Ontario – applicant seeking court appointment of arbitrator ordered to pay security for costs – #323

In Rayman Tiger Inc. v. Unger Tiger Inc., 2020 ONSC 691, Master Michael P. McGraw ordered that an arbitral party, applying for the appointment of an arbitrator, file security for costs related to its application.  Having insufficient assets in Ontario or any reciprocating jurisdiction, the party had to post security in order to engage the court’s assistance for its arbitration.  In ordering $15,000.00 rather than the $37,714.01 sought by respondents, Master McGraw distinguished the complexity of issues and facts of the eventual arbitration from those raised by the narrower application to appoint an arbitrator.

Unger Tiger Inc., Griesbaum Tiger Inc., Boake Tiger Inc., Moneta Tiger Inc. and Lindy Tiger Inc. (“Unger Respondents”) and Rayman Tiger Inc. (“Rayman”) are parties to a May 5, 2006 Co-Ownership Agreement (“Agreement”) which governs their interests in land (“Lands”) and other assets related to a project in Cambridge, Ontario (“Project”).  Each is a beneficial owner of its proportionate undivided interests in the Lands and assets related to the Project as tenants-in-common, having been incorporated solely for that purpose.

Rayman was dissolved under Ontario’s Corporations Tax Act, RSO 1990, c C.40.  Unger Respondents claim that, by its dissolution, Rayman defaulted under the Agreement. Further to a 2013 notice of default, Rayman was divested of its shares on January 27, 2014 which vested in Unger Tiger Inc.

Rayman claimed that it continued to hold its 15% interest in the Lands and the Project. 

[5] Rayman submits that the divestiture and transfer of its shares was improper and that it continues to hold a 15% Co-Ownership interest. Rayman alleges that the Unger Respondents did not comply with the relevant provisions of the Agreement to effect a transfer of the shares, have not produced documentation to demonstrate that they did and the board resolution purporting to transfer Rayman’s shares was not signed by all directors. Rayman further claims that it remains a guarantor for the mortgages registered against the Lands. Rayman also takes issue with the accuracy and sufficiency of the Co-Ownership’s financial reporting and disclosure and denies any misappropriation”.

Rayman served a July 28, 2018 notice of arbitration seeking production of all the books and records of the co-ownership, including receipts, disbursements and financial records from 2009.  Unger Respondents resisted the demand, arguing that Rayman was no longer a co-owner and had no rights to the materials.

On December 20, 2018, Rayman applied to the Superior Court for the appointment of an arbitrator pursuant to the Agreement for the purpose of obtaining books and records.

Unger Respondents applied for an order requiring that Rayman provide security for costs under Rule 56.01(1) of Ontario’s Rules of Civil Procedure, RRO 1990, Reg 194.

Unger Respondents’ application was first heard September 10, 2019 but, due to time constraints and the absence of or gaps in factums filed, the application was adjourned and heard later.

Master McGraw noted that Rule 56.01(1) did not create a prima facie right to security for costs.  Instead, referring to Stojanovic v. Bulut, 2011 ONSC 874, paras 4-5, he explained that it “triggers an enquiry whereby the court, using its broad discretion, considers multiple factors to make such order as is just in the circumstances including: the merits of the claim, the financial circumstances of the plaintiff and the possibility of an order for security for costs preventing a bona fide claim from proceeding”.

The case law set out the variety of criteria which a court could consider in applications for security and set out the parties’ respective burdens of proof.  Defendant has the initial onus of showing that plaintiff falls within one (1) of the four (4) categories in Rule 56.01(1).  Master McGraw characterized that onus as “a light one”.  If that onus is met, plaintiff has the burden to show that it has sufficient assets in Ontario or a reciprocating jurisdiction to satisfy a costs order.  In contrast to the “light” onus resting on defendant, Master McGraw at para. 15 described the plaintiff’s disclosure as requiring “robust particularity”.

To outline the process and scope of the court’s enquiry and the parties’ respective burdens, Master McGraw pointed to various cases including Yaiguaje v. Chevron Corporation, 2017 ONCA 827 paras 23-25, Novak v. St. Demetrius (Ukrainian Catholic) Development Corporation, 2018 ONCA 219 paras 7-8, Cobalt Engineering v. Genivar Inc., 2011 ONSC 4929 para. 16. Having done so, he highlighted the summary provided in Coastline Corporation Ltd. v. Canaccord Capital Corporation, 2009 CanLII 21758 (ON SC) para. 7:

(i) 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;

(ii)  Once the first part of the test is satisfied, “the onus is on the plaintiff to establish that an order for security would be unjust”;

(iii)  The second stage of the test “is clearly permissive and requires the exercise of discretion which can take into account a multitude of factors”. The court exercises a broad discretion in making an order that is just;

(iv)  The plaintiff can rebut the onus by either demonstrating that:

(a)  the plaintiff has appropriate or sufficient assets in Ontario or in a reciprocating jurisdiction to satisfy any order of costs made in the litigation,

(b)  the plaintiff is impecunious and that justice demands that the plaintiff be permitted to continue with the action, i.e. an impecunious plaintiff will generally avoid paying security for costs if the plaintiff can establish that the claim is not “plainly devoid of merit”, or

(c) if the plaintiff cannot establish that it is impecunious, but the plaintiff does not have sufficient assets to meet a costs order, the plaintiff must meet a high threshold to satisfy the court of its chances of success;

(v)  Merits have a role in any application under Rule 56.01, but in a continuum with Rule 56.01(1)(a) at the low end;

(vi)  The court on a security for costs motion is not required to embark on an analysis such as in a motion for summary judgment. The analysis is primarily on the pleadings with recourse to evidence filed on the motion, and in appropriate cases, to selective references to excerpts of the examination for discovery where it is available;

(vii)  “If the case is complex or turns on credibility, it is generally not appropriate to make an assessment of the merits at the interlocutory stage. The assessment of the merits should be decisive only where (a) the merits may be properly assessed on an interlocutory application; and (b) success or failure appears obvious”[.]

At paras 16-18, Master McGraw listed the respective arguments or facts relied on by Unger Respondents and Rayman to meet their respective onuses.  Unger Respondents argued that Rayman was a nominal corporation which had been divested of its only assets.  It sought security in the amount of $37,714.01 on a substantial indemnity scale or alternatively, $29,888.39 on a partial indemnity scale.

Rayman countered, arguing that its 15% interest was worth approximately $447,274.00, a multiple of the security sought by Unger Respondents.

[17] Rayman acknowledges that its only asset is its purported 15% interest in the Co-Ownership and the Lands pursuant to the Agreement. Rayman does not claim that it is impecunious or that it would be unable to proceed with the Application if security for costs is ordered. However, Rayman submits that since the Unger Respondents unilaterally and improperly deprived Rayman of its only asset, they cannot benefit from their wrongdoing by asserting that Rayman has no assets. Rayman also argues that Unger is improperly withholding financial information which would allow Rayman to demonstrate that it has sufficient assets or to establish that it is impecunious. Rayman submits that if it is ordered to pay costs of the Application, then the Unger Respondents can seize Rayman’s interest in the Co-Ownership”.

Master McGraw readily acknowledged that precedents had accepted that property or funds sought in litigation could be considered as assets for the purposes of security for costs.  See Ensign Group Inc. v. Saine Estate, 2005 CanLII 24747 (ON SC) para. 11.

Despite this acknowledgement, Master McGraw pointed out that Rayman’s application sought the appointment of an arbitrator and not, directly, an entitlement to land.

[20] In arguing that it has sufficient assets to satisfy a costs award, Rayman relies entirely on its purported 15% interest in the Co-Ownership. However, Rayman’s 15% interest is not the anticipated fruits of this Application. If Rayman is successful on the Application, an arbitrator will be appointed under the Agreement to determine if Rayman is entitled to the books and records of the Co-Ownership. The court has not been asked to determine Rayman’s alleged entitlement to a 15% interest in the Co-Ownership or the Lands or the value of any such interest. There is currently no proceeding or forum where this dispute will be adjudicated, including in the proposed arbitration”.

Master McGraw further resisted determining that either party had convinced him of the merits of their position on Rayman’s application to appoint an arbitrator.  On the record, given the contested facts, he determined that the merits of Rayman’s application was a “neutral factor” in his determination of costs.

Additional complications arose due to the impact of limitation periods.  Unger Respondents argued that Rayman’s application involved a corporate remedy subject to a long-expired two (2) year limitation period under the Limitations Act, 2002, SO 2002, c 24, Sch B. Rayman argued that he was trying to recover an interest in land, subject to a ten (10) year period.

Balancing Rayman’s right to pursue a meritorious claim and Unger Respondents’ right not to be without remedy to collect costs if successful, Master McGraw held that security would be ordered but not in the amount sought by Unger Respondents.

[29] Applying a holistic approach and having considered all of the relevant factors and balanced the interests of Rayman to have the Application decided on the merits and the Unger Respondents to be protected against an unenforceable costs award, I conclude that it is just in the circumstances that security for costs be ordered. Rayman will not be prohibited from proceeding with the Application which relates to private, commercial interests with no public interest considerations, and the Unger Respondents will be afforded some protection from an unenforceable costs award. There is also no evidence that the Unger Respondents are using this motion as a litigation tactic to prevent the Application from proceeding”.

Master McGraw dismissed the range of costs sought by Unger Respondents on either a substantial indemnity or a partial indemnity scale. He ordered that Rayman post security for costs in the amount of $15,000.00.

In doing so, he recalled that the application made by Rayman for the appointment of an arbitrator was not as complex as the disputed facts and law. “While there are numerous, disputed issues of fact and law, the issue on the Application is still a narrow one relating only to the appointment of an arbitrator. The amount must also not function to potentially block Rayman’s access to the courts”.

Earlier in his reasons, Master McGraw had summarized Rayman’s own arguments as to the merits of its application to appoint an arbitrator.

[25] To be successful on the Application, Rayman must establish that it is entitled to have an arbitrator appointed under the Agreement. Rayman submits that there is a good chance that the court will appoint an arbitrator because jurisdiction to determine Rayman’s entitlement under the Agreement is not clearly outside the terms of the arbitration provisions and the arbitrator has the power to rule on its own jurisdiction (Ontario Medical Assn. v. Willis Canada Inc., 2013 ONCA 745).  Rayman also asserts that the court will defer to an arbitrator given that its entitlement under the Agreement is a question of fact or mixed fact and law over which the arbitrator has jurisdiction”.

The parties were invited to file written costs submissions for their motion on the security for costs, failing agreement on the amount.

urbitral note – First, the case highlights a potential obstacle in arbitration when a party seeks the court’s assistance in advancing the arbitration. 

Second, Master McGraw distinguished between the merits of the potential arbitration and the application to appoint an arbitrator for that arbitration.  The range of issues and facts on the latter ought to be far less complex or extensive than the former.  As such, the range of costs should be lower too.

Third, the application for security for costs considers assets within Ontario and “reciprocating jurisdiction”.  Arbitration practitioners representing parties located or operating exclusively outside of Ontario must inform their clients of the potential exposure to a successful application for security for costs if and when they apply to appoint an arbitrator.  Though the costs may be nominal relative to other costs, the order may be a condition precedent to applying. 

Fourth, the exposure of paying security for costs is only temporary if the application to appoint an arbitrator is well-founded and granted.  Not only will the sum deposited be reimbursed but the applicant will be entitled to its costs on its successful motion to appoint an arbitrator.