SUPERIOR COURT OF JUSTICE – ONTARIO
COURT FILE NO.: CV-13-2729-SR
DATE: 20140609
RE: BeneFACT Consulting Group Inc. v. Nanotek Computers Corp.
BEFORE: Lemon, J
COUNSEL: Sabrina Hussain, for the Defendant
Ryan Zener, for the Plaintiff
HEARD: May 1, 2014
E N D O R S E M E N T
ISSUE
[1] The defendant, Nanotek Computers Corp., moves to set aside the default judgment and the writ of possession filed by the plaintiff and seeks an order allowing Nanotek to file a statement of defence.
BACKGROUND
[2] The plaintiff, BeneFACT Consulting Group Inc., prepares and submits technical and financial documentation to the Canada Revenue Agency on behalf of Canadian companies that perform scientific research and experimental development (“SR&ED”), to obtain available tax credits.
[3] As part of its services, BeneFACT reviews and analyzes the business activities of its client in order to identify any eligible activities and related expenses that may qualify as credits. If such work and expenses are identified, BeneFACT prepares a technical report, a cost analysis and tax forms on these activities, which are then filed with the CRA. Once accepted by the CRA, BeneFACT’s client becomes entitled to the tax credits.
[4] The contract between the parties imposes, inter alia, the following obligations:
BeneFACT will be responsible for preparing all the necessary technical reports and will complete the Federal SR&ED forms and the related provincial forms where applicable. The CLIENT shall assist BeneFACT in this process (i.e. provide documents and information as required) and provide Governmental and/or Agency consent(s). BeneFACT shall not be responsible for omissions in the claim(s), or if the CLIENT fails to provide the required information and/or cooperate with BeneFACT in a timely manner.
The CLIENT shall engage BeneFACT to prepare and submit SR&ED claims for the 2011, 2012 and 2013 fiscal periods. The CLIENT agrees to pay BeneFACT Consulting for services rendered, for each fiscal year a contingency fee of 20%, plus applicable taxes of all realized benefits per each fiscal year end that the CLIENT receives.
[5] Based on this contract, BeneFACT commenced preparations on Nanotek’s SR&ED claim for the fiscal year ending in 2011 as of January 24, 2013. This included a site visit and meeting with Nanotek’s principal, drafting a narrative description of Nanotek’s eligible work and gathering information and details on further eligible projects.
[6] In its statement of claim, BeneFACT pleads that Nanotek repeatedly failed or otherwise refused to provide feedback on the narrative when promised, to answer correspondence in a timely fashion, or to provide details on potential other eligible projects and work done by Nanotek, despite diligent attempts by BeneFACT to obtain that co-operation.
[7] Without the cooperation of Nanotek, BeneFACT was unable to complete the 2011 SR&ED claim. BeneFACT pleads that it had a reasonable expectation of the fees that it would receive as a result of entering into and completing the terms of the contract. As a direct result of Nanotek’s breach, BeneFACT has lost that opportunity. Accordingly, BeneFACT is entitled to be put in the position it would have occupied but for Nanotek’s breach of the contract.
[8] BeneFACT pleads that its estimate for Nanotek’s 2011 SR&ED claim was $101,000 based on information provided by Nanotek. Its fees would have entitled it to payment in the amount of $20,200 plus HST of $2,626 for a total of $22,826 plus interest payable in accordance with the contract. It claimed for all three years for a total claim of approximately $70,000.
[9] BeneFACT issued its statement of claim on June 16, 2013. An affidavit of service was filed evidencing service on June 26, 2013. Nanotek failed to file a statement of defence. The matter went before Dawson J. on December 16, 2013, for an uncontested assessment of damages for breach of contract. Dawson J. granted BeneFACT judgment in the amount of $22,387.95 plus costs in the amount of $4,284.80.
[10] Nanotek pleads that it received notice of the judgment by correspondence from BeneFACT dated February 18, 2014. BeneFACT retained counsel who wrote to the plaintiff on February 24, 2014. The Notice of Motion was brought March 26, 2014, and the matter was argued on May 1, 2014.
LEGAL PRINCIPLES
[11] In Mountain View Farms Ltd. v. McQueen 2014 ONCA 194, at paras. 47 - 51, Gillese JA. set out the test for setting aside a default judgment as:
The court’s ultimate task on a motion to set aside a default judgment is to determine whether the interests of justice favour granting the order. The approach to be taken to this determination has been considered numerous times by this court. The following draws heavily on the summary of the principles in those cases by Perell J. in Watkins v. Sosnowski, 2012 ONSC 3836, 2012 ONSC 3836, at paras. 19-20 and 23-24.
The court must consider the following three factors:
(a) whether the motion was brought promptly after the defendant learned of the default judgment;
(b) whether there is a plausible excuse or explanation for the defendant’s default in complying with the Rules; and
(c) whether the facts establish that the defendant has an arguable defence on the merits.
- To this list, I would add the following two factors the court should have regard to, as set out in Peterbilt of Ontario Inc. v. 1565627 Ontario Ltd. 2007 ONCA 333, 2007 ONCA 333, 87 O.R. (3d) 479 (C.A.), at para. 2:
(d) the potential prejudice to the moving party should the motion be dismissed, and the potential prejudice to the respondent should the motion be allowed; and
(e) the effect of any order the court might make on the overall integrity of the administration of justice.
These factors are not to be treated as rigid rules; the court must consider the particular circumstances of each case to decide whether it is just to relieve the defendant from the consequences of his or her default.
For instance, the presence of an arguable defence on the merits may justify the court exercising its discretion to set aside the default judgment, even if the other factors are unsatisfied in whole or in part. In showing a defence on the merits, the defendant need not show that the defence will inevitably succeed. The defendant must show that his or her defence has an air of reality.
ANALYSIS
MOVED PROMPTLY
[12] The plaintiff acknowledges that the defendant has made out this part of the test.
VALID REASON
[13] The parties dispute the details of service. The plaintiff has filed an affidavit of service along with an affidavit from the paralegal who served the statement of claim. In response, Mr. Pabla, the Director and authorized agent of Nanotek, deposes:
Contrary to what has been claimed in the Affidavit of Service by Plaintiff’s agent, I do not recall being personally served with the Plaintiff’s Statement of Claim. . . . I also do not recall ever meeting or being introduced to a Ms. Peloso who is alleged to have personally served me.
I have made enquiries of Nanotek Corp.’s personnel, and no one has stated that they accepted service on behalf of the company or myself, and I have not authorized any personnel to accept any service without consulting me first.
The address on the Affidavit of Service is also not the correct address for the Defendant Company. The correct address for service for the Defendant at that time was either: 4525 Ebenezer Road, Unit 19, Brampton, ON, L6P 1X6, which was the operating address for the Defendant, or 3 Latania Boulevard, Brampton, ON, L6P 1S8, which was the registered address. Please note this company has ceased all business operations as of December of 2013. It has not been officially dissolved as of present but all future documents should be served at 79 Latania Boulevard, Brampton, Ontario.
I only learned about the Plaintiff’s claim and Default Judgment on February 18, 2014 when my assistant, Lorelei Egerton, informed me that a fax was sent by the Plaintiff advising the Defendant of the Default Judgment in excess of $22,000.00 and issued Writ of Sale and Seizure.
[14] Counsel for BeneFACT submits that I should accept the affidavit of the process server rather than relying on the “belief” of Mr. Pabla. He also points out a variety of credibility issues relating to both this topic and the issue of arguable defence. Given the detail provided by the process server, I have difficulty accepting the vague evidence of Mr. Pabla. On the other hand, once he became aware of the judgment, he acted quickly to respond to it. That is inconsistent with the suggestion that he simply ignored the proper service to his detriment. While this point may make for interesting cross-examination at some future date, I am not prepared, on the basis of affidavit evidence, to reject Mr. Pabla’s evidence. Accordingly, I am prepared to accept that there is a valid reason for his failure to respond to the statement of claim.
ARGUABLE DEFENCE
[15] Although there are a number of technical defences relating to the terms of the written contract, the heart of the defence is as set out in Mr. Pabla’s affidavit as follows:
SR&ED tax credits by the Canada Revenue Agency (“CRA”) are available for technological companies which engage in developing new, unique and innovative software or applications. All of this development must take place in Canada in order to qualify.
Nanotek was a retail computer sales and service operation which did not engage in any form of innovative research and development work what so ever. It simply repaired and sold computers and related equipment.
My other company which is a wholly different entity than the Defendant herein does engage in some development, but it is very minimal development, and all of it is outsourced to India and accordingly would also not qualify for SR&ED tax credit. Further, that said company is a company which does not have any contractual relations with the Plaintiff herein.
The only company the Plaintiff has a contract with is Nanotek Computer Corporation (the Defendant herein), which did not meet the criteria for SR&ED tax credits and thus did not qualify for nor require the Plaintiff’s services.
Upon discovering that Nanotek did not meet the criteria, and upon my accountant’s advice, I forthwith informed the Plaintiff that their services were not required. However, the Plaintiffs repeatedly called and hounded me for some time. I did not cooperate with them because I knew that no SR&ED tax credits were receivable by the Defendant without gross misrepresentation to CRA by the Plaintiff. I did not engage the Plaintiffs after March of 2013 and stopped responding to their emails and phone calls.
Accordingly, even if the contract is held to be binding on the Defendant Company, this contract was terminated immediately through my verbal communication over the phone before any services were rendered by the Plaintiff. No benefit has been received by the Defendant from any work or services allegedly undertaken by the Plaintiff. [Emphasis mine]
[16] In response, the plaintiff’s representative, Hazel Peloso, deposes that:
My first steps in this matter were to gather evidence and determine what steps had been taken to date. This is my standard practice and the practice followed by the Legal Department.
I spoke to the Technical Consultant assigned to the 2011 SR&ED Claim, Madis Saks and reviewed his notes as to his actions prior to escalation of the file. Mr. Saks is no longer employed by BeneFACT. I also reviewed Mr. Saks’ email correspondence with Mr. Pabla.
Mr. Ram Narayanan had prepared a draft “Technical Report” regarding Nanotek’s eligible activities, and delivered same to Mr. Pabla for review. This is a critical component of a SR&ED claim where the work done by a client is described in narrative form, and the client’s review of same is an integral part of preparing a SR&ED claim.
Based on my experience at BeneFACT and with Mr. Saks in particular, I verily believe that had he been advised that the work described in the technical reports had been undertaken by another corporation, as Mr. Pabla is now alleging, Mr. Saks would have immediately advised the Legal Department. At no material time did he advise the Legal Department that there were any issues, based on which I verily believe that he was not advised of same by the client.
I am not producing the said Technical Report as it is not material to the within Motion and contains sensitive details of Nanotek’s work which are not appropriate for the public record. Further, the terms of BeneFACT’s Agreement require it to treat in the strictest confidence all information obtained from a client. Even though the Defendant now alleges that work was done by another corporation, I refer to the Affidavit of Matthew Pattillo, contained in this Motion record, and agree that BeneFACT and Nanotek intended to enter into a contract to file SR&ED claims for the software development described by Mr. Pabla and contained in the Technical Report prepared by Mr. Ram Narayanan. As such, that information is governed by the terms of the Agreement.
Mr. Saks advised that he corresponded with Mr. Pabla via email from mid-March, 2013 through to early May, 2013 in attempts to set up an introductory phone call and meeting to complete preparation on the 2011 SR&ED Claim.
Although Mr. Saks was unable to speak to Mr. Pabla on the phone, they did exchange emails regarding Mr. Pabla’s availability to meet.
I draw this Honourable Court’s attention to Mr. Pabla’s email of May 2, 2013 sent at 12:54 PM in which he states “The best time to resume on the file would be 1st week of June”, to which Mr. Saks replied on even date two minutes later that he would send a “meeting invite”.
Moments later, Mr. Saks proposed a meeting time via email, to take place on June 3, 2013. Two minutes thereafter Mr. Pabla responded with a new meeting time, to take place on June 6, 2013.
I refer to paragraph 25 of Mr. Pabla’s Affidavit, wherein he denies “engag[ing] the Plaintiffs after March of 2013 and stopped responding to their emails and phone calls” and do not believe that Mr. Pabla’s evidence is credible.
To the contrary, the above exchange proves that Mr. Pabla was willing or, in the alternative, was representing to BeneFACT his willingness to “engage” them in the process of completing the 2011 SR&ED Claim. [Emphasis mine]
[17] In reply, Mr. Pabla deposes that:
- Ram contacted me again on March 6, 2013, wanting to set up an appointment to go over the write-ups and BeneFACT understanding of my company in more detail. This appointment never materialised as Ram left BeneFACT shortly thereafter or at least was no longer working on my file. I was informed of this on March 16, 2013, by Madis Saks, a senior consultant with BeneFACT who was taking over the claim. He started contacting me by email to set up a meeting. However he never explained what exactly the meeting was about. [Emphasis mine]
[18] As can be seen, Mr. Pabla is inconsistent in his evidence as to what happened after March 2013. The plaintiff submits that based on that failure to provide credible evidence, the judgment should not be set aside.
[19] Again, I have considerable doubts about Mr. Pabla’s evidence. On the other hand, the affidavit material filed by the plaintiff is hearsay, and some of the affidavit material was filed in response to the defendant’s reply material without an opportunity for the defendant to respond. I don’t fault counsel for the plaintiff for filing that material. The reply affidavit by Mr. Pabla set out more defences with greater detail then his original motion record. I agree with counsel of the plaintiff that that is a factor in further reducing Mr. Pabla’s credibility.
[20] Despite the argument by plaintiffs’ counsel that I can make findings of credibility against Mr. Pabla and dismiss the motion, I do not believe the materials here rise to that level. Direct evidence, however doubtful, can well be an answer to inadmissible hearsay evidence. Therefore, I find that the defence is arguable.
POTENTIAL PREJUDICE
[21] Obviously the defendant would be prejudiced if the motion is dismissed since judgment would be found against it without an opportunity to be heard. The prejudice to the plaintiff is also clear. Costs have been incurred and delay has resulted from the defendant’s failure to respond in a timely fashion. On the other hand, the costs thrown away might still be dealt with in a costs order. If successful at trial, interest will also, perhaps, respond to that prejudice.
[22] The plaintiff claimed for $60,478 for breach of contract. Dawson J. rendered judgment for far less. Setting aside that judgment, leaves the way clear to the plaintiff to continue its claim for the full amount. If it is successful in that full claim, any prejudice will obviously be remedied.
[23] On balance, there is greater prejudice to the defendant if I do not set aside the judgment.
INTEGRITY OF THE ADMINISTRATION OF JUSTICE
[24] Delay and parties “gaming the system” do not benefit the administration of justice. The plaintiff is certain that this has occurred. On the other hand, the administration of justice would not be well served by making findings of credibility on a paper record and confirming judgments on hearsay evidence.
RESULT
[25] Accordingly, the motion is granted. The judgment of the plaintiff and the writ of seizure and sale is set aside. The defendant shall file its statement of defence within 15 days of this endorsement.
COSTS
[26] Despite my comments above, I do not have sufficient background information to make a determination with respect to costs. If the parties cannot otherwise agree upon costs, written submissions may be made to me. The defendant shall make its submissions with respect to costs within 15 days. The plaintiff shall make its submissions within 15 days thereafter. The defendant shall provide any reply submissions within ten days thereafter. All submissions shall be no more than three pages not including any bills of cost or offers to settle.
Lemon, J.
DATE: June 09, 2014
COURT FILE NO.: CV-13-2729-SR
DATE: 20140609
SUPERIOR COURT OF JUSTICE – ONTARIO
RE: BeneFACT Consulting Group Inc. v. Nanotek Computers Corp.
BEFORE: Lemon, J
COUNSEL: Sabrina Hussain, for the Defendant
Ryan Zener, for the Plaintiff
ENDORSEMENT
Lemon, J
DATE: June 09, 2014