CHEMICHECK INC. v. TEVA CANADA LIMITED, 2015 ONSC 2061
CITATION: CHEMICHECK INC. v. TEVA CANADA LIMITED, 2015 ONSC 2061 COURT FILE NO.: CV-14-498963 MOTION HEARD: MARCH 25, 2015
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Chemicheck Inc. v. Teva Canada Limited
BEFORE: MASTER R.A. MUIR
COUNSEL: Jonathan Stainsby and Ronak Shah for the defendant, moving party Hedy L. Epstein for the plaintiff, responding party
REASONS FOR DECISION
[1] The defendant brings this motion for an order requiring the plaintiff to post security for costs pursuant to Rule 56.01(1)(d) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (the "Rules"). The defendant takes the position that the plaintiff is a corporation with insufficient assets in Ontario to pay any costs award that may ultimately be made in favour of the defendant.
[2] The plaintiff is opposed to the relief sought by the defendant.
[3] This is an action seeking payment of outstanding invoices for services rendered to the defendant by the plaintiff. The defendant has delivered a statement of defence and counterclaim. The defendant alleges that the plaintiff has overbilled the defendant by the amount of $650,000.00. The defendant alleges that some of the plaintiff's invoices were submitted for work not performed, others amounted to duplicate billing and others included incorrect hourly rates. The defendant also seeks damages for certain costs associated with securing a replacement contractor and for the plaintiff's alleged concealment of a conflict of interest.
[4] Rule 56.01(1)(d) provides 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 . . .
[5] The test on a motion of this nature is summarized in the decision of Master Glustein in Coastline Corp. v. Canaccord Capital Corp., [2009] O.J. No. 1790 (S.C.J. – Master). In general terms, the moving defendant has the initial onus of demonstrating that the plaintiff falls into one of the categories set out in Rule 56.01(1). This onus is not a heavy one. The defendant need only show that the plaintiff is a corporation and that there is good reason to believe that the plaintiff has insufficient assets in Ontario to pay the costs of the defendant. The onus then shifts to the plaintiff to tender evidence that it has assets available to respond to any costs order, to demonstrate impecuniosity or to ask the court to make such order as is just in the circumstances.
[6] The applicable principles are set out in full detail at paragraph 7 of Coastline which reads as follows:
7 I apply the following legal principles:
(i) The initial onus is on the defendant to satisfy the court that it "appears" there is good reason to believe that the matter comes within one of the circumstances enumerated in Rule 56.01 (Hallum v. Canadian Memorial Chiropractic College, (1989), 70 O.R. (2d) 119 (H.C.J.) at 123);
(ii) Once the first part of the test is satisfied, "the onus is on the plaintiff to establish that an order for security would be unjust" (Uribe v. Sanchez (2006), 33 C.P.C. (6th) 94 (Ont. S.C.J. – Mast) ("Uribe") at para. 4);
(iii) The second stage of the test "is clearly permissive and requires the exercise of discretion which can take into account a multitude of factors". The court exercises a broad discretion in making an order that is just (Chachula v. Baillie, (2004), 69 O.R. (3d) 175 (S.C.J.) at para. 12; Uribe, at para. 4);
(iv) The plaintiff can rebut the onus by either demonstrating that:
(a) the plaintiff has appropriate or sufficient assets in Ontario or in a reciprocating jurisdiction to satisfy any order of costs made in the litigation,
(b) the plaintiff is impecunious and that justice demands that the plaintiff be permitted to continue with the action, i.e. an impecunious plaintiff will generally avoid paying security for costs if the plaintiff can establish that the claim is not "plainly devoid of merit", or
(c) if the plaintiff cannot establish that it is impecunious, but the plaintiff does not have sufficient assets to meet a costs order, the plaintiff must meet a high threshold to satisfy the court of its chances of success;
(See Willets v. Colalillo, [2007] O.J. No. 4623 (S.C.J. – Mast.) at paras. 46, 47, and 55; Uribe, at para. 5; Zeitoun v. Economical Insurance Group, (2008), 91 O.R. (3d) 131 (Div. Ct.) at para. 50; Bruno Appliance and Furniture Inc. v. Cassels Brock & Blackwell LLP, [2007] O.J. No. 4096 (S.C.J. – Mast.) ("Bruno") at para. 35);
(v) Merits have a role in any application under Rule 56.01, but in a continuum with Rule 56.01(1)(a) at the low end (Padnos v. Luminart Inc., [1996] O.J. No. 4549 (Gen. Div.) ("Padnos"), at para. 4; Bruno, at para. 36);
(vi) The court on a security for costs motion is not required to embark on an analysis such as in a motion for summary judgment. The analysis is primarily on the pleadings with recourse to evidence filed on the motion, and in appropriate cases, to selective references to excerpts of the examination for discovery where it is available (Padnos, at para. 7; Bruno, at para. 37);
(vii) "If the case is complex or turns on credibility, it is generally not appropriate to make an assessment of the merits at the interlocutory stage. The assessment of the merits should be decisive only where (a) the merits may be properly assessed on an interlocutory application; and (b) success or failure appears obvious" (Wall v. Horn Abbott Ltd., [1999] N.S.J. No. 124 (C.A.) at para. 83);
(viii) The evidentiary threshold for impecuniosity is high, and "bald statements unsupported by detail" are not sufficient. The threshold can only be reached by "tendering complete and accurate disclosure of the plaintiff's income, assets, expenses, liabilities and borrowing ability, with full supporting documentation for each category where available or an explanation where not available" (Uribe, at para. 12; Shuter v. Toronto Dominion Bank, [2007] O.J. No. 3435 (S.C.J. – Mast.) ("Shuter") at para. 76);
(ix) To meet the onus to establish impecuniosity, "at the very least, this would require an individual plaintiff to submit his most recent tax return, complete banking records and records attesting to income and expenses" (Shuter, at para. 76);
(x) A corporate plaintiff who claims impecuniosity must demonstrate that it cannot raise security for costs from its shareholders and associates, i.e. it must demonstrate that its principals do not have sufficient assets (Smith Bus Lines Ltd. v. Bank of Montreal, (1987), 61 O.R. (2d) 688 (H.C.J.) at 705). Evidence as to the "personal means" of the principals of the corporation is required to meet this onus (Treasure Traders International Co. v. Canadian Diamond Traders Inc., [2006] O.J. No. 1866 (S.C.J.) ("Treasure Traders"), at paras. 8-11). A corporate plaintiff must provide "substantial evidence about the ability of its shareholders or others with an interest in the litigation to post security". "A bare assertion that no funds are available" will not suffice. (1493677 Ontario Ltd. v. Crain, [2008] O.J. No. 3236 (S.C.J. – Mast.) at para. 19);
(xi) Consequently, full financial disclosure requires the plaintiff to establish the amount and source of all income, a description of all assets including values, a list of all liabilities and other significant expenses, an indication of the extent of the ability of the plaintiffs to borrow funds, and details of any assets disposed of or encumbered since the cause of action arose (Morton v. Canada, (2005), 75 O.R. (3d) 63 (S.C.J.) at para. 32);
(xii) Because the plaintiff has the onus to establish impecuniosity, a defendant "can choose not to cross-examine if the plaintiff fails to lead sufficient evidence". The decision not to cross-examine does not convert insufficient evidence into sufficient evidence (Bruno, at pars. 27-28; Shuter, at paras. 59 and 71); and
(xiii) When an action is in its early stages, an installment (also known as "pay-as-you-go") order for security for costs is usually the most appropriate (Bruno, at para. 65; Hawaiian Airlines, Inc. v. Chartermasters Inc., et al., (1985), 50 O.R. (2d) 575 (S.C.O. – Mast.)).
[7] These are the factors and principles I have applied in determining the issues on this motion. Overall, I am guided by the central principle that an order for security for costs is discretionary. The role of the court on a motion such as this is to make the order that is just in all of the circumstances. See Hallum at paragraph 10.
[8] The defendants have met their initial onus. The plaintiff is obviously a corporation. The plaintiff concedes that it has insufficient assets to respond to a significant costs order in favour of the defendant. It should be noted, however, that the plaintiff takes the position that its lack of assets and general financial hardship have been caused by the defendant's failure pay its invoices.
[9] The onus now shifts to the plaintiff to establish that an order for security for costs would not be just in the circumstances of this action. On this motion, the plaintiff has chosen to rely, in part, on impecuniosity. In my view, the plaintiff has not established impecuniosity. Impecuniosity requires a plaintiff to demonstrate that it cannot raise funds for security for costs from its shareholders and others who may benefit from the litigation. Evidence as to the personal means of the principals of the corporation is required to meet this onus. The evidence put forward by the plaintiff consists of general statements by the sole shareholder of the plaintiff that she is possessed of only limited assets that she is unable to borrow against. The principal of the plaintiff also states that she is unable to raise the necessary security by borrowing or obtaining the funds from other sources. Very little detail is provided. No supporting documents in the nature of her bank statements or income tax returns are provided. No particulars of any attempts to raise funds have been provided.
[10] Moreover, there is a troubling pattern apparent from the plaintiff's bank statements that have been produced. Regular deposits are made to the corporation's bank account with TD Canada Trust and then almost immediately most of those amounts are transferred to another bank account. No explanation has been provided for those transfers.
[11] In my view, the plaintiff's evidence falls short of the robust disclosure necessary to establish impecuniosity, as set out in Coastline cited above.
[12] However, I accept that the plaintiff has established, for the purposes of this motion, that its claim has a reasonably good chance of success. The plaintiff's evidence is that its invoices were reviewed and approved by one of the defendant's managers on a regular basis. The defendant did not raise any issues with respect to the plaintiff's invoices between 2011 and April 2013 when it terminated its agreement with the plaintiff. The defendant has not filed any evidence on this motion that addresses the merits of the plaintiff's claim. Statements found in a pleading or a letter written by a lawyer do not amount to evidence in the absence of at least an affidavit or documentary evidence supporting such allegations.
[13] A further factor also favours the plaintiff's position. It appears clear from the evidence that the defendant was the plaintiff's main customer, accounting for nearly all of the plaintiff's revenue. The plaintiff has been unable to secure other accounts to make up for this lost business. When the defendant terminated its agreement with the plaintiff it refused to pay the plaintiff's outstanding invoices in the approximate amount of $350,000.00. The plaintiff's evidence is that the majority of those invoices had been approved for payment by the defendant's management personnel. Given that I have no evidence to the contrary from the defendant, I can only conclude, at least for the purpose of this motion, that the plaintiff's impoverishment has been caused by the defendant's refusal to pay the plaintiff's invoices. This is an appropriate consideration on a motion for security for costs. See Delta Muskoka General Contractors Inc. v. Ophelders, 2011 ONSC 4345 at paragraph 39.
[14] The defendant may have a valid defence to the plaintiff's action. It may also succeed on its counterclaim at the end of the trial. The court's difficulty on this motion, however, is the lack of evidence from the defendant in relation to the merits of its position. As a result, I can only conclude that the plaintiff's current financial difficulties are largely a result of the defendant's default and that the plaintiff has a good chance of success at trial.
CONCLUSION
[15] I am troubled by the plaintiff's lack of full financial disclosure and the unexplained transfers from its operating account with TD Canada Trust. However, it is my view that the strength of the plaintiff's case on the merits and the failure of the defendant to pay the plaintiff's approved invoices are the most important factors on this motion. Those factors militate in favour of the plaintiff's position, despite the plaintiff's failure to establish impecuniosity. I have therefore concluded that it is just in the circumstances of this action that the plaintiff be relieved from having to post security for costs. The defendant's motion is dismissed.
[16] If the parties are unable to agree on the issue of costs, they may make brief submissions in writing. The plaintiff's submissions shall be served and filed by April 13, 2015. The defendant's submissions shall be delivered by April 22, 2015. Any reply submissions shall be made by April 27, 2015.
Master R.A. Muir
DATE: March 30, 2015