A lien is an extraordinary remedy which stands as security for a claim for money by the lien claimant. Prior to trial, a valid registered lien can only be lifted from title by posting security (cash, bond or letter of credit) into court for the full amount of the lien as well as an additional amount for the lien claimant’s costs. Under the Construction Act (the “Act“), the party posting security (typically, either the owner or general contractor) is required to provide additional security for costs for 25% of the lien amount, up to a maximum of $250,000.
It is not often, however, that the lien claimant will be ordered to post security for the Defendant’s costs. This is due, at least in part, to the fact that the Act does not specifically provide for motions for security for costs in lien actions. The Act further requires leave from the Court before any interlocutory step not provided for in the Act is taken. Leave to bring an interlocutory step will only be granted where the Court is satisfied the step is necessary or would expedite the resolution of the issues in dispute.
A recent decision1 shows that where a Defendant to a lien action seeks leave to bring a security for costs, necessity may be established where it is shown that there is good reason to believe that a corporate plaintiff does not have sufficient assets in Ontario to pay the Defendant’s costs. Once necessity has been established, the Court will then consider whether it is just to make an order for security for costs by considering all of the circumstances of the action, including the merits of the case.
The Decision
In SRK Woodworking, the Plaintiff commenced a lien action seeking $100,993.69. The Defendant contractor counterclaimed for breach of contract damages in the amount of $160,000.00. The Plaintiff registered a lien, which was subsequently vacated by the Defendant by posting security for the amount of the lien together with an additional $25,248.42 in respect of costs.
The Defendant subsequently moved for an order requiring the Plaintiff to post security for costs, on the basis that and there was good reason to believe the corporate Plaintiff had insufficient assets in Ontario to pay costs to the Defendant if it was unsuccessful at trial.
Should leave be granted?
Justice Sheard adopted the reasoning of Justice MacNeil in Compass Mechanical Contracting Inc. v. AIM Recycling Hamilton et al.2 (“Compass“) regarding the test of “necessity” that must be met in order for leave to be granted to bring a motion for security for costs in a construction lien action.
As stated in Compass, the purpose of security for costs it to “even the playing field” by ensuring that an insolvent Plaintiff should not be given risk-free opportunities to pursue litigation. In order to meet the test for necessity under the Act, there must be “good reason to believe that a corporate Plaintiff does not have sufficient assets in Ontario to pay the Defendant’s costs“.3
In SRK Woodworking, the Plaintiff admitted that it did not have the ability to pay a costs award. With this admission, coupled with the fact that the Defendant posted security for the full amount of the Plaintiff’s lien claim together with an additional 25% of the amount claimed for costs, Justice Sheard was satisfied that the Defendant had met its onus of demonstrating necessity in accordance with the Act, and granted leave to the Defendant to bring its motion. Doing so, in Justice Sheard’s view, would “even the playing field“.
Should Security be Ordered?
According to the Divisional Court’s decision in Know Your City Inc. v. The Corporation of the City of Brantford 4, the Court is to look at all of the circumstances of a case, including the merits, when deciding whether it is just to make an order for security for costs.
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. The onus then shifts to the Plaintiff to establish that an order for security would be unjust by demonstrating that: (i) it has appropriate or sufficient assets to satisfy a costs order; (ii) that it is impecunious and that justice demands that the Plaintiff be permitted to continue with the action because it has a claim that is not “plainly devoid of merit”; or (iii) if impecuniosity is not established, by meeting the high-hurdle high threshold of satisfying the Court that it has a reasonable chance of success in the action.
To resist the motion, the Plaintiff must establish direct and indirect impoverishment. In Melco Construction Inc. v. Jack Frost Sparking Springs Co. Ltd.5, this was described as:
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. As I mentioned earlier, 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.6
While the Plaintiff in SRK Woodwoorking had admitted that it could not pay a costs award, the evidence fell short of establishing that the Plaintiff was impecunious. The only evidence delivered by the Plaintiff was the financial circumstances of its managing director and another director of the corporation. Justice Sheard was critical of the lack of evidence regarding the Plaintiff’s financial circumstances, and made it clear that evidence concerning the finances of the Plaintiff’s managing director and director was not evidence of the Plaintiff’s assets. Her Honour found that the Plaintiff had not met its obligation to make full disclosure of the financial information envisioned by the Court in Melco.
The Court then considered whether the Plaintiff had met its onus of demonstrating that it had a good chance of success in the action. This too was not accepted by Justice Sheard, who observed that the Plaintiff had failed to lead any evidence of the merits of its claim against the Defendant.
The Court also rejected the argument that the Plaintiff’s financial difficulties were caused by the Defendant, and that for this reason, an order for security should not be granted. Relying on the cross-examination of the Plaintiff’s managing director, the Court found that the Plaintiff had cash-flow problems prior to invoicing the Defendant. The Plaintiff’s landlord had locked the Plaintiff out of its premises for non-payment of rent. As well, and prior to invoicing the Defendant, the Plaintiff had requested advance payments in order to pay invoices unrelated to the project at issue in the litigation.
Based on the above, the Court found that the Defendant was entitled to an order for security for costs.
Takeaway
Justice Sheard’s decision should serve as a reminder to lien claimants. Where a Defendant seeking security for costs can establish that the lien claimant appears to have insufficient assets in Ontario to pay an adverse costs order, the lien claimant must to provide full financial disclosure if it intends to demonstrate impecuniosity, and must also provide strong evidence of the merits of its case against the Defendant. Failure to do so will result in an order for security for costs.
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1 SRK Woodworking Inc. v. Declan Construction Ltd. et al., 2022 ONSC 6229 (“SRK Woodworking“).
2 Compass Mechanical Contracting Inc. v. AIM Recycling Hamilton et al., 2022 ONSC 4656 [“Compass“].
3 Compass, at para 19.
4 Know Your City Inc. v. The Corporation of the City of Brantford, 2020 ONSC 7363 (Div. Ct.)
5 Melco Construction Inc. v. Frost Sparkling Springs Co. Ltd., 2011 ONSC 2197 [“Melco“].
6Melco, at para 25, citing Morton v. Canada (Attorney General), [2005] O.J. No. 948 (Sup. Ct. J.), at para 32.
