Court File and Parties

COURT FILE NO.: CV-18-00591679

MOTION HEARD: 20210721

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Premium Host Inc. v Paramount Franchise Group Inc., Paramount Franchise Inc., 2302733 Ontario Inc., Mohamad Fakih, Holly Graham and Michel Gagnon

BEFORE: Master L. La Horey

COUNSEL: Andrew Winton, Jonathan C. Lisus and Carter Liebzeit, Counsel for the moving parties defendants Adrienne Boudreau, Counsel for the responding parties plaintiffs

HEARD: July 21, 2021 via videoconference

REASONS FOR DECISION

OVERVIEW

[1] The moving parties Paramount Franchise Group Inc., 2302733 Ontario Inc., Mohamad Fakih, and Holly Graham (collectively the “defendants”) have brought this motion for security for costs against three former franchisees in three actions which are being tried together for 15 days commencing November 8, 2021.

[2] The three former franchisees, Premium Host Inc. (“Premium”), Everest Group Inc. (“Everest”) and Versatile Holdings Inc. (“Versatile”) (collectively the “plaintiffs”) each operated a Paramount Fine Foods franchise. In the fall of 2017 each of the three franchisees issued rescission notices under the Arthur Wishart Act (Franchise Disclosure), 2000 (“Wishart Act”)[^1] and ceased operating as franchises.

[3] For the reasons that follow, I grant the motion for security for costs in respect of each plaintiff.

BACKGROUND AND CHRONOLOGY

[4] The three plaintiffs have overlapping share ownership. There are six shareholders including two married couples. Shahid Saleem Khawaja (“Shahid”) and Nida Shahid (“Nida”) are married, as are Sadar Samiuddin Khan (“Sami”) and Zarmina Khan (“Zarmina”). The other two shareholders are Dr. Gul Nawaz Sheikh (“Nawaz”) and Yousaf Jamil Khan (“Yousaf”).[^2] The shareholdings of the franchisees are as follows:

a) Premium: 60% Shahid; 30% Nawaz; 10% Sami;

b) Versatile: 75% Nida; 25% Sami; and,

c) Everest: 55% Shahid; 25% Zarmina; 20% Yousaf.

[5] On November 14, 2017, Royal Bank of Canada (“RBC”) commenced an action against Versatile, Sami, Nida, and Shahid seeking repayment of monies pursuant to credit facilities and personal guarantees (the “Versatile Action”, court file no. CV-17-586380). On the same day, RBC commenced a similar action against Everest, Yousaf, Zarmina, and Shahid (the “Everest Action”, court file no. CV-17-586381)

[6] Versatile and Everest each brought third party claims on March 7, 2018 against the defendants seeking contribution and indemnity for amounts found to be owed to RBC, validation of the notices of rescission and for payment under s. 6(6) of the Wishart Act. On February 17, 2018 Premium brought this action against the defendants for similar relief as in the third party claims. In respect of their claims, Versatile and Premium each seek to recover in excess of $3 million from the defendants. Everest seeks to recover in excess of $2.7 million from the defendants. In each of the three actions the corporate defendants have counterclaimed against the franchisee and its shareholders (as guarantors of obligations of the franchisee). The value of the counterclaims is roughly 10% to 15% of the amount of the claim in each action against the defendants.

[7] As the plaintiffs argue that the defendants have delayed in bringing the motion for security for costs and also argue that the motion is an abuse of process, the chronology of the litigation and, in particular, the motion for security for costs is relevant. On this motion, the plaintiffs filed an affidavit of David Hamson, an associate at the plaintiffs’ law firm. In his affidavit sworn June 24, 2021, Mr. Hamson relies on information and belief from counsel arguing this motion, Ms. Boudreau. In their factum on the motion the defendants take the position that this affidavit should be struck out or given no weight and that the documents attached to the affidavit “speak for themselves” and note that most were already in the extensive record on this motion. At the hearing Ms. Boudreau agreed that the evidence contained in the Hamson affidavit would not be relied upon and accordingly I have not relied upon the contents of the Hamson affidavit.

[8] The plaintiffs indicated an intention to bring motions for summary judgment following the close of pleadings and delivered motion records in January 2019. On March 25, 2019 the motions were adjourned to August 14 -16, 2019.

[9] On July 18, 2019 the defendants delivered a motion request form for a security for costs motion.

[10] At approximately the same time the summary judgment motions were converted to a trial.[^3] Justice Cavanagh decided that the defendants are entitled to the costs of the motions for summary judgment on a partial indemnity scale in any event of the cause, in an amount to be determined by the trial judge.[^4]

[11] On August 12, 2019 the parties attended a case conference with Master Sugunasiri (as she then was) and a security for costs motion was scheduled returnable on December 3, 2019.

[12] In October 2019 Justice Cavanagh set the trial to begin on May 18, 2020.

[13] In response to an enquiry from the court office as to whether the security for costs motion would be proceeding on December 3, 2019, former counsel for the defendants advised on October 28, 2019 that the motion would not be proceeding. The circumstances surrounding this are unclear.[^5]

[14] On December 3, 2019 former counsel for the defendants wrote to the court seeking a case conference to reschedule the motion for security for costs. Former defence counsel later indicated in an email that she was advised in January 2020 that Master Sugunasiri did not have any availability until April 2020.

[15] On March 12, 2020 the parties attended a case conference before Justice Sossin just prior to the closure of in-person hearings due to COVID-19.

[16] On April 6, 2020 defence counsel wrote to plaintiffs’ counsel in response to a letter in which the plaintiffs proposed proceeding to discoveries. Defence counsel suggested a teleconference with Justice Sossin to deal with potentially adjourning the trial to a date to be determined, scheduling the motion for security for costs to be dealt with in writing or by video conference, and scheduling productions and examinations. Ms. Boudreau responded by letter the same day in which, inter alia, she said that since the defendants advised of their intention to bring a security for costs motion in July 2019 the defendants had scheduled two motions and cancelled them. She said that if the defendants wished to proceed they should serve their materials.

[17] On April 23, 2020 Justice Sossin advised the parties by email that he had enquired into the possible arrangements for the security for costs motion but that “aside from urgent motions, only motions on consent may go forward in writing to Masters at this time”.

[18] Due to COVID, the trial of the three actions which had been scheduled to proceed in May 2020 was adjourned.

[19] Thereafter, the parties attended a mediation (April 28, 2020), exchanged affidavits of documents and commenced examinations for discovery. Examinations were conducted in the period July to October 2020.

[20] On August 10, 2020 the defendants wrote to the court seeking to reschedule the security for costs motion in the event that the court resumed hearing non-urgent motions. On August 27, 2020 Master Sugunasiri set a November 26, 2020 hearing date for the security for costs motion.

[21] The parties appeared before Justice D.A. Wilson on October 11, 2020 and a trial date of March 15, 2021 was set for 14 days.

[22] The defendants served the motion record for the security for costs motion on or about October 23, 2020.

[23] On October 26, 2020 Master Sugunasiri ordered a timetable on consent which required the plaintiffs to deliver their responding record by November 16, 2020. The plaintiffs’ record was delivered on November 17, 2020 and included affidavits from the shareholders. Five of the six shareholders claimed impecuniosity.

[24] On November 23, 2020 Master Sugunasiri adjourned the motion from November 26, 2020 to March 1, 2021 to allow sufficient time for cross-examination on the affidavits.

[25] On November 24, 2020 Justice Sossin ordered that this action, the third party claim in the Versatile Action, and the third party claim in the Everest Action be heard together.

[26] The matter was pre-tried by Justice Stewart on January 11, 2021. At that time the trial was scheduled for March 15, 2021. At the pre-trial, the defendants advised of their intention to seek an adjournment of the trial date. Justice Stewart declined the adjournment request and directed the defendants to take any further adjournment requests to Civil Practice Court.

[27] The defendants brought a motion seeking to compel five of the shareholders to answer questions refused on cross-examinations on their affidavits filed on the security for costs motion, which was heard by Master McGraw on February 19, 2021. Master McGraw ordered a number of questions to be answered and documents produced. As a result of this further disclosure Master Sugunasiri adjourned the motion for security for costs to March 9, 2021.

[28] On March 5, 2021 the defendants attended before Justice D.A. Wilson on a case conference convened by the defendants’ former counsel seeking an adjournment of the trial scheduled for March 15, 2021. In her endorsement, Justice Wilson said that the motion for security for costs “should have been brought at the outset of this litigation”. Justice Wilson refused to adjourn the trial saying that she found “no exceptional or extenuating circumstances” to adjourn the trial and that “Once a case is fixed for trial, the interlocutory matters such as motions and examinations for discovery should be complete”.

[29] On March 9, 2021 the motion for security costs was heard by Master Sugunasiri. Pursuant to her decision released March 10, 2021 she dismissed the defendants’ motion for security for costs on the basis that the Rules did not provide for the global order for security for costs that the defendants had sought with respect to the three actions.[^6] The defendants had sought an order that the three plaintiffs collectively pay $597,427.32 to the credit of the three actions. She noted that although Justice Sossin had ordered that the three actions proceed to trial together, they were not consolidated. Master Sugunasiri fixed the costs of the motion in the sum of $70,000 payable to the plaintiffs.

[30] On March 11, 2021 the defendants repeated their request for an adjournment at a trial management conference before Justice Stinson, which he declined to entertain.

[31] On April 28, 2021 newly appointed counsel for the defendants (counsel on this motion) requested an adjournment of the trial that was set for May 2021. Justice Myers granted the adjournment request, “primarily due to the pandemic”, noted that the defendants were receiving an indulgence and ordered the trial to commence on November 8, 2021 for no more than 15 days. Justice Myers further stated that it was “in the interests of justice that the trial be adjourned one last time” and that the “defendants should expect this trial to proceed on the specifically scheduled date”.

[32] The appeal of Master Sugunasiri’s decision on the security for costs motion was heard by Justice Dow on May 12, 2021 and a decision was released the same day. Justice Dow ordered: 1) the appeal be dismissed “without prejudice to the materials filed and additional material being used in support of individual orders for security for costs in each action …”; 2) that the costs of the motion before Master Sugunasiri be undisturbed; and 3) that the costs of the appeal agreed and fixed in all-inclusive sum of $20,000 be reserved to the court official hearing the security for costs motion.[^7]

[33] In May 2021 the defendants then delivered a new notice of motion and three separate bills of costs, one for each action. The plaintiffs delivered a further responding record and additional cross-examinations have taken place.

[34] On this motion the defendants have filed over 4,000 pages of materials and the plaintiffs have filed over 6,500 pages.

LAW – SECURITY FOR COSTS

[35] Rule 56.01 of the Rules of Civil Procedure provides in relevant part as follows:

(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;

[36] On a motion for security for costs the initial onus is on the defendants to satisfy the court that it “appears” that the matter comes within one of the enumerated circumstances. In this case the ground relied upon is 56.01(d), that the corporate plaintiffs have insufficient assets in Ontario to pay the costs of the defendants.[^8]

[37] It is not disputed that the plaintiffs have insufficient assets to pay the costs of the defendants.

[38] In the second part of the test, the parties agree that the onus is on the plaintiffs to show that an order for security for costs would be “unjust”.[^9] It is at this step that the plaintiffs and defendants part company.

[39] In Yaiguaje v Chevron Corp., the Court of Appeal provided guidance as to when an order for security for costs ought to made stating:[^10]

[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 Rules 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, [1989] O.J. No. 1399 (H.C.J.); Morton v. Canada (Attorney General) (2005), 2005 CanLII 6052 (ON SC), 75 O.R. (3d) 63, [2005] O.J. No. 948 (S.C.J.); Cigar500.com Inc. v. Ashton Distributors Inc. (2009), 2009 CanLII 46451 (ON SC), 99 O.R. (3d) 55, [2009] O.J. No. 3680 (S.C.J.); Wang v. Li, [2011] O.J. No. 3383, 2011 ONSC 4477 (S.C.J.); and Brown v. Hudson's Bay Co., [2014] O.J. No. 795, 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.

[40] Justice Perell, in a decision post Yaiguaje summarized the case law as follows (footnotes omitted):[^11]

9 On a motion for an order for security for costs, the initial onus is on the party moving for security to show that the other party falls within one of the circumstances for which an order may be made; then the responding party may avoid the order by showing that security is unnecessary because it has sufficient exigible assets in Ontario or that it should be permitted to proceed to trial despite its inability to pay costs.

10 Where the defendant relies on the plaintiff or applicant having insufficient assets in Ontario to pay costs, the onus of proof on the defendant is modest and he or she must just show that there is a basis for concern about the sufficiency of assets.

11 A party may rely on his or her impecuniosity as a ground to resist a motion for security for costs, particularly when the other party's alleged wrongdoing caused the impecuniosity.

12 A litigant who relies on impecuniosity bears the onus of proof on this point and must do more than adduce some evidence of impecuniosity and must satisfy the court that he or she is genuinely impecunious with full and frank disclosure of his or her financial circumstances and his or her incapacity to raise the security. There is a high evidentiary burden to demonstrate impecuniosity, and if full disclosure is not made, impecuniosity will not be a factor in the exercise of the court's discretion.

13 A corporate plaintiff or applicant relying on impecuniosity must show not only that it does not have sufficient assets itself but also that it cannot raise the funds for security for costs from its shareholders and associates. A corporate plaintiff or applicant must provide substantial evidence about the ability of its shareholders or others to finance the litigation and a bare assertion of inability will not suffice. Since the onus is on the plaintiff to establish impecuniosity, the defendant's decision not to cross-examine does not entail that impecuniosity has been conceded or established.

14 Where impecuniosity is shown, to avoid having to post security for costs, the plaintiff needs to demonstrate only that his or her claim is not plainly devoid of merit. Conversely, where the plaintiff fails to show that he or she is impecunious, then to avoid posting security, he or she will have to demonstrate a stronger case on the merits or some other reason to justify the court not ordering that security be posted. If the plaintiff shows a real possibility of success, then the court may conclude in the circumstances of the case, justice demands that he or she not be required to post security. Other relevant factors include the nature and complexity of the plaintiff's action and the likelihood that an order to post security will impede the plaintiff from pursuing his or her claim.

15 On a motion for security for costs, the court has a broad discretion in deciding whether ordering security for costs is just in the circumstances. In determining whether to order security for costs, the overarching principle is whether in all the circumstances the order is in the interests of justice and even where the requirements of the rule have been met, the court has discretion to refuse to make the order. The security for costs rule is not to be used as a litigation tactic to prevent a case from being heard on its merits.

16 The merits of the plaintiff's case are a relevant factor in the exercise of the court's discretion to make an order for security for costs. However, a security for costs motion is not a decision on the merits akin to a summary judgment motion and the analysis of the merits is primarily based on the pleading with recourse to the evidence filed on the motion, and in appropriate cases, the excerpts from the transcripts from the examinations for discovery.

17 The defendant's unexplained delay in moving for security for costs when aware of the plaintiff's impecuniosity is a factor that may be considered in exercising the court's discretion. The defendant's delay and evidence that the plaintiff has been prejudiced by the delay may be sufficient to defeat the motion for security for costs.

18 Although the court has the discretion to make any order for security for costs that is just in the circumstances, the general rule is that a defendant can obtain security for costs for the costs incurred up to the hearing of the motion and prospective costs. The court may consider all the factors including the financial circumstances of the plaintiff or applicant, the nature of its claim, and the timing of the motion for security for costs, to order less than the amount requested by the defendant. In exercising its discretion, the court may because of the timing of the motion specify that the quantum should reflect the costs of the proceeding prospectively.

ANALYSIS

1) Overview of the Parties’ Positions

[41] The plaintiffs allege that the court ought to have regard to a number of factors in determining whether an order for security for costs is just on this motion which I have grouped together as follows:

a. The defendants’ conduct in this litigation disentitles them to an award for security for costs. The plaintiffs allege that the defendants have engineered multiple adjournments of the trial, the motion is an abuse of process, they have delayed in bringing the motion, there is no explanation for the delay, and the plaintiffs have been prejudiced;

b. The nature of the counterclaim in these matters militates against an order for security for costs;

c. The plaintiffs are impecunious, and they cannot raise funds sufficient to post security. A order for security would effectively end the actions just before trial.

d. The plaintiffs have a good chance of success in each of the three actions, or at the very least, the claims are not plainly devoid of merit;

e. The defendants have caused financial hardship to the plaintiffs; and

f. An order for security for costs would subvert the purposes of the Wishart Act and if an order is made, it would be the first of its kind and mark a significant departure from recission case law.

[42] In addition, the plaintiffs say that the quantum of security is excessive.

[43] The defendants say that the plaintiffs cannot demonstrate impecuniosity and it is clear that at least some of the shareholders have the wherewithal to raise funds to post security on behalf of the plaintiff shell corporations. The defendants say that the plaintiffs cannot show that an order for security for costs would be unjust. They deny that their motion is tactical, that they have delayed in bringing the motion or that the motion is in any way abusive. The defendants say that the plaintiffs have not shown a strong case on the merits and that the counterclaim is irrelevant on this motion.

[44] Below I consider the various factors and the arguments made by the parties.

2) Litigation Conduct of the Defendants

[45] The plaintiffs make a number of submissions under the general rubric of the defendants’ conduct in this litigation that they argue militates against an award of security for costs.

Adjournments Requests by Defendants

[46] The plaintiffs submit that the defendants have engineered multiple adjournments of the trial and it would not be fair to reward these litigation tactics with an order for security for costs. The circumstances which led to the adjournments of this trial were before the various judges who heard and ruled on the requests. In effect, the plaintiffs are asking me to reconsider the adjournment requests, which would be inappropriate. Thus I do not find the adjournment requests made by the defendants amount to a factor for me to consider on this motion, except to the extent that trial scheduling has an impact on other factors and the timing of the ultimate hearing of this motion in proximity to the commencement of trial.

Abuse of Process

[47] The plaintiffs contend that the defendants have litigated this motion in installments such that the defendants’ conduct amounts to an abuse of process, or at the very least impropriety.

[48] The essence of the plaintiffs’ argument is that the defendants were aware, before the hearing before Master Sugunasiri, that the plaintiffs were going to argue that the court did not have jurisdiction to award a “global costs award”, but nonetheless proceeded with the motion as then constituted. At the hearing before Master Sugunasiri the defendants relied on the “basket clause” in the alternative to argue for separate orders. The plaintiffs assert that it is abusive for the defendants to now to seek separate orders in each action, when they could have done so before.

[49] The defendants rely on the decision of Justice Dow on the appeal of Master Sugunasiri’s motion, which dismissed their appeal without prejudice to their motion for individual security for cost orders. They refer to the passage in Justice Dow’s decision in which he suggested that that it was unfortunate that the motion was not adjourned when it came on for hearing in March 2021 in order to permit the defendants to refile their motion material and divide the total amount sought between the three actions. Justice Dow was of the view that “there is a basis for the motions to pursue security for costs in each action, without limiting counsel for the franchisees to make submissions with regard to the merits of such orders.” It is clear that in dismissing the appeal Justice Dow specifically contemplated that the defendants could proceed with their motion for security for costs once reconstituted. Thus I reject the plaintiffs’ contention that this motion is an abuse of process.

[50] The defendants’ decision to proceed to seek a global security for costs award in the first instance has not been without consequence to them as Justice Dow left undisturbed the costs award of the motion before Master Sugunasiri in the sum of $70,000 in favour of the plaintiffs.

[51] The decision of the defendants to proceed in the fashion they did has caused some delay in the determination of the merits of the security for costs motion, which I consider next.

Delay

[52] The plaintiffs say that by the time the motion was heard by me, more than two years will have passed since the defendants first indicated that they would seek an order for security for costs. This is true. The question is whether this delay, or some part thereof, is a factor that should militate against the granting of the motion for security for costs.

[53] According to the plaintiffs, the defendants have offered no satisfactory explanation for why the motion was not brought shortly after it was first proposed in July 2019 and that the plaintiffs have been prejudiced by this delay. The plaintiffs have incurred costs in proceeding with the litigation to the eve of trial and the motion was heard only approximately four months before the commencement of the three-week trial.

[54] The plaintiffs agree that some part of the delay was due to the pandemic for which the defendants cannot be faulted.

[55] Delay on the part of the moving party bringing a motion for security for costs is a factor that the court can have regard to in exercising its discretion. Unexplained delay and evidence that the plaintiffs have been prejudiced may be sufficient to defeat the motion for security for costs.[^12]

[56] The plaintiffs rely on the decision of Justice Quinn in Susin v Genstar Development Co. in which he stated:[^13]

Presumably, if the action is frivolous and vexatious it did not become so yesterday. And if the plaintiff has insufficient assets in Ontario to pay the costs of the defendant, this state of affairs did not arise overnight. Counsel for the defendant says that one may move for security for costs at any stage of a proceeding. I agree. Nonetheless, when security is sought two years into a law suit and eight weeks before the trial, the defendant must explain why the motion was not initiated earlier and why it is reasonable for it to be brought now. Absent such an explanation, it is unfair for a plaintiff to face a security-for-costs motion at this late date.

[57] In reply, the defendants referred me to Future Health Inc. v. Economical Mutual Insurance Company[^14] in which Justice Lococo distinguished Susin and made an award of security for costs 12 years after the commencement of the action. The case is distinguishable, in that notwithstanding the age of the action, the proceedings were not far advanced as the defendant had not filed an affidavit of documents and discoveries had not been held.

[58] In Kawkaban Corporation v Second Cup Ltd.,[^15] Justice O’Driscoll quotes Master Barlow in Charron v MacDonald, who explained the importance of bringing a motion for security for costs at an early stage as follows:

…there is, however, a much more serious objection to this motion: namely, the delay in bringing the application. Where 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.

By reason of the delay of the defendant MacDonald in making his application for security, the plaintiff has gone to the expense of bringing the action down to the eve of trial when she is faced with this application for security for costs. She should not be prevented at this late date from going to trial even if the material should be sufficient to warrant an order for security.

[59] The defendants first raised the issue of a motion for security for costs in July 2019 yet did not deliver their motion record until over a year later, in October 2020, and the motion was not heard until July 2021. The defendants say that the relevant date to consider is July 2019 when they indicated their intention to bring a motion. Normally that would be the case, but here, where the motion was heard two years after first being raised and months prior to a three-week trial, a closer look at the history of the matter is warranted.

[60] Although the defendants did not breach any rule by not promptly delivering a motion record after indicated an intention to bring the motion, the question is whether their delay in so doing and in not proceeding more expeditiously with this motion is delay that militates against the granting of a security for costs order shortly before trial. There was no explanation provided as to why the motion record was not delivered within a reasonable time after July 2019.

[61] The motion originally returnable for December 3, 2019 was cancelled in October 2019. As earlier noted, it is unclear from the record why it was cancelled. After that, the defendants had difficulty in securing a new date, at first due to the lack of available motion dates, then because of the pandemic for which they cannot be faulted. Yet nothing prevented them from delivering motion materials in the meantime. Even if some of the delay in serving a record can be attributable to the pandemic, both parties have proceeded with other steps in the litigation throughout the pandemic. I note that the plaintiffs’ counsel said in her letter on April 6, 2020 that if the defendants wished to proceed with their security for costs motion, they should serve their materials.

[62] The defendants delivered their motion record on October 23, 2020. The plaintiffs’ delivered their responding record on November 17, 2020 pursuant to the timetable set by Master Sugunasiri in October 2020 at a case conference convened at the instance of the plaintiffs. The new motion date of November 26, 2020 had to be adjourned to accommodate cross-examinations of the plaintiffs’ affiants. Given the time crunch, including a lack of availability on the part of the affiants, cross-examinations could not be completed in time for the motion. The plaintiffs say that the delay is attributable to the defendants as they failed to build in enough time in the timetable for cross-examinations. The November 26, 2020 date was booked on August 27, 2020 yet the motion record was not delivered until October 23, 2020. Had the motion record been delivered earlier the matter could likely have been heard in November 2020.

[63] Although I do not agree with the plaintiffs’ submission that the defendants’ bringing of this motion is an abuse of process, the defendants’ choice to bring the motion as a global motion and subsequent appeal delayed determination of the motion on its merits for which the defendants are responsible.

[64] The plaintiffs say that they have been prejudiced as a result of this delay and that they have incurred significant costs in moving the litigation forward since the defendants first indicated that they would be bringing a security for costs motion. The plaintiffs have filed bills of costs on this motion which indicate that they have incurred legal costs of well over $500,000 to-date.

[65] Although the defendants put the plaintiffs on notice of a motion for security for costs in July 2019, a threatened motion, and even a booked motion, is not the same thing as a motion which has been brought and materials delivered, in the context of a motion in which delay can be a relevant factor on the merits of the motion itself.

[66] The defendants say that they did not delay the motion for security. The defendants argue that the plaintiffs have put up “roadblocks” and they allege that the plaintiffs have changed their position about summary judgment and whether they wished to proceed to trial without discoveries. Whether or not the plaintiffs were proceeding by way of summary judgment or by trial, with or without discoveries, it is my view this motion could have been heard and determined sooner but for the conduct of the defendants.

[67] The plaintiffs continued to invest in the litigation, incurring significant legal costs without the certainty of knowing whether or not security would have to be posted and, at times, without any certainty that the defendants were serious about proceeding with the motion.

[68] It is hard to fathom why it took so long for the defendants to deliver a motion record within a reasonable time after July 2019. As I have said, they breached no rule in not delivering the motion record until October 2020, and the defendants are not precluded from relief by originally framing this motion as a global motion given the decision of Justice Dow, but they ought to bear the consequences of their choices and are partly responsible for the delay which is a factor I ought to take into account in determining the justness of issuing an order and the quantum of any amount ordered.

3) Counterclaims

[69] The plaintiffs argue that the counterclaims in this case militate against an order for security for costs. They rely on European Flooring Contract Services Ltd.v Toddglenn ILofts et al,[^16] for the proposition: “Where there is a counterclaim and the facts on which the counterclaim is based is in large part on the same facts and circumstances raised in the plaintiff’s claim, this militates against an order for security for costs.”

[70] The plaintiffs submit that the recission action and the counterclaim are two sides of the same coin and that the claim and counterclaim arise out of the same set of facts.

[71] In their factum at paragraph 85, the plaintiffs state that “in the within case, the recission actions are also complete, potentially dispositive defences to the counterclaims. That is because where a rescission is determined to be proper, then a counterclaim for breach of contract, and other counterclaims against the franchisee necessarily fail.” At the hearing, counsel for the defendants agreed with this statement.

[72] The plaintiffs say that if security for costs is ordered in this case, and the plaintiffs are unable to post security, their recission actions will not proceed. However, the franchisees, in response to the same counterclaim, will nonetheless advance the same arguments and facts that they would have made in the recission actions, had they been allowed to proceed, but in defence of the counterclaim. If the franchisees are successful, the counterclaims will fail, but the franchisees will not be permitted to recover the statutory compensation that they have sought in the main action.

[73] The defendants say that the counterclaims are irrelevant on this motion and there is no rule that precludes an order for security for costs in favour of a defendant/plaintiff by counterclaim. They rely on the decision of the Divisional Court in Wilkings v The Velocity where the court said that a defendant should not have to choose between seeking security for costs and initiating a counterclaim.[^17]

[74] They argue that the rare case where a defendant’s counterclaim points against security is where the counterclaim is “the real driver of the action”[^18] and courts have made orders for security for costs against a plaintiff/ defendant by counterclaim.[^19] The defendants contend that counterclaims are “derivative of the main claim”. They say that the counterclaims are “relatively small” in proportion to the value of the plaintiffs’ claim and assert that they will take up relatively little cost and trial time.

[75] While the counterclaims may be relatively small, they are not insignificant: the defendants claim over $1,000,000. They are brought against the shareholders as guarantors of the financial obligations as well as against the plaintiffs. The central liability issue in the counterclaim is the same as in the main action, namely the validity of the recission.

[76] On balance, I agree with the plaintiffs that the counterclaims militate against the granting of security and the existence of the counterclaims is one factor which I must weigh in determining the overall justness of an order for security for costs, including the quantum of any security ordered.

4) Impecuniosity

[77] While it was not disputed that the plaintiff corporations have insufficient assets to pay the costs of the defendants, whether or not they are impecunious was hotly contested.

[78] In order for a corporate plaintiff to demonstrate it is impecunious it must show that that it cannot raise funds for the security for costs from its shareholders and associates.[^20] In so doing it must provide substantial evidence about the ability of its shareholders to finance the litigation.[^21] Evidence of the “personal means” of the principals is required to meet the onus.[^22] There should be no unanswered material questions in this regard.[^23]

a) Premium

[79] Nawaz is a 30% shareholder in Premium. He is a doctor of internal medicine and owns a number of properties with about $3 million in combined equity. The plaintiffs do not contend that Nawaz is impecunious.

[80] Nawaz invested $300,000 in Premium but had not, as of the date of his cross-examination, paid any amount for legal fees. Although he says he is confident that Premium’s action will be successful and he will recover his investment, he is not willing to post security. He says that to raise funds he would have to ask the permission of his wife, the co-owner of properties, and that she would not agree, although he has not asked her. From reviewing the evidence, including the transcript of Nawaz’s cross-examination, I conclude that Nawaz is unwilling to lend funds to Premium to post security, not that he is unable. As Master McGraw said in the context of a motion for refusals in these proceedings, shareholders “should not be able to take advantage of the benefit of the action, while avoiding the consequences of standing behind an unsuccessful action.”[^24]

[81] The other two shareholders in Premium are Shahid and Sami, whose circumstances will be considered below. Even without any contribution from them, I am satisfied that Premium is not impecunious as it has the ability to raise funds from Nawaz.

b) Everest

[82] Everest’s shareholders are Shahid (55%), Zarmina (25%) and Yousaf (20%). Shahid is the majority shareholder of Everest and Premium and his wife, Nida, is the majority shareholder of Versatile.

[83] Shahid is a real estate agent and owns a real estate brokerage, “Shahid Khawaja Real Estate”. He reported a gross income of $82,530 for 2020 with a net taxable income of $54,684.21.

[84] The plaintiffs say that Shahid is impecunious in that his monthly expenses exceed current income, the bank statements he has provided reflect a lack of available assets and that he has no credit available. Shahid has said that he has exhausted his resources in funding these actions and the actions by the creditors of the franchisees.

[85] Shahid and Nida reside in a four-bedroom luxury home (Saxony Court) owned by Shahid. In his affidavit of November 16, 2020, Shahid shows an estimated market value of $3,000,000 of Saxony Court with a mortgage owing of $1,950,000. There is therefore $1,050,000 in equity in Saxony Court.

[86] The defendants say that Shahid’s reported net income does not align with his bank accounts as over $330,000 cycled through his bank accounts in a one year period. The defendants say that his financial picture is incomplete because he has not provided the financial documents for the brokerage except for a pro forma, unsigned, audited 2019 balance sheet and income statement. Shahid has not produced a sales commission report similar to the report prepared by Yousaf (who works as an agent with the brokerage).

[87] On a refusals motion in this matter, where the defendants sought further financial information from Shahid with respect to the brokerage, Master McGraw found that Shahid’s ability to access funds from the brokerage was relevant to the security for costs motion and ordered Shahid to advise “if he has used funds from [the brokerage] to fund the litigation and if he is able to obtain funds from [the brokerage] to pay security for costs, and if not, to explain why not with supporting documentation from the [brokerage]”.[^25] In response to this question, Shahid said that the 2019 statements are the most current financial statements available for the brokerage and that there are no funds to borrow from it. I agree with the defendants’ submission that the answer is inadequate and does not meet the level of financial disclosure required to establish impecuniosity.

[88] The defendants submit that the claim by Shahid that he cannot fund an order for security for costs is belied by the brokerage’s advertising, the number of real estate listings and the lifestyle enjoyed by Shahid and Nida.

[89] Considering the evidence filed, in particular the equity in Saxony Court and given the incomplete financial disclosure of Shahid in respect of the brokerage, I find that Shahid has the ability to advance a shareholder loan to Everest for security for costs.

[90] I next turn to the question whether Zarmina has the wherewithal to contribute to security for costs as a shareholder of Everest. Zarmina works as a manager of three restaurant franchises and her Notice of Assessment for 2020 shows a net income of $51,586. Her husband Sami Kahn has limited ability to work due to health issues. Their evidence is that they do not have access to funds to lend to Everest.

[91] RBC and another creditor of the plaintiffs, BDC, commenced actions and obtained judgments in 2018 against the shareholders of Everest and Versatile. In order to raise funds to pay these judgments Zarmina, Sami, Nida and Yousaf obtained a loan through a private lender (the “Kaur Loan”) of $1.16 million. The lender required a blanket mortgage over a number of properties owned by the shareholders. In order to repay the Kaur Loan, the shareholders sold some of their properties.

[92] Zarmina and Sami live with their children in a house they purchased in 2018. Since that time they have accumulated debt and their credit rating has deteriorated, in part due to the failure of the Paramount franchise. When they were unable to refinance the mortgage on the house they entered into a trust agreement with friends whereby the friends agreed to take title to the family home in trust for them and another individual. The friends were then able to refinance the property due to their superior credit rating. The bank advanced as a mortgage 80% of the value of the property at $1,125,000 and registered a charge for the full value of the home. Zarmina and Sami continue to live in this home and pay rent to the trustees. They had an investment property, but it was sold in order to repay the Kaur loan. I am satisfied that Zarmina does not have the ability to make a shareholder loan to Everest.

[93] Yousaf, a 20% shareholder in Premium, is a real estate agent who earned $134,390.32 in 2020. He says that his current income is insufficient to cover monthly expenses and liabilities. His line of credit statements and VISA bills show that he sometimes carries a balance. His said that his only asset is a residence which he lives in with his mother which is fully mortgaged, including to Kaur. In July 2020 he purchased a second property with his mother for $1,639,000, a 3,600 square foot pre-construction home, in respect of which he has paid approximately $220,000 in deposits. Overall, Yousaf has, at best, a modest ability to contribute to a security for costs order.

[94] I conclude that Everest is not impecunious as it has the ability to raise money from its shareholders.

c) Versatile

[95] As set out above, Nida owns 75% of Versatile and Sami owns 25%. I have already concluded that Sami does not have any ability to loan funds to Versatile. The question then becomes whether Nida has any ability to do so.

[96] Nida is a stay-at-home mother with limited income and limited credit. However, it is appropriate to consider the joint financial situation of Shahid and Nida. Shahid gifted to Nida some part of the money to acquire her interest in Versatile, he personally guaranteed Versatile’s debt to RBC and Shahid is financing Versatile’s action. Moreover, their funds are co-mingled and Shahid has on-line access to Nida’s bank accounts and transfers funds between those accounts and his own as needed.

[97] As set out above I am satisfied that Shahid has ability to advance a shareholder loan and I am of the view that it is appropriate to consider his financial means in this context. I conclude that Versatile is not impecunious.

5) Merits

[98] The plaintiffs say that it is possible to assess the likely outcome of each of the actions given that the actions are on the eve of trial, examinations for discovery have been completed, and the parties have tendered affidavits in respect of each of the actions in connection with the summary judgment motions. They say that the disclosure documents mandated by the Wishart Act were fatally deficient and that each of the actions has a good chance of success on the merits.

[99] The defendants say that the plaintiffs have not shown a strong case on the merits. They take the position that the merits should receive limited consideration because of the complexity of the case and credibility issues.

[100] While the merits are a factor on a motion for security for costs, the court is not required to embark on an analysis such as is required on a summary judgment motion. It is generally not appropriate to make an assessment on the merits where the case is complex or turns on credibility.[^26]

[101] In this case, the plaintiffs brought motions for summary judgment which were to be heard over three days. The motions were converted to a trial after the defendants delivered responding materials. As demonstrated by the voluminous amount of evidence filed by the plaintiffs on this motion from the summary judgment motion (over a 1,000 pages) and the fact that the summary judgment motions did not proceed, it is clear that this case is complex. Further, there are credibility disputes including concerning a signed receipt for a franchise disclosure document.[^27]

[102] It would not be appropriate for me to make an assessment of the merits in these circumstances, beyond saying that the claims are not plainly devoid of merit.[^28] On this motion I am unable to say whether or not the plaintiffs have a good chance of success.[^29]

[103] The merits are therefore a neutral factor on this motion.

6) Alleged Financial Hardship Caused by Defendants

[104] The plaintiffs argue that the defendants have caused the impecuniosity of the plaintiffs by failing to provide adequate disclosure and then by failing to pay statutory compensation and that this is a factor that militates against an order for security for costs. In order to give effect to this argument, I would have to determine the merits of the plaintiffs’ claims, which as noted above, I am not in a position to do. Therefore this is not a factor that I take into consideration in this case.

7) Context of Action – Franchise litigation

[105] The plaintiffs say that requiring a franchisee to post security for costs in order to pursue a claim for recission would defeat the “unique consumer protection focus of the recission remedy, and is contrary to the Wishart Act, more generally.”

[106] In a related argument, the plaintiffs also say that an order for security for costs would be the first of its kind, in that they have been able to find no case “in which a single unit franchisee claiming impecuniosity was ordered to post security for costs.”

[107] The defendants take the position that there is no rule that says franchisees are immune from security for costs and state that the court has previously ordered franchisees to post security.

[108] The plaintiffs rely on 6792341 Canada Inc. v Dollar IT Ltd.,[^30] a decision of the Court of Appeal involving a recission action and the interpretation of s. 6 of the Wishart Act. The plaintiffs refer to paragraph 72 of that decision which reads:

The purpose of the legislation is to protect franchisees and the mechanism for so doing is the imposition of rigorous disclosure requirements and strict penalties for non-compliance. The legislation must be considered and interpreted in light of this purpose.

[109] However, in that passage the Court of Appeal was engaged in interpreting a section of the Wishart Act; it was not opining on any other legislative provision, specifically the Rules enacted pursuant to the Courts of Justice Act. It is certainly within the competence of the legislature to enact special rules for franchise litigation.

[110] Thus I am skeptical as to whether the mere fact of this being litigation by a franchisee constitutes a factor militating against, or a bar to, a security for costs order.

[111] In any event, in this case the franchises in question were not small owner-operated franchises. Based on the evidence before me it is apparent that these franchises were investments by relatively well-off individuals with comfortable lifestyles who hoped to make a significant profit.

[112] The defendants refer to the decision of Master McGraw in 2176693 Ontario Inc. v The Cora Franchise Group Inc.[^31] as an example of a case where a franchisee was ordered to pay security for costs. The plaintiffs attempt to distinguish this case as being decided prior to Yaiguaje where the Court of Appeal said that courts are to take a holistic approach to motions for security for costs and that courts are not to be bound by rigid categories, but to have regard to the “justness” of the case. They say that Cora should be given little, if any, weight. Further they distinguish Cora on the basis that franchisee in that case did not claim impecuniosity. On reading Master McGraw’s decision in Cora it is not clear that he would have decided the case differently if Yaiguaje had been before him as he was alive possibility of a security order being refused if such order would be “unjust”.[^32]

[113] More importantly, the plaintiffs did not point to any case in which a court has said that the Rules are to be interpreted differently because an action is brought by a franchisee. The plaintiff has brought forward no case that holds that franchisees are per se exempt from Ontario’s loser-pays cost regime.

[114] The fact that that this litigation has been commenced for relief under the Wishart Act is not a factor assisting the plaintiffs in this case.

8) Overall Assessment of Justness of Security for Costs

[115] After examining the evidence and circumstances of this case and considering the matter holistically, I find that it is just that an order for security for costs be made.

9) Quantum

[116] The defendants seek security in the sum of $302,069.53 for the Premium action, $407,289.42 in the Everest action, and $371,955 in the Versatile action.

[117] The parties agree that I am entitled to consider the factors relevant to the determination of whether to grant security for costs in determining quantum.

[118] In exercising its discretion, the court may, because of the timing of the motion, order that the quantum reflect only the future costs of litigation.[^33] The defendants seek $300,000 to $400,000 from each plaintiff in security just months before trial (over a million dollars in total). Given that this situation is at least partially as result of the delays on the part of the defendants (as outlined above) it would not be just to order security in the full amount (apart from any other consideration).

[119] In my view, a more appropriate starting point would be to have regard to the go-forward amounts for trial preparation and attendance. Based on the bills of costs submitted by the defendants in the three actions these amounts (inclusive of tax) are roughly $68,000 for Premium, $115,000 for Everest and $102,000 for Versatile.

[120] The plaintiffs should not have to post security for the defence of the counterclaim. The defendant estimated that the counterclaim would take up approximately 10% of the 15 days of trial time. However, that estimate does not appear to take into account the fact that the central liability issue in both the main action and counterclaim is the validity of the recission. Accordingly, a more significant reduction is appropriate.

[121] The plaintiffs say that the quantum of security sought by the defendants is excessive. They also point to the higher hourly rates of some of the defendants’ current counsel compared to previous counsel. I accept that there would be some duplication in fees charged resulting from two changes of counsel which should not have to be borne by the plaintiffs. In setting an amount for security for costs there should be some modest reduction due to these factors.

[122] Given the foregoing I believe it would be just to reduce the go-forward amounts for trial preparation and attendance by one-third.

[123] In my view, a fair and reasonable amount for security for costs to be paid by each of the plaintiffs in all of the circumstances (including the financial circumstances of the shareholders from whom the security will come) is as follows (inclusive of tax): Premium - $45,000; Everest - $76,000; and, Versatile - $67,000.

DISPOSITION

[124] An order shall go that that the plaintiffs are to post security within 45 days of these reasons in the amounts set out above.

[125] Justice Dow directed that the costs of the appeal before him agreed and fixed in the all-inclusive sum of $20,000 be “reserved to the court official that determines the security for costs, if any, ordered in these actions.” I will consider the entitlement to costs of the appeal before Justice Dow when I consider the costs of this motion.

[126] If the parties cannot agree on the costs of this motion, and the liability for the costs of the appeal fixed at $20,000, they may file written costs submissions not to exceed three pages (double-spaced) excluding costs outlines. The defendants shall deliver their costs submissions by September 20, 2021, and the plaintiffs shall deliver costs submissions by October 4, 2021.

Master L. La Horey

Date: 20210823

[^1]: S.O. 2000, c. 3 [^2]: For convenience, I refer to each of the shareholders by their first name, given the commonality of some of the surnames. No disrespect is intended. [^3]: Cost endorsement of Justice Cavanagh, 2021 ONSC 1697 at para 8 and 10 [^4]: Ibid, para 27 [^5]: In its Chronology of Security for Costs filed by the defendants on this motion the entry for October 28, 2019 states: “Parties consent to adjourn security for cost motion.” The reference in the chart is to an email chain in the plaintiffs’ responding record in which the court enquires on October 23, 2019 if the motion scheduled for December 3, 2019 is proceeding and former counsel for the defendants replies on October 28, 2019 saying, “The motion will not be proceeding on December 3, 2019. We will confer with opposing counsel and Master Sugunasiri to obtain a new date.” Thus it is not clear that the cancellation of the motion was “on consent” and the defendants have not filed anything to explain the cancellation. [^6]: 2021 ONSC 1832 (Master) [^7]: Endorsement of Justice Dow May 12, 2021 in this action. [^8]: Coastline Corp. v Canaccord Capital Corp, 2009 CanLII 21758 (ON SC), [2009] O.J. No. 1790 (Master) at para 7 [^9]: Both sides cite to Coastline at para 7 [^10]: 2017 ONCA 827 at para 23 - 25 [^11]: Chill Media Inc. v Brewers Retail Inc., 2021 ONSC 1296 at paras 9 to 18 [^12]: Chill Media at para 17 [^13]: [2001] O.J. No. 3825 (SCJ) at para 7 [^14]: 2012 ONSC 4308 (SCJ) [^15]: [2005] O.J. No. 4197 (Div Ct) at para 26, quoting Master Barlow in Charron v MacDonald, 1938 CanLII 352 (ON SC), [1938] O.W.N. 410 (Ont. H.C.). See also Pelz v Anderson, 2006 CanLII 39571 (ON SC), [2006] O.J. No. 4726 (Master). [^16]: 2013 ONSC 6445 at para 33, Master Wiebe quoting Justice Farley in Better Business Bureau of Metropolitan Toronto Inc. v. Tuz, [1999] O.J. No. 1359 [^17]: (2008), 2008 CanLII 12500 (ON SCDC), 89 OR (3d) 751 (Div Ct) at para 17 [^18]: Relying on 1324789 Ontario Inc. v Marshall, 2020 ONSC 4651 at para 11 in which the court distinguished European Flooring. [^19]: The plaintiffs cite to Chill Media where an order for security was made against a plaintiff / defendant by counterclaim. There is, however, no discussion in the case on the impact of the counterclaim. [^20]: Chill Media Inc. v Brewers Retail Inc., 2021 ONSC 1296 at para 13, Coastline at para 7; Grayker Corporation v Fadalti, 2006 CanLII 18365 (ON SCDC) at para 16; Montrose Hammond & Co. v CIBC World Markets Inc., 2012 ONSC 4869 at para 35; 720441 Ontario Inc. The Boiler 2015 ONSC 164 (Master) at para 7 [^21]: Chill Media at para 13 [^22]: Coastline at para 7 [^23]: DK Manufacturing Group Ltd. v Co-operators General Insurance, 2021 ONSC 661 (Master) at para 16; Morton v Canada (Attorney General), 2005 CanLII 6052 (ONSC) at para 32 [^24]: Premium Host Inc. v Paramount Franchise Group Inc., 2021 ONSC 1430 at para 14. See also Bayerische Landesbank v Sieber, 2016 ONSC 3982 at para 29. [^25]: Premium Host v Paramount Franchise Group Inc., 2021 ONSC 1430 (Master) [^26]: Coastline at para 7; Spot Coffee Park Place Inc. v Concord Adex Investments Limited, 2021 ONSC 978 (Master) at para 20 [^27]: See Justice Cavanagh’s decision with respect to costs of the summary judgment motions, 2021 ONSC 1697 at paras 4,7, and 8 [^28]: The traditional test when the plaintiffs have demonstrated impecuniosity, Chill Media at para 14. [^29]: See Chill Media at para 14 where Justice Perell explained that where a plaintiff has failed to demonstrate impecuniosity, as here, to avoid having to post security the plaintiff will have to demonstrate a stronger case on the merits or some other reason to avoid posting security. [^30]: 2009 ONCA 385 at para 72 [^31]: 2017 ONSC 6600 (Master) [^32]: Ibid at para 81. Indeed as the Court of Appeal points out in Yaiguaje (at para 23), the Rules explicitly provide that order for costs should only be made where the justness of the case requires it [^33]: Chill Media at para 18