ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: NATURAL ENERGY SYSTEMS INC. Plaintiff – and – DOUGLAS HALLETT Defendant

Counsel: Benjamin Salsberg, for the Plaintiff John S. Curtis, for the Defendant

Heard: January 11, 2019

Endorsement

SANFILIPPO J.

Overview

[1] The plaintiff, Natural Energy Systems Inc. (“NES”), obtained a default judgment against the defendant, Douglas Hallett, on August 15, 2017 in relation to one of the remedies sought by it in this action. Specifically, the Partial Default Judgment ordered the Defendant to pay the sum of $170,000, while allowing the Plaintiff to continue to pursue the balance of the relief sought in its statement of claim.

[2] The Defendant brought this motion to set aside the Partial Default Judgment. The Plaintiff concedes that the Defendant moved promptly upon becoming aware of the default judgment, but contends that Mr. Hallett did not provide a plausible explanation for failing to attend to his defence and failed to prove that he has an arguable defence on the merits. I do not agree.

[3] For the reasons that follow, I have determined that the noting in default and Partial Default Judgment shall be set aside, any writs of seizure and sale issued and registered further to the Partial Default Judgment shall be vacated, and the Defendant is granted leave to deliver his statement of defence and counterclaim within thirty days of the date of this Order. I will impose terms enabling the parties to use the extensive evidence adduced in preparation of this motion in the trial of this action, to maximize efficiencies.

[4] The Defendant’s Notice of Motion sought injunctive relief, which was not pursued in argument and is dismissed. The Defendant’s claim for security for costs was not established and is dismissed. The Defendant’s claim for a stay of this action on the basis of an arbitration clause contained in a unanimous shareholders’ agreement dated November 12, 2008 is dismissed, without substantive determination and without prejudice to the Defendant seeking this relief after the close of pleadings.

A. BACKGROUND

[5] The Defendant deposed that he was the founder of the Plaintiff Corporation, NES, which he claims to have incorporated on November 12, 2008. He says that the NES holds patents that he claims to have originated and assigned to it, for a process for the conversion of organic material to methane rich fuel gas. Mr. Hallett swears that he is an officer, director, shareholder and, indeed, creditor of the Plaintiff Corporation.

[6] Mr. Greenwood, the affiant of the evidence relied on by the Plaintiff, deposed that he is also an officer, director and shareholder of NES. On or about November 12, 2008, Mr. Hallett and Mr. Greenwood are said to have entered into a unanimous shareholders’ agreement dated November 12, 2008 (the “Shareholders’ Agreement”), along with a third investor, Craig McEwen, in furtherance of their participation as shareholders of NES.

[7] Mr. Hallett swears that in the period from the incorporation of NES in 2008 to 2015, he financially supported it with his own funds or funds of corporations owned or controlled by him, such as Hallett Environmental and Technology Group Inc. (the “Hallett Group”), to the extent of approximately $1.7 million. He states, as well, that he holds 1.2 million common shares and 1.0 million preferred shares in NES having, he says, a value of $1 million.

[8] The Defendant states that, on or about March 17, 2014, he obtained security for an amount said to be owed to him by NES pursuant to a General Security Agreement (“GSA”) entered into with NES. The Plaintiff contests the validity of this GSA, stating that it did not learn of it until a year later and that it is invalid because NES does not have obligations to the Defendant that would legitimize the GSA.

[9] The Plaintiff states that in March 2015 it discovered several issues with the Defendant’s conduct, including the GSA. On or about March 9, 2015, a shareholders’ meeting is said to have been held to elect a new Board of Directors. Mr. Hallett complains that this shareholders’ meeting improperly removed him as Chairman of the Board and CEO of NES, contrary to the terms of the Shareholders’ Agreement. The Plaintiff states that the ousting of Mr. Hallett from the Plaintiff Board was conducted properly, in accordance with the Shareholders’ Agreement.

[10] After the events of March 9, 2015, the parties engaged counsel to address the myriad issues that had arisen between them. Mr. Greenwood complained on behalf of the Plaintiff, including in a letter dated March 23, 2015, that Mr. Hallett had failed to return all of the Plaintiff’s records in his possession such that the entirety of the potential issues remained under scrutiny.

[11] Mr. Greenwood produced, on behalf of NES, a seven page letter dated May 25, 2015, from then-counsel for NES to then-counsel for Mr. Hallett, that addressed, amongst other things: the Defendant’s removal from the Board of the Plaintiff; the Defendant’s challenge of the legitimacy of the current Board; the Defendant’s claim that he is owed $1 million by the Plaintiff; the Plaintiff’s challenge to the legitimacy of the GSA; the Defendant’s alleged improper and unauthorized sale of shares in NES to others; the Plaintiff’s suspension of the Defendant’s rights as a shareholder; and the Plaintiff’s allegation that the Defendant has engaged in a pattern of serious misconduct, including its suspicion of misappropriation, which the Plaintiff intended to retain a forensic auditor to investigate. Mr. Greenwood deposed that NES considered that Mr. Hallett’s rights and entitlements under the Shareholders’ Agreement were suspended since “late May 2015”.

[12] Mr. Hallett responded that the actions of Mr. Greenwood and NES were improper and taken in direct contravention of his rights as a shareholder, director and officer and creditor. He denied that his shares were validly suspended and claimed that NES owes money to him. He produced copies of letters sent by his then-counsel asserting his entitlements, and deposed that the Plaintiff asked that he not commence litigation to allow the counsel to negotiate a resolution. Mr. Hallett states that he was gradually and systematically deprived of any cash flow through his removal from NES, which is said to have limited his litigation options.

[13] In the period between 2015 and 2017, the parties were not successful in achieving a resolution of the issues between them.

B. THIS ACTION

Initiation of Litigation

[14] On February 28, 2017, the Plaintiff commenced this proceeding by way of a Notice of Action.

[15] On March 30, 2017, the Plaintiff issued its Statement of Claim, which seeks relief that can generally be categorized as follows:

(a) payment of the amount of $170,000, on the basis of wrongful or improper misappropriation, which I will refer to as the “Claim for Misappropriated Funds”. The amount of the funds said to have been misappropriated by Mr. Hallett was pleaded as $120,000 in the Notice of Action but was increased by $50,000 in the Statement of Claim issued one month later;

(b) an Order and declaration cancelling all securities issued in the Plaintiff Corporation to the Defendant, including the GSA and any common and special or preference shares held by the Defendant. In furtherance of this relief, the Plaintiff also seeks a declaration that the GSA, together with any financing registered further to it, is null and void. I will refer to this group of relief as the “Claim for Cancellation of Securities”, recognizing that it pertains both to the GSA and the Defendant’s alleged share interest.

(c) any such further and other relief, including but not limited to any entitlements and remedies provided for pursuant to the Business Corporations Act, Canada, RSC 1985, c. C-44 (“CBCA”), the Shareholders’ Agreement and the Personal Property and Security Act, Ontario, RSO 1990, c. P.10 (“PPSA”).

[16] On April 15, 2017, the Plaintiff served the Defendant with the Notice of Action and the Statement of Claim.

The Defendant’s Notice of Intent to Defend

[17] On May 3, 2017, Mr. Hallett directed lawyer Bruce Baron to deliver a Notice of Intent to Defend on his behalf and in his name. Mr. Baron did so. The Notice of Intent to Defend specifically stated that the Defendant was acting in person. Indeed, if this was not apparent from the initial Notice of Intent to Defend delivered on behalf of Mr. Hallett at 1:23 p.m. that day, it was emphasized by a revised Notice of Intent to Defend delivered that day at 2:19 p.m. that provided a revised, updated personal address for Mr. Hallett.

[18] Mr. Hallett states that due to lack of financial resources, he did not retain Mr. Baron to act in his defence. The self-represented Defendant did not deliver a Statement of Defence.

The Plaintiff’s Lack of Notice of the Motion for Partial Default Judgment

[19] On May 8, 2017, counsel for the Plaintiff wrote to Mr. Baron to state that the Plaintiff would take no steps to note the Defendant in default provided that a Statement of Defence were delivered by May 31, 2017. The Plaintiff warned that it would pursue default judgment proceedings thereafter, without further notice to the Defendant, if it did not receive a Statement of Defence: “If a defence is not received by that date, I’ve been instructed to undertake default proceedings”.

[20] Mr. Hallett contends that he did not receive any further communication from Mr. Baron, including the Plaintiff’s email of May 8, 2017 stipulating a deadline for delivery of a Statement of Defence, and was thereby not aware that he was at risk of being subject to a default proceeding without further notice.

[21] On June 2, 2017, without any further notice to Mr. Hallett, the Plaintiff noted the Defendant in default. The Plaintiff did not serve Mr. Hallett with the requisition for the noting in default.

[22] On August 15, 2017, without notice to the self-represented Defendant, the Plaintiff brought a motion for partial default judgment.

C. THE MOTION FOR PARTIAL DEFAULT JUDGMENT

[23] The motion for default judgment brought by the Plaintiff on August 15, 2017 was solely in relation to the Plaintiff’s Claim for Misappropriated Funds. The Plaintiff sought partial judgment in the amount of $171,000: owing to a typographical error, this did not coordinate with the entitlement pleaded in the Statement of Claim of $170,000.

[24] In relation to its Claim for Cancellation of Securities, the Plaintiff sought an Order granting it leave to proceed with a further motion to determine the value of the Defendant’s shares in the Plaintiff and directing that the Plaintiff could set off the amount of the Partial Default Judgment as against any purchase price to be paid for the Defendant’s share interest.

[25] The Plaintiff’s motion relied on a five paragraph affidavit sworn on August 3, 2017 by Mr. Greenwood, said to be the current president of NES (the “Greenwood Affidavit”), which stated that the Defendant delivered his Notice of Intent to Defend but had not otherwise defended this action. The Greenwood Affidavit adopted paragraphs 2 through 6 of the Statement of Claim as true. These paragraphs state as follows:

“2. The Plaintiff is a corporation incorporated pursuant to the provisions of the CBCA. Its affairs are governed by the said statute and the provisions of the [Shareholders’ Agreement].

3. The defendant is a natural person residing in the Province of Ontario. At all times material to this action the defendant, in addition to being a shareholder, was also an officer and director of the plaintiff and a party/signatory to the [Shareholders’ Agreement].

4. During the month of March 2015, it was discovered that the defendant had surreptitiously made or caused to be made the following unauthorized withdrawals from the accounts of the plaintiff totaling $170,000 (the “Funds”).

5. The aforementioned unauthorized withdrawal of the Funds by the defendant constitutes a wrongful and unlawful misappropriation of the Funds from the plaintiff. Accordingly, the defendant is duly indebted to the plaintiff in the amount of $170,000, together with interest payable thereon.

6. Also during the month of March 2015, it was discovered that the defendant had without authority, wrongfully, unlawfully, and surreptitiously cause the plaintiff to execute the Purported [General Security Agreement], contrary to the provisions of the CBCA, the constating documents pertaining to the plaintiff, and the terms of the [Shareholders’ Agreement]. The plaintiff further pleads that at no material time did it have any obligations to the defendant which could properly or lawfully give rise to any security interest in the plaintiff’s assets in favour of the defendant.

[26] The Greenwood Affidavit annexed two documents as pertinent to the Plaintiff’s claim for default judgment: the Statement of Claim, and the Shareholders’ Agreement.

D. THE PARTIAL DEFAULT JUDGMENT

[27] On August 15, 2017, Dow J. granted the Plaintiff’s motion for partial default judgment, ordering the Defendant to pay the sum of $170,000 and $1,000 in costs, together with post-judgment interest in the amount of 2% per year, and allowing the Plaintiff to continue to seek the balance of the relief claimed in the Statement of Claim by way of further motion to the Court (the “Partial Default Judgment”).

[28] Paragraph 2 of the Partial Default Judgment states as follows:

THIS COURT ORDERS that the plaintiff is at liberty to continue to seek the balance of the relief claimed in the Statement of Claim including, but not limited to, bringing a further motion to determine the value of the defendant’s share in the plaintiff (the “Defendant’s Interest”) and seeking an Order directing that the plaintiff may set off the amount of $170,000 against any purchase price to be paid by the plaintiff in consideration of the purchase of the Defendant’s Interest, as determined pursuant to the provisions of [the Shareholder’s Agreement]. [Emphasis added]

E. STEPS TAKEN BY THE DEFENDANT LEADING TO THIS MOTION

[29] The Defendant states that he first became aware of the Default Judgment in late August 2017, when contacted by the new Chairman of NES. In October 2017, the Defendant retained counsel to bring a motion to set aside the Partial Default Judgment.

[30] In the last week of October 2017, Mr. Hallett’s lawyer contacted the Plaintiff’s counsel to convey that he had been retained to advise the Defendant in relation to the Partial Default Judgment. On December 1, 2017, this counsel wrote to the Plaintiff’s counsel to again give notice of Mr. Hallett’s intention to bring a motion to set aside the Partial Default Judgment, and did so again on December 13, 2017 and December 18, 2017, without reply.

[31] On February 8, 2018, the Plaintiff stated that it would not consent to the setting aside of the Partial Default Judgment and delivered to Mr. Hallett’s counsel a Notice of Intention to Exercise the Right to Purchase Shares, which purports to be effective December 28, 2017 although executed on February 6, 2018. This was a further step by the Plaintiff to act on the Partial Default Judgment, the first such step having been taken on September 25, 2017, when the Plaintiff registered a Writ of Seizure and Sale against Mr. Hallett with the Sheriff of the County of Frontenac.

[32] On February 15, 2018, one week after receiving the Plaintiff’s Notice of Intention to Exercise the Right to Purchase Shares, the Defendant brought this Motion to set aside the Partial Default Judgment.

[33] In the period from February 15, 2018 to January 11, 2019, the parties engaged in extensive productions and examinations, principally focused on their dispute concerning whether the Defendant had established an arguable defence on the merits. By the time that this motion was argued, the parties had developed a significant record:

(a) On May 28, 2018 and on December 24, 2018, the moving party Defendant filed five volumes of Supplementary Motion Records additional to his Motion Record, containing supplementary affidavits of Mr. Hallett sworn May 9, 2018, and September 28, 2018, additional to his initial affidavit of February 15, 2018;

(b) On January 8, 2019, the Plaintiff filed a three volume Responding Motion Record, containing affidavits of Mr. Greenwood sworn April 23, 2018 and August 23, 2018, additional to his initial affidavit sworn August 3, 2017;

(c) The parties filed transcripts of cross-examinations on affidavits conducted of Mr. Greenwood and Mr. Hallett on October 2, 2018 and November 8, 2018.

[34] The materials show that the Plaintiff continued to deliver answers to undertakings arising from the cross-examinations and further productions pertaining to matters in issue to January 7, 2019, four days before the return of this motion.

F. APPLICABLE PRINCIPLES TO THE MOTION TO SET ASIDE DEFAULT JUDGMENT

[35] The Plaintiff’s motion to set aside the Partial Default Judgment is based on Rules 19.08(2) and (3) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, which provide as follows:

19.08 (2) A judgment against a defendant who has been noted in default that is obtained on a motion for judgment on the statement of claim under rule 19.05 or that is obtained after trial may be set aside or varied by a judge on such terms as are just.

(3) On setting aside a judgment under subrule (1) or (2), the court or judge may also set aside the noting of default under rule 19.03.

[36] The Defendant submits that, in the interests of justice, the Partial Default Judgment ought to be set aside solely on the basis that the Plaintiff moved for default judgment without notice even though the Plaintiff knew, from the protracted dealings between the parties on the very matters raised by the Statement of Claim, that the Defendant intended to defend this action. The Defendant relies on the Court of Appeal’s decision in Male v. The Business Solutions Group, 2013 ONCA 382, 115 O.R. (3d) 359 as authority for his submission that a default judgment ought to be set aside without any inquiry into the cause for the default or the merits of the defence when the plaintiff obtains default judgment without notice to a defendant who the plaintiff knows intends to defend.

[37] The Plaintiff does not dispute that it had a history of dealings with the Defendant concerning issues raised by this action, from 2008 to 2015 in the affairs of NES and from 2015 to 2017 in the dispute over Mr. Hallett’s removal from NES, and that this proceeding is the culmination of the parties’ inability to reach an agreement on these issues. The Plaintiff submits, however, that it provided notice to the lawyer consulted by the Defendant of the time frame within which it would move for default judgment, and had no obligation to also provide notice to the then-self-represented Defendant directly.

[38] My task is to determine whether the interests of justice favour granting an order setting aside the Partial Default Judgment. The Defendant contends that I ought to do so solely on the basis of lack of notice to a party with a demonstrated intention to defend. Should I decline to do so on this ground alone, the parties agree that my determination should be guided by the principles and five factors set out in Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194, 119 O.R. (3d) 561, on which they both rely, in my view correctly, as the governing authority.

[39] In Mountain View at paras. 47-49, the Court of Appeal stated that the court should assess five factors in determining whether the interests of justice require that a default judgment be set aside:

(a) Whether the motion was brought promptly after the defendant learned of the default judgment;

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

(c) Whether the facts establish that the defendant had an arguable defence on the merits;

(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.

[40] The Court of Appeal emphasized, at paras. 50-51, that all factors are not equal and are not intended to be inflexibly applied. The presence of an arguable defence may justify the exercise of discretion to set aside a default judgment even if the other factors are not proven:

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.

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.

[41] I will consider these principles in order.

G. ANALYSIS

(a) Lack of Notice of the Motion for Default Judgment

[42] The first basis relied on by Mr. Hallett in seeking to set aside the Partial Default Judgment is that the judgment was obtained irregularly without notice to a defendant who had demonstrated an intention to defend. He relies on the statement by Borins J., as he then was, in Royal Trust Corp. of Canada v. Dunn (1991), 6 O.R. (3d) 468 (C.J.) at para. 19, that where a default judgment was obtained without the plaintiff following correct procedures, the default judgment can be set aside as a matter of right, without the requirement of establishing a defence to the claim.

[43] In Royal Trust, the plaintiff requisitioned a noting in default and proceeded with a motion for default judgment in circumstances in which the defendant was not yet in default and where the defendant had delivered both a notice of intent to defend and a motion to strike or stay the action. By bringing a motion to strike or stay the action, the defendant had indeed taken a step in the defence of the proceeding. LeBlanc v. York Catholic District School Board (2002), 61 O.R. (3d) 686 and 698 (S.C.J.) states at para. 21 that “It is well accepted that the bringing of a motion before the court to obtain a stay or the dismissal of an action is recognized as a step in the defence of the proceeding.”

[44] The Defendant also points to Male, in which the Court of Appeal similarly determined, at para. 17, that a default judgment should be set aside as a matter of right, without inquiry into the defence, when the plaintiff moved for default judgment even though the defendant had advanced motions for orders transferring the proceeding or staying it in favour of arbitration. These steps showed that the defendants were actively defending the case at the time that the default judgment was sought. The Court of Appeal also emphasized, at para. 18, that it was unreasonable for the plaintiff to move for default judgment without notice to the defendant with whom he was actively engaged, knowing that the defendant intended to defend.

[45] I adopt the principles set out in these cases, but have determined that the record before me does not contain evidence that would allow for the application of these principles to set aside the Partial Default Judgment as a matter of right. Unlike the defendants in the cases referred to, Mr. Hallett did not take any step to defend this action apart from delivering a Notice of Intent to Defend. While I am mindful that Mr. Hallett’s protracted history of disputing the Plaintiff’s claims was known to the Plaintiff and ought to have resulted in an understanding that he intended to proceed with a defence, Mr. Hallett did not take steps to do so. Further, he did not take any steps to notify the Plaintiff that his lack of finances and health challenges prevented him from advancing any such steps within the time period required by the Rules.

[46] I do not accept Mr. Hallett’s submission that NES did not provide any warning that Mr. Hallett would be noted in default. It did so through its counsel’s email to the counsel consulted by Mr. Hallett with the expectation that this caution would be conveyed to Mr. Hallett. I agree that NES could reasonably rely on this communication to counsel appearing, albeit in a limited capacity, on behalf of Mr. Hallett.

[47] The Plaintiff is correct that Rule 19.02(3) provides that NES was not required to provide Mr. Hallett with notice of the motion for default judgment: “Despite any other rule, a defendant who has been noted in default is not entitled to notice of any step in the action and need not be served with any document in the action, except where the court orders otherwise.” In Casa Manila v. Iannuccilli, 2018 ONSC 7083, I explained why I believe that the “better practice” is to provide the defendant who has been noted in default with notice of the motion for default judgment. This motion to set aside the Partial Default Judgment is a cogent example of how all parties would have benefitted, in cost-effectiveness and efficiencies, had NES provided notice of its motion for default judgment to Mr. Hallett. While NES met strict procedural requirements, the lack of notice to Mr. Hallett resulted in issues being advanced in this motion to set aside a default judgment that would have been brought forward in a more timely and efficient manner in response to the motion for default judgment.

[48] Because he did not take any step to advance his defence beyond delivery of a Notice of Intent to Defend, including not communicating with the Plaintiff concerning the timing for delivery of his statement of defence and his continued intention to do so beyond the time deadlines set out by the Rules, the Defendant did not take an active step in his defence. The Plaintiff was entitled to proceed in the manner that it did. As such, I find that the Defendant is not entitled to have the Partial Default Judgment set aside as a matter of right, but rather must satisfy me that I should exercise my discretion to do so.

(b) Application of the Principles set out in Mountain View

[49] In assessing whether the interests of justice require that I exercise my discretion to set aside the Partial Default Judgment, I will now consider each of the factors set out in Mountain View and assess them in the context of the applicable principles.

(i) The Requirement to Act Promptly

[50] I accept Mr. Hallett’s sworn affidavit evidence that he became aware of the Partial Default Judgment in late August 2017, after speaking with the new Chairman of NES, Mr. Dragan Matovic. If NES disputed this evidence, it could have led evidence from Mr. Matovic, but did not do so.

[51] The Defendant moved promptly to set it aside the Partial Default Judgment. Mr. Hallett explained that he retained counsel in October 2017 to bring a motion to set aside the Partial Default Judgment. He says that he was not able to do so earlier due to health issues and financial constraints that resulted from his removal from NES.

[52] The Plaintiff does not take any issue with the promptness with which the Defendant moved to set aside the Partial Default Judgment.

(ii) Plausible Explanation for the Defendant’s Default

[53] Some two-and-a-half months passed from the deadline imposed by NES for Mr. Hallett to deliver his statement of defence, namely May 31, 2017, to the rendering of the default judgment on August 15, 2017. Mr. Hallett deposed that he did not know of the deadline, as it had neither been communicated to him directly by NES nor conveyed to him by the limited retainer counsel with whom he had consulted. Mr. Hallett thought that he had time to plead a defence. Assessing this evidence contextually, I am prepared to accept Mr. Hallett’s testimony on this point. The dispute between him and NES was long-standing and did not, at that time, exhibit any particular urgency, such that I accept that he was not aware that NES intended to rely strictly on the time parameters set out by the Rules for the delivery of his defence pleading.

[54] This is not to condone Mr. Hallett’s failure to take steps in his defence other than delivery of a Notice of Intent to Defend, or to otherwise communicate with counsel for NES in this time period. However, I accept that Mr. Hallett had challenges both financial and health-related that provide a plausible explanation for his default in defence during this time period.

(iii) Arguable Defence on the Merits

[55] The moving party Defendant is not required to prove his defence. As the Court of Appeal stated in Mountain View at para. 51, he does not have to establish that his defence “will inevitably succeed” at trial, but rather is required to file evidence to show that the defence that he seeks to assert has an “air of reality”.

[56] It is important to note that the Defendant is not required to establish that he has an arguable defence to all of the claims pleaded in the Statement of Claim in circumstances, such as the present, where the default judgment that is sought to be set aside relates to only one of the claims. Rather, the Defendant must show that he has an arguable defence (a defence with an “air of reality”) to the claim in regard to which the Partial Default Judgment has been rendered: the Plaintiff’s Claim for Misappropriated Funds.

[57] The Defendant advanced two grounds in support of his position that he has an arguable defence on the merits of this claim: first, that he did not misappropriate any funds from NES; and second, that he seeks to defend this proceeding in its entirety on the basis that it ought to be stayed in favour of arbitration.

1. Arguable Defence to the Claim for Misappropriated Funds

[58] The motion record filed by NES in support of its motion for partial default judgment relied on paragraphs 2 through 6 of the Statement of Claim as the evidentiary basis for its claim that Mr. Hallett had made unauthorized withdrawals from NES totaling $170,000. The Statement of Claim does not itemize the withdrawal(s) that total the $170,000 said to have been taken.

[59] The Defendant has shown that the Plaintiff did not provide him with an accounting of the alleged unauthorized withdrawals that NES states constitute misappropriations by Mr. Hallett until the cross-examination of Mr. Greenwood conducted on October 2, 2018: almost eight months after the Defendant filed his motion to set aside the Partial Default Judgment. The disclosure provided by the Plaintiff at that time, termed the “Hallett Disbursement Summary” shows withdrawals totaling $175,477.46, which was rounded down to the $170,000 awarded by the Partial Default Judgment.

[60] The Hallett Disbursement Summary contains four entries in December 2015, nine entries in January 2016 and five entries in February 2016. These 18 entries total $165,248.38, and are augmented by two entries for January and February of an unassigned year, to produce a total of 20 entries that are said to represent funds that Mr. Hallett misappropriated totaling $175,477.46.

[61] The Hallett Disbursement Summary explains, in notes describing each of the 20 entries, the payee of the money said to have been transferred from NES. Ten of these entries state that the funds transferred from NES were sent to Mr. Hallett or, in one case, his son. One of the entries states that the funds were transferred from NES to, indeed, Mr. Greenwood. Nine of the entries are in relation to transfers to third parties.

[62] Mr. Hallett states that he has an arguable defence to the Plaintiff’s characterization of these 20 entries as misappropriated funds. He swears that he did not misappropriate any funds from NES. He recognizes, however, that this bald assertion, in itself, would not be sufficient to discharge the burden of establishing an arguable defence, and thereby set out to explain, in his affidavits, that the 20 entries contained in the Hallett Disbursement Summary derive from two categories:

(a) Payments to Mr. Hallett, or to his company, the Hallett Group, for expenses and services incurred on behalf of NES; and

(b) Payments to third party suppliers, an employee and contractors who provided products and services to NES.

Payments to Mr. Hallett or to the Hallett Group

[63] The Hallett Disbursement Summary shows ten transfers to Mr. Hallett or to the Hallett Group: four in December 2015 and six in January and February 2016. Mr. Hallett submits that these payments were partial reimbursement of amounts owed to him by NES.

[64] Mr. Hallett deposed that the four payments that he received in December 2015, totaling $30,000, were payments received by NES from Green Shields Energy Inc. (“Green Shields”) further to a contract that NES entered into with Green Shields in January 2015. Mr. Hallett first characterized these funds as reimbursement for expenses that he claims to have incurred on behalf of NES, including in attending to the contract with Green Shields. He subsequently maintained that he received these funds further to the sale of shares to Green Shields.

[65] The Hallett Disbursement Summary shows that in January and February 2016, Mr. Hallett is said to have received from NES amounts transferred in six entries over six days totaling $43,401.00. Mr. Hallett states that these amounts, even when added to the $30,000 that he received in the four transfers in December 2015, total $73,401.00, which is well-below the amounts that he claims to have been owed by NES.

[66] Mr. Hallett characterizes these transfers to him as reimbursements for amounts owed to him by NES. Mr. Hallett produced in evidence a chart showing expenses that he incurred on behalf of NES and billed NES for during the period from January 9, 2009 to February 15, 2015, totaling $100,345.43. This chart contains one monthly entry for each of the 48 months from 2009 to 2012, inclusive, and 8 entries for 2013 to 2015. Mr. Hallett produced 56 individual detailed monthly expense reports for each of the amounts said to have been incurred by him on behalf of NES throughout this time period. These 56 individual monthly expense reports add up to the total amount that Mr. Hallett deposed was owed to him by NES during this time period: $100,345.43. A review of these expense reports disclose that they pertain to travel, attendance at meetings and related expenses.

[67] The amount owed by NES to Mr. Hallett in relation to his outstanding expense submissions would be even greater if the $30,000 received by Mr. Hallett from Green Shields in December 2015 is re-characterized as funds received further to Mr. Hallett’s sale of some of his shares in NES to Green Shields or its principal Jeff Shields.

[68] Mr. Hallett submits that the Partial Default Judgment should be set aside to allow him an opportunity to advance his defence that the funds received by him from NES were not misappropriated funds but rather payments for amounts he was owed leaving, he submits, an outstanding balance in his favour.

Payments to Third Parties

[69] Mr. Hallett deposed that nine of the entries on the Hallett Disbursement Summary pertain to expenses paid to third parties who supplied products and services to NES, including in relation to the contract with Green Shields. These include the following:

(a) The Hallett Disbursement Summary states that $7,983.38 was transferred with “no record found”. The Plaintiff states that these funds were misappropriated. Mr. Hallett has produced two invoices from a storage company totaling this amount, as well as an email sent to the storage company showing that a draft was forwarded in payment of storage in this amount;

(b) A payment of $20,000 to a law firm is supported by five invoices from that firm that have been produced. Similarly, a payment to a patent and trademark firm in the amount of $2,250 for a patent renewal fee is supported by an invoice;

(c) Various payments to five contractors totaling $67,514.50 are documented by expense reports.

[70] Mr. Hallett submits that during the time that these payments were made, December 2014 and February 2015, he was an officer and director of NES with authority to contract and to make payments. Further, he submits that no one identified and questioned the payments that he made to third parties as contained in the Hallett Disbursement Summary until that list was produced as part of the cross-examination of the Plaintiff’s representative, Mr. Greenwood.

[71] Mr. Hallett submits that the Partial Default Judgment should be set aside to allow him an opportunity to advance his defence that these funds were not misappropriated but rather constitute payments to third parties.

The Plaintiff’s Position in Relation to the 20 Entries said to Constitute Misappropriation

[72] The Plaintiff submits that the Defendant has failed to prove that the documentary evidence relied upon in defending the Claim for Misappropriated Funds is valid and contemporaneous or paid in the manner deposed to by Mr. Hallett. NES contends that it can show that certain of the records have been backdated, relying on whether the address contained in certain of the invoices was Mr. Hallett’s address as at the time of the invoicing. The Plaintiff submits that certain expenses submitted by Mr. Hallett can be shown to have been incurred by him on behalf of one of his companies, Heat Environmental Technology Group Inc., and do not properly answer the claim of misappropriation. NES questions as well whether the third party expenses were properly approved by it prior to being incurred by Mr. Hallett on its behalf.

[73] These considerations may be material to the ultimate determination of whether Mr. Hallett misappropriated funds, but that is a higher threshold than must be established by a defendant on a motion to set aside a default judgment. My task is not to determine whether Mr. Hallett’s defence is established, or will “inevitably succeed”, and I will not do so. The analysis that I must conduct is whether the evidence presented by Mr. Hallett as to his defence to the alleged misappropriation has an “air of reality”.

Conclusion: The Defendant has Established an Arguable Defence

[74] The Defendant’s testimony denying misappropriation is supported by documentation and is directly responsive to the accounting produced by the Plaintiff to legitimize its quantification of funds said to have been misappropriated: $170,000. I acknowledge the Plaintiff’s submission that the evidence provided by the Defendant must still be proven and established at trial to constitute a defence to the claim of misappropriation, and the payment of expenses and receipt of funds to or from related companies must be explained and proven. However, the Defendant does not need to prove his defence at this stage in order for the Partial Default Judgment to be set aside. The Defendant has to show that his defence has an “air of reality”. I have determined that it does.

[75] I find that the Defendant has established an arguable defence on the merits of the Plaintiff’s Claim for Misappropriated Funds, which forms the substance of the Partial Default Judgment.

2. Arguable Defence Based on the Arbitration Clause

[76] In light of my determination that Mr. Hallett has an arguable defence to the Claim for Misappropriated Funds, which forms the basis for the Partial Default Judgment, by reason of the evidence he has produced about the financial transactions in issue, it is not necessary to decide whether the Defendant’s position that this proceeding ought to be stayed in favour of Arbitration also constitutes an arguable defence. I can decide this motion without this determination.

[77] However, in the event that I am found to have erred in determining that Mr. Hallett has an arguable defence to the Claim for Misappropriated Funds by reason of his evidence about the financial transactions in issue, I will analyse whether Mr. Hallett has an arguable defence on the basis that this proceeding ought to be stayed in favour of Arbitration.

[78] The Shareholder’s Agreement contains the following Dispute Resolution provision as its Article 10 (“Arbitration Clause”):

10.1 Dispute Resolution

All disputes and questions whatsoever which shall arise between any of the parties in connection with this Agreement, or the construction or application thereof or any Section or thing contained in this Agreement or as to any act, deed or omission of any party or as to any other matter in any way relating to this Agreement, shall be resolved by arbitration. …

[79] Section 7(1) of the Arbitration Act, 1991, S.O. 1991, c. 17, provides as follows:

If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding.

[80] The Plaintiff contends that the Arbitration Clause does not apply because the Plaintiff suspended Mr. Hallett’s shareholder rights in accordance with section 2.1 of the Shareholders’ Agreement, rendering the Shareholders’ Agreement inapplicable. This argument is circular, and without merit.

[81] The Plaintiff also contends that the Arbitration Clause does not apply to misappropriation of funds, which is at the core of the Partial Default Judgment. The Defendant submits that the Arbitration Clause would cause the entirety of the proceeding to be stayed, including the component of it that pertains to the Plaintiff’s Claim for Misappropriated Funds.

[82] The Plaintiff pleaded the Shareholders’ Agreement as part of the claims asserted in its statement of claim, specifically in seven of the pleading’s eleven paragraphs: paras. 1(j), 2, 3, 6, 7, 8 and 9. Further, paragraph 2 of the Partial Default Judgment, which grants the Plaintiff the ability to continue to seek an adjudication of its Claim for Cancellation of Securities, makes this determination specifically referable to the Shareholders’ Agreement: “…as determined pursuant to the provisions of the [Shareholders’ Agreement]”. The only two documents tendered by the Plaintiff is its motion for default judgment were the Statement of Claim and the Shareholders’ Agreement.

[83] Section 7(5) of the Arbitration Act, 1991 provides that a Court may stay a portion of a proceeding that it determines to be subject to an arbitration agreement, and allow a portion of the proceeding not found to be so subject to continue, if the Court finds that:

(a) The agreement deals with only some of the matters in respect of which the proceeding was commenced; and

(b) It is reasonable to separate the matters dealt with in the agreement from the other matters.

[84] I find that the Defendant has an arguable defence that the Plaintiff’s Claim for Cancellation of Securities activates the Arbitration Clause. I conclude that the Defendant does not have an arguable defence that the Plaintiff’s Claim for Misappropriated Funds, itself, activates the Arbitration Clause. However, I find that the Defendant has an arguable defence that the Plaintiff’s Claim for Misappropriated Funds cannot reasonably be separated from the remainder of the claims pleaded by the Plaintiff in its Statement of Claim and thereby activates the Arbitration Clause pursuant to the operation of s. 7(5) of the Arbitration Act, 1991.

(iv) Prejudice to the Parties

[85] In assessing prejudice to the parties, I adopt the reasoning of Corbett J. in Landmark Home Solutions Inc. v. Binnj Inc., 2015 ONSC 5820 at para. 48:

It will almost always be the case that the prejudice to a plaintiff on a motion such as this is primarily delay and costs. If the motion is granted, the plaintiff may yet prevail another day. If the motion is denied, the defendant never gets its day in court on the merits.

[86] I find that the prejudice to the Defendant in not being afforded an opportunity to be heard on his defence outweighs any prejudice to the Plaintiff in responding to it substantively.

(v) Integrity to the Administration of Justice

[87] The heavy emphasis in examining whether the moving party can establish an arguable defence on the merits, even in the absence of a satisfactory explanation for the default, is long-standing, emphasized by Mountain View but traced to Chitel v. Rothbart (1988), 29 C.P.C. (2d) 136 (Ont. C.A.). The reason for this is that if the defendant has an arguable defence on the merits, justice demands that the defendant be allowed an opportunity to argue the defence. Conversely, if the defendant does not have an arguable defence on the merits, then justice requires that the plaintiff should not be put to the burden of investing more time and expense in a legal proceeding that will obviously lead to the same result as that already achieved in the default judgment.

[88] Once an arguable defence on the merits is established, as I have found here, the interests of justice support the setting aside of the default judgment.

(c) Conclusion – The Partial Default Judgment Shall be Set Aside

[89] Having found the Defendant moved promptly in his motion, has a plausible explanation for the default, and has an arguable defence on the merits of that portion of the Plaintiff’s Claim that is the subject of the Partial Default Judgment, and having considered the potential prejudice to the parties and impact on the administration of justice, I find that it is in the interests of justice that the default judgment be set aside.

(d) Terms for the Setting Aside of the Partial Default Judgment

[90] The parties spent almost a year in development of this motion and, in doing so, have amassed a considerable evidentiary record. It is cost-effective and efficient for the evidence to be preserved, so that it does not need to be repeated in the development of this action post-pleading.

[91] In accordance with Rules 19.08(2) and 1.04, I have determined that the setting aside of the Partial Default Judgment shall be on terms that allow for the efficient use by the parties in the ongoing action of the extensive steps taken by them in adducing evidence for this motion.

[92] Accordingly, I order that the affidavits and accompanying evidence filed on this motion to set aside the Partial Default Judgment, and any cross-examination on them, may be used at trial in the same manner as an examination for discovery. As this evidence is available for use at trial, the scope of examinations for discovery shall not repeat questions that have already been asked and answered in the cross-examinations conducted on this motion.

H. THE OTHER RELIEF SOUGHT BY THE DEFENDANT

[93] In addition to the primary relief sought, namely an Order setting aside the Partial Default Judgment, the moving party Defendant sought, in his Notice of Motion, three other forms of relief:

(a) An injunction preventing the Plaintiff from purchasing the Defendant’s share in the Plaintiff;

(b) An Order requiring the Plaintiff to post security for costs;

(c) An Order that this action be stayed and referred to an arbitrator pursuant to the Arbitration Clause contained in the Shareholders’ Agreement.

The Injunctive Relief

[94] The moving party Defendant did not make any submissions in relation to the claim for injunctive relief. It is not identified or addressed in the Defendant’s factum. Presumably, this is because the injunctive relief was pleaded to counter the term of the Partial Default Judgment that allows the Plaintiff to bring a motion to determine the value of Mr. Hallett’s shares in NES, which has not been done. I dismiss this element of the Defendant’s motion as abandoned.

Security for Costs

[95] The moving party Defendant did not make submissions, or file materials, that would establish an entitlement to an Order for security for costs. I dismiss this element of the Defendant’s motion.

The Stay Based on the Arbitration Clause

[96] The Defendant made fulsome submissions that the Arbitration Clause provided Mr. Hallett with an arguable defence to this action sufficient to allow for an Order setting aside the Partial Default Judgment. The Arbitration Clause and its role in the relationship between the parties and this dispute were fully addressed in this context, where the purpose was to show that this issue raised an arguable defence, but not in the context of an entitlement to a stay.

[97] Time did not allow for thorough submissions on the stay sought by reason of the Arbitration Clause. The time set aside for the argument of this motion was far-exceeded (more than doubled) in addressing solely the issue of whether the Partial Default Judgment should be set aside, leaving the issue of a stay based on the Arbitration Clause as a second-priority issue, better-suited for determination on full submissions at another time. In this regard, I note that the parties did not cite, argue or refer me to a single case authority pertaining to a stay under s. 7 of the Arbitration Act, 1991 or section 106 of the Courts of Justice Act, R.S.O. 1990, c. C.43. I will not determine the Defendant’s claim for a stay at this time. The determination of whether the requirements necessary for a stay are satisfied are now better-assessed, in the context of this case given the evidentiary record developed on this motion, after the close of pleadings.

[98] I dismiss the stay sought by the Defendant based on the Arbitration Clause, without substantive determination and without prejudice to the Defendant seeking this relief after the close of pleadings.

I. DISPOSITION

[99] I order that:

(a) the partial default judgment rendered in this action by Dow J. on August 15, 2017 is set aside;

(b) any and all writs of seizure and sale rendered further to the partial default judgment, including the writ of seizure and sale registered with the sheriff of the County of Frontenac on September 25, 2017, are vacated;

(c) the noting in default in this action of June 2, 2017 is set aside;

(d) the Defendant is granted leave to deliver a Statement of Defence and Counterclaim within thirty (30) days of the date of this Order;

(e) the affidavits and accompanying evidence filed on this motion to set aside the partial default judgment, and any cross-examination on them, may be used at trial in the same manner as an examination for discovery;

(f) the scope of examinations for discovery in this action shall not repeat questions that have already been asked and answered in the cross-examinations conducted on this motion to set aside the partial default judgment;

(g) the Defendant’s claim for injunctive relief is dismissed as abandoned;

(h) the Defendant’s claim for security for costs is dismissed;

(i) the Defendant’s motion for an order that this action be stayed and referred to arbitration is dismissed, without substantive determination and without prejudice to the Defendant seeking this relief after the close of pleadings.

J. COSTS

[100] At the conclusion of this long motion, I heard cost submissions and received the parties’ Cost Outlines. No offers to settle the motion had been delivered by either party.

[101] The Defendant has been successful in the principal relief sought in this motion, namely to set aside the Partial Default Judgment, and is thereby presumptively entitled to costs: Bell Canada v. Olympia & York Developments Ltd., 1994 ONCA 239, 17 O.R. (3d) 135; Yelda v. Vu, 2013 ONSC 5903, leave to appeal denied, 2014 ONCA 353 at para 11. I see no reason, or special circumstances, that would justify deviation from costs “following the event”.

[102] The Defendant submitted a Cost Outline that quantifies his costs on a partial indemnity basis at $38,826.96, inclusive of fees, taxes and disbursements, and on a substantial indemnity basis at $51,702.18, on an all-inclusive basis. The quantification of these costs is based on 171.9 hours of lawyers’ time.

[103] The Defendant submitted that he ought to receive costs quantified on a substantial indemnity basis. I do not agree. In Young v. Young, [1993] 4 S.C.R. 3, at p. 134, the Supreme Court stated that substantial indemnity costs should only be awarded “where there has been reprehensible, scandalous or outrageous conduct on the part of one of the parties.” This principle was recently applied in Mars Canada Inc. v. Bemco Cash & Carry Inc., 2018 ONCA 239, 140 O.R. (3d) 81. The Plaintiff’s conduct in this motion does not meet the requirements for the Defendant to establish an entitlement to costs on a substantial indemnity basis.

[104] In quantifying costs on a partial indemnity basis, I have taken into consideration that the Defendant’s conduct in failing to defend this action on a timely basis and not actively communicating with the Plaintiff allowed for the issuance of the Partial Default Judgment. I find that the 171.9 hours submitted by the Defendant is excessive for a motion of this nature. Also, the Defendant sought more relief in the Notice of Motion than was established, and in some cases mutually inconsistent relief, meaning that the Defendant’s success was divided.

[105] The objective of quantification of costs is to determine an amount that is fair and reasonable, understanding that the mathematical quantification of what the successful litigant has spent in legal fees is pertinent but not dispositive. In Zesta Engineering Ltd. v. Cloutier (2002), 21 C.C.E.L. (3d) 161(O.N. C.A.) at para. 4, the Court of Appeal stated: “[i]n our view, the costs award should reflect more what the court views as a fair and reasonable amount that should be paid by the unsuccessful parties rather than any exact measure of the actual costs to the successful litigant.” The quantification of costs is not a mere mathematical exercise in as much as a determination of what is fair and reasonable: Boucher v. Public Accountants Council for the Province of Ontario (2004), 71 O.R. (3d) 291 (C.A.) at para. 26.

[106] Having considered all applicable principles, including all elements of Rule 57.01, and in accordance with the discretion provided to me under Section 131 of the Courts of Justice Act, I have determined that it is fair, reasonable and proportionate to award the Defendant costs of this motion in the amount of $12,000, all-inclusive of legal fees, disbursements and applicable taxes, payable by the Plaintiff.

Sanfilippo J.

Released: February 26, 2019