Court File and Parties

CITATION: Poisson v. Economical Insurance, 2021 ONSC 7827

DIVISIONAL COURT FILE NO.: DC-21-00000152-000 SC-19-00062493-000

DATE: 20211129

SUPERIOR COURT OF JUSTICE – ONTARIO DIVISIONAL COURT

RE: Adam Poisson and Cheri Poisson, Plaintiffs (Respondents) AND Economical Mutual Insurance Company, Defendant (Appellant)

BEFORE: Justice S. Nicholson

COUNSEL: S. M. Atkin, for Plaintiffs (Respondents) D. Smith, for the Defendant (Appellant)

HEARD: November 26, 2021

Reasons

NICHOLSON J.:

[1] The Appellant, Economical Mutual Insurance Company (“Economical”) appeals from an order of Deputy Justice Dycha dated July 13, 2021, dismissing its motion to set aside a default judgment obtained by the Respondents, Adam and Cheri Poisson (“the Poissons”).

Background:

[2] The underlying action arises from flooding that occurred on August 29, 2017. The Poissons submitted a claim to their insurer, Economical, for damage caused to their basement. While Economical agreed to pay the sum of $4,571.00 in accordance with an estimate that it had obtained, the Poissons believed that the costs of repairs were $17,289.00.

[3] After some unproductive negotiations, Economical, on August 29, 2019, advised the Poissons that if they wished to recover any amount above what the Economical had agreed to pay, they would have to file a Statement of Claim that day.

[4] The Poissons retained counsel. On October 25, 2019, counsel wrote to Economical advising them that the Poissons intended to commence an action. A small claims court action was commenced on November 12, 2019 claiming damages in the amount of $12,771.50, plus punitive damages in the sum of $5,000.00.

[5] On November 29, 2019, a process server attended Economical’s office in London and left a copy of the Statement of Claim with an employee named Edward Archer. Despite this service of the Statement of Claim, Economical did not deliver a Statement of Defence. The Poissons noted Economical in default and scheduled an Assessment Hearing on February 11, 2020 where default judgment was granted in the amount of $12,717.50 plus costs in the sum of $500.00. The Poissons chose not to pursue the punitive damages.

[6] In May of 2021, Economical was served with a Notice of Garnishment. According to the affidavit of Brian Fraser, the Claims Adjuster responsible for handling the claim, he was unaware that a Statement of Claim had been issued until their office received the Notice of Garnishment. Economical brought a motion to set aside the default judgment dated June 25, 2021. The motion was heard on July 13, 2021.

Reasons of the Deputy Judge:

[7] In dismissing the motion of Economical, the Deputy Judge appropriately referred to Rule 11.06 of the Small Claims Court Rules. That rule provides as follows:

11.06—The court may set aside the noting in default or default judgment against a party and any step that has been taken to enforce the judgment, on such terms as are just, if the party makes a motion to set aside and the court is satisfied that,

(a) the party has a meritorious defence and a reasonable explanation for the default; and

(b) the motion is made as soon as is reasonably possible in all the circumstances.

[8] In his reasons, the Deputy Judge misstated both the date of service as November 20, 2019 instead of November 29, 2019 and the date that default judgment was obtained, as May 31, 2019 instead of February 11, 2000. Nothing turns on these discrepancies, in my view.

[9] In applying the test under Rule 11.06, the Deputy Judge accepted that Economical had a meritorious defence to the action, being the possible expiration of the limitation period and the difference in opinion on the costs of the repairs. Furthermore, the Deputy Judge accepted that the motion to set aside the default judgment was made as soon as was reasonably possible.

[10] However, the Deputy Judge was not satisfied that Economical had provided a reasonable explanation for the default. In his affidavit in support of the motion, Mr. Fraser had simply indicated that he was one of two property managers in the London office. The person identified as having been served with the Statement of Claim, Edward Archer, was in the IT department. Mr. Fraser states “due to inadvertence, the Plaintiff’s Claim was never forwarded for my review. I was not aware that a Plaintiff’s Claim had been issued until our office received a Notice of Garnishment in May 2021”. Mr. Fraser also explained that other than the letter dated October 25, 2019 letter from plaintiffs’ counsel, he did not receive any further correspondence informing him that a Plaintiff’s Claim had been issued.

[11] The Deputy Judge was critical of the affidavit from Mr. Fraser. In his view, it was deficient. It failed to provide an explanation as to how Mr. Archer came to be the person who accepted the Statement of Claim. The Deputy Judge was clearly of the view that the claim of inadvertence was “bald”. There were no further details provided to explain the inadvertence. The Deputy Judge described his concerns as follows:

“The Defendant does not deny that Mr. Archer was served with the Statement of Claim. The service upon Mr. Archer, a representative of the Defendant at the Defendant’s offices, is proper service. The Plaintiffs are not obliged to serve Mr. Fraser. There is no explanation in the Affidavit of Mr. Fraser as to what Mr. Archer did with the Statement of Claim that he received. There is no explanation as to the training that the Defendant’s employees are given as to the steps that they should take when served with a Claim, and how the present circumstances differ from the method that should be undertaken to ensure that the Claim is properly addressed. There is no Affidavit from Mr. Archer as to what steps he took when he received the Statement of Claim. The Court does not know whether Mr. Archer recognized the document as a Pleading. Rather, the Court has the assertion of Mr. Fraser that it was inadvertence that the Claim did not come to his attention. Is that an “explanation” or is it merely a conclusion that he reached? How can Mr. Fraser state it was inadvertence, without having (or giving) an explanation as to what happened to the paperwork after it was handed to Mr. Archer. Given the fact that Insurers are in the business of defending claims, it is not speculative for the Court to conclude that there are procedures involved in ensuring that the receipt of a Claim against the company would be registered and then forwarded on to the appropriate person for handling. Essentially, Mr. Fraser’s Affidavit indicates that it should have come to his attention and it didn’t, but the Court is not given an explanation as to why that is the case. Note, that Mr. Archer received the Claim before the pandemic so that could not be an excuse for not getting the Claim into the appropriate hands. With the aid of hindsight, it is clear that the Claim should have come to the attention of Mr. Fraser and it did not, but the Court has been given no explanation as to why that was the case. The onus on the Defendant is to provide to the Court a reasonable explanation for the default.”

[12] The Deputy Judge recognized that it is usually preferable that matters be resolved by a full hearing. He noted that “while it may seem Draconian that the insurer will be unable to make its Defence to this Claim, it must be borne in mind that by creating a three prong test, those who promulgated the Rules contemplated a balancing of interests, as well as a clear guideline as to the nature of the evidence that must be presented to the Court. Inherent in the adoption of the three prong test, there will be cases where, although meritorious Defences can be proffered, the Judgment should stand because the Defendant was, as here, unable to reasonably explain the default”.

The Test on Appellate Review:

[13] The parties do not appear to be at odds with respect to the standard of review applicable in this case, although they disagree with respect to the level of deference owed to the Deputy Judge’s decision.

[14] On an appeal from the Small Claims Court, the standard of review for errors of law is correctness, and for errors of fact or mixed fact and law the standard of review is palpable and overriding error. An exercise of discretion is entitled to deference, unless the judge exercised his or her discretion on the wrong principles or “unless the decision is so clearly wrong as to amount to an injustice” (see: Teliawala v. Sandhu, 2019 ONSC 2385 (per Favreau J.).

[15] In its submissions, the Appellant argues that the Deputy Judge made an error in law by finding that each branch of the three prong test set out in Rule 11.06 was mandatory. They indicate that throughout his Reasons, the Deputy Judge described that Economical “must” satisfy each branch of the test. In its submission, the test is not to be applied rigidly, but flexibly, and the Deputy Judge’s failure to do so amounts to an error of law.

[16] Economical relies upon Chitel v. Rothbart, 1988 CarswellOnt 451, [1988] O.J. No. 1197, 29 C.P.C. (2d) 136 (ONCA), where Houlden J.A. stated as follows at para.1:

In deciding whether or not to set aside the default judgments, the learned Weekly Court Judge set out the correct rules to be applied in such an application. Unfortunately, however, in exercising his discretion, he applied the rules as if they were rigid rules. This was wrong. Having found that the appellant had a defence on the merits and that the motion to set aside the judgment was brought in a reasonable time and that the judgments amounted to almost $900,000, we are all of the opinion that notwithstanding the fact that the appellant’s explanation for the delay was unsatisfactory, the learned Judge should have set aside the judgments and permitted the appellant to defend the counterclaim. However, as the explanation for the delay was unsatisfactory, we believe that the appellant should be put on strict terms.

[17] Similarly in Peterbilt of Ontario Inc. v. 1565627 Ontario Ltd., 2007 ONCA 333, the Court of Appeal described that the motions judge erred in treating the principles identified in the case law governing the exercise of discretion on a motion to set aside a default judgment as rigid preconditions to the exercise of that discretion, such that the failure to satisfy any one of those supposed preconditions necessitated the dismissal of the motion to set aside the default judgment.

[18] The Poissons argue that the Deputy Judge properly applied Rule 11.06, which itself uses the word “may” indicating that it is a matter of discretion whether or not to set aside the default judgment. Accordingly, the Poissons submit that on appeal, this Court should afford the Deputy Judge’s exercise of discretion considerable deference. They note that in Bottan v. Vroom, the Court of Appeal emphasized that where a motions 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. It is not the role of an appellate court to replace the discretion by the motions judge. An appellate court should defer to the findings of fact made by a motions judge unless the motions judge disregarded or failed to appreciate relevant evidence (para. 13).

Principles Applicable to Setting Aside a Default Judgment:

[19] The jurisprudence establishes that the rules governing the setting aside of default judgments are to be applied flexibly, as opposed to rigidly (see: Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194). Although the rules are not the same, this applies under Rule 19.03 of the Rules of Civil Procedure that relates to actions before the Superior Court, as well as to Rule 11.06 of the Small Claims Court Rules. The Court ought to take a holistic approach to determine whether the interests of justice favours setting aside the default judgment.

[20] The over-riding principle appears to be that it is the goal of the courts to determine cases based on their merits. Default judgments do not represent a determination on the merits. Default judgments come about based on the failure of a defendant to respond to a claim in a timely fashion. If a defendant can justify this failure, in the ordinary course default judgments are set aside.

[21] If there is a meritorious defence it is all the more important that the default be set aside and the claim determined on its merits. Where the record makes clear that the defendant has no defence, there is little point in setting aside the default judgment as the net effect of doing so may simply be to increase the defendant’s liability by exposing him or her to the risk of a representation fee at trial (see: Hiley v. Hill, 2018 ONSC 5315, per De Sa J.) Furthermore, if there is not a defence, further delay and expense to the plaintiff in obtaining his or her inevitable judgment is unfair (see: Natural Energy Systems Inc. v. Hallett, 2019 ONSC 1372, per Sanfilippo J.).

[22] In my respectful view, the Deputy Judge committed an error in principle by applying too stringent an interpretation of “reasonable explanation”. Although not well articulated, nor fleshed out in a fulsome manner, Mr. Fraser’s affidavit established that the Statement of Claim was served upon an employee who did not forward it to a person responsible for defending the action. Accordingly, the crux of the matter is that the Statement of Claim never came to the attention of Mr. Fraser, a fact which the Deputy Judge accepted. In the context of a small claims court action, where the evidentiary requirements are lower than a Superior Court action, it was, respectfully, too demanding to require an explanation into the inner workings of the company with respect to the handling of incoming Statements of Claim.

[23] This is not a case in which a defendant willfully ignored several demands for a defence or made a conscious decision not to defend. Instead, this case is akin to Heasman v. Mac’s Convenience Store Inc., 2015 ONSC 2290, 252 ACWS (3d) 576. In Heasman, also a Divisional Court appeal from a Small Claims Court decision, Dawson J. addressed a situation in which a process server swore an affidavit in which he served “Jakie Fernandez, Manager” with the Statement of Claim at the defendant’s place of business. The receptionist, Jacqueline Fernando, swore an affidavit on the motion indicating that she never was served with the Statement of Claim. Dawson J. noted that the Deputy Judge did not need to determine whether the process server or Ms. Fernando were being truthful. The net result of the receptionist’s affidavit was that the Statement of Claim did not come to the appellant’s attention. Dawson J. noted that the Deputy Judge set the bar unreasonably high in apparently concluding that the appellants would have to establish that the process server fabricated before the test established by Rule 11.06 was met. Dawson J. concluded on this issue, as follows (at para. 22):

[22] The appellants put forth evidence that the claim did not come to their attention. In all the circumstances, I conclude that was sufficient to meet the test. This is particularly so given the preference of the courts for the determination of cases on their merits.

[24] For their part, the Poissons rely upon Sinnaduarai v. Laredo Construction Inc., [2005] O.J. No. 5429 (Ont. C.A), a decision of Labrosse J.A. In that case, the original motions judge described the explanation of Laredo’s failure to deal with the process after it was served as “particularly sparse”. The deponent on the moving party’s affidavit had described that he had believed that a copy of the statement had been sent to Laredo’s solicitor or he apparently neglected to send it and through inadvertence the claim had unfortunately been misplaced in his office. The motions judge felt that this was no explanation at all. The motions judge felt that the affidavit should have at least dealt with the volume of work in the office, the number of matters in litigation that would cause a statement of claim to be dealt with so casually, what was done with it, such as a memo or diary entry, or even an explanation of the company’s usual procedure when legal matters arose and papers were served upon it.

[25] It is important that in Laredo, the motions judge noted that while there was an arguable defence on the merits, it was also concluded that the defence would ultimately fail because it would be appropriate to grant relief from forfeiture.

[26] The Court of Appeal in Laredo noted that the factors governing the setting aside of a default judgment are not to be applied rigidly. There have been cases where the explanation for the default has been given less weight because the defence had merit. However, this did not, in the Court’s view, mean that the second part of the test was to be ignored because of an arguable defence.

[27] In my view, Laredo is distinguishable, because (1) the defendant was ultimately determined also to have no arguable defence and (2) it is clear that the Statement of Claim in Laredo had come to the appropriate person’s attention. It was the time period after the claim had come to its attention that the defendant was unable to explain to the satisfaction of the motions judge what had transpired.

[28] In the within case, the Deputy Judge accepted that there was a meritorious defence. He also accepted that the claims adjuster was unaware of the Statement of Claim until May of 2021. In my view, he also ought to have accepted that this unawareness was a “reasonable explanation” as to why no defence was filed.

[29] Ultimately, I am persuaded by the principle that, in most cases, it is preferable that the parties be afforded an opportunity to have a full and complete hearing on the merits rather than one party or the other be defeated on a procedural technicality. This is particularly important in Small Claims Court, where many litigants are self-represented.

Disposition of Appeal:

[30] For the above reasons, this appeal is allowed. The default judgment is set aside, as is the noting in default, and any steps to enforce the default judgment must be halted. Economical shall file their Statement of Defence no later than December 15, 2021.

[31] At the outset of the hearing counsel advised that they had reached agreement with respect to the costs of the appeal, and of the motion held on July 13, 2021. In accordance with that agreement, the Appellant is entitled to $2,500 for costs of the appeal, and $500 for costs of the motion, payable within 60 days.

“Justice S. Nicholson”

Justice Spencer Nicholson

Date: November 29, 2021