Ontario appeal court declines to order security for costs in international commercial arbitration enforcement appeal

I previously blawged about the recent Ontario international commercial arbitration enforcement proceedings in Znamensky Selekcionno-Gibridny Center LLC v. Donaldson International Livestock Ltd., 2009 CanLII 51197 (ON S.C.). See my post entitled: “Blawgin’ ain’t easy” (except this time): Ontario court enforces Russian ICAC foreign arbitral award for a backgrounder.
 Subsequently, Znamensky brought a motion for security for costs of the appeal launched by Donaldson  from the order of Pitt J. dated September 29, 2009, which ordered that two international arbitration awards in favour of Znamensky be recognized and enforced in Ontario.  In addition, he awarded costs in favour of Znamensky in the amount of $30,000.00. Znamensky moved under rule 61.06(1) of the Rules of Civil Procedure, which states:

61.06(1)  In an appeal where it appears that,
(a) 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;
(b) an order for security for costs could be made against the appellant under rule 56.01; or
(c) for other good reason, security for costs should be ordered,
a judge of the appellate court, on motion by the respondent, may make such order for security for costs of the proceeding and of the appeal as is just.

Znamensky’s counsel’s principal argument centred on sub-rule 61.06(1)(b) which implicates sub-rules 56.01(1)(c) and (d) of the Rules of Civil Procedure,  the latter of which provides as follows:

56.01 The court, on motion by the defendant or respondent in a proceeding, may make such order for security for costs as is just where it appears that,
….
(c) the defendant or respondent has an order against the plaintiff or applicant for costs in the same or another proceeding that remains unpaid in whole or in part;
(d) the plaintiff or applicant is a corporation or a nominal plaintiff or applicant, and there is good reason to believe that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent.

On February 22, 2010, Blair, J.A. (in Chambers) of the Court of Appeal for Ontario dismissed Znamensky’s motion for security for costs: Donaldson International Livestock Ltd. v. Znamensky Selekcionno-Gibridny Center LLC, 2010 ONCA 137 .

 Znamensky’s counsel argued that Donaldson has not paid the outstanding costs orders totalling $115,000 and, in addition – based on information obtained on an examination of Donaldson in aid of execution respecting those unpaid orders –there was good reason to believe that Donaldson has insufficient assets in Ontario to pay the costs of Znamensky if the latter was successful on the appeal. (at para.12). The evidence obtained showed that Donaldson’s net assets were worth approximately $125,000 vis-a-vis the outstanding costs orders of $115,000 in connection with the first Ontario proceedings, plus the outstanding costs order of $30,000 from below.(Id.)
Blair, J.A. rejected this argument, noting:
 [13]         However, based on the line of authority in this Court establishing that a respondent on appeal may not rely on rule 61.06(1)(b) to obtain an order for security for costs of an appeal as against a defendant/appellant, Mr. Bredt fairly concedes that he cannot resort to subsection (1)(b) and rule 56.01 in the circumstances.  The policy rationale behind this line of jurisprudence is not to impose security for costs upon foreign or impecunious defendants who are forced into court by others to defend themselves.  See Diversitel Communications Inc. v. Glacier Bay Inc., [2004] O.J. No. 10, 181 O.A.C. 6 (C.A.), at para 8; GEAC Canada Ltd. v. Craig Erickson Systems Inc., [1994] O.J. No. 1061, 26 C.P.C. (3d) 355 (C.A.); Toronto Dominion Bank. v. Szilagyi Farms Ltd., (1988), 65 O.R. (2d) 433 (C.A.).  In Szilagyi Farms, Morden J.A. expressed the rationale in these terms, at p. 440:
… it has for a long time been the accepted position that no party should have to give security for costs as a condition of simply defending itself (see Re Percy and Kelly Cobalt & Chrome Iron Mining Co. (1876), 2 Ch. D. 531, 24 W.R. 1057) and, in this regard, it can be said that an appeal is simply a step in the proceeding in which the defendant appealing is continuing to defend itself. 
[14]         Here, the position is that Donaldson is the impecunious defendant – or at least arguably so – who was simply defending itself against Znamensky’s enforcement proceedings and now simply seeks to take another step in the proceeding by continuing to defend itself through the appeal.
Justice Blair also rejected Znamensky’s  “backdoor” argument under Rule 61.06(1)(c). The learned Justice writes:
[17]         First, the wording of rule 61.06(1)(c) is clear: where it appears that “for other good reason” security for costs should be ordered, the judge may make such an order.  This must mean good reason other than those already encompassed in rule 61.06(1)(a) or (1)(b) – and, through (1)(b), those encompassed in rule 56.01.  In other words, a party seeking an order for security for costs under rule 61.06(1)(c) may not resort to what are in effect the same grounds that would support a rule 56.01 order when it is barred by the line of jurisprudence cited above from relying on subrule (1)(b), the gate through which it must travel to have access to rule 56.01.  Here, Mr. Waldin submits, that is precisely what Znamensky is attempting to do – “back door” itself into rule 56.01(c) and (d) through rule 61.06(1)(c)  when it is forbidden from accessing it through rule 61.06(1)(b).  Stripped to its essentials, Znamensky’s motion is founded on the still-unpaid costs orders and Donaldson’s impecuniosity.  I agree.
 …

[20]         While there may be a connection between the issues dealt with here and below in the first Ontario proceedings and the issues raised before Justice Pitt and on the appeal of his order, the fact is that Znamensky would have had to come to Ontario to enforce its awards whether the earlier proceedings had taken place or not.  Znamensky is therefore the “plaintiff” and Donaldson the defendant seeking to defend the enforcement claim being asserted against it.  The rationale underpinning the Szilagyi Farms line of authorities precluding access to rule 61.06(1)(b) against defendant/appellants remains relevant.  Apart from the contention that the appeal is “not the strongest”, Znamensky’s claim for security for costs continues to rest on the arguments that there are substantial unpaid costs orders outstanding and that Donaldson does not have sufficient assets to pay them if it is unsuccessful on the appeal.  These arguments are the stuff of rule 56.01(c) and (d), which cannot be accessed by a respondent in the position of Znamensky, disqualified as it is from passing through the forbidden rule 61.06(1)(b) gate.

Frankly, I am surprised that Justice Blair did not order security for costs against Donaldson, particularly in light of the unpaid costs orders, complicated litigation history, including an anti-suit injunction, all of which led to the favourable decision of Armstrong, J.A. in Donaldson International Livestock Ltd. v. Znamensky Selekcionno-Gibridny Center LLC, 2008 ONCA 872 (CanLII). (Ont. C.A.).

Donaldson’s appeal of Pitt. J’s order is scheduled for April 7, 2010.

Perhaps the Court of Appeal for Ontario may take a fresh look at the arguments relating to issue estoppel and change of arbitral venue as they relate to the underlying alleged death threats which apparently pre-empted Donaldson from participating in the arbitration in Russia. Stay tuned.

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