CITATION: Cinaport China Opportunity Fund LP. v. Qinghai, et al., 2017 ONSC 7464

Court File No. CV-15-00521053-0000

SUPERIOR COURT OF JUSTICE

B E T W E E N:

Cinaport China Opportunity Fund LP.

Plaintiff

• and -

Qinghai, Gong et al.

Defendants

R E A S O N S F O R J U D G M E N T

BEFORE THE HONOURABLE JUSTICE J.T. AKBARALI

on November 3, 2017, at TORONTO, Ontario

APPEARANCES:

Michael Polvere

Nicholas Baker

Counsel for the Plaintiff

K.B. Ng

Counsel for the Defendants

SUPERIOR COURT OF JUSTICE

T A B L E O F C O N T E N T S

W I T N E S S E S

WITNESSES

Examination in-Chief

Cross- Examination

Re- Examination

E X H I B I T S

EXHIBIT NUMBER

ENTERED ON PAGE

RULING

REASONS FOR JUDGMENT

1

REASONS FOR SENTENCE

Transcript Ordered:

November 17, 2017

Transcript Completed:

November 30, 2017

Ordering Party Notified:

November 30, 2017

FRIDAY, NOVEMBER 3, 2017

REASONS FOR JUDGMENT

AKBARALI J. (Orally):

In this motion the Defendant, Gong Qinghai, or Mr. Gong, seeks to set aside default judgment attained against him. He does not argue that the service of the claim upon him was invalid; however, he argues that the default judgment did not come to his notice until he learned of it in the course of bankruptcy proceedings brought against him in Hong Kong by the Plaintiffs. He argues that he moved promptly to deal with it when he learned of the default judgment. He argues that he has an arguable defence on the merits. He argues that the prejudice that he will suffer if the default judgment is not set aside is significant given that judgment is for 2.75 million, plus interest and costs, and he argues that it is in the interest of justice to set the default judgment aside and allow for a trial on the merits.

In Mountainview Farms Ltd. v. McQueen, 2013 ONSC 1440, the Court of Appeal held that court’s ultimate task on this kind of motion is to determine whether the interests of justice favour granting the order setting aside default judgment. This requires the consideration of five factors: first, whether the motion was brought promptly after the defendant learned of default judgment; second, whether there was a plausible excuse or explanation for the defendant’s default in complying with the rules; third, whether the facts establish that the defendant has an arguable defence on the merits; fourth, the potential prejudice to the parties; and fifth, the effect of any order that the court makes on the overall integrity of the administration of justice.

I will review each of these factors to explain my decision, and I begin by considering the first two factors together; that is, whether the motion was brought promptly after the Defendant learned of the default judgment and whether the Defendant has a plausible excuse for not complying with the rules.

In this case, there is disagreement as to when Mr. Gong learned of the claim and the default judgment. The claim was issued on January 30th, 2015. The first time Mr. Gong could have learned of it was on March 5th, 2015, in what has been described before me as “the elevator encounter”. In this encounter the process server effected service on Mr. Gong. There is video evidence of the encounter. The process server identified Mr. Gong in an elevator, with the help of a doorman at the building at which Mr. Gong was staying. There was no question that the man in the elevator was Mr. Gong.

The process server spoke to him in Mandarin and Cantonese. Mr. Gong’s wife was also present and engaged in the conversation. The transcript shows that Mr. Gong responded to the process server. The transcript shows that Mr. Gong understood that the documents she was trying to give him were from a law firm. The process server refers to court documents in the transcript.

Once Mr. Gong learned that the documents were from a law firm, and again, after he learned that they were court documents, he denied being Mr. Gong. He left the envelope on the floor.

I reject Mr. Gong’s evidence that he did not understand Cantonese. In an affirmation Mr. Gong swore in the bankruptcy proceedings currently ongoing in Hong Kong, he describes another incident of service of a document upon him, where the process server said to him in Cantonese that he was serving court documents. The clear implication of this is that Mr. Gong understood that he was being served with court documents when he was advised of that in Cantonese on that occasion.

There is clear evidence that Mr. Gong speaks Mandarin. I thus find that whether the process servers spoke to him in Mandarin or in Cantonese, he understood she was trying to serve him with court documents from a law firm, but he chose to leave them on the floor.

In addition to the elevator encounter, there were other attempts at personal service, and it appears that Mr. Gong evaded that. Mr. Gong was noted in default. The evidence shows that Mr. Gong received notice that he was noted in default and notice that the Plaintiffs intended to move for default judgment. This notice was given by letter and successfully delivered.

Mr. Gong says there is no evidence that he received the letters. The evidence is of delivery. There is also no evidence that Mr. Gong did not receive the letters. The addresses to which they were sent were his office, and a residence where he stayed when he was in Hong Kong regularly. I find that he did receive the letters, that he had knowledge of the proceeding, that he had knowledge he was noted in default, and that he had knowledge that there was an impending motion for default judgment.

Default judgment was granted on August 5th, 2016 on a motion brought in writing before Justice Diamond. A statutory demand based on the default judgment was issued in Hong Kong on September 29, 2016. Mr. Gong was personally served with the statutory demand and default judgment on November 18, 2016. This service was also captured on video. As with the elevator encounter, in this encounter Mr. Gong again refused to take the envelope and allowed it to drop to the ground.

I note that there is also evidence in the record about a conversation between the Plaintiff, Mr. Grewal, and Mr. Cai, Mr. Gong’s assistant, that supports that Mr. Gong may have had knowledge of these proceedings. However, this is hearsay evidence and I do not rely on it. It is inadmissible for the truth of its contents.

My conclusion is that Mr. Gong had knowledge of the proceeding as of March 5th, 2015. He had knowledge of the pending motion for default judgment around March of 2016.

With respect to the default judgment, he was served as of September 29, 2016, and if he did not know of it at that time, it is because of his own wilful decision to leave the envelope on the ground.

Mr. Gong’s counsel says he did not expect to be sued. This is not a case where Mr. Gong had knowledge that something was coming and he tried to avoid it. I reject this argument. It is clear from the transcript of the elevator encounter that Mr. Gong knew he was being served with court documents. It was not incumbent on the process server to describe that the envelope contained an originating process from Ontario. Mr. Gong understood a law firm was sending him court documents. Even if he did not know it was coming, he knew enough to know it was something he should take seriously.

Mr. Gong admits acquiring actual knowledge in 2017 of the proceeding and the default judgment in the course of the bankruptcy proceedings brought against him in Hong Kong. At the most generous, counted from his actual knowledge, he took several months to move to set aside default judgment. The motion to set aside default judgment was brought in May 2017.

On these facts, as I have reviewed them, I conclude that the motion to set aside default judgment was not brought promptly. Mr. Gong repeatedly declined opportunities to engage with these proceedings. He never defended the proceeding. He never moved to set aside the noting in default, and he waited until execution was imminent in Hong Kong before he surfaced and sought to defend the proceeding.

I also conclude that Mr. Gong had no good excuse to account for his failure to comply with the rules. This is not a case of a mistake; I do not accept Mr. Gong’s evidence that he did not take the envelopes because he did not consider Hong Kong a safe place, and in any event, there were letters that were delivered that included the noting in default and notice of the impending motion for default judgment. Mr. Gong received those and did nothing.

I conclude that Mr. Gong deliberately chose to try to frustrate the process of the Ontario Court and the Plaintiff’s claim by avoiding service.

Turning to the third element of the test, whether there is an arguable defence, it is my view that this is a proper case in which to apply the Court of Appeal decision in Sunlife Assurance Company of Canada v. Premier Financial Group Incorporated (Premier Financial), 2013 ONCA 151, where on facts very similar to these the Court held that, “A conscious decision not to participate in the proceedings bars consideration of the defence to the merits even if one exists.”

To be clear, I agree with Mr. Gong that I have discretion to consider the defence on the merits, even where there is a conscious decision not to participate in the proceedings: Jane Doe 464533 v N.D., 2017 ONSC 127. I agree with Justice Kiteley that the statement of the Court of Appeal in SunLife does not mean that in all cases where a defendant has deliberately chosen not to participate in the proceedings, the merits of the defence cannot be looked at.

In this case, Mr. Gong’s derision for the Ontario Court proceedings is clear. His deliberate decision to take no steps at all to participate in it is clear. There is ample evidence of that, including video evidence. In my view, this is an appropriate case to exercise my discretion not to consider the defence on the merits.

Had I considered the defence on the merits, I would have had concerns about the commercial reasonableness of the narrative Mr. Gong urges. According to him, he was the middleman on a transaction worth about 2.75 million dollars. He stood to receive about $90,000 in commission. He was prepared to guarantee just shy of 1.8 million dollars representing 66 per cent of the value of the shares acquired by the plaintiffs and pay that to the plaintiffs in exchange for shares if the company in which they bought shares did not go public.

The remaining 35 per cent of the share price was not to be paid by the Plaintiffs until the company went public that the documents are silent on how that 35 per cent share value would be accounted for if Mr. Gong’s guarantee was called upon. Counsel could point me to nothing on the issue.

If, as Mr. Gong suggests, Mr. Tung was the owner of the shares, one would assume the documents would speak to Mr. Tung being made whole by Mr. Gong, or having 35 per cent of the shares returned to him; otherwise he would have in effect sold 100 per cent of his shares for 65 per cent of their value.

The silence of the documents on this point supports the Plaintiff’s position that Mr. Gong was the disclosed principal and beneficial owner of the shares.

There would be no need to account for the unpaid 35 per cent of the proceeds on the exercise of Mr. Gong’s guarantee if the 35 per cent outstanding balance was due to Mr. Gong.

Emails between the parties also support that Mr. Gong was intimately involved with the transaction in language that suggests that he was acting as principal.

However, Mr. Gong also raises a limitation defence. Were I considering the defence on the merits, I would have concluded that this defence raises a triable issue. The Plaintiff’s evidence about discoverability is hearsay and therefore inadmissible. There is an air of reality to the limitation period defence, which may or may not have succeeded on a trial.

The fourth element of the Mountainview test is the potential prejudice accruing to the parties. In this case, the Plaintiffs will be prejudiced if the judgment is set aside because they will have incurred three years of delay and costs to obtain the default judgment and to take steps to enforce it in Hong Kong.

If the judgment is not set aside, Mr. Gong will be prejudiced because he will have a significant judgment outstanding against him without any trial on its merits.

The Plaintiff’s waste of costs could be compensated for in terms, but the delay cannot be compensated for. The Plaintiffs also make an argument that Mr. Gong has been disposing of his assets. The evidence of the disposition of assets is that Mr. Gong sold some shares that he owns through a corporate structure, ostensibly because of bankruptcy proceedings in Hong Kong.

It is not sufficient evidence for me to conclude, on a balance of probabilities, that he is disposing of assets to place them outside of the reach of creditors like the Plaintiffs. I place no weight on this evidence in my analysis.

The fifth element of the Mountainview test is the effect of any order I make on the integrity of the administration of justice. This is the most important factor in this case to my analysis.

I have already made clear that Mr. Gong deliberately avoided engaging in the court process in this province, although he had many opportunities to do so. He evaded service on multiple occasions. He ignored letters that he received. Only now, when enforcement in Hong Kong is imminent does he surface and seek to defence.

The administration of justice suffers when it cannot provide an effective and efficient process within which plaintiffs can bring their disputes to be determined in an orderly fashion. The proper administration of justice requires that there be consequences for parties who seek to game the system. They must not be allowed to do so.

If defendants could string along plaintiffs doing nothing except cause delay and expense and then surface at the 11th hour and be allowed to mount a late defence on the merits, the integrity of the administration of justice would be harmed.

I accept the statement of Justice Corbett in Canadian Imperial Bank of Commerce v. Petten, 2010 ONSC 6726 at paragraph 7, that the civil litigation process is,

“…an essential feature of an ordered society under the rule of law. Those fundamental principles are compromised if the process for obtaining judgment is too slow and too costly and those fundamental principles are compromised if defendants may defy the process for months or years thereby delaying a just resolution on the merits.”

That, in my view, is what Mr. Gong is trying to do here. Considering all of the elements of the test in Mountainview, and despite the very able arguments of Mr. Gong’s counsel, I find that the interests of justice do not justify granting an order setting aside the default judgment. Accordingly, I dismiss the motion

R E C E S S

U P O N R E S U M I N G: THE COURT: Costs are in the discretion of the court under s. 131 of the Courts of Justice Act. This discretion is to be exercised in accordance with the factors listed in Rule 57.01 of the Rules of Civil Procedure, including the principle of indemnity, the expectations of the unsuccessful party, the complexity of the issues and the importance of the issues to the parties. Overall, the court must consider what is fair and reasonable, with a view to balancing compensation to the successful party with the goal of fostering access to justice: Boucher v. Public Accountants Council for the Province of Ontario, 2004 14579 (ON CA), at paragraphs 26 and 37. In addition, the principal of proportionality informs the balancing of interests in deciding whether an award of costs is fair and reasonable: Strudwick v. Applied Consumer & Clinical Evaluations Inc., 2014 ONCA 588 at para 126 to 127.

The Plaintiffs seek their costs on a partial indemnity scale of $49,553.30, inclusive of HST and disbursements. If successful, Mr. Gong would have sought partial indemnity costs of $36,179.04, inclusive of HST and disbursements. I note that one significant disbursement of just over $4,000 was borne by the Plaintiffs to cross examine Mr. Gong by video link from Hong Kong.

The factual issues in this motion were moderately complex. Both counsel prepared thorough materials. Although it was not necessary to delve deeply into the merits of the defence given my reasons, counsel could not have known that in advance and much of the material was geared towards explaining the complex claim that underlay the default judgment.

In contrast, the legal issues were fairly straightforward, the law on setting aside default judgment is well understood.

The issues in this motion were important to the parties. A lot of money was at stake, and it is not surprising that each side should have wanted to advance their positions strongly. In my view, no party took steps that were unnecessary in this proceeding.

Mr. Gong’s bill of costs assists in understanding his reasonable expectations should he be unsuccessful in the motion. In my view, the costs sought by the plaintiff is not consistent with Mr. Gong’s reasonable expectations should he be unsuccessful.

The Plaintiff’s bill of costs discloses eight timekeepers, of which four were lawyers. Two junior lawyers had limited and well-defined roles. The two senior lawyers who attended today were each very involved in the proceeding. I do not intend to criticize how the file was staffed. Counsel’s materials were well prepared and they did a thorough job in their clients’ interests. However, I accept that there must necessarily have been some duplication of effort as a result. It is not consistent with Mr. Gong’s reasonable expectations to have to pay for that duplication of effort.

In the result, I have concluded that $40,000 in costs, inclusive of HST and disbursements is fair and reasonable. This amount roughly approximates Mr. Gong’s partial indemnity costs, plus the disbursements for the video conferencing. This is a figure that is consistent with Mr. Gong’s reasonable expectations and reflects the stakes of this proceeding as well as the high quality of advocacy that all counsel demonstration in this motion.

I thank all counsel for their able assistance today.

Form 2

CERTIFICATE OF TRANSCRIPT (SUBSECTION 5 (2))

Evidence Act

I,

Nancy Allen

(Name of Authorized Person)

certify that this document is a true and accurate transcript of the recording of

Cinaport China Opportunity Fund LP. v. Qinghai, Gong et al

in the

Superior Court of Justice

(Name of Case)

(Name of Court)

held at

393 UNIVERSITY AVENUE, TORONTO

(Court Address)

taken from Recording

4899_803_20171103_143712__10_AKBARAJ.dcr

, which has been certified in Form 1.

November 30, 2017

(Date)

(Signature of Authorized Person(s))