The Estate of Goldentuler v. Crosbie et al.

[Indexed as: Goldentuler Estate v. Crosbie]

Ontario Reports

Ontario Superior Court of Justice,

Divisional Court,

Matlow, Kiteley and Whitaker JJ.

November 12, 2014

123 O.R. (3d) 621 | 2014 ONSC 6441

Case Summary

Civil procedure — Setting aside or varying orders — Motion judge erring in invoking inherent jurisdiction of Superior Court in setting aside order of another Superior Court judge striking out statement of defence and counterclaim for failure to pay costs — Motion judge having jurisdiction under rule 59.06(2)(a) to set aside order if prerequisites for setting aside were made out — Moving parties failing to establish that they were entitled to have order set aside — Rules of Civil Procedure, R.R.O. Reg. 194, rule 59.06(2) (a).

The defendants moved to set aside an order striking out their statement of defence and counterclaim for their failure to comply with previous costs orders. They relied on negligent representation by their former lawyer, which they allegedly discovered only after the order was made. Invoking the inherent jurisdiction of the Superior Court, the motion judge granted the motion. The plaintiff appealed.

Held, the appeal should be allowed.

The defendants' motion should have been treated as if it had been brought pursuant to rule 59.06(2)(a) of the Rules of Civil Procedure. The motion judge erred in invoking the inherent jurisdiction of the Superior Court. He had jurisdiction under rule 59.06(2)(a) to set aside the order if the prerequisites for doing so were made out. His finding that the defendants did absolutely nothing to protect themselves from the consequences of their former lawyer's negligent conduct was fatal to the defendants' motion and should have led the motion judge to deny the defendants any relief.

Halton Community Credit Union Ltd. v. ICL Computers Canada, [1985] O.J. No. 101, [1985] O.C.P. No. 133, 8 O.A.C. 369, 1 C.P.C. (2d) 24 (C.A.), consd

Other cases referred to

Goldentuler Estate v. Crosbie, [2012] O.J. No. 602, 2012 ONSC 926 (S.C.J.)

Statutes referred to

Courts of Justice Act, R.S.O. 1990, c. C.43, s. 6(1) [as am.]

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rules 19.08, 57.03, (2), 59.06(2)(a) [page622]

APPEAL from an order setting aside an order striking out a statement of defence and counterclaim.

Karl Girdhari, for plaintiff/appellant.

John J. Adair, for defendants/respondents.

The judgment of the court was delivered by

MATLOW J.: —

This Appeal

[1] This is an appeal by the plaintiff, pursuant to leave granted by Justice M.F. Brown, from the order of Justice Edwards dated February 7, 2012 [[2012] O.J. No. 602, 2012 ONSC 926 (S.C.J.)]. By that order, Justice Edwards (the "motion judge") set aside the order of Justice Ferguson dated January 8, 2008, by which, pursuant to rule 57.03(2) [of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194], Justice Ferguson struck out the statement of defence and counterclaim of the defendants for their failure to pay costs previously ordered by other judges at various stages of this action.

[2] Justice Brown, in paras. 22 and 28 of his endorsement, viewed Justice Edwards' earlier order of June 17, 2011, in which Justice Edwards addressed issues relating to his jurisdiction, as an integral part of the order in appeal and, on his own motion, granted leave to appeal that order as well. There is no indication that either counsel made any objection before Justice Brown and neither counsel raised any objection before us. Accordingly, in this appeal, both orders and both reasons should be viewed, collectively, as components of the order of February 7, 2012, to which I will refer below as the "order in appeal".

This Action

[3] The order in appeal was made in an action commenced on March 15, 2007, by the late Henry Goldentuler ("Goldentuler"), a lawyer who employed the defendant Koskie as a lawyer and employed the other personal defendants in other capacities. When a dispute developed between Goldentuler and the personal defendants, the latter left their employ with Goldentuler, taking with them, without his knowledge, files that they had been working on and formed a new association in a new law firm created by the defendant Koskie, the defendant KLC Firm (Corporation). It was in consequence of the removal of the files that Goldentuler brought this action for damages and other relief. [page623]

[4] Goldentuler died on October 5, 2008, and the action now proceeds in the name of his estate.

The Applicable Standard of Review

[5] Throughout these reasons, it will be shown that Justice Edwards invoked his inherent jurisdiction rather than his jurisdiction pursuant to rule 59.06(2)(a) and conducted the hearing of the motion before him on a wrong basis. This led him to reach conclusions in his reasons and in his final disposition that reflected serious errors of law. Those errors are addressed throughout these reasons. The standard of review that must now be applied to the order in appeal is that of correctness. In my view, it does not meet that standard.

The Disposition of this Appeal

[6] For the reasons that follow, the appeal is allowed and the order in appeal is set aside. The order of Justice Ferguson is, therefore, restored.

The Scope of this Appeal

[7] During my preparation of these reasons, I realized that there was no copy of a formal order reflecting the order granting leave to appeal in the material before us. It now appears that none was obtained.

[8] Nor is there a copy of any notice of motion from the defendants that might have set out the basis on which their motion before Justice Edwards was brought. Having regard to the circumstances, it is likely that none ever existed.

[9] The scope of the leave to appeal granted was addressed in paras. 14 to 27, inclusive, of Justice Brown's endorsement. In para. 19, he stated that "this is a case that would benefit from appellate review of the principles regarding the inherent jurisdiction of the Superior Court" and that, in his view, "there is indeed a point of principle involved in this case" which he went on to describe as "the appropriate parameters of a motions judge to invoke the inherent jurisdiction of the Superior Court in circumstances where the Court of Appeal has dismissed the moving party's appeal, albeit administratively". In para. 20 of his reasons, he described the point of principle as whether "the fact that a party's appeal has been administratively dismissed by the Court of Appeal is a factor for a motions judge to consider in the exercise of his or her discretion in invoking the inherent jurisdiction of the Superior Court or is it a bar to invoking the inherent jurisdiction of the Superior Court at all"? [page624]

[10] In the absence a formal order reflecting Justice Brown's order, it is my view that the scope of the leave granted included all factors relevant to whether Justice Edwards was entitled to invoke his inherent jurisdiction in the circumstances of this case. This view is supported by the wide range of submissions made by both counsel without objection. It would serve no useful purpose to require counsel for the plaintiff to obtain a formal order now.

[11] Counsel for the plaintiff, in para. 2 of his factum, described what he considered to be the issues in this appeal as follows:

The two issues that need to be determined in this Appeal are:

(1) Did the learned motions judge have jurisdiction to overturn an Order of another judge of the same level that was made under rule 57.03? and

(2) If the answer to the first question is yes, then the second question is did the learned motions judge apply the test under rule 19.08 correctly?

[12] It is the plaintiff's position that Justice Edwards did not have such jurisdiction.

[13] Counsel for the defendants, in para. 1 of his factum, stated that there is only one issue in this appeal, which he described as follows:

(1) The single issue on this appeal is whether the Superior Court's inherent jurisdiction includes the power to set aside a prior order of the Superior Court, even where that prior order was the subject matter of an appeal.

[14] It is the defendants' position that a judge of the Superior Court does have inherent jurisdiction to set aside but not to overrule a prior order of another Superior Court judge.

Justice Edwards' Jurisdiction

[15] Rule 59.06(2)(a), to which much reference will be made below, reads as follows:

Setting aside or varying

(2) A party who seeks to,

(a) have an order set aside or varied on the ground of fraud or of facts arising or discovered after it was made;

may make a motion in the proceeding for the relief claimed.

[16] The motion before Justice Edwards should, in the circumstances, have been treated as if it had been brought pursuant to [page625] rule 59.06(2)(a). Justice Edwards had jurisdiction pursuant to this rule to set aside the order of Justice Ferguson, and it was unnecessary and wrong for him to invoke the inherent jurisdiction that all Superior Court judges possess.

[17] In particular, it was not open to Justice Edwards to invoke his inherent jurisdiction in the face of explicit statutory provisions that provided for two types of attack on such orders as that of Justice Ferguson, namely, s. 6(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43, which confers appellate jurisdiction on the Court of Appeal; and rule 59.06(2)(a), which confers jurisdiction on judges of the Superior Court to set aside orders made by other judges in certain specific circumstances. To create yet another avenue by which Justice Ferguson's order could be attacked would have required further legislative authority that did not exist.

[18] The defendants' motion before Justice Edwards was based on certain parts of the negligent legal representation provided by their former lawyer, Elkin, some of which they claimed to have discovered only after the order of Justice Ferguson was made. It was fresh evidence of that negligence that they sought to adduce on the motion. The defendants' right to bring such a motion was independent of the right that they had exercised unsuccessfully to appeal Justice Ferguson's order to the Court of Appeal seeking to have it overruled on the basis of some error that had occurred. That appeal was administratively dismissed twice.

[19] If the defendants had correctly succeeded on their motion, it would have been open to Justice Edwards to set aside Justice Ferguson's order. However, as the defendants were not so entitled, there was no alternative for Justice Edwards but to dismiss it.

[20] In these circumstances, Justice Edwards was required to address the following questions:

(1) Did the defendants establish what the law required in order to be entitled to adduce fresh evidence, pursuant to rule 59.06(2)(a), of "facts arising or discovered after" Justice Ferguson's order of June 8, 2008 was made?

(2) On the evidence before him, including any fresh evidence that he correctly admitted, was it open to him to set aside the order of Justice Ferguson?

(3) If it was, subject to question 4, should he exercise his discretion by setting aside Justice Ferguson's order?

(4) Regardless of the answers to the above questions, were the defendants disqualified from obtaining any discretionary [page626] relief because they knew, or should reasonably have known, of the negligent conduct of Elkin in the conduct of their litigation but failed to take reasonable steps to minimize the harm that he had caused?

The Motion Judge's Reasons for Decision

[21] In the balance of these reasons, I propose to examine the order in appeal and the reasons given further.

[22] With respect, they reflect the effort of an able and dedicated judicial colleague to achieve a result that he considered just in the face of law that did not permit it.

[23] Throughout the discussion that follows, I have copied and indented large portions of both sets of Justice Edwards' reasons and I have inserted various observations in differently indented paragraphs below the text to which they refer. The paragraph numbers set out in Justice Edwards' reasons are the same as in his original text.

[24] I will begin by turning to Justice Edwards' reasons for his first order, that of June 17, 2011:

EDWARDS J.

Overview

[1] A defence is struck out for failure to pay various costs awards. An appeal is filed and ultimately the appeal is dismissed as a result of the appellant's failure to perfect the appeal. The appeal is not heard on its merits. The plaintiff then moves before me for what would amount to an uncontested judgment. The defendants seek an adjournment of the plaintiff's motion to allow them time to file material that would explain their various failures in responding to various court ordered costs awards. Underlying their request is the suggestion their former counsel did not inform them of some of the costs awards and did not proceed with an appeal when they believed an appeal had been filed. In short, the defendants will argue they were not well represented by their former counsel.

The Issue

[12] Counsel for the defendants appeared before me without material. This was not his fault as he was essentially retained on the eve of the motion. I raised with counsel the question of whether I had any jurisdiction to entertain the defendants' request for an adjournment, as I was concerned that there was no jurisdiction to hear the defendants given that the order of Ferguson J. striking out the defendants' Statement of Defence was the subject matter of an appeal that had been dismissed, albeit administratively. As such, I expressed real reservation about the defendants' standing.

[25] The plaintiff had earlier complied fully with rule 57.03(2) and had brought a motion on January 8, 2008, on notice, before [page627] Justice Ferguson for an order striking out the defendants' statement of defence and counterclaim for their failure to pay costs previously ordered to be paid by them. Counsel for the defendants did not file any material but appeared and requested an adjournment so he could prepare material. Justice Ferguson exercised the discretion conferred on him by the rule by refusing the request for an adjournment and by ordering that the statement of defence and counterclaim be struck out.

[26] The plaintiff subsequently brought a motion before Justice Edwards on May 24 and 25, 2011 for an assessment of the plaintiff's damages and for final judgment. Just as before, counsel for the defendants did not file any material but appeared and requested another adjournment so he could prepare material that would presumably explain, as Justice Edwards described it, the defendants' "various failures in responding to various court ordered costs awards".

[27] Justice Edwards later determined, correctly, in para. 13 of his reasons, that the administrative dismissals of the defendants' appeal would not be a bar to their bringing a motion before him for an order setting aside Justice Ferguson's order:

[13] The concerns that I raised were responded to by defence counsel in two ways. First, it was suggested that there was jurisdiction under Rule 59.06(2) and, secondly, that the court had an inherent jurisdiction to control its own process so as to prevent an abuse of process. While I do not intend to decide whether the defendants will ultimately be successful in setting aside the order of Ferguson J., I do intend to deal with the larger issue of whether either basis allows a defendant to seek an adjournment of a motion for default judgment.

[28] I interpret this description of the "larger issue" to mean that Justice Edwards intended to deal with whether the defendants were entitled to forestall the granting of a final judgment and be given an opportunity to seek an order setting aside the order of Justice Ferguson. Justice Edwards' reference to "whether either basis allows a defendant to seek an adjournment of a motion for default judgment" is not clear. Any defendant against whom a motion for judgment has been brought is entitled to seek an adjournment of the motion.

Position of the Plaintiff

[14] It goes without saying that the plaintiff argues the defendants have no standing before the court. Their Statement of Defence has been struck out and an appeal of that decision was unsuccessful. As such, it is argued the order of Ferguson J. striking the defence is final. As a secondary argument, the plaintiff argues there is no sworn material before the court to support any of the arguments made by defence counsel. [page628]

Position of the Defendants

[15] Counsel for the defendants found himself in the unenviable position of appearing before me essentially with no sworn evidence to support his position, largely due to the lateness of his retainer and the fact that Mr. E. was not available due to his trial commitment in another court in Newmarket.

[16] Nonetheless, I did have the benefit of the transcript of Mr. E.'s sworn evidence taken before a panel of the Law Society on May 4, 2011. ["Mr. E." was Mr. Elkin, the defendants' former counsel.] This evidence was taken in connection with an application of Mr. Crosbie to become a licensed paralegal. It appears from this transcript that one of the concerns of the Law Society was the failure of Mr. Crosbie to abide by court orders -- specifically the various orders referenced above that required him and the other defendants to pay costs. The Law Society heard from Mr. E as to what he had, or had not, told his clients i.e. the defendants about the costs orders made by DiTomaso J., Boyko, J., and Ferguson, J. Mr. E's sworn evidence ranged from "I thought all the costs awards had been paid" so he was unaware of some of the costs awards as junior counsel hadn't properly reported to him on the results of the various motions. I reproduce below part of Mr. E.'s evidence before the Law Society.

I had no idea there was an outstanding costs award until Mr. Crosbie and I met with you and you told me that there was a major issue in this hearing. I'm still not clear on where they come from. I'm not clear of them. I'm not suggesting they don't exist, but I've not paid them and I've never asked Mr. Crosbie to pay them.

Q. If you were aware of them and the fact that they were outstanding, what would you have done with respect to letting Mr. Crosbie know?

R. I would have told him. I would have requisitioned funds I'd thought that they were reasonable or I would have appealed. I take -- personal and full responsibility for any outstanding order that have been unpaid, because I hadn't known about them, and it would be a much different story if I'd known about them, and it would be a much different story if I'd asked Crosbie, Mr. Crosbie to pay them and he hadn't, and that is not -- that is not the case . . .

THE WITNESS: In circumstances where costs were awarded against Mr. Crosbie, either they were paid or they were appealed or he wasn't made aware of them. And if he wasn't made aware of them I take responsibility for that. It was my fault or it was the fault of members of my firm. I've looked at the docket sheet (inaudible).

So I'm coming here and testifying to the fact that if you're concerned about Crosbie's flaunting a costs award, he didn't even know about it. And if there's any fault that lies here, I'll take the fall for that. This is, I understand, a hearing to determine whether or not Mr. Crosbie should be accepted as a paralegal, and the question is whether or not he flaunted a costs award. He did not.

[17] The essence of Mr. E.'s evidence can be found at page 11 of the transcript when he states:

I've looked at this file now. It's three accordion files of what I can only describe as completely irrational commercial litigation between two [page629] parties who just can't stand each other. And so I was, to be honest with you, hoping it was going to go away.

[18] The thrust of Mr. Adair's argument suggests that his clients were misled by Mr. E. into believing that the Order of DiTomaso J. had been appealed and that they were unaware of the unpaid costs orders that resulted in the Order of Ferguson J. striking their Statement of Defence. Underlying this argument is the suggestion that Mr. E. did not properly handle their litigation. Counsel for the plaintiff argues that should not be the concern of the court, as the defendants may have their remedy against Mr. E. in another proceeding.

[19] While I did not have affidavit evidence from any of the defendants nor did I have an affidavit from Mr. E, there was enough in Mr. E.'s sworn evidence before the Law Society to give me concern about what knowledge if any the defendants had of the various orders that were disobeyed and thus resulted in their defence being struck. There is also enough doubt raised about what knowledge the defendants had of the appeal or intended appeal of the order of DiTomaso J.

[29] Justice Edwards was not entitled to consider small portions of the evidence that were given at a hearing of the Law Society that related only to the defendant, Crosbie. That part of the evidence formed no part of the record before him and was not otherwise admissible. The plaintiff was not a party in the hearing of the Law Society and did not have an opportunity to challenge it by cross-examination or by tendering evidence.

Jurisdiction to Hear the Defendants

[20] Mr. Adair placed reliance on Rule 59.06 (2) which provides:

Setting Aside or Varying

(2) A party who seeks to,

(a) have an order set aside or varied on the ground of fraud or of facts arising or discovered after it was made;

(b) suspend the operation of an order;

(c) carry an order into operation; or

(d) obtain other relief than that originally awarded,

may make a motion in the proceeding for the relief claimed.

[21] I have real reservation about the utility of this rule in the context of what may have happened in this case. Put at its highest if I were to accept the arguments of Mr. Adair that Mr. E. is the real reason why the defendants find themselves in the predicament they are in, it is difficult to see that those facts are facts "arising or discovered after the fact". These words connote a test whereby the moving party could put before the court new evidence that could not have been put forward by the exercise of due diligence, which led to the order of Ferguson, J. Arguably, the defendants could have placed evidence before Ferguson J. that would have called into question their legal representation by Mr. E. and the fact that they were either unaware of some of the costs orders, or thought they were the subject of an appeal. [page630]

[30] Justice Edwards should not have had any reservation about the application of rule 59.06(2)(a) to the defendants' motion. This rule, as is evident from its wording, specifically applies to such a situation. The facts "arising or discovered after the fact" were the facts related to any fresh evidence that the defendants acquired about Elkin's negligent conduct of this litigation after Justice Ferguson had issued his order of January 8, 2008. The evidence of Elkin's negligence acquired prior to the motion before Justice Ferguson could not have constituted "fresh evidence" and could not correctly have been admitted by Justice Edwards.

[31] The fact that the defendants could "arguably" have adduced evidence of their lawyer's negligence at the earlier hearing before Justice Ferguson did not affect the applicability of rule 59.06(2)(a) to the defendants' motion before Justice Edwards. What it did show, significantly, is that the evidence that the defendants wished to tender as fresh evidence was "arguably" not fresh evidence at all and could not correctly be admitted.

[32] Without fresh evidence to adduce, the defendants could not have been entitled to succeed on a rule 59.06(2)(a) motion.

[22] The question then is whether Rule 59.06 can be utilized where the order has been the subject of an unsuccessful appeal. This issue appears to have been dealt with in Warren v Gilbert 2010 Carswell Ont 10218, 266 O.A.C. 344, 2010 ONCA 295 where LaForme J.A. held:

The court confirmed in Aristocrat that even when a judgment of the Superior Court of Justice has been affirmed on appeal, the proper venue for a r. 59.06(2) motion is the Superior Court of Justice. As that court is the proper venue for the hearing of the motion, it is also the proper venue for any request for directions concerning the motion. Moreover, issues arising out of newly discovered documents should also be submitted to the Superior Court of Justice pursuant to a r. 59.06(2) motion. (sic)

[33] I accept this statement of the law as binding both on Justice Edwards and on this court. It supports the finding that he made in para. 23 of his reasons.

[23] Without deciding then whether the defendants will succeed in a motion to vary the Order of Ferguson J., I am satisfied I have jurisdiction to hear the defendants.

[24] I am also satisfied that as the Superior Court of Justice of Ontario is a superior court of justice, it has the inherent jurisdiction to control its own process and to prevent an abuse of process. There is doubt on the limited record before me about what the defendants knew or didn't know because of the inaction of Mr. E in the conduct of this action. It would be wrong to disentitle the defendants from placing before the court evidence to support the arguments made before me. As was so eloquently put by D.M. Brown J. in Abrams v Abrams, 2010 ONSC 2703: [page631]

The Superior Court of Justice of Ontario is a superior court of record possessing "all of the jurisdiction, power and authority historically exercised by courts of common law and equity in England and Ontario." As such, the Superior Court of Justice of Ontario enjoys the inherent, or necessary, powers to regulate and control its own proceedings and to prevent the abuse of its process. This inherent power is recognized, in part, by section 146 of the Courts of Justice Act, which provides that the "jurisdiction conferred on a court . . . shall, in the absence of express provision for procedures for its exercise in any Act, regulation or rule, be exercised in any manner consistent with the due administration of justice".

In sum, the court's inherent jurisdiction, or power, to regulate, manage and control the proceedings before it co-exists with the specific rules of practice in respect of various proceedings. A court's power to control its own process is the sum of both sets of powers. Both sets of powers may operate together, with a court's inherent power ceding only in the face of clear, unambiguous statutory, or regulatory, language that the court cannot manage its process in a specified manner.

[34] To the extent that Justice Edwards concluded that he had jurisdiction pursuant to rule 59.06(2)(a), his conclusion was correct. However, to the extent that he concluded that he was entitled to invoke his inherent jurisdiction as he did, I disagree. His inherent jurisdiction was limited to cases in which there was "jurisdiction conferred on a court and an absence of express provision for procedure for its exercise in any Act, regulation or rule". It did not permit him to disregard the express provisions of rule 59.06(2)(a) and undertake what would have been, in essence, the hearing of an appeal.

[35] The defendants' motion came back before Justice Edwards on December 1, 2011. At the conclusion of the hearing, he reserved judgment and, on February 7, 2012, he granted the order in appeal, setting aside the order of Justice Ferguson and allowing the defendants to file their statement of defence and counterclaim "as previously filed within 30 days from the date hereof".

[36] I turn next to Justice Edwards' reasons for his second order, that of February 7, 2012 [at para. 3].

The Issue

The defendants, who on all accounts were not well served by their former solicitor, have found themselves in the position where not only was their statement of defence struck out, but an appeal in relation to the order striking the defence was also unsuccessful. Specifically, the appeal was administratively dismissed not once, but twice. One might in these circumstances then consider the order striking the defence final, such that the defendants would have no standing when faced with a motion by the plaintiff for judgment and an assessment of damages.

[37] It is never too late to bring a motion pursuant to rule 59.06(2)(a) even in relation to an order that had otherwise [page632] become final. However, any undue delay in bringing the motion may be fatal to the success of the motion [at para. 4]:

The issue of standing was decided by me in reasons that I released on June 17, 2011. Specifically, I agreed with the defendants that there was jurisdiction under rule 59.06 to hear the defendants. As well, I agreed that the Supreme Court of Justice has an inherent jurisdiction to control its own process so as to prevent an abuse of process. I acknowledged that on the limited record that I had before me in May 2011, that there was a doubt as to what the defendants knew or did not know about the action or lack of action of their former solicitor. As such, I gave the defendants standing to argue that the order striking the statement of defence should be set aside.

[38] Once again, Justice Edwards erred in invoking the inherent jurisdiction of the court in the face of rule 59.06(2) (a) and in the absence of evidence of any potential abuse of process. If there had been any such abuse, it was entirely on the part of the defendants in the manner in which they and Elkin conducted this litigation. There is no evidence of any past or contemplated abuse on the part of the plaintiff [at para. 5]:

The fundamental issue that this case presents is at what point in time may a client no longer shield himself or herself behind the failure of their lawyer, such that the court may say that the client should have done more to prevent their defence being struck out. Adopting a sporting analogy: "Three strikes and you're out", one may question whether the analogy applies to the facts of this case, such that while the defendants were given standing to argue that their defence should be reinstated, that on the facts of this case there came a point in time when the defendants should have known that their position was in jeopardy and done more than rely on their former solicitor.

[39] Because the defendants, despite there being clear signs of Elkin's negligence in the conduct of their defence, failed to take reasonable steps to avoid the consequences of his conduct, they were not entitled to any relief and the order in appeal should not have been granted and cannot stand. I will return to this issue in para. 40 and following, below [at paras. 22, 23 and 39-43]:

The Facts

On January 8, 2008, the plaintiff's motion to strike out the defendants' statement of defence and counterclaim and for failure to pay the outstanding costs award referenced above came before Ferguson J. On the morning of the motion but, prior to the actual hearing of the motion, it would appear that Mr. Elkin signed a letter to Mr. Goldentuler, indicating that he would not be attending court as he was not feeling well. Mr. Elkin was intent on having someone attend to adjourn the motion.

This matter did come before Ferguson J. on January 8, 2008, at which time Ferguson J. reviewed the history of the motion before him and the fact that there had been three prior attendances. When the matter was called before Ferguson J., no one had arrived from Mr. Elkin's office. Ferguson, J., having reviewed the history of the matter then struck out the defendants' statement of defence and counterclaim. Approximately an hour later counsel [page633] from Mr. Elkin's office arrived at the courtroom and asked Ferguson J. to hear the motion on its merits. Justice Ferguson read his endorsement to counsel attending for Mr. Elkin and the transcript reveals the following exchange:

The Court: All right. I'll read it to you anyway. "History of this motion. first return November 15th before Justice Jenkins, adjourned to November the 27th pre-emptory on the defendants." -- that's you. The endorsement is on the wrong file. But it's in the court file. "Second return November 27th before Justice Boyko. Mr. Elkin attended and advised the defendants were seeking financing and he requested an adjournment." Sorry, the first adjournment was pre-emptory. Then he requested another one. "Adjourned to January the 2nd. Registrar called counsel for the plaintiff and advised there was no judge for January 2nd. The trial coordinator subsequently called the plaintiff's counsel and advised that Elkin had said new dates of January 8 or 15 were satisfactory. The plaintiff's counsel served a confirmation notice on January the 4th that the motion would be heard on January 8th at 9:30. No one appeared for the defendants at 10:25. The defendants have never filed any material in response to this motion. In my view this is a proper case to make an order under rule 57.03. I order that the defence and counterclaim are hereby struck. I think the bill of costs is high and that the travel time and rate should be reduced. I fix the costs of the three attendances on the motion at $3,100.00 payable forthwith." Then I added, "At 10:35 Ms. Nitchke now attends from Elkin's office and requests an adjournment. She advises that Elkin is 'under the weather' and cannot come and requests an adjournment. She does not know why Mr. Elkin's personal attendance is required. I decline to change my endorsement".

So that's what I'm going to do. I'm not blaming you, but just so you would understand this is not an appropriate way to litigate. It sounds to me like Mr. Elkin is looking to get himself in more trouble.

Ms. Nitchke: I hope not.

The Court: Having read the file, take that message to him from me.

Ms. Nitchke: Okay.

The Court: I hope you don't follow his example. Thank you.

Mr. Goldentuler: Thank you. Your Honour.

The Court: She will make a copy for you.

Ms. Nitchke: Thank you. Your Honour.

Analysis

The defendants make clear throughout their affidavit material and have made clear to me in the very able argument of Mr. Adair that they trusted Mr. Elkin and that their trust was based on a long standing history of having dealt with Mr. Elkin in the past. Accepting for the moment that the defendants, like all clients, can repose this trust in their solicitor to act in their best interest with respect to litigation before the court, the issue as I frame it, is whether there is a point in time that the defendants can no [page634] longer hide behind their trust in their lawyer as a basis for the order that is now being sought?

I frame this issue in the manner as it is clear, even from the defendants' own material and specifically the affidavit of Olga Leyenson, that by mid January 2008 her confidence (and presumably the confidence of the other defendants) in Mr. Elkin was shaken by reason of the news that their statement of defence had been struck out and there were outstanding costs awards. Ms. Leyenson indicates in her affidavit: ". . . I was of the view in the circumstances that Mr. Elkin had made an error, but that he had promised to fix it. I also relied on Mr. Crosbie's long standing relationship with Mr. Elkin and gave Mr. Elkin the benefit of the doubt."

Was it appropriate for Ms. Leyenson and the defendants to give Mr. Elkin the benefit of the doubt? At this point in time, what knowledge did the defendants have with respect to Mr. Elkin's conduct that should have raised serious red flags as to whether Mr. Elkin should be someone in whom the defendants could place their trust to properly appeal the order of Ferguson, J. to the Court of Appeal, such that they had a realistic prospect that the statement of defence would be reinstated, presumably on terms.

The red flags that in my view were clearly within the defendants' knowledge were as follows:

1. Mr. Elkin had entered into a consent order before DiTomaso, J. in April 2007 for the return of the files without instructions from any of the defendants.

2. The defendants had been forced to attend a motion before DiTomaso, J. on September 7, 2008, when they were possibly facing a finding of contempt.

3. Mr. Goldentuler's letter to the Law Society in early January 2008, a copy of which was sent to Mr. Koskie, provided information relating to their statement of defence being struck out (of which they at that point had no knowledge) and the fact that there were outstanding costs awards. Mr. Koskie's response to the Law Society leaves one with the impression that he and the other defendants were content to simply leave the so-called procedural irregularities for Mr. Elkin to handle.

4. In the fall of 2008 Mr. Koskie had taken upon himself to attend at the Court of Appeal office and discovered that the defendants' appeal had been already administratively dismissed on one occasion.

Mr. Koskie in his affidavit notes that the administrative dismissal had been set aside, but the appeal had not been perfected. There is no indication on the material before me that anything else was done by Mr. Koskie or any of the other defendants in relation to Mr. Elkin's perfecting the appeal. In short, I am left with the distinct impression that the defendants, misguided as they may have been in their trust in Mr. Elkin, did absolutely nothing to protect themselves by retaining the services of new counsel to ensure that they would no longer be presented with the types of red flags that they had been presented with on more than one occasion.

[Emphasis in original] [page635]

[40] Justice Edwards' finding that the defendants did "absolutely nothing to protect themselves" from the consequences of Mr. Elkin's negligent conduct, without more, was fatal to the defendants' motion and should have led Justice Edwards to deny the defendants any relief [at para. 44].

Position of the Defendants

The defendants argue that this court, as a Superior Court of Justice, has an inherent power to regulate and control its own process and that, in the circumstances of this case, such power should be exercised in order to achieve a fair trial on the merits of the case. It is suggested that there are no rules in the Rules of Civil Procedure that would prevent this court from exercising its inherent jurisdiction so as to allow the defendants to file their statement of defence. By analogy, it is argued that if a judgment obtained following a default trial can be set aside under rule 19.08, it makes no sense that an order striking a statement of defence cannot also be set aside.

[41] Rule 19.08 had no application or relevance to the motions brought before Justice Edwards. Justice Ferguson's order was not a "default judgment" within the meaning of rule 19.08 as the defendants were not, and could not have been, noted in default as contemplated by the rule. It was a motion in which all parties were represented and could have presented evidence. However, the new counsel for the defendants sought only an adjournment which Justice Ferguson refused as he was entitled to do.

[42] The defendants did not have an absolute "right to a fair trial on the merits of the case". That right was lost when the order of Justice Ferguson was granted because of the conduct of the defendants and their counsel [at para. 45]:

The defendants rely heavily on the decision of the Court of Appeal in Halton Community Credit Union Ltd. v. ICL Computers Ltd. (1985), 1 CPC (2d) 24, where a default judgment had been obtained largely as a result of the inaction of the defendants' solicitor in failing to file a statement of defence. In that regard, the fundamental principle that has been followed since is as follows:

Undoubtedly counsel is the agent of the client for many purposes, including (in most cases) the power to make a binding settlement, but it is a principle of very long standing that the client is not to be placed irrevocably in jeopardy by reason of the neglect or inattention of his solicitor, if relief to the client can be given on terms that protect his innocent adversary as to costs thrown away and as to the security of the legal position he has gained. There may be cases where the plaintiff has so changed his position that this is impossible.

[43] The statements of law set out in Halton Community Credit Union Ltd. v. ICL Computers Canada, [1985] O.J. No. 101, 1 C.P.C. (2d) 24 (C.A.) applied to the motion before Justice [page636] Edwards and were definitive of the proper result of the motion regardless of the disposition of all of the other issues raised.

[44] However, whereas Halton involved a default judgment that was issued against the defendant "largely as a result of the inaction of the defendant's solicitor", the order of Justice Ferguson was not a default order and the motion before Justice Edwards was for an order setting aside an order made by another judge of the same court after hearing from counsel for all parties. The defendants were represented on the motion before Justice Ferguson by another lawyer from Mr. Elkin's office who chose not to make any submissions with respect to the merits of the motion and sought only an adjournment so that he could prepare and file material. The outcome of that motion was not dictated by rule 57.03 but expressly permitted Justice Ferguson to strike out the defendants' statement of defence "or make such order as is just". Justice Ferguson considered the record before him and the submissions of both counsel and concluded that, in the exercise of his discretion, the statement of defence and counterclaim should be struck out [at para. 47]:

Accepting that there has been such neglect and inattention that clearly has jeopardized the defendants, should this court exercise its discretion in the face of what I have described as red flags that demonstrate the defendants had knowledge of some of the events that show Mr. Elkin's lack of attention and neglect?

[45] Having found that the defendants had knowledge of some of Elkin's "lack of attention and neglect", Justice Edwards was required to determine if they nevertheless exercised due diligence [at para. 48]:

The Plaintiff's Position

The plaintiff argues that this court does not have any inherent jurisdiction to set aside the order of Ferguson, J., striking out the defendant's statement of defence. It is argued that rule 59.06(2)(a) does not create a substantive right to set aside a judgment or order and that this rule does not give the court inherent right to vary. With respect, that issue was determined in my reasons of June 17, 2011. Much of the case law to which plaintiff's counsel referred me to relates to cases where one party sought to set aside a judgment on the basis of fresh evidence. These cases rightly point to the due diligence test, but are of little help to the particular facts before me. The cases relied upon by the plaintiff, for the most part, dealt with situations where the matter had been dealt with on the merits after a trial or a summary judgment motion. Both parties were before the court. In the case before me, if I do not grant the relief sought by Mr. Adair, this case will proceed to an uncontested damages hearing.

[Emphasis in original]

[46] Justice Edwards did have jurisdiction pursuant to rule 59.06(2)(a) to set aside the order of Justice Ferguson on the basis [page637] of properly admissible fresh evidence. However, for the reasons set out above, the evidence did not support such an order [at paras. 49-51].

Analysis

If I am to be guided by that fundamental principle of ensuring that a litigant is not to be irrevocably placed into a position of jeopardy because of the neglect of his or her lawyer, what factors should this court consider in exercising its discretion in favour of the defendants, and what factor should be considered against the defendants in refusing to exercise that discretion.

Much guidance can be obtained in answer to those questions by referring to how this court has dealt with motions to set aside the noting in default of a party or default judgment. The following factors are generally accepted as appropriate considerations on such a motion.

1. Has the defaulting party given an adequate explanation for the inaction that led to the default?

2. Does the defendant have an arguable defence?

3.The relative prejudice to the plaintiff and defendant if the default is not set aside.

See Peterbilt of Ontario Inc. v. 1565627 Ontario Ltd. et al, 2007 ONCA 333 (Ont. C.A.)

Explanation for the Delay

As to the explanation as to why the defendants now find themselves in the position they are now in, I have concluded that this is, at best, a neutral factor. While the explanation is largely focused on the neglect and inattention of Mr. Elkin, as I have already noted, the defendants had many red flags that should have alerted them to the failure of their lawyer and how those failures were putting themselves into a position of jeopardy. If this factor alone was the only factor that I was called upon to consider in determining whether to exercise my discretion to set aside the order of Ferguson J., I would have declined to do so. It is not, however, the only factor.

[47] Justice Edwards' finding that the defendants "had many red flags that should have alerted them to the failure of their lawyer and how those failures were putting themselves into a position of jeopardy" required that the defendants' motion be dismissed. There was no other "factor" that could have brought him to a different disposition.

[48] The defendants were not entitled to rely on the judgment in Halton which rested on the Court of Appeal's finding, at p. 3 (QL) of the reasons of Arnup J.A., that, "In this case no fault on the part of the defendant personally is shown, beyond the observation of Mr. Wilkins that the defendant might have paid a lot closer attention to what was happening in its case."

[49] Justice Edwards' finding that the defendants' explanation "is, at best, a neutral factor" and his statement that if it were the [page638] only factor that he had to consider in determining whether to exercise his discretion to set aside the order of Justice Ferguson, he would have declined to do so required that the defendants' motion be dismissed [at paras. 52-53]:

Prejudice

Mr. Girdhari argues that the plaintiff is prejudiced by reason of Mr. Goldentuler's death. It was his law firm that suffered the alleged loss of files that were removed by the defendants in 2007. Without his evidence on both liability and damages issues, it is submitted that the plaintiff has been clearly prejudiced.

The difficulty with this argument is that Mr.Goldentuler died in October, 2008. The action was started in March 2007. There is no evidence before me to suggest that this matter would have been at trial before Mr. Goldentuler died. I can only speculate as to whether discoveries may have been completed before his death but, given the procedural history of this matter, I have concluded that even the completion of discoveries by October 2008 was highly unlikely. As such, if the plaintiff has been prejudiced by reason of Mr. Goldentuler's death, the prejudice was not caused by the defendants. Those cases where parties seek to set aside an act of default that addresses the issue of prejudice, make clear that the prejudice being asserted must be caused by the defaulting party. (See DiMarco v. Moss, [2004] O.J. No. 145, 2004 CarswellOnt. 147 (C.A.)) The unfortunate passing of Mr. Golentuler, and the problems that this may cause for the plaintiff, were not caused by the defendant. On this aspect of the test then, the defendants have satisfied me that there is no prejudice that the plaintiff can rely upon that was caused by the defendants.

[50] It was not open to Justice Edwards to "speculate" on whether the discoveries of Mr. Goldentuler might have been completed before he died and to make it possible for the transcripts to be used as his evidence at trial. It is clear, however, that the motion before Justice Ferguson, and the previous motions on which it was based, delayed the progress of the action including the examinations for discovery and those motions were all caused by Mr. Elkin's negligent conduct of this litigation. Had that delay not occurred, there is no reason to conclude that Mr. Goldentuler's discoveries would not have taken place before he died. Accordingly, Justice Edwards' finding "that there is no prejudice that the plaintiff can rely upon that was caused by the defendants" is not supported by the evidence [at para. 54]:

Defence on the Merits

The last issue that I must consider is whether, on the material before me, the defendants can show a defence on the merits. A defence on the merits must address both liability and damages issues. I am satisfied, from my review of the materials before me, that there will be significant legal and factual damages issues that the court will have to deal with, whether it be by a damages assessment or at trial. Those issues, in my view, are better [page639] addressed in a contested hearing. As such, on this aspect of the test that I must apply, the pendulum is tipped in favour of the defendants.

[51] Justice Edwards erred in equating that "there will be significant legal and factual damages issues that the court will have to deal with" with the requirement that the defendants show a good defence on the merits. Nor is it of significance that those issues are "better addressed at a contested hearing". No proper reason is shown why Justice Edwards concluded that on the requirement of showing a good defence on the merits, "the pendulum" is tipped in favour of the defendants [at para. 55]:

Conclusion

The facts of this case are particularly egregious when it comes to the neglect and lack of attention of the defendants' solicitor that ultimately led to the position the defendants now find themselves in. That said, as I framed the issue at the beginning of these reasons, there may come a point in time when the client can no longer shelter behind their lawyer's neglect, such that the court may say that the client should have done more to avoid having their defence struck out. The facts of this were a close call. Certainly if the only issue I had to consider required the defendants to provide an adequate explanation for why they found themselves in a default position under the rules, I would have found against the defendants. As noted above, while Mr. Elkin clearly shoulders responsibility for having put his clients in jeopardy, there were enough red flags, of which the defendants were clearly aware, that the defendants in my opinion should have done more than simply deferred to Mr. Elkin. This is particularly so given their legal background.

[52] This finding by Justice Edwards, alone, required that the defendants' motion be dismissed [at para. 56]:

The interests of justice in general dictate that litigation between the parties should be decided on the merits and not on a technical basis. While there is no prejudice to the plaintiff in this case, fairness dictates that this case should be decided where both sides can test the issues of liability and damages. The rules are intended to provide a structured framework within which litigation is to be conducted. The rules should not be used, and abused as they were in this case, so as to prolong and add unnecessary costs to the parties. While my order allowing the defendants to re file their statement of defence may be seen by some as adding further cost and prolonging this litigation, in reality my order will, as rule 1.04 dictates, secure the just determination of the proceeding -- albeit perhaps not necessarily the most expeditious and least expensive determination. Fairness must be done between the parties, and this order will allow for such fairness. An order shall issue setting aside the order of Ferguson, J. and allow the defendants to file their statement of defence and counterclaim as previously filed. Such filing shall take place within 30 days of this order.

[53] The order of Justice Ferguson reflected a fair and just disposition of the motion before him having regard to the record before him. There is no absolute right to a trial by a defendant who, by his or her conduct, has lost his or her entitlement. The [page640] defendants, by their motion before Justice Edwards, sought to recover the right to a trial that they had forfeited by their own conduct. Although Justice Edwards had the jurisdiction to grant that relief to the defendants, they failed to provide the required evidence upon which he could properly grant their request [at para. 57]:

In order to assure that this matter proceeds in a timely and orderly fashion, I intend to case manage this case in accordance with the inherent powers that are reviewed at length by D. M. Brown J. in Abrams v. Abrams (2010), 2010 ONSC 2703, 102 OR (3d) 645 paragraphs 46-56. As the issue of case management was not addressed in argument, counsel may consider putting together a timetable, on consent, for my approval by no later than February 20, 2012, or alternatively arrange through the trial co-ordinator a time to address the issue. A timetable that counsel may wish to consider should address the usual procedural timelines for productions, discoveries, completion of all interlocutory motions, exchange of experts' reports and pre-trial. It is my intention to case manage this matter so as to ensure that this case is ready for pre-trial before me by no later than January 31, 2013, and thereafter ready for trial by no later than the Spring sittings 2013.

Conclusions

[54] This case has become unduly complex because the motion before Justice Edwards, and the appeal before us, were argued without sufficient focus on what are the really important issues that required the attention of the courts at both levels. Those issues are those raised in the questions set out in para. 20, above.

[55] For the reasons set out above, the motion judge erred in failing to address those issues. Having conducted the correct analysis, I have concluded that the appeal is allowed and the decision of Justice Edwards must be set aside. The decision of Justice Ferguson is restored and the statement of defence and counterclaim of the defendants is struck.

[56] Counsel may make written submissions with respect to costs by exchanging them and delivering them to the office of this court at Newmarket, in triplicate, within one month following the release of these reasons, failing which no award of costs will be made.

Appeal allowed.