Court File and Parties
Court File No.: CV-18-604129 Date: 2022-10-05 Superior Court of Justice - Ontario
Re: Umbrella Warranty Ltd., Plaintiff And: Aviva Warranty Services Inc., Aviva Canada Inc. and Aviva Insurance Company of Canada, Defendants
Before: Associate Justice Todd Robinson
Counsel: R. Laurion, for the defendants (moving parties) S. Toole, for the plaintiff
Heard: June 30, 2022 (by videoconference)
Reasons for Decision (Security for Costs)
[1] The plaintiff, Umbrella Warranty Ltd. ("Umbrella"), has sued the defendants, Aviva Warranty Services Inc. ("AWSI"), Aviva Canada Inc. and Aviva Insurance Company of Canada (collectively with AWSI, "Aviva"), for at least $5 million in damages. Umbrella alleges breaches of marketing-related contracts, misrepresentations, and loss of opportunity. The claim stems from an alleged refusal by AWSI to permit Umbrella to market a vehicle mechanical breakdown insurance product to independent automobile repair shops and, subsequently, AWSI terminating the prime contract with Umbrella. Aviva Canada Inc. and Aviva Insurance Company of Canada are not parties to any of the agreements. They have been named on the basis that they are parent companies and directing minds of AWSI that are alleged to have negotiated with Umbrella with respect to underwriting the products covered by the agreements.
[2] Aviva seeks $150,000 in security for costs against Umbrella, as well as an order staying this action pending security being posted and an order directing the registrar to dismiss the action, with costs, if security is not paid within thirty days. Aviva relies on an admission by Umbrella's Chief Executive Officer, Darren Fox, that Umbrella has ceased carrying on business and no longer has any assets. Aviva argues that Umbrella has not established impecuniosity and that this is not a case where Umbrella's claim has any higher chance of success than Aviva's defences. Aviva accordingly argues that security for costs is warranted.
[3] Umbrella opposes, arguing that an order for security for costs is not just in this case. Umbrella takes the position that it is impecunious and that it was AWSI's breaches of contract that put Umbrella out of business. Umbrella further argues that it has a meritorious claim with a high probability of success, which it submits is undisputed by any of Aviva's evidence.
[4] Umbrella is admittedly out of business with no assets. This motion turns on the justness of an order for security for costs. On a holistic view of the case, I have determined that an order for security for costs is just, albeit in an amount less than what Aviva is requesting and payable by Umbrella in stages. I am ordering $85,000 in security for costs payable in four installments.
Analysis
Legal framework
[5] Aviva moves under subrule 56.01(1)(d) of the Rules of Civil Procedure, RRO 1990, Reg 194. It provides that the court may make such order for security for costs as is just where it appears that the plaintiff is a corporation or a nominal plaintiff and there is good reason to believe that the plaintiff has insufficient assets in Ontario to pay the costs of the defendant.
[6] The initial onus is on Aviva to satisfy me that it "appears" that there is "good reason to believe" that Umbrella has insufficient assets in Ontario to pay Aviva's costs. If Aviva satisfies that initial onus, then the onus switches to Umbrella to demonstrate that an order for security for costs would be unjust.
[7] In Yaiguaje v. Chevron Corporation, the Court of Appeal confirmed that determining the justness of a security for costs order requires a holistic approach, in which all the circumstances of the case are examined. My assessment is to be guided by the overriding interests of justice. Although various factors have been outlined by courts to be considered, such as merits of the claim, delay in bringing the motion, the impact of a defendant's conduct on the available assets of the plaintiff, access to justice concerns, and the public importance of the litigation, those factors are not static. Each case must be considered and decided on its own facts: Yaiguaje v. Chevron Corporation, 2017 ONCA 827 at paras. 22-25.
Is there good reason to believe that Umbrella lacks sufficient assets?
[8] I am satisfied that Aviva has met its threshold onus. Umbrella admits through the affidavit of Darren Fox that Umbrella has ceased business operations, has "no tangible assets", and remains indebted to its shareholders.
Is an order for security for costs just in the circumstances of this case?
[9] Umbrella has the onus of establishing that an order for security for costs would be unjust. It has advanced several arguments in support of that position, notably the following:
(a) Aviva does not genuinely require security for costs and this motion is nothing more than a litigation tactic to stop Umbrella's case from being heard on its merits;
(b) Umbrella is impecunious;
(c) Umbrella has a meritorious claim; and
(d) Umbrella's cessation of business resulted directly from Aviva's conduct.
[10] In my view, Umbrella has not satisfied me that this motion is purely tactical and has not met its onus of demonstrating impecuniosity, that its claim has (as Umbrella submits) "a high probability of success", or that Aviva's conduct has caused Umbrella's cessation of business or financial hardships. Since Umbrella is admittedly out of business with no assets, I find it just to order security for costs in the circumstances of this case.
a. Is this motion purely tactical?
[11] The Court of Appeal has directed that courts must be vigilant to ensure that security for costs is not used as a litigation tactic to prevent a case from being heard on its merits, since security for costs is designed to be protective in nature: Yaiguaje v. Chevron Corporation, supra at para. 23. Since the Court of Appeal released that decision, it has become quite common for plaintiffs to assert that a defendant's true motivation for seeking security for costs is purely strategic.
[12] Umbrella argues that Aviva is a large insurance company that does not require protection for a costs award, which Umbrella submits in this case would amount to a miniscule fraction of its annual revenues. I do not accept that argument. Whether a defendant actually needs security is not a factor in and of itself.
[13] It is a presumptive right of any successful defendant in civil litigation, regardless of their financial means, to obtain an award for their costs of defending the action. Security for costs under subrule 56.01(1)(d) is about protecting a defendant against having to incur the expense of defending a claim in circumstances where that defendant appears to have no real prospect of recovering costs from the plaintiff. If security is being ordered under subrule 56.01(1)(d), it is first and foremost because the plaintiff appears to have insufficient exigible assets to satisfy a potential adverse costs award.
[14] I fail to see why a plaintiff with nominal or no assets should be able to avoid security for costs simply because it has sued a large or financially stable defendant. In my view, finding that such a defendant is somehow less deserving of security for costs than another defendant in the same litigation position with less financial wherewithal would itself be unjust.
[15] Other than Aviva's argued lack of genuine need for security, Umbrella has advanced no real argument on why I should view this motion as tactical. In my view, the evidence before me does not support any finding or inference that this motion has been brought by Aviva for purely strategic purposes. Notably, two of the three named defendants were not parties to any of the agreements at issue.
b. Is Umbrella impecunious?
[16] Umbrella has the onus of demonstrating impecuniosity. It is a high evidentiary threshold requiring financial disclosure with "robust particularity", namely 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: Coastline Corporation Ltd. v. Canaccord Capital Corporation, 2009 ONSC 21758 at para. 7(viii)-(xii).
[17] Meeting the evidentiary onus requires Umbrella to show not only that it does not have sufficient assets itself, but also that it cannot raise the funds to post security for costs from its shareholders, principals, or others. That requires specific evidence about the ability of its shareholders or others to finance the litigation: Chill Media Inc. v. Brewers Retail Inc., 2021 ONSC 1296 at para. 13; Coastline, supra at para. 7(x).
[18] I agree with Aviva that Umbrella has not established impecuniosity. There has been financial disclosure for Umbrella and its principal and largest shareholder, Darren Fox, but there is no evidence on either the financial ability of other shareholders to fund the litigation or the extent of any efforts to request financial assistance from them. I also accept Aviva's submission that the evidence on Mr. Fox's own assets supports that he has or will have access to sufficient funds to post security.
[19] Mr. Fox's evidence supports that Umbrella has no assets, has no access to credit facilities, and has been unable to qualify for any loans that could be used to post security for costs (albeit that the loan applications seem to have been made in direct response to this motion). However, the evidentiary gaps are not with disclosure of Umbrella's financial position. They are with the financial status and ability to raise funds of its shareholders.
[20] Mr. Fox is one of eight shareholders in Umbrella. He holds 33% of the total shares. His personal assets beyond bank accounts are limited to shares in Umbrella and Lucro Technologies Inc. ("Lucro"), his current employer. His annual income is modest, with child support obligations and indebtedness to the Canada Revenue Agency. However, his personal bank account balances, including a tax free savings account, are not insignificant. He also admittedly has or will have access to up to $315,833.13 in equalization payments in divorce proceedings, which includes the distribution of proceeds from the sale of Mr. Fox's matrimonial home being held in trust. Mr. Fox does not have current access to those funds, though, since he feels litigation is required to resolve disputed entitlements.
[21] Lucro holds significant funds in its own bank accounts, as set out in Mr. Fox's affidavit. Although Mr. Fox does not believe that he could sell his shares in Lucro, there is no evidence that he cannot do so or that he has attempted to value his shares. His affidavit is also silent on the ownership of Lucro, the percentage and value of his shareholdings in Lucro, and whether he is able to obtain a shareholder loan from Lucro.
[22] Umbrella's sole evidence about the ability of the remaining seven shareholders to fund the litigation is a brief statement in Mr. Fox's affidavit. Mr. Fox states that he has been advised by each of them that they "will not loan the company money because they have lost money by investing in Umbrella." This is precisely the type of bare assertion that case law has consistently held to be insufficient evidence. A corporate plaintiff must provide substantial evidence about the ability of its shareholders or others with an interest in the litigation to post security. Bare assertions that no funds are available are insufficient: Coastline, supra at para. 7(x).
[23] Notably, although six of the other shareholders have modest or minor shareholdings, the other major shareholders in Umbrella are stated to be Trudy Fox and the estate of Mel Fox, who jointly own 32% of the total shares. Trudy Fox and Mel Fox are Darren Fox's parents. Mr. Fox's affidavit states that their shares were originally owned by him, but transferred to his parents in exchange for the $7,500 financial retainer paid to Umbrella's lawyers. Mr. Fox's evidence is that he is living in a house owned by Trudy Fox and also drives a vehicle owned and paid for by her. There is no evidence on the value of the house or vehicle, other than that Mr. Fox believes approximately $7,700 is owing on the car.
[24] Trudy Fox and the estate of Mel Fox are essentially equal shareholders to Darren Fox. There is no evidence on the terms of the share transfer from Mr. Fox. They thereby appear to have the same financial interest in Umbrella succeeding in this litigation as Mr. Fox himself. Mr. Fox's statement about unwillingness of other shareholders to loan Umbrella money "because they have lost money by investing in Umbrella" evidently does not apply to Mr. Fox's parents. Their involvement post-dates the incidents alleged by Umbrella as causing its insolvency. Notably, Trudy Fox and Mel Fox acquired a significant ownership interest in the company by paying only a modest amount to support Umbrella specifically in contemplation of this litigation.
[25] If Trudy Fox and the estate of Mel Fox are not prepared to assist in funding the litigation, then there ought to be clear evidence confirming that they are not and the reasons for declining to do so. However, there is no evidence on their financial status or their willingness (or unwillingness) to further fund the significant litigation that ultimately appears to be for their benefit as much as Darren Fox's benefit.
[26] In my view, Umbrella has not established impecuniosity. I am not satisfied that funds for security for costs cannot be raised through Darren Fox, Trudy Fox, or the estate of Mel Fox.
c. Does Umbrella's claim have a high probability of success?
[27] In my view, merits is a neutral factor on this motion. I have come to that view for several reasons.
[28] First, Umbrella is advancing a significant unliquidated claim, but has tendered no evidence quantifying it. The only evidence of Umbrella's damages is a self-serving statement by Darren Fox about agreements with two companies that Mr. Fox says would have referred Umbrella to potential customers. Mr. Fox states, "Umbrella states that these agreements would have provided Umbrella with an opportunity to directly market the Product to more than 2 million Canadian customers" and goes on to state that the opportunity was lost by AWSI's breaches of the prime contract. However, the only documentary evidence supporting those statements are two memoranda of understanding that frankly do not substantiate the scope or potential value of the alleged marketing opportunities.
[29] Also, the memoranda of understanding were executed in November 2016 and January 2017, respectively, which was well before Umbrella alleges that AWSI unilaterally restricted its ability to market to small repair shops in April 2018. There is no evidence on what happened between Umbrella and those companies after the memoranda of understanding were executed. There is no evidence that Umbrella had moved forward with those agreements at all.
[30] Success by a plaintiff in a civil action requires not only that it prove liability of the defendants. It must also prove its damages. Umbrella has not put forward cogent evidence of a meritorious damages claim.
[31] Second, the pleadings support divergent positions of the parties. Aviva has not admitted any liability and expressly denies making any false, negligent, or actionable misrepresentations to Umbrella at any time. In my view, Darren Fox's evidence does not demonstrate a strong case for actionable misrepresentations. To the contrary, in the record before me, Mr. Fox's evidence on what transpired is limited, lacks particularity, and is generally unsubstantiated.
[32] I agree with Umbrella that Mr. Fox's evidence on merits is unchallenged by any evidence before me from Aviva. Indeed, Aviva has led no evidence on the merits of the claim or defences. Nevertheless, Mr. Fox's evidence does not support Umbrella's assertion that its claim "has a high probability of success." In my view, the evidence before me falls far short of establishing an overwhelming or obviously successful claim.
[33] For example, Mr. Fox states generally that, "at all material times both before and after" entering the marketing agreements with AWSI, he advised Martin Campbell, the Assistant Vice President Specialty Warranty with AWSI, that marketing to independent automobile repair shops would be an integral part of Umbrella's marketing strategy. Mr. Fox goes on to state that Mr. Campbell "represented to Umbrella that it would be able to continue to market to these independent automobile repair shops." However, there are no particulars of the dates, locations, or details of any discussions. No documentary evidence has been tendered clearly supporting that the claimed representations were made by Mr. Campbell. In my view, Mr. Fox's sparse evidence does not cogently refute Aviva's pleaded position.
[34] Umbrella specifically points out that Aviva has not tendered an affidavit from Martin Campbell to refute Darren Fox's evidence on this motion. However, it was not necessary for Aviva to file an affidavit in response to Mr. Fox's evidence, or to cross-examine Mr. Fox. Insufficient evidence does not become sufficient evidence through a decision not to file responding material or to cross-examine: Bruno Appliance and Furniture Inc. v. Cassels Brock & Blackwell LLP, 2007 ONSC 44824 (ON SCJ) at para. 57.
[35] Third, even if I were to accept Umbrella's position that representations were made by Martin Campbell, Umbrella has not addressed how it intends to overcome the entire agreement and termination for convenience clauses contained in the prime contract.
[36] The entire agreement clause expressly states that the agreement "supersede[s] any previous communications, representations, warranties or agreements, either oral or written, with respect to the subject matter of [the] Agreement." Umbrella has advanced no cogent argument based on the contract terms for how AWSI's alleged direction to cease marketing to independent automobile repair shops was in breach of either the prime contract or the marketing agreements between Umbrella and AWSI.
[37] Specifically, I was directed to nothing in the prime contract or marketing agreements supporting that Umbrella had unfettered discretion to market to independent automobile repair shops. Mr. Fox has tendered an email exchange with a customer and product manager with AWSI that, in my view, supports only that AWSI may arguably have had notice of Umbrella's intention to market to small independent automobile repair shops in April 2015. Umbrella's position appears to hinge on its reliance on representations said to have been made by Martin Campbell at unspecified times that may well be contractually overridden by the entire agreement clause.
[38] I note that the email from Martin Campbell relied on by Umbrella as advising that it "would no longer be permitted to market the Product to independent automobile repair shops" is not nearly as black and white as Umbrella argues. Contrary to Mr. Fox's view of the email, it does not expressly state that Umbrella cannot market to independent repair shops. Rather, on review of the email exchange, Mr. Campbell confirms that one retailer was declined, but that other individual corporations and shops would be considered "on a one by one basis." He asks that AWSI be consulted for each prospect to "assess the risk before proceeding too far with them." Mr. Campbell further acknowledges willingness to work with one of the two companies with which Umbrella had previously signed a memorandum of understanding.
[39] Umbrella asks me to infer from the email exchange that Mr. Campbell was clearly instructing Umbrella that it could not market to independent repair shops at large. I cannot say that Umbrella will be unable to succeed in that argument at trial, or that Umbrella's interpretation of the emails will not be accepted, but in my view it is not an appropriate inference to draw based on the limited evidence before me.
[40] Also, AWSI terminated the relationship with Umbrella under the termination for convenience clause in the prime contract. That section provides both parties the right to terminate "for any reason" on 180 days prior written notice. AWSI sent its termination notice two months after the email relied upon by Mr. Fox from Martin Campbell as advising Umbrella that it would no longer be permitted to market to independent automobile repair shops. There is no evidence on what transpired in those two months.
[41] Mr. Fox states that, after issuing the termination notice, AWSI took steps to remove and shut down Umbrella's website and to prevent Umbrella from continuing to market or sell the product. It is a bald and self-serving statement, unsubstantiated by any corroborating evidence. Moreover, Mr. Fox's statement is a verbatim copy of para. 20 of the statement of claim, so amounts to nothing more than parroting Umbrella's pleaded allegation. Aviva expressly denies those allegations in the statement of defence. In my view, validity of AWSI's termination for convenience is a triable issue on which I cannot find Umbrella has any greater chance of success than AWSI.
[42] Fourth, although not dispositive of Umbrella's claim against Aviva Canada Inc. and Aviva Insurance Company of Canada, there is nothing in Mr. Fox's evidence supporting a factual basis for a claim against either of them. Neither entity is even mentioned. They were not parties to the contracts and agreements at issue. Even if Martin Campbell did make the alleged representations, there is no evidence supporting that those representations were, or were reasonably understood to be, made on behalf of any party other than AWSI.
[43] On a motion for security for costs, the court is not required to undertake an analysis akin to summary judgment in assessing merits: Bruno Appliance, supra at para. 37; Coastline, supra at para. 7(vi). It is often difficult for the court to come to any reasonable conclusion on the merits of a claim at the time of a motion for security for costs. This is such a case. There is insufficient evidence before me to decide if Umbrella's claim is any more or less meritorious than Aviva's defences.
d. Did Aviva's conduct cause financial hardship to Umbrella or cause Umbrella's cessation of operations?
[44] In my view, Umbrella has not established a reasonable correlation between AWSI's termination of the agreements and Umbrella going out of business. Notably, Umbrella's financial statements for 2015-2019 support that its annual expenses exceeded its annual revenue long before AWSI is alleged to have interfered in Umbrella's marketing to independent repair shops and before the agreements were terminated. There is no evidence on Umbrella's ongoing business and revenues leading up to the termination and, further, no cogent evidence on how being directed to stop marketing to independent repair shops in April 2018 hampered Umbrella's business. Mr. Fox's bald statements of lost opportunities are insufficient to support that Umbrella's anticipated revenues were realistic or attainable.
[45] Umbrella is advancing a significant claim in circumstances where it admittedly has no exigible assets. With the benefit of a full evidentiary record at trial, Umbrella may well be able to prove that AWSI breached the agreements and caused Umbrella to go out of business. However, the record before me is insufficient to support a clearly meritorious correlation between them.
What quantum of security is appropriate and how should it be paid?
[46] Rule 56.04 provides me with broad discretion in fixing the amount and form of security, as well as the time for paying the security into court.
[47] Aviva's bill of costs sets out estimated partial indemnity fees to trial of $285,876.69, including HST and disbursements. That is comprised of fees to date of $11,491.50, anticipated fees to trial of $112,260, HST, and disbursements. Aviva submits that security of $150,000 is reasonable in the circumstances.
[48] Umbrella argues that, if security is ordered, it is premature to fix security for costs to trial since issues may narrow or change through the discovery process. Umbrella accordingly submits that security should only be ordered to the end of examinations for discovery and should be no more than $20,000. I disagree. I see no reason to force the parties back to another motion later in litigation seeking additional security for costs when there is no evidence of any anticipated change in Umbrella's financial circumstances.
[49] Neither the number of hours claimed for the tasks identified in Aviva's bill of costs nor the disbursements were specifically challenged by Umbrella, other than submitting that $20,000 would be more appropriate to get through examinations for discovery. Overall, I find the time estimates for the various stages to be reasonable, but the rates claimed are, in my view, high based on the year of call for the two identified lawyers. That is a relevant consideration in assessing reasonable expectations of the parties. Specifically, Aviva claims a rate of $575 per hour for a 2015 call and $950 per hour for a 1998 call. Umbrella's costs outline for this motion shows a rate of $395 per hour for a 2012 call. Both sides calculate partial indemnity at 60% of actual rates.
[50] Aviva submits that its time estimates likely underestimate the costs that will be incurred by the defendants. However, Aviva has put forward the bill of costs in the materials for my consideration. It has tendered no specific evidence on the volume of documents, the extent of anticipated examination, or number and nature of anticipated witnesses for trial. I find no basis to view Aviva's assessment of its own anticipated costs as being underestimated.
[51] With respect to costs to date, the supporting dockets include over two hours of time communicating about and assessing this security for costs motion. That time is more properly viewed as costs of this motion. The dockets further redact the identity of the person with whom the senior lawyer was communicating, so it is unclear if these are internal emails between counsel or staff or external emails to Aviva's representative(s) or others. It is also not clear to me if this time is duplicated in Aviva's costs outline for the motion.
[52] Having considered the amounts claimed in the bill of costs, reasonable expectations of the parties, and principles of proportionality, I find that a fair and appropriate amount of security is $85,000, inclusive of HST and disbursements, on a partial indemnity basis. In my view, it is appropriate that the amount be paid in stages as the action progresses to trial.
[53] I am not prepared to grant the relief requested by Aviva directing the registrar to dismiss the action if security is not paid. In my view, that is relief that should only be granted on a further return to court. If Umbrella defaults, then Aviva is entitled to move for dismissal under rule 56.06. In response to that motion, Umbrella will have the opportunity to explain its default. The court may then fairly decide if dismissal is warranted.
Costs
[54] The parties agreed on partial indemnity costs of the motion in the amount of $10,000 to the successful party. The only dispute was whether those costs should be payable forthwith or in the cause if Umbrella was successful. Since Aviva has been successful, that dispute is moot. Regardless, I find nothing on the facts or circumstances of this motion that would warrant varying the general rule that costs should follow the event.
Disposition
[55] For the above reasons, I order as follows:
(a) Umbrella shall post security for costs in the amount of $85,000 to the credit of this action on a staged basis in accordance with the following:
(i) $22,500 for costs to completion of examinations for discovery and fulfilment of undertakings, payable within 60 days;
(ii) $8,000 for costs to completion of mediation, payable by no later than 60 days prior to the date of the scheduled mediation;
(iii) $4,500 for costs to completion of the pre-trial, payable by no later than 30 days prior to the scheduled pre-trial; and
(iv) $50,000 for costs through trial preparation and completion of trial, payable by no later than 90 days prior to the date fixed for commencement of trial.
(b) If Umbrella fails to post the required security for costs when due, then this action shall be stayed until the funds are posted or pending further order of the court.
(c) Umbrella shall pay to Aviva their costs of this motion fixed in the amount of $10,000, including HST and disbursements, payable forthwith.
ASSOCIATE JUSTICE TODD ROBINSON
DATE: October 5, 2022