Notable Cases

CITATION: Combined Air Mechanical Services Inc. v. Flesch, 2010 ONCA 633
DATE: 20100930
DOCKET: M39163 (C51986)

COURT OF APPEAL FOR ONTARIO

Laskin J.A. (In Chambers)

BETWEEN

Combined Air Mechanical Services Inc., Dravo Manufacturing Inc. and Combined Air
Mechanical Services

Plaintiffs (Appellants/Responding Parties)

– and-

William Flesch, WJF Investments Inc., Service Sheet Metal Inc. and James Searle

Defendants (Respondents/Moving Parties)

Daniel Chitiz and Alastair McNish, for the moving parties

J. Gardner Hodder, for the responding parties

Heard: September 28, 2010

On appeal from the judgment of Justice Edward Belobaba of the Superior Court of Justice, dated April 8, 2010, and on a motion for security for costs.

Laskin J.A. (In Chambers):

A. The Motion

[1] The defendants, James Searle and his company Service Sheet Metal Inc. (the Searle respondents) move for security for the costs of an appeal brought by the plaintiffs (now appellants).

[2] The Searle respondents and the defendant William Flesch and his company WJF Investments Inc. brought summary judgment motions to dismiss the appellants’ action against them. Belobaba J. granted their motions. The appellants have appealed his orders. The Searle respondents seek an order that the appellants be required to post security for the costs awarded in their favour by Belobaba J. on the summary judgment motion, $20,000, together with $6,420 for the costs of the appeal.

B. Background

[3] I will briefly set out the background that gives rise to this motion. In 2003, Searle and Flesch formed a partnership to sell and service heating, ventilation and air conditioning systems in the commercial and industrial market. In 2006, they sold their interests to the appellants under an acquisition agreement. The agreement contained restrictive covenants and an indemnification clause. Under the indemnification clause, if Flesch and his company breach the restrictive covenants or otherwise wrong the appellants and are required to pay damages, the Searle respondents are required to pay one third of the damages awarded.

[4] The appellants brought this action claiming that both Flesch and Searle breached the restrictive covenants in the acquisition agreement and committed other wrongs. However, on the summary judgment motions, the appellants acknowledged that they had no direct case against the Searle respondents. The Searle respondents remained in the action only because of their potential liability under the indemnification clause.

[5] On the motion before me, counsel for the appellants reiterated that his clients have no claim against the Searle respondents apart from their obligation under the indemnification clause. The appellants still seek to hold Flesch liable for damages and to obtain one third of those damages from the Searle respondents.

C. Security for Costs

[6] Under rule 61.06 of the Rules of Civil Procedure, a judge of this court has jurisdiction to order security for the costs of an appeal (including costs of the proceeding) in three categories of cases:

• Where it appears there is good reason to believe that the appeal is frivolous and vexatious and that the appellant has insufficient assets in Ontario to pay the costs of the appeal;

• Where it appears that an order for security for costs could be made against the appellant under rule 56.01;and

• Where it appears that for other good reasons security for costs should be ordered.

[7] The Searle respondents cannot rely on either of the first two categories. Although they question the strength of the appeal, the Searle respondents do not assert that it appears frivolous. Moreover, they acknowledge that the appellants are not impecunious. They also acknowledge that they are not entitled to an order for security for costs under rule 56.01. They rest their motion on the residual third category, “for other good reason”.

[8] What constitutes “other good reason”? The court does not have a closed list of cases in which security for costs has been ordered under the residual category. The list of reasons justifying security under the residual category is open ended. However, the “other good reason” must be related to the purpose for ordering security: that a respondent is entitled to a measure of protection for costs incurred and to be incurred in the proceeding, which is now on appeal. And, the “other good reason” should be a fairly compelling reason, as the respondent cannot meet the requirements of either of the first two categories. Security for costs awards under the residual category are not to be made routinely. I now turn to the Searle respondents’ specific requests.

(a) Security for costs of the appeal

[9] The Searle respondents’ request for security for the costs of the appeal has no merit. Searle and his company are properly respondents on the appeal because of their potential liability under the indemnification clause. They intend to participate in the appeal, as might be expected, by supporting the position of Flesch. There is no “good reason” to order the appellants to post security for the costs of the appeal.

(b) Security for the costs of the motion before Belobaba J.

[10] The Searle respondents’ request that the appellants post security for the $20,000 in costs ordered by Belobaba J. is not as straightforward. The appellants made two separate claims against the Searle respondents: a claim for damages for breach of the restrictive covenants and for other wrongdoing; and, a claim for indemnification should Flesch be found liable for damages. In their appeal, the appellants maintain the latter claim, but not the former.

[11] The Searle respondents say that most, if not all, of the $20,000 costs award pertains to the appellants’ claim for breach of the restrictive covenants and other wrongdoing, which the appellants have now abandoned. Therefore, the Searle respondents argue that it would be just to order the appellants to post that amount as security.

[12] The argument has some attractiveness, but I reject it. First, as I have said, the Searle respondents are properly parties to the appeal both from their perspective and the perspective of the appellants because of their potential liability under the indemnification clause. Thus, at bottom, the Searle respondents seek to have the appellants make an advance payment into court in the amount of the motion judge’s costs award before the appeal is heard, even though the notice of appeal automatically stays payment of that costs award. I see no compelling reason for requiring the appellants to do so. If the costs award stands after the appeal is decided, there is no suggestion that at that time the Searle respondents will be unable to collect those costs from the appellants.

[13] Second, the $20,000 costs award is not wholly attributable to the abandoned claim against the Searle respondents. The motion judge commented in his endorsement on costs (at para. 12) that the Searle respondents’ position on the summary judgment motion was to “follow on” and support the Flesch defendants. From his comments, I take it that the costs award in favour of the Searle respondents reflects both time taken to defend the allegations against them and time taken to support Flesch. Yet there is no breakdown between the two.

[14] Third, if the appellants succeed on their appeal, they may be entitled to have the $20,000 costs award reduced and even offset by a costs award in their favour from this court.

[15] For these reasons, I would dismiss the Searle respondents’ motion for security for costs. The appellants are entitled to their costs of this motion in the amount of $3,500, inclusive of disbursements and applicable taxes.