Autoweld Systems Limited Plaintiff - v. -, 2011 ABQB 265

Court of Queen ’ s Bench of Alberta Citation: Autoweld Systems Limited v. CRC-Evans Pipeline International, Inc., 2011 ABQB 265 Date: 20110419 Docket: 0801 02976 Registry: Calgary Between: Autoweld Systems Limited Plaintiff - and - CRC-Evans Pipeline International, Inc., CRC-Evans Automatic Welding, Inc., Malcom Timothy Carey and Richard Lee Jones Defendants _______________________________________________________ Reasons for Decision of the Honourable Mr. Justice T.F.

McMahon _______________________________________________________ Introduction [ 1 ] This is an application by the Defendants CRC-Evans Pipeline International Inc., CRC-Evans Automatic Welding, Inc., Malcom Timothy Carey and Richard Lee Jones (collectively “CRC-Evans”) for an order for security for costs against the Plaintiff Autoweld Systems Limited (“Autoweld”) in the sum of $605,975. [ 2 ] Autoweld is a designer, manufacturer and supplier of internal automatic welders for use in large diameter pipeline construction. Its registered office is in England. Its corporate secretary resides in England.

Its two directors are respectively resident in

England and the United Arab Emirates. [ 3 ] It is admitted that Autoweld has no assets or business operations within Alberta. [ 4 ] CRC-Evans is in a similar business and is effectively a competitor of Autoweld. The two individuals named as Defendants were shareholders and officers of CRC-Evans at the relevant time. [ 5 ] In 1996, CRC-Evans sued an Alberta pipeline company. In 1997, CRC-Evans sued several additional companies including Autoweld. Both actions alleged that Autoweld and the others had used CRC-Evans’ confidential and proprietary information without license or permission from CRC-Evans.

The actions were settled by a settlement agreement which provided for the discontinuance of the actions and for the parties to enter into a license agreement. The parties, including CRC-Evans and Autoweld, then entered into a license agreement. That agreement acknowledged that certain CRC-Evans confidential and proprietary information had been used without permission from CRC-Evans.

The agreement granted to Autoweld a license for the current and future use of CRC-Evans’ confidential and proprietary information and copyrights in the design, manufacture, assembly and operation of Autoweld welders, all on certain fairly complex terms. [ 6 ] In March 2008, Autoweld commenced this action against CRC-Evans and the two individual officers.

The Amended Statement of Claim alleges that in negotiating the settlement agreement, CRC-Evans and the two individuals represented that CRC- Evans was the exclusive owner of the confidential and proprietary information and expressly warranted in the settlement agreement that CRC-Evans had not waived or by its actions or inactions become estopped from enforcing its rights to such exclusive use. [ 7 ] The Amended Statement of Claim then alleges that the representations and warranties were untrue, inaccurate and misleading.

It alleges that in the course of negotiating the settlement agreement CRC-Evans failed intentionally or negligently to disclose certain information which it is alleged they had a duty to disclose. [ 8 ] The relief which Autoweld seeks in this action is recission of the settlement agreement, a declaration that the settlement agreement is void; and also for corollary relief for declaration that the license agreement is void. [ 9 ] This latter relief as to the license has been stayed as a result of a decision of the Alberta Court of Appeal. [ 10 ] CRC-Evans initiated several motions to stay this action pending arbitration.

The Alberta Court of Appeal determined that this action can proceed in so far as it related to the settlement agreement. The part of this litigation that related to the licence agreement was stayed. Applicable Statutory Provisions and Rules [ 11 ] The Business Corporations Act, R.S.A. 2000, c.B-9,

section 254 : 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. [ 12 ] Alberta Rules of Court , Alberta Regulation 124/2010, Rule 4.22:

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 theaction; (

e) any other matter the Court considers appropriate. [13] The new rules came into effect November 1, 2010. Although this motion was brought before that date, it was heard after thatdate and so are applicable. Although the criteria for security for costs are similar, they are not the same as in the former Rules. Gone forexample is any reference to the place of residence of the plaintiff. [14] This Rule 4.22 has been the subject of one other decision of this Court: Attila Dogan Construction v. AMEC AmericasLimited, 2011 ABQB

Section 254 Grounds [15] As to

section 254 of the Business Corporations Act, CRC-Evans argues that Autoweld’s unaudited accounts for the year-endMarch 31, 2009 show net assets of £23,827. [16] CRC-Evans argues that costs, if it is successful, will be substantially more than Autoweld’s current net assets and so I shouldconclude that Autoweld will be unable to pay. They rely upon Sprung Enviroponics Ltd. v. Calgary (City) (1990), 1990 ABCA 23, 72 Alta. L.R. (2d) 237 (C.A.) at p. 245: The owners of a limited liability company with few assets other than a cause of action, are in a very fortunate position.

They can makethe company sue; if it wins, they take the proceeds as shareholders. If it loses, they can walk away from the company and the suit. Thatis why the Legislatures passed these sections in Business Corporations Acts.... [17] In my view, the facts before me are insufficient to show that Autoweld “will be unable to pay the costs of a successfuldefendant”. The facts do not support that definitive conclusion. This is not the case of an insolvent plaintiff, or of a plaintiff withoutstanding judgments against it, or with significant unpaid creditors.

There is no evidence that Autoweld does not have a viable ongoingbusiness capable of generating revenue. It is not possible to conclude on these facts that Autoweld “will be unable to pay”. Rule 4.22 Grounds [18] The “just and reasonable” test as found in the former Rule 593 (1.1) was commented upon in Ritter v. Hoag (2003) 2003ABQB 229 , 25 Alta.L.R. (4th) 267 (Q.B.) at para. 8. Where the applicant proceeds under Rule 593(1)(

g) he must show that the plaintiff is not possessed of sufficient property to answer thecosts of the action. Where he proceeds under the Alberta Business Corporations Act s. 254, he must show that the corporate plaintiff willbe unable to pay the costs of a successful defendant. But there is no similar requirement where the applicant proceeds under Rule593(1.1). In Taylor & Associates Ltd. v. Dubuc, [2003] A.J.

No. 26, 2003 ABQB 30, Master Funduk observed (paragraphs 20 and 21): There is no evidence that the Plaintiff has any significant assets, although by the same token there is no evidence that it does not.However, sub-rule (1.1) is "notwithstanding" sub-rule (1). The limited case law on sub-rule (1.1) does not put a burden on a defendant tostill show that a plaintiff does not have sufficient exigible assets. The "notwithstanding" in sub-rule (1.1) cannot be read out.

[ 19 ] Rule 4.22 mandates consideration of five factors and I will consider each in turn. [ 20 ] A. Whether it is likely the Applicant for the order will be able to enforce an order or judgment against assets in Alberta: In this case, there is no evidence that Autoweld has any assets in Alberta so this factor weighs in favour of a security for costs order. [ 21 ] B. The ability of the Respondent to the application to pay the costs award: As indicated in Ritter , the bar is lower than that set by

section 254 . I need not determine that Autoweld “will be unable to pay the costs”. The mandate is merely to consider the ability of Autoweld to pay in determining what is just and reasonable. As I have described, the Plaintiff is not insolvent, nor is there evidence of outstanding judgments or significant debt and the Plaintiff seems to have a viable ongoing revenue generating business. Nevertheless, the modest net assets of Autoweld suggests a real risk of an inability to pay substantial costs after protracted and expensive litigation. What is a viable business today may not be so at the end of this litigation.

Alternatively, its revenue stream may be diverted elsewhere. Interestingly, CRC-Evans cites a recent decision of the English Court of Appeal in which a security for costs order against Autoweld in certain unrelated English litigation was confirmed: Autoweld Systems Ltd. v. Kito Enterprises LLC [2010] EWCA Civ. 1469. The applicable rule there for the ordering of security for costs permitted such an order where: The claimant is a company or other body (whether incorporated inside or outside Great Britain) and there is reason to believe that it will be unable to pay a defendant’s costs if ordered to do so.

Autoweld has brought no evidence in this application to show an inability to pay and indeed, as I will discuss later, argues that it has a limited ability to pay. [ 22 ] C. The merits of the action in which the application is filed: There is insufficient basis at this early stage to determine which party has the better prospect of success in this commercial dispute. Autoweld has filed no affidavit evidence. CRC-Evans has filed an affidavit sworn by one of its officers and a named defendant in which he deposes to a good defence on the merits. Significant detail is provided.

Autoweld relies upon its cross-examination on this and other affidavits to establish the merits of its claim. The parties have litigated related issues since 1996. It is a reasonable inference that commercial bodies, well advised, will not litigate hopeless causes for fifteen years. The former Rule 594 required an affidavit from the applicant alleging a good defence on the merits and specifying its nature. I do not see that Rule 4.22(

c) raises the bar or demands a higher standard or a more detailed inquiry into the merits. When the motion is brought before document production and before oral questioning, none of that is realistic. What the new factor does do is broaden the consideration from only the merits of the defence to the merits of the action. It therefore requires a balanced view of the entire action as it then appears. On the material before me I am satisfied that there is merit, i.e., that both the claimant and the defence raise serious and arguable issues. [ 23 ] D.

Whether an order to give security for payment of a costs award would unduly prejudice the respondents ability to continue the action: Autoweld focuses on this factor – it is said that a significant security for costs award would put an end to this suit and prevent Autoweld from seeking the Court’s relief. Autoweld has modest assets, much less than the $605,000 demanded for security for costs.

Autoweld argues that CRC-Evans has, over the course of the last two years, brought applications and appeals before this Court, the Alberta Court of Appeal and the Supreme Court of Canada to have this litigation stayed and referred to international arbitration. All were unsuccessful with respect to the settlement agreement. For a company with the modest balance sheet of Autoweld it can be inferred that responding to those efforts was a real financial burden. As a consequence of these motions and appeals, the underlying action has made little progress in two years.

CRC-Evans had, of course, every right to pursue those applications, but it is nevertheless an

appropriate consideration on this application. This factor is not new. The Respondent’s ability or inability to post security even when the respondent appears to have a claim with merithas always been a relevant factor: Liu v. Tangirala (2005), 2005 ABQB 246 , 375 A.R. 161 and Singh v. Dura (1988), 1988 ABCA 155 , 86 A.R. 268(Alta.C.A.) at para. 27. Where the respondent is a body corporate, however, the circumstances are different: Calmont Leasing Ltd. v. 32262 B.C.

Ltd. (2002),2002 ABCA 290 , 317 A.R. 331 (Alta.C.A.) at para. 8: It is interesting that many of the decided cases which decline to order security for costs on the grounds that it would shut an impecuniousplaintiff or appellant out from the court despite an arguable case, are cases where that plaintiff or appellant was an individual. Some ofthose arguments sound especially hollow in the case of a limited liability company. In the case of a limited liability company, it isparticularly important that there be sworn evidence that the appellant or plaintiff has no way to raise any kind of security of anydescription.

That is because an impecunious company with a cause of action is a one-way valve which allows money to flow from asuccessful lawsuit through the company to its creditors or shareholders (or both), but prevents any money from flowing in the oppositedirection. I have no sworn evidence from Autoweld that it cannot raise any security in or near the amount demanded. [24] E. Any other matter the Court considers appropriate: There is a counter-claim by CRC-Evans. A counter-claim in somecircumstances can be a consideration in granting security for costs. In this case, however, the counter-claim is defensive only.

It pleadsthat if Autoweld is successful in seeking recission then CRC-Evans seeks certain relief. Hence, in this case the counter-claim is of noconsequence at this stage. Conclusion [25] An order for security for costs is discretionary. On balance, it is just and reasonable that security be ordered, given primarilythe unchallenged description of Autoweld’s net asset position and the absence of any evidence from Autoweld that it could not raisesignificant security if required. [26] The quantum demanded is, however, too high at this stage. Security need not be ordered through to the end of trial.

Securitycan be amended as to the amount as the litigation proceeds. [27] The amount demanded by CRC-Evans assumed forty days of pre-trial questioning and thirty days of trial. It seeks a scale ofColumn 5 times three because Autoweld’s claim alleges fraud and exceeds $11 million. [28] Autoweld objects that there should be no need for forty days of pre-trial questioning.

It is reasonable to require security onlythrough to completion of oral questioning and I will assume twenty days of questioning at this stage. [29] Including disbursements, I therefore fix security to costs at $250,000 to be posted within thirty-five days of the entry of thisorder. CRC-Evans can apply for further security for costs after twenty days of oral questioning or when oral questioning is completed,whichever first occurs.

Security will be provided by payment of cash to the Clerk of the Court or in another form with consent of CRC-Evans, or by order upon further application. [30] Unless otherwise ordered, all proceedings in this action will be stayed until security is provided.

[ 31 ] If the security is not provided in accord with this Order, CRC-Evans may apply to have the claim struck. [ 32 ] CRC-Evans is entitled to its costs of this application on Column 5 times three in any event of the cause. Heard on the 13 th day of April, 2011. Dated at the City of Calgary, Alberta this 19 th day of April, 2011. T.F. McMahon J.C.Q.B.A. Appearances: Grant N. Stapon, Q.C. Bennett Jones LLP for the Plaintiff James E. Redmond, Q.C. T.J. Williams James E. Redmond Professional Corporation for the Defendants