COURT OF APPEAL FOR ONTARIO
CITATION: Falcon Lumber Limited v. 2480375 Ontario Inc. (GN Mouldings and Doors), 2020 ONCA 310
DATE: 20200525
DOCKET: C67321
Gillese, Brown and Huscroft JJ.A.
BETWEEN
Falcon Lumber Limited
Plaintiff (Respondent)
and
2480375 Ontario Inc., carrying on business as "GN Mouldings and Doors", Muhammad Asjid Iqbal, GN Trim and Doors Ltd., a.k.a. "GN Trim & Door Ltd.", Surinder P. Lotey a.k.a. "Paul Lotey", 2562825 Ontario Inc., carrying on business as VK TRIM & DOORS, 2625068 Ontario Inc., carrying on business as VK Trim & Doors
Defendants (Appellant)
Micheal Simaan and Rahul Gandotra, for the appellant
Ritchie J. Linton, for the respondent
Heard: In-writing
On appeal from the order of Justice Leonard Ricchetti of the Superior Court of Justice, dated October 15, 2019, reported at 2019 ONSC 4280.
BROWN J.A.:
I. OVERVIEW
[1] There are two appellants on this appeal. The first, Mr. Paul Lotey, appeals the order of the motion judge striking out the statement of defence filed on behalf of himself and two of his companies, GN Trim and Doors Ltd. a.k.a. “GN Trim & Doors Ltd.” (“GN Trim”) and 2562825 Ontario Inc., carrying on business as VK TRIM & DOORS (“256”) (collectively the “Lotey Defendants”). They were defending a March 31, 2016 action commenced by the respondent, Falcon Lumber Limited (“Falcon Lumber”), for the payment of $131,748.17 for lumber and building materials sold and delivered to GN Trim in 2015.
[2] The second appellant is the law firm of Kramer Simaan Dhillon LLP (the “KSD Firm”) who represented the Lotey Defendants in the proceeding below and who continue to represent Mr. Lotey on this appeal. The KSD Firm appeals that part of the motion judge’s order requiring it to pay Falcon Lumber’s costs of the motion fixed in the amount of $6,246.54.
[3] In addition to the Lotey Defendants, there are two other groups of defendants in this action. The second is the Moulding Defendants, which consists of Muhammad Asjid Iqbal and 2480375 Ontario Inc., carrying on business as “GN Mouldings and Doors”. Falcon Lumber pleaded that in 2015 the Lotey Defendants and Mouldings Defendants colluded to avoid payment of its invoices for the goods sold and delivered. As the litigation unfolded, the claim against the Mouldings Defendants took a back seat to an amended claim involving the dealings between the Lotey Defendants and the third defendant group, 2625068 Ontario Inc., carrying on business as VK Trim & Doors (“262”). It purchased the assets of GN Trim in April 2018 from Mr. Lotey’s company, 256.
[4] In October 2018, Falcon Lumber amended its statement of claim to add 262 and Mr. Lotey’s company 256 as defendants. The amendment resulted from the disclosure the motion judge had ordered in June 2018 concerning the November 2017 receivership of GN Trim. The productions revealed the following series of transactions:
(i) In March 2017, Mr. Lotey incorporated 256;
(ii) In April 2017, Mr. Lotey caused GN Trim – the company to which Falcon Lumber had sold the lumber – to grant him a security interest over its assets;
(iii) In November 2017, Mr. Lotey took the position that GN Trim had defaulted on the general security agreement and appointed a private receiver over GN Trim’s assets. At the time, Mr. Lotey was the largest creditor of GN Trim;
(iv) Two days after its appointment, the receiver sold GN Trim’s assets to Mr. Lotey’s new company, 256, by way of a private sale for $147,000. 256 operated its business from the Bolton, Ontario address from which GN Trim had operated (the “Premises”);
(v) In March 2018, 262 was incorporated with its registered head office listed as the Premises; and
(vi) In late April, 262 closed the purchase of GN Trim’s assets from 256 for $580,000. The assets acquired by 262 were the same assets of GN Trim that 256 had bought from the receiver.
[5] Falcon Lumber pleads that the 2017 and 2018 transactions involving GN Trim, 256, and 262 were intended to defeat its claim as a creditor for the goods it had sold and delivered to GN Trim and resulted in Mr. Lotey receiving a personal financial benefit. Mr. Lotey and 262 deny the allegations.
[6] By Superior Court of Justice standards, this is a claim for a modest amount of money. One would expect a reasonably prompt disposition of the dispute on its merits.
[7] That has not occurred.
[8] The main reason is that close to three years were consumed by Falcon Lumber trying to obtain proper documentary disclosure and production from the Lotey Defendants regarding their dealings with GN Trim’s assets including what, if any, benefit Mr. Lotey personally received from those dealings.
[9] According to the motion judge in his July 2019 reasons, by July 4, 2019, when he heard Falcon Lumber’s motion to strike out the statement of defence of the Lotey Defendants for failure to make proper production: (i) there had been 30 dates for motions, cross-motions, and case conferences; (ii) on most court attendances the primary issue had been the Lotey Defendants’ failure to provide complete productions; (iii) 22 orders or judicial endorsements had been made; (iv) six court production orders had been made against the Lotey Defendants; and (v) as of the date of the motion, the Lotey Defendants still had not made full and complete production of relevant documents: at para. 1.
[10] The motion judge struck out the statement of defence of the Lotey Defendants, without leave to amend, noted them in default, and permitted Falcon Lumber to proceed to obtain default judgment against them. As well, he awarded Falcon Lumber its costs of the motion of $6,246.54 against the Lotey Defendants’ counsel, the KSD Firm.
[11] As noted above, Mr. Lotey appeals the striking out of his statement of defence; his companies, GN Trim and 256, do not join in the appeal. The KSD Firm appeals the award of costs made against it.
[12] For the reasons set out below, I would dismiss Mr. Lotey’s appeal and deny the KSD Firm leave to appeal the cost order.
II. THE LITIGATION
A. The ACTION’S PROCEDURAL HISTORY
[13] Following the close of pleadings in June 2016, Falcon Lumber and the Lotey Defendants pursued separate, but parallel, procedural tracks in this litigation.
[14] Falcon Lumber sought documentary production from and the examination of the Lotey Defendants. The Lotey Defendants did not appear in response to an initial notice of examination, which led Falcon Lumber to obtain a consent order from Price J., dated August 18, 2016, that examinations for discovery take place on October 7, 2016.
[15] Contemporaneously, Mr. Lotey informed Falcon Lumber that he intended to seek summary judgment dismissing the action as against him personally. In August 2016, he advised Falcon Lumber that he had secured the first available motion date: April 5, 2017.
[16] Falcon Lumber’s difficulties in obtaining proper production from the Lotey Defendants resulted in motions to produce and culminated in its motion to strike out their statement of defence. The return dates for Mr. Lotey’s summary judgment motion tracked those for the Falcon Lumber motions.
2016
[17] Mr. Lotey first attended for examination for discovery in October 2016. He appeared both in his capacity as a named defendant and as the representative of GN Trim. Mr. Lotey confirmed that he was the sole shareholder of GN Trim.
[18] Mr. Lotey swore GN Trim’s initial August 2016 Affidavit of Documents as the principal of the company. The only documents listed were the invoices sent by Falcon Lumber. Mr. Lotey’s personal affidavit did not list any documents.
[19] Mr. Lotey brought to the discovery only the Falcon Lumber invoices; he refused to produce any other documents. Falcon Lumber was not prepared to proceed in the circumstances and advised it would bring a motion to compel production. In his July 2019 reasons, the motion judge stated, at para. 26:
There can be no dispute that the Lotey Defendants had not produced all relevant documents in the Affidavit of Documents as required by the Rules (as subsequently decided by this court) and as such, the Plaintiff did not want to and had every right not to proceed with the examination for discovery.
2017
[20] Falcon Lumber moved for an order requiring the Lotey Defendants to produce a full and complete Affidavit of Documents. That motion was heard by Barnes J. in March 2017. He disposed of the motion by order dated July 21, 2017 (the “Barnes J. Production Order”).
[21] In his reasons, Falcon Lumber Limited v. 2480375 Ontario Inc., 2017 ONSC 4470, Barnes J. stated, at para. 22:
Thus the documents sought by the Plaintiff are relevant to the issues raised by the action. The documents can help discover why the amount claimed has not been paid, who may have obtained the benefit arising from the failure to pay, whether there is any financial relationship between the [Lotey] Defendants and the nature of any financial relationships. All of these items are relevant to the issue of unjust enrichment and whether the corporate veil can be pierced in this action.
[22] Barnes J. ordered the Lotey Defendants to “produce full disclosure of the last 24 months of their business records, corporate records and financial information, including the last 24 months of financial statements; the last 12 months [bank] statements with cancelled cheques; and payroll ledger for the prior 24 months. They shall also produce a full and complete affidavit of documents”: at para. 3.
[23] As the motion judge wrote about the Barnes J. Production Order in his July 2019 reasons, at para. 29: “This court order should have finally resolved the production issues. It did not.”
[24] In April 2017, Mr. Lotey’s motion for summary judgment had been adjourned to late August 2017. Mr. Lotey was cross-examined in June 2017. Barnes J. released the reasons for his production order the following month.
[25] Falcon Lumber then brought a motion to compel Mr. Lotey to re-attend for cross-examination to answer undertakings given and refusals made on his June cross-examination. Shaw J. disposed of the motion in October 2017: Falcon Lumber Ltd. v. 2480375, 2017 ONSC 6248. He wrote, at para. 4, that:
The defendants have not complied with Justice Barnes order. GN [Trim] and [Mr.] Lotey were to have provided disclosure by August 31, 2017. Counsel for the defendants informed the court during the motion that the disclosure would be provided by September 28, 2017.
[26] Shaw J. also ordered Mr. Lotey to answer certain questions refused on his cross-examination. Counsel for the Lotey Defendants advised that proper production would be made by September 28, 2017. It was not.
2018
[27] Falcon Lumber arranged for the continuation of Mr. Lotey’s cross-examination and the examination for discovery of the Lotey Defendants to take place in March 2018. Although Mr. Lotey attended, full production had not been made. As a result, Falcon Lumber did not proceed with the examination for discovery, although it did continue its cross-examination of Mr. Lotey on his summary judgment motion affidavit.
[28] Counsel from the KSD Firm took the position that the examination for discovery of the Lotey Defendants should proceed notwithstanding deficient production. The motion judge quite properly rejected that contention, stating at paras. 39-40:
Clearly, the Lotey Defendants' counsel did not and does not understand that all relevant documents should have been produced in advance for a proper and complete cross-examination.
This is a further example of the deliberate delay and failure to comply with the Rules for almost two years and the failure to comply with the Barnes J.’s order for almost a year. Six months had elapsed since Lotey Defendants' counsel advised the court that the productions would be made by September 28, 2017.[^1] [Emphasis in original.]
[29] Further production-related steps took place during 2018:
• On May 3, 2018, GN Trim served an unsworn further affidavit of documents, that bore Mr. Lotey’s name, which its counsel advised included the disclosure ordered by the July 2017 Barnes J. Production Order.
• On May 16, 2018, Falcon Lumber’s motion to strike and Mr. Lotey’s motion for summary judgment came before the motion judge. This was the parties’ first attendance before the motion judge, who dealt with all subsequent motions. In his July 2019 reasons, the motion judge wrote that at that time “it was painfully obvious that the Lotey Defendants continued to be in breach of the Barnes J.’s order”: at para. 43.
• The motion judge adjourned Mr. Lotey’s summary judgment motion because “it would be unfair to [Falcon Lumber] to force on the motion for summary judgment with such multiple and deliberate delays by Lotey and without a full examination for discovery of Lotey by [Falcon Lumber]”.
• The motion judge directed that an examination of Mr. Lotey occur in June 2018. The examination did not proceed due to a dispute over whether Mr. Lotey’s answers would bind GN Trim which, at that point, was in receivership.
• At a June 28, 2018 case conference, the Lotey Defendants advised the motion judge that GN Trim had been placed in receivership. The motion judge ordered the production of documents relating to the receivership. Some were produced in August 2018.
• As a result of the productions, Falcon Lumber amended its claim as described in paras. 4 and 5 above.
• Other productions due from the Lotey Defendants remained outstanding at the time of a further attendance before the motion judge in December 2018. The motion judge directed the completion of productions.
2019
[30] By the time of a January 10, 2019 case conference before the motion judge, the Lotey Defendants had not made complete production. A further order for a better Affidavit of Documents was made and examinations directed for February.
[31] Following the case conference, the Lotey Defendants produced some further documents. They did not make full production before the scheduled February 27, 2019 examinations notwithstanding letters from Falcon Lumber’s counsel requesting that they do so. As put by the motion judge at para. 62:
[D]espite now having consented to provide a fresh and complete Affidavit of Documents, the Lotey Defendants continued to fail to produce all relevant documents, in particular the documentation in relation to the trail of the monies and assets from GN [Trim] Ltd., the security, receivership and subsequent sales.
[32] On the day of examination, February 27, 2019, the Lotey Defendants produced some additional documents. Counsel for Falcon Lumber stated that he was “not going to be ambushed” or conduct an examination “in dribs and drabs”. Counsel for the Lotey Defendants invited him to examine on the documents produced. Counsel for Falcon Lumber refused and adjourned the examination. The motion judge quite properly stated, at para. 64:
It was entirely appropriate for Plaintiff’s counsel to refuse to proceed with the examination that day. On the other hand, Lotey Defendants' counsel's position is, in light of the history, absolutely shocking and unprofessional.
B. The motion to strike
[33] In April 2019, Falcon Lumber initiated a motion for an order either to strike out the Lotey Defendants’ statement of defence or to produce a better, complete Affidavit of Documents. For the motion, Falcon Lumber filed an affidavit from its sales manager, Stephen Blackadder, that itemized the types of documents the Lotey Defendants had failed to produce to date.
[34] As well, in its notice of motion, Falcon Lumber put the SKD Firm on notice that it would seek costs of the motion against it. Mr. Blackadder deposed that “it appears to me that Counsel for the Lotey Defendants has engaged in a litigation policy promoting non-disclosure; failing to inform of all material changes in the course of litigation, and causing unnecessary delay and costs in consequence.”
[35] On the return of the motion on May 17, 2019, the SKD Firm sought an adjournment to retain counsel to deal with the claim for costs against it. The motion judge granted an adjournment until July 4, 2019. As terms of adjournment, the court ordered the Lotey Defendants to deliver by the end of June 2019 a better Affidavit of Documents that disclosed specific items, deliver the related productions at least a week before the motion’s return date, and bring the productions to court on the return of the motion so that the court could examine them.
[36] In late June, the Lotey Defendants served a fresh Affidavit of Documents, which Mr. Lotey affirmed on behalf of himself and his two corporations.
[37] According to the motion judge, on the July 4, 2019 return of the motion: “it became clear that the Lotey Defendants had not produced what was ordered”; the “Affidavit of Documents was incomplete”; “[m]any of the produced documents were redacted; and some were missing”; and the “redactions and missing documentation obfuscated exactly what happened” and whether “the transactions were bona fide”: at paras. 69-71. When the motion judge asked counsel for the Lotey Defendants about the missing documentation, counsel’s “response was that he would ‘now’ ask the bank for this documentation”: at para. 72. The motion judge continued, at para. 74:
To get to the “bottom line,” I asked the Lotey Defendants’ counsel whether the new Affidavit of Documents and the most recently produced documents showed what happened to the assets and monies regarding the sale of the GN [Trim] Ltd. Counsel for the Lotey Defendants admitted that the documentation/information in the now produced documentation did not disclose this information. [Emphasis in original.]
C. Reasons of the motion judge
[38] The motion judge found that the Lotey Defendants had: willfully disregarded court procedure and orders for three years; done everything in their power to avoid an adjudication on the merits; and done everything they could to prejudice Falcon Lumber’s claim by failing to provide full disclosure of the various transactions relating to GN Trim’s assets: at paras. 86-91.
[39] The motion judge considered but rejected the option of affording the Lotey Defendants yet a further opportunity to make proper production. The Lotey Defendants had ignored his “last chance order” of May 17, 2019 and their actions were “clearly contumelious”. In striking out the Lotey Defendants’ statement of defence, the motion judge stated, at para. 95:
If the Rules and court orders can be ignored repeatedly and over a number of years without severe consequences, then there would be no point in having Rules or making orders on such motions. The Lotey Defendants’ actions can no longer be excused.
[40] The motion judge ordered the SKD Firm to pay the substantial indemnity costs of the motion to strike fixed in the amount of $6,246.54. I will consider his reasons for doing so in Part IV below.
III. FIRST ISSUE: STRIKING OUT THE LOTEY DEFENDANTS’ STATEMENT OF DEFENCE
A. The governing principles
The fundamental obligation to disclose and produce relevant documents
[41] At the heart of the rules governing actions in the Superior Court of Justice lie the obligations of every party to an action to disclose every document relevant to any matter in issue in an action that is or has been in its possession, control or power, whether or not privilege is claimed in respect of a document, and to produce all such documents, unless privilege is claimed in respect of a document: Rules of Civil Procedure, rr. 30.02(1)-(2).
[42] Three requirements imposed by the Rules of Civil Procedure emphasize the importance of the obligation to disclose and produce relevant documents to the proper and fair functioning of the civil litigation process:
• First, the obligation to disclose all relevant documents is not limited to documents upon which the party intends to rely to establish its claim or defence. A party must disclose “every document relevant to any matter in issue”, whether or not the document helps or hurts the party’s case: r. 30.02(1);
• Second, in order to ensure that a party fully understands its obligation to disclose and produce all relevant documents, the party’s lawyer must certify in the party’s Affidavit of Documents that the lawyer has explained “the necessity of making full disclosure of all documents relevant to any matter in issue in the action” and “what kinds of documents are likely to be relevant to the allegations made in the pleadings”: Forms 30A and 30B; rr. 30.03(4) and 76.03(4). Courts expect that a party has received from its counsel legal advice that the documents it must disclose and produce are determined by their relevance to the issues pleaded, not by whether the party regards the document as favourable or harmful to its case. No doubt this advice may rub against the litigation instincts of some parties, who would prefer to “deep-six” relevant documents that might undermine their claims or defences; and
• Third, the obligation to disclose and produce is not a “one-time” obligation. It is a continuing one: Tripp v. Ontario (Ministry of Transportation) (1999), 1999 CanLII 3762 (ON CA), 123 O.A.C. 278 (C.A.), at para. 22. Where, after serving an affidavit of documents, a party comes into the possession or control of a relevant document or discovers that its Affidavit of Documents is inaccurate or incomplete, the party must “forthwith” serve a supplementary affidavit of documents “specifying the extent to which the affidavit of documents requires modification and disclosing any additional documents”: Rules of Civil Procedure,r. 30.07.
Taken together, these key rules are designed to ensure that parties make full disclosure of all relevant documents and production of all relevant non-privileged documents well in advance of the examinations for discovery permitted in Superior Court actions or, in the case of newly discovered documents, “forthwith” – i.e. within a few days – after their discovery.
[43] The goal of Ontario’s civil justice system is to provide the public with the just, most expeditious, and least expensive determination of every civil proceeding on its merits: Rules of Civil Procedure, r. 1.04(1); Rules of the Small Claims Court, r. 1.03(1). To achieve that goal, parties to every action must comply with their document disclosure and production obligations without the need for a court to intervene to compel their adherence. This court has stated, in regard to family law litigation, that a party’s fundamental duty to disclose financial information is automatic, immediate, and ongoing, and should not require court orders to obtain production: Roberts v. Roberts, 2015 ONCA 450, 65 R.F.L. (7th) 6, at paras. 11 and 13. The same applies to civil actions. The fundamental obligation to disclose relevant documents and produce those that are not privileged should be performed automatically by a party, without the need for court intervention.
[44] Of course, the Rules of Civil Procedure provide for means by which a party can seek the assistance of the court where an opposite party has ignored or breached its obligation to make automatic, immediate, and ongoing full disclosure and production. A party usually seeks the court’s intervention by bringing a motion against the defaulting party under either r. 30.06 or r. 30.08. In certain parts of the province, parties may have ready access to a case management judge who can deal more informally and expeditiously with requests for relief under these rules.
[45] Rule 30.06 focuses on the situation where the served affidavit of documents is inadequate or the opposite party wishes to challenge the other party’s assertion of privilege over a document. It states:
30.06 Where the court is satisfied by any evidence that a relevant document in a party’s possession, control or power may have been omitted from the party’s affidavit of documents, or that a claim of privilege may have been improperly made, the court may,
(a) order cross-examination on the affidavit of documents;
(b) order service of a further and better affidavit of documents;
(c) order the disclosure or production for inspection of the document, or a part of the document, if it is not privileged; and
(d) inspect the document for the purpose of determining its relevance or the validity of a claim of privilege.
[46] Rule 30.08 overlaps to some degree with r. 30.06, as it deals with the situation where a party fails to disclose a document. But r. 30.08 also addresses a party’s failure to produce a document for inspection. Rule 30.08(1) authorizes a court to impose certain sanctions at the trial of an action. It states:
30.08(1) Where a party fails to disclose a document in an affidavit of documents or a supplementary affidavit, or fails to produce a document for inspection in compliance with these rules, an order of the court or an undertaking,
(a) if the document is favourable to the party’s case, the party may not use the document at the trial, except with leave of the trial judge; or
(b) if the document is not favourable to the party’s case, the court may make such order as is just.
[47] Rule 30.08(2) authorizes a court to impose certain pre-trial sanctions, including striking out a pleading. It states:
30.08(2) Where a party fails to serve an affidavit of documents or produce a document for inspection in compliance with these rules or fails to comply with an order of the court under rules 30.02 to 30.11, the court may,
(a) revoke or suspend the party’s right, if any, to initiate or continue an examination for discovery;
(b) dismiss the action, if the party is a plaintiff, or strike out the statement of defence, if the party is a defendant;[^2] and
(c) make such other order as is just.
[48] However, each time a party defaults on its disclosure and production obligations and requires the opposite party to seek the court’s assistance to remedy the default, two things happen. First, the cost of the litigation increases. Motions are not cheap; they add significantly to the overall costs of a civil case. Second, the final determination of the case on its merits gets pushed back, delayed by the need to bring a defaulting party into compliance with its disclosure obligations.
The principles guiding the striking out of pleadings for breach of production obligations
[49] Limited jurisprudence exists about when it is appropriate to strike out a party’s pleading under r. 30.08(2)(b) for breach of documentary disclosure and production obligations. Given the variety of circumstances in which a party may resort to r. 30.08, the most pragmatic articulation of a guiding principle is that made by Wein J. in Newlove v. Moderco Inc., 2002 CanLII 34748 (Ont. Sup. Ct.), at para. 21, that “the scope of the remedy is one within the discretion of the Court, to be determined in the context of the particular case.” Several principles guide the exercise of that discretion.
[50] First, contrary to the appellant’s assertion, striking out a pleading under r. 30.08(2)(b) is not restricted to “last resort” situations, in the sense that it must be preceded by a party breaching a series of earlier orders that compelled better disclosure or production. Some cases have granted the remedy where previous orders were breached: DLE Consulting Inc. v. Graham, 2016 ONCA 315, 130 O.R. (3d) 799; Vacca v. Banks, 2005 CanLII 1054 (Ont. Div. Ct.). In others, no prior order had been made: Royal Bank of Canada v. Russo, 2002 CarswellOnt 73 (Ont. Div. Ct.). However, courts usually want to ensure that a party has a reasonable opportunity to cure its non-compliance before striking out its pleading: Koohestani v. Mahmood, 2015 ONCA 56, 124 O.R. (3d) 205, at para. 54.
[51] Second, a court should consider a number of common sense factors when deciding whether to strike out a pleading under r. 30.08(2): (i) whether the party’s failure is deliberate or inadvertent; (ii) whether the failure is clear and unequivocal; (iii) whether the defaulting party can provide a reasonable explanation for its default, coupled with a credible commitment to cure the default quickly; (iv) whether the substance of the default is material or minimal; (v) the extent to which the party remains in default at the time of the request to strike out its pleading; and (vi) the impact of the default on the ability of the court to do justice in the particular case: Royal Bank of Canada, at para. 12; and see the cases reviewed in King v. Belair Direct (2004), 2004 CanLII 19530 (ON SCDC), 184 O.A.C. 189 (Div. Ct.), at paras. 12-13.
[52] Third, although a court may also consider the merits of a party’s claim or defence, as it does under r. 60.12 dealing with the failure to comply with an interlocutory order[^3], this factor may play only a limited role where breaches of production obligations are alleged as one would reasonably expect a party with a strong claim or defence to comply promptly with its disclosure and production obligations.
[53] Finally, a court must consider whether an order to strike out a pleading would constitute a proportional remedy that is consistent with the recent calls of the Supreme Court of Canada to alter the Canadian litigation culture.
[54] Parties who default on their documentary disclosure and production obligations impede the ability of our civil justice system to provide the fair, timely, and cost-effective adjudication of civil disputes on their merits. Their defaulting conduct promotes the culture of complacency towards delay decried by the Supreme Court, in the context of the criminal justice system, in R. v. Jordan, 2016 SCC 27, [2016] 1 S.C.R. 631, at para. 40. As well, such conduct undermines on-going efforts to shift the Canadian civil litigation culture in the direction of providing more accessible justice to the public. As the Supreme Court pointed out in Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, at para. 27, the “developing consensus that the traditional balance struck by extensive pre-trial processes and the conventional trial no longer reflects the modern reality and needs to be re-adjusted.” (emphasis added) In Hryniak, the Supreme Court called for a civil justice system that not only provides a fair process that results in the just adjudication of disputes, but also is “accessible — proportionate, timely and affordable,” for without an accessible process, a fair process is illusory: at para. 28.
[55] Hryniak requires judges to actively manage the civil legal process in line with the principle of proportionality: at para. 32. Orders to strike out pleadings are one means by which to ensure that the civil justice process delivers justice that is proportionate, timely, and affordable. Accordingly, when considering whether to strike out a party’s pleading by reason of its failure to comply with its documentary disclosure and production obligations, in addition to the factors set out in paras. 50 to 54 above, a court should consider:
• the extent to which the defaulting party’s conduct has increased the non-defaulting party’s costs of litigating the action, including the proportionality of those increased costs to the amount actually in dispute in the proceeding; and
• to what extent the defaulting party’s failure to comply with its obligation to make automatic disclosure and production of documents has delayed the final adjudication of the case on its merits, taking into account the simplicity (or complexity) of the claim and the amount of money in dispute.
[56] Applying the principle of proportionality in the context of a motion to strike out a pleading for failure to perform document disclosure and production obligations means that the moment when a court may make the order to strike will come much earlier in a simple claim for a modest amount of money than it will in a complex case where millions are in dispute. Common sense dictates that the simple case should spend less time in the court system and impose lower legal costs on the litigants than the more complex one.
[57] To summarize, several principles guide the exercise of a court’s discretion to strike out a party’s claim or defence under r. 30.08(2) for non-compliance with documentary disclosure and production obligations:
• The remedy is not restricted to “last resort” situations, in the sense that it must be preceded by a party breaching a series of earlier orders that compelled better disclosure or production. However, courts usually want to ensure that a party has a reasonable opportunity to cure its non-compliance before striking out its pleading;
• A court should consider a number of common sense factors including: (i) whether the party’s failure is deliberate or inadvertent; (ii) whether the failure is clear and unequivocal; (iii) whether the defaulting party can provide a reasonable explanation for its default, coupled with a credible commitment to cure the default quickly; (iv) whether the substance of the default is material or minimal; (v) the extent to which the party remains in default at the time of the request to strike out its pleading; and (vi) the impact of the default on the ability of the court to do justice in the particular case;
• The merits of a party’s claim or defence may play only a limited role where breaches of disclosure and production obligations are alleged as one would reasonably expect a party with a strong claim or defence to comply promptly with its disclosure and production obligations;
• In considering whether an order to strike out a pleading would constitute a proportional remedy in the circumstances, a court should consider:
o the extent to which the defaulting party’s conduct has increased the non-defaulting party’s costs of litigating the action, including the proportionality of those increased costs to the amount actually in dispute in the proceeding; and
o to what extent the defaulting party’s failure to comply with its obligation to make automatic disclosure and production of documents has delayed the final adjudication of the case on its merits, taking into account the simplicity (or complexity) of the claim and the amount of money in dispute.
B. Application of the governing principles
[58] Where a motion judge exercises discretion, an appellate court should intervene only where the discretion has been exercised on a wrong principle of law or a clear error has been made. An appellate court should defer to the findings of fact made by a motion judge unless he or she disregarded or failed to appreciate relevant evidence: Bottan v. Vroom, 2002 CanLII 41691 (Ont. C.A.), at para. 13.
[59] In the present case, Mr. Lotey submits that the motion judge made three reversible errors in striking out his statement of defence. His submissions must be assessed in the larger context of the case: a claim for only about $131,000; a three-year history of the Lotey Defendants failing to make full disclosure and production of relevant, non-privileged documents; and six court orders directing them to cure their non-compliance.
The Lotey Defendants were in default of their production obligations
[60] First, Mr. Lotey submits that the Lotey Defendants were not in default at the time the motion to strike came before the motion judge in July 2019. As part of his argument, Mr. Lotey contends that there was no evidence of continued non-compliance by the Lotey Defendants with past orders.
[61] Mr. Lotey’s submission stands at odds with the record. In his reasons, the motion judge thoroughly and accurately reviewed the disclosure and production orders made against the Lotey Defendants following the close of pleadings, which showed continued non-compliance by them. As well, the record clearly shows that at the time of the July 4, 2019 hearing, the Lotey Defendants were in default of the May 17, 2019 production order, as found by the motion judge.
[62] First, the motion judge had ordered the production, by June 27, 2019, of the bank statements and cancelled cheques of GN Trim. Mr. Lotey, in his June 27, 2019 affidavit, admitted that he had not produced them but stated that he had requested them from his bank. Waiting for three years after the start of an action to ask for obviously relevant documents does not satisfy a party’s obligation of prompt and automatic disclosure and production.
[63] Second, the April 2018 sale of assets by 256 to 262 contemplated that 256 would assign its lease of the Premises to 262. In his May 17, 2019 endorsement, the motion judge ordered the Lotey Defendants to produce, by June 27, 2019, the assignment of lease. In his June 27, 2019 affidavit, Mr. Lotey deposed that the lawyer who acted for his company, 256, on the transaction advised him that there was no assignment of lease because 262 entered into a new lease with the landlord. The motion judge did not accept Mr. Lotey’s explanation, stating at para. 70(c) that:
While the Lotey Defendants were to show how the leased business premises were “transferred” between the companies, the Lotey Defendants simply said there was no assignment. There was no new lease produced, no termination documents, or other documents which would show this was either a sham transaction or a legitimate leasing transaction.
[64] In his supplementary submissions, Mr. Lotey describes these comments by the motion judge as “improper and unreasonable”. On the contrary, they were astute and most appropriate given the issues raised by Falcon Lumber’s pleading.
[65] Finally, the Lotey Defendants were ordered to produce the cancelled cheques of 256. Mr. Lotey deposed that they were produced in late June 2019. But, as the motion judge found, the information on many of the cheques had been redacted. As the motion judge quite accurately wrote, at para. 71, the “redactions and missing documentation obfuscated exactly what happened with respect to the initial corporate dealings/transfer, the securitization, the receivership and the subsequent sale.”
[66] Notwithstanding this evidence of the continuing failure of the Lotey Defendants to discharge their production obligations, in his supplementary submissions Mr. Lotey argues that “any prejudice by the redactions could easily be remedied by ordering that the documents be unredacted.” This extraordinary submission speaks volumes about the Lotey Defendants’ cavalier attitude toward their production obligations, showing that they regard them as nothing more than a game of “catch me if you can”. The culture shift directed by Hryniak has no place for such tactical gameship, which unreasonably increases litigation costs and delays the adjudication of a case on its merits.
The motion judge’s order was not disproportionate in the circumstances
[67] Mr. Lotey next submits that the motion judge’s order was disproportionate because there was no prejudice to Falcon Lumber and he could remedy any remaining production deficiencies.
[68] There is no merit in that argument.
[69] This action involved a modest monetary claim of about $131,000. If the action were started today, it would fall within the Simplified Procedure regime. Part of the claim is a straight-forward debt claim for the payment of invoices for goods sold and delivered. That is the type of claim that should enter and exit the Superior Court civil justice system quite quickly.
[70] However, the claim contains an additional element: it seeks to impose the liability for a corporate debt on the principal of the company based on allegations that the principal used a scheme to take the benefit of the transaction with Falcon Lumber for himself. Corporate principals who are the targets of such claims are entitled to defend an action. But, they are not entitled to defend by ignoring and defaulting on their fundamental document disclosure and production obligations. Breaching the Rules of Civil Procedure is not a legitimate defence tactic.
[71] In the present case, the various motion judges were generous in affording the Lotey Defendants multiple opportunities to cure their disclosure defaults. As the chronology of events set out above discloses, three judges made production orders and one of them, the motion judge, made several production orders during the one-year period that he case managed the action. The Lotey Defendants’ default of their production obligations ran from at least July 21, 2017, when the Barnes J. Production Order was made, until the July 4, 2019 hearing before the motion judge.
[72] Hryniak’s goal of accessible civil justice cannot be achieved if courts allow defendants in modest monetary claims to remain in default of their fundamental production obligations for two years. Such cases should be disposed of on their merits within two years, not remain mired in production disputes and motions for two years.
[73] On the record before us, the motion judge did not “jump the gun” in striking out the Lotey Defendants’ statement of defence. He had been case managing this action for the better part of a year. As the Divisional Court appropriately observed in Starland Contracting Inc. v. 1581518 Ontario Ltd. (2009), 2009 CanLII 30449 (ON SCDC), 252 O.A.C. 19 (Div. Ct.), at para. 26:
The authority to dismiss proceedings for repeated failure to comply with court orders and flagrant disregard for the court process is an essential management tool. A case management judge or master who has a continuous connection with an action, the parties and their counsel is well-positioned to monitor the conduct of the participants throughout the proceedings, and to determine whether anyone is deliberately stalling, showing bad faith or abusing the process of the court when deadlines are missed and defaults occur under procedural orders. A decision to dismiss an action or strike a pleading because of such defaults is entitled to deference, unless that decision is shown to have been exercised on wrong principles or based upon a misapprehension of the evidence such that there is a palpable and overriding error.
[74] In the present case, the motion judge had been more than generous in the opportunities he granted the Lotey Defendants to cure their disclosure failures. An order to strike out their pleading could well have been made much earlier in the life of this action.
Mr. Lotey should pay the price for the production failures of the corporate Lotey Defendants
[75] Finally, Mr. Lotey submits that the motion judge erred in striking out his statement of defence “as he failed to recognize that any findings as pertaining to [GN Trim] and/or 256, ought not to be considered or attributed to Lotey as a defendant in his personal capacity.”
[76] This submission ignores the facts contained in the record, which show that Mr. Lotey controlled the disclosure and production of documents by GN Trim and 256:
• He was the sole directing mind of both companies;
• In August 2016, Mr. Lotey affirmed two affidavits of documents: one as an individual defendant and the other as the principal of GN Trim;
• Mr. Lotey attended the short October 7, 2016 examination for discovery both in his personal capacity and as the representative of GN Trim;
• Mr. Lotey was the named affiant in a May 2018 updated affidavit of documents for GN Trim;
• In January 2019, the Lotey Defendants sent an unsworn joint affidavit of documents to Falcon Lumber in which Mr. Lotey was shown as the intended affiant; and
• A joint affidavit of documents of the Lotey Defendants was affirmed by Mr. Lotey in June 2019.
[77] Falcon Lumber has asserted both statutory and common law causes of action against the Lotey Defendants in its effort to impose personal liability on Mr. Lotey for the unpaid debt of GN Trim. One of the causes of action sounds in fraud and seeks to pierce the corporate veil: Yaiguaje v. Chevron Corporation, 2018 ONCA 472, 141 O.R. (3d) 1, at paras. 64-83. Whether Falcon Lumber can meet the statutory and common law tests to impose liability on Mr. Lotey personally for the debt is a matter for the default judgment proceeding.
[78] The issue before the motion judge was quite different: Which of the Lotey Defendants directed their litigation conduct? There is only one answer on the record: Mr. Lotey. The Lotey Defendants advanced a joint defence. Mr. Lotey controlled the disclosure of documents by each of the three Lotey Defendants and he was the party who filed the affidavits that sought to explain and justify the disclosure and production failures of the Lotey Defendants. In those circumstances, it was open to the motion judge to sanction the disclosure misconduct of the corporate Lotey Defendants by striking out the joint statement of defence because Mr. Lotey clearly directed that disclosure misconduct.
C. Conclusion
[79] For the reasons set out above, I conclude that the motion judge did not err in striking out the statement of defence of Mr. Lotey. I would dismiss Mr. Lotey’s appeal.
IV. SECOND ISSUE: AWARDING COSTS AGAINST COUNSEL
[80] The KSD Firm appeals the order of the motion judge requiring it to pay Falcon Lumber’s costs of the motion fixed in the amount of $6,246.54. The order also prevented the KSD Firm from seeking recovery of the costs from its client.
[81] I accept Falcon Lumber’s submission that the KSD Firm requires leave to appeal the cost order. Section 133(b) of the Courts of Justice Act, R.S.O. 1990, c. C.43 (“CJA”) states that no appeal lies without leave of the court to which the appeal is to be taken “where the appeal is only as to costs that are in the discretion of the court that made the order for costs”. Where a party seeks to join an appeal under s. 133(b) of the Courts of Justice Act with an appeal as of right, that party must seek leave to appeal: Rules of Civil Procedure, r. 61.03(17)(b). The only aspect of the order that the KSD Firm may appeal is the cost order. Leave to appeal therefore is required.
[82] While the joint Amended Amended Notice of Appeal of Mr. Lotey and the KSD Firm does not expressly seek leave to appeal, the section of the notice dealing with the jurisdiction of this court to hear the appeal does refer to s. 133(b) of the CJA “if required”. I will proceed on the basis that the KSD Firm is seeking leave to appeal costs.
[83] Awarding costs is a discretionary exercise that is afforded significant deference. Leave to appeal a costs order is granted sparingly and only where there are strong grounds to believe that the lower court erred: Feinstein v. Freedman, 2014 ONCA 205, 119 O.R. (3d) 385, at para. 52.
[84] I would not grant leave to appeal. I do not see strong grounds to believe that the motion judge erred.
[85] The motion judge dealt with the cost claim against the KSD Firm in a procedurally fair way. Prior to the May 17, 2019 motion return date, Falcon Lumber had put the KSD Firm on notice that it would seek costs against it. On the return of the motion, counsel from the KSD Firm sought an adjournment “to retain counsel for claim of costs personally,” as recorded by the motion judge in his endorsement. The motion judge granted the adjournment. When the motion was returned on July 4, 2019, the KSD Firm had not retained counsel. The motion proceeded and counsel made submissions in respect of the cost request. Accordingly, the motion judge satisfied the requirement of giving the lawyer a reasonable opportunity to make representations to the court: Rules of Civil Procedure, r. 57.07(2).
[86] The motion judge properly instructed himself on the law concerning awards of costs against counsel personally. He understood that such awards are rare and he accurately summarized the guiding factors as discussed in Galganov v. Russell (Township), 2012 ONCA 410, 294 O.A.C. 13.
[87] As well, at para. 98 of his reasons, the motion judge gave a detailed explanation for his decision to order costs against the KSD Firm:
• Counsel had continually attempted to force on the examinations knowing that the Affidavit of Documents was not complete, despite non-compliance with court orders, producing new documents on the day of the examination, and suggesting that missing documents could simply be asked for during the examination;
• The Lotey Defendants failed to produce Affidavits of Documents by the various dates represented by counsel to the court;
• Counsel did not advise the court after the GN Trim receivership that he had a new client, the receiver, and deal with the receiver’s obligation to produce relevant documentation;
• Counsel’s request on May 17, 2019 for an adjournment to retain its own counsel but the subsequent appearance without counsel “simply appeared to be yet another delay tactic”; and
• At the July 4, 2019 hearing, the “Lotey Defendants’ counsel was aware there had not been compliance with the court orders, yet, said nothing until directly pressed on the issue by this court. Lotey Defendants' counsel facilitated an expensive delay in this proceeding.”
[88] Although the motion judge assumed that the KSD Firm simply followed its clients’ instructions, the motion judge noted at para. 99:
The difficulty is that counsel must never forget they are also officers of the court and have duties to the court in connection with this responsibility. There comes a point when following instructions, makes counsel complicit in the flagrant disregard of the Rules and court orders. That happened here.
[89] The KSD Firm submits that those findings are tainted by three palpable and overriding errors.
[90] First, they submit that there was no evidence that the firm knew about the November 2017 receivership of GN Trim before they disclosed that information to the motion judge at the June 28, 2018 case conference. I read the motion judge’s reasons as stating the KSD Firm should have disclosed the fact of the receivership at the parties’ earlier attendance before him on May 16, 2018.
[91] I take the KSD Firm’s point on this issue. The record shows that on June 13, 2018 the firm sent Falcon Lumber’s counsel the November 2017 notice of the receiver’s appointment. Whether the firm knew about the receivership before that time cannot be ascertained from the record. In any event, I do not think it makes a material difference because Mr. Blackadder of Falcon Lumber acknowledged that he knew about the receivership back in November 2017. Given that Falcon Lumber knew about the receivership before the May 16, 2018 attendance before the motion judge, it could have informed the motion judge about the receivership and made submissions about its impact on outstanding disclosure issues. The motion judge’s May 16, 2018 endorsement does not record any such discussion. Accordingly, it is difficult to see how any failure by the KSD Firm to make such disclosure at that time “caused costs to be incurred without reasonable cause or to be wasted by undue delay, negligence or other default”: Rules of Civil Procedure, r. 57.07(1).
[92] If that was the only reason why the motion judge awarded costs against the KSD Firm, I might question the soundness of his order. But it was not. The other reasons enumerated by the motion judge provide more than ample support for the cost order.
[93] The KSD Firm submits that the motion judge erred in characterizing the firm’s request for an adjournment to retain counsel and then not showing up with counsel on the next return date as a delay tactic. I do not agree. By that point, the motion judge had been managing the case for almost one year and was in a good position to assess the litigation conduct of the Lotey Defendants and their counsel. Against that background, it was open to him to characterize the adjournment request as a delay tactic.
[94] It was also open to the motion judge to treat as another example of a delay tactic the conduct of the lawyer from the KSD Firm regarding the documents ordered produced in the May 17, 2019 endorsement. In that endorsement, the motion judge had specifically directed that copies of the new Affidavit of Documents and productions be brought to court on the return date. The motion judge obviously wanted to see what the Lotey Defendants had produced. It was clear that he was giving them one last chance to remedy their disclosure failures.
[95] Nevertheless, when counsel from the KSD Firm appeared in court on July 4, 2019, he provided the court with redacted copies of documents over which no claim for privilege was asserted in the updated June 27, 2019 Affidavit of Documents. A lawyer from the KSD Firm signed the certificate in that affidavit. It is no surprise that the motion judge concluded that the “Lotey Defendants' counsel facilitated an expensive delay in this proceeding.”
[96] Remarkably, in its submissions on this appeal, the KSD Firm contends that “[t]he issue of the appropriateness of the redactions is one that should either be established during examinations, and if still outstanding thereafter, on a refusals motion.” That is an extraordinary submission for the KSD Firm to make in light of the history of this litigation. It reinforces the correctness of the motion judge’s conclusion that the KSD Firm was “complicit in the flagrant disregard of the Rules and court orders” and should be required to pay costs of the motion to Falcon Lumber, without recourse to their client.
[97] For these reasons, I would deny the KSD Firm leave to appeal the cost order made against it.
[98] Falcon Lumber raises an additional issue in respect of the cost appeal. It submits that the KSD Firm put itself in a conflict of interest position by appealing the cost order which was made “without recovery from their clients”. Although it was open to the KSD Firm to appeal an order that imposed on it a financial obligation, it is very troubling that the KSD Firm would seek leave to appeal the cost order while, at the same time, acting for Mr. Lotey on his appeal.
[99] Such a course of action gives rise to an appearance of a conflict of interest. If the KSD Firm succeeded in its cost appeal but Mr. Lotey failed in his appeal, the most likely outcome would be an order against Mr. Lotey to pay Falcon Lumber its costs of the motion below.
[100] A law firm is under a duty to avoid conflicting interests, including its own personal interest: R. v. Neil, 2002 SCC 70, [2002] 3 S.C.R. 631, at para. 19. The Law Society of Ontario’s Rules of Professional Conduct state that “[a] lawyer shall not represent a client in a matter when there is a conflict of interest unless there is consent, which must be fully informed and voluntary after disclosure, from all affected clients and the lawyer reasonably believes that he or she is able to represent each client without having a material adverse effect upon the representation of or loyalty to the other client”: r. 3.4-2. Notwithstanding r. 3.4-2, r. 3.4-3 states that “a lawyer shall not represent opposing parties in a dispute.” As the Commentary to the rule explains: “A lawyer representing a client who is a party in a dispute with another party or parties must competently and diligently develop and argue the position of the client. In a dispute, the parties' immediate legal interests are clearly adverse.”
[101] In the present case, the immediate legal interests of Mr. Lotey and the KSD Firm – the other “party” affected by the order – are clearly adverse on the issue of who should pay the costs of the motion below in the event Mr. Lotey’s appeal was dismissed. Accordingly, it is very troubling that the KSD Firm acted for Mr. Lotey on the appeal when the firm was bringing its own appeal against the motion judge’s award of costs against it.
V. DISPOSITION
[102] For the reasons set out above, I would dismiss Mr. Lotey’s appeal from the order striking out his statement of defence. I would deny the KSD Firm leave to appeal the motion judge’s award of costs against it in the amount of $6,246.54.
[103] I would award Falcon Lumber its costs of the appeal fixed in the amount of $14,000, inclusive of disbursements and taxes, which I would allocate $7,000 as payable by Mr. Lotey and $7,000 payable by the KSD Firm, with both amounts to be paid within 30 days of the date of the release of these reasons.
Released: “EEG” MAY 25 2020
“David Brown J.A.”
“I agree. E.E. Gillese J.A.”
“I agree. Grant Huscroft J.A.”
[^1]: The motion judge appears to have confused the continued cross-examination of Mr. Lotey for the summary motion, which did proceed, with the continued examination for discovery of the Lotey Defendants, which did not. This confusion is of no consequence.
[^2]: Other rules authorize a court to dismiss an action or strike out a statement of defence where a party defaults on a procedural obligation. For example, a pleading may be struck out where: (i) a person sought to be examined fails to attend the examination, take an oath or affirmation at the examination, to answer any proper question at the examination, or produce a document he or she is required to produce (r. 34.15(1)(b)); or, where a party fails to comply with an interlocutory order (r. 60.12(b)).
[^3]: Koohestani, at para. 58.