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Default Judgment - Setting Aside

. 828343 Ontario Inc. v. Demshe Forge Inc.

In 828343 Ontario Inc. v. Demshe Forge Inc. (Div Ct, 2021) the Divisional Court considered an interesting case where through apparent inadvertence by counsel a default judgment was obtained (without the defendant being served of with an earlier assignment court date). It wasn't until some nine years after the initial service of the claim that the defendant become aware of it. The defendant's moved successfully to set aside the default judgment. On appeal the appellant/plaintiff sought re-instatement of the default judgment, and on cross-appeal the defendants sought (unusually to my mind) dismissal for delay.

In this quote the court sets out the test for setting aside a default judgment:
[38] There is no dispute that, in exercising his discretion to set aside a default judgment under Rule 19.08 of the Rules of Civil Procedure, the motion judge correctly articulated the guiding principles set out in Mountain View Farms Ltd., which require the court to consider:
a. Whether the motion was brought promptly after the defendant learned of the default judgment;

b. Whether the defendant had a plausible explanation for the failure to defend the claim;

c. Whether the defendant had an arguable defence on the merits;

d. The prejudice that may be caused to each party should the motion be granted or refused, as the case may be; and

e. The effect that an order granted may have on the administration of justice.
[39] As the motion judge noted, at para. 32 of his reasons, these are not rigid rules, all of which must be satisfied.

....

[43] The contentious aspect of the motion judge’s decision is his failure to reach a conclusion on whether the defendants had an arguable defence on the merits.

[44] The plaintiff asserts that the defendants were required to show that their defence had an air of reality, relying on the pronouncement by the Court of Appeal in Mountain View Farms Ltd., at para. 51, that the presence of an arguable defence on the merits may justify the court exercising its discretion to set aside a default judgment even if the other factors are unsatisfied in whole or in part. The plaintiff also finds support for its position from the decision of Master Short in Maplecrete Group Ltd. v. Canning, 2009 CanLII 30137 (ON SC), where, in the absence of evidence of “even the barest bones of the facts supporting a defence”, it was deemed not appropriate to set aside a default judgment.

[45] The defendants are, of course, hampered in their ability to adduce evidence of an arguable defence, given the death of Mr. Muddiman. Furthermore, as submitted by the defendants and accepted by the motion judge, in some circumstances it will not be necessary to show an arguable case where the plaintiff has taken actions without notice to the defendants.

[46] The Court of Appeal’s decision in Male v. Business Solutions Group (2013), 2013 ONCA 382 (CanLII), 115 O.R. (3d) 359 (C.A.) is on point. In that case, a dispute had arisen between partners. The plaintiff claimed that he had been expelled from the premises of the partnership of which he was a member in violation of s. 25 of the Partnerships Act, R.S.O. 1990, c. P.5. In an action which he commenced on 22 November 2011, he claimed continuing payment of his share of the partnership profits. He sought an interim injunction obliging the partnership to continue paying him. On 14 December 2011, both the plaintiff’s motion for an injunction, and a motion brought by the other partners to transfer the action to the Small Claims Court, to stay the action under the Arbitration Act, and to move the action to Toronto, were dismissed. Mere hours after that decision had been handed down, the plaintiff noted the defendants in default. The plaintiff’s lawyer advised the defendants’ lawyer that he had done so two days later. On 21 December 2011, the defendants moved for leave to appeal from the decision refusing to stay the action and transfer it to Toronto. However, on 10 January 2012, the plaintiff obtained default judgment. The lawyer for the plaintiff did not notify the defendants’ lawyer that default judgment was being sought, despite the defendants having served their motion for leave to appeal. On 13 January 2012, the defendants moved to set aside the default judgment.

[47] A motion judge refused to set aside the default judgment on the basis that:
a. The defendants’ lawyer had maintained that he would not be filing a statement of defence; and

b. The defendants appeared to be content to repeat their mantra of the applicability of the arbitration clause without doing anything to advance or address the resolution between the partners, an approach which the motion judge referred to as “an example of technical approach without substance”.
[48] The Court of Appeal concluded that the default judgment ought to have been set aside as a matter of justice, without an inquiry into the merits of the defence, finding, first, that the motion judge had erred in principle by failing to take into account the fact that the defendants were actively defending the case at the time the noting in default occurred and at the time the default judgment was taken out. Second, in the circumstances, it was unreasonable for the lawyer for the plaintiff to have noted the defendants in default and to have pursued default judgment without notice to the defendants’ lawyer, with whom he was actively engaged, when he knew that the defendants were defending.

[49] The Court of Appeal referred, with approval, to the Advocates’ Society’s publication The Principles of Civility for Advocates (Toronto: Advocates’ Society, 2019), s. 19 of which provides:
Subject to the Rules of Practice, advocates should not cause any default or dismissal to be entered without first notifying opposing counsel, assuming the identity of opposing counsel is known.
Additionally, the court comments interestingly on default litigation practice:
[62] Aside and apart from what The Principles of Civility for Advocates recommends, it is always prudent for a lawyer representing a party intending to move for default judgment to notify a represented defendant before the motion is heard. If doing so prompts a response which obviates the need for the motion to be heard, thereby avoiding the wasting of time and resources, all parties benefit. If, on the other hand, the defendant, although notified, does nothing in response, the task of the defaulting party subsequently obtaining an order setting aside the default judgment will be made that much harder.

[63] Indeed, Rule 19.02 provides that although a defendant who has been noted in default is not entitled to notice of any step in the action, including a motion for judgment, this is subject to the proviso, in subrule 3, that the court may order otherwise. As D. M. Brown J. stated in Elekta Ltd. v. Rodkin, 2012 ONSC 2062, at para. 10, by far the better practice is to serve the default judgment motion materials on the defendant in any event. This allows the judge hearing an undefended trial, or a motion for judgment, to be satisfied that the defaulting defendant was provided with proper notice of the claim and of the pending motion or hearing for judgment. A number of other authorities to similar effect were conveniently summarised by Sanfilippo J. in Casa Manila Inc. v. Iannuccilli, 2018 ONSC 7083, at para. 12.

[64] In assessing the effect of setting aside the default judgment on the administration of justice, the motion judge was significantly, and in my view correctly, influenced by the conduct of the plaintiff’s lawyer. As the motion judge noted, the integrity of the administration of justice depends greatly upon the civil interaction between lawyers. The defendants were legally represented. The plaintiff’s lawyer knew that. Prior to noting the defendants in default and obtaining default judgment, the defendants’ lawyers should have been advised.

[65] If anything, the motion judge’s conclusion that failing to set aside the default judgment would negatively impact upon the integrity of the administration of justice understates the position.

[66] As set out in the foregoing paragraphs, there are also many other things which the plaintiff’s lawyer should have, but failed, to do. He not only failed to adhere to the principles of civility. He misled the court. He manipulated the court’s process. He obtained for his client a judgment that his client would simply not have been entitled to obtain, had the Rules of Civil Procedure been properly followed.
. Ken Jackson Construction Limited v. Macklin

In Ken Jackson Construction Limited v. Macklin (Ont CA, 2017) the Court of Appeal allows an appeal from the denial of a motion to set aside a default judgment issued by the court registrar:
[2] We agree that the motion judge erred and that his decision should be set aside, for the following reasons.

[3] Firstly, the Registrar signed judgment against the individual appellants for the amounts of the invoices billed to the corporate appellant. The claims pleaded by the respondent against the individual appellants were for breach of trust and conversion. There was no basis pleaded that would make the individual appellants liable for invoices billed to the corporation. The respondent did not seek to pierce the corporate veil: see Mitchell v. Lewis 2016 ONCA 903. In any event, personal liability like this would not amount to a “debt or liquidated demand in money” within the judgment signing jurisdiction of the Registrar: see Rules of Civil Procedure, R.R.O. 1990, Reg. 194, r. 19.04(1).

[4] Secondly, the Registrar had no jurisdiction to grant judgment against the individual appellants on the claim against them for breach of trust and conversion, as this was also not for “a debt or liquidated demand in money.”

[5] Specifically, in its statement of claim, the respondent sought unspecified damages for breach of trust and conversion. It did not plead any facts which would have allowed a court to conclude that the appellants had misapplied trust funds or the amount of any wrongful use of trust funds. Moreover, it is clear from the statement of claim that the claim against the individual appellants is merely contingent; it is only in the event that they have failed to retain sufficient trust funds that the claim is made. To that end, the respondent sought an accounting.

[6] Further, the Registrar erred in awarding interest on the judgment against the appellants at the rate of 2 per cent per month when the statement of claim failed to plead the respondent's entitlement to such a rate. There was no basis pleaded in the statement of claim that would allow interest to be awarded at a rate other than in accordance with ss. 128 and 129 of the Courts of Justice Act, R.S.O. 1990, c. C.43.

[7] In summary, where, as here, with respect to the liability of the individual appellants and the rate of interest claimed, the statement of claim did not contain the particulars required to sign default judgment for a debt or liquidated demand of money, the default judgment is granted without jurisdiction. The appellants were entitled to have the judgment set aside as of right in the interests of justice. See Schill & Benninger Plumbing and Heating v. Gallagher Estate, 2001 CanLII 24134 (ON CA), [2001] O.J. No. 260 (C.A.), paras. 8-10. The motion judge erred in not doing so.

[8] Where a Registrar has jurisdiction to sign default judgment, a motion judge has discretion to set aside a default judgment after weighing and balancing the following five factors, which were set out in Intact Insurance Co v. Kisel, 2015 ONCA 205, 125 O.R. (3d) 365, at para. 14:
(a) whether the motion was brought promptly after the defendant learned of the default judgment;

(b) whether the defendant has a plausible excuse or explanation for the default;

(c) whether the defendant has an arguable defence on the merits;

(d) the potential prejudice to the defendant should the motion be dismissed, and the potential prejudice to the plaintiff should the motion be allowed; and

(e) the effect of any order the court might make on the overall integrity of the administration of justice.
[9] Here, the Registrar had jurisdiction to sign judgment against the corporate appellant for the amounts invoiced to it by the respondent. Although the motion judge enumerated the five well-known criteria from Kisel, he applied them too rigidly and erred in failing to consider the overarching factor of whether the justice of the case required him to allow the action to be adjudicated on its merits.

[10] The appellants' evidence met the air of reality test and demonstrated an arguable defence on the merits in relation to the issues of whether the respondent’s action was statute-barred, whether the rate of interest claimed was sustainable and whether there was any claim for breach of trust against the individual appellants. Further, the respondent filed no evidence that it would suffer any prejudice if the noting in default and default judgment were set aside.

[11] Having regard to the arguable defences on the merits and absence of prejudice, as well as the relatively short delay of about four months between the service of the statement of claim and the appellants' retaining counsel to deal with the claim, together with the appellants' explanation for the delay, the criteria to set aside the noting in default and default judgment are satisfied.

[12] The motion judge erred in principle, and his exercise of discretion refusing to set aside the noting in default and default judgment was unreasonable.
. Intact Insurance Company v. Kisel

In Intact Insurance Company v. Kisel (Ont CA, 2015) the Court of Appeal conveniently set out the different tests for setting aside a noting in default, and a default judgment:
[12] Rules 19.03(1) and 19.08(1) provide the basis for setting aside a noting of default and a default judgment, respectively. Both rules give the court discretion to set aside the default “on such terms as are just.” This court has held that the tests to be met under these rules are not identical. See Metropolitan Toronto Condominium Corp. No. 706 v. Bardmore Developments Ltd. (1991), 1991 CanLII 7095 (ON CA), 3 O.R. (3d) 278 (Ont. C.A.), at pp. 284-85.

[13] When exercising its discretion to set aside a noting of default, a court should assess “the context and factual situation” of the case: Bardmore, at p. 285. It should particularly consider such factors as the behaviour of the plaintiff and the defendant; the length of the defendant’s delay; the reasons for the delay; and the complexity and value of the claim. These factors are not exhaustive. See Nobosoft Corp. v. No Borders Inc., 2007 ONCA 444 (CanLII), 225 O.A.C. 36, at para. 3; Flintoff v. von Anhalt, 2010 ONCA 786 (CanLII), [2010] O.J. No. 4963, at para. 7. Some decisions have also considered whether setting aside the noting of default would prejudice a party relying on it: see e.g. Enbridge Gas Distribution Inc. v. 135 Marlee Holdings Inc., [2005] O.J. No. 4327, at para. 8. Only in extreme circumstances, however, should the court require a defendant who has been noted in default to demonstrate an arguable defence on the merits: Bardmore, at p. 285.

[14] On a motion to set aside a default judgment, on the other hand, the court considers five major factors, one of which is whether the defendant has an arguable defence on the merits. The five factors are:
(a) whether the motion was brought promptly after the defendant learned of the default judgment;

(b) whether the defendant has a plausible excuse or explanation for the default;

(c) whether the defendant has an arguable defence on the merits;

(d) the potential prejudice to the defendant should the motion be dismissed, and the potential prejudice to the plaintiff should the motion be allowed; and

(e) the effect of any order the court might make on the overall integrity of the administration of justice.
Again, these factors are not rigid rules. The court has to decide whether, in the particular circumstances of the case, it is just to relieve a defendant from the consequences of default: Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194 (CanLII), 372 D.L.R. (4th) 526, at paras. 48-50.
. Mountain View Farms Ltd. v McQueen

In Mountain View Farms Ltd. v McQueen (Ont CA, 2014) the Court of Appeal re-stated the law on setting aside default judgments, as follows:
[47] The court’s ultimate task on a motion to set aside a default judgment is to determine whether the interests of justice favour granting the order. The approach to be taken to this determination has been considered numerous times by this court. The following draws heavily on the summary of the principles in those cases by Perell J. in Watkins v. Sosnowski, 2012 ONSC 3836 (CanLII), 2012 ONSC 3836, at paras. 19-20 and 23-24.

[48] The court must consider the following three factors:
(a) whether the motion was brought promptly after the defendant learned of the default judgment;

(b) whether there is a plausible excuse or explanation for the defendant’s default in complying with the Rules; and

(c) whether the facts establish that the defendant has an arguable defence on the merits.
[49] To this list, I would add the following two factors the court should have regard to, as set out in Peterbilt of Ontario Inc. v. 1565627 Ontario Ltd. 2007 ONCA 333 (CanLII), 2007 ONCA 333, 87 O.R. (3d) 479 (C.A.), at para. 2:
(d) the potential prejudice to the moving party should the motion be dismissed, and the potential prejudice to the respondent should the motion be allowed; and

(e) the effect of any order the court might make on the overall integrity of the administration of justice.
[50] These factors are not to be treated as rigid rules; the court must consider the particular circumstances of each case to decide whether it is just to relieve the defendant from the consequences of his or her default.

[51] For instance, the presence of an arguable defence on the merits may justify the court exercising its discretion to set aside the default judgment, even if the other factors are unsatisfied in whole or in part. In showing a defence on the merits, the defendant need not show that the defence will inevitably succeed. The defendant must show that his or her defence has an air of reality.
. Zeifman Partners Inc. v. Aiello

In Zeifman Partners Inc. v. Aiello (Ont CA, 2020) the Court of Appeal set out the test for setting aside a default judgment:
[21] In her reasons, the motion judge correctly identified the factors that a court must take into account in deciding whether to set aside a default judgment. Those factors are set out in this court’s decision in Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194, 119 O.R. (3d) 561, at paras. 48, 49. They are:

1. whether the motion was brought promptly after the defendant learned of the default judgment;

2. whether there is a plausible excuse or explanation for the defendant's default in complying with the Rules;

3. whether the facts establish that the defendant has an arguable defence on the merits;

4. the potential prejudice to the moving party should the motion be dismissed, and the potential prejudice to the respondent should the motion be allowed; and

5. the effect of any order the court might make on the overall integrity of the administration of justice.


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