In 1400467 Alberta Ltd v Adderley, 2014 ABQB 439, Madam Justice Veit explained the circumstances in which a defendant will be ordered to pay security for costs and security for judgment. An order for security for costs requires the ordered party to pay money to the court or a trust account in an amount representing part or all of the opposing party's legal costs; security for judgment requires money to be paid in the requested amount of judgment. These orders effectively ensure that the party who successfully applies for the order can collect money owed to them by the opposing party when a judgment or a costs order has been rendered.
Originally, the action commenced when the defendants allegedly breached a non-compete contract entered into with the plaintiff. The defendants then counterclaimed that the plaintiff had breached the purchase and sale agreement featuring the transfer of a multi-million-dollar business. The plaintiff, 1400467 Alberta Ltd., asked the court to order the defendants to pay security for costs in the amount of $200,000, as well as security for judgment in the amount of $1.5 million.
The plaintiff was concerned that because the defendants reside and hold assets in Saskatchewan, it may have difficulty enforcing a potential judgment outside Alberta. Fueling this concern were the facts that the defendants had only provided the plaintiff with limited financial information in previous steps of the litigation, and that one defendant had recently divested 50% of his interest in a main asset.
Security for Costs
The Alberta Rules of Court, Rule 4.22, outlines what a judge must consider when awarding security for costs. The judge must consider:
- whether it is likely the applicant for the order will be able to enforce an order or judgment against assets in Alberta;
- the ability of the respondent to the application to pay the costs award;
- the merits of the action in which the application is filed;
- whether an order to give security for payment of a costs award would unduly prejudice the respondent’s ability to continue the action;
- any other matter the Court considers appropriate.
Although Rule 4.22 empowers a judge to order security for costs, Justice Veit quickly outlined that “even where a defendant fails to satisfy any of the specific factors mentioned in the rule,” a judge should still not automatically order security for costs. In fact, regardless of Rule 4.22, the general rule is that a plaintiff cannot require a defendant to provide security for the plaintiff’s costs, even if the defendant resides in another jurisdiction than the plaintiff. Few exceptions to this general rule exist; they include:
- When providing security for costs is required by statute (for example the Patent Act RSC 1985, c P-4, requires plaintiffs to give security for costs in certain actions against patentees);
- A “near miss” situation on a summary judgment application. This occurs when a judge denies summary judgment even though the applicant was just short of meeting the onus required. As the applicant will likely be successful at trial, the defendant must post security for costs.
- When the defendant has an extensive track record of “flouting” court rules or orders.
The reasoning behind the general rule stems from the fact that the plaintiff has both the choice to commence the action, and the decision in which location to do it in; a defendant is involuntarily brought into the matter. As such, the plaintiff cannot then call upon the defendant to provide security for their costs, when it was the plaintiff who initiated the action to begin with. In application, the plaintiff here chose to commence their action in Alberta instead of Saskatchewan, and as such cannot effectively argue that they are entitled to security for costs because it is more difficult for them to enforce an Alberta judgment in Saskatchewan.
In addition, Justice Veit also clarified that the inability of a respondent to pay costs is not reason by itself to order security for costs, under Rule 4.22(b). However, if a defendant is arranging their finances to avoid paying a judgment, a court may see it fit to order security for costs.
Justice Veit applied the factors laid out in Rule 4.22 to the case at hand, and concluded that none of the facts of the case would result in it being fair and just to order security for costs; none of the exceptions to the general rule against a defendant paying security for costs to the plaintiff applied either. As such, the court declined to order the defendants to pay security for the plaintiff's costs.
Security for Judgment
The plaintiff also sought security for judgment in the amount of $1.5 million dollars. Similar to security for costs, Justice Veit emphasized that it is also very rare for a judge to order security for judgment. While the order is rare, there are some cases in which a court will feel such an order is appropriate. Although this list is not exhaustive, such circumstances include:
- When appellants are only allowed to appeal a decision on the explicit condition that they post security for judgment;
- When a court is convinced that assets are being “dissipated, or hidden, or dealt with in a way such as to escape judgment”;
- If the court is very suspicious that the defendant has no defense. This is similar to the “near miss” situation mentioned above.
The plaintiff argued that the second exception applied, being that the defendants had organized their assets to make it more difficult to enforce a judgment against them. Justice Veit concluded that it was not particularly important whether or not the defendants could satisfy the judgment, but instead whether the defendants were acting improperly as to intentionally shield assets. As it was not established that the defendants had acted improperly, Justice Veit declined to order security for judgment against them.