Many contractors in the construction industry operate their business using a corporation which in most cases does not have substantial assets. Covering litigation costs is not always easy for a small corporate entity. If a contractor brings a claim for collection of its fees against a defendant, the defendant may move to seek an order for “Security for Costs” against the contractor whose corporation would not have enough assets to potentially cover litigation costs of the defendant should the defendant prevail at trial. If security for the cost is ordered a plaintiff is required to pay monies into the court to be held as security pending a resolution in the matter. If a plaintiff is not financially well off, motions of this types could impact whether it chooses to even proceed with its litigation. Some defendants use security for cost motion as a tactic to prevent small contractors from moving with legal proceedings to collect outstanding fees; however, the case law developed over the years provides safeguards to protect financially vulnerable parties and pre-vent abuse of the rule to prevent meritorious claims.
Obtaining security for the cost is a two-step pro- cess. The first step places the burden on the
party bringing the motion to establish that the other party is in fact a corporation and that there is “good reason” to believe that the plaintiff does not have enough assets in On-tario to cover costs awards. Establishing that a plaintiff appears to have insufficient assets is not easy. This involves providing enough evidence to establish a strong belief, one that is beyond mere speculation. Moreover, the courts have indicated that a corporation that is proven to have “insufficient assets” will likely have specific attributes such as, previously failing to meet liabilities or failures to make payments to creditors. It will be up to the defendant to establish that one of these attributes exist for a corporation to meet its burden.
Even if a defendant is successful in this first step, the second step allows the plaintiff an opportunity to prevent an order by establishing that they do in fact have assets to cover potential cost awards or that the corporation has little or no finances (they are impecunious) and should still be permitted to continue the action. Even if the plaintiff cannot establish that it is impecunious, the plaintiff could still attempt to prove to the court that their matter has a high chance
of success and the Courts will likely allow it to proceed.
The Court still has the discretion not to grant an order for security for cost “in the interest of justice.” Moreover, Courts are aware that security for cost motions should not be used as a “litigation tactic” to prevent cases from being heard and they will examine the circumstances to determine what is truly fair and just.
The safeguards put in place ensures that legitimate claims are still dealt with and the party to a dispute who has greater financial ability does not prevent a smaller entity from enforcing its legitimate claim.
The content of this article is not and should not be interpreted as legal advice.
1. Rules of Civil Procedure, R.R.O. 1990, Reg. 194.
2. City Commercial Realty Services (Canada) Ltd. v. Bakich,  OJ 6443 (Ont. CA) at para 8 3. Ibid at para 12.
4. AAD Investments Inc. v. Casboro Industries Ltd.  3041 ONSC at para 5-6; and Nicholas v. Environmental Systems (International) Ltd.,  FC 1160 at para 18.
6. Fulop v. Corrigan  ONSC 1648, para 90