Citation and Court Information

CITATION: Typhoon Capital BV v. Jacob, 2022 ONSC 1663

DIVISIONAL COURT FILE NO.: DC-21-00000599
DATE: 20220401

ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT

BETWEEN:

TYPHOON OFFSHORE B.V. and TYPHOON CAPITAL B.V. Plaintiffs/Respondents

– and –

SASHA JACOB, JACOB SECURTIES INC., JACOB CAPITAL MANAGEMENT INC., JACOB SECURITIES HOLDINGS INC., JACOB TRADING CORP. and JACOB & COMPANY SECURITIES INC. Defendants/Appellants

COUNSEL:

Michael Schafler and Michael Beeforth, for the Respondents

Richard Quance and Katherine Lee, for the Appellants

HEARD at Toronto by videoconference: March 15, 2022

Matheson J.

Reasons for Decision

[1] This is an appeal from the order of Associate Justice Jolley dated June 24, 2021, with reasons reported at 2021 ONSC 4555, striking out the appellants’ statement of defence without leave to amend (the “Order”). The Associate Justice found that the appellants had “flouted multiple peremptory court orders” and their breaches had become “contumelious” showing an “utter disregard” for court orders.

[2] For the reasons set out below, this appeal is dismissed.

Brief Background

[3] The respondents’ underlying action seeks to enforce two costs awards against Jacob Securities Inc. (“JSI”), as follows:

(1) in 2014, JSI was ordered to pay the costs of an arbitration, to the respondents, in the agreed-upon amount of $425,000; and

(2) in 2015, JSI commenced an application for judicial review to set aside the above arbitration award and, in 2016, the judicial review application was dismissed with costs of $55,000 awarded against JSI.

[4] The enforcement action was commenced in 2016. The respondents (the plaintiffs in the action) allege that the appellant Mr. Jacob is the sole controlling mind of all of the corporate appellants, which are all part of a common, singular business enterprise. The respondents allege that Mr. Jacob has used JSI as a shell corporation and the other corporate appellants as instruments through which he has siphoned all available cash flow out of JSI and converted those funds for his personal use.

[5] The appellants’ position in defence of the action is that JSI was an investment bank that ceased doing business in 2015 and that the other corporate appellants carry on separate businesses. The appellants deny that any funds were siphoned by Mr. Jacob or the other corporate appellants and used to pay any improper amounts.

[6] The Associate Justice case-managed the action throughout the relevant time. The chronology of the case management steps is set out in the Associate Justice’s reasons for decision in some detail and is largely uncontested.

[7] In brief, case management began in April 2018 after the appellants’ failure to attend at examinations for discovery. The respondents moved for case management and for a schedule for discovery steps. There was then a series of five court orders that give rise to the Order, as follows:

(1) In response to the April 2018 motion, the Associate Justice ordered that the action be case managed and imposed a schedule that was peremptory on the appellants. The Associate Justice proceeded to case manage the action going forward.

(2) The second order, of May 2019, arose from the respondents’ motion on refusals and to compel answers to undertakings given on discovery. The Associate Justice noted that the appellants had not met the prior court-ordered schedule for answers to undertakings. An amended timetable was ordered, including a reattendance. The new schedule was peremptory on the appellants.

(3) The appellants did not comply with the new schedule. The third order was made in July 2019, requiring a reattendance on a specific date and setting a date for a mediation. This schedule was also peremptory.

(4) As a result of continued problems and delays, a fourth order was made in November 2019. At that time, respondents’ counsel requested an order permitting them to move immediately to strike out the statement of defence if any more deadlines were missed. The Associate Justice denied that request but indicated that the appellants had been put on notice that such a motion may be brought if they missed any more deadlines.

(5) The fifth order was made in February 2021. No one attended that case conference for the appellants despite proper notice. In the interval between the fourth and fifth orders there was a delay due to COVID-19, which was not the subject of complaint by the respondents, however, there were other delays and failures to comply with the court-ordered schedule by the appellants. In addition, by order of a different Associate Justice in February 2020, counsel to the appellants obtained an order removing them from the record due to non-payment of fees. That order required that the appellants take appropriate steps to retain new counsel (or in Mr. Jacob’s case, retain new counsel or serve notice of intention to act in person) within 30 days. By the time of the fifth order, about a year had passed, and the appellants had not complied with the order regarding representation.

[8] As set out in the endorsement for the fifth order, the Associate Justice decided to give the appellants “one final opportunity” to address the schedule. A timetable was set for the parties to reach a new consent schedule for the completion of answers to undertakings, notices regarding new counsel or intentions to act in person, and the mediation. If not addressed by mid-April (roughly six weeks later) the respondents would be free to bring a motion to strike out the statement of defence. The fifth order was also breached.

[9] Before the fifth order was made, the appellants had been in a dialogue with their former counsel to resume representation on a limited retainer for the mediation. Promptly after the case conference giving rise to the fifth order, respondents’ counsel sent the proposed draft schedule to the appellants and their potential counsel. On March 1, 2021, potential counsel indicated that his firm expected to be retained for the mediation and the appellants would consent to the schedule shortly. That did not occur. The respondents heard nothing until April 22, 2021, after the deadline set in the fifth order. At that time, a different lawyer from the same firm advised the respondents’ counsel that the appellants were prepared to schedule a new date for the mediation.

[10] On the motion giving rise to the Order, and on this appeal, the appellants noted COVID-19, changes of counsel within the firm and deaths in counsel’s family by way of explanation for the delay. A notice of appointment of counsel was served but not until April 30, 2021.

[11] Other steps were taken by the respondents after April 2021. An outstanding costs order was paid May 11, 2021. More answers to outstanding undertakings were provided in May and follow-up letters were sent with respect to requests to third parties for the production of documents to answer outstanding undertakings. By the time of the motion to strike out the statement of defence, there were 23 undertakings that remained unanswered, all of which related to third party documents where requests had been made for those documents.

[12] With respect to the inquiries of third parties, the appellants noted that their counsel began making those inquiries as early as 2018. The 2021 inquiries were follow-ups. However, in the fourth order (of November 19, 2019), the Associate Justice had expressly required that follow-ups be made, if needed, by December 11, 2019. That order was breached.

[13] Because the appellants had failed to comply with the fifth order, the respondents moved to strike out the statement of defence, giving rise to the Order.

Decision at issue

[14] The Associate Justice gave lengthy reasons for her decision to strike out the statement of defence without leave to amend. She reviewed the case-management history of the action and the law on case-management and on the exercise of discretion to strike out a statement of defence arising from a failure to comply with a timetable (Rule 3.04(4)(b)) a failure to appoint new counsel within 30 days (Rule 15.04(7)(a), the failure to comply with an interlocutory order (Rule 60.12(b)) and the failure to take certain discovery steps (Rules 30.03(2), 34.15 and 60.12(b)).

[15] The Associate Justice set out the applicable legal principles, including cases relied upon by the appellants then and now. None of the grounds for appeal point to an error in the law as recounted in the reasons for decision.

[16] The Associate Justice considered the status of discovery steps as of the motion before her. She also noted the appellants’ statement that they were willing to comply with new timetables going forward. However, she found that there was no change in circumstances that caused her to believe that Mr. Jacob was more serious about fulfilling his obligations than he had been any of the other five times, which included peremptory orders made with his consent.

[17] The Associate Justice considered the mitigating circumstances put forward by the appellants, including the problems with retention of counsel.

[18] The Associate Justice also considered, but did not rely on, prejudice to the respondents. She found that, if needed, she would have been satisfied that there was prejudice.

[19] The Associate Justice noted that she had carefully reviewed the substance of the appellants’ defaults and the impact on the ability of the court to do justice. Having done so, she was satisfied that the breaches were not merely technical breaches but had resulted in a situation where it would not be appropriate to have the appellants continue their defence. She found that the appellants had shown an open disregard for court orders and that the failure to enforce them with appropriate sanctions would bring the system of case management into disrepute and undermine confidence in the civil justice system, citing Tizard Estate v. Ontario, [2003] O.J. No. 3010 (S.C.).

[20] The Associate Justice found as follows, at para. 76:

Having flouted multiple peremptory court orders, including orders to which they consented, and having similarly ignored the last chance order, I find the defendants’ breaches to have become “contumelious such as to demonstrate an utter disregard by the defaulting party for the court’s orders”. [Citation omitted.]

[21] In reaching this conclusion, the Associate Justice considered whether or not there was another practical and appropriate remedy short of striking out the defence that would ensure compliance with past and future orders and the rules. She noted that the court had tried costs awards, peremptory orders, warnings and ultimately a last chance order, concluding that she was satisfied that there was no other appropriate and practical remedy.

Standard of Review

[22] The standard of review on this statutory appeal is as set out in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at paras. 7, 10. Errors of law are reviewed on a correctness standard. For errors of fact, there must be a palpable and overriding error. Errors of mixed fact and law also require a palpable and overriding error unless there is an extricable error of law or principle, which is reviewed on a correctness standard.

[23] Where an associate justice exercises discretion, the court on appeal must determine whether the correct principles were applied and whether the associate justice misapprehended the evidence such that there is a palpable and overriding error. The decision to strike a claim or defence is one of discretion, which must be exercised on proper principles: Starland Contracting Inc. v. 1581518 Ontario Ltd., (2009), 252 O.A.C. 192 (Div. Ct.), at paras. 7 and 24.

[24] As set out in Starland, at para. 26, a case management judge or associate justice 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.

Issues

[25] The appellants submit that the Associate Justice made the following errors:

(i) failing to consider that by the time of the motion, the appellants had substantially complied with the court orders regarding discovery;

(ii) finding that the appellants had shown utter disregard for the court’s orders;

(iii) failing to impose a less drastic remedy, such as fixing a new timetable;

(iv) finding that the respondents had been prejudiced; and,

(v) failing to consider that the appellants had a viable defence and the interests of justice therefore weighed in favour of allowing appellants to defend themselves.

Analysis

[26] On the first issue, the extent of any continuing breach, the appellants submit that the Associate Justice ought to have considered the circumstances at the time of the Order and the extent to which they remained in default. The appellants submit that by the time of the Order they had substantially complied with the outstanding discovery requests.

[27] The appellants rely on Starland, a case where this court did overturn an order striking out a pleading. In Starland, the Divisional Court found that the motions judge had erred in finding that there was non-compliance as of the time of the motion. The appellants seek the result in Starland, where the court below was overturned. While there are some factual similarities, they do not determine the outcome of this appeal.

[28] The Associate Justice did not err in principle in her approach to Starland or make a reviewable error regarding the facts. Starland provides as follows, at para. 34:

Where an order is made by a court on a “last chance” basis, the defaulting party is given fair warning as to the possible consequences of a failure to comply with its terms. Unless the court has the authority to follow through with the threatened sanction, its ability to control its process will be undermined. That said, the fact that an order has been described as a “last chance” order is not determinative where a party seeks to strike the other party’s pleadings. In each case the discretion of the master or judge must be exercised having regard to the circumstances prevailing at the time the matter is brought back to court, including whether and to what extent the party remains in default of the order in question.

[29] The Associate Justice did consider the status of compliance at the time of the motion. The appellants seem to suggest that was the only relevant consideration. Starland does not stand for that proposition.

[30] With respect to the facts, the Associate Justice set out the history regarding compliance with discovery obligations, up to and including the circumstances as of the time of the motion giving rise to the Order. She accurately found that there were only 23 outstanding undertakings as of the motion, all of which related to third party inquiries. She noted the late follow-up requests made to third parties, which were late (given her order requiring follow-up that was made in 2019). She declined to draw inferences that some third-party documents may have been obtained and then gone astray and made no reviewable error in doing so.

[31] Further, the Associate Justice did not rest her decision on the degree of compliance with discovery steps. As set out in her reasons for decision, at para. 78:

Like Vacca v. Banks, the decision here to strike the defence is not made because of the defendants’ failure to answer their undertakings, although, to be clear, they have not answered their undertakings. It is as a result of their repeated breaches of court orders. [Emphasis added; citation omitted.]

[32] Repeated breaches of court orders may also support an order to strike out a pleading. In Starland the court referred to the case law regarding the impact of repeated breaches. At para. 32 of Starland, the court quotes from Vacca, in which the court stated as follows at paras. 27-28:

There comes a time when this court is obliged to meet its responsibility for the effective administration of justice through case management by dismissing an action. Such is the case when the plaintiff repeatedly fails to comply with orders of the court whether or not there has been prejudice to the defendants.

In the circumstances of four breached orders, including the “last chance” order, the Master realistically had only two options – one was to give the plaintiffs yet another chance – the other was to dismiss the action.

[33] In Vacca, the Divisional Court upheld the decision to strike out the claim.

[34] Here, the Associate Justice found that the appellants had “flouted multiple peremptory court orders, including orders to which they consented, and having similarly ignored the last chance order.” She found that the appellants’ breaches showed utter disregard for the court’s orders. There was an ample record before the Associate Justice to support this conclusion, no error in principle, and deference is owed to the Associate Justice as the case management justice.

[35] There is then the issue of the draconian nature of the remedy. The appellants submit that the Associate Justice ought to have, instead, fixed dates for the continued examination of Mr. Jacob and the mediation and ordered costs consequences if Mr. Jacob failed to attend.

[36] The Associate Justice expressly addressed the drastic nature of the requested remedy and considered whether to grant some lesser remedy. She made no error in doing so. She considered the possibility of a new timetable in view of the prior promises to comply with timetables, including consent timetables, that were breached. She was satisfied that all efforts short of dismissal had been tried and had not succeeded. She noted that the court had tried costs awards, peremptory orders, warnings and ultimately a last chance order. Her finding that there was no change in circumstances that persuaded her that the appellants were any more serious about fulfilling their obligations is entitled to deference.

[37] On the issue of prejudice, the appellants submit that the finding that the respondents were prejudiced was an error. The Associate Justice found that the respondents had demonstrated prejudice because some bank records dating back more than six years were no longer available. Those records related to the allegations that monies were improperly withdrawn from the JSI business account during a relevant time period.

[38] The appellants emphasize that the first requests for third party records were timely. Accepting that they were, this does not address the court order requiring that follow-up requests be made. That order was breached. No reviewable error has been shown in the Associate Justice’s findings of fact. Further, the Associate Justice did not rely on the finding of prejudice in reaching her decision.

[39] Lastly, the appellants submit that the Associate Justice erred in failing to consider the merits of their defence to the action. The appellants submit that the respondents “have tendered no positive evidence to prove any of the allegations in their pleadings” on their motion while the appellants have shown that some funds were used to pay legitimate expenses and submit that audit steps would not have permitted “siphoning” to occur. The appellants put forward no authority that the moving party was obliged to prove its case on its motion.

[40] In exercising her discretion, the Associate Justice recognized that she had to balance the appellants’ right to have their case heard against the impact of their conduct on the court’s ability to do justice. She considered whether or not the breaches were mere technical breaches, concluding that they were not and had resulted in a situation where it would not be appropriate to have the appellants continue their defence. She concluded that, in the circumstances of this case, the impact of the appellants’ conduct called for the Order. She made no error in doing so.

Order

[41] This appeal is dismissed. Costs shall be paid by the appellants in the agreed amount of $16,000, all inclusive.

___________________________ Matheson J.

Released: April 1, 2022

CITATION: Typhoon Capital BV v. Jacob, 2022 ONSC 1663

DIVISIONAL COURT FILE NO.: DC-21-00000599
DATE: 20220401

ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT

BETWEEN:

Typhoon Capital BV et al. Plaintiff/Applicant

– and –

Jacob et al. Defendant/Respondent

REASONS FOR JUDGMENT

Matheson J.

Released: April 1, 2022