In Heidari v Naghshbandi, the Court of Appeal for Ontario canvassed the governing principles relevant to a motion to obtain security for costs of an appeal under Rule 61.06(1) of the Rules of Civil Procedure. In denying the respondent’s motion, the Court found that even where the appeal in question is “only weakly arguable” and involves the review of discretionary determinations by the trial judge that “attract substantial appellate deference”, the Court will not find that the appeal is frivolous if the appellant can point to a potential error of law, however unlikely to succeed. The decision thus makes it clear that there is a high hurdle to obtain security for costs of an appeal on the basis that it is frivolous and vexatious, and that a Court will generally prefer to allow appeals to be heard on their merits unless the interests of justice clearly weigh in favour of protecting the respondent’s costs.
The appellant, Mr. Naghshbandi, and the respondent, Mr. Heidari, were friends and former business partners in an engineering business. Between 1998 and 2008, they incorporated companies, bought properties, and made loans to each other to fund their ventures. Most of their transactions were not documented. When their friendship soured, two lawsuits ensued:
- In 2009, the respondent sued the appellant for repayment of $187,092 in claimed loans. The appellant denied owing anything and counterclaimed against the respondent, alleging that the respondent owed him $291,333.
- The same year, the respondent Tarra Engineering Inc. (in which both the respondent and appellant had been shareholders and directors), sued the appellant for repayment of $450,146 in claimed loans. The appellant denied the claim and counterclaimed against the respondent, Tarra Engineering Inc., and the respondent Tarra Engineering and Structural Consultants Inc. (a new company the respondent formed after the litigation began), alleging wrongful dismissal, corporate oppression, and fraud, and seeking over $3 million in damages and half the value of Tarra Engineering Inc. Significantly, a decade later and on the eve of trial, the appellant abandoned his counterclaim.
At trial, the judge ruled against the appellant in both actions. He noted that “both parties agree that the litigation ultimately turns on findings of credibility”. He found that the appellant was not credible, that his testimony was not corroborated by any other witness, and that it appeared to have been “a complete fantasy”. He ordered the appellant to pay damages to the respondent for $173,544 and to Tarra Engineering Inc. for $105,810. He also ordered the appellant to pay costs to the respondent and Tarra Engineering Inc. of $444,002.73 and to Tarra Engineering and Structural Consultants Inc. of $69,183.94.
On appeal, the respondents moved to seek security for costs of the appeal pursuant to Rule 61.06(1) of the Rules of Civil Procedure. Rule 61.06(1) states:
61.06(1) In an appeal where it appears that:
- 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;
- an order for security for costs could be made against the appellant under rule 56.01; or
- 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.
Before considering whether security for costs ought to be granted, the Court of Appeal first helpfully set out the governing principles for a motion under Rule 61.06(1). These include:
- Rule 61.06(1) is permissive rather than mandatory, and the court retains the ultimate discretion to refuse an order for security for costs, even if the moving party meets the terms of the Rule;
- Relatedly, the Rule requires a two-stage analysis: the respondent must first show they meet the terms of the Rule, and if so, the motion judge must “take a step back” and consider the justness of the order sought in all the circumstances, “with the interests of justice at the forefront”;
- The interests of justice involve weighing a number of factors, including (but not limited to), the merits of the appeal, the timeliness of the security for costs motion, the public importance of the litigation, and the form and amount of the security sought; and
- The court must balance the interests of the moving party in providing adequate protection for their costs, while ensuring that the rule is not used as a sword to defeat potentially meritorious appeals.
With respect to Rule 61.06(1)(a) (i.e. whether the appeal is frivolous and vexatious and the appellant has insufficient assets in Ontario to pay the costs of the appeal), the Court defined “frivolous” as being “devoid of merit or with little prospect of success”, and “vexatious” as being “taken to annoy or embarrass the respondent or conducted in a vexatious manner, including an oblique motive for launching the appeal”. The respondent argued that the appeals were frivolous because they primarily challenged findings of fact (including findings of credibility which the parties agreed were crucial in this case), and raised no arguable errors in law. The respondent also argued that the appeals were vexatious, noting that the appellant abandoned the counterclaim on the eve of trial, after a decade of litigation.
The appellant disputed both claims, arguing that the “thrust of the appeal” raised an arguable error of law in that the trial judge erred in law by substituting “loan” claims with “joint investment” claims, which could be an inappropriate legal characterization of the payments is issue. The Court of Appeal accepted the appellant’s argument that the characterization of the payments at issue was not frivolous. The Court further found that there were proper reasons to bring the appeal, including the appellant’s desire to “clear his name” and to challenge the adverse credibility findings made against him, such that the appeal was not vexatious. Accordingly, the Court found that the moving party failed to meet its burden under Rule 61.06(1)(a).
With respect to Rule 61.06(1)(c) (i.e. whether there is “other good reason” to order security for costs), the Court of Appeal made it clear that the “other good reason” must be (i) consistent with the overall purpose of the Rule (i.e. to protect the costs of the respondent) and (ii) “fairly compelling” given that it is a catch-all provision in the Rule. The Court provided examples of circumstances that would warrant security for costs under this subrule, which includes situations where the appellant has committed fraud, sought to make himself judgment proof, and where it would be “nearly impossible” to collect costs from the appellant, notwithstanding potential assets in Ontario. On the facts of this case, the Court found that there was no “other good reason” to order security.
This case serves as a useful reminder that obtaining security for costs is ultimately a discretionary remedy. As the Court noted, the Rule is not mandatory, even if the moving party satisfies the plain requirements of the Rule. At the forefront, the Court must weigh the importance of providing the respondent with a measure of protection for the costs to be incurred on the appeal, against the potential for denying the appellant a chance to pursue an appeal. Even where there is only a “weakly arguable” case by the appellant and where the appellant will “face strong headwinds on appeal” on the merits, as was admittedly the case here, the Court is loath to characterize an appeal as frivolous and vexatious absent compelling justification. Thus, a party seeking to move for security for costs on appeal should, to use the Court’s words, “take a step back” and consider broader interests of justice arguments in favour of their case, beyond the plain language of the rule, to persuade the judge that such an order is indeed warranted.
 2020 ONCA 757.
 Ibid at para 14.
 Ibid at para 3.
 Ibid at para 4.
 Ibid at para 6.
 Ibid at para 10.
 Ibid at paras 13-14.
 Ibid at para 17.
 Ibid at para 23.