Written By David R. McKinnon and Russell J. Kruger

A defendant seeking a security for costs order against a corporate plaintiff faces a more stringent test than other defendants, the Alberta Court of Queen's Bench recently held in Amex Electrical Ltd v 726934 Alberta Ltd, 2014 ABQB 66.

In Amex, the Court considered an application by certain defendants for a security for costs order against a corporate plaintiff. In a detailed decision, the Court noted the potential applicability of two statutory provisions: section 254 of the Alberta Business Corporations Act, RSA 2000, c. B-9, and Rule 4.22 of the Alberta Rules of Court. These provisions state:

Security for costs

254         In any action or other legal proceeding in which the plaintiff is a body corporate, if it appears to the court on the application of a defendant that the body corporate will be unable to pay the costs of a successful defendant, the court may order the body corporate to furnish security for costs on any terms it thinks fit.

Considerations for security for costs order

4.22        The Court may order a party to provide security for payment of a costs award if the Court considers it just and reasonable to do so, taking into account all of the following:

(a)          whether it is likely the applicant for the order will be able to enforce an order or judgment against assets in Alberta;

(b)          the ability of the respondent to the application to pay the costs award;

(c)           the merits of the action in which the application is filed;

(d)          whether an order to give security for payment of a costs award would unduly prejudice the respondent's ability to continue the action;

(e)          any other matter the Court considers appropriate.

In considering the test applicable to the facts before it, the Court noted that the tests espoused by the two provisions are "completely different" (para. 54). Section 254 sets a more stringent threshold ("unable to pay the costs") while Rule 4.22 adopts a more lenient standard ("just and reasonable"). Rule 4.22 could apply on its face to a corporate plaintiff; however, the Court concluded that section 254 "is the sole standard which applies if the respondent in a security-for-costs application is a corporate plaintiff". Rule 4.22 applies in all other fact patterns (subject to other statutes). In so finding, the Court reasoned that it must interpret all applicable statutory provisions harmoniously, and apply the principle that a general enactment should not be interpreted as applying to cases dealt with in a more specific enactment. As a result, and contrary to previous Alberta case law on point, the Court concluded that section 254, and only section 254, must apply in the case of a corporate plaintiff.

In addition, the Court held that notwithstanding the difference between the tests, both share the common element that each is discretionary in nature. Given the more stringent and specific nature of the section 254 test, however, if a court concludes that an applicant has established that a corporate plaintiff will be unable to pay the costs of a successful defendant, it should be reluctant to exercise its discretion against the applicant. After reviewing the case law, the Court set out eight factors which it viewed as increasing the likelihood of a court exercising its discretion and granting a security for costs order:

1. the respondent is a corporation and has no assets in Alberta;
2. the respondent is a corporation and the assets it has in Alberta are of a nature or a value that there is a substantial risk that the applicant may not be able to recover any cost award likely to be granted to it;
3. the likelihood the respondent will receive judgment against the applicant is low;
4. a security for costs order will not prevent the respondent from prosecuting its action;
5. the applicant is not seeking security for steps already taken;
6. if the applicant has counterclaimed and the issues raised by the counterclaim and the claim are different, this will not deter a court from granting security for costs;
7. the applicant has applied for a security for costs order at the earliest opportunity; and
8. the resolution of the issues presented by the respondent's action is not important to the greater community.

Conversely, the Court also listed conditions that it viewed as increasing the likelihood that a security for costs award would be denied:

1. the applicant failed to apply for security for costs at the earliest opportunity;
2. the applicant seeks security for costs of steps already taken;
3. the respondent has assets in Alberta of a nature and value that there is little risk the applicant will be unable to recover any costs awards likely to be granted to the applicant;
4. the likelihood the respondent will receive judgment against the applicant is high;
5. the shareholders of a corporation, which has no assets in Alberta or the assets it has in Alberta are of a nature and value that there is a substantial risk the applicant may not be able to recover any costs award likely to be granted to it, have assets in Alberta that would be sufficient to meet any costs award likely to be granted and have offered to provide personal guarantees;
6. a security for costs order will prevent the respondent from prosecuting its action;
7. if the applicant has counterclaimed and the issues raised by the counterclaim and the claim are the same or the counterclaim adds significantly to the action, with the potential to prolong discoveries and trial, this may be a relevant factor in refusing security or in determining the amount; and
8. the resolution of the issue presented by the respondent's action is important to the community.

On the facts of the matter before it, the Court noted that the section 254 test applied, and proceeded to consider two questions: 1) the amount of costs for which the applicants were entitled to seek protection; and 2) whether the respondent would be able to pay that amount if its claim was dismissed (in fact, the Court asked: "Does [the corporation] have in Alberta exigible assets"). The Court concluded that there was no evidence that the respondent would be unable to pay the amount that it determined to be a fair estimate for go-forward costs, and dismissed the application.

While the Court has clearly attempted to render thorough reasons to bring general clarity to security for costs applications, important questions remain.

What, exactly, is the role of the discretionary factors the Court provides? While the lists seem to find an obvious home under Rule 4.22 and the "just and reasonable" test, the role of these factors in the section 254 analysis is less clear. Since the Court concluded that the test here is whether the corporate plaintiff will be unable to pay the costs of a successful defendant, the relevance of a list of discretionary factors that would increase the likelihood of granting a security for costs order in circumstances where the test is already met appears redundant (while several of these factors are said to form part of the section 254 test and not apply to the discretion exercised under this test, confusingly, not all of them are categorized in this way). Perhaps such a list could be used to "offset" the discretionary factors in the second list that could presumably apply to deny a security for costs order even where the "unable to pay" test is met, but such a possibility is not spelled out in the decision. Further, if a section 254 analysis properly accounts for discretionary factors that would decrease the likelihood of gaining a security for costs order (which the Court appeared to do in asking whether the corporate respondent had exigible assets in Alberta), such a test begins to merge with a Rule 4.22 analysis.

In sum, while Amex appears to signal that defendants will face a more difficult task in successfully seeking security for costs against a corporate plaintiff, future application of the tests and the factors identified will indicate whether this is in fact the case.