SUPERIOR COURT OF JUSTICE – ONTARIO

Court File No.: 14-60555R
Date: July 14, 2015

In the matter of the Construction Lien Act, R.S.O. 1990, c. C.30 as amended

RE: 1652472 ONTARIO INC. o/a NORTH KEY CONSTRUCTION, Plaintiff

AND:

BLACK & MCDONALD LIMITED et al. al., Defendants

BEFORE: MASTER MACLEOD

COUNSEL:
Catherine DiMarco for the defendant, moving party

Robert G. Smart, for the plaintiff, responding party

HEARD: July 14, 2015

ENDORSEMENT

[1] The defendant brings a motion for security for costs of this reference. The reference itself involves four lien claims by North Key Construction in connection with four solar farm projects located in different counties in the East Region. Those lien claims along with all of the related sub-trade and supplier liens have been referred to the master in Ottawa.

Background

[2] These projects are interesting. Each one involves co-ownership between the original landowner and a project specific corporation. Black & McDonald was the general contractor for each of the projects covered by this series of liens. North Key was the prime sub-contractor. As described by counsel for North Key, in the most simple terms the contract was to erect 22,000 posts each of which was to be used to support the solar panels forming the solar array for each of the solar generation projects. Needless to say each post had to be adequate to the task and had to be positioned in accordance with the overall design. When most of the work had been completed, disagreements arose between the parties and North Key’s contract was terminated. The registration of liens and this litigation ensued.

[3] The critical questions are whether the plaintiff or the defendant breached the contract, whether the defendant is liable to North Key for extra costs arising from changes to the design, and whether North Key is liable to the defendant for deficiencies, for over certification, for additional completion costs and for failing to meet certain other legal requirements. There are millions of dollars in issue.

[4] For reasons dealt with at the previous hearings for directions it is necessary to determine the issues between North Key and Black & McDonald before knowing if there are any funds available to any of the other lien claimants. This is because of the CRA super priority and the union trust claims which must be satisfied before any other funds can trickle down to sub-trades and suppliers. As discussed in previous endorsements contained in my procedure book, the only scenario in which the Crown’s priority does not attach to the funds is if there is no money owing to North Key. In that scenario the holdback funds which have been paid into court would be available to satisfy the union claims and perhaps some small amount would remain for the other lien claimants.

[5] The only other scenario in which the lien claimants can be paid is if North Key is completely successful in this and its related litigation against another contractor on a different series of similar projects. In that case North Key estimates it would have a surplus after paying all of its liabilities.

[6] The first hearing for directions (construction lien pre-trial) was held on April 2nd, 2014 and there have been several subsequent hearings including a joint hearing on both sets of projects. Although the issues have been narrowed, it appeared by April of this year that the only way forward was to have a trial of the issues between North Key and Black & McDonald. As well since the length of that trial will exceed what can be accommodated in the master’s schedule in Ottawa it is necessary to have that trial before a judge. An order has been made under Rule 54.10 but I otherwise remain seized of the reference.

[7] At the first hearing I made an order designating a court file number 14-60555R as a master court file incorporating all of the lien proceedings. There are also separate Ottawa file numbers for each of the individual lien proceedings and in particular for the four North Key liens. Although this motion was brought in one of those individual files, 14-59958R, as the four lien actions are to be tried together or one after the other the order for security for costs is to apply in all four. I have therefore used the master court file number in these reasons. Schedule A attached identifies the four action numbers for the individual lien claims as well as the original court file numbers in the counties of origin.

Security for Costs

[8] Turning to the motion itself, I granted leave to the defendant to bring this motion at the hearing in April. Several decisions of this court have held that a motion for security for costs is appropriate in a lien proceeding particularly given the scheme under the Act which requires the defendant to post security for both the lien and for costs in order to vacate the lien from the owner’s land. While this does not mean that leave will automatically be granted in every instance, a motion for security for costs may generally be justified as a necessary step to doing justice between the parties and because it may shorten the proceeding by ensuring the plaintiff cannot proceed with risk free litigation.[^1] . Though I granted leave to argue the motion I did not of course pre-decide that security for costs is appropriate. That is the issue to which I now must turn.

[9] It is conceded that the plaintiff is no longer operating and is now a shell corporation without assets apart from its potential recovery in this series of lawsuits and the related Miwel litigation. In the event that North Key is unsuccessful in the litigation and becomes liable for costs, it is quite clear that a judgment against it will be unenforceable. The threshold requirement in Rule 56.01 (d) is therefore engaged. This permits the court to make an order for security for costs but does not require it to do so.

[10] Under the Rules it has been held that once the threshold requirement under rule 56.01 has been engaged, the onus shifts to the plaintiff to show cause why security should not be granted.[^2] That may sound like a rebuttable presumption that security for costs should be granted. It is important to remember however that the wording of the rule is that the “court may make such order for security for costs as is just”. These are words of discretion and what is just in each case will depend on all of the circumstances.[^3] In applying my discretion under the Rules and in applying the principle of proportionality it is necessary to consider the overall purpose and intent of the Construction Lien Act and the reference rules under which I am operating. Both the Act and the rules speak to streamlined and cost effective procedures. Notwithstanding the fact that there are millions of dollars claimed in these actions and millions of dollars claimed by way of setoff and counterclaim, one must not lose sight of the other lien claimants whose rights may also be infringed by an inappropriate order for security.

[11] On the evidence before me on this motion, the plaintiff cannot meet the test for impecuniosity within the meaning of the Smith Bus Lines and Hallum line of cases.[^4] In the first place it has not made the kind of financial disclosure that would be necessary and it has certainly not put forward evidence concerning the means and ability of its shareholders or its creditors.[^5] A plaintiff seeking to show that an order for security would be unjust must also put forward cogent and specific evidence that it cannot pursue the action if security is ordered.[^6] Other than bald assertions there is no such evidence in the affidavit of Mr. Isbester.

[12] It is undisputed that if North Key is successful in this litigation, the recovery will be largely for the benefit of its creditors and in particular the Minister of National Revenue. In fact North Key’s liens specifically encompass all of the amounts it acknowledges are owing to the other lien claimants. There was an exercise early on in the proceeding in which I required North Key to clearly indicate which of those claims it was disputing and which were encompassed in its own claims against the defendant. Thus at least some of the creditors have a significant stake in the outcome of the upcoming trial.

[13] On the evidence there are only three arguments made by North Key that can be given any weight. The first of these is that a motion for security for costs brought late in the proceeding on the eve of trial should be considered tactical and an abuse of process. North Key deposes that it has paid over $300,000.00 in legal fees on the combined lien proceedings and might not have done so had security for costs been sought at the outset.

[14] The second argument is that the defendant advances a claim for setoff and counterclaim. Security for costs against a defendant by counterclaim is not contemplated by the rule and the court must be cautious not to give the plaintiff by counterclaim an inappropriate advantage.

[15] The third argument is that the only reason the plaintiff finds itself in a position of poverty is the very dispute at the heart of the action. The defendant is the cause of the poverty of the plaintiff by (wrongfully) withholding funds owing to the plaintiff. It would be unjust to permit a defendant to choke off the plaintiff’s cash flow and then to use that circumstance to obtain an order for security for costs which would prevent the plaintiff from asserting its rights.

[16] With respect to the first two arguments, I generally adopt the analysis of Master Wiebe in Unimac-United Management Corp. v. Canadian National Railway.[^7] As in that case, given the procedural history of the reference and the fact that the defendant required leave to bring the motion, I cannot find that there has been unreasonable delay. The defendant is not disentitled from brining the motion simply because a trial date has now been set. In fact the motion could not have been brought earlier because this is the date I set for the hearing when I granted the defendant leave to proceed.

[17] With respect to costs of the counterclaim, this is not a case in which the counterclaim introduces new issues or is likely to generate costs unrelated to the main action. Again Master Wiebe has succinctly summarized the jurisprudence. I would just add however that the jurisprudence surrounding counterclaims is sometimes misunderstood. It has never been the case that a defendant who counterclaims is disentitled from seeking security for costs against the plaintiff. Rather it is the law that when a counterclaim is the defence this is not a basis for using the security for costs rule to seek security against the defendant (as plaintiff by counterclaim.)[^8]

[18] Where a counterclaim is separate from the defence the situation is different and of course in that situation if the court is granting security for costs to the defendant it must be cautious not to also grant the defendant (as plaintiff by counterclaim) security for costs of the separate counterclaim. This is not the situation here. The counterclaim and setoff are the defence. To be cautious however, like Master Wiebe, I would recognize that the counterclaim adds some element of cost and discount the bill of costs accordingly.

[19] Notwithstanding the view expressed in O’Neill v. Le Roux[^9] that if the court decides security for costs is warranted “then the court may not circumvent its duty by ordering a token amount”, it is quite clear that the court has wide discretion to fashion an appropriate order. The court is not obliged to order any particular percentage of a proposed litigation budget as security.[^10]

[20] What of the argument that the poverty of the plaintiff is the fault of the defendant? To accept this argument requires an assessment of the merits of the case. Naturally if the plaintiff is correct in its allegations that it is owed millions of dollars wrongfully withheld from it then it would appear harsh indeed if it is prevented from bringing the matter to conclusion by a security for costs order. This assessment of the merits is normally part of the impecuniosity assessment.[^11] It is not by itself a basis for withholding an order. In other words the court will not refrain from ordering security just because the claim may have merit. Certainly the apparent merits or lack of merits may always form part of the analysis about what order is just[^12] but it is obviously insufficient to conclude that security for costs will be unjust if the plaintiff is correct. The court must also have regard to the injustice that will result if the plaintiff fails to prove its case and the defendant is unable to collect its costs. That is the purpose of the rule.

[21] In support of its assessment of the merits the plaintiff points to the fact that it was only removed from the job when 95% of all posts had been installed and North Key delivered invoices for extra work. Until that point North Key asserts there had been no complaints about the quality of the work. It asserts that the defendant is a huge international corporation and that it knowingly contracted with small local companies without requiring performance bonds or other sophisticated but costly safeguards. In the plaintiff’s submission the defendant is simply trying to use its economic might to roll over the plaintiff and it knows the plaintiff’s only assets are the accounts receivable represented by the lien claims. In effect it argues the defendant is proceeding in bad faith.

[22] I cannot give much weight to this evidence because it amounts to little more than argument dressed up in affidavit form. The moving party defendant by contrast provided detailed affidavits setting out the evidence of various witnesses. The evidence of the defendants will be that the plaintiff was in financial difficulty and had abandoned the contracts before it purported to deliver claims for unjustified extras. The defendant has set out in detail the supporting documents for its defence and setoff claim in which it documents the cost of completing incomplete work, rectifying deficiencies and dealing with unpaid sub trades and suppliers. The defendant alleges that the plaintiff misquoted and mismanaged its work, took on more than it could handle and simply failed to pay its obligations. Contrary to the plaintiff’s assertion that there will be surplus even if the plaintiff is fully successful, it is the defendant’s calculation that the indebtedness of the plaintiff exceeds its maximum possible recovery.

[23] The plaintiff has simply not met the evidentiary burden of demonstrating that security for costs would be unjust. In fact the plaintiff’s insistence on relying on general assertions of fact without specific supporting detail and its failure to put forward significant cogent and detailed evidence creates the general impression that it very unlikely to be successful at trial. I do not mean to suggest that volume of evidence will win the day but the contrast between the level of detail and supporting documentation in the Isbister affidavit of June 25th, 2015 compared to the materials put forward by the moving party is somewhat worrying.

[24] The plaintiff has offered to release the costs portion of the lien bonds posted as security for its liens. Although that totals $200,000.00 I agree with counsel for the defendant that such an order cannot be made without considering the position of each of the sub trade and supplier lien claimants. They also have claim to the costs portion of the bonds. All of the bonds which had previously been posted to secure those liens have been released as a term of the order that the holdback be paid into court. In any event the liens were over secured because their claims are contained within the North Key liens.

[25] I conclude that security for costs will be appropriate. I must now consider the quantum of that security.

[26] In light of the amount the plaintiff deposes it has spent on legal fees to date, I do not doubt that the defendant has spent the amounts outlined in the bill of costs. I also do not seriously doubt the estimated costs to be incurred for the trial. As noted above, however, I will take into account that there is a counterclaim and make some allowance for costs relating to the counterclaim. In addition there are costs incurred by virtue of the sheer number of liens which are not the liens of the plaintiff. Finally, though I am not persuaded that the plaintiff has met the evidentiary burden of proving impecuniosity and I cannot accept the plaintiff’s “David & Goliath” argument for not granting an order, these are nevertheless factors to be considered. The financial risk to the defendant of being unable to make full recovery of a potential costs award must be balanced against the prejudice to the plaintiff if the order is too extreme.

[27] In the final analysis fixing an amount for security for costs is not a scientific exercise. Given the nature of the dispute and the factors outlined above, it is my view that the plaintiff should be required to post security in the amount of $225,000.00. This is roughly 50% of the partial indemnity costs estimated by the defendant.

[28] Security need not be cash of course. It may be in the form of a bond or letter of credit or other acceptable security.

[29] In conclusion there will be an order that the plaintiff post security for costs in an acceptable form in the amount of $225,000.00. The security will stand as security for each of the actions identified in Schedule A.

[30] I invite the parties to agree on costs of the motion itself. If they cannot do so or if there is any dispute about the form of the security then I may be spoken to for further direction.

July 14th, 2015

Master Calum MacLeod

SCHEDULE A: Reference file numbers for the Black & McDonald actions

Reference File Number

Ottawa Main Action Number

Original Court File Number

Project

14-60555R

All 4 projects – Master Reference

14-59973R

14-59973

935 / 12 (Perth)

Smiths Falls 2

14-59965R

14-59965

936 / 12 (Perth)

Smiths Falls 5

14-59958R

14-59958

12-1329 (Perth)

Smiths Falls 6

14-59924R

14-59924

12-1328 (Perth)

Brockville

[^1]: See for example GTA Structural Steel Ltd. V. 20 Ashtonbee Holdings Ltd. (2005) 49 C.L.R. (3d) 157 (S.C.J. Ont.) and cases referred to therein.

[^2]: For example, Dean’s Standard Inc. v. Hachem 2014 ONSC 1977 @ para 24

[^3]: Crudo Creative v. Marin (2007) 90 O.R. (3d) 948 (Div. Ct.)

[^4]: See Hallum v. Canadian Memorial Chiropractic College (1980 1989 4354 (ON SC), 70 O.R. (2d) 119 ( H.C.J.) and O’Neill v. Le Roux 2011 ONSC 3931

[^5]: Biotechnik Inc. v. O’Shanter Development Co. (2003) 30 C.L.R. (3d) 52 (Ont. S.C.J.) See also Design 19 Construction Ltd. V. Marks (2002) 22 C.P.C. (5th) 117 (Ont. S.C.J.)

[^6]: See Unique Labeling Inc. v. International Private Beverage (2009) 2009 ONCA 591, 98 O.R. (3d) 233 (C.A.)

[^7]: 2015 ONSC 2372

[^8]: Toronto Dominion Bank v. Szilagyi Farms Ltd. (1988) 1988 4745 (ON CA), 65 O.R. (2d) 433 (C.A.)

[^9]: supra, note 4 @ para27

[^10]: See Crudo Creative, supra @ para. 36 See also Fountain Healthy Aging Inc. v. 1633935 Ontario Corp. 2011 ONSC 1309 (Master)

[^11]: John Wink v. Sico Inc. (1987) 1987 4299 (ON SC), 57 O.R. (2d) 705 (H.C.J.) @ p. 708

[^12]: Aviaco v. Boeing (2000) 48 C.P.C. (4th) 366 (S.C.J.)