Court File and Parties

COURT FILE NO.: CV-20-637087

MOTION HEARD: 20240904

REASONS RELEASED: 20241211

SUPERIOR COURT OF JUSTICE – ONTARIO

BETWEEN:

2455993 ONTARIO INC. Plaintiff

• and-

SOLACE IS COMFORT INC. Defendant

BEFORE: ASSOCIATE JUSTICE McGRAW

COUNSEL: R. Scocco E-mail: rocco@scoccolaw.ca -for the Plaintiff/Defendant by Counterclaim, 2455993 Ontario Inc.

D. Judson E-mail: doug@judsonhowie.ca -for the Defendant/Plaintiff by Counterclaim, Solace Is Comfort Inc.

REASONS RELEASED: December 11, 2024

Reasons For Endorsement

I. Background

[1] This is a motion by the Plaintiff/Defendant by Counterclaim, 2455993 Ontario Inc. (“245”) for security for costs in respect of the Counterclaim brought by the Defendant/Plaintiff by Counterclaim, Solace Is Comfort Inc. (“SIC”). 245 seeks an order requiring SIC to post $45,000.

[2] This action arises from a lease agreement dated March 16, 2016 between 245 as owner and SIC as tenant dated March 16, 2016 (the “Lease”) for the premises at 62 Marine Parade Drive, Unit 3, Toronto (the “Unit”). SIC operated a specialty retail business from the Unit offering mastectomy and post-surgical garments, swimwear, orthotics, diabetic footwear, custom bracing and related products from December 1, 2016 until 245 terminated the Lease on May 30, 2019. There were disputes between 245 and SIC with respect to rent, additional rent (SIC’s share of expenses) and the heating, ventilating and air conditioning (“HVAC”) system.

[3] 245 commenced this action under the Simplified Rules by Notice of Action issued on February 27, 2020 and Statement of Claim dated March 25, 2020. 245 claims $59,224.61 for outstanding rent and operating costs. SIC delivered a Defence and Counterclaim on November 1, 2020. In its Counterclaim, SIC claims damages of $525,271.80 including: $77,271.84 for the return of rent and additional rent; $85,000 for maintenance work; $33,000 for lost revenue before vacating the Unit; $10,0000 for moving and storage; and $150,000 for unrealized profits from inventory owned. This matter is still proceeding under the Simplified Rules.

[4] This motion first came before me on June 24, 2024. Only 65 minutes was scheduled which was insufficient and the motion was adjourned to today for 3 hours.

II. The Law and Analysis

[5] For the reasons that follow, I conclude that it is just in the circumstances for SIC to post security for costs on the terms set out below.

[6] Rule 56.01(1) states:

“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;”

[7] Rule 56.01(1) does not create a prima facie right to security for costs but rather triggers an enquiry whereby the court, using its broad discretion, considers multiple factors to make such order as is just in the circumstances including the merits of the claim, the financial circumstances of the plaintiff and the possibility of an order for security for costs preventing a bona fide claim from proceeding (Stojanovic v. Bulut, 2011 ONSC 874 at paras. 4-5). The court has broad latitude to make any order that is just in the circumstances (Yuen v. Pan, 2018 ONSC 2600 at para. 14)

[8] In Yaiguaje v. Chevron Corp., 2017 ONCA 827, the Court of Appeal held as follows:

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

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

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

[9] Determining the order which is just in the circumstances requires a balancing between ensuring that meritorious claims are allowed to go forward with the consequences of being left with an unenforceable costs award where a party pursues an unsuccessful claim (Ascent Inc. v. Fox 40 International Inc., [2007] O.J. No. 1800 at para. 3; Rosin v. Dubic, 2016 ONSC 6441 at para. 39; Lipson v. Lipson, 2020 ONSC 1324 at paras. 47-48). In some cases, security is required to correct the imbalance of a plaintiff having security for a successful claim while a defendant has no security for a successful defence and to prevent a plaintiff from going to trial without posting security, be unsuccessful then avoid paying costs (2232117 Ontario Inc. v. Somasundaram, 2020 ONSC 1434 at para. 27; DK Manufacturing Group Ltd. v. Co-Operators Insurance, 2021 ONSC 661 at para. 26).

[10] The initial onus is on the defendant to show that the plaintiff falls within one of the enumerated categories in Rule 56.01(1). The plaintiff can rebut the onus and avoid security for costs by showing that they have sufficient assets in Ontario or a reciprocating jurisdiction to satisfy a costs order; the order is unjust or unnecessary; or the plaintiff should be permitted to proceed to trial despite its impecuniosity should it fail (Travel Guild Inc. v. Smith, 2014 CarswellOnt 19157 (S.C.J.) at para.16; Coastline Corp. v. Canaccord Capital Corp., 2009 21758 (ON SC), [2009] O.J. No. 1790 (ONSC) at para. 7; Cobalt Engineering v. Genivar Inc., 2011 ONSC 4929 at para. 16). This was summarized by Master Glustein (as he then was) in Coastline:

“7…

(i) The initial onus is on the defendant to satisfy the court that it "appears" there is good reason to believe that the matter comes within one of the circumstances enumerated in Rule 56;

(ii) Once the first part of the test is satisfied, "the onus is on the plaintiff to establish that an order for security would be unjust";

(iii) The second stage of the test "is clearly permissive and requires the exercise of discretion which can take into account a multitude of factors". The court exercises a broad discretion in making an order that is just;

(iv) The plaintiff can rebut the onus by either demonstrating that:

(a) the plaintiff has appropriate or sufficient assets in Ontario or in a reciprocating jurisdiction to satisfy any order of costs made in the litigation,

(b) the plaintiff is impecunious and that justice demands that the plaintiff be permitted to continue with the action, i.e. an impecunious plaintiff will generally avoid paying security for costs if the plaintiff can establish that the claim is not "plainly devoid of merit", or

(c) if the plaintiff cannot establish that it is impecunious, but the plaintiff does not have sufficient assets to meet a costs order, the plaintiff must meet a high threshold to satisfy the court of its chances of success”

[11] Heidi Scott, SIC’s principal, confirmed during her examination for discovery that SIC is not operational. She also states in her affidavit filed on this motion that Amoena Canada terminated its exclusive supplier agreement with SIC on June 6, 2019 effectively ending SIC’s business. SIC provided its answers to undertakings on September 16, 2022 including banking and financial statements for 2016-2019.

[12] 225’s submits that SIC is insolvent, which SIC denies. It is not necessary for 225 to demonstrate that SIC is insolvent. The light initial onus under Rule 56.01(d) requires 225 to demonstrate that it appears there is good reason to believe that SIC does not have sufficient assets in Ontario or a reciprocating jurisdiction to satisfy a costs award (Georgian Windpower Corp. v. Stelco Inc., [2012] O.J. No. 158 (ONSC) at para. 7; Coastline at para. 7). This is not a heavy onus and only requires 225 to establish that there is more than conjecture, hunch or speculation (Mazzika Arbika Ltd. v. Aviva Insurance Company of Canada, 2017 ONSC 6801 at paras. 21-27; Amelin Resources Inc., LLC v. Victory Energy Operations, LLC, 2022 ONSC 4514 at paras. 17-18).

[13] I am satisfied that 225 has met the light onus that there is good reason to believe that SIC does not have sufficient assets to satisfy a costs award. SIC has not operated for over 5 years and its banking and financial documentation supports the conclusion that it does not have sufficient assets. I reject SIC’s submission that the court should not give weight to the banking and financial information because it is outdated. It was open to SIC to file updated financial information or other evidence to demonstrate that even though it has not operated a business in over 5 years, its financial circumstances have improved since 2019 such that it now has sufficient assets. It has not done so. The fact that SIC advises that it is funding this litigation does not on its own alter this conclusion.

[14] SIC submits that it would be unjust to order security for costs because it is impecunious and its claim is not plainly devoid of merit. In my view, SIC has not met the heavy onus to establish that it is impecunious. This would require the court to find that, even beyond its assets, SIC cannot raise the necessary funds to post security (Paulus v. Murray, 2007 6904 at para. 5). A corporate party must not only establish that the corporation itself is impecunious, but that it cannot raise funds from its shareholders to do so (2311888 Ontario Inc. v. Ross, 2017 ONSC 1295 at para. 20). A corporation asserting impecuniosity must provide evidence of its financial circumstances with “robust particularity” including complete and accurate disclosure of income, assets, expenses, liabilities and borrowing ability with supporting documentation for each category (Ross at paras. 18-19). There must be more than some evidence of impecuniosity and the court must be satisfied that it is genuinely impecunious with full and frank disclosure of its financial circumstances (Montrose Hammond & Co. v. CIBC World Markets Inc., 2012 ONSC 4869 at paras. 34-35; EBA Advertising Inc. v. Kahn (c.o.b. Taxi Taxi Co.), 2013 ONSC 4971).

[15] Based on the record, SIC has not made sufficient disclosure to conclude that it is impecunious. SIC has not filed any evidence regarding its ability to raise funds from its principals and shareholders including whether Ms. Scott has sufficient assets to post security. There is also no evidence that SIC has made any inquiries or attempts to borrow funds from third party lenders and the costs of doing so (Chantrs Blinds and Shutters Inc. v. 2037208 Ontario Inc., 2022 ONSC 6832 at para. 20). Ms. Scott deposed that she controls and operates a new company in a business similar to SIC which has an operating line of credit, however, there is no evidence or information as to whether this line of credit could be used to post security or if the lender providing the line was asked or would advance funds for security.

[16] As I have not concluded that SIC is impecunious, SIC must demonstrate that its Counterclaim has a good chance of success or a real possibility of success (Coastline at paras. 3 and 7; Chalhal v. Abdullah et al, 2022 ONSC 1727 at paras. 47-50; Chill Media Inc. v. Brewers Retail Inc., 2021 ONSC 1296 at para. 14). In considering the merits, the court is not required to embark on an analysis such as on a summary judgment motion (Coastline at para. 7; Horizon Entertainment Cargo Ltd. v. Marshall, 2019 25904 at para. 3). The court’s consideration of the merits is based primarily on the pleadings with recourse to evidence filed on the motion and 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 (Coastline at para. 7; Horizon at para. 3). An assessment of the merits should only be decisive where the merits may be properly assessed on an interlocutory application and success or failure appears obvious (Coastline at para. 7; Horizon at para. 3).

[17] In my view, it is not possible to conclude on the record before me that SIC’s Counterclaim has a good chance or real possibility of success. There are numerous disputed issues of fact and law and issues of credibility which must be determined. These include SIC’s allegations that 245 made fraudulent and negligent misrepresentations with respect to the HVAC; that 245’s alleged conduct with respect to the HVAC denied SIC quiet enjoyment and resulted in disruptions to SIC’s business which, together with the Lease termination, caused SIC to lose sales and profits both during and after the tenancy and the Amoena agreement and ultimately caused the termination of its business, or, if SIC was not profitable due to other factors; that 245 acted in bad faith; and that 245 breached SIC’s right to renew the Lease. These issues can only be properly determined on a complete record at trial or a summary judgment motion, not on the limited record at this interlocutory stage.

[18] Similarly, I reject SIC’s argument that it would be unjust to order security because any insufficiency of SIC’s assets was caused by 245’s actionable conduct complained of in the Counterclaim (John Wink Ltd. v. Sico Inc., 1987 4299 (ON SC); Cigar500.com Inc. v. Ashton Distributions Inc., 2009 46451 (ON SC), [2009] O.J. No. 3680 (S.C.J.) at para. 40; at paras. 21-27). Again, there are multiple, significant issues of disputed fact, particularly with respect to SIC’s allegations that 245’s conduct in terminating the Lease and with respect to the HVAC was the cause or primary cause of the loss of profits and its business as opposed to other causes unrelated to 245.

[19] SIC also argues that 245’s delay in bringing this motion precludes an order for security (Chalhal at paras. 33, 51-55; Wilson Young & Associates v. Carleton University et al, 2020 ONSC 4542 at para. 59). A motion for security for costs must be brought promptly upon the Defendant discovering that it has a reasonable basis for bringing the motion as a plaintiff should not have to post security after it has incurred significant expense in advancing the litigation (Wilson Young at para. 59). The moving party should not be entitled to security for costs if its delay causes prejudice to the plaintiff and failure to explain the delay is fatal to the motion even in the absence of prejudice (Wilson Young at para. 59).

[20] To a certain degree, I accept SIC’s submissions on timing. 245 submits that it first became aware of SIC’s financial difficulties when it received SIC’s banking and financial statements in satisfaction of answers to undertakings on September 16, 2022. 245 did not raise any concerns with SIC’s counsel until September 8, 2023 and did not bring this motion until January 15, 2024. I agree that it could have been brought sooner though not before discoveries as SIC asserts. However, I cannot conclude that the timing of 245’s motion is strategic or that SIC would suffer material prejudice due to the timing (Wilson at para. 59; Yaiguage at para. 23). I conclude that the delay should be reflected in the amount and terms of security, including by limiting security to future steps in the litigation due to 245’s willingness to participate in the litigation without security.

[21] I also do not accept SIC’s submission that no security should be ordered because it is in respect of a counterclaim which is a defence that could have been asserted by way of set off. It is an established principle that a party should not have to post security for costs as a condition of defending itself and where the facts on which a counterclaim is based are largely the same facts and circumstances raised in the plaintiff’s claim, this militates against an order for security (Paramount Franchise Group, 2022 ONSC 4533 at para. 11). Whether a plaintiff by counterclaim should be ordered to post security is a relevant factor for the court to consider in exercising its discretion (Wilkings v. The Velocity Group Inc., (2008) 89 O.R. (3d) 731 (Div. Ct.) at paras. 23 and 29). The court should consider whether or not the counterclaim is in substance a reiteration of the plaintiff by counterclaim's defence to the main action and if it is, the court may exercise its discretion to deny the motion by the defendant by counterclaim that the plaintiff by counterclaim post security for costs or qualify the amount of security to otherwise be posted (Wilkings at para. 29; Acasta v. Acasta, 2023 ONSC 34 at paras. 25-26).

[22] In the present case, while some of SIC’s claims are substantially just reiterations of its defences to 245’s claims, the Counterclaim also raises independent factual and legal issues which go beyond its defence in both substance and quantum. Specifically, I am satisfied that SIC’s claims for rent, additional rent and some maintenance amounts are largely defences to 245’s claim. However, SIC’s damage claims for lost profits both during and after its tenancy are multiple times more than 245’s claim and are fundamentally different from the largely Lease-related issues in the main claims and defences. In my view, this can be addressed sufficiently through an appropriate reduction in the amount of security ordered.

[23] Applying a holistic approach, I conclude that it is just in the circumstances to exercise the court’s discretion to order security for costs. Taking into consideration the relevant factors I am satisfied that an amount can be ordered on reasonable terms which balances the parties’ interests, namely, one that is not so onerous as to prevent SIC from asserting its Counterclaim while providing 245 with some protection from an unenforceable costs award (Chill Media at para. 14). The justness of the order and the balance between seeing claims through to trial against the risk of unenforceable costs awards can and should be reflected in the quantum of security ordered, not simply whether security is ordered at all (Rosin at paras. 38-39; Lipson at para. 48). It is also relevant that this is private, commercial litigation with no public interest considerations in which SIC is claiming damages well in excess of 245 is claiming. If SIC is successful, its principals stand to benefit and therefore should accept at least some of the risk of pursuing their claims (Design 19 Construction Ltd. v. Marks, [2002] O.J. No. 1091 (Ont. S.C.J.) at paras. 10-15). The courts have held that those who are prepared to finance the litigation should also be prepared, in the absence of impecuniosity, to post security (Crudo Creative Inc. v. Marin, 2007 60834 (ON SCDC), [2007] O.J. No. 5334 (Ont. Div.).

[24] The court has broad discretion to determine a fair and reasonable amount of security which is substantially similar to the exercise of its discretion in fixing costs of a proceeding pursuant to Rule 57.01 (Canadian Metal Buildings Inc. v. 1467344 Ontario Limited, 2019 ONSC 566 at para. 27). The quantum should reflect an amount that falls within the reasonable contemplation of the parties, what the successful defendant would likely recover and the factors set out in Rule 57.01 (720441 Ontario Inc. v. The Boiler et al, 2015 ONSC 4841 at para. 56; Marketsure Intermediaries Inc. v. Allianz Insurance Co. of Canada, 2003 CarswellOnt 1906 at paras. 17-20). In most cases, security for costs will be ordered on a partial indemnity scale in tranches by stage(s) in the litigation on a "pay as you go" basis (Marketsure at paras. 13-18).

[25] In determining a fair and reasonable amount, there is no reason to depart from the general rule that security for costs should be ordered on a partial indemnity scale. I am satisfied that the amount of $45,000 sought by 245 must be reduced to reflect numerous factors. This includes the timing of the motion and 245’s willingness to proceed without security until this stage of the litigation notwithstanding earlier knowledge of SIC’s financial difficulties. Consistent with my conclusions above regarding SIC’s claims asserted in the Counterclaim, a reduction is also necessary to exclude amounts related to SIC’s defence and to account for the inevitable overlap and economies of scale associated with the Counterclaim. I have also taken into consideration the fact that this proceeding is under the Simplified Rules and to provide for more reasonable costs expectations. Finally, I also conclude that it is in the interests of justice, in particular to provide for the possibility of settlement, that the first instalment of security not be made until after the action is set down for trial and the second after the Pre-Trial Conference.

[26] Having reviewed 245’s submissions on quantum and considering all of the factors canvassed above, I am satisfied that it is fair and reasonable, within the parties’ reasonable expectations and just in the circumstances for SIC to post security of $25,000 on the following terms: $15,000 within 60 days of the matter being set down for trial; and $10,000 within 60 days after the Pre-Trial Conference.

IV. Order and Costs

[27] Order to go on the terms set out above.

[28] If the parties cannot agree on the costs of this motion, they may file written costs submissions not to exceed 3 pages (excluding Costs Outlines) on a timetable to be agreed upon by counsel.

Released: December 11, 2024

Associate Justice McGraw