CITATION: 2437021 Ontario Inc. v. Axim Centre Inc. et al., 2017 ONSC 7054
COURT FILE NO.: 17-71702
DATE: 2017/11/27
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
2437021 Ontario Inc.
Plaintiff/Respondent
– and –
Axim Centre Inc. and Ahmed Abou-Gabal aka Ahmed Gabal
Defendants/Applicants
Jennifer Therrien for the Plaintiff/Respondent
Christopher S. Spiteri for the Defendants/Applicants
HEARD: November 3, 2017
REASONS FOR JUDGMENT
Justice Sally Gomery
[1] On April 26, 2017, the plaintiff 2437021 Ontario Inc. obtained default judgment for $586,468.44 plus costs against the defendants Axim Centre Inc. and Ahmed Abou-Gabal. The action is based on a mortgage against property owned by Axim at 9 Antares Drive in Ottawa and a guarantee signed by Mr. Abou-Gabal. The defendants are now asking the court to set aside the judgment, the underlying noting in default and a notice of garnishment dated June 12, 2017.
What events led to the default judgment?
[2] The events from February to April 2017 leading to the default judgment are not in dispute:
February 17: The plaintiff issued a statement of claim. John Hamilton at Kelly Santini is acting for the plaintiff.
March 20: The plaintiff’s process server told Jennifer Banning, Mr. Hamilton’s assistant, that she had been unable to serve the defendants. Ms. Banning phoned Mr. Abou-Gabal. He told her that the statement of claim could be served on his lawyer, John MacDonell at Spiteri & Ursulak. Ms. Banning asked Mr. MacDonell by e-mail to confirm that he had these instructions. He did so by return e-mail.
March 23: Ms. Banning e-mailed the statement of claim to Mr. MacDonell.
April 3: Mr. MacDonell’s office sent Ms. Banning the back page of the statement of claim with a handwritten notation signed him saying: “Service accepted on behalf of defendants April 3, 2017”.
April 4: On Mr. Hamilton’s instructions, Ms. Banning served the statement of claim again on Mr. Abou-Gabal and Mr. MacDonell by hand-delivering it to each of them personally.
April 25: Kelly Santini filed a requisition for default judgment.
April 26: A default judgment for $586,468.44 was issued.
May 25: Mr. Hamilton filed a writ of execution.
June 9: Kelly Santini sent a notice of garnishment to Intact Insurance Company, demanding that $139,999.75 it owed to Mr. Abou-Gabal be paid instead to the Sheriff of the City of Ottawa in satisfaction of the default judgment.
June 13: Mr. Hamilton sent Mr. Abou-Gabal a letter advising him of the default judgment and serving him with the notice of garnishment.
[3] After getting Mr. Hamilton’s letter, Mr. Abou-Gabal e-mailed Mr. MacDonell on June 19 asking how the plaintiff could have obtained default judgment. Mr. MacDonell’s immediate reaction was that he knew nothing about the action and had never communicated with Kelly Santini about it. The plaintiff has asked that I infer, based on this initial denial, that Mr. MacDonell was never retained to defend the action.
[4] On the contrary, I find that Mr. MacDonell was retained to defend the action, and that this was communicated to Kelly Santini when he confirmed he had instructions to accept service of the statement of claim and then later sent a signed acknowledgement of service. In his June 19 email, Mr. Hamilton did not deny knowing that Mr. MacDonell was retained as defence counsel. It would be surprising if he had, given that Mr. MacDonell was representing Axim and Mr. Abou-Gabal in other related proceedings discussed further below.
Should the default judgment be set aside?
[5] In Intact Insurance Company v. Kisel, the Ontario Court of Appeal set out five factors that a court should consider on a motion to set aside a default judgment.[^1] The factors are:
Whether the defendant brought the motion promptly after learning of the judgment;
Whether the defendant has a plausible excuse or explanation for the default;
Whether the defendant has an arguable defense on the merits;
The potential prejudice to the defendant or the plaintiff if the motion is dismissed or allowed;
The effect of the court’s decision on the overall integrity of the administration of justice.
[6] In Kisel, the Court emphasized that these five factors are not rigid rules. In the end, a court must decide if, taking all circumstances of the case into account, it is just to relieve a defendant from the consequences of default.
[7] In this case, the plaintiff agrees that the defendants acted promptly once they learned of the default judgment. They say that every other factor argues against setting aside the default judgment. I will consider each of these factors in turn, and then the overarching issue of whether it would be just to grant the motion.
Does the defendant have a good explanation for the default?
[8] The plaintiff argues that Mr. MacDonell has not really explained why he failed to file a defence. His correspondence with Mr. Hamilton simply refers to a “slip” on his part.
[9] Based on the materials filed, Mr. MacDonell may have confused the statement of claim in this action with other mortgage enforcement proceedings against his clients. The plaintiff is the third mortgagee on the Antares Drive property. On March 2, the property was sold by way of power of sale by the first mortgagee, First National Financial GP Corporation (“FN”). On March 31, 2017, FN served a notice of application on the defendants, the second mortagee and the plaintiff. It sought a declaration that it had sold the property for fair market value and that it was entitled to a share of the proceeds in satisfaction of the defendants’ debt to FN. FN also sought orders for the distribution of the funds from the sale of the Antares property to the second mortgagee in the amount the defendants still owed to it, and distribution of any surplus funds to the third mortgagee, the plaintiff in this action.
[10] Mr. MacDonell represented the defendants in FN’s application. Since the sale of the Antares Road property and FN’s proceedings were happening around the same time that the statement of claim in this action was served, and Mr. Hamilton represented the plaintiff in the FN proceedings and this action, it would be somewhat understandable if Mr. MacDonell failed to realize that the plaintiff had started a separate proceeding.
[11] This is however speculation on my part. I agree with the plaintiff that Mr. MacDonell has not provided a clear explanation of why he failed to serve a statement of defence or seek an extension of time if he could not get instructions to do so. As a result, this factor weighs against setting aside the default judgment.
Do the defendants have an arguable defense on the merits?
[12] The plaintiff argues that the defendants’ proposed statement of defence is no more than a general denial of the allegations in the statement of claim. It contends that the only substantive defence raised is duress, and no facts are pleaded in support of this defence. More fundamentally, the plaintiff argues that the defendants could not possibly have any defence, because they did not contest FN’s application to distribute the surplus proceeds of sale of the Antares property to the plaintiff. According to the plaintiff, this amounts to an admission that the third mortgage is valid and enforceable.
[13] I disagree. The defendants’ failure to contest the FN application does not mean that they have no basis to defend this action.
[14] First of all, at paragraph 4 of the draft statement of defence, the defendants allege that the mortgage was a continuation of a previous mortgage with the plaintiff’s principal. The previous mortgage apparently had a much lower interest rate. Based on these allegations, even if the defendants had through their actions conceded that the plaintiff could enforce its mortgage, they could still take issue with the amount of interest claimed by the plaintiff.
[15] The failure to contest the FN application furthermore does not imply that Mr. Abou-Gabal is personally liable. The statement of claim alleges at paragraphs 1(a) and 9 that both defendants owned the Antares property but both the FN application and the draft defence state that Axim alone owned the property. The statement of claim also says at paragraph 3 that Mr. Abou-Gabal executed the mortgage as guarantor. The relief claimed against Mr. Abou-Gabal is therefore based on his role as guarantor, and there is more at stake in the action than the enforcement of a mortgage against a property owner.
[16] Finally, the proposed statement of defence goes beyond a general denial. At paragraph 4, Mr. Abou-Gabal says that he was given no opportunity to seek and receive independent legal advice when he was asked to sign. This is the basis for his defence of duress. If he signed on behalf of Axim, this could also be the basis for a defence on behalf of the company. At paragraph 7, Mr. Abou-Gabal denies receipt of any consideration for the execution of the guarantee, contrary to the standard charge terms set out in the statement of claim. At paragraph 9, he denies that the plaintiff ever directed any demand for payment to him, as guarantor or at all. All of these allegations form the basis for a potential defense of the action.
[17] I conclude that the defendants have an arguable defense on the merits of the action.
What prejudice will the parties suffer if the motion is granted or denied?
[18] The plaintiff argues that the defendants will not suffer any prejudice if I dismiss the motion to set aside the default judgment, because they have, by failing to contest the FN application, conceded the plaintiff’s rights.
[19] As already discussed above, this argument fails to take into account defenses raised in the draft statement of defence. If I dismiss the motion, the defendants will be deprived of the ability to raise any of these defenses.
[20] On the other hand, the plaintiff will not suffer any prejudice if I grant the motion. They will still be able to proceed with their claim.
What effect will my order have on the integrity of the justice system?
[21] After Mr. Abou-Gabal got Mr. Hamilton’s letter advising him of the default judgment on June 13, he followed up with Mr. MacDonell. Mr. MacDonell in turn contacted Mr. Hamilton, and asked him if Kelly Santini had given him notice that he would take default judgment if no defence was filed. Mr. Hamilton said that his office must have sent such notice and promised to locate it and forward it to Mr. MacDonell.
[22] In an email to Mr. MacDonell later that day, Mr. Hamilton changed his position. He said he could find no undertaking by Kelly Santini to provide a reminder of time limits, or any request from Mr. MacDonell’s office requesting an extension of time to file a defence. As a result, the judgment was “properly issued”. Mr. Hamilton added that his client would consider setting aside the default judgment only if he received a “complete” statement of defence, and suggested that the defendants might instead present a settlement proposal.
[23] Rule 7.2-2 of the Rules of Professional Conduct states that:
A lawyer shall avoid sharp practice and shall not take advantage of or act without fair warning upon slips, irregularities, or mistakes on the part of other legal practitioners not going to the merits or involving the sacrifice of a client’s rights.
[24] In its Principles of Civility for Advocates, the Advocates’ Society has set out what a lawyer in Mr. Hamilton’s position should have done before noting the defendants in default and seeking a default judgment:
- Subject to the Rules of Practice, advocates should not cause any default or dismissal to be entered without first notifying opposing counsel, assuming the identity of opposing counsel is known.[^2]
[25] Mr. Hamilton violated Rule 7.2-2 and the principles of civility that advocates in Ontario ought to respect. His office received written confirmation from Mr. MacDonell that he had instructions to accept service on behalf of his clients. They served the statement of claim on Mr. MacDonell not once but twice. The second time, Mr. Hamilton’s assistant hand-delivered the statement of claim. Mr. MacDonell acknowledged service in writing on April 3, 2017.
[26] Mr. Hamilton never sent a letter or email to Mr. MacDonell warning him that he would note his clients in default if a statement of defence were not filed within the time limits set out in the Rules of Civil Procedure.[^3] To the extent that he had any doubt about Mr. MacDonell’s retainer, he did not pick up the phone and ask him. Instead, on the 21st day after personal service of the statement of claim, he sought a default judgment.
[27] If I dismiss this motion, other counsel may see this as an invitation to disregard the prohibition against sharp practice. In Kisel, the Court of Appeal held that a plaintiff’s failure to provide a reasonable indulgence to the defendant to file a defence went to the question of prejudice.[^4] In that case, the plaintiffs had noted the defendant in default within 45 days of the delivery of the statement of claim, after a warning that they might do so if no defence had been filed.
[28] The plaintiff’s speed in obtaining default judgment is more extreme in this case. Moreover, as already mentioned, Mr. Hamilton did not give any warning to Mr. MacDonell about what he intended to do.
[29] In the circumstances of this case, I conclude that dismissing the motion would have a negative impact on the administration of justice.
Conclusions
[30] Having weighed relevant factors, and in particular the failure of plaintiff’s counsel to give fair warning to defense counsel, I find that granting the relief requested is the just result. I accordingly order that the default judgment and noting in default be set aside, and grant the defendants 10 days to serve and file their statement of defence.
[31] Where a plaintiff has obtained a default judgment in accordance with the Rules of Procedure, a court has discretion to let writs of execution stand.[^5] The plaintiff has asked that the writ of execution and notice of garnishment stand in this case, even if the default judgment is set aside. In support of its position, the plaintiff relies on the 1981 decision in Hegedus v. Luciani[^6] and the 1987 decision in 333113 Ontario Ltd. v. Grantham.[^7]
[32] In Hegedus, the plaintiff applied for and obtained a default judgment after being served with a motion by the defendant to extend the deadline to deliver a responding affidavit. When the motion to extend time was argued, the plaintiff’s counsel failed to advise the judge that a default judgment had already been issued. Although Justice Grange had “misgiving bordering on incomprehension” about the conduct of the plaintiff’s lawyer, he was equally concerned about “delaying tactics by defendants or their solicitors seeking to avoid immediate and proper judgment”.[^8] He accordingly let the writ of execution stand, even though the default judgment was set aside.
[33] In 333113 Ontario, Master Donkin reached the same conclusion. He relied on the decision in Hegedus and the amount of time that had passed since writs of seizure and sale had been issued.[^9] His decision does not mention much time had passed.
[34] Our approach to setting aside default judgments has changed in the last 20 years. Ontario courts once applied a more technical test, requiring the defendant to justify the reason for the default and produce evidence supporting the defendant’s proposed defence.[^10] These are no longer the primary considerations on a motion like this. Among other factors, we now consider the impact of setting aside a default judgement, both on the parties and on the administration of justice. Given this evolution, I have some doubts about how the court weighed competing considerations in Hegedus.
[35] In any event, the facts in both Hegedus and 333113 Ontario are different than those here. There is no evidence that the defendants in this case were engaged in delaying tactics. Their lawyer simply neglected, through inadvertence, to file a statement of defence. There was no long lapse of time between the filing of the writ of execution and notice of garnishment on June 12, 2017 and the service of this motion by the defendants on July 25, 2017.
[36] A court may allow a writ to stand when evidence indicates there is a risk that the defendant will dispose of his or her assets before judgment to the detriment of the plaintiff creditor.[^11] The plaintiff has provided no such evidence in this case.
[37] In these circumstances, I exercise my discretion to order the setting aside of the notice of garnishment dated June 12, 2017, as well as the writ of execution dated May 25, 2017.
[38] In their notice of motion, the defendants have asked for a costs order of $1,000 against the plaintiff and Mr. Hamilton, payable in any event of the cause. I do not think that Mr. Hamilton’s actions rise to the level where a cost award against him is appropriate. I do however order plaintiff to pay costs of $1000, forthwith, to the defendants.
Justice Sally Gomery
Released: 2017/11/27
CITATION: 2437021 Ontario Inc. v. Axim Centre Inc. et al., 2017 ONSC 7054
COURT FILE NO.: 17-71702
DATE: 2017/11/27
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
2437021 Ontario Inc.
Plaintiff/Respondent
– and –
Axim Centre Inc. and Ahmed Abou-Gabal aka Ahmed Gabal
Defendants/Applicants
REASONS FOR JUDGMENT
Justice S. Gomery
Released: 2017/11/27
[^1]: 2015 ONCA 2015 at para 14. [^2]: The Court of Appeal endorsed this principle in Male v. The Business Solutions Group, 2013 ONCA 382 at para. 19. [^3]: R.R.O. 1990, Reg. 194. [^4]: Kisel at para. 26. [^5]: Canadian Imperial Bank of Commerce v. Sheahen (1978), 1978 2169 (ON SCDC), 22 O.R. (2d) 686 (Div. Ct.) at pp. 690-92. [^6]: 1981 CarwellOnt 403, 23 C.P.C. 282 (H.C.J.). [^7]: 1987 CarswellOnt 532, 23 C.P.C. (2d) 168 (Master Donkin). [^8]: Hegedus v. Luciani at paras. 7 and 9. [^9]: 333113 Ontario at para. 9. [^10]: Lenskis v. Roncaioli, 1992 CarswellOnt 345, [1992] O.J. No. 1713, 11 C.P.C. (3d) 99 (Ont. Ct. Gen. Div.). [^11]: 1317621 Ontario Inc. v. Krauss, 2008 39224 (Ont. S.C.) at para. 30.