An award of costs to a successful party is an integral part of the court system in British Columbia. As expressed by our Court of Appeal, in addition to indemnifying the successful party, an award of costs can:
– deter frivolous actions or defences;
– encourage conduct that reduces the duration and expense of litigation and discourage conduct that has the opposite effect;
– encourage litigants to settle whenever possible, thus freeing up judicial resources;
– have a winnowing function in the litigation process by requiring litigants to make a careful assessment of the strength or lack thereof of their cases at the commencement and throughout the course of the litigation, and by discouraging the continuance of doubtful cases or defences[1].
An award of costs, however, must be distinguished from the payment of costs. When a realistic prospect for the payment of costs by the unsuccessful party does not exist, the objectives behind a costs award become less applicable. In such circumstances, a party can hold another party hostage to litigation by commencing frivolous actions and litigating them in a long, protracted fashion without any practical consequences. To combat these situations, courts have the discretion to order a party to post security for a potential costs award in the event that party is not successful. This brings home the consequences of unmeritorious litigation and a failure to post such security may result in the action being dismissed.
The purpose of this paper is to provide a summary of the law on security for costs in British Columbia as it applies to corporations and individuals commencing actions in this province.
Security for Costs Generally
Security for costs is essentially an order requiring a plaintiff to pay or deposit money or some other form of security in lieu thereof (e.g. a letter of credit) into court to secure payment for court costs in the event that the plaintiff is not successful. As explained by Spencer J. in Island Research & Development Corp. v. The Boeing Co.:
The purpose of security for costs is to protect a defendant from the likelihood that in the event of its success it will be unable to recover its costs from the plaintiff. The plaintiff is not permitted a free ride on an unlikely claim at the defendant’s expense. The factors to be considered in achieving a just balance between the defendant’s right to protection and the plaintiff’s right to advance a potential claim for adjudication include the chance of the claim’s success, the anticipated level of cost in conducting the action and the prospect of the plaintiffs ever having assets from which to pay the defendants’ costs if the claim fails.[2]
In the event that the plaintiff does not post security for costs, then the action may be stayed until the security is posted. Should the plaintiff continue to refuse or otherwise fail to post security, then the defendant may apply to have the action dismissed.
An order for security for costs is discretionary and, as will be discussed, the law has developed different applications when dealing with corporate plaintiffs as opposed to individual plaintiffs.
Security for Costs against a Corporate Plaintiff
The jurisdiction of the court to make an order for security for costs against a corporate plaintiff stems from section 236 of the Business Corporations Act[3]:
If a corporation is the plaintiff in a legal proceeding brought before the court, and if it appears that the corporation will be unable to pay the costs of the defendant if the defendant is successful in the defence, the court may require security to be given by the corporation for those costs, and may stay all legal proceedings until the security is given.
One of the leading cases in British Columbia on security for costs against a corporate plaintiff is Fat Mel’s Restaurant Ltd. v. Canadian Northern Shield Insurance Co.[4] This was an insurance coverage case arising out of a fire that destroyed a restaurant. Insurance coverage was denied on the basis that the fire was the result of an arson and the then-insolvent plaintiff sued Canadian Northern Shield. On its application for security for costs, the defendant sought $42,400 as the amount of security that should be posted. Master Powers ordered that $10,000 be posted as security, partly because of the impecuniosity of the plaintiff. The defendant appealed.
Madam Justice Proudfoot, writing for a unanimous Court of Appeal, held:
The making of an order under s. 229 of the Company Act [the predecessor to section 236 of the Business Corporations Act] is discretionary. However, once the application for security has shown that the plaintiff will not be able to pay costs should the claim fail, security is generally ordered unless the court is satisfied that there is no arguable defence.[5]
The Court of Appeal found that the defendant satisfied this test and overturned the lower decision finding that the Master was clearly wrong in considering the plaintiff’s impecuniosity.
A subsequent Court of Appeal decision in Kropp v. Swaneset Bay Golf Course Ltd.[6] elaborated on the principles underlying security for costs applications against corporate plaintiffs. There, the plaintiffs commenced an action to enforce a builder’s lien against a golf course owned by the defendant. The corporate plaintiff was incorporated solely for the purposes of the development of the golf course. The individual plaintiff was the sole shareholder of the plaintiff company and was to perform services on behalf of the plaintiff company. At issue between the parties were the terms of a management and development contract and payment subsequent to termination of this contract.
At the time litigation was commenced, the plaintiff company was essentially bankrupt and owned no assets. Similarly, the individual plaintiff did not have any assets and provided evidence that he did not have the resources to deposit the amount of security sought.
In chambers, the judge dismissed the defendants’ application for security for costs against both plaintiffs. The defendants appealed the chambers judge’s order as against the corporate plaintiff only. In holding that the chambers judge erred in not ordering security for costs against the corporate plaintiff, Mr. Justice Finch, for the Court of Appeal, adopted the following principles from the English Court of Appeal’s decision in Keary Development v. Tarmac Construction[7] as a “useful guide” to the application of section 229 of the Company Act:
- The court has a complete discretion whether to order security, and will act in light of all the relevant circumstances;
- The possibility or probability that the plaintiff company will be deterred from pursuing its claim is not without more sufficient reason for not ordering security;
- The court must attempt to balance injustices arising from use of security as an instrument of oppression to stifle a legitimate claim on the one hand, and use of impecuniosity as a means of putting unfair pressure on a defendant on the other;
- The court may have regard to the merits of the action, but should avoid going into detail on the merits unless success or failure appears obvious;
- The court can order any amount of security up to the full amount claimed, as long as the amount is more than nominal;
- Before the court refuses to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled; and
- The lateness of the application for security is a circumstance which can properly be taken into account.[8]
Relying on the principles set out in Kropp, Mr. Justice Romilly, in Citizens for Foreign Aid Reform Inc. v. Canadian Jewish Congress[9], laid out the test on an application for security for costs as follows:
- Does it appear that the plaintiff company will be unable to pay the defendants’ costs if the action fails?
- If so, has the plaintiff shown that it has exigible assets of sufficient value to satisfy an award of costs?
- Is the court satisfied that the defendants have an arguable defence to present?
- Would an order for costs visit undue hardship on the plaintiff such that it would prevent the plaintiff’s case from being heard?
The law on security for costs against corporate plaintiffs as expressed in Fat Mel’s, Kropp and Citizens is now well-established in British Columbia. Of course, the onus remains on the party seeking security to prove the elements of the test in Citizens with regard to the underlying principles in Kropp.
Plaintiff’s Ability to Pay Costs and the Plaintiff’s Exigible Assets
A defendant must show a prima facie case that the corporate plaintiff may be unable to pay costs and once that is established, the onus passes to the plaintiff to demonstrate that it has the ability to pay or that it has sufficient exigible assets to satisfy an award of costs.[10]
A prima facie case about the plaintiff’s inability to pay costs is not often a ground of contention. Generally speaking, something has given rise to a defendant’s concern about the plaintiff’s financial circumstances (e.g. lack of business operations, lack of assets, evidence of insolvency or other significant indebtedness, etc.), which has led to the application. However, a defendant may be mistaken about a plaintiff’s financial situation and evidence from the plaintiff about its operations, revenue and/or income may defeat the application.
If the plaintiff does not have the cash on hand nor the ability to raise cash to pay an order for security for costs, it may still defeat the application if it can demonstrate that it owns sufficient exigible assets to satisfy an award of costs. Black’s Law Dictionary defines “exigible” as “demandable” or “requireable”. In the context of a security for costs application, an exigible asset is one held by the plaintiff that may be demanded or executed against.
Normally, the plaintiff’s ownership (or lack thereof) of real property or equipment forms the subject of this discussion. But, the mere fact that the plaintiff owns such property may not be enough to show that it is an exigible asset. For example, land may be encumbered by mortgages and other charges rendering the plaintiff’s residual ownership insufficient to satisfy an award of costs. In the case of equipment, it is often the subject of a general security agreement that would rank in priority over any claim by a subsequent judgment creditor for costs.
Even if a plaintiff is able to show that it has an ability to pay costs or otherwise has sufficient assets, the courts have established that the location of the plaintiff’s business or its assets is an important consideration. In particular, whether the jurisdiction is non-reciprocating under the Court Order Enforcement Act, is a factor for a court to consider in the exercise of its overall exercise of discretion.[11]
Arguable Defence
A plaintiff may resist an order to post security for costs if it can establish that the defendant does not have an arguable defence. There is some question as to who bears the onus at this stage of inquiry.[12] Nevertheless, while this stage of the test invariably requires an examination on the merits of the case, as set out in Kropp, the court should avoid going into detail on the merits unless success or failure appears obvious.[13]
In Split Vision Eyewear Inc. v. The Economical Insurance Group, Mr. Justice Walker observed that this analysis is context specific and noted that the courts have not established parameters for what is meant by an “arguable defence”.[14] At an early stage in the litigation, an examination of the pleadings may be sufficient, but in more advanced litigation, further evidence is likely required. Moreover, where an action may turn on the credibility of witnesses, this factor alone may be sufficient to show an arguable defence.[15]
Notwithstanding the above, the cases suggest that there is a low threshold for a finding of an arguable defence.[16]
Undue Hardship
If the first two elements of the Citizens tests are satisfied, the court may exercise its discretion to refuse an order for security for costs in the presence of “undue hardship” on the plaintiff that may prohibit the plaintiff from posting such security. In order to resist a security for costs application under this heading, the plaintiffs must lead evidence and advance the argument that an order to post security for costs would unfairly stifle the plaintiff’s ability to pursue a potentially meritorious claim and result in an injustice. Though if a plaintiff has funds to pay the security, but for example is a foreign entity, then undue hardship will not be satisfied.[17]
Impecuniosity is often the foundation for plaintiffs seeking relief from an order to post security for costs. However, as explained in Kropp, mere impecuniosity is not sufficient:
To succeed in showing that an order for security would stifle the action the plaintiff must do more than show that it has no assets: see Paul v. General Magnaplate Corp. (1995), 27 O.R. (3d) 314 (Gen. Div.). The defendants have already made out a prima facie case that the corporate plaintiff has insufficient assets to pay costs of unsuccessful. Mr. Kropp’s affidavit does not really add to that position and establish that the corporate plaintiff is impecunious, in the sense of lacking any means of raising money for security. I think the law requires him to do so. As Megarry, V.C., said in Pearson, supra, at 535, the purpose of the provision is to protect “the community against litigious abuses by artificial persons manipulated by natural persons.”
…
So I am respectfully of the view that the learned chambers judge erred in finding that the corporate plaintiff would be prevented from pursuing its claim if security were to be ordered. And it would, in my view, be contrary to the principles enunciated above to refuse security on the grounds that the corporate plaintiff would “have difficulty” in pursuing the action if security for costs were to be ordered…
Other cases have followed Kropp in deciding that blanket statements about impecuniosity are not sufficient for a plaintiff to avoid an order for security for costs and that evidence about the plaintiff’s inability to raise security is required.[18]
The defendant’s conduct is a possible consideration particularly where it has rendered a plaintiff impecunious.[19] Having said that, there must be some nexus between the defendant’s action and the resultant impecuniosity. As explained by Justice Ehrcke:
In almost every action it will be possible for plaintiffs to assert that they have suffered a loss because of the actions of the defendants; that is what lawsuits are typically all about. So in this sense, plaintiffs who claim to be impecunious will almost always be able to say that their impecuniosity is linked to the conduct of the defendants and to the very subject matter of the lawsuit. In assessing this factor, therefore, consideration must be given to how remote the alleged connection is.[20]
Ultimately, what is undue hardship in any given case will be driven by the surrounding circumstances, the probability of such hardship stifling a claim and the court’s assessment of the fairness and potential injustice if an order requiring security for costs is made.
Security for Costs against an Individual Plaintiff
There are many differences between applications for security for costs against individual plaintiffs and corporate plaintiffs. The most significant of these relates to the underlying policy objections to protect an individual’s right to access the court irrespective of his or her financial circumstances. As a consequence, it is well-established that a more stringent test is applied on an application for security for costs against an individual plaintiff.
In Bronson v. Hewitt[21], Mr. Justice Goepel canvassed the difference between the development of Kropp guidelines vis-à-vis corporate plaintiffs and the law in relation to individual plaintiffs:
Since Kropp, those [seven] principles have been constantly applied in this court when security for costs has been sought against corporations.
Historically, a much different approach was taken in regards to natural litigants. In Cowell v. Taylor (1885, 31 Ch. D. 34 (C.A.), Lord Bowen declared “from time immemorial” the general rule has been that poverty is no bar to a litigant (my emphasis). In Pearson, Megarry V.C. noted at p. 533:
The basic rule that a natural person who sues will note be ordered to give security for costs, however poor he is, is ancient and well established.[22]
…
With individuals, the fundamental concern has always been access to the courts. Access to justice is as important today as it was in 1885 when Lord Bowen declared in Cowell that “the general rule is that poverty is no bar to a litigate”. Individuals, no matter how poor, have always been granted access to our courts regardless of their ability to pay a successful defendant’s costs. Only in egregious circumstances have been ordered to post security for costs.
A similar statement to Mr. Justice Goepel’s comment about “egregious circumstances” was expressed by Madam Justice Dillon in Han v. Cho where her Ladyship explained:
The courts have always drawn a distinction between individual plaintiffs and corporate plaintiffs. … In the case of a natural plaintiff, the court has taken care to specify that the inherent jurisdiction to order security for costs should be exercised cautiously, sparingly, and under very special circumstances. … In Fraser v. Houston, supra, at para. 11, the court said that orders should not be made except in egregious circumstances amounting to an abuse of the court’s jurisdiction. Certainly, the fact that an individual plaintiff resides outside the jurisdiction, has no assets in it, or is impecunious, is normally not sufficient to attract an order. (citations omitted)
…
The onus is on the applicant to establish that he or she will be unable to recover costs (Bronson #1 at para. 45). The fact that the plaintiff resides outside the jurisdiction, has no assets within the jurisdiction, or is impecunious is plaintiff also has a weak claim, or has failed to pay costs before, or refused to follow a court order for payment of maintenance.[23]
Other examples of special or egregious circumstances may include:
– an individual who is a “man of straw” or of weak character[24];
– conduct amounting to an abuse of the court’s jurisdiction[25];
– misleading statements were made by a plaintiff before the court[26]; and
– pleadings containing serious allegations of bad faith and dishonesty in the context of a “very strong defence”[27].
Although a more stringent test is applied as against an individual plaintiff, the “Kropp guidelines” should still be considered by the court in its exercise of discretion.[28]
A second distinction is that British Columbia, unlike the other provinces, does not have any Rule of Court governing when an order may be made against an individual. For that reason, the jurisdiction of the court to award security for costs against an individual does not arise out of statute, but instead arises out of the court’s inherent jurisdiction. Procedurally, the immediate difference is that an application for security for costs against an individual plaintiff must be brought before a judge, whereas an order against a corporate plaintiff may be brought before a master.
Security for Costs against Corporate and Individual Plaintiffs
While the law clearly treats corporate and individual plaintiffs differently, questions may arise as to what test applies where the action includes both corporate and individual plaintiffs. Naturally, a defendant would want to apply the corporate test for the individual; whereas the corporate plaintiff would want the more stringent individual test to apply. In Kropp, the initial chambers application involved both types of plaintiffs; however, the defendants did not appeal the order in relation to the individual defendant. Thus, the Court of Appeal was only concerned with the corporate defendant and did not offer any definitive guidance as to how the two plaintiffs are treated on security for costs applications.
The question about which test applies becomes even more noteworthy where the plaintiff is the sole shareholder, director and officer of the corporate plaintiff akin to its alter ego. In those situations, the line between corporation and individual are often blurred.
In Hawksview Enterprises Ltd. v. British Columbia Hydro and Power Authority[29], Madam Justice Holmes was asked to consider a security for costs application against a corporate plaintiff and individual plaintiffs who jointly advanced similar claims against the defendants arising out of a fire destroying a home owned by the corporate plaintiff, but in which the individual plaintiffs resided. The corporate plaintiff did not have sufficient financial resources to pay costs and the individual plaintiffs resided in Mexico with no assets in British Columbia. Madam Justice Holmes concluded that the test in respect of the corporate plaintiff was met, but determined that the more stringent test for individuals should be applied in respect of the company given the similarity in the claims advanced and the close connection between the company and the individuals.
More recently, though, the Court of Appeal in Ocean Pastures Corporation v. Old Masset Economic Development Corporation, overruled a prior decision of Hawksview, and effectively held that the different tests should be applied to the different plaintiffs.
The chambers judge in Ocean Pastures relied on Hawksview and refused to grant an order for security for costs against a corporate plaintiff. Mr. Justice Goepel, writing for the Court of Appeal in Ocean Pastures, noted that the claims by the individual plaintiffs and the corporate plaintiffs in Hawksview and the case before him were distinct, thus requiring separate considerations. His Lordship concluded:
Hawksview was, with respect, wrongly decided and should not be followed. The chambers judge in this case and the chambers judge in Hawksview both fell into error by conflating the claims of the individual and corporate plaintiff. They failed to recognize that the claims of the individual were separate and apart from those of the corporation and would continue regardless of whether the corporation posted security.
Thus, it is now clear that in actions commenced by corporate and individual plaintiffs, the courts will apply the different tests to corporations and individuals, respectively, notwithstanding the similarity in the claims advanced.
Other Factors to Consider – Delay and Amount of Security
The timing of an application for security for costs is a very important factor considered by the court. Essentially, any delay in bringing the application will work against the applicant, particularly when significant steps in the litigation have be undertaken by the parties. The rationale behind this is to prevent a defendant from lulling a plaintiff into a sense of security in the action. As explained by Madam Justice Prowse:
In addition, as was recognized in Kropp at para. 17, delay in the application “is a circumstance which can properly be taken into account”. This is in keeping with the fact that the power to order security for costs is discretionary and therefore the Court must balance the interests of the parties. However, delay is not a bar to security for costs unless the plaintiff has been lulled by the delay in to a false sense of security and has thereby been prejudiced.
The prejudice associated with the delay is in relation to the litigation process and the costs incurred by a plaintiff. This is especially material because an early order for security for costs might have impacted the strategy employed by a plaintiff in pursuing its claim. Thus, when assessing delay, the courts look into the timing of the application relative to the trial date, the status of examinations for discovery, the volume of documents produced by the parties and any other litigation procedures in the action.
In respect of the amount of security, the general practice is for counsel to submit a draft bill of costs based on the tariff amounts set out in the Supreme Court Civil Rulesand counsel’s best estimate of the steps required in the litigation. While a draft bill of costs is useful, the Court of Appeal reiterated that the amount is discretionary provided that it is more than nominal and that the draft bill of costs may be used as a guideline in determining the amount.[30]
Conclusion
Security for costs can be an effective tool employed by defendants, particularly in the face of unmeritorious litigation. When such security is ordered, it not only gives the defendant some assurances about the cost consequences against the plaintiff, but it also places significant pressure on the plaintiff to seriously consider the merits of the claim. By bringing home the ramifications of costs to a potentially unsuccessful plaintiff, it may result in early settlements or even favourable outcomes for the defendant, where a plaintiff fails to post security.
[1] Giles v. Westminster Savings and Credit Union, 2010 BCCA 282
[2] (3 January 1991), Vancouver C902161 (BCSC), at p. 3
[3] SBC 2002 Chapter 57
[4] 76 BCLR (2d) 231 (CA)
[5] ibid, at para. 16.
[6] 29 BCLR (3d) 252 (CA)
[7] [1995] 3 All ER 534 (CA), at pp. 539-542
[8] Kropp, supra at note 6, at para. 17
[9] 36 CPC (4th) 266 (BCSC), at para. 14
[10] Emperor Oil Ltd. v. Panorama Petroleum Inc., 2015 BCSC 1498, at para. 5
[11] Vetshopaustralia Pty. Ltd. v. Pivotal Partners Inc., 2007 BCSC 1519, at para. 25
[12] see: Split Vision Eyewear Inc. v. The Economical Insurance Group, 2010 BCSC 396, at paras. 61 – 65; as compared with Walton Excavatin Ltd. v. Yellowridge Construction Ltd., 2010 BCSC 999, at para. 12
[13] Kropp, supra note 6, at para. 17
[14] Split Vision, supra note 12, at para. 61
[15] LaFleur v. Murphy et al, 2001 BCSC 736, at paras. 15 and 16.
[16] JP Drywall Systems (BC) Ltd. v. Preview Builders International Inc., 2015 BCSC 2333, at para. 22
[17] see: Changzhou Henxiang Decorative Material Co. Ltd. v. Wan, 2015 BCSC 891, at para. 29
[18] see: Radha Holdings Ltd. v. Quantum Properties Brooklyn Inc., 2016 BCSC 1364, at para. 27
[19] Integrated Contractors Ltd. v. Leduc Development Ltd., 2009 BCSC 965, at para. 14; see also Number 216 Holdings Ltd. v. ING Insurance Company of Canada, 2013 BCSC 9, at para. 55
[20] Beasse et al v. Holness et al, 2006 BCSC 1265, at para. 24
[21] 2007 BCSC 1751
[22] Ibid, at paras. 25 – 26 and 43
[23] 2008 BCSC 1229, at paras. 21 and 27
[24] Extra Gift Exchange Inc. v. Accurate Effective Bailiffs Ltd., 2008 BCSC 440, at para. 25
[25] Fraser v. Houston (1997), 36 BCLR (3d) 118 (SC), at para. 20
[26] Gill v. Pacific Newspaper Group Inc., 2006 BCSC 650, at para. 31
[27] Felgoron Executive Pension Scheme and Keith Griffiths v. Pacific International Securities Inc. and Barbara Maters, (19 December 2002) Vancouver Registry S022686 (SC)
[28] Extra Gift, supra note 25
[29] 2014 BCSC 226
[30] Ocean Pastures Corporation v. Old Masset Economic Development Corporation, 2016 BCCA 12, at para. 29
