Court File and Parties

Court File No.: CV-20-636488-0000 Date: 2023-08-03 Superior Court of Justice - Ontario

Re: Lizard Creek Power Inc. And: His Majesty the King in Right of Ontario and Independent Electricity System Operator

Before: J.T. Akbarali J.

Counsel: N. Joan Kasozi, for the plaintiff Eunice Machado and Spender Nestico-Semianiw, for the defendant His Majesty the King in Right of Ontario Melanie Ouanounou, for the defendant Independent Electricity System Operator

Heard: August 2, 2023

Endorsement

Overview

[1] I am the case management judge assigned to these proceedings, which arise out of the plaintiff’s failed attempt to build a commercial dam.

[2] The plaintiff alleges that His Majesty the King in Right of Ontario (through the Ministry of Natural Resources and Forestry (“MNRF”)) negligently and in bad faith refused to grant it location approval for the proposed dam, which required the plaintiff to bring a hearing before the Mining and Lands Tribunal (the “MLT”). After an eight-day hearing, the MLT recommended that the Minister approve the location of the proposed dam, subject to certain conditions. Eventually the Minister granted location approval, subject to conditions different than those recommended by the MLT. But it was too late.

[3] As part of the project to build the intended dam, the plaintiff obtained a feed-in tariff (“FIT”) contract with the Independent Electricity System Operator (“IESO”), a crown corporation. The FIT program aims to promote development of renewable energy sources in Ontario by paying private suppliers standard rates on a per unit basis to feed in energy to Ontario’s electricity grid.

[4] The FIT contract included a milestone date for commercial operation of the dam, which required the plaintiff to bring the facility into commercial operation within four years of entering into the contract. The contract defines failure to achieve commercial operation by the milestone date to be a supplier event of default. In this case, the milestone date was extended by another four years, although the extension included the plaintiff’s waiver of its ability to rely on a force majeure clause in the contract. The parties disagree about the scope and meaning of the waiver.

[5] The FIT contract also provided for a “long-stop date”, which is 18 months following the milestone date, by which the dam had to be in commercial operation. The contract also defines failure to achieve commercial operation by the long-stop date as a supplier event of default, which IESO argues enables it to exercise its right to terminate the contract.

[6] In this case, IESO terminated the FIT contract due to the plaintiff’s failure to bring the dam to commercial operation by the long-stop date. The plaintiff argues that the termination was in breach of contract and in breach of IESO’s duty of good faith. It argues that the failure to bring the dam to commercial operation by the long-stop date was a direct result of the negligence and bad faith of the MNRF.

[7] On this motion, I am asked to grant an order for security for costs in favour of the defendants. They argue that the order is warranted under r. 56.01(d) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, because (i) the plaintiff is a corporation and (ii) there is good reason to believe it has insufficient assets in Ontario to pay the defendants’ costs. The defendants rely on admissions that the plaintiff was incorporated as a single-purpose entity to build the dam, and conducts no other business, and has never been a going concern.

[8] The plaintiff argues that the defendants have not met their onus under r. 56.01(d) to establish good reason to believe it has no assets. In the alternative, the plaintiff argues that I ought to exercise my discretion not to grant an award for security for costs because it has a good case on the merits, the defendants delayed in bringing this motion, and the plaintiff’s losses were caused by the defendants’ conduct. The plaintiff does not assert impecuniosity.

Test for an Order for Security for Costs

[9] There is no disagreement on the legal principles to apply to this motion. They are set out conveniently in para. 7 of Master Glustein’s (as he then was) decision in Coastline Corporation Ltd. v. Canaccord Capital Corporation, 2009 21758. Below, I cite the principles most relevant to this case [case citations omitted]:

(i) The initial onus is on the defendant to satisfy the court that it “appears” there is good reason to believe that the matter comes within one of the circumstances enumerated in Rule 56.01;

(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;

(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”;

(xiii) When an action is in its early stages, an installment (also known as “pay-as-you-go”) order for security for costs is usually the most appropriate.

Have the defendants discharged their burden?

[10] To discharge their burden, the defendants rely on admissions made by the plaintiff’s principal that the plaintiff was incorporated as a single-purpose corporation for the purpose of constructing the dam, and that it has engaged in no other business, apart from prosecuting this lawsuit.

[11] From this, the defendants ask me to infer that there is good reason to believe that the plaintiff has insufficient assets to pay their costs.

[12] The plaintiff argues that the defendants have failed to meet their burden. There is no investigator’s report in the record with respect to its assets. The defendants have not done a property search nor an execution search. There is no evidence the plaintiff has not paid its debts. Rather, the evidence in the record is that the plaintiff funded over $4 million in expert fees when working on the dam project, and another $400,000 in legal fees at the MLT. Recently, the plaintiff paid each defendant $35,000 in costs (for a total of $70,000) relating to a failed motion to strike defences.

[13] First, I accept that the plaintiff did not have to put in evidence information about its assets. The defendants are not entitled to an examination in aid of execution as a result of having brought a motion for security for costs: 1427814 Ontario Ltd. v. 3697584 Canada Inc., 2008 CarswellOnt 5554, at para. 13.

[14] However, I am not persuaded that the defendants’ failure to conduct investigations and searches means that there is no evidence on which I can find that there is good reason to believe the plaintiff has insufficient assets to pay the defendants’ costs. I accept the defendants’ argument that, especially where the corporation has never been a going concern, the types of investigations the plaintiff points to would not be likely to be useful or helpful. In any event, what is necessary is not that the defendants adduce evidence that the plaintiff has insufficient assets, but that they “prove facts from which a court can conclude that there is good reason to believe that that is the case”: City Commercial Realty (Canada) Ltd. v. Bakich, 2005 CarswellOnt 10512, at para. 8, quoting Websports Technologies Inc. v. Cryptologic Inc. (2004), [2003] O.J. No. 5455, at para. 8.

[15] The evidence that the plaintiff met significant expenditures five years ago when it was working towards the realization of the dam project tells me nothing about the state of financial affairs at the plaintiff today.

[16] The evidence reveals that the plaintiff corporation has never generated any revenue. Its sole purpose was to construct the dam, and presumably then operate it, but shovels never made it into the ground. The plaintiff did not own the land on which it proposed to build the dam.

[17] Presumably the plaintiff had investors who were funding, directly or indirectly, the expenses of the dam project, but whether those investors provided debt or equity funding is unknown. In any case, it defies common sense to think that investors would leave their funds in the corporation when the project has failed.

[18] The cause of action properly belongs to the plaintiff, which is not a shell corporation. However, in the circumstances, there is good reason to believe that the plaintiff does not have sufficient assets to pay the defendants’ costs of the litigation if it is unsuccessful.

[19] In my view, this conclusion is an inference of fact that arises from the facts in evidence about the corporation. It rises above “conjecture, hunch, or speculation” (City Commercial, at para. 8). The defendants have discharged their onus under the first part of the test.

Should security for costs be ordered?

[20] Having concluded that the defendants have met their onus, I turn to the second stage of the analysis. At this stage, the onus lies on the plaintiff to demonstrate that an order for security for costs would be unjust.

[21] As I have noted, the plaintiff does not argue that an order would be unjust because it is impecunious. Rather, it relies on the defendants’ alleged delay, the defendants’ alleged responsibility for its losses, and its argument that it has a good chance of success in the litigation.

[22] First, I disagree that the defendants have delayed in bringing this motion. The evidence upon which they rely was first deposed to during cross-examinations on the earlier motion. That motion was not decided until November 2022, and the plaintiff was ordered to pay costs of that motion by February 2023. There is nothing undue or improper in the defendants waiting until the costs order was due (and, as it turned out, paid) to bring the motion because whether the costs order was or was not paid could have affected the structure of the motion and the relief sought. The motion was brought promptly thereafter.

[23] Second, the plaintiff’s focus on the defendants’ alleged responsibility for its losses is misplaced. In every lawsuit, a plaintiff alleges that a defendant is responsible for its losses. The relevant question on a security for costs motion is whether the defendants’ conduct has caused the plaintiff’s inability to pay the defendants’ costs of the action. Here, the plaintiff does not plead impecuniosity, and does not argue that it cannot pay the costs. The defendants’ alleged responsibility for the plaintiff’s loss is thus irrelevant, and no argument is made that the defendants’ conduct has rendered the plaintiff unable to pay an adverse costs award.

[24] I thus turn to the question of whether the plaintiff has met the high threshold of satisfying the court of its chances of success in the litigation.

[25] The parties spent a good deal of time arguing the merits of litigation. The problem in this case is that it is not appropriate, and I do not have the record, to embark on a merits analysis. The case before me is complex, and will involve important findings of credibility. It is inappropriate for me to make such assessments on a limited paper record, prior to discoveries, on an interlocutory motion. The argument on the merits before me leads me to conclude that there are triable issues. These go beyond issues of credibility and liability. The defendants raise real concerns about the plaintiff’s ability to establish damages, which will require the plaintiff to prove that, had the location approval been granted, it could have obtained all the other (discretionary) government approvals, including environmental approvals, within the requisite time period to meet the long-stop date. I am not in a position to reach any such conclusion on this motion.

[26] As a result, I cannot find that the plaintiff has established a good chance of success on the merits. It has not discharged its onus on the second part of the test.

[27] I note that the Court of Appeal in Yaiguaje v. Chevron Corporation, 2017 ONCA 827, directed courts to take a step back and consider the justness of the security for costs order sought in all the circumstances of the case, with the interests of justice at the forefront. I have done so. I am faced with a request for security for costs in a case that will be expensive to litigate, where there is good reason to believe the plaintiff has insufficient assets to pay the defendants’ costs if unsuccessful, where the amount sought is significant, in litigation that is not public interest litigation, and where the plaintiff has not satisfied me that it has a good chance of success on the merits.

[28] In these circumstances, I conclude that a security for costs order is just.

[29] Although the costs sought by the defendants are significant, I note that the eight-day hearing at the MLT resulted in costs to the plaintiff only of $400,000, and dealt only with the limited question of location approval. Given the broader scope of this action, I am satisfied that the partial indemnity costs claimed by each of the defendants are, broadly speaking, realistic and reasonable. However, I note the case law that suggests that, especially where an order for security for costs is made at an early stage, it is appropriate to make the order in stages.

[30] Accordingly, I make the following order:

a. With respect to His Majesty the King in Right of Ontario, the plaintiff shall post security for costs as follows:

i. $275,000 plus HST within thirty days;

ii. $165,000 plus HST at the commencement of oral discoveries;

iii. $185,000 plus HST at the conclusion of the pre-trial conference.

b. With respect to IESO, the plaintiff shall post security for costs as follows:

i. $115,000 plus HST within thirty days;

ii. $115,000 plus HST at the commencement of oral discoveries;

iii. $140,000 plus HST at the conclusion of the pre-trial conference.

Costs of the Motion

[31] At the hearing of the motion, I proposed that all parties upload their costs outlines to CaseLines and that, once I had written my reasons on the merits of the motion, I would proceed to determine costs on the basis of the written outlines. All parties were agreeable to the proposal, and that is the process I have followed.

[32] The legal principles relating to costs determinations are not contentious. The three main purposes of modern costs rules are to indemnify successful litigants for the costs of litigation, to encourage settlement, and to discourage and sanction inappropriate behaviour by litigants: see Fong v. Chan (1999), 1999 2052 (ON CA), 46 O.R. (3d) 330, at para. 22.

[33] Subject to the provisions of an act or the rules of this court, costs are in the discretion of the court, pursuant to s. 131 of the Courts of Justice Act, R.S.O. 1990, c. C.43. The court exercises its discretion considering the factors enumerated in r. 57.01 of the Rules of Civil Procedure, including the principle of indemnity, the reasonable expectations of the unsuccessful party, and the complexity and importance of the issues. Overall, costs must be fair and reasonable: see Boucher v. Public Accountants Council for the Province of Ontario (2004), 2004 14579 (ON CA), 71 O.R. (3d) 291 (Ont. C.A.), at para. 38. A costs award should reflect what the court views as a fair and reasonable contribution by the unsuccessful party to the successful party rather than any exact measure of the actual costs to the successful litigant: see Zesta Engineering Ltd. v. Cloutier (2002), 2002 25577 (ON CA), 21 C.C.E.L. (3d) 161 (Ont. C.A.), at para. 4.

[34] The defendants are the successful parties and are presumptively entitled to their costs. I note that in calculating the security for costs awards I order above, I excluded the defendants’ claim for costs related to this motion, which I address separately here.

[35] His Majesty the King’s bill of costs supports all-inclusive partial indemnity costs of $22,088.55, while IESO’s bill of costs supports all-inclusive partial indemnity costs of $21,342.03.

[36] The defendants’ claim for costs is lower than that which would have been made by the plaintiff were it successful. The plaintiff’s costs outline discloses all-inclusive partial indemnity costs of $24,433.59.

[37] Taking into account the material prepared, the necessary steps in this motion, the time spent, the plaintiff’s reasonable expectations as disclosed by its own costs outline, the amount claimed in the litigation and the importance of the issues to the parties, I make the following costs orders:

a. The plaintiff shall pay His Majesty the King in Right of Ontario its partial indemnity costs, all-inclusive, of this motion, fixed at $20,000 within thirty days;

b. The plaintiff shall pay IESO its partial indemnity costs, all-inclusive, of this motion, fixed at $20,000 within thirty days.

J.T. Akbarali J.

Date: August 3, 2023