Security for costs: Protecting yourself against companies with nothing to lose
In the context of litigation, every claimant should consider whether their claim is worth pursuing against a corporate defendant, as the defendant company may be financially troubled or a shell company with little or no assets. While this risk is reasonably understood by even lay litigants, few often consider what similar risks might apply when they are the target of a financially-troubled company’s lawsuit. Although there are many issues to be considered, the single greatest risk faced by such a defendant is arguably their inability to recover costs if successful.
What are costs?
Costs are monies ordered paid to reimburse a litigant for the legal fees expended to advance the litigation. Most often, costs are ordered paid to the successful party from the unsuccessful party. In Canada, the costs recoverable include a portion of the hourly fees and charges of the party’s lawyer (in some cases, full indemnification of these costs may be ordered), disbursements including court fees, witness allowances including both conduct money and expert witness fees and, in some cases, other professional fees.
For further reading on the rules surrounding each party’s entitlement, please see our previous article “Recovering Costs: Determining The Successful Party“
Security for costs
While the issue of costs is typically addressed after a lawsuit has concluded and the relative success of each party has been determined by a judge, Canadian courts have recognized that if a plaintiff is a shell company or a company with little or no assets, the issue may need to be addressed well in advance of the lawsuit’s conclusion. If it is clear that the plaintiff company will be unable to pay the defendant’s costs if ordered, the court may require that the plaintiff company post as security the defendant’s anticipated costs before being allowed to proceed. In other words, the plaintiff company will be required to place monies in trust, to be distributed to the defendant if ordered after the lawsuit’s conclusion. This does not happen automatically, and the onus is on the defendant to make an application as described below.
The defendant commences the application by producing evidence that the plaintiff company lacks assets and that it would be unable to satisfy an adverse costs award. Given that defendants are not often privy to such information, courts will typically accept any reasonable evidence that the defendant is able to produce.
Once the defendant produces evidence that the plaintiff company lacks assets, the plaintiff company will likely be ordered to post security unless it can establish that:
(a) it has assets and is capable of paying costs if ordered;
(b) the defendant has no arguable defence; or
(c) an order for security would stifle its action.
(a) Plaintiff company has assets and is capable of paying
Simply put, if the plaintiff company is able to produce satisfactory evidence that it will be able to pay the defendant’s costs if ordered, it is unlikely that security will be ordered posted. Instead, the plaintiff company will be allowed to proceed with its claim.
(b) Defendant has no arguable defence
Based on the parties’ submissions, the court will assess whether the defendant is clearly liable and is seeking a costs order to prevent the plaintiff company from pursuing an otherwise genuine claim. Only where the plaintiff company’s success and the defendant’s corresponding failure is “obvious” will the court consider this point to be determinative. In practice, such a conclusion is rarely reached given that most defendants are capable of raising a defence.
(c) Order for security would stifle the action
In circumstances where the plaintiff company lacks assets capable of satisfying an adverse costs award and the defendant has an arguable defence, the plaintiff company will frequently resort to arguing that an order for security would unfairly stifle its claim. To establish unfairness, the plaintiff company will often seek to prove a causal relationship between its financial hardship and the defendant’s alleged misconduct. For instance, in Apex Mountain Resort Ltd. v. British Columbia,  B.C.J. No. 1918, 1998 CarswellBC 1758 (S.C.), the plaintiff company argued that their impecuniosity “ought not to damn them because that economic reality ha[d] been precipitated by the very acts that found the litigation.” Such an argument is almost assured in the case of an indigent company. On this point, in Beasse v Holness,  BCJ No 1928, Mr. Justice Ehrcke wrote:
“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.“
In other words, a plaintiff company must establish that the defendant’s conduct is truly the cause of its financial hardship, and not some other factor. Given the difficulty in evaluating the strength of the connection between a plaintiff’s finances and a defendant’s alleged misconduct, Canadian courts have often relied on reasonable inference—most commonly in the defendant’s favour. For instance, in Devocht v Hallgren,  BCJ No 168,the court held that the “measure and extent of consumer debt” held by the plaintiff company was evidence that factors other than the defendant’s alleged misconduct were to blame for its impecuniosity. In Tim Keith Contracting Ltd. v. Richform Construction Supply Company Limited, 2010 BCSC 1861,the court held that “…the number of actions against the plaintiff and the amounts claimed in them is [evidence] that the plaintiff has been defaulting on its financial commitments to a variety of creditors for reasons that extend beyond its dispute with this defendant.”
Decision maker has discretion
Despite the seemingly formulaic approach to security for costs orders outlined above, such orders are ultimately discretionary. That is, the judge, arbitrator or other decision maker has a broad latitude to decide how best to do justice between the parties. Where the evidence presented by both sides is equivocal or where there is a genuine interest in having the claim heard despite the plaintiff’s inability to pay, it may be ordered that security be posted in stages, that security be posted in a reduced amount, or that no security be posted at all.
Overall, applying for security is a step nearly all defendants should consider when targeted by a corporation’s lawsuit. If the application is successful, the monies ordered held in trust will provide substantial protection against mounting legal costs. If unsuccessful, the application itself is likely to cause the plaintiff company to seriously examine whether its lawsuit is financially viable. As such, the application may still serve as a useful tool in guiding the dispute to an early resolution.