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Second Round Knock Out: Security for Costs and the New Construction Act

Ivan Merrow, Associate

The Gatti Group Corp. v. Zuccarini, 2019 ONSC 3393 and 2019 ONSC 7050

Ontario’s reformed Construction Act has been fully in force since October 1, 2019. The changes to the Act and its regulations are still settling across the province, at times in surprising ways. In the Ontario Superior Court’s recent decision, The Gatti Group Corp v. Zuccarini, 2019 ONSC 7050 (“Zuccarini”), the Act amplified the defendants’ successful second security for costs motion, resulting in an order that the plaintiff post $95,000 into court in 30 days.

The case profiles the court’s flexibility and discretion when awarding security for costs. More importantly, the Act’s security for costs formula may be used as a guideline for future security for costs awards in construction matters.

Security for costs

In Ontario, unsuccessful litigants risk paying the other side’s legal costs following any hearing, loss, dismissal, or judgment. Construction cases are no different. Without security, successful litigants may have no recourse to collect those costs. Lien claimant plaintiffs may have security by virtue the Act’s requirement requiring 25% of the claim for lien amount to be posted to vacate that lien from title. Defendants and counterclaimants, however, are generally unsecured.

Defendants who have a good reason to believe that a plaintiff will be unable to pay their costs after the action is dismissed can bring a motion for security for costs under Rule 57 of the Rules of Civil Procedure (the “Rules”). A successful motion for security for costs requires a plaintiff to post security into court before continuing with its action, in many cases bringing it to an end.  In Zuccarini, the defendants did just that.

Round 1: defendants fail to meet their initial onus

During examinations for discovery, the Zuccarinis learned that the construction company plaintiff had terminated all its employees except for one, moved its business to its owner’s home office, and appeared to only have one project on the go.

The Zuccarinis brought an initial motion for security for costs but were unsuccessful. In the Honourable Master Wiebe’s reasons, he found that the defendants failed to meet their onus to prove a there was a “good reason to believe” that the plaintiff had insufficient assets to satisfy a costs award. Master Wiebe applied Justice Lang’s test from City Commercial Realty (Canada) Ltd. v. Batich, 2005 CarswellOnt 10512 (C.A.), that the plaintiff must have a demonstrated belief of asset insufficiency beyond “mere conjecture, hunch, or speculation.” Unspecified social media evidence, operating out of a home office, and admissions about letting go employees were not enough. Master Wiebe dismissed the motion without prejudice to it being brought again on better evidence.

Round 2: plaintiff fails to prove impecuniosity

After the first motion’s dismissal, the defendants turned the tables by obtaining an order for further disclosure from the plaintiff. Specifically, the plaintiff was ordered to produce its project-related financial statements dated 2014 to 2019. The plaintiff failed to produce its 2018 and 2019 financial statements without explanation. The other statements showed minimal assets and repeated deficits.

The Zuccarinis capitalized on the new information and brought a second security for costs motion. Using the financial statements, they proved there was a good reason to believe, and more than “mere conjecture, hunch or speculation,” that the plaintiff had insufficient assets to satisfy a costs award.

After the defendants met their initial onus, the evidentiary burden turned to the plaintiff construction contractor to demonstrate why security for costs should not be ordered.

In Ontario, the two primary defences to a security for costs motion are:

  1. the plaintiff must prove that it has sufficient assets to satisfy the defendants’ costs; or
  2. prove that it is “impecunious,” an order for security for costs would be unjust, and that the order would deprive the plaintiff the opportunity to prove its case.

In Zuccarini, the defendant did not attempt to prove that it could satisfy the defendants’ costs, nor did it lead evidence on impecuniosity. The failure to disclose recent financial statements led to a total knock-out.

Security for costs calculation

Ultimately, the defendants claimed $128,753.45 in security for costs: $72,987.95 for amounts spent prior to the motion and $55,765.50 for amounts expected to be spent to prepare for and attend trial. When evaluating these amounts, the Honourable Master Wiebe applied a partial indemnity scale of 60% against the full amount of costs claimed by the defendants. 

The court considered several factors to determine the amount of security ordered. Among other things: the experience and hourly rates of the defendants’ lawyers, the conduct of the defendants’ prior lawyer, the amounts spent up to that point in the action, the number of days of trial, and the defendants’ bill of costs for trial.

The plaintiff unsuccessfully attempted to argue that it should not have to pay security for costs when it also bore the burden of defending a counterclaim. However, the plaintiff led no evidence to demonstrate that both the claim and counterclaim related to the same issues and was unsuccessful on this point.

In the alternative, the plaintiff argued that the amount of security ought to be set by virtue of the old Construction Lien Act’s requirement that a maximum of $50,000.00 be posted to vacate a lien of $200,000.00 or more. The plaintiff’s submission was innovative. The Act’s security for costs formula is ordinarily just applied to parties vacating liens. Unfortunately, this submission boomeranged. The Honourable Master Wiebe not only rejected that costs cap as out of date, citing the new Act’s higher limit of $250,000.00, but applied the Act against the plaintiff. The court calculated 25% of the plaintiff’s claim and the defendant’s counterclaim as potential figures for security for costs awards in the circumstances—$85,857.50 and $103,342.00 respectively.

Applying the “rough justice” approach in Yong Tai Construction v. Unimac Group Ltd., 2015 ONSC 4866 (SCJ), the Honourable Master Wiebe split the difference between the two costs amounts and ordered the plaintiff to post $95,000.00 as security for costs in 30 days.

Lessons learned from Zuccarini’s “rough justice”

This case has several takeaways for construction and civil litigants in Ontario.

Defendants bringing security for costs motions must prove their initial onus by proving there is “good reason to believe” that the plaintiff had insufficient assets to satisfy a costs award beyond “mere conjecture, hunch, or speculation.” The defendants in this case were fortunate to have a second chance after their motion was dismissed. Had the initial dismissal been final, they could very well have been ordered to proceed to trial without any security for costs.

Plaintiffs responding to security for costs motions should be financially transparent. They must have evidence to prove sufficient assets to satisfy a costs award, or be prepared to prove impecuniosity. In this case, despite the plaintiff’s arguments on the merits of the case, the refusal to disclose recent financial statements contrary to a court order was fatal.

The Act will continue to have wide-ranging impacts on the practice of construction law in Ontario. The higher security limits in the Act appear to have set a benchmark in this case for “just” security for costs amounts to be awarded against plaintiffs.