Legal Blog

Holdback & Costs

A motion for security for costs allows a defendant to respond to a claim brought by an impecunious or out-of-jurisdiction plaintiff. A successful motion essentially establishes a pay-to-litigate system in which the plaintiff is required to proactively pay money into court to account for any adverse costs award that might eventually be awarded if it were to lose the case.

On a motion for security for costs, the defendant must first meet the initial burden of establishing that it appears that there is good reason to doubt that the plaintiff has sufficient assets in Ontario to satisfy an adverse costs award. If the defendant does so, then the onus shifts to the plaintiff to demonstrate that the order for security for costs would be unjust in the circumstances.

In Gowing Contractors Ltd. v. Walsh Construction Company Canada, a 2022 decision of the Ontario Superior Court of Justice (Associate Judge), a general contractor brought a seemingly textbook motion for security for costs. The general was sued by its sub for over $3 million. The sub was no longer in business: it had ceased operations, tendered no evidence of what happened to its assets, transferred property to a numbered company with no apparent connection, changed its registered business address, held no real property, no longer had a website, and was even named as a defendant in several other actions in Ontario. Yet, the associate judge denied security for costs, finding that the general had not even met its initial burden. The reason for this seemingly incongruous result is all in the holdback.

Holdback an Asset

The sub effectively did not dispute that it had ceased carrying on business. Instead, it relied on the ace up its sleeve; the general had retained almost $1.4 million in holdback as setoff for damages for alleged deficiencies and delay. The holdback was admittedly earned and unpaid. The sub argued that the holdback was an asset that could respond to any adverse costs award and that the general had therefore not met its initial burden.

The general first raised a technical response; usually, not a good idea. It argued that a corporate entity, different from the general, held the holdback and thus the holdback was not an asset that could respond to pay a costs award. The associate judge was not blind to the practical realities. He found that the holdback was an asset of the general writ large and could be used to satisfy a costs award.

Its technical argument defeated, the general next argued that the holdback was not an asset that could be used to pay an adverse costs award because it was meant to account for damages for alleged deficiencies and delay that the general advanced in its counterclaim.  The associate judge accepted that this argument was tenable, but noted that it hinged on whether the setoff was justified. Ultimately, if the setoff arguments were not accepted at trial, then the holdback would more than cover any adverse costs award.

Evidence

This brought into sharp focus the test on security for costs. Although the general had pleaded damages of $4.6 million, it had only led evidence on the security for costs motion to support approximately $300,000 in damages. The associate judge found that, although security for costs motions should not devolve into a trial of what would ultimately be determined, the general needed to provide some evidence that the holdback funds were not actually owing to the sub or, at the very least, some evidence that there was merit to its quantification of the amount of the setoff. Bare allegations in the general’s counterclaim were not enough to meet its initial burden on the security for costs motion. Instead, what mattered was the evidence it filed on the motion; the general had to substantiate its damages beyond generalities and did not do so.

Because the holdback was large enough to account for any adverse costs award, even after deducting the $300,000 in damages for which the general had provided evidence, the associate judge denied the motion.

Image courtesy of FelixMittermeier.

Written by Tim Morgan, a litigator with a focus on commercial matters. He has appeared before all levels of Ontario Courts and has represented businesses of all sizes, from Canada’s largest corporations to privately held, family-run businesses.