In this week’s blog, Marcus Rozsa discusses the low bar for setting aside both a noting in default and default judgement, as demonstrated in two recent Superior Court of Justice motions. He explains, however, that if the circumstances call for it, the courts will not always grant the relief sought by the default party.
In IQFA Logistics v Thompson, 2023 ONSC 4937 (Released August 30, 2023), the Plaintiff opposed the Defendant’s motion to have a noting in default set aside. The action arose out of an alleged breach of the Defendant’s obligation to provide the Plaintiff with vacant possession of a property on the date of closing. The Plaintiff purported that the Defendant left “junk” throughout the property he sold to him which resulted in a delay in having the property surveyed. The facts showed that the Defendant was served with the Statement of Claim on August 6, 2022 and noted in default on September 8, 2022. He retained litigation counsel on October 11, 2022 and served a Notice of Intent to Defend the following day. The Plaintiff argued that the Defendant failed to explain the delay between August 6 and October 11 and/or show extraordinary circumstances that prevented him from responding within the time prescribed by the Rules of Civil Procedure. The Plaintiff also argued that the Defendant had been aware of the claim since June 2022 but evaded service by instructing his real estate lawyer not to accept service and refusing to provide a personal address for service. The Defendant countered by merely asserting that he was searching for litigation counsel during the period of non-compliance.
While acknowledging that the Defendant did not comply with the Rules and may have evaded service, the court deemed the circumstances appropriate to set aside the noting in default. The court noted that although the Defendant had a real estate lawyer at the time of service, he did not have litigation counsel. The court did not require the Defendant to demonstrate extraordinary personal circumstances preventing him from filing a defence. The fact that he was searching for litigation counsel was a sufficient reason to set the noting in default aside. The court also emphasized the long-standing approach of allowing cases to be decided on their merits as opposed to a technical breach of the Rules.
The court in Sieta & Pikes Development Limited v. 2573138 Ontario Ltd., 2023 ONSC 4974 (Released August 31, 2023) considered a Defendant’s motion to set aside a default judgement. The underlying claim was brought by an undischarged bankrupt and a company that she incorporated. The Plaintiffs issued their Statement of Claim on May 29, 2019 and served it on the Defendants on July 2, 2019. On August 2, 2019, the Defendants were noted in default. The Plaintiffs obtained default judgement on September 24, 2019. The judgement was eventually brought to the attention of the Defendants on August 9, 2022. They promptly moved to have it set aside.
The court articulated the five factors to be considered in determining whether a default judgement should be set aside, which are:
- whether the motion was brought promptly after the Defendant learned of the default judgment;
- whether there is a plausible excuse or explanation for the Defendant’s default in complying with the Rules;
- whether the facts establish that the Defendant has an arguable defence on the merits. In this regard, the Defendant needs to show that there is arguable merit to the defence, not that it will succeed;
- 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
- the effect of any order the court might make on the overall integrity of the administration of justice.
The court added that “the factors are not to be treated as rigid rules, rather, the court must consider the particular circumstances of each case to decide whether it is justice to relieve the Defendant from the consequences of his or her default.”
In setting aside the default judgement, the court focused primarily on factor #1. While noting that almost four years passed between the judgement being made and the motion being heard, the facts showed that the Defendants did not become aware of same until August 2022. Upon obtaining that information, they moved quickly to have the motion heard, which the court found to be proper. The court also noted that the Defendants clearly have a defence on the merits. Specifically, the court classified their assertion that the Plaintiffs have no capacity to bring the action in the first place as a strong one. Thus, while acknowledging that the Plaintiffs will face prejudice if the default judgement is set aside, the court found that the Defendants would face even greater prejudice should the inverse conclusion be reached.
Despite the courts’ typical willingness to set aside both noting in defaults and default judgements, the ONCA recently reminded us in 10720143 Canada Corp. v. 2698874 Ontario Inc., 2023 ONCA 463 (and the Superior Court motion that was appealed) that this is not always the case.
The Superior Court action arose out of the Plaintiff advancing funds in excess of $385,000 to an “investor” who fraudulently misappropriated the “investment”. The majority of the advance was supposedly for the purchase of a valuable farm property referred to as the “Keele property”. The proposed investment never transpired and the Plaintiff lost all of the money he had given to the fraudulent investor. The Plaintiff also alleged that a lawyer and his firm knowingly assisted the investor in his defrauding of the Plaintiff.
The Plaintiff commenced a lawsuit against the investor, his shell companies, and the lawyer / law firm in February 2020. A notice of intent to defend was served and filed by counsel for all of the Defendants shortly following the issuance of the Claim. However, despite numerous requests that a Statement of Defence be served, counsel for the Defendants failed to do so. In October 2020, counsel for the Plaintiff advised that the Defendants would be noted in default if a defence was not served imminently. Upon no steps being taken, the Defendants were noted in Default on November 25, 2020. In February 2022, a dual motion was heard. The Defendants brought a motion to set aside a noting in default and the Plaintiff brought a motion for default judgement.
The motions judge noted that in the year and three months between being noted in default and bringing the motion to set the default aside, the Defendants did little in terms of substance. Instead of immediately bringing a motion to set aside the noting in default, counsel for the Defendants brought a series of unusual motions to get off the record for the different entities he was representing. Despite these motions, he remained on record time and time again. Counsel for the Defendants also refused to allow the Defendants to be produced for discoveries and made no intimation that the Defendants were serious about defending the claim on its merits.
The court acknowledged that the conventional approach in motions to set noting in defaults aside is to grant the relief. Quoting Justice Molloy in McNeill Electronics v. American Sensors Electronics Inc., the court noted that “It is not in the interests of justice to strike pleadings or grant judgments based solely on technical defaults. Rather, the Court will always strive to see that issues between litigants are resolved on their merits whenever that can be done with fairness between the parties.” The court also cited the ONCA in Nobosoft Corporation v. No Borders Inc. et al, who held that absent evidence of the parties flouting or abusing the Rules, courts typically set aside the noting of default – especially if their delay is not inordinate and prejudice is not sustained by the Plaintiff.
In this case, the motions judge deemed the circumstances appropriate to not set aside the noting in default. The court emphasized that the Defendants skillfully manipulated both the Plaintiff and the litigation to effectively delay the proceedings and avoid adjudication of the claim on its merits. In doing so, the court held that the Defendants reduced the chances of recovery and compounded the prejudice to the Plaintiff.
On the second part of the motion, the motions judge again ruled against the Defendants, and granted default judgement. The judge summarized his findings as such:
“The plaintiffs’ record provides compelling evidence of a meritorious claim on behalf of parties who have been intentionally and maliciously deceived. That evidence required a substantial answer from the defendants and not merely a minimal procedural response calculated to engender additional delay.”
The court went on to acknowledge the less-than-onerous test required for the Defendants to set aside the default judgement under Rule 19.08 of the Rules. The case law, including the ONCA decision of Zeifman Partners Inc. v. Aiello, states that while a party must show an arguable case on the merits to set aside a default judgement, they do not need put “their best foot forward.” Nevertheless, the court held that at the very least, there is an obligation on the party to show that an arguable defence on the merits will be provided. In this case, the court opined that there was no evidence to suggest that any meritorious defence will be offered, and that conversely, the conduct of the Defendants reflects “an ongoing, concerted, and to date successful effort to avoid addressing the merits of the case.”
The ONCA upheld the decision of the motions judge on both fronts.
With respect to setting aside the noting in default, the Defendants argued that they demonstrated an intention to defend by serving a notice of intention to defend shortly after the claim was issued. The Defendants also contended that their delay in bringing a motion was attributable to the Plaintiffs not informing them that they had been noted in default and that settlement discussions were ongoing. The court rejected these arguments, noting that the Defendants should have made inquiries into whether they had been noted in default considering the Plaintiffs requested that a Defence be served and warnings had been given. The court added that even if there were genuine settlement discussions transpiring (which the court doubted), the Defendants were still obligated to comply with both the Rules and requests from the Plaintiff that a Defence be served. The ONCA also piggybacked on the motion judges finding that the Defendants exercised delay tactics and should not be rewarded for same.
Regarding the motions judge granting default judgement, the court reiterated that on a motion for default judgment on an unliquidated claim, the moving party is required to demonstrate that they are entitled to judgment on the claim as pleaded, based on a combination of the deemed admissions of fact as pleaded in the claim, and the facts as found, based on the evidence filed on the motion for default judgment. In this case, the court held that the motions judge was adequately satisfied on the evidence in front of him that the lawyer / law firm knowingly assisted their client in his deliberate and continuous misleading of the Plaintiff in respect of the investments. According to the court, it was open to the motions judge to draw inferences from the evidence relating to the lawyer’s knowledge of what was transpiring to conclude that he was an active participant in his client’s fraudulent scheme. The court held that default judgement was properly granted in the circumstances and there was insufficient reason to set it aside.
