Legal Blog

Costs Security #2

We have previously discussed the concept of security for costs (see May 2008 newsletter). A defendant may request the court to force a financially strapped plaintiff to post money into court as security for costs that may be awarded against the plaintiff if the plaintiff is ultimately unsuccessful at trial. The concept has had a checkered history in construction lien actions. Melco Construction Inc. v. Jack Frost Sparkling Springs Co. Ltd., a 2011 decision of the Ontario Superior Court of Justice, is a recent case that deals with a request for security for costs in a construction lien action.

Hurdles

To obtain security for costs in an ordinary action, the defendant must show that a corporate plaintiff does not have sufficient assets in Ontario to pay for an adverse costs award. If the defendant is able to demonstrate this, then the burden shifts to the plaintiff to show that it is impecunious and has no means by which it can raise the funds to provide the requested security. In essence, the rule tries to strike a balance between the prejudice to a defendant because a corporate plaintiff has no assets to pay costs and the prejudice to a corporate plaintiff because, not only is it without assets, it cannot fund the security by access to loans or its shareholders.

The defendant in a construction lien action has an additional problem. Before any motion in a construction lien action can be successful, the moving party must first obtain leave of the court to bring the motion; to obtain that leave, the moving party must demonstrate that (a) the motion is necessary, or (b) it would expedite the resolution of the issues in dispute.

Prior Decisions

Some decisions have found that a motion for security for costs is “necessary” to do procedural justice between the parties when the defendant has posted security to vacate the claim for lien. It is necessary to level the playing field such that both of the parties will have posted security.

Other decisions have found that the word “necessary” does not mean procedurally fair. It has to mean more. Otherwise, in every lien action, a defendant who stops the money flow, and therefore causes a lien claimant to have insufficient assets to pay costs, could bring a motion for security for costs and, by virtue of the lien claimant’s inability to pay that security, stop a lien action in its tracks.

Background

A general registered a claim for lien and the owner duly vacated it by posting security of $313,000. The general ultimately claimed compensatory damages of about $2.2 million and punitive damages of $500,000. The owner counterclaimed for $250,000 in damages for wrongful interference in contractual relations and for an additional $750,000 for punitive damages.

About 2 years later, after allowing the action to languish, the plaintiff corporation brought a motion to allow its president to represent it. It claimed that it could not afford to retain legal counsel because the two principals of the corporation had each gone bankrupt and the corporation’s liabilities exceeded its assets. As it happened, the plaintiff was unsuccessful in that motion for reasons that were not set out.

That motion was the equivalent to waiving a red flag in front of a bull. The defendant realised that the plaintiff had no funds to pay costs if it were unsuccessful in its action and quickly brought a motion for security for costs.

Merits

It would have been difficult for the plaintiff to deny that it had insufficient assets to pay a costs award given the evidence that it adduced on the previous motion. Accordingly, the defendant met the first test and the burden shifted to the plaintiff to show that it was impossible for it to raise the funds to post security.

The plaintiff’s principals submitted an affidavit dealing with their financial affairs. However, the motions judge found much fault with its sufficiency. He adopted the reasoning of another judge and stated,

“In motions of this nature, the financial evidence of plaintiffs must be set out with robust particularity. There should be no unanswered material questions, as is the case here. It is worth remembering that the financial status of the plaintiffs is known only to them … they bear the burden of proving the effect upon them of an order for security for costs…. Full financial disclosure is required and should include the following: 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.”

In essence, the judges have said, “plaintiffs you have to drop your financial pants and let everybody view the results.” In this case, the plaintiffs had submitted scanty information. They provided no financial statements, tax returns, bank statements, credit line information, credit card information, or information regarding the receivables of the plaintiff or the principals. The information provided did not answer the following questions that the judge posed in his reasons for decision: How much were the principals earning? What assets did they have? What were their current liabilities and significant expenses? What assets had they disposed of or encumbered since the start of the action?

Leave

The judge relied on the prior decisions that allowed leave because it was “necessary” to balance the interests of the parties. He did not reference the decisions that were contrary and explain or refuse to follow them.

Accordingly, the judge granted leave to bring the motion and held that the plaintiff had to post security for costs to continue with the action.

Quantum

The defendant estimated that the costs for discoveries and a full 2-week trial would be about $150,000. We are not sure if that was what the defendant was requesting the plaintiff pay into court or whether the security requested was based on partial indemnity costs, which would be about 60% of that. Regardless, the judge had some sympathy with the argument of the plaintiff that the reason for its financial problems arose from the actions of the defendant. He also correctly noted that much of the costs would be incurred because of the defendant’s counterclaim, something for which the plaintiff would not have to post security for costs.

Accordingly, the judge dealt with the posting of security in stages. The first security to be posted would be $10,000 for discoveries and then $6,000 up to the first pre-trial. Thereafter, the defendant would have to make additional requests for security.

Result

The plaintiff and its principals would have to find the funds to post the security. The judge ordered that if the plaintiff failed to pay the security, the plaintiff could take no further steps in the action.