Hagshama Canada 9 Gold Ltd. v. Decade Urban Communities Corp.

COURT FILE NO: CV-19-630231

MOTION HEARD: 20210419

REASONS RELEASED: 20210721

SUPERIOR COURT OF JUSTICE – ONTARIO

BETWEEN:

HAGSHAMA CANADA 9 GOLD LTD. and HAGSHAMA CANADA 9 PLATINUM LTD.

Plaintiffs

• and-

DECADE URBAN COMMUNITIES CORP. and MICHAEL SISKIND

Defendants

-and-

GUPM CONSTRUCTION MANAGERS (A DIVISION OF GARY ULIAS & ASSOCIATES INC.)

Third Party

BEFORE: MASTER M.P. McGRAW

COUNSEL: N. Holmberg for the Defendants Email: nholmberg@lolg.ca

I. Schein Email: ischein@mindengross.com

REASONS RELEASED: July 21, 2021

Reasons for Endorsement

I. Introduction

[1] This is a motion by the Defendants seeking security for costs of $731,000 from the Plaintiffs in this action arising from a joint venture. The Plaintiffs have no assets in Ontario, therefore, in determining the justness of the order, the disputed issues are largely limited to the Plaintiffs’ assertion that they are impecunious and the merits of their claims.

II. Background

[2] The Plaintiffs are Ontario companies created solely for the purpose of entering into a joint venture with the Defendant Decade Urban Communities Corp. (“DUCC”), an Ontario corporation specializing in real estate development projects. The parties formed a joint venture company known as 690 King Street Corporation (“690 King”) to purchase lands located in Kitchener and build condominiums (the “Project”). The Third Party Defendant GUPM Construction Managers was the general contractor for the Project.

[3] The Plaintiffs were incorporated by Keren Hagshama Ltd. (“KHL”), an Israeli corporation carrying on business as a syndicator of investment funds in international revenue-producing real property. KHL sources investment opportunities and works with developers to acquire and/or develop property in the United Kingdom, the U.S., Canada and Israel and raises funds from its database of investors. Once opportunities are identified, KHL establishes corporate entities like the Plaintiffs as investment vehicles to issue shares to investors and collect shareholder loans. KHL provides consulting services including management and accounting and receives management and success fees. Hanan Shemesh, a founding partner of KHL, and Manfred Leventhal, are the directors and officers of the Plaintiffs.

[4] The investment opportunity with respect to the Project was presented to KHL by the Defendant Michael Siskind, a principal of DUCC. Consistent with its business model, KHL identified investors, all of whom are Israeli citizens. Pursuant to Formation Agreements, shares were issued to the investors who advanced shareholder loans to the Plaintiffs which were in turn transferred to 690 King. KHL opened bank accounts in Israel for the Plaintiffs to receive funds from the shareholders then closed them. The Plaintiffs have never had bank accounts in Canada.

[5] On December 4, 2014, the Plaintiffs and DUCC entered into separate but substantially similar joint venture agreements (the “Agreements”). Among other things, the Agreements provide that Hagshama Canada 9 Gold Ltd. (“HCG”) would make a capital contribution of $954,131, Hagshama Canada 9 Platinum Ltd. (“HCP”) would contribute $2,188,888 and DUCC would contribute $332,595 and act as Promoter and Project Manager. KHL was entitled to receive management fees and a success fee of 13%-18% of the distributable profits at the end of the Project before payment of proceeds. The parties agreed to share the risks and apportion all profits, losses and/or distributions or allocations by 690 King. The initial Business Plan anticipated sales of $40,475,587 with total Project costs of $35,655,976 and a profit of $4,819,611. On February 10, 2016, 2 days prior to the start of construction, the Agreements were amended to increase total costs of the Project to $36,736,103 with decreased profit of $3,756,884.

[6] The Defendants delivered regular reports from CB Ross, a construction consulting and management firm. On September 17, 2017, the Defendants delivered CB Ross Report #17 which disclosed that as of July 2017 the Project was expected to be a further $1.39 million over budget resulting in additional loss of profit. On November 15, 2017, DUCC advised Mr. Shemesh and the Plaintiffs that the costs of the Project had increased substantially over budget and that DUCC would infuse its own capital and borrowed funds. On November 21, 2017, the Defendants delivered a further revised Business Plan indicating that the expected profit had been further reduced to $2,042,260. The Project was completed in May 2018.

[7] To date, the Plaintiffs have not earned any profit from the Project. On June 24, 2019, DUCC transferred $121,000 to HCG and $279,000 to HCP from the Project representing recovery of capital contributions. The funds were transferred to U.S. bank accounts opened by KHL and distributed that day to shareholders. KHL has received management fees of $216,981. DUCC claims that it invested millions of dollars of its own funds and loans which it is unlikely to recover.

[8] The Plaintiffs have inquired into the potential availability of $901,171 for distribution by 690 King to shareholders. The Defendants have advised that any funds retained by 690 King have been held back for the remaining Tarion warranty, inspection costs and sub-contractor payments. Further, pursuant to the Order of Justice Broad dated November 6, 2020, 690 King was ordered to pay $575,572 plus interest of at least $264,822 to a sub-contractor, Desco Plumbing Heating and Supply Inc. to satisfy its claim against the Project as a result of the insolvency of another sub-contractor (the “Desco Decision”). This is under appeal.

[9] The Plaintiffs commenced this action by Notice of Action issued on October 31, 2019. In their Statement of Claim issued on November 7, 2019, the Plaintiffs claim $7,000,000 for lost profits and capital contributions due to the Defendants’ alleged negligence, negligent misrepresentation and breach of the Agreements.

[10] The Defendants brought this motion on December 10, 2020. The Plaintiffs filed 2 affidavits from Mr. Shemesh and the Defendants filed an affidavit from Mr. Siskind. Cross-examinations were held on April 6 and 8, 2021. The parties have not exchanged documents and examinations for discovery have not been conducted.

III. The Law and Analysis

[11] For the reasons that follow, I am satisfied that it just in the circumstances for the Plaintiffs to post security for costs on the terms set out below.

[12] Rule 56.01(1)(d) provides that 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 the plaintiff 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. The Plaintiffs concede that they have insufficient assets in Ontario to satisfy a costs award and acknowledge that they have no assets in Ontario or anywhere else.

[13] Rule 56.01(1) 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 including 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 (Stojanovic v. Bulut, 2011 ONSC 874 at paras. 4-5). The court has broad latitude to make any order that is just in the circumstances (Yuen v. Pan, 2018 ONSC 2600 at para. 14).

[14] In Yaiguaje v. Chevron Corp., 2017 ONCA 827, the Court of Appeal provided thorough guidance with respect to the justness of Rule 56 order:

“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.”

[15] The initial onus is on the defendant to show that the plaintiff falls within one of the four enumerated categories in Rule 56.01. 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, as the Plaintiffs argue here, the plaintiff should be permitted to proceed to trial despite its impecuniosity should it fail (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). This was summarized by Master Glustein (as he then was) in Coastline:

“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;

(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";

(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;

(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;”

[16] The Plaintiffs submit that they are impecunious and can avoid an order for security for costs as their claim is not plainly devoid of merit (Coastline at para. 7; Yaiguaje at para. 19; AAD Investments Inc. v. Casboro Industries Ltd., 2017 ONSC 3041 at paras. 4-6). Alternatively, the Plaintiffs argue that if the court finds that they are not impecunious, they can still avoid a security for costs order because their claims have a good chance of success (AAD at paras. 4-8).

[17] Master Glustein described the high threshold to demonstrate impecuniosity in Coastline including the disclosure requirements for corporate plaintiffs:

7… (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);”

[18] Master Glustein expanded on these requirements in T.S. Publishing Group Inc. v. Shokar, 2013 ONSC 1755 holding that a plaintiff must lead evidence of "robust particularity", with full and frank disclosure of the financial circumstances of the corporate plaintiff and its principals (T.S. Publishing at para. 34).

[19] The courts have long held that if a corporation claims impecuniosity it must lead evidence that shareholders, creditors, principals and others who would benefit from any award at trial could not raise funds to post security for costs (Design 19 Construction Ltd. v. Marks, [2002] O.J. No. 1091 (Ont. S.C.J.) at paras. 10-15). Citing previous case law, Nordheimer J. stated:

“……If the creditors are prepared to take the benefit of this action, then I fail to see why they should not also have to accept the burden of it. We are, of course, only speaking of a requirement that security for costs be posted. If the plaintiff is ultimately successful, then those funds will be returned to the creditors. If the plaintiff is not, I fail to see why the creditors should be able to avoid the consequences of standing behind an unsuccessful action….” (Design 19 at paras. 10-15)

[20] In Crudo Creative Inc. v. Marin, 2007 CanLII 60834 (ON SCDC), [2007] O.J. No. 5334 (Ont. Div.), the Divisional Court summarized the significant burden on corporate plaintiffs and the need to demonstrate that they are impecunious in the extended or indirect sense such that those who would benefit from or are funding the litigation including principals are unable to fund security:

“32 The key question here is whether the respondent has access to assets or funds: Re Di Paola (2007), 2006 CanLII 37117 (ON CA), 84 O.R. (3d) 554 (C.A. (Chambers)) at para. 23 (whether assets "available to it to fund the appeal. Presumably, its appeal is being funded by some source outside of the company"); Rhonmont Properties Ltd. v. Yeadon Manufacturing Ltd., [2003] O.J. No. 1883 (C.A.) at para. 5 (corporation "not impecunious in the extended sense that the shareholders and principals of the corporation are unable to fund security for costs"); Burglia, at para. 5 quoting Superior Salmon Farms Ltd. v. Corey Feed Mills Ltd. and Aqua Health Ltd. (1991), 1991 CanLII 5688 (NB KB), 115 N.B.R. (2d) 265 (Q.B.) at 269-70 ("Obviously someone is prepared to finance the prosecution of the action. That person or persons should also be prepared to either provide security for the costs of the defendants in the event the claim fails or to establish that security cannot be raised."); Smith Bus Lines, at para. 43 (evidence that "amount of security is not only not possessed by the plaintiff but is not available to it"); Han Holdings Ltd., at para. 18 ("There was evidence...that certainly raised the possibility that Han had access to funds"); see also Kurzela v. 526442 Ontario Ltd. (1988), 1988 CanLII 4663 (ON SC), 66 O.R. (2d) 446 (Div. Ct.) at 447-8; ABI Biotechnology Inc. v. Apotex Inc., 2000 CanLII 27027 (MB CA), [2000] M.J. No. 14 (C.A.) at para. 45-6; 1056470 Ontario Inc. v. Goh (1997), 1997 CanLII 12255 (ON SC), 34 O.R. (3d) 92 (Gen. Div.) at 95-6.

33 A corporate plaintiff carries a significant burden of establishing direct and indirect impoverishment: Design 19 Construction Ltd. v. Marks, [2002] O.J. No. 1091 (S.C.J.) at para. 8. Rule 56.01(d) and its equivalents are clearly intended to place corporate plaintiffs in a more vulnerable position than plaintiffs who are individuals: 671122 Ont. Ltd., at 67; ABI Biotechnology, at para. 34, 36, 45, 47; Fat Mel's Restaurant v. Canadian Northern Shield Insurance Co. (1993), 1993 CanLII 1669 (BC CA), 76 B.C.L.R. (2d) 231 (C.A.) at para. 27.

34 On the record here, it has not been established by compelling evidence that the respondent does not have access through its shareholder to the means to post security for costs. In this sense, the respondent is not impecunious in the extended sense. There is no evidence of unsuccessful attempts by the respondent to borrow or raise funds. The respondent is funding its action and Mr. Crudo, owner and employee of a similar corporate entity, is on the totality of the evidence, far from indigent.”

[21] More recently, Master Jolley summarized this evidentiary burden in Marvello Construction v. Santos et al., 2017 ONSC 3913, a case cited by the Plaintiffs:

“14 A corporate plaintiff that claims impecuniosity must show not only that does it not have assets but also that it cannot raise security for costs from its shareholders and associates. Evidence as to the personal means of the principals of the corporation is required to meet this onus. A corporate plaintiff must provide "substantial evidence about the ability of its shareholders or others with an interest in the litigation to post security". Consequently, as I stated in Renuity v. Balsam Lake Green Energy 2017 ONSC 3022 at paragraph 11, full financial disclosure requires the plaintiff to establish for itself and its shareholders and principals 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 to borrow funds, and details of any assets disposed of or encumbered since the cause of action arose.”

[22] I cannot conclude that the Plaintiffs are impecunious. The Plaintiffs state that they have produced all available financial documentation including their unaudited financial statements which confirm that they have no assets other than those that may be in the possession of 690 King and have significant liabilities to their shareholders/investors. Since they have no bank accounts, there are no bank records to produce and no other financial documents exist. Even accepting that the Plaintiffs have produced all of their own financial records, this is not the end of the analysis and does not satisfy their onus. The difficulty for the Plaintiffs is that this is the extent of the financial disclosure on this motion.

[23] The Plaintiffs claim that they do not have access to any funds or assets. However, they have not demonstrated that they are impecunious with the necessary robust particularity and compelling evidence. In particular, the Plaintiffs have not filed evidence of any efforts to raise or borrow funds from their principals, shareholders/investors or anyone else who stands to benefit if this action is successful or any financial disclosure that these individuals are unable to fund security. They have also not sought out any bank loans, other investors or litigation funding.

[24] The Plaintiffs advise that this action is for the benefit of their shareholders/investors and that any funds recovered will be paid to them. However, they have not asked the shareholders/investors to advance additional funds to post security for costs. The Plaintiffs submit that section 16.4 of the Formation Agreements limits the liability of each shareholder to the amount of their investment in the “Company’s capital and in the Owners’ Loan as shall be from time to time” and therefore, prevents the Plaintiffs from asking the investors/shareholders to advance additional funds for security for costs. Apart from the fact that this is the Plaintiffs’ own interpretation of the Formation Agreements, translated copies of which were not made available, the key issue is that they have not asked and filed evidence of these efforts. The Plaintiffs cannot satisfy their onus by simply stating that they are unable to ask.

[25] The Plaintiffs submit that it is “common sense” that as non-conventional investment vehicles that do not operate ongoing businesses and have no bank accounts or assets, they cannot borrow or otherwise access funds. However, the Plaintiffs’ chosen corporate structure does not exempt them from the requirement to provide evidence that they have made the necessary efforts to raise or borrow funds. I was not referred to any authority in support of this proposition. While each case is to be considered on its own circumstances, to accept this assertion would allow the manner in which the Plaintiffs have arranged their affairs to have the effect of evading financial scrutiny arising from their assertion of impecuniosity. This would also be contrary to one of the main purposes for rigorous financial disclosure where a plaintiff asserts impecuniosity, namely, that the plaintiff’s financial capabilities and those of its principals are known to them but not the defendants (Hallum, supra). Again, it is insufficient for the Plaintiffs to assert, without evidence of effort, that they cannot borrow or raise funds.

[26] I also do not accept the Plaintiffs’ submission that there is no requirement for Mr. Hemesh as a principal and shareholder of both Plaintiffs to contribute to security for costs or demonstrate with sufficient financial disclosure that he is does not have the means to do so. Although the Plaintiffs argue, among other things, that he has a small equity interest, I was not referred to any case law which exempts principals from inquiries into their means based on the amount of their holdings or otherwise. There is also no evidence with respect to Mr. Leventhal’s ability to fund security for costs.

[27] Given the significant amount of $7,00,000 claimed by the Plaintiffs as compared to their aggregate capital contributions of $3,143,019 (before deducting the $400,000 distribution in June 2019), it also is unclear if KHL also stands to benefit if this litigation is successful by receiving additional management fees or, depending on the amount recovered, success fees. Finally, the Plaintiffs have also not advised how this litigation is being financed and whether the source of funding is a potential source of security, another relevant inquiry where impecuniosity is asserted. Some of this information was refused on cross-examination and the Defendants did not bring a motion to compel answers. While the parties made submissions on the propriety of some refusals. I make no findings or draw any adverse inferences. The issue is that in some cases the required evidence is not before the court which does not assist the Plaintiffs in satisfying their onus.

[28] I also reject the Plaintiffs’ allegations that that their lack of assets was caused by the Defendants. This would require me to conclude that the insufficiency of the Plaintiffs’ assets is a direct result of the Defendants’ mismanagement of the Project as alleged in their Statement of Claim (Cigar500.com Inc. v. Ashton Distributions Inc., 2009 CanLII 46451 (ON SC), [2009] O.J. No. 3680 (S.C.J.) at para. 40; Montrose Hammond & Co. v. CIBC World Markets Inc., 2012 ONSC 4869 at para. 34). I am unable to do so. As discussed below, this action is still in the pre-discovery phase, there are numerous disputed issues of fact and credibility and this is not a case where there is a direct nexus between the Plaintiffs’ lack of funds and the Defendants’ conduct such as the refusal to pay a liquidated debt (Cigar500.com at para. 43).

[29] The merits are a consideration on every security for costs motion. Master Glustein provided the following guidance in Coastline:

“3… (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;

(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;

(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;” [citations omitted]

[30] Master Glustein expanded on the role of the merits in T.S. Publishing Group Inc.:

“(vi) Where impecuniosity has not been shown, a closer scrutiny of the merits of the case is warranted; in those cases there is no compelling argument that there is a danger that poverty of the plaintiff will cause an injustice by impeding pursuit of a claim that otherwise would have been permitted to be tried. Where impecuniosity has not been shown, a legitimate factor in deciding whether or not it would be just to require security for costs is whether the claim has a good chance of success (Zeitoun at para. 50, cited at Bruno at para. 16); and

(vii) A "good chance of success" requires more than establishing a genuine issue requiring trial but is not as high as proving the claim on a balance of probabilities. The court in each case must review the pleadings, evidence, transcripts and any other relevant fact before the court on the motion to determine if there is a good chance the plaintiff will succeed at trial. Plaintiff's "evidence" that relies solely on allegations in a statement of claim which are denied by the defendants without further evidence from the plaintiff does not support a good cause of action (Bruno Appliance & Furniture Inc. v. Cassels Brock & Blackwell LLP, [2012] O.J. No. 3620, 2012 CarswellOnt 9492 (Mast.), at paras. 47-51, and para. 61; affirmed, 2013 ONSC 686, [2013] O.J. No. 687, 2013 CarswellOnt 1630 (S.C.J.)). ” (T.S. Publishing at para. 35).

[31] Since I have not concluded that the Plaintiffs are impecunious, a closer look at the merits is required. The Plaintiffs argue that there is sufficient evidence before the court to establish that their claims have a good chance of success (AAD at paras. 4-8). The Plaintiffs submit that the Desco Decision supports this conclusion given that allegations of mismanagement against the Defendants were made and the Defendants were in control of the management of the Project. The Defendants submit that this action has no merit and that no findings of mismanagement were made in the Desco Decision. The Defendants also argue that the Plaintiffs’ claims are barred by the 2-year limitation period in the Limitations Act 2002 (Ontario) given that they have admitted to knowing and understanding the Project’s viability and their profits were at risk in or about September 2017. The Plaintiffs submit that that they did not know that their capital contributions and profits were at risk until at least November 2017 when they received DUCC’s letter and that post-construction investigations were required to determine that the cost overruns were attributable to the Defendants’ mismanagement.

[32] I am unable to conclude that the Plaintiffs’ claims have a good chance of success or that they have no merit. This action is in the early, pre-discovery stages with only pleadings and the limited evidence in the affidavits and cross-examination transcripts filed on this motion. This is substantial litigation where many of the material issues relate to the management of a large construction project. There are numerous, complex disputed issues of fact which will evolve with significant documentary production, examinations for discovery and expert evidence. There also appears to be a discoverability issue with respect to the limitations period raised by the Defendants which will likely require findings of credibility. To draw the conclusions urged by the parties would require a more complete record and submissions more characteristic of a summary judgment motion. These findings cannot and should not be made on the limited record at this stage of the proceedings. Accordingly, the merits are more of a neutral factor on this motion.

[33] Determining the order which is just in the circumstances requires a balancing between ensuring that meritorious claims are allowed to go forward with the consequences of being unable to collect costs where a party pursues an unsuccessful claim and the prospect of an unenforceable costs judgment (Ascent Inc. v. Fox 40 International Inc., [2007] O.J. No. 1800 at para. 3; Rosin v. Dubic, 2016 ONSC 6441 at para. 39; Lipson v. Lipson, 2020 ONSC 1324 at paras. 47-48). In some cases, security is required to correct the imbalance of a plaintiff having security for a successful claim while a defendant has no security for a successful defence (2232117 Ontario Inc. v. Somasundaram, 2020 ONSC 1434 at para. 27). I conclude that security for costs can be ordered without prohibiting the Plaintiffs from proceeding with this action while affording the Defendants reasonable and proportionate protection from an unenforceable costs award. In my view, it is just and appropriate for parties such as the Plaintiffs with no assets and no bank accounts who set up their affairs as they have and make no efforts to raise or borrow funds or provide any financial disclosure beyond their own to provide some reasonable protection to the Defendants from an unenforceable costs award. The fact that this is private commercial litigation with no public interest considerations supports this conclusion. Applying a holistic approach, considering all of the relevant factors and balancing the parties’ interests, I conclude that it is just in the circumstances that security for costs be ordered.

[34] Determining the order which is just in the circumstances and striking the appropriate balance extends to the quantum of security. In Rosin, H.J. Pierce J. held as follows:

“38 Citizens are entitled to access to the courts for the purpose of determining disputes. Society's interest is in having disputes determined on their merits. The purpose of security for costs is to protect a defendant from the prospect of an unenforceable judgment for costs; that is a risk in this case if the plaintiff is unsuccessful. However, the amount of security to be posted should not be so onerous as to effectively block access to the courts.

39 While I am persuaded that security for costs is warranted in this case, I am concerned that the amounts claimed by the defendants, both individually and collectively, may have the effect of blocking the plaintiff's access to the court….” (Rosin at paras. 38-39)

[35] The court has broad discretion to determine a fair and reasonable amount of security which is substantially similar to the exercise of its discretion in fixing costs of a proceeding pursuant to Rule 57.01 (Canadian Metal Buildings Inc. v. 1467344 Ontario Limited, 2019 ONSC 566 at para. 27). The quantum should reflect a number that falls within the reasonable contemplation of the parties, 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 (Marketsure at paras. 13-18). When an action is in its early stages, like the present one, an instalment or “pay as you go” order is usually the most appropriate (Coastline at para. 7).

[36] The Defendants’ request $710,000 on a substantial indemnity scale in the following instalments: $130,000 within 30 days of the granting of security for costs; $130,000 within 30 days of the completion of examinations for discovery; $61,000 within 30 days of the completion of mediation; and $410,000 no later than 90 days before trial. The Plaintiffs argue that the Defendants’ amount is grossly exaggerated and that $252,379 on a substantial indemnity scale and approximately $200,000 on a partial indemnity scale are more accurate and reasonable.

[37] In my view, the significant amount sought by the Defendants is not fair, reasonable, within the reasonable expectations of the parties or proportionate. The Defendants have not established any basis to award security for costs on a substantial indemnity scale. The first instalment of $130,000 is based on actual costs incurred to date and includes over $20,000 for this motion. In any event, the Defendants concede that $260,000 for the first two tranches is too onerous.

[38] Calculated on a partial indemnity scale, the amount sought by the Defendants is reduced to approximately $514,000. This includes approximately $10,000 for pleadings and over $70,000 for documentary and oral discovery. In my view, the Defendants are not entitled to security for this security for costs motion. If the parties cannot agree on the costs of this motion, they will be determined in writing (Lipson at para. 52).

[39] Having considered the relevant factors and reviewed the estimated costs filed by the parties, I am satisfied that it is fair and reasonable, within the parties’ reasonable expectations, reflective of the nature and complexity of the action, proportionate and just in all of the circumstances for the Plaintiffs to post security for costs of $70,000 on a partial indemnity scale within 60 days representing security up to and including documentary and oral discovery including any motions arising from discoveries. This is without prejudice to the Defendants’ right to seek further security after these steps have been completed. The Plaintiffs shall not take any further steps in this action until security is posted and proof is provided to Defendants’ counsel.

IV. Disposition and Costs

[40] Order to go on the terms set out above. If the parties cannot agree on the costs of this motion, they may file written costs submissions not to exceed 3 pages (excluding Costs Outlines) on a timetable to be agreed upon by counsel. If counsel cannot agree on a timetable, they may schedule a telephone case conference to speak to one.

Released: July 21, 2021

Master M.P. McGraw