the motion. Mr. Dick spent some 34 hours preparing to argue the motion and presenting argument on the motion on November 9, 2012. He did not participate in argument after November 9, 2012 because on November 9, 2012 the plaintiffs withdrew their objection that Ms. Fischer was a witness on the motion.

[19] I consider that in accepting all of Mr. Stille’s November 26, 2013 affidavit, including those parts of the affidavit that contained information available before November 9, 2012 and those parts of the affidavit that filled in weak spots or holes in the plaintiffs’ position which defence counsel raised in argument, I have granted the plaintiffs an indulgence. The price of an indulgence is the payment of the costs of those who have sought, unsuccessfully, to prevent its being granted. See Fox v. Bourget (1987), 17 C.P.C. 2d (94) Ont. Dist. Ct.

[20] I therefore award the costs of this motion, fixed at $15,000 to the defendants. This is significantly less than the defendants requested. I have not awarded the defendants any costs for the motion for security for costs on the basis of subrule 56.01(1)(e). The defendants withdrew this part of their motion early on. This part of the defendants’ motion was not affected by belated disclosure of information by the plaintiffs, and not affected by Mr. Stille’s affidavits. I consider $15,000 to be the fair and reasonable amount of costs which the plaintiffs ought to pay in the circumstances I have described in paragraphs [16] to [19] above.

[21] The plaintiffs are to pay these costs to the defendants within 30 days.

(original signed)___

Date: December 18, 2014
Master Thomas Hawkins