Court File and Parties
SUPERIOR COURT OF JUSTICE – ONTARIO
RE: Novatrax International Inc. (Plaintiff)
- and -
Hagele Landtechnik GmbH, Karl Hagele, Benjamin Hagele and Cleanfix North America Ltd. (Defendants)
BEFORE: Justice A. J. Goodman
COUNSEL: Craig Bryson, for the Plaintiff/responding party John H. McNair, for the Defendants/moving party
HEARD: April 26, 2013
ENDORSEMENT
This is a motion brought by the defendants for an order setting aside the noting of default against the defendants and the subsequent default judgment granted by Gorman J. on March 17, 2011, and for an order vacating enforcement steps taken by the plaintiff pursuant to such default judgment.
The action arises from the defendant’s termination of the distributorship agreement on November 24, 2009. The plaintiff commenced the action on January 21, 2010 claiming inter alia, damages for breach of contract, breach of the duty of good faith, misrepresentation, negligence, unfair competition and interference with economic relations against all of the defendants.
Background:
The plaintiff is a company established by John and Carmen Van Lierop in November 2000 as the North American distributor for Cleanfix fans and components.
The defendant, Hagele Landtechnik GmbH (“Hagele”) is a German corporation which manufactures and sells patented “Cleanfix” reversible fans and fan components to customers in Europe and North America. The defendants, Karl Hagele and Benjamin Hagele, are the president and general manager of Hagele, respectively.
The defendant, Cleanfix North America Ltd. (“Cleanfix”) was incorporated on June 3, 2009 as the Canadian subsidiary of Hagele. Cleanfix maintains its office in Stratford, Ontario.
The impugned agreement between the parties provided, inter alia rights for the plaintiff to sell or distribute Hagele’s fans, fan kits, accessories and replacement parts on an exclusive basis in Canada and the United States.
The plaintiff issued a Statement of Claim on January 21, 2010. The defendants did not file a Notice of Intent to Defend or a Statement of Defence. On several occasions defendants’ counsel advised but did not actually file a motion challenging the jurisdiction of the Ontario Court on the basis of a contractual term regarding choice of venue.
The action was held in abeyance during the months following service of the Statement of Claim while the parties and their solicitors conducted discussions to resolve the issues.
The plaintiff noted the defendants in default on September 2, 2010. On January 25, 2013, the defendants learned that notices of garnishment issued from the Superior Court in London had been served upon customers of Cleanfix in four provinces, along with Cleanfix’ principal banker, the Toronto-Dominion Bank. The notices of garnishment disclosed that judgment had been granted against all defendants on March 17, 2011 in the amount of $1,155,800.
Position of the defendants
The parties entered into two “Exclusive Sales Agreements” in 2001. The initial contract covered the period from August 1, 2000 until July 31, 2003 and was renewed annually until 2006. The second Exclusive Sales Agreement came into effect on July 1, 2006 for a term ending July 31, 2011, subject to the mutual rights of termination.
The plaintiff was initially represented by Mr. Wade Sarasin (“Sarasin”) at Lerners LLP in London. Mr. Tingley, (counsel on behalf of the defendants, (“Tingley”) wrote to Sarasin on February 16, 2010 to advise that the defendants intended to bring a motion to have the action dismissed on the basis that the court was without jurisdiction to entertain the action. Tingley asked that Sarasin not require a defence until the motion had been determined. It was agreed that Sarasin would not require a Statement of Defence, in light of the proposed challenge to jurisdiction.
Over the subsequent weeks, Tingley’s partner was involved in discussions with the plaintiff’s independent counsel with respect to possible settlement. As it appeared that the settlement discussions might bear fruit, Tingley deferred bringing the motion to stay or dismiss the action on jurisdictional grounds. On May 3, 2010, he wrote to Sarasin to confirm that the action was being held in abeyance pending settlement. Tingley received no response from Sarasin, and concluded that they shared the same understanding of the status of the action.
On August 13, 2010, Tingley received a letter from another lawyer at Lerners LLP, Mr. Paul Brooks (“Brooks”) enclosing a copy of a notice issued by the Local Registrar under sub-rule 48.15(1). Brooks’ accompanying letter asked that Tingley take steps to serve and file a defence before the 45-day deadline of September 3, 2010.
The defendants submit that Tingley maintained the view that the action was improperly brought in Ontario, and was reluctant to take any step which might be construed as attorning to the jurisdiction of the Superior Court. He responded to Brooks by letter dated August 16, 2010, pointing out that the jurisdiction motion had been held in abeyance pending the ongoing settlement negotiations between the parties. He advised Brooks that the latter had authority to sign Tingley’s consent to an order extending the deadline imposed in the dismissal notice for six months or twelve months, as Brooks considered appropriate. Tingley asked Brooks to contact him if he had any concerns about this course of action.
Tingley recalls receiving no response to his August 16th correspondence with Brooks. He believed, wrongly, that his proposed solution was satisfactory to the plaintiff. From the motion materials filed in the subsequent default proceedings against the defendants, Tingley has become aware of the plaintiff’s contention that Brooks emailed a letter to him on August 25, 2010 in response to the August 16th proposal. Tingley has no recollection of receiving or considering this letter until he reviewed the plaintiff’s motion materials in 2013. His time docket entries for August 26, 2010 show an entry for reviewing “letter from plaintiff’s counsel”. Tingley has no recollection or record of such letter but, having regard to the time entry, acknowledges that he cannot depose that the letter was never received.
Immediately after the delivery of the Brook’s letter of August 25, 2010, the plaintiff changed lawyers. The court file contains two separate requisitions to the Local Registrar to note the defendants in default, dated August 31 and September 2, 2010. Both requisitions were filed by the firm of Filion Wakely Thorup Angeletti LLP in London, with Mr. Frank Angeletti (“Angeletti”) shown as counsel. It appears that the plaintiff replaced Lerners LLP with Angeletti during the six days between August 25th and August 31, 2010. The defendants received no Notice of Change of Lawyers from Angeletti and were unaware that Brooks and Lerners LLP no longer had carriage of the action. Tingley deposed that had he known of the change of lawyers, he would have contacted Angeletti to confirm that the abeyance arrangements made with Lerners remained acceptable.
The defendants were unaware that default judgment had been issued against them. Meanwhile, negotiations between the parties continued. The plaintiff had not disclosed the existence of the default judgment for almost two years after the judgment was granted, while its principals continued to deal with the defendants in respect of the commercial issues.
After obtaining judgment against the defendants, the plaintiff did nothing to disclose this result. Instead, the plaintiff resumed direct negotiations with the defendant in June 2011 regarding, inter alia, the purchase of equipment, inventory and the training of Cleanfix personnel.
Position of the plaintiffs
On June 22, 2009, the defendants advised the plaintiff that due to the shareholder dispute and ostensibly a downturn in sales, the terms of the Agreement were no longer acceptable and that Novatrax had to accept one of two options, none of which were acceptable to the plaintiff.
On November 24, 2009, the defendant delivered a letter terminating the Agreement on the basis that a) Novatrax had failed to meet the minimum purchases of fan kits, b) Novatrax had failed to maintain reliable engineering services, and c) there had been a fundamental change in Novatrax’s management. The plaintiff alleges that the defendants, by the nature of their correspondence and conduct provided them with nothing short of an ultimatum.
The plaintiff, being unable to negotiate any satisfactory resolution commenced litigation. By August, 2010, the plaintiff believed that the defendants had no intention of resolving matters. Novatrax had ceased to operate for all intents and purposes. The plaintiff retained new counsel to move the file forward and instructed counsel to note the defendants in default and to proceed with obtaining default judgment.
The plaintiff submits that clear and unequivocal notice had been provided to the defendants that this step would be taken if a Statement of Defence was not filed before the matter was dismissed by the deadline set by the Registrar.
The plaintiff submits that the defendants seized upon the shareholder dispute as an excuse and opportunity to cancel the exclusive sales agreement and arrogate Novatrax customers and business for itself, and that the actions of the defendants were calculated to, and did in fact, ruin Novatrax as a business. The defendants did not act in good faith.
The shareholder dispute was finally resolved in June 2012 and Ische’s shares were redeemed by Novatrax. The plaintiff instructed its counsel to take steps to execute on the judgment. A writ of execution was obtained and filed in the County of Perth and in January 2013, the plaintiff instructed counsel to proceed with Notices of Garnishment.
Legal principles:
Rule 19.08 of the Rules of Civil Procedure provides that default judgment obtained on a motion for judgment on the Statement of Claim under Rule 19.05 may be set aside or varied by a judge on such terms as are just. In setting aside the default judgment, the court may also set aside the noting of default under Rule 19.03.
The parties do not dispute the three-part test for setting aside default judgment. 1 The moving party must establish:
a. Whether the motion to set aside the default judgment was made as soon as possible after the applicant became aware of the judgment;
b. Whether the circumstances giving rise to the default has been adequately explained; and
c. Whether the moving party has an arguable defence on the merits.
- In Peterbilt of Ontario Inc. v. 156527 Ontario Ltd., 2007 ONCA 333, 87 O.R. (3d) 479, the Court of Appeal cautioned against treating these principles governing the exercise of discretion to set aside default judgment as “rigid preconditions” to the making of an order, such that the failure to satisfy any one of the elements dictates dismissal of the motion. While being guided by these principles, the court observed the motion judge must determine whether the interests of justice favour an order setting aside the default judgment. In so determining, the motion judge must balance the potential prejudice to the defendant should the motion be dismissed and the potential prejudice to the plaintiff if the motion were allowed, having regard to the effect of any order “... on the overall integrity of the administration of justice.”
Analysis:
- I have reviewed the materials filed; the facta submitted by the parties and have heard the submissions of counsel.
Was the motion to set aside the default judgment made as soon as possible after the applicant became aware of the judgment?
- The plaintiff concedes that the defendants brought this motion within a reasonable time after becoming aware of the default judgment. Therefore, I need not address this question further.
Has the moving party adequately explained the circumstances that gave rise to the default?
I am satisfied with the explanation provided by the defendants that counsel did not take any step on the defendants’ behalf prior to September 3, 2010, believing that the plaintiff’s counsel, Brooks, would take the appropriate measures to avoid administrative dismissal of the action, and that the lawsuit continued to be held in abeyance by mutual understanding.
Tingley has put forward a detailed and forthright explanation of his handling of the file in the months after service of the Statement of Claim. Tingley was entitled to rely on the conduct of the plaintiff’s lawyers. I note that there was never a direct response to Tingley’s emails at the time of the requisition regarding the abeyance arrangement.
The plaintiff hired Angeletti, who initiated the requisition process on August 31, 2010 to note the defendants in default. There is no evidence from the plaintiff whether Angeletti was aware of the arrangements which had existed between Tingley and the Lerner firm. The plaintiff’s actions in these circumstances fairly raise the inference that they deliberately took advantage of the defendants’ belief that the action remained on hold.
The timing of the plaintiff’s change of counsel immediately prior to obtaining the requisition and their explanations for this action as offered to this court are highly questionable.
It seems that the defendants reasonably believed that there was an “open claim” against the defendants, albeit one which was not being actively prosecuted. For example, at no time during negotiations of the purchase of the sonic welder did the plaintiff disclose that judgment against the defendants had been obtained. The plaintiff confirmed that the cost of the plaintiff’s “lost” investment in the welder formed part of the damages which had been awarded against the defendants. Even repeated references by the defendants to the claim did not prompt the plaintiff to disclose to the defendants the default steps which had been taken.
I am satisfied that the defendants maintained the firm resolve and intention to defend this action, beginning with determination of the appropriate forum and venue for adjudication of the plaintiff’s claim. For reasons which the plaintiff has failed to explain, it conducted negotiations and discussions with the defendants before and after the noting in default and before and after default judgment was obtained. I am persuaded that the plaintiff refrained from active enforcement of the judgment until it appeared that it could not extract the desired concessions from the defendants.
In my opinion, the defendants have demonstrated ample explanation for the default. In this case, I have some concerns about the plaintiff’s conduct in moving forward with the requisition and the default judgment in the face of ongoing settlement discussions. Such conduct is further exacerbated by the plaintiff’s conduct in not ever raising the fact of the judgment to the defendants despite ample opportunities to do so. The plaintiff’s assertion that they have been aggrieved by the defendants’ unilateral and intimidating conduct leading to the genesis of this litigation does not justify their conduct in pursuing the course of action that they did. I do not find that there was any inadvertence or a deliberate failure to act with respect to the conduct of the defendants’ counsel.
Does the moving party have an arguable case on the merits?
The issues in this action are complex. The factum filed by Mr. Angeletti on the motion for default judgment before Gorman J., was 35 pages in length. The plaintiff outlined therein the theory that the defendants attempted to re-negotiate the Exclusive Sales Agreement, then terminated it, all as part of a plan to usurp the plaintiff’s rights and business and divert it to Cleanfix. This point is disputed by the defendants who have provided a foundation for their defence to the claim before me. On the issue of its engineering failures, the defendants have demonstrated a basis upon which to argue a breach by the plaintiff of that term in the agreement.
I agree with the defendant’s contention that there had been a fundamental change in the plaintiff’s management structure. One of the principles of the plaintiff company had left with some degree of acrimony. There was an ongoing dynamic and dispute which gave rise to some nexus to this particular action. The defendants have established a basis to argue that there was a change in ownership or management and thereby the right to terminate the agreement.
The defendants have also established facts in support of their pleadings that they had sufficient cause to terminate the Exclusive Sales Agreement on all of the three alternate grounds identified in the agreement with the added issue of forum conveniens for the adjudication of this dispute.
The test to determine whether a defence on the merits exists includes: Does the defence on the merits raise a genuine issue for trial? Does the defence have an air or reality about it in light of the evidence brought forward in the motion? Are there real credibility issues relating to important facts? The answer to all of these questions is affirmative. I am satisfied the defendants have provided detailed evidence in this motion sufficient to put a defence “in play”. In my opinion, this is a case which calls for a full examination of the claim and defence on their merits.
Conclusion:
In this case, after having received the requisition, the plaintiff did not choose to advise the defendants of that step or their action leading up to receiving default judgment. The plaintiff was content not to take any steps to enforce the judgment for two years and did not advise the defendants of their course of action while settlement discussions ensued. In my view, the plaintiff had couched their post-judgment activities for their own self-interests and benefit. I agree with defendant’s counsel that this is not a case where the interest of justice requires that default judgment be maintained for reasons of delay which would prejudice the plaintiff. Here, any delay which will result from setting aside default judgment was occasioned by the plaintiff’s direct and deliberate conduct.
I find that the moving party has met their onus pursuant to Rule 19.08 and the defendants’ motion is granted.
It is ordered that the noting of default against the defendants on September 2, 2010 and the default judgment granted by Gorman J. on March 17, 2011 be set aside.
Justice Gorman’s order as to costs dated April 4, 2011 is set aside and any and all notices of garnishment and writs of seizure and sale issued pursuant to the default judgment or costs ordered, are vacated except for the order of Leitch J. of March 19, 2013, which is to be continued and remain in full force until a further order of this court.
The defendants shall serve their Statement of Defence or a motion with respect to the appropriate choice of forum within 30 days.
If the parties cannot agree on the issue of costs, I will consider brief written submissions. These cost memoranda shall not exceed 3 pages in length, (not including any bill of costs or offers). The defendants shall file their costs submissions within 15 days of the date of this endorsement. The plaintiff may file its submissions within 15 days of receipt of the defendants’ materials. The defendant may file a reply within five days thereafter.
“Justice A.J. Goodman”
A.J. Goodman J.
June 19, 2013
Footnotes
- See Morgan v. Toronto (City) Police Services Board (2003), 2003 14993 (ON CA), 34 C.P.C. (5th) 46 (Ont. C.A.) at para. 19.