When a lawsuit is filed, the stakes are high for both parties. For defendants, the financial risks can be particularly daunting, especially if the plaintiff lacks the means to pay costs if their claim is unsuccessful. To address this, Alberta law allows defendants to apply for security for costs, requiring plaintiffs to set aside funds to cover potential costs awards. This article examines the two key frameworks for these applications in Alberta: Rule 4.22 of the Alberta Rules of Court and Section 254 of the Alberta Business Corporations Act (ABCA).
Understanding Security for Costs
Security for costs applications are a procedural tool designed to protect defendants from financial loss in cases where the plaintiff cannot pay a costs award. These orders are particularly important in situations involving plaintiffs with limited assets or uncertain financial stability.
Rule 4.22: A Broad Approach
Rule 4.22 applies to all plaintiffs, whether individuals or corporations, and provides a general framework for security for costs applications. Under this rule, the court considers several factors:
- The plaintiff’s ability to pay a potential costs award.
- The merits of the action—whether the claim has a reasonable likelihood of success.
- Prejudice to the plaintiff—whether an order would prevent them from pursuing their claim.
- Any other relevant factors the court deems appropriate.
This rule emphasizes fairness and judicial discretion. For instance, courts may be reluctant to grant security for costs if doing so would unduly limit access to justice, especially for individuals with valid but under-resourced claims.
Section 254 (ABCA): A Specific Standard for Corporate Plaintiffs
Section 254 introduces a more stringent standard for corporate plaintiffs, requiring defendants to demonstrate that the corporation will be unable to pay the costs of a successful defendant.¹ This provision reflects the heightened financial risks defendants face when dealing with corporate entities that may have limited assets or no presence in Alberta.
Although Section 254 sets a clear financial threshold, courts still exercise discretion. Relevant factors include:
- Location and Value of Assets: If the corporation lacks eligible assets in Alberta, this increases the likelihood of a security for costs order.
- Timing: Applications made early in proceedings carry more weight.
- Merits of the Claim: A weak claim can bolster the defendant’s argument for security.
- Prejudice: Courts may deny security if it would effectively bar the plaintiff from continuing their claim.
Key Differences Between Rule 4.22 and Section 254
Rule 4.22 | Section 254 | |
Applies to: | Individual and corporate plaintiffs | Corporate plaintiffs only |
Factors Considered: | Strength of case, plaintiff’s | Financial capacity of the |
Focus: | Balancing fairness and justice | Ensuring corporates are not |
Case Law Insights
Arraf v Royal View Surgical Centre Ltd., 2024 ABKB 262
Dr. John Arraf and his professional corporation sued Royal View, alleging wrongful and constructive dismissal after his departure from the surgical center. The defendants sought security for costs, arguing that Dr. Arraf’s assets in the U.S.A. could complicate enforcement of a potential costs award. Initially, the request was dismissed, but on appeal, the decision was overturned. The Court ordered security for costs, citing errors in the lower court’s analysis, including insufficient consideration of corporate plaintiffs under Section 254 of the ABCA and the absence of clear evidence of enforceable assets in Montana. Balancing factors like the corporate plaintiff’s inability to pay and Dr. Arraf’s income, the Court found security for costs just and reasonable.
The Court emphasized that applications for security for costs under Rule 4.22 and Section 254 of the ABCA are discretionary and involve balancing access to justice with economic security.² This highlights the need for a nuanced, evidence-based approach when considering security for costs.
Blazer Mechanical Plumbing & Heating LTD v Delnor Construction 2012 LTD, 2024 ABKB 183
Blazer claimed unpaid compensation for work performed for Delnor, while Delnor argued the work was to fix Blazer’s errors and thus not compensable. Security for costs was granted in favour of Delnor. Blazer appealed, contending that its insurance policy should cover potential cost awards, eliminating the need for security, and argued the order would cause undue prejudice. The Court dismissed the appeal, finding the insurance policy insufficient to guarantee payment of costs and highlighting Blazer’s lack of other assets or financial means to satisfy a potential award. The Court upheld the security for costs as just and reasonable.
This case stated that when applied to corporate parties, security for costs can be granted under Rule 4.22 or Section 254.³ Rule 4.22 was applied to assess the balance between protecting the applicant’s ability to recover costs and avoiding undue prejudice to the respondent. The Court determined that an insurance policy proposed by the respondent did not adequately address concerns regarding cost recovery, especially since it did not guarantee coverage. The decision underscored the importance of substantive evidence when seeking to counter an application for security for costs.
Vizor v 383501 Alberta Ltd (Val Brig Equipment Sales), 2022 ABQB 5
The Court addressed a security for costs application against Mr. Vizor and his corporation, DJH. Val Brig Equipment Sales (VBES) argued for security for costs under both Rule 4.22 and Section 254 of the, asserting that both Mr. Vizor and DJH lacked sufficient assets in Alberta to satisfy potential cost awards. The Court considered factors under Rule 4.22, such as enforceability of judgments, the respondents’ ability to pay, and undue prejudice. Under Section 254, the court noted DJH’s status as an impecunious shell corporation. Evidence of Mr. Vizor’s limited personal assets and DJH’s lack of operational capacity favoured the application. Additionally, the Court highlighted the corporation’s inability to fund litigation independently, aligning with established precedents emphasizing corporate shareholders’ responsibility to fund claims. Concluding that VBES’s application was timely, the claims lacked merit, and there was no undue prejudice to the respondents, the Court granted an order for security for costs.
Rule 4.22 was used for individual plaintiffs, while Section 254 addressed the corporate respondent’s inability to pay.⁴ The Court found that the respondents failed to demonstrate undue prejudice and had no meaningful assets in Alberta. The decision emphasized that corporate shareholders bear responsibility for funding litigation, especially when corporations lack the means to pay costs.
Together, these recent cases illustrate the dual application of Rule 4.22 and Section 254 in Alberta. Rule 4.22 provides a flexible framework for individuals and corporations, considering fairness and undue prejudice, while Section 254 applies a stricter standard for corporations unable to pay costs. Across all three cases, courts have emphasized the necessity of concrete evidence to justify or resist security for costs orders, balancing the interests of justice against the risk of unrecoverable costs. The decisions collectively reinforce that security for costs aims to prevent abuse of litigation while safeguarding access to justice.
Conclusion
Security for costs applications are an essential mechanism to manage financial risks in litigation. By understanding the distinctions between Rule 4.22 and Section 254, litigants can better navigate Alberta’s legal landscape. Whether you are defending against a claim or pursuing one, consulting experienced legal counsel is key to achieving the best outcome.
¹ Arraf v Royal View Surgical Centre Ltd., 2024 ABKB 262, at para 29
² Arraf v Royal View Surgical Centre Ltd., 2024 ABKB 262, at para 30
³ Blazer Mechanical Plumbing & Heating LTD v Delnor Construction 2012 LTD, 2024 ABKB 183, at para 7
⁴ Vizor v 383501 Alberta Ltd (Val Brig Equipment Sales), 2022 ABQB 5, at para 163
Note: This article provides general commentary and is in no way intended to replace the need to consult with a legal professional concerning the specific circumstances of your situation. This article should not be construed or relied upon as legal advice.
