Court of Appeal for Ontario

Date: 20211029 Docket: C68577

Before: Feldman, Harvison Young and Thorburn JJ.A.

Between: Warren Kawaguchi, Kent Kawaguchi, Lisa Kawaguchi, Julia Shimoda and J. & K. Die Casting Limited Plaintiffs/Responding Parties (Appellants)

And: Kawa Investments Inc., Lori Kawaguchi, 2708699 Ontario Inc., Oscar Lulka, Susan Lulka, CBRE Limited, Carol Trattner, Rob Ironside, Top Producers Real Estate Inc. and J. Armand Ardila Defendants/Moving Parties (Respondents)

Counsel: Robert S. Choi and Adam Beyhum, for the appellants Gavin Tighe and Anna Husa, for the respondents

Heard: April 13, 2021 by video conference

On appeal from judgment of Justice Markus Koehnen of the Superior Court of Justice, dated August 3, 2020.

Feldman J.A.:

[1] The motion judge prevented the appellants, the plaintiffs in the action, from discontinuing their action against the respondents, three of the defendants in the action. He then granted the respondents’ motion for summary judgment, dismissing the action against them.

[2] The issues on the appeal are whether the motion judge erred in law by finding that the appellants were not entitled to serve a notice of discontinuance under the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (the “Rules”) or, alternatively, by setting aside the notice of discontinuance as an abuse of process; if not, whether he erred by granting summary judgment; and whether he erred by ordering substantial indemnity costs.

[3] For the reasons that follow, I would dismiss the appeal. While the motion judge erred in law in his interpretation of rules 23.01(1) and 25.05, by finding that the pleadings were closed and therefore the appellants could not deliver a notice of discontinuance, he did not err in setting aside the notice of discontinuance as an abuse of process and ordering the action be dismissed on summary judgment, or in ordering substantial indemnity costs of the action and of the motion.

A. Background Facts and Findings by the Motion Judge

[4] The appellants are siblings and are the cousins of the defendant Lori Kawaguchi. The corporate appellant, J. & K. Die Casting Ltd., (“J. & K.”) is a Kawaguchi family business, as is the corporate defendant, Kawa Investments Inc. (“Kawa”). Both businesses had been operated by the Kawaguchi family for 55 years at the time these proceedings arose. The respondents are a commercial real estate services and investment firm, and two real estate agents. The defendants Lori Kawaguchi and Kawa were not parties on the motions to set aside the discontinuance and for summary judgment, and are not respondents on this appeal.

[5] The dispute arose from the attempted sale of 18 Golden Gate Court in Scarborough, the industrial property owned by Kawa, which is the location where J. & K. operates its business. Lori Kawaguchi, as president of Kawa, entered into a listing agreement with the respondents to sell the property. Lori Kawaguchi claims that she owns 50.2% of the shares of Kawa, which she inherited on the death of her father in 2012. The individual appellants own the remaining 49.8% of the shares. The appellants dispute the validity of the share transfer to Lori Kawaguchi and therefore, her status and her authority to act on behalf of Kawa.

[6] The listing agreement led to a conditional agreement of purchase and sale with a third party, but the listing was terminated when this litigation was commenced and the conditional agreement of purchase and sale did not close.

[7] The appellants’ claim against the respondents was for breach of contract and in tort for failing to investigate and verify Lori Kawaguchi’s authority to enter into the listing agreement on behalf of Kawa.

[8] The appellants moved in the action for an interim injunction to prevent the marketing and sale of the property. In response, the respondents voluntarily agreed to cease marketing the property pending the outcome of the injunction motion. The injunction was granted against Lori Kawaguchi and against Kawa, but denied against the respondents. The judge who heard the injunction motion indicated that she viewed the action as having little or no merit against the respondents: there was no contract between the appellants and the respondents, the documentary evidence showed that Lori Kawaguchi was the majority shareholder, and in any event, the realtor respondents could rely on the indoor management rule when accepting the listing from Lori Kawaguchi. [1]

[9] Following the injunction motion, when the appellants refused to dismiss the action against the respondents, the respondents’ counsel advised that the respondents would be moving for summary judgment. In response, the appellants served a notice of discontinuance. Counsel for the appellants confirmed to the motion judge that the appellants wished to retain the right to recommence the action against the respondents in the future.

[10] The respondents proceeded to bring their motion for a declaration that the appellants’ notice of discontinuance was invalid, and for summary judgment dismissing the action against them. The issue turned on the interpretation of rr. 23.01(1) and 25.05 of the Rules. The appellants submitted that they were entitled to discontinue because pleadings were not closed within the meaning of r. 25.05, because the time for delivery of a reply had not expired as against the defendants, Lori Kawaguchi and Kawa, who had been late in filing their joint defence and counterclaim.

[11] The motion judge rejected that submission, concluding that pleadings closed at different times against each defendant, and that as against the respondents, the pleadings were closed.

[12] The motion judge found, in the alternative, that if he was incorrect about the proper interpretation of the Rules, he would set aside the notice of discontinuance as an abuse of process and grant summary judgment dismissing the action against the respondents. The motion judge found that there was no genuine issue requiring a trial arising from the claim that the respondents were negligent by failing to conduct due diligence regarding Lori Kawaguchi’s authority to enter into the listing agreement.

[13] First, the fact that Lori Kawaguchi is a director and president of Kawa entitled the respondents to rely on the indoor management rule.

[14] Second, the appellant Warren Kawaguchi facilitated showing the property to potential purchasers, including accompanying them on showings and directing when showings could and could not occur. He never indicated any objection that the listing was unauthorized.

[15] Third, the motion judge rejected the one alleged inconsistency in the evidence of one of the respondents, Rob Ironside, which counsel identified as the only issue that required a trial.

[16] The motion judge concluded that in light of the “flimsy” nature of the claim, the respondents were entitled to a final resolution of the issues raised, and should not be exposed to a new action based on the same facts. He therefore dismissed the claim against them.

[17] The motion judge also awarded costs to the respondents on a substantial indemnity basis. He found that because of the appellant Warren Kawaguchi’s participation in the showing process, the respondents “clearly had actual authority from 2 of 3 directors.” Therefore, the action against them was frivolous and vexatious.

B. Issues

[18] The appellants raise four issues on this appeal:

1. Did the motion judge err in law by finding that the appellants were not entitled to discontinue the action against the respondents because pleadings were closed within the meaning of r. 25.05?
2. Did the motion judge err by setting aside the notice of discontinuance as an abuse of process?
3. Did the motion judge err by granting summary judgment?
4. Did the motion judge err by finding an abuse of process that justified an award of substantial indemnity costs?

C. Analysis

(1) Did the motion judge err in law by finding that the appellants were not entitled to discontinue the action against the respondents because the pleadings were closed within the meaning of r. 25.05?

[19] The first issue before the motion judge was whether the appellants were entitled to discontinue the action against the respondents. The issue turns on the interpretation of rr. 23.01(1) and 25.05, and in particular, whether pleadings in an action remain open as long as they are not complete in respect of any one of multiple defendants, or whether they can close in respect of each defendant separately.

[20] The two rules read as follows:

23.01(1) A plaintiff may discontinue all or part of an action against any defendant,

(a) before the close of pleadings, by serving on all parties who have been served with the statement of claim a notice of discontinuance (Form 23A) and filing the notice with proof of service;

(b) after the close of pleadings, with leave of the court; or

(c) at any time, by filing the consent of all parties.

25.05 Pleadings in an action are closed when,

(a) the plaintiff has delivered a reply to every defence in the action or the time for delivery of a reply has expired; and

(b) every defendant who is in default in delivering a defence in the action has been noted in default.

[21] The motion judge focused on the singular noun “a reply” in subrule 25.05(a), inferring from the use of the singular that pleadings close against each defendant separately. He accepted the submission that, were it otherwise, a defendant who has defended a multi-defendant lawsuit would be precluded from moving the action forward, such as to discovery of documents, until the last defendant had defended and the time for reply had expired. With respect to the motion judge, this interpretation is incorrect and constitutes an error of law.

[22] The Rules tie the deadline for taking certain procedural steps to the defined state of the close of pleadings in only seven contexts: the first is determining when a plaintiff may discontinue an action (r. 23.01(1)); the second is determining when a party may amend its pleadings without leave or consent (r. 26.02 (a)); the third is the time by which the parties shall agree to a discovery plan (r. 29.1.03(2)); the fourth is the time by which a party shall serve its affidavit of documents under the simplified procedure (r. 76.03(1)); the fifth is the time after which a party may set an action or a third party claim down for trial (rr. 48.01 and 29.08(1)); the sixth is the time when a defendant may move to dismiss for delay when the plaintiff has failed to set the action down for trial (r. 24.01); and the seventh is the latest time by which a party to an action may deliver a jury notice (r. 47.01).

[23] However, contrary to the policy justification suggested by the motion judge, there is no general requirement that pleadings must be closed for parties to proceed with the next steps in litigation. For example, under r. 31.04(1), either party may serve a notice of examination after the defendant has delivered a statement of defence and, unless the parties agree otherwise, has served an affidavit of documents. The pleadings may still be open at this stage, but the Rules permit the parties to move forward and initiate examinations.

[24] I see no ambiguity in the wording of r. 25.05. For pleadings to be closed, the rule requires that the plaintiff reply to every defence or that the time to reply has expired, and that every defendant who has not defended has been noted in default. The reference to “every” defence and “every” defendant in both parts of the rule makes it clear that in a multi-defendant action, in order for pleadings to be closed in that action, they must be closed against all defendants.

[25] I see no unfairness or disadvantage to a defendant in giving the rule its plain meaning. It is important to note that the timing of when pleadings are closed is not wholly within the discretion or power of the plaintiff. In the case where a plaintiff chooses not to reply to any defence, when the deadline for filing a reply has gone by, that timing requirement of the rule will have been satisfied. In addition, under r. 19.01, not only can the plaintiff note a defendant in default, but a defendant can also move to have another defendant noted in default. This would satisfy the second timing requirement of r. 25.05.

[26] I conclude that the motion judge erred in his interpretation of the requirements of the rule for delivering a notice of discontinuance. In this case, it is not disputed that when the appellants served the notice of discontinuance, although the time for delivering a reply had passed in respect of the respondents, the time for delivering a reply to the late-filed joint statement of defence and counterclaim of Lori Kawaguchi and Kawa had not yet passed. In addition, those defendants had not been noted in default. As a result, pleadings in the action were not closed and, under r. 23.01(1)(a), the appellants were entitled to serve a notice of discontinuance.

(2) Did the motion judge err by setting aside the notice of discontinuance as an abuse of process?

[27] In Holterman v. Fish, 2017 ONCA 769, [2018] 3 C.T.C. 55, leave to appeal to S.C.C. refused, 37889 (July 5, 2018), this court discussed when a consent notice of discontinuance could be set aside at the request of the plaintiff, in exceptional circumstances that arose after the notice was delivered. The current appeal does not fall into that category.

[28] However, there is long-standing case law in Ontario, as well as in other provinces, that affirms that a court has the authority, in the appropriate circumstances, to set aside a notice of discontinuance that was properly delivered under the Rules as an abuse of process: see Angelopoulos v. Angelopoulos (1986), 55 O.R. (2d) 101 (H.C.), at 109-10; Toronto (City) v. Abasi, 1990 CarswellOnt 2289 (H.C.); Glasjam Investments Ltd. v. Freeman, 2014 ONSC 3878, at paras. 60-62; Smith v. Dueck, 1997 CarswellBC 792 (S.C.), at paras. 22-23; De Shazo v. Nations Energy Co., 2006 ABCA 400, 401 A.R. 142, at paras. 11-15; and DLC Holdings Corp. v. Payne, 2021 BCCA 31, 456 D.L.R. (4th) 337 at paras. 31-33.

[29] In Angelopoulos, Henry J. set aside a notice of discontinuance for abuse of process. In that case, the wife had commenced a family law proceeding against the husband. The wife then moved before a master for relief in accordance with the action. That proceeding resulted in a consent order that dealt with much of the requested relief, and also restrained the wife from attending at the premises of the parties’ jointly owned business. Following the order, the wife nevertheless continued to attend at and to disrupt the business.

[30] As pleadings remained open, the wife served a notice of discontinuance, with the intention to avoid the effect of the consent order and to be able to recommence the proceedings afresh. Henry J. held that while the Rules gave the plaintiff the absolute right to serve a notice of discontinuance, he had the power to set aside the notice as an abuse of process under r. 1.04, which provides:

1.04(1) These rules shall be liberally construed to secure the just, most expeditious and least expensive determination of every civil proceeding on its merits.

(2) Where matters are not provided for in these rules, the practice shall be determined by analogy to them.

[31] In my view, in the circumstances of this case, the motion judge was entitled to exercise the same jurisdiction under r. 1.04 as Henry J. did in Angelopoulos. By seeking an injunction to obtain interim relief based on the merits of the claim, the appellants took a significant step in the proceeding. They were successful against the main defendants in the action, which accomplished their goal of preventing the sale of the property until the authority of Lori Kawaguchi is determined at a trial. However, their claim against the respondents was found to have little or no merit. Unhappy with that result, and faced with the respondents’ indication that they intended to move for summary judgment, the appellants sought to be free to not pursue their claim against the respondents for the moment but to be able to recommence the same proceeding on the same facts at a future time. In those circumstances, the motion judge was entitled to conclude that the notice of discontinuance constituted an abusive use of the Rules.

[32] In oral argument on the appeal, appellants’ counsel postulated that if the injunction were to be lifted, the respondents could again accept a listing of the property for sale, and that was why the appellants should retain the ability to recommence the action against them. However, in those circumstances, the action would be based not on the same facts, but on the new facts just described. And I would add, it is most unlikely that these respondents would accept the listing again until the now-known corporate dispute is resolved.

[33] The principle against allowing a plaintiff to discontinue an action once the action has proceeded past a certain point has been in place in England and followed in Canada since the late 19th century: see Fox v. Star Newspaper Company, [1898] 1 Q.B. 636 (C.A.) at 639, aff’d [1900] A.C. 19 (H.L. (Eng.)); Schlund v. Foster (1908), 11 O.W.R. 175 (H.C.), aff’d 11 O.W.R. 314 (Div. Ct.); Blum v. Blum, [1965] 1 O.R. 236 (C.A.), at 238-39; Hennig v. Northern Heights (Sault) Ltd. (1980), 30 O.R. (2d) 346 (C.A.), at 353-54; and Sampson v. City of Kingston, 1981 CarswellOnt 2747 (H.C.), at paras. 6-10. In Fox, Lord Chitty summarized the effect of the Rules of the Supreme Court, 1883 (U.K.), Order 26, r. 1, which dealt with discontinuance, as follows:

The principle of the rule is plain. It is that after the proceedings have reached a certain stage the plaintiff, who has brought his adversary into court, shall not be able to escape by a side door and avoid the contest. He is then to be no longer dominus litis, and it is for the judge to say whether the action shall be discontinued or not and upon what terms… The substance of the provision is that, after a stage of the action has been reached at which the adversaries are meeting face to face, it shall only be in the discretion of the judge whether the plaintiff shall be allowed to withdraw from the action so as to retain the right of bringing another action for the same subject-matter.

[34] This principle is continued under r. 23.01(1)(a), which allows a plaintiff to unilaterally discontinue its action until the close of pleadings. To discontinue its action after this stage, a plaintiff must obtain leave of the court or the consent of all parties (rr. 23.01(1)(b) and (c)). However, the case law demonstrates that in some circumstances, particularly where there are judicial orders or findings in the action, a court may find it to be an abuse of process for the plaintiff to seek to discontinue the action and to be able to recommence the same action, against the same defendant, on the same facts. In addition, in those circumstances, issues of res judicata and issue estoppel could potentially arise.

[35] I see no error in the motion judge’s exercise of his jurisdiction under r. 1.04 to set aside the notice of discontinuance in this case as an abuse of process.

(3) Did the motion judge err by granting summary judgment?

[36] The appellants’ position is that the motion judge should have found that there was a genuine issue requiring a trial, and declined to order summary judgment dismissing the action against the respondents. Their action is based on an allegation that the respondents should have done more due diligence investigation of Lori Kawaguchi’s authority to enter into the listing agreement on behalf of Kawa, and that had they done so, they would have learned about the dispute regarding her authority. They also assert that there are other parties at CBRE who had had previous dealings with Kawa when it sold another property and who knew there were more family members involved, and those parties were required to give evidence.

[37] The problem with the appellants’ position was identified by the motion judge: the appellant Warren Kawaguchi was complicit in the respondents’ attempts to market the property by facilitating some showings, and of even more significance, he never told the respondents that he or anyone else had any objection to the listing or to Lori Kawaguchi’s authority to act on behalf of Kawa. There was therefore no basis for the respondents to suspect any problem, and no basis to make any inquiries of Warren Kawaguchi.

[38] Further, any information from other parties at CBRE could have been elicited by way of an undertaking on the cross-examination of the respondent, Rob Ironside. A trial was not required to elicit this evidence.

[39] Lastly, the motion judge specifically asked counsel to identify any issue requiring a trial. The sole issue that counsel relied on was an alleged conflict in the evidence of Mr. Ironside, which the motion judge rejected as a conflict.

[40] I see no basis to interfere with the motion judge’s decision to grant summary judgment and dismiss the appellants’ claim against the respondents.

(4) Did the motion judge err by finding an abuse of process that justified an award of substantial indemnity costs?

[41] A deferential standard applies to appellate review of a discretionary costs award, unless it is based on an error in principle or is clearly wrong: Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, [2004] 1 S.C.R. 303, at para. 27. In this case, the substantial indemnity costs award followed the motion judge’s decision on the merits. That decision was based in part on an error in law in the interpretation of when pleadings are closed (r. 25.05), and therefore, when a plaintiff may serve a notice of discontinuance (r. 23.01(1)).

[42] However, the motion judge’s decision to award substantial indemnity costs of the action and of the motion was based on his finding of abuse of process in both commencing the action against the respondents, which he found to be frivolous and vexatious, and in resisting a summary dismissal, given the facts and circumstances that were identified by the judge who refused to grant the injunction against the respondents.

[43] Given that reasoning, I see no basis to interfere with the decision of the motion judge on costs.

D. Result

[44] In the result, I would dismiss the appeal from the order setting aside the notice of discontinuance and granting summary judgment dismissing the action against the respondents and from the orders for substantial indemnity costs.

[45] I would award costs of the appeal to the respondents on the partial indemnity scale fixed at $8,280, inclusive of disbursements and HST.

Released: October 29, 2021 “K.F.” “K. Feldman J.A.” “I agree. Harvison Young J.A.” “I agree. Thorburn J.A.”

[1] On the record on the motion under appeal, the corporate documents show Lori Kawaguchi as a director and president of Kawa, but do not show her as the majority shareholder.