Focal Elements Ltd. v. TVM Sault Inc., 2018 ONSC 4273
Court File No.: 27395/17 Date: 2018-10-12 Ontario Superior Court of Justice
Between: Focal Elements Ltd., Plaintiff – and – TVM Sault Inc., TVM Construction Management Inc., and The Toronto-Dominion Bank, Defendants
Counsel: Adam Wainstock, Counsel for the Plaintiff Jamie Spotswood, Counsel for the Defendants
Heard: July 13, 2018 Before: Rasaiah J.
Reasons on Motion
Overview
[1] The Defendants, TVM Sault Inc. ("TVM Sault") and TVM Construction Management Inc. ("TVM Management") (collectively "TVM"), seek leave to and move for an order compelling the Plaintiff, Focal Elements Ltd. ("Focal"), to post security for costs pursuant to Rules 56.01(1)(d) and (e) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.
[2] Focal Elements Ltd. (“Focal”) opposes the motion and submits that security for costs is not appropriate. In addition, Focal submits that TVM has not met the threshold test for being granted leave to bring the within motion.
TVM's Position
[3] TVM asserts the following. a. Leave should be granted. Courts commonly grant security for costs in construction lien actions. b. There is good reason to believe that Focal has insufficient assets in Ontario to pay a cost order that may be made in the litigation. c. Focal has not advanced its lien action and there is no prospect that it will. d. There is no merit to Focal’s action. e. The separate but related lien actions against Focal and TVM have not progressed and there is no prospect that they will either. f. Granting TVM security for costs will ensure that Focal does not suffer a procedural injustice, permitting Focal to initiate and keep TVM in risk free litigation. g. Granting TVM security for costs will expedite the issues in dispute and facilitate progress in the action by giving TVM the security to which it is entitled to progress the action so it can be resolved and TVM's funds released from Court. h. TVM did not delay in bringing the within motion, but if it is found to have, sufficient explanation is established in the evidence for delay, and Focal has not suffered no prejudice. i. TVM’s conduct did not directly result in Focal’s liabilities and indebtedness. j. TVM’s counterclaim does not preclude an order. k. The quantum of security for costs claim, if security for costs is ordered, is not excessive, and at the end of the day, this is within the discretion of the court to order.
Focal's Position
[4] Focal asserts the following: a. Focal’s liabilities and indebtedness result directly from TVM’s conduct and the matters in dispute in this action. b. Focal’s claims are not frivolous or vexatious – there is merit to them. c. Focal’s claims are intertwined with the lien actions of Focal’s subcontractors and suppliers. Focal is “sandwiched” in the middle of claims proceeding both ways; and the claims of the subcontractors and suppliers against TVM (for holdback) (TVM is also a defendant in those other actions) are in ways reliant on Focal’s claims proceeding.) d. Focal is not only the plaintiff in the various proceedings but also a defendant and a defendant to TVM’s counterclaim which is based in large part on the same facts and circumstance and in addition raises new issues. e. TVM has delayed in bringing this motion and the delay is fatal to the motion. f. An order for security for costs will not expedite the resolution of any matters in issue. g. All of Focal’s arguments apply equally to the granting of leave and the determination related to granting an order for security for costs.
Introduction
[5] I have decided to grant leave to bring the motion; and to grant the motion and order that an order for security for costs issue, but not in the quantum requested by TVM.
Facts
[6] TVM Sault was the owner and developer of the Riverwalk Condominium project located in Sault Ste. Marie, Ontario (the "Project"). TVM Management was the Project's general contractor. The Project consisted of the redevelopment of a former hospital into a five-story condominium complex.
[7] Focal is a corporation that provides among other services, drywall and framing services, in the construction industry.
[8] On June 8, 2015, TVM Sault issued a drywall tender request for the drywall and related work on the Project.
[9] Focal submitted a tender, along with two or three other bidders. TVM accepted Focal's bid.
[10] TVM Management and Focal subsequently entered into a Stipulated Price CCDC-CCA1 contract dated July 28, 2015 to complete work on the Project (the "Subcontract").
[11] Pursuant to the Subcontract, TVM states that Focal contracted to, among other things: a. Adhere to the architectural drawings outlined in the drawing log and the scope of work contained in the Subcontract; b. Install all wood backing in washrooms for grab bars; c. Install all hollow metal frames in drywall where indicated on the applicable drawings; d. Install fire caulking to all areas related to the scope of work; e. Make smooth all drywall ceilings throughout all suites and common areas; Supply, install, and prime all drywall; f. Supply and install all suspended drop ceilings in common areas; and g. Supply and install drywall and labour for underground garage walls (the "Work")
[12] The fixed price for the Subcontract was $857,000.
[13] During its time on the Project, Focal retained various suppliers and subcontractors including, 9448616 Canada Ltd. (“944”), Lyons Ltd. (“Lyons”), Service Rentals & Sales Ltd. (“Service Rentals”), and following unionization that occurred during the Project, the United Brotherhood of Carpenters and Joiners of America, Local 2486 (“Union”), to complete the work.
[14] TVM Management states it paid Focal a total of $829,000 gross of discounts for the Project. This amount included approximately $62,000 in extras and $31,766 in reimbursed expenses.
[15] TVM asserts that near the end of the project, Focal's labourers abandoned Focal for unpaid wages, and just after, Focal delivered invoices to TVM, including an invoice charging TVM Management $305,484.85 for "extra labour”.
[16] Focal worked on the Project from on or about August 2015 through to October 19, 2016.
[17] Focal states the additional costs and labour overruns on this project were caused by poor site management by TVM – Focal’s labour costs for 2016 alone exceeded $786,000.00 as a result (more than $325,000.00 more than its budgeted labour costs for the entire Project (which it asserts included a contingency for rectifying deficiencies - there was a cushion built in for that). Focal states that Focal’s labour costs on the Project exceeded its budgeted labour costs by $305,484.85 (plus HST) (in addition to contract funds and other extra work and project extension costs incurred by Focal that TVM has not paid for).
[18] Focal registered a lien against the project property. In addition, Lyons, Service Rentals and the Union commenced lien actions and sued both Focal and TVM Sault.
[19] TVM asserts that the reality is that Focal was ill-equipped to complete the work. Focal’s work was continuously delayed due to inadequate labour and supervision; unionization (the process itself, and thereafter its inability to absorb higher union rates for which TVM would not be responsible); and Focal having to redo a considerable amount of deficient work, the work having been of poor quality.
[20] Further TVM asserts that extras were to be submitted and paid throughout the project in accordance with the contract.
[21] TVM also disputes the extras claimed in the action, and take the position that they were part of the original scope.
[22] TVM borrowed money to pay $783,165.80 into court as security for the lien and Focal's costs. Focal has not advanced its lien action and TVM asserts that there is no prospect that it will. TVM states that the separate but related lien actions against Focal and TVM Sault brought by Lyons, Service Rentals and the Union have not progressed and there is no prospect that they will either.
[23] In November of 2016 TVM received two notices/requirements to pay from Canada Revenue Agency (“CRA) indicating to them that Focal had CRA liabilities of approximately $100,000.
[24] In October of 2017, TVM received two more requirements to pay from CRA indicating that the liabilities had increased to approximately $340,000.
[25] TVM’s counsel wrote to Focal November 23, 2017 seeking security for costs. At this time, pleadings were not yet completed, nor examinations for discovery. Some document discovery had been completed. Focal did not respond.
[26] TVM wrote again in January of 2018 seeking security for costs or in the alternative information that Focal had sufficient assets in Ontario to satisfy a cost order. Focal did not respond.
[27] TVM filed the motion on or about April of 2018.
[28] Focal has not come out and directly asserted that it has assets to pay costs or stated that it has sufficient assets in Ontario, or that it is impecunious. Limited information was filed by Focal regarding its financial status and its ability to be fund a cost order made in the litigation if one was made.
Law for Security for Costs Motion
[29] In BFG Packaging SRL v. Alpha Marathon Film Extrusion Technologies Inc., 2018 ONSC 1146 (Ont. Master), a succinct summary of the law on motions for security for costs was set out:
[4] Rule 56.01(1) of the Rules of Civil Procedure 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,
(a) the plaintiff or applicant is ordinarily resident outside Ontario;
(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 remain unpaid in whole or in part;
(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; or
(f) a statute entitles the defendant or respondent to security for costs.
[5] The applicable law is summarized by Master Glustein, as he then was, in Coastline Corp. v. Cannacord Capital Corp., 2009 ONSC 21758, [2009] O.J. No. 1790 (Master) at para. 7:
(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 paras. 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. (1985), 50 O.R. (2d) 575 (S.C.O.-Mast.)).
[30] The general purpose of security for costs is to afford defendant’s reasonable measure of protection for their costs but also with regard to their potential impact on the plaintiffs: 671122 Ontario Ltd. v. Canadian Tire Corp. (1993), 15 O.R. (3d) 65 (Ont. C.A.), para. 6.
[31] In respect of r. 56.01(d), where a corporate plaintiff fails to provide robust particulars of its ability to pay costs, the court may draw an adverse inference: General Products Inc. v. Actiwin Co., 2015 ONSC 6923.
[32] Where a plaintiff failed to respond to a defendant’s inquiry as to the availability of assets, the court may order security for costs: 737071 Ontario Inc. v. Min-A-Mart Ltd. (1996), 47 C.P.C. (3d) 68 (Ont. Gen. Div.).
[33] As to quantum, r. 56.04 provides wide and flexible discretion as to the type and amount of security for costs that should be ordered. In cases where the matter is still in its procedural infancy, with examinations for discovery yet to be scheduled, an order for "pay-as-you-go" security is usually the most appropriate: Morton v. Canada (2005), 75 O.R. (3d) 63 (S.C.J.) at para. 42.
Should Leave Be Granted?
[34] The Construction Lien Act, R.S.O. 1990, c. C.30 (the "CLA") does not expressly provide for motions by defendants for security of costs.
[35] Subsection 67(2) CLA states that interlocutory steps, other than those provided for in the CLA, shall not be taken without consent of the court. Consent is obtainable upon proof that the steps are necessary or would expedite the resolution of the issues in dispute: Unimac-United Management Corp. v. Canadian National Railway Co., 2015 ONSC 2372 (Ont. Master) at paras. 15 and 20; Melco Construction Inc. v. Jack Frost Sparkling Springs Co., 2011 ONSC 2197 at para. 15.
[36] After reviewing the authorities provided by both counsel, while I agree that there is no doubt there are cases that go both ways, I am of the view it is clear that motions for security for costs can be brought and leave can be granted to bring them in construction lien cases in appropriate cases having regard for the condition precedents on the moving party satisfying the court that at minimum one of the conditions precedent set out in s. 67(2) CLA has been met.
[37] TVM’s filed authorities that have interpreted “necessary” in this context (security for cost motions) to be related to interests of procedural fairness and justice to both parties, to create a level playing field, having regard for the purpose and rationale of r. 56.01(1).
[38] In 1049086 Ontario Ltd. v. Torbear Contracting Inc., [2005] O.J. No. 5435 (Ont. S.C.) at para. 21, in the context of analyzing leave, Scott J. wrote that r. 56.01(1) provides a mechanism to preserve the procedural balance between the parties so that one party is not insulated by circumstances (i.e. its own lack of assets) from the risk inherent in the conduct of litigation, so no step in the proceeding would be taken unnecessarily or at least without a cost benefit consideration. In that regard, Scott J. wrote that a security for costs motion could well be a necessary step in construction lien actions. I agree.
[39] A threshold consideration for establishing leave for a motion for security for costs under r. 56.01(1)(d), as “necessary” is whether or not the moving party has established that "there is a good reason to believe" that the responding party does not have sufficient assets in Ontario to pay costs if the party was unsuccessful at trial; in essence establishing the initial onus, step one of the security for costs inquiry: Unimac at para. 20.
[40] Master Polika, set out in GTA Structural Steel Ltd. V. 20 Ashtonbee Holdings Ltd., [2005] O.J. No. 4999, that not being permitted to proceed with litigation risk-free and the requirement to post security could have the effect of expediting the resolution of issues in dispute: para 40. I agree. I am also of the view that a requirement to post security for costs could have the effect of expediting the resolution of the issues in dispute by encouraging a plaintiff who is not advancing its action, to do so.
[41] I find this is an appropriate case to grant leave; and that TVM has met both conditions precedent to be granted leave and delay does not affect the granting of leave for the following reasons and based on the above.
[42] I find that there is an imbalance, namely TVM has been put to the expense of posting significant security. Mr. Sofer borrowed money on which he is paying significant monthly interest payments (which presumably would be since on or about January of 2017 after the Order of Gareau J. was made). Focal’s claim was issued in January of 2017 and it has yet to provide all of its documents on which it intends to rely or reach examinations for discovery. In the meantime, TVM’s borrowed funds sit in the Court. There is no evidence before me that satisfies me that the other lien claimants have been moving their claims forward either. Apparently not much has transpired since October of 2017 (after payout of holdback).
[43] TVM estimates that the costs to take this action through discovery to be $73,315.50 and $41,285.45 on a partial indemnity basis and that there is good reason to believe Focal has insufficient assets in Ontario to satisfy an order for costs.
[44] In order to establish a "good reason to believe", the moving party must show "a belief of insufficiency that goes beyond mere conjecture, hunch or speculation". A moving party does not have to establish that a plaintiff corporation in fact has insufficient assets to pay costs. Unimac at para. 22; City Commercial Realty Services (Canada) Ltd. v. Bakich, [2005] O.J. No. 6443 (C.A.) at para. 8.
[45] The evidence and answers to undertakings indicate that Focal has a total current liability to CRA in the amount of $294,590.
[46] Focal filed its 2016 tax filing (prepared by its accountant). It indicates “yes” as having property that is eligible for capital cost allowance and claimed $2,444 as amortization of tangible assets (namely, class 8 shop facility equipment with undepreciated capital cost of $12,221).
[47] The tax filing indicates the main revenue-generating business activity as residential building construction. Focal has had only one contract since the Project and has not disclosed particulars of same or any future work it may have.
[48] Focal does not have a bank account.
[49] The said tax filing indicates a net loss of $1,083,041 in 2016. It indicates “yes”, that the net loss is different from that reported on the financial statement. It indicates non-capital losses from the previous taxation years of $108,733 (2015, 2014, 2013 and 2009; $23,140, $73,125, $6,352, and $6,116 respectively). It indicates Maria Tawachi, as sole shareholder (and president) at that time. Mr. Tawachi on cross-examination thought he was. However, it is not disputed that Maria Tawachi’s shares were transferred to Mr. Tawachi at some point and he currently is the sole shareholder. Accordingly, there is one shareholder for Focal, Mr. Tawachi.
[50] The tax filing also indicates total assets at the end of the 2016 tax year were $37,287 and revenue was in the amount of $729,846. The prior year’s income (2015) was indicated as $735,652.
[51] The tax filing included a balance sheet which did not indicate any work in progress; prepaid expenses of $27,510 (inventory); and tangible capital assets of $9,777 (namely, tangible capital assets less accumulated amortization) which reflects the tax filing’s report of total assets of $37,287. The previous year’s assets were $158,696, the majority of which consisted of work in progress (which was $145,000).
[52] The balance sheet indicates that there was $678,442 in trade payables, $334,591 in employee tax deductions payable, $35,886 in withholding taxes payable, and $187,856 due to shareholder loans, for a total of $1,236,775 in liabilities. The prior year figures for these items were $46,599, $81,125, $24,552, and $121,554 respectively.
[53] The difference in the 2016 and 2015 due to shareholder loans is $66,302 based on the balance sheet. Current ability to borrow was not particularized by Focal on this motion.
[54] The balance sheet indicated a retained earnings deficit of $1,199,488. The prior year indicated a deficit of $115,134.
[55] A question at cross-examination of Mr. Tawachi on his affidavits, which occurred May 31, 2018 (“cross-examinations”) as to whether Focal was taking the position that it had assets in Ontario to satisfy a cost order was taken under advisement. The answers to the questions taken under advisement were that legal position questions were not a proper question on cross-examination, and the question as to whether Focal was taking the position that it has assets in the province of Ontario to satisfy a cost award was not answered.
[56] A question at cross-examination as to the current financial status of Focal was taken under advisement and not answered at the date of the hearing of the motion.
[57] At cross-examinations Mr. Tawachi indicated that Focal had no other assets that are not listed in the 2016 tax filing filed. As of the date of the motion, Focal had not answered an undertaking to advise if the assets noted in the 2016 tax filing were any different on the 2017 tax return.
[58] At cross-examination, TVM asked for a breakdown of the income for 2016 set out by the tax filing; an undertaking was given. It was not answered at the time of the hearing of the motion.
[59] I find that TVM has established that based on the evidence and/or lack of evidence before the court that there is good reason to believe that Focal has insufficient assets in Ontario to satisfy a cost order.
[60] In its factum, Focal took two positions on the timing of TVM’s motion. The first position was that TVM delayed in bringing the motion and the delay is fatal to the motion. Focal’s second position was that the motion was premature, examinations for discovery not yet having taken place – examinations reveal the merit of the action.
[61] TVM submits there was no delay and even if delay was found, the delay was sufficiently explained and Focal has not established prejudice arising from delay.
[62] I agree there was delay but find that it is not fatal in granting leave or on the motion for an order for security for costs (which for ease I will address here and not repeat under the motion for security for costs analysis).
[63] I further find that the motion is not premature and TVM does not have to wait until examinations for discovery are completed.
[64] As referred to by Master Graham in Pelz v. Anderson, [2006] O.J. No. 4726, at paragraph 11, quoting from Charron v. MacDonald, [1938] O.W.N. 410 I am of the view in terms of timing and bringing of a motion for security for costs, that:
…when a defendant believes that he is entitled to an order for security for costs, he should move at the earliest possible moment in order that the plaintiff may know whether or not he will be required to give security and to prevent him from proceeding at very considerable expense down to trial and then find himself faced with an order for security with which he is unable to comply.
[65] Accordingly, the first step on this issue on this motion is to examine whether or not there was a delay; a determination of when the defendant believed he was entitled to an order for security for costs, and if the moving of the defendant can be said to have been made at the earliest possible moment.
[66] The law is clear that that if there has been a delay there is an obligation on the moving party to explain the delay and for the responding party to establish prejudice, if any, arising from any found delay. A simple finding of delay is not fatal to a motion. However, if it is unexplained or causes prejudice to the plaintiff, it may well be: Unimac, paras 51-61.
[67] TVM tendered evidence as to what transpired up to TVM initiating the motion. The lien was registered November 23, 2016. On November 29, 2016 TVM received two requirements to pay from CRA against Focal in respect of unpaid payroll remittances and HST. The statement of claim was issued January 13, 2017. TVM delivered its statement of defence and counterclaim April 13, 2017. On October 23, 2017, TVM received a second set of requirements to pay from CRA. This time, the amounts were much higher. Within approximately one month or receiving this second set, TVM by its counsel wrote to Focal’s counsel putting Focal on notice to TVM’s concerns and requesting security for costs. In the letter TVM makes it clear that TVM believes it is entitled to an order for security for costs. TVM did not bring a motion at this time. It waited for a response. No response came. TVM wrote again within a few months; sent a follow-up, second inquiry/letter. Again, there was no response from Focal to this letter. Thereafter, TVM brings the motion for an order for security for costs returnable April 24, 2018. It is after this date that Focal delivered its statement of defence to the crossclaim, May 31, 2018. By this time, TVM had delivered productions and Focal, only an affidavit of documents. Examinations for discovery had not taken place but the transcripts filed seem to suggest discussions were had about timelines regarding same.
[68] The first said letter from TVM to Focal dated November 23, 2017 articulates that TVM has concern over the CRA debt of $73,851.15 and seeks $50,000 in security for costs. The second letter dated January 2, 2018 does not mention the increased liability as a concern but gives Focal until January 9, 2018 to respond. This second letter also indicates that TVM has instructed that a motion be brought if agreement to post is not received or in the alternative, information to satisfy TVM that security for costs is not required.
[69] Looking at the CRA Requirements to Pay documents, the first one consists of 2 notices (received separately according to Mr. Sofer), one in the amount of $73,851.15 for payroll remittances undated (but stated to have been received on or about November 29, 2016) and one in the amount of $22,707.36 for HST which is dated November 29, 2016 for a total of $96,558.51. The second set also consists of 2 CRA Requirements to Pay documents, one in the amount of $340,106.92 for payroll remittances dated October 23, 2017 and one in the amount of $35,972.71 for HST which is dated October 23, 2017, for a total of $376,079.63.
[70] Mr. Sofer on cross-examinations stated that prior to the first letter sent by TVM to Focal regarding security for costs, he had been discussing the issue with his counsel for “some time” because he had to borrow money to pay into court to bond off the liens which was costing him hefty monthly interest (payments) and he wanted to ensure that at the end of the day TVM did not end up with a judgement against a hollow company. The borrowing of the money to bond off the liens presumably occurred just before, on, or shortly after the order of Gareau J. dated January 19, 2017.
[71] Based on this evidence, I do find that TVM delayed in initiating the motion. However I find, the evidence establishes a sufficient explanation. Mr. Sofer it appears was waiting on his counsel to move the case forward which he alluded to on cross-examinations.
[72] The court file reflects that on March 23, 2017 a notice of change of lawyers for TVM was filed indicating that TVM appointed Jamie Spotswood of Clyde and Co. Canada LLP as lawyer of record for them.
[73] It is reasonable to infer that TVM’s new counsel with the letters was attempting to seek posting without necessity of a contested motion, and/or information that would or could indicate it was not an issue before going to the step of bringing the motion and in my view, over a reasonable time frame – a month and a half. When no response was received to the second letter, TVM initiated its motion approximately three months thereafter.
[74] Further, and in terms of prejudice, and the effect of any delay, I would find that Focal has not established prejudice. Despite the case having been started in January of 2017, this proceeding is still at initial stages and there is no evidence that Focal incurred considerable expense and/or time prior to the initiation of the motion. Further and I think it is important in the context of delay and prejudice in this particular case, to note that Focal was on notice to the issue of security for costs in November of 2017, after the first letter from TVM’s counsel. Focal acknowledges that it received the letters and that it did not respond to the letters from TVM on the basis that “no response was required” on the basis of its belief that security for costs was not warranted or appropriate. There is no evidence that TVM at any time backed off from its position on security for costs after the first letter or second letter; or that Focal was (or could have been) blindsided by the motion or led down a path of incurring more expense unaware that this was an issue for TVM.
[75] I am of the view that the above is enough for TVM to meet the threshold of being granted leave.
Should an Order for Security for Costs Be Made?
Step One of the Inquiry
Insufficient Assets in Ontario
[76] At step one of the inquiry, in respect of r. 56.01(1)(d), the defendant need not prove that the plaintiff has insufficient assets to answer for costs so long as it establishes “good reason to believe” such is the case.
[77] In analyzing the leave issue above, I have indicated that I am satisfied that TVM has established that there is good reason to believe that Focal does not have sufficient assets in Ontario to pay a cost order made in the litigation.
[78] Focal has not rebutted that it has appropriate or sufficient assets in Ontario to satisfy any order of costs made in the litigation, despite invitations to do so.
[79] The evidence, and considerations I applied in my analysis under this step are set out above in my analysis for granting leave for the motion, and I will not repeat them.
Frivolous and Vexatious
[80] TVM only needs to establish one of the six categories to engage the second step of the inquiry for an order for security for costs. I indicated that it has already met step one of the security for costs inquiry in respect of r. 56.01(1)(d). However it moves under two, so I will address this second category briefly for completeness.
[81] In respect of this category, r. 56.01(1)(e), I am not satisfied given the credibility and reliability issues and questions I see as arising on the evidence, that it can be said at this stage that the claim is completely devoid of merit.
[82] In respect of r. 56.01(1)(e), a motion for security for costs ought not to be turned into a motion for summary judgment: Intellibox Concepts Inc. v Intermec Technologies Canada Ltd. (2005), 14 C.P.C. (6th) 339.
[83] The salient evidence and consideration I applied to come to this conclusion overlaps with my consideration of the merits of the claim in the context of step two and are set out below in that section.
Step Two of the Inquiry: Considerations
Impecuniosity
[84] I find Focal has not met its onus.
[85] Focal has not filed up-to-date information. There are many unanswered questions regarding Focal’s current financial status and/or its ability to raise funds. No particulars were provided regarding the income from the job Focal has/had since the Project. While it may not have a bank account, it was not explained how it was receiving the income presumably it is making/made from the other job it had since the Project. It is unclear what Focal’s plans are for the funds about to be released to it from the 944 lien action, and in particular, what if any of it would be available to satisfy a cost order. It is unclear as to what further funding is available to Focal from its shareholder. It is not known what ability if any Focal has to borrow in light of it now having had work since the Project (since I do not know anything about that work).
[86] On cross-examination neither Mr. Tawachi nor his counsel when asked indicated that Focal was suggesting that it was impecunious. Focal undertook to advise if that was being asserted if it was decided that it was an appropriate question to answer. This question was not answered.
[87] At cross-examinations, in respect of shareholder loans, Mr. Tawachi stated that he and his wife borrowed from two sources (loans) and lent money to Focal by way of shareholder loans. At the hearing of the motion, Focal’s submissions included that the court may be able to infer that Focal was impecunious on the basis that Mr. Tawachi and his wife in the past have borrowed money that it loaned to Focal. I decline to do so, in that equally, without further evidence, it can be interpreted to mean that Focal has the ability to borrow or raise money.
[88] I also decline to find Focal as impecunious based on the debt and asset information that is before the court. I decline emphasizing that impecuniosity is not the same as or as simple as establishing “insufficient assets”. Any finding on that basis alone in my view would not be not appropriate or in line with the case authorities.
[89] It was clearly open to Focal to argue impecuniosity, but there was insufficient evidence before the court to make a finding in its favour on this point in my view.
Merit of the Claim and Chance of Success
[90] I reviewed the pleadings and the claims.
[91] I reviewed the evidence filed.
[92] I am mindful that this is not a motion for summary judgment.
[93] Focal asserts its claims have merit, namely, that it will be able to establish that: a. it has not been paid for part of its contract work, legitimate extras, increased material costs and increased labour costs; b. that the original scope was very different than originally contemplated; c. that there were additions/extras, inaccuracies, and inconsistencies in the Project drawings; d. that Focal’s tender was issued for the July 2015 drawings to which numerous changes were made (particulars including but not limited to that an existing block wall in building “C” (priced and quoted on) had been demolished and was altered to be finished as an EIFS wall instead resulting in additional labour and material costs of $41,200); e. delays were not caused by Focal, but by TVM’s mismanagement of the Project; and f. that Focal was not given notice and/or an opportunity to address or review alleged deficiencies (which Focal denies existed and/or states were not related to Focal’s work or stated that it was a matter of satisfying an inspector’s opinion and that inspector’s way of doing things - Focal performed its work as directed).
[94] On the merits of this case and what is owed, TVM asserts it did not mismanage as alleged by Focal. TVM asserts that any overrun incurred by Focal was as a result of its mismanagement of its workers, the unionization of workers for the Project, and Focal having to repair deficient work. TVM believes Focal workers were not being paid by Focal and that there were difficulties with that throughout the Project. TVM believes the last invoice sent by Focal was a last ditch effort to secure additional funds to pay workers for the extra work Focal incurred due to its own mismanagement, incompetent supervision, and deficient work. TVM notes that the invoice would not have been payable until November, and Focal walked away the day of or day after the invoice was dated (October 19 and 20, 2016). TVM asserts that it was well known amongst the trades that Focal regularly made commitments that it did not keep which impacted the other trades.
[95] I am not in a position in my view to determine whether there is or is not a good chance of success. There are a number of credibility issues in this case which can dictate which way a case will rise and fall. What I can say tentatively on what was presented is that if Focal’s evidence is accepted, there may be a good chance of success on some of the issues and not on others.
[96] I provide not all but a few pieces of my review of the evidence to demonstrate my finding.
[97] Focal states that the affidavit filed on this motion of Mr. Pope (president of the electrical subtrade on the Project who deposed to a number of project issues caused by Focal delays, Focal’s inability to adhere to schedules, Focal’s poor quality of work, and Focal’s lack of proper site supervision) contains untrue statements and alleges that Mr. Pope was not personally on the site most of the time to even be in a position to make the statements made in his affidavit filed. The details of Mr. Pope’s presence on site during the Project are not provided.
[98] There were many trades and suppliers involved in this Project who may or may not support Focal’s and/or TVM’s factual allegations which effects the level of success in the case. With the exception of some evidence from Mr. Pope, that evidence is not before the court.
[99] Attached to the reply affidavit of Mr. Sofer are a number of emails directed to Mr. Tawachi regarding issues expressed by the project manager spanning the time period of approximately March 2016 to August 2016. The emails outline missing items/deficiencies; the need for more manpower from Focal who cannot keep up; issues with supervision of work in respect of proper work (prior to inspections) and allowing construction to proceed in a timely fashion (other trades not being able to finish their work). Mr. Tawachi’s explanation is that the issues were not caused by Focal. Emails indicate that Mr. Kein McKeown and Mr. Tawachi, had different views as to what trades were holding up the others and what the problem was (email stream from Mr. McKeown to Mr. Tawachi dated April 26, 2016).
[100] While Focal acknowledges the unionization during the Project, it denies that it caused any consequential delays. There was one email, however, in September of 2016 in which Mr. Tawachi is informing Mr. Sofer that the Union is informing Mr. Tawachi that he was told by the Union that it would be 2 weeks before they could have additional tapers (in response to more being requested). It is not known if this in fact ended up being the case.
[101] Mr. Tawachi did acknowledge and state that the labour rates after unionization created a $15 to $17/hr difference depending on the applicable worker’s classification and that there were also union dues. Union rates were not budgeted for and Focal agrees TVM is not responsible for the difference. Focal has yet to provide sufficient details of the effect of this, in my view.
[102] TVM asserts and filed documents (site notes/diaries) suggesting there were previous complaints long before October 2017 related to Focal’s payment of its workers (which Focal denies, other than to acknowledge the odd mistake or late courier delivery – isolated incidents). The notes don’t speak to the details to verify either way what the issues were.
[103] Mr. Tawachi claims he had conversations with Mr. Sofer as to extras and additional costs, and based on his previous working relationship with Mr. Sofer, believed that these issues could be dealt with essentially globally at the end of the project – he had been treated more than fairly by Mr. Sofer previously – he had a belief they would resolve it and move forward – “when it came down to the horrendous extra labour created by the flow of project, that’s where it became very a sensitive issue to handle without jeopardizing the relationship with TVM by taking a hardline approach to it”. He indicated that continuation of the relationship played a major factor and how he handled moving forward with TVM. An email from Mr. Tawachi to Mr. Sofer dated April 15, 2016 was filed in support of the foregoing. Yet in his affidavit, it appears Mr. Tawachi states that he attempted to discuss the escalating costs with Mr. Sofer on numerous occasions both verbally and in writing and that Mr. Sofer refused to deal with the extra cost claim.
[104] Mr. Sofer did not have a recollection of any monetary request related to extras referred to in the said email and that there are always emails of this nature in construction. There was a letter dated August 12, 2016 from Mr. Sofer to Mr. Tawachi filed which seems to suggest that they spoke about default under the contract in relation to delay and based on their mutual respect and in effort to maintain their continuing and developing relationship, both of them expressed a preference to work together and to that end, Mr. Tawachi undertook to increase his crew and maintain the increase until the Project was completed or until fewer men were required to complete the work and that TVM agreed to accept this plan to remedy the default. There is no indication of any agreement or terms related to payment by TVM related to this plan. In response to this letter, by email dated August 21, 2016, Mr. Tawachi acknowledged receipt of it but indicated he was not in agreement with allegations of non performance etc.; confirmed in the interest of completing the project as fast as humanly possible, increased manpower; and will adjust down as milestones are achieved. The response is silent as to expected payment in respect of the increased manpower.
[105] At the end of the day the assessment of the merits is not by itself a basis for withholding an order. In other words the court need 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 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: 1652472 Ontario Inc. (c.o.b. North Key Construction) v. Black & McDonald Ltd., 2015 ONSC 4560 (Master) at para. 20.
Focal’s Ability to Pursue its Action
[106] Mr. Tawachi’s two affidavits filed do not explain either way, if an order for security for costs would keep Focal from proceeding with Focal’s action. This troubled me. He is the sole shareholder. Mr. Tawachi’s focus appeared to be more so on asserting that requiring Focal to post security for costs would amount to requiring Focal to post security for costs as a condition of defending itself having regard for TVM’s counterclaim.
[107] On cross-examination, Mr. Tawchi did not indicate that Focal could not or would not be able to continue with his action.
[108] This is a consideration in my view in determining what is just.
Fault of TVM for Focal’s Financial Status
[109] It is a consideration on these motions whether or not the plaintiff’s deficiency in its assets was due to the wrongful conduct of the defendant which is the very subject matter of the litigation. If a defendant’s conduct did bring about the demise of the plaintiff’s business, but that conduct was arguable justifiable or likely not actionable, then it would not be unjust to disregard the conduct when exercising the second stage discretion on a Rule 56.01 motion: Cigar 550.com Inc. v. Ashton Distributors Inc., [2009] O.J. No. 3680 (Ont. S.C.) at paras. 39-40.
[110] Focal asserts that its insufficiency of assets, can be traced to the conduct of TVM on the Project and its refusal to pay Focal the additional amounts it claims are owing.
[111] An answer to undertakings from Focal asserts that $956,911.68 of their 2016 tax filing reported loss reflects losses relating solely to TVM.
[112] While it is true that TVM did not pay the last two invoices issued by Focal prior to Focal leaving the Project, it paid continuously before, all invoices after review. Some invoices were paid early with a discount incentive applied. Given the credibility issues in this case, TVM may have arguable justifiable refusal to pay those last invoices. I am of the view that I have to keep in mind, in analyzing this consideration, that TVM’s arguments are yet to be determined in respect to how Focal found itself in the position it did during and after the Project, which includes the unionization and issues that flowed from that, including but not limited to the resulting substantial increase in labour costs (which is Focal’s most substantial claim). Focal has admitted that the increase is not TVM’s responsibility, meaning it is not something TVM would have been expected to absorb. Focal essentially states its labour costs were double its budgeted costs for the Project. The unionization during the Project caused hourly rates for workers to increase $15 to $17 per hour which is a substantial increase. While T4s were filed by Focal, there was no breakdown filed as to the difference in what Focal would have paid if not for the unionization.
[113] Further TVM’s allegations also refer to a number of deficiencies that had to be addressed that Focal would have been responsible for outside of Focal’s extras and overrun arguments as causing its insufficiency of assets. Focal states it had budgeted for them as part of the quote. However, details of and/or the costs associated on this issue were not provided to sufficiently assess that.
[114] Further, it appears that Focal elected to suspend its operations after the Project– it stopped applying for other work. There is no evidence in this case, as in the other authorities presented, that TVM’s non-payment of the invoices was the reason why it did not or could not get other work. The evidence in fact is that Focal has been able to get other work since the Project.
[115] In my view, Focal has not established sufficient evidence for a finding on this point in its favour that would tip the balance in its favour of a dismissal of the motion for these reasons.
Other Proceedings/Litigants
[116] Focal’s statement of defence and crossclaim filed as against the Union claims that the construction services and material provided by the Union were not performed nor provided in a good and workmanlike manner; that there was numerous delays in the provision of services to be provided by the Union which resulted in damages being sustained by Focal; that the Union did not complete its work and that there were numerous deficiencies in the services and materials provided by the Union on the Project; and that accordingly, no funds are owing by Focal to the Union; and that if funds are owing they are significantly less than the amount claimed. In the crossclaim, however, Focal claims it performed its work on the Project in a good and workmanlike manner and without delay; that TVM is in breach of their contract; that TVM constantly fell behind and caused delays to the Project, did not have the site prepared or ready for Focal to perform its work; that Focal is owed $649,000 from TVM on account of material and labour; and that Focal relies on the statements contained in Focal’s lien action against TVM. Accordingly, the litigation of the crossclaim, in terms of facts and issues will mirror that of Focal’s lien action claim.
[117] Focal’s statement of defence and crossclaim filed as against Lyons is similar except that its deficiency allegations are focused on the alleged provision of deficient materials, as Lyons was a supplier. The crossclaim against TVM is essentially identical to that of the one made in the Union’s lien action.
[118] Focal’s statement of defence and crossclaim filed as against Service Rentals is similar except that its deficiency allegations are focused on the alleged provision of deficient equipment and materials, as Service Rentals was a supplier of same. The crossclaim against TVM is essentially identical to that of the one made in the Union’s lien action and Lyon’s lien action.
[119] Focal suggests that if Focal is ordered to provide security for costs and it is not able to proceed, these claims will be affected and TVM’s crossclaim will proceed in any event.
[120] However, as stated previously, Focal has not filed any evidence stating outright that it would not be able to proceed.
[121] Secondly, Mr. Tawachi deposed that the subcontractors, suppliers and union members are pursuing their claims as against Focal and TVM in any event. All of these claims, Mr. Tawachi asserts will continue, as will TVM’s counterclaim to which Focal’s claims it asserts would operate as a set-off.
[122] Further, Mr. Sofer deposed that the other lien claims have not progressed and that there was presently no prospect that they would progress; that no steps have been taken in either of the actions since a holdback payment was made to the subcontractors from the funds that TVM paid into court (October 26, 2017). There is nothing filed by Lyons, Service Rentals or the Union regarding their intentions.
TVM’s Counterclaim
[123] TVM’s counterclaim focuses on alleged improper charges of the plaintiff, delays by the plaintiff, deficiencies, and negligence. The defendants claim the amount of $300,000 for breach of contract and negligence; in the alternative, damages in the amount of $300,000 for payment on account of deficiency repairs, costs to complete work not performed, and related contract and administrative costs; damages in the amount of $250,000 for loss of reputation; pre-judgment and post-judgment interest pursuant to the Courts of Justice Act; costs of the action and the counterclaim on a substantial indemnity basis; and such further and other relief as the court may deem just.
[124] Focal’s claim is for approximately $650,000, a significant amount of which it asserts will go to the other lien claimants.
[125] Focal argues that it should not have to post security for costs in order to defend itself; the underlying facts behind the claim and counterclaim are in large part the same; and the counterclaim is not a mere defence to the claim.
[126] TVM asserts, and I agree that a counterclaim by TVM does not preclude it from seeking security for costs from Focal: Wilkings v. Velocity Group Inc. (2008), 89 O.R. (3d) 571. However, it can in some cases be grounds to refuse to make an order altogether or alternatively lead to discount of the security depending on the circumstances: Unimac, para 48, 50.
[127] The facts on which the counterclaim in my view are based in large part on the facts and circumstances raised in Focal’s claim, but I don’t find it has been established on the facts in this case that the counterclaim has been or will be the real driver of the action.
[128] TVM asserts, and I acknowledge that in some of the authorities provided to me, even with an overlap of facts and circumstances the outcome concluded with orders for security for costs, albeit discounted.
[129] I agree with Focal that the counterclaim does introduce new issues that would generate costs unrelated to the main action – in particular the claim for loss of reputation and breach of contract related to repair of deficiencies– but I am not persuaded it would be significant. This too, namely the existence of new issues does not preclude an order and can be taken into account in determining quantum: 1652472 Ontario Inc. (c.o.b. North Key Construction) v. Black & McDonald Ltd., 2015 ONSC 4560, para 18.
[130] I am of the view that the above are noteworthy considerations but do not tip the balance in favour of dismissal of the motion. They are factors in my view, in this case that should lead to a discount on the quantum.
Quantum
[131] I find the bill of costs was not sufficiently explained by evidence filed; the amount claimed for security is excessive; and that it is more appropriate that any security ordered should be “pay as you go”, at this time, for the following reasons.
[132] I agree that “initial review and communications” entries on the bill of costs are not detailed. It is not clear, how much of this time was related to the other actions and/or what may have been related to TVM’s ultimate counterclaim. “Pleadings” entries include time related to the other actions. “Production of documents” entries are not clear as to how much of this time related to and/or beneficially extended to the other actions and/or TVM’s counterclaim, but it is clear that Focal still has yet to produce more documents. The same can be said of the “legal research entries”. Examinations are anticipated to proceed in Toronto. Lastly, I also agree that the “security for costs motion” entries should be considered in submissions for a costs order based on and following the outcome of such motion, as opposed to being a consideration for security for costs order.
[133] TVM’s counsel acknowledged not all, but some of the above and suggested that if the court was of the view that I have set out on this issue, that the court apply “rough justice” in determining quantum and/or to discount quantum based on such considerations, pointing to the authorities filed. I agree that is something the court can do based on the authorities submitted.
[134] I considered Focal’s suggestion that releasing the posted security in respect of its action be ordered. I am not satisfied that this is what is just or that it would level the playing field on the facts of this case.
[135] Therefore, considering the above lack of particulars regarding the entries; and arguable relation to TVM’s counterclaim and the other actions; and removing costs related to the security for costs motion, the rough justice application to the bill of costs I have decided on, on a partial indemnity basis is $10,000 for fees and $300 to $350 for disbursements for a total of $10,350.
Order
[136] THIS COURT ORDERS that within 30 days after this order is served on the plaintiff, the plaintiff shall pay into court the sum of $10,350 as security for the costs for the period up to and including examinations for discovery.
[137] THIS COURT ORDERS that until the security required by this order has been given, the plaintiff may not take any step in this proceeding, except an appeal from this order (or as otherwise ordered).
[138] If the parties are unable to agree on the issue of costs, brief submissions, restricted to five pages, may be made to my attention via the trial coordinator within 30 days of the release of these reasons.
Rasaiah J. Released: October 12, 2018