Koohestani et al. v. Mahmood et al.

[Indexed as: Koohestani v. Mahmood]

Ontario Reports

Court of Appeal for Ontario,

G. Epstein, van Rensburg and Benotto JJ.A.

January 29, 2015

124 O.R. (3d) 205 | 2015 ONCA 56

Case Summary

Civil procedure — Pleadings — Striking out — Motion judge striking statement of defence for failure to pay damages and costs awarded to plaintiffs on motion for partial summary judgment — Defendants' appeal allowed — Defence not unmeritorious — Partial summary judgment for relatively small amount in relation to entire claim — Motion judge not giving defendants opportunity to cure default — Sanction unduly severe in circumstances.

Civil procedure — Summary judgment — Parties not prepared to proceed on date set for trial — Counsel for plaintiff asking trial judge to hear motion for partial summary judgment on issue of whether defendants had breached interim agreement — Defendants consenting to trial judge hearing motion despite absence of notice of motion — Trial judge granting partial summary judgment — Defendants not permitted to rely on procedural irregularities on appeal from partial summary judgment. [page206]

The plaintiff sued the defendants for damages for unjust enrichment, breach of fiduciary duty, breach of confidence and misappropriation. The parties were not prepared to proceed on the date set for trial. In order to make use of the time set aside, counsel for the plaintiff asked Roberts J. to hear a motion for partial summary judgment on the issue of whether the defendants had breached an interim agreement. Despite the fact that no notice of motion was served or filed, counsel for the defendants consented to Roberts J. hearing the motion, and in fact insisted that the motion proceed even after the plaintiff's counsel offered to bring a "proper motion". Roberts J. found that the defendants had breached the interim agreement and ordered them to pay damages and costs. The order, made in December 2012, was not settled until November 6, 2013. Earlier in 2013, the plaintiff moved for an order striking out the statement of defence for failing to pay the damages and costs awarded by Roberts J. The defendants moved to vary Roberts J.'s order to allow for a set-off and for leave to amend their statement of defence to advance a counterclaim. Spence J. heard the motions on November 7, 2013. He dismissed the defendants' motion, granted the plaintiff's motion and struck the statement of defence. The defendants appealed the orders of Roberts J. and Spence J.

Held, the appeal from the order of Roberts J. should be dismissed; the appeal from the order of Spence J. should be allowed.

As the defendants had consented to Roberts J. hearing the motion for partial summary judgment, it was not open to them to rely, on appeal, on procedural irregularities such as the plaintiff's failure to plead breach of the interim agreement and failure to serve a notice of motion. The defendants were not denied procedural fairness. Roberts J.'s finding that the defendants had breached the interim agreement was supported by the evidence.

It was open to Spence J. to consider striking the statement of defence based on the defendants' failure to pay the amounts ordered by Roberts J. However, striking out a defence is a severe remedy and should generally not be imposed as a remedy of first resort. The defaulting party should, at least, be provided with an opportunity to cure the default. Spence J. did not give the defendants such an opportunity. That failure was of particular note given that the order of Roberts J. was not finally settled until the day before the motion to strike was heard. It could not be said that the defendants' defence was obviously without merit. The misconduct that led to the striking of the defence took place in the context of a peripheral dispute involving a small amount of money in relation to the amount of the entire claim. The defendants were misled by their former counsel as to their liability to comply with Roberts J.'s order. While that fact did not insulate them from the consequences of their conduct, it was relevant to the determination of an appropriate sanction. A less draconian remedy was appropriate. The order striking the statement of defence was set aside and the amounts owing under the order of Roberts J. were ordered to be paid within 30 days, failing which the plaintiff would be entitled to move to strike out the statement of defence.

Cases referred to

Bell ExpressVu Limited Partnership v. Torroni (2009), 94 O.R. (3d) 614, [2009] O.J. No. 356, 2009 ONCA 85, 69 C.P.C. (6th) 14, 246 O.A.C. 212, 304 D.L.R. (4th) 431; Finlay v. Van Paassen (2010), 101 O.R. (3d) 390, [2010] O.J. No. 1097, 2010 ONCA 204, 266 O.A.C. 239, 318 D.L.R. (4th) 686, 188 A.C.W.S. (3d) 675; Marché D'Alimentation Denis Thériault Ltée v. Giant Tiger Stores Ltd. (2007), 87 O.R. (3d) 660, [2007] O.J. No. 3872, 2007 ONCA 695, 47 C.P.C. (6th) 233, 286 D.L.R. (4th) 487, 247 O.A.C. 22; [page207] R. v. Austin, 2006 39077 (ON CA), [2006] O.J. No. 4660, 214 C.C.C. (3d) 38, 72 W.C.B. (2d) 6 (C.A.); R. v. Palmer, 1979 8 (SCC), [1980] 1 S.C.R. 759, [1979] S.C.J. No. 126, 106 D.L.R. (3d) 212, 30 N.R. 181, 50 C.C.C. (2d) 193, 14 C.R. (3d) 22, 17 C.R. (3d) 34, 4 W.C.B. 171; Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, [2014] S.C.J. No. 53, 2014 SCC 53, 2014EXP-2369, J.E. 2014-1345, 373 D.L.R. (4th) 393, [2014] 9 W.W.R. 427, 59 B.C.L.R. (5th) 1, 461 N.R. 335, 25 B.L.R. (5th) 1, 358 B.C.A.C. 1, 614 W.A.C. 1, 242 A.C.W.S. (3d) 266; Tarion Warranty Corp. v. 1486448 Ontario Inc., [2012] O.J. No. 1930, 2012 ONCA 288, 25 C.P.C. (7th) 25, 2012 CarswellOnt 5355, 216 A.C.W.S. (3d) 610

Statutes referred to

Business Corporations Act, R.S.O. 1990, c. B.16, s. 246 [as am.]

Rules and Regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rules 1.04, 2.01, 2.03, 26.02, 27.07(1), 37.01, 48.04(1), 57.03(2), 60.12(b)

APPEAL from the order of L.B. Roberts J. of the Superior Court of Justice dated December 12, 2012; and from the order of Spence J. of the Superior Court of Justice dated November 7, 2013.

James S.G. Macdonald, for appellants.

R. Douglas Elliott and Ruzbeh Hosseini, for respondent.

The judgment of the court was delivered by

G. EPSTEIN J.A.: —

Overview

[1] Canada Limousine Inc. is a car-for-hire business that provides limousine transportation. Since 2005, the respondent Amir Houshang Koohestani and the two appellants, Shahid Mahmood and Ajaz Ali, have been the company's only shareholders. In 2011, relations among the three shareholders broke down. Lawyers became involved. The respondent and the company sued the appellants. In the course of this litigation, an order was made awarding the respondent damages based on the appellants' breach of an interim agreement into which the shareholders had entered. A further order was made that, among other things, struck out the appellants' statement of defence for their failure to pay the amounts they owed under the first order. The appellants appeal both orders.

[2] When the dispute arose, Canada Limousine owned five vehicles -- three sedans, a stretch limousine and a sport utility vehicle ("SUV"). Each of the sedans was driven exclusively by one of the three shareholders. Each shareholder treated his sedan as his own vehicle. The stretch limousine and SUV were [page208] driven by all of the shareholders as well as by drivers on contract with Canada Limousine.

[3] On January 19, 2011, the appellants held a shareholders' meeting in the respondent's absence and removed him as director and officer of the company.

[4] On January 28, 2011, the respondent commenced an action against the appellants, naming himself and Canada Limousine as the plaintiffs.[^1] The statement of claim seeks over $680,000 in damages, alleging unjust enrichment, breach of fiduciary duty, breach of confidence and misappropriation.

[5] The three shareholders attended a case conference and entered into an interim agreement dated February 16, 2011. The agreement provided that an accountant would be retained to perform an audit and valuation of Canada Limousine, the appellants would ensure that client calls were dispatched to the respondent fairly and equally, the respondent would have unrestricted access to the stretch limousine and the SUV to attend to these calls, none of the shareholders would divert business away from Canada Limousine, and all three shareholders would act in good faith and in a commercially reasonable manner in executing the terms.

[6] Canada Limousine was not a party to the interim agreement.

[7] The trial was scheduled to commence before Roberts J. on September 24, 2012. However, the parties were not prepared by that date and insufficient time had been set aside for the matter to be heard. Roberts J. therefore adjourned the trial on terms primarily relating to the production of expert reports and additional financial information. The trial has not yet taken place.

[8] At the appearance on September 24, 2012, counsel for the respondent asked Roberts J. to hear a motion for partial summary judgment on the issue of whether the appellants had breached the interim agreement. The allegations considered by Roberts J. were that the appellants had (i) withheld amounts owed to the respondent for his work as a driver for Canada Limousine from January to June 2011; (ii) dispatched client calls [page209] unfairly; and (iii) diverted Canada Limousine's business to themselves. A notice of motion was not served or filed.

[9] With the consent of both parties, Roberts J. decided to hear the motion on the basis that it would begin the next day and that any evidence given would also apply to the trial. The hearing lasted four days. The respondent and one of the appellants, Mr. Ali, testified.

[10] In reasons released December 12, 2012 , Roberts J. found there was no genuine issue for trial concerning the appellants' breach of the interim agreement in their failing to pay the respondent certain amounts owed to him. Roberts J. ordered the appellants to pay the respondent $4,583.75 in damages, with further amounts to be considered when more information, specified in the reasons, was provided to the court.

[11] In the months that followed, Roberts J. issued several endorsements affirming her December 12, 2012 order and adding further details to it. On March 13, 2013, Roberts J. finalized the amount of damages the appellants owed the respondent for their breach of the interim agreement in the amount of $6,613.66. She also awarded costs to the respondent on a partial indemnity scale in the amount of $8,580.65, inclusive of disbursements and HST.

[12] Ultimately, on November 6, 2013, Roberts J. settled the December 12, 2012 order. She confirmed that the language she used in her December 12, 2012 order was accurate such that the appellants were personally liable to pay the respondent's damages and costs because it was they, not Canada Limousine, who were parties to the interim agreement and who were found to have breached it.

[13] Earlier in 2013, on July 22, the respondent had moved for an order striking out the appellants' statement of defence for failure to pay the damages and costs awarded to the respondent pursuant to the December 12, 2012 order of Roberts J., as subsequently modified. In response, the appellants moved to vary the order of Roberts J. to allow for a set-off of moneys they alleged the respondent owed by to Canada Limousine. The appellants also moved for leave to amend their statement of defence to advance a counterclaim and for an adjournment of the motion. The motion came before Spence J.

[14] Spence J. refused the adjournment request and heard the two motions on November 7, 2013. The same day, Spence J. allowed the respondent's motion and struck the appellants' statement of defence. He also dismissed the appellants' motion to vary Roberts J.'s order and advance a counterclaim. Substantial [page210] indemnity costs in the amount of $32,000, inclusive of HST, plus disbursements were awarded to the respondent.

[15] The appeal of Roberts J.'s order was initially filed in the Divisional Court. By order dated May 20, 2014, Hourigan J.A. transferred that appeal to this court to be heard together with the appeal of Spence J.'s order. In their appeal of the order of Roberts J., the appellants submit that the motion judge erred by hearing the motion for partial summary judgment in the face of procedural irregularities and by concluding that they breached the interim agreement. The appellants submit that Spence J. erred in striking their defence as the circumstances did not warrant such a harsh remedy. They also argue that Spence J. erred in refusing to allow them to amend their defence to assert a counterclaim. Finally, the appellants contend that the scale and amount of Spence J.'s costs award were unwarranted.

[16] I would dismiss the appeal from the order of Roberts J. The appellants agreed through their counsel to argue the motion for partial summary judgment. In my view, the appellants cannot avoid the consequences of their decision to participate in the motion for partial summary judgment by pointing to inconsequential procedural irregularities. Roberts J.'s finding that the appellants breached the interim agreement is, in my view, supported by the evidence and is entitled to deference. I see no reason to interfere.

[17] I would allow the appeal from the order of Spence J. In my view, striking the defence was a disproportionate response to the appellants' conduct. I would reinstate the defence. I would also reduce the amount of costs the appellants were ordered to pay.

Decisions Below

Summary judgment on breach of agreement -- Roberts J., December 12, 2012, with supplementary endorsements dated February 7, 2013 and March 13, 2013

[18] For the period January to June 2011, the respondent was paid $2,282.78 by Canada Limousine for his work as a driver. His pay was based on the company's ledger. The respondent took the position that an additional $17,830.70 was owed to him, as the ledger did not properly reflect his legal entitlements under the interim agreement. To determine this position, Roberts J. had to resolve, if possible, five issues.

[19] The first issue concerned the fares attributable to the respondent's driving -- particularly additional account fares, cash fares, "after midnight" and "no show" fares -- and expenses [page211] that were potentially reimbursable to the respondent -- particularly airport fees and "407 ETR" fees. Roberts J. accepted the respondent's "run sheets" as an accurate record of his driving services. The run sheets were prepared contemporaneously and were partially corroborated by e-mails the appellants produced. While the run sheets lacked key details, invoices that could be used to confirm, correct and expand on the run sheets had been handed in to the company's office by the respondent and were therefore accessible only to the appellants. In her December 12, 2012 reasons, Roberts J. ordered the appellants to produce these invoices to enable the parties to make submissions on additional accounts, cash fares, "after midnight" and "no show" fares, airport fees and 407 ETR expenses. The appellants did not produce most of these invoices. Some 407 ETR invoices were provided but these failed to state whether the expense was incurred while driving a fare (reimbursable) or while driving alone (not reimbursable): they were therefore of no use. As a result, as stated in her February 7, 2013 endorsement, Roberts J. used the respondent's run sheets and calculations, rather than the company ledger, to determine the respondent's fares and reimbursements for airport fees and 407 ETR expenses. This determination led to an additional $2,029.91 in damages being awarded as of March 13, 2013.[^2]

[20] The second issue concerned a 25 per cent corporate commission that was deducted from the respondent's pay.[^3] Roberts J. considered the evidence and found that the shareholders were only required to pay a 20 per cent commission. Non-shareholder drivers were required to pay 25 per cent. Since the respondent remained a shareholder, the motion judge ordered [page212] the appellants to reimburse the respondent for the 5 per cent wrongly withheld.[^4]

[21] The third issue concerned a deduction taken from the respondent's pay for insurance on the SUV. Roberts J. found that although the shareholders had personally paid the insurance on their respective sedans, the company had always paid the insurance on the SUV. As previously noted, the interim agreement provided that the respondent was to have unrestricted access to the SUV to service client calls. The agreement was silent as to who would pay for the insurance on the SUV. In Roberts J.'s view, there was no basis upon which the appellants could unilaterally change the established manner in which the business operated. The respondent was therefore entitled to be reimbursed for this deduction, totalling $1,960.80.

[22] The fourth issue concerned a deduction taken from the respondent's pay in April 2011 with respect to a bank loan. The loan was used for corporate purposes. The respondent was not asked and did not agree to pay the expense. Roberts J. reasoned that a corporation cannot unilaterally impose such an expense on a shareholder and ordered that this deduction, in the amount of $2,622.95, be reimbursed.

[23] The final issue concerned a deduction from the respondent's pay that was purportedly his share of the more than $25,000 in expert fees charged by Kalex Valuations Inc., the company that carried out the valuation of Canada Limousine contemplated by the interim agreement. In her March 13, 2013 endorsement, Roberts J. concluded that the resolution of this dispute had to wait for trial.

[24] In summary, as of December 12, 2012, the damages for the appellants' breach of the interim agreement were determined to be $4,583.75. Pursuant to the order of March 13, 2013, an additional $2,029.91 in damages was added, as well as an order that the appellants pay partial indemnity costs and disbursements of $8,580.65.[^5] [page213]

Endorsements -- Roberts J., November 4 and 6, 2013

[25] In her November 4, 2013 endorsement, Roberts J. dismissed the appellants' recusal motion, apparently heard on September 26, 2013, which included an allegation of racial bias towards the appellants' then counsel. Roberts J. also requested the parties' final drafts of her December 12, 2012 order so she could settle the formal order before the hearing of the motion before Spence J. scheduled for November 7, 2013.

[26] In her November 6, 2013 endorsement, Roberts J. ruled on the appellants' argument that the damages were the liability of Canada Limousine, despite the fact that the December 12, 2012 reasons state, at para. 63, "[t]he defendants shall repay to Mr. Koohestani the amount of $4,583.75". The respondent had brought the motion against the appellants based on their breach of the interim agreement to which only the shareholders were parties. The appellants were therefore personally liable to the respondent.

Motion to strike the defence -- Spence J., November 7, 2013

[27] Spence J. rejected the appellants' explanations for why they had failed to pay the damages and costs further to the December 12, 2012 order of Roberts J. and her two supplementary endorsements. It was no excuse that the appellants could purportedly not afford to appeal the order.

[28] Spence J. further held that no exceptional circumstances existed that would justify taking into account the respondent's alleged liabilities to Canada Limousine. Set-off had not been raised before Roberts J. and, in any event, the damages and costs were against the appellants personally, not the company. Even with the proposed set-off, there would still be moneys owing to the respondent.

[29] Spence J. viewed the appellants' conduct as an attempt to relitigate Roberts J.'s order and found this to be an abuse of process. The appellants' conduct justified striking their statement of defence and denying their motion to amend their defence to assert a counterclaim.

[30] As the respondent was completely successful and had made two offers to settle and the appellants had wasted the court's time and the respondents' resources, Spence J. ordered the appellants to pay substantial indemnity costs in the amount of $32,000, inclusive of HST, plus disbursements of $2,445.97 and any HST on the disbursements. [page214]

Issues

[31] The appellants, in their two appeals, raise the following issues:

A. Appeal from the order of Roberts J.: Summary judgment on breach of the interim agreement

(1) Did Roberts J. err in hearing the motion for partial summary judgment?

(2) Did Roberts J. err in finding breaches of the interim agreement?

B. Appeal from the order of Spence J.: Motion to strike the defence and cross-motion to add a counterclaim

(1) Did Spence J. err in striking the statement of defence?

(2) Did Spence J. err in dismissing the appellants' motion to add a counterclaim?

The appellants also seek to adduce fresh evidence consisting of affidavits to the effect that they did not pay the damages and costs ordered by Roberts J. based on the advice of their former counsel.

Analysis

A. Appeal from Roberts J.'s order

(1) Did Roberts J. err in hearing the motion for summary judgment despite the procedural irregularities?

[32] The appellants submit that Roberts J. erred in hearing the motion for partial summary judgment. They argue that the respondent failed to plead breach of the interim agreement and failed to serve a notice of motion under rule 37.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. The hearing was disorganized and the appellants were not prepared to respond.

[33] The appellants further argue that as the matter had been set down for trial, the respondent was required, under rule 48.04(1), to obtain leave to bring the motion. If Roberts J. impliedly granted leave, she erred in doing so by not considering the relevant factors. In particular, at the September 2012 hearing, there was no evidence tendered of any substantial or unexpected change in circumstances since the time the action was set down for trial in March 2012. To the contrary, the respondent's motion related to work performed from January 2011 to June 2011. [page215]

[34] Due to the circumstances in which Roberts J. agreed to hear the motion, I find no merit in any of these procedural arguments.

[35] On September 24, 2012, after the respondent's counsel raised the possibility of a motion on breach of the interim agreement, Roberts J. explained that she was willing to deal with the issue the following day. She then set out a proposed procedure to do so, namely, hearing oral evidence and resolving questions of fact on that evidence. She concluded by asking, "Does that make sense?" Appellants' counsel replied, "Yes." Roberts J. then asked him, "[D]o you have any other issues that you want to raise that we will deal with tomorrow?" Appellants' counsel replied, "No, Your Honour."

[36] The following day, as counsel for the respondent proceeded with the motion, Roberts J. expressed concern that she would not be able to determine the damages even if she was able to find that the interim agreement had been breached. The following exchange then took place:

Roberts J.: [I]t would seem if you would sit down and go through line by line and get all the documents in front of you and if you have a copy of all the run sheets and the financial records and the calls which you say are in the defendants' possession, I think it is going to be pretty clear whether or not your client has been paid or not. And maybe what we do is you come back, if you want to, if you can't agree you come back in October and I will set up a date and you come back and argue the issue [of liability] in front of me. You go to a master for accounting.

Respondent's counsel: I think that's an excellent suggestion. And we might be more organized when we come before you, bring a proper motion in October, give my friend the opportunity to respond.

Roberts J.: I think that makes more sense. Frankly, Mr. Barnwell [appellants' counsel] if you cannot agree. Now it might be . . .

Appellants' counsel: I came in today to deal with the allegations that my clients have violated this interim agreement. They make a lot of aspiration [sic] against the clients, I am prepared to proceed.

Roberts J.: All right.

(Emphasis added)

[37] Later that day, appellants' counsel again insisted that the dispute over the interim agreement be dealt with that day, noting that he had risen at 3:00 a.m. that morning to prepare and had brought witnesses to testify.

[38] Against this background, I find no merit in the argument that the appellants were denied procedural fairness. As the record shows, this argument is the exact opposite of the position the appellants, through their counsel, took before Roberts J. While the appellants' counsel may have been uncertain as to the scope [page216] of what the respondent's counsel intended to assert about the interim agreement, he nonetheless insisted that the motion proceed, even after the respondent's counsel offered to bring a "proper motion". Writing for the court in R. v. Austin, 2006 39077 (ON CA), [2006] O.J. No. 4660, 214 C.C.C. (3d) 38 (C.A.), at para. 14, Doherty J.A. warned that "[a]rguments by appellate counsel that fly in the face of positions taken by counsel at trial quite properly attract judicial scepticism and resistance". This is one such argument.

[39] Rules 2.01 and 2.03 afford a response to the appellants' argument concerning procedural irregularities. The words of Laskin J.A. in Finlay v. Van Paassen (2010), 101 O.R. (3d) 390, [2010] O.J. No. 1097, 2010 ONCA 204, at para. 14, are instructive:

Rule 2.01 reflects the general principle found in rule 1.04(1), which guides the interpretation of all the Rules: "These rules shall be liberally construed to secure the just, most expeditious and least expensive determination of every civil proceeding on its merits." Rule 1.04(1) and rule 2.01 are intended to do away with overly "technical" arguments about the effect of the Rules and orders made under them. Instead, these provisions aim to ensure that the Rules and procedural orders are construed in a way that advances the interests of justice, and ordinarily permits the parties to get to the real merits of their dispute.

[40] Given the latitude afforded by the Rules against the backdrop of this record, I see no reason to interfere with the exercise of Roberts J.'s discretion to accommodate the parties' mutual request to use the days set aside for trial in a productive fashion. In the circumstances, the decision could only be said to have advanced the interests of justice.

[41] I would not give effect to this ground of appeal.

(2) Did Roberts J. err in finding breaches of the interim agreement?

[42] The appellants challenge all but $197.75 (the amount relating to cash fares) of the damage award Roberts J. made in the respondent's favour. The appellants argue that Roberts J. erred in her contractual interpretation, in finding breaches of the contract and in failing to provide sufficient reasons. The appellants do not quarrel with the quantum of damages ordered for each breach.

[43] I would reject the appellants' related arguments that Roberts J.'s contractual interpretation was unreasonable and that her reasons were insufficient. It is evident from reading her December 12, 2012 reasons that Roberts J. interpreted the interim agreement as reflecting the shareholders' intention that past practices would continue. The interim agreement was short, dealt with only four substantive issues, stated that the contract [page217] was to be executed in a "commercially reasonable manner and in good faith", and was made in the midst of a dispute that had locked the respondent out of a small business that he had previously operated with the other two parties to the contract. In this context, in the absence of express words to the contrary, it was entirely reasonable to conclude that an implied term of the contract was that the business would continue to operate as it had before the litigation commenced. The motion judge's interpretation of the agreement attracts deference: Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, [2014] S.C.J. No. 53, 2014 SCC 53, 373 D.L.R. (4th) 393, at paras. 50-55. I see no reason to interfere.

[44] With this implied term in mind, Roberts J. considered the breaches alleged by the respondent.

[45] The evidence supported Roberts J.'s conclusion that, by deducting the SUV insurance premiums and a 25 per cent corporate commission from the respondent's pay, the appellants had disregarded long-standing practices. I see no reason to interfere with Roberts J.'s order that the appellants reimburse the respondent for these deductions.

[46] The evidence supported Roberts J.'s finding that the bank loan in issue was a corporate loan. In my view, the finding of Roberts J. that the company, not the respondent, was responsible for any amounts owing under that loan was reasonable. I see no reason to interfere with her order that the appellants reimburse the respondent for this deduction.

[47] Finally, in my view, particularly given the failure of the appellants to produce the invoices despite repeated requests to do so, Roberts J.'s decision to rely upon the run sheets and calculations of the respondent was reasonable. I see no reason to interfere with the damages ordered with respect to the fares and reimbursable expenses.

[48] In summary, I am of the view that Roberts J.'s interpretation of the interim agreement was a reasonable one. Her finding that the appellants had breached the contract on several occasions was supported by the evidence.

[49] I would not give effect to this ground of appeal.

B. Appeal from Spence J.'s order

(1) Did Spence J. err in striking the appellants' statement of defence?

Fresh evidence motion

[50] I will start with the motion to adduce fresh evidence as it is relevant to this aspect of the appeal. The proposed evidence is [page218] an affidavit sworn by Mr. Ali and one sworn by the appellants' former counsel, Mr. Barnwell. The import of the affidavits is that Mr. Barnwell, at all times, maintained the belief that the damages and costs Roberts J. ordered to be paid were the responsibility of Canada Limousine and not that of the appellants personally; Mr. Barnwell therefore advised his clients that they should, under no circumstances, pay the amounts themselves.

[51] I would not admit the fresh evidence. First, the proposed evidence could have been put before Spence J. There is no explanation of why it was not other than the difficulties created by the fact that, in the motion before Spence J., Mr. Barnwell continued to represent the appellants. This problem was not insurmountable. Moreover, during argument before this court in support of the motion to admit fresh evidence, counsel for the appellants conceded that the proposed evidence could not reasonably be expected to have affected the result before Spence J. as the information was otherwise in the record. It follows that the proposed evidence does not meet two of the four tests set out in R. v. Palmer, 1979 8 (SCC), [1980] 1 S.C.R. 759, [1979] S.C.J. No. 126.

Motion to strike the statement of defence

[52] I now turn to the appeal from the order striking the statement of defence. I am satisfied that the order must be set aside.

[53] It was open to Spence J. to consider striking the appellants' defence based on their failure to pay the amounts ordered by Roberts J: rules 57.03(2) and 60.12(b). First, there was no credible dispute that the amount was owed by the appellants personally. Second, the record demonstrated that the appellants, rather than appeal the December 12, 2012 order, had spent the better part of a year engaging in what could only be described as a series of collateral attacks on the order. The appellants' cross-motion before Spence J. to vary Roberts J.'s order was yet another skirmish in this campaign. Third, the appellants' ongoing communication with and appearances before Roberts J. were not only suggestive of efforts designed to avoid paying the damage award and costs order but also misguided and disrespectful. I refer specifically to conduct including

• multiple unsolicited communications from the appellants' counsel directly to Roberts J. attempting to re-argue the motion;

• attempts in submissions on costs and in submissions on settling the formal order to re-argue the merits; [page219]

• allegations of bias and later racial bias against Roberts J. leading to a recusal motion in September 2013;

• unreasonable attempts to have respondent's counsel made personally liable for costs.

[54] Notwithstanding the legitimate concerns raised before Spence J., my difficulty with his decision to strike the appellants' defence is that he failed to apply the principles relevant to such a request, particularly those set out by this court in Bell ExpressVu Limited Partnership v. Torroni (2009), 94 O.R. (3d) 614, [2009] O.J. No. 356, 2009 ONCA 85. In Bell ExpressVu, at para. 35, the majority identified striking out a defence as a severe remedy and made it clear that it should generally not be imposed as a remedy of first resort. The defaulting party should, at least, be provided with an opportunity to cure the default.

[55] Such was not done in this case.

[56] This failure is of particular note given the order of Roberts J. was not finally settled until November 6, 2013, the day before the motion to strike. The record suggests to me that it was the appellants' recusal motion and ongoing attempts to re-argue the merits that led to such profound delay in settling the terms of the order. Nonetheless, the November 6, 2013 endorsement indicates that on that day a non-trivial change was made to the December 12, 2012 order -- namely, the removal of any reference to declaratory relief. The respondent has not disputed that the time for appealing the order continued to run when the parties appeared before Spence J. Given the ongoing willingness of Roberts J. to hear further submissions and alter the order into November 2013, and the extant right to appeal that order when the motion was argued before Spence J., it is possible that the appellants did not fully appreciate the peril of not paying the damages and costs ordered by Roberts J.

[57] In addition to the primary principle identified in Bell ExpressVu, that striking out a defence should not be the remedy of first resort, additional factors should be taken into account in deciding whether to strike a defence for failure to comply with court orders.

[58] First, the action should be examined with particular attention to the merits of the defence: Bell ExpressVu, at para 36. The pleading and any evidence relevant to the defence may demonstrate a strong defence supporting the conclusion that the interests of justice warranted finding another way to sanction the misconduct. On the other hand, a blatantly unmeritorious defence may give rise to the inference that the defendant's refusal to comply with a court order is part of a deliberate [page220] strategy to delay a decision on the merits -- conduct that may justify the imposition of a more severe sanction.

[59] In my view, it cannot be said that the appellants' defence in this case is obviously without merit.

[60] Second, the context of the misconduct relied upon is relevant to the determination of a response that is not only proportional to the severity of the misconduct but also in keeping with the overarching objectives that guide the application of the rules, namely, that set out in rule 1.04 that the rules should be interpreted to secure the just determination of each civil proceeding on its merits.

[61] In this case, the misconduct that led to the striking of the defence took place in the context of a peripheral dispute involving a relatively small amount (just over $15,000) in relation to the amount in issue, at least as pleaded (over $680,000). See Tarion Warranty Corp. v. 1486448 Ontario Inc., [2012] O.J. No. 1930, 2012 ONCA 288, 2012 CarswellOnt 5355.

[62] Third, in some cases the record may indicate that it was counsel for the defaulting parties rather than the parties themselves who should bear primary responsibility for the misconduct in issue. As stated by Sharpe J.A., writing for the court in Marché D'Alimentation Denis Thériault Ltée v. Giant Tiger Stores Ltd. (2007), 87 O.R. (3d) 660, [2007] O.J. No. 3872, 2007 ONCA 695, at para. 28, "The law will not ordinarily allow an innocent client to suffer the irrevocable loss of the right to proceed by reason of the inadvertence of his or her solicitor . . . ."

[63] Here, even without the proposed fresh evidence, the record before Spence J. points to Mr. Barnwell as the guiding (although hardly inadvertent) force behind the appellants' failure to comply with Roberts J.'s order. The fact that much of what concerned Spence J. was conduct that lies at the feet of their former counsel does not insulate the appellants from the consequences of such conduct. However, in my view, it is relevant to the determination of an appropriate sanction.

[64] The failure of Spence J. to take these factors into account disentitles his decision to the deference it would normally attract. I would not sanction the appellants' failure to comply with the order of Roberts J. and associated conduct by striking the defence. My review of the record demonstrates a misguided refusal to accept the result of the motion for partial summary judgment rather than an abuse of process. In this light and in the light of my other observations set out above, I would impose a less draconian remedy. I would set aside the order striking the statement of defence on the following terms. I would order that the amounts owing under the order of Roberts J., including costs [page221] and post-judgment interest, be paid within 30 days of the release of these reasons, failing which the respondent would be entitled to move to strike out the statement of defence.

(2) Did Spence J. err in dismissing the appellants' motion to amend their statement of defence by adding a counterclaim?

[65] By striking the defence, the issue of the counterclaim became moot before Spence J.

[66] My conclusion that I would reinstate the defence would also restore the appellants' right to seek leave to amend their defence by adding a counterclaim. This issue, however, cannot be resolved here as, contrary to normal practice in a motion for leave to amend a pleading, the appellants have not provided a draft proposed counterclaim. Since pleadings have been closed, the appellants must have the consent of the other parties to add a counterclaim or obtain leave of the court: rules. 27.07(1) and 26.02. Further, any proposed counterclaim must contain a legally tenable claim that is not statute-barred. Given the history of these proceedings thus far, I would add a caution that any proposed counterclaim must not address issues that have been determined by Roberts J. In other words, care must be taken that a proposed counterclaim does not amount to a collateral attack on Roberts J.'s order.

Disposition

[67] In the result, I would dismiss the appeal from the order of Roberts J.

[68] I would allow, in part, the appeal from the order of Spence J. relating to the order striking out the statement of defence, in accordance with the terms set out above.

[69] I would dismiss the appeal from the order of Spence J. dismissing the appellants' request to amend their defence to add a counterclaim without prejudice to their being able to move under the appropriate rules for leave to add a counterclaim.

[70] My proposed disposition alters the result before Spence J. In the circumstances, I would set aside his order as to costs. Given the divided success, I would award the respondent his costs of the motion before Spence J. in the amount of $2,500, plus disbursements and applicable taxes.

[71] Success has also been divided in this court but the overall outcome favours the respondent. I would therefore order the appellants to pay the respondent's costs of these appeals fixed in the amount of $10,000, inclusive of disbursements and [page222] applicable taxes. These costs include the costs of the motion before Hourigan J.A. that consolidated the two appeals.

Appeal from order of Roberts J. dismissed; appeal from order of Spence J. allowed.

Notes

[^1]: In the statement of claim, s. 246 of the Business Corporations Act, R.S.O. 1990, c. B.16 is pleaded and relied upon, indicating that the respondent has added Canada Limousine as a plaintiff because he intends to seek leave to bring a derivative action. His counsel confirmed this intention before Roberts J. on September 24 and 25, 2012. But, there is no evidence that the respondent has yet been granted leave to do so. I therefore do not refer to Canada Limousine as a party.

[^2]: In her February 7, 2013 endorsement, Roberts J. accepted the respondent's calculation of the driver revenue that was owed to him by the appellants. But, she delayed making a final determination on the driver revenue payable until the issue of the Kalex expert fees had been decided. In her March 13, 2013 endorsement, Roberts J. held that the expert fees issue could not be decided on the evidence before her and would be left to trial.

[^3]: The parties initially disagreed about a 5 per cent additional commission on fare income exceeding $5,000 in April and May 2011. In the February 7, 2013 endorsement, Roberts J. noted that she erred on this issue in her December 12, 2012 reasons. The revised calculations the respondent provided, and which Roberts J. accepted, included the additional 5 per cent commission payable to Canada Limousine on driver revenue exceeding $5,000 in a month.

[^4]: This amount formed part of the additional $2,029.91 in damages awarded as of March 13, 2013.

[^5]: In her February 7, 2013 endorsement, Roberts J. accepted the respondent's calculation of the driver revenue that was owed to him by the appellants. But, she decided not to make a final determination on the driver revenue payable until the issue of the Kalex expert fees had been determined.