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Notes: Jabneel Development Inc.(Applicant/Contractor) and the Town of Lamont, Alberta, Canada (Town/Beneficiary) entered into a Development Agreement and Master Sale Agreement for the subdivision, development and sale of residential properties in Lamont. To assure its performance, Applicant/Contractor obtained a standby letter of credit for CAD 406,500in favor of Town/Beneficiary issued by the Canadian Imperial Bank of Commerce/CIBC (Issuer).

When Issuer notified Town/Beneficiary that the standby would not be extended, Town/Beneficiary drew on it for its full value. Town/Beneficiary subsequently informed Applicant/Contractor that it was terminating the agreements and retaining the proceeds from the standby while also retaining the right to seek further damages for Applicant/Contractor’s failure to perform on the contract.

Applicant/Contractor sued Town/Beneficiary for the return of CAD 406,500, the proceeds of the standby. The trial court directed that CAD 100,000 be held by Town/Beneficiary with the balance returned to Applicant/Contractor. The trial court ruled that CAD 406,500 was “grossly disproportionate to any conceivable loss or exposure” on behalf of Town/Beneficiary.

Town/Beneficiary appealed, and the appellate court reversed the trial court’s judgment, reasoning that the trial court erred in ordering return of a portion of the standby proceeds to Applicant/Contractor. The appellate court ruled that Town/Beneficiary should hold the full amount of the standby pending litigation determining its entitlement to receive the security.

Thereafter, Town/Beneficiary applied for security for costs for continued litigation against Applicant/Contractor, which the trial court denied, finding that Town/Beneficiary had not proven that it would use the entire CAD 100,000 held in trust, determining that the balance could be used as security. Town/Beneficiary appealed. The Alberta Court of Queen’s Bench, Lee, J., set aside the trial court’s decision and ordered that Town/Beneficiary be granted CAD 39,228 security for costs.

Rule 4.22 of the Alberta Rules of Court provides that the court may order a party to provide security for payment of a costs award, taking into account the ability of Town/Beneficiary to enforce a costs award; the ability of Applicant/Contractor to pay a costs award; the merits of the action; if there was any undue prejudice to Applicant/Contractor; and any other matters the court considers appropriate.

The Appellate Judge found that Town/Beneficiary had no ability to enforce a successful award of costs and that Applicant/Contractor had demonstrated the ability to finance the litigation. Legal costs incurred by Town/Beneficiary were CAD 265,366.27 and Applicant/Contractor owed Town/Beneficiary CAD 28,993.57 in unpaid court costs. The Judge reasoned that Town/Beneficiary had or would incur service and engineering costs of over CAD 800,000 due to the termination of the agreements between Applicant/Contractor and Town/Beneficiary. Additionally, the Judge found that the rejection of the application for security for costs was based on an incorrect interpretation of the adequacy of the CAD 406,500. The Judge found that the CAD 406,500 plus interest was accounted for and had been used up pursuant to the contract. The Judge granted Town/Beneficiary’s application for security for costs in the amount of CAD 39,228, ruling that the amount was reasonable in the circumstances.

[ACA/VLG]

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