Court File and Parties

COURT FILE NO.: CV-17-62211-SR MOTION HEARD: 20181218 REASONS RELEASED: 20190121

SUPERIOR COURT OF JUSTICE – ONTARIO

BETWEEN:

CANADIAN METAL BUILDINGS INC. Plaintiff

• and-

1467344 ONTARIO LIMITED, OPERATING AS SEC & CO. Defendant

BEFORE: MASTER M.P. McGRAW

COUNSEL: E. Grigg Email: E.Grigg@AdvocatesLLP.com -Counsel for the Defendant

Z. Pringle Email: zpringle@shlaw.ca -Counsel for the Plaintiff

REASONS RELEASED: January 21, 2019

Reasons for Endorsement

I. Overview

[1] As set out in my Endorsement dated November 21, 2018 (the “November 21 Endorsement”), the Defendant, 1467344 Ontario Limited, Operating As SEC & Co. (“SEC”) brought motions seeking security for costs (the “Security For Costs Motion”) and leave to cross-examine the affiant of the Plaintiff’s Affidavit of Documents (the “AOD Motion”) while the Plaintiff, Canadian Metal Buildings Inc. (“CMB”) brought a motion for a discovery plan and timetable (the “Timetable Motion”). The parties resolved the AOD Motion as a result of the Plaintiff’s delivery of a Supplementary Affidavit of Documents and additional productions and the Timetable Motion by agreeing to a discovery plan.

[2] With respect to the Security For Costs Motion, as set out in the November 21 Endorsement, the parties did not cite, consider or provide submissions with respect to recent case law from the Ontario Court of Appeal, in particular, Yaiguaje v. Chevron Corp., 2017 ONCA 827. Accordingly, I adjourned the Security for Costs Motion to December 18, 2018 for 60 minutes to provide the parties with additional time to prepare and file supplementary legal submissions.

II. The Action

[3] This action arises from a contract dated October 7, 2016 between SEC, as general contractor, and CMB, as subcontractor (the “Subcontract”), related to the construction of an aircraft hangar and office space for Sky Ship Capital Corp. near a proposed helicopter base in Caledon, Ontario (the “Project”). Pursuant to the Subcontract, CMB was required to provide all labour and equipment for the construction of a prefabricated steel building provided by a third party manufacturer.

[4] The Plaintiff commenced this action by Statement of Claim issued on July 13, 2017 alleging that it was not paid the balance of the agreed Subcontract price of $96,050. The Plaintiff claims $78,342.90.

[5] In its Statement of Defence and Counterclaim dated August 16, 2017, the Defendant denies liability on the basis of set-off and counterclaims for $171,050.98 alleging that CMB was negligent in performing deficient work and delaying the Project and improperly registered a lien claim against the Project.

[6] Notwithstanding the amount of the counterclaim, the parties have agreed to proceed under the Simplified Rules.

III. The Law and Analysis

[7] Rule 56.01 states:

(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;

[8] As set out by Master Dash in Stojanovic v. Bulut, 2011 ONSC 874, Rule 56.01 does not create a prima facie right to security for costs but rather triggers an enquiry whereby the court, using its broad discretion, considers multiple factors to make such order as is just in the circumstances. These factors include the merits of the claim, the financial circumstances of the plaintiff and the possibility of an order for security for costs preventing a bona fide claim from proceeding

[9] The Court of Appeal has recently provided guidance and clarification with respect to security for costs. In Yaiguaje, the Court of Appeal stated:

“23 The Rules explicitly provide that an order for security for costs should only be made where the justness of the case demands it. Courts must be vigilant to ensure an order that is designed to be protective in nature is not used as a litigation tactic to prevent a case from being heard on its merits, even in circumstances where the other provisions of rr. 56 or 61 have been met.

24 Courts in Ontario have attempted to articulate the factors to be considered in determining the justness of security for costs orders. They have identified such factors as the merits of the claim, delay in bringing the motion, the impact of actionable conduct by the defendants on the available assets of the plaintiffs, access to justice concerns, and the public importance of the litigation. See: Hallum v. Canadian Memorial Chiropractic College (1989), 1989 CanLII 4354 (ON SC), 70 O.R. (2d) 119 (H.C.); Morton v. Canada (Attorney General) (2005), 2005 CanLII 6052 (ON SC), 75 O.R. (3d) 63 (S.C.); Cigar500.com Inc. v. Ashton Distributors Inc. (2009), 2009 CanLII 46451 (ON SC), 99 O.R. (3d) 55 (S.C.); Wang v. Li, 2011 ONSC 4477 (S.C.); and Brown v. Hudson's Bay Co., 2014 ONSC 1065, 318 O.A.C. 12 (Div. Ct.).

25 While this case law is of some assistance, each case must be considered on its own facts. It is neither helpful nor just to compose a static list of factors to be used in all cases in determining the justness of a security for costs order. There is no utility in imposing rigid criteria on top of the criteria already provided for in the Rules. The correct approach is for the court to consider the justness of the order holistically, examining all the circumstances of the case and guided by the overriding interests of justice to determine whether it is just that the order be made.”

[10] The Court of Appeal subsequently provided additional guidance in Novak v. St. Demetrius (Ukrainian Catholic) Development Corporation, 2018 ONCA 219:

“7 Justice Epstein's order was made prior to the release of this court's decision in Chevron Corp. v. Yaiguaje, 138 O.R. (3d) 1, 2017 ONCA 827, which was included in the appellant's materials. We do not read that decision as altering the established test for ordering security for costs. The established test requires a judge, after analysing the specific factors spelled out in the rules, to consider the overall justness of the order sought. In Yaiguaje v. Chevron Corp. the court found that the motion judge had erred in principle in her consideration of the justness of the order.

8 In this case, we are satisfied the Epstein J.A. did not err in considering the ordering of security for costs to be just. Unlike in Yaiguaje v. Chevron Corp, the appellant in this case has a direct economic interest in the appeal. The respondent is not a global enterprise but a not-for-profit senior citizens care centre operated by a church. Unrecoverable costs will reduce the respondent's resources it can dedicate to the care of its clients. There is no indication the respondent sought security for costs as a litigation tactic to end the appeal. The appeal raises no overarching, important, or novel issue. There is no apparent overriding public interest in allowing the appeal to proceed without the posting of ordered security for costs.”

[11] In Baca v. Tatarinov, 2018 ONSC 1307, I summarized the “established test” referred to in Novak. The law on security for costs was also summarized by J.R. Henderson J. in 2311888 Ontario Inc. v. Ross, 2017 ONSC 1295 at para.17 and Master Muir in 2179548 Ontario Inc. v. 2467925 Ontario Inc. [2017] O.J. No. 246 at para. 8.

[12] The initial onus is on the defendants to show that the plaintiff falls within one of the four enumerated categories in Rule 56.01. If the defendant meets the initial onus, the plaintiff can rebut the onus and avoid security for costs by showing that they have sufficient assets in Ontario or a reciprocating jurisdiction to satisfy a costs order; the order is unjust or unnecessary; or the plaintiff should be permitted to proceed to trial despite its impecuniosity should it fail (see Travel Guild Inc. v. Smith, 2014 CarswellOnt 19157 (S.C.J.) at para.16; Coastline Corp. v. Canaccord Capital Corp., 2009 CanLII 21758 (ON SC), [2009] O.J. No. 1790 (ONSC) at para. 7; Cobalt Engineering v. Genivar Inc., 2011 ONSC 4929 at para. 16).

[13] Master Glustein (as he then was) set out the applicable principles at paragraph 7 of Coastline:

“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), 1989 CanLII 4354 (ON SC), 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), 2004 CanLII 27934 (ON SC), 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), 2008 CanLII 20996 (ON SCDC), 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 CanLII 11781 (ON SC), [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 CanLII 7240 (NS CA), [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 CanLII 37475 (ON SC), [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), 1987 CanLII 4190 (ON SC), 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), 2005 CanLII 6052 (ON SC), 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), 1985 CanLII 2155 (ON SC), 50 O.R. (2d) 575 (S.C.O. - Mast.)).

[14] The defendant’s onus under Rule 56.01(d) is a light one to show that there is good reason to believe that the plaintiff has insufficient assets in Ontario to satisfy a costs award (Georgian Windpower Corp. v. Stelco Inc. [2012] O.J. No. 158 (ONSC) at para. 7).

[15] In General Products Inc. v. Actiwin Company Limited, 2015 ONSC 6923 at para. 19, Lemon J. identified the relevant factors when considering the sufficiency of evidence put forward by a plaintiff attempting to demonstrate that it has sufficient assets in Ontario to satisfy a costs award:

i.) the court must critically consider the quality as well as the sufficiency of the assets presently held and whether they are bona fide assets of the company;

ii.) there must be demonstrated exigible assets. It is insufficient for the plaintiff to show that it is profitable since the focus of the rule is not on income, but rather on the nature and sufficiency of assets;

iii.) the court must consider the liabilities of the company as well as its assets and in particular whether the assets to which the defendant is expected to look are secured to another creditor;

iv.) the rule does not countenance extensive and speculative inquiries as to the further value and availability of the asset. A mere possibility that the assets may be removed at some future time is not, without more, grounds for security;

v.) the failure of a plaintiff to respond to a defendant’s enquiry as to the availability of assets may raise a doubt as to the existence of assets.

[16] The plaintiff’s financial disclosure requires “robust particularity” including: 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 (General Products at para. 19; Al Masri v. Baberakubona, 2010 ONSC 562 at para. 19).

[17] Although SEC seeks security for costs for the entirety of this action in the amount of $27,509.23 on a partial indemnity scale, SEC agrees that it would be appropriate in the circumstances to grant a first tranche of $12,000 up to and including the completion of examinations for discovery. CMB opposes this motion on the basis that it has sufficient assets to satisfy a costs award and is not advancing any arguments that it is impecunious.

[18] Turning to the relevant tests and principles, I give little weight to SEC’s reliance on emails from Justin Bruzzese, President of CMB to SEC in which he indicated that SEC’s failure to pay CMB might “bankrupt us” or cause CMB to “not make payroll”. I view these emails in the context of a subcontractor attempting to secure payment for work completed and they shed little light on the sufficiency and availability of exigible assets to satisfy a costs award, which is the proper focus of this Court’s inquiry.

[19] I place greater weight on the following:

i.) CMB submits that its main asset is approximately $207,000 in accounts receivable which could be collected or sold to pay a costs award. However, the receivables list relied on by CMB is dated February 28, 2018 (almost 10 months old) and counsel was unable to provide any updated information or evidence of collectability;

ii.) CMB asserts that it owns equipment with a net book value of $107,000 which could be sold to pay a costs award. However, this estimate is also dated February 28, 2018 and CMB has provided no updates or evidence of the estimated market value of this equipment including any appraisals (on a forced liquidation basis or otherwise) or any evidence regarding the age or condition of this equipment. Further, all of CMB’s assets, including its equipment, are encumbered by a General Security Agreement in favour of RBC (the “GSA”);

iii.) the record demonstrates, and CMB does not refute, that it has limited to minimal cash flow. Further, CMB’s unaudited balance sheet dated February 28, 2018 is outdated, does not show any cash and indicates that its net income for the year ended February 28, 2018 was $9,975;

iv.) CMB submits that it has the capacity to borrow under a $125,000 revolving line of credit with RBC, which is secured by the GSA. However, again, there is no updated documentary evidence demonstrating if, or how much is currently available to CMB under this line of credit;

v.) CMB submits that it can borrow additional funds under a $100,000 unsecured loan with Business Development Bank of Canada which is not payable until 2021. However, there is no documentary evidence to support this assertion and the evidence suggests that CMB has already used these funds to purchase equipment;

vi.) CMB does not own any real property.

[20] I conclude that CMB has not provided satisfactory evidence regarding the sufficiency and availability of its assets to pay a costs award. As set out above, the evidence regarding the actual value of CMB’s accounts receivable and equipment is deficient and outdated before any consideration of the fact that all of its assets are encumbered by the GSA. In my view, CMB has not provided the robust particularlity required and not demonstrated that it has sufficient, exigible assets which could be used to satisfy a costs award or that it has the ability to borrow funds to do so.

[21] CMB submits that to the extent this Court concludes that it has not provided sufficient evidence of its assets because its information is not current, no negative inference should be drawn given that SEC initially advised that it was bringing this motion in April 2018. I reject this argument in its entirety. CMB could have filed updated and/or more detailed financial information at any point up to the hearing of this motion, including after the parties’ attendance before me on November 21. CMB chose not to do so and its counsel was unable to provide any guidance when the parties re-attended. Consistent with the relevant case law, the responsibility and consequences for not doing so lie squarely and entirely with CMB.

[22] I also reject SEC’s assertion that, to the extent to which this Court concludes that there is good reason to believe that it does not have sufficient assets, it is due to SEC’s conduct in refusing to pay it the balance of the Subcontract price. Specifically, CMB submits that the amount claimed in this action accounts for more than half of the accounts receivable that it has written off. Considering the amount of CMB’s claim in the context of the financial information before me, I cannot conclude that the insufficiency of CMB’s assets is a direct result of SEC’s failure to pay the disputed amount.

[23] Having considered all of the relevant factors, principles and circumstances, and for the reasons set out above, I am satisfied that SEC has met the light threshold and onus of establishing that there is good reason to believe that CMB has insufficient assets in Ontario to satisfy a costs award. I further conclude that CMB has failed to rebut this onus.

[24] I now turn to a consideration of whether it is just that an order for security for costs be made. In considering the overriding interests of justice, CMB confirms that if ordered to post security for costs, it will not prevent CMB from proceeding with this action. There is also no evidence to suggest that this motion is a litigation tactic by SEC to assert leverage to prevent this action from proceeding. This is supported by the fact that this motion has been brought early in these proceedings, prior to discoveries.

[25] Further, this action arises from a contractual arrangement between two commercial parties who are presumed to have a certain degree of sophistication and experience. This is in contrast to the access to justice and public interest considerations and the novel issues which were engaged in Yaiguaje. Rather, this is largely a collection and set-off action involving two commercial actors. Accordingly, having examined all of the circumstances holistically and guided by the overriding interests of justice, I conclude that it is in the interests of justice that an order for security for costs should issue.

[26] While the merits will always be a factor on a security for costs motion, the specific issue is where on the continuum of factors the merits fall in each particular case including whether or not the merits cannot be determined due to issues of complexity and credibility and therefore are a neutral factor which should not affect the outcome of the motion (Sadat at paras. 40-43). In the present case, particularly given that CMB is not asserting that it is impecunious and that there are numerous issues of credibility that must be determined at trial, I conclude that the merits are a neutral factor which do not alter my conclusion that it is just in all of the circumstances that a security for costs order should issue.

[27] Turning to the quantum of security for costs, the exercise of the court’s broad discretion in determining a fair and reasonable amount is substantially similar to the exercise of its discretion in fixing costs pursuant to Rule 57.01. The amount should reflect a number that falls within the reasonable contemplation of the parties reflecting what the successful defendant would likely recover and the factors set out in Rule 57.01 (720441 Ontario Inc. v. The Boiler et al, 2015 ONSC 4841 at para. 56; Marketsure Intermediaries Inc. v. Allianz Insurance Co. of Canada, 2003 CarswellOnt 1906 at paras. 17-20). In most cases, security for costs will be ordered on a partial indemnity scale (The Boiler at para. 58; Marketsure at paras. 17-18). It is appropriate in certain circumstances to order that security for costs be paid in tranches by stage(s) in the litigation on a “pay as you go” basis (Marketsure at paras. 13-15).

[28] CMB submits that $5,000 is a fair and reasonable amount up to and including the completion of examinations for discovery. Although I am not satisfied that the amount of $12,000 sought by SEC is appropriate, based on my consideration of the record, the parties’ bills of costs and counsel’s submissions, I also conclude that $5,000 is not sufficient having regard to the amount sought in this action and its relative complexity.

[29] Having considered the relevant factors and bills of costs, I am satisfied that it is fair, reasonable and within the reasonable contemplation of the parties for CMB to post security for costs in the amount of $10,000 up to and including examinations for discovery (including any motions arising from discovery) without prejudice to SEC’s right to seek further security for costs from CMB for subsequent steps. In my view, this amount is also reflective of the nature and complexity of this action and is consistent with the principles set out in Rule 1.04 and proportionality.

IV. Disposition

[30] Based on my consideration of all of the relevant factors and circumstances, I conclude that the following Order is just in the circumstances:

i.) the Plaintiff shall post security for costs with the Accountant of the Superior Court of Justice (Ontario) to the credit of this action and in favour of the Defendant in the amount of $10,000 with respect to the Defendant’s costs to be incurred up to and including the completion of examinations for discovery (including any motions arising from discoveries) within 90 days;

ii.) the Plaintiff shall not take any further steps in this action until security for costs is posted and proof of same is provided to counsel for the Defendant;

iii.) this order is made without prejudice to the Defendant’s right to bring a motion for additional security for costs for steps to be taken after examinations for discovery.

[31] Order to go on the terms set out above. If the parties cannot agree on the costs of this motion, the Timetable Motion and/or the AOD Motion, they may file written costs submissions not to exceed 3 pages (excluding costs outlines) with me through the Hamilton Trial Coordinators on or before March 1, 2019 on a timetable to be agreed upon by counsel.

Released: January 21, 2019

Master M.P. McGraw