Court File and Parties

Court: ONTARIO – SUPERIOR COURT OF JUSTICE Citation: 2019 ONSC 1220 Court File No.: CV-15-533989 Motion Heard: 2019-02-20

Counsel: Doug LaFramboise for the moving defendants Maryam Shahidi for the plaintiffs

Before: Master R. A. Muir

Endorsement

[1] This is a motion brought by the defendants represented by the DDH Law Firm pursuant to Rule 19.03 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (the “Rules”). The moving defendants seek an order setting aside their noting in default along with leave to deliver a statement of defence. The plaintiffs are opposed to the relief sought. The other remaining parties take no position on this motion.

[2] This motion had to be decided on an expedited basis as the plaintiffs’ default judgment motion is scheduled to be heard on March 8, 2019.

[3] This is a franchise dispute. The plaintiffs are seeking compensatory and declaratory relief from the defendants pursuant to the rescission provisions of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the “Act”).

[4] The statement of claim was issued on August 7, 2015 and served on the defendants in September 2015. The moving defendants were noted in default on October 6, 2015. The moving defendants were advised of their noting in default shortly thereafter.

[5] It appears that the moving defendants’ lawyer learned of the existence of the statement of claim in the spring of 2016. A notice of intent to defend was served in March 2016. On April 20, 2016, the moving defendants’ lawyer was advised by the plaintiffs’ lawyer that his clients had been noted in default and the plaintiffs would not consent to setting aside the noting in default.

[6] Despite this knowledge, the moving defendants did nothing to set aside the noting in default until the fall of 2018 when they were served with the plaintiffs’ default judgment motion materials.

[7] The test on a motion such as this is not in dispute and can be found in the decision of the Court of Appeal in Intact Insurance Company v. Kisel, 2015 ONCA 205. The court states as follows at paragraphs 12 to 14 of that decision:

12 Rules 19.03(1) and 19.08(1) provide the basis for setting aside a noting of default and a default judgment, respectively. Both rules give the court discretion to set aside the default "on such terms as are just." This court has held that the tests to be met under these rules are not identical. See Metropolitan Toronto Condominium Corp. No. 706 v. Bardmore Developments Ltd. (1991), 3 O.R. (3d) 278 (Ont. C.A.), at pp. 284-85.

13 When exercising its discretion to set aside a noting of default, a court should assess "the context and factual situation" of the case: Bardmore, at p. 285. It should particularly consider such factors as the behaviour of the plaintiff and the defendant; the length of the defendant's delay; the reasons for the delay; and the complexity and value of the claim. These factors are not exhaustive. See Nobosoft Corp. v. No Borders Inc., 2007 ONCA 444, 225 O.A.C. 36, at para. 3; Flintoff v. von Anhalt, 2010 ONCA 786, [2010] O.J. No. 4963, at para. 7. Some decisions have also considered whether setting aside the noting of default would prejudice a party relying on it: see e.g. Enbridge Gas Distribution Inc. v. 135 Marlee Holdings Inc., at para. 8. Only in extreme circumstances, however, should the court require a defendant who has been noted in default to demonstrate an arguable defence on the merits: Bardmore, at p. 285.

14 . . . Again, these factors are not rigid rules. The court has to decide whether, in the particular circumstances of the case, it is just to relieve a defendant from the consequences of default: Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194, 372 D.L.R. (4th) 526, at paras. 48-50.

[8] These are the factors and principles I have considered and applied in determining the issues on this motion. In my view, it is in the interest of justice that the noting in default be set aside.

[9] There is some evidence of an intention to defend this action. A notice of intent was served. The moving defendants certainly moved to respond to this action after they were served with the default judgment materials. However, there is simply no explanation for why they waited for three plus years before bringing this motion. This is a lengthy delay.

[10] However, the authorities make it clear that the court must consider other factors such as the behaviour of a plaintiff and a defendant, the complexity and value of the claim and prejudice to the parties. The Court of Appeal in Intact emphasized the discretionary role of the court on motions of this nature in order to make the order that is just in the circumstances of each particular case. A rigid rule that establishes a complete bar to an order setting aside a noting in default is simply not consistent with that approach.

[11] While it is true that the moving defendants have not explained their delay, other factors favour the moving defendants. First, the moving defendants’ lawyer was involved with this dispute before the statement of claim was issued but the lawyers for the plaintiffs did not immediately send a copy of the statement of claim to him. They simply served the moving defendants and noted them in default. The communications immediately after the noting in default were with the moving defendants directly and not with their lawyer. It is obvious from the pre-litigation correspondence that a dispute was extant and the moving defendants’ lawyer should have been advised of the issuance of the statement of claim.

[12] Second, this is a relatively complex claim involving several parties and the purchase of an existing franchise. The action involves relatively complex facts and the application of the remedial provisions of the Act including declarations affecting the personal liability of the officer and director of the franchisor corporation and a related corporation. The amounts involved are significant. The plaintiffs’ default judgment motion asks for damages in excess of $600,000.00.

[13] Although it is not usually necessary for a defendant to show an arguable defence on the merits, it is my view that the moving defendants have done so. The defences raised by the moving defendants include the fact that the franchise in question was not bought from the franchisor but rather from a third party. The moving defendants did not have a direct agreement with the plaintiffs. The moving defendants plead that they provided all necessary disclosure in any event. Even in situations where the court considers the merits, a defendant simply has to show an arguable defence. This is a low threshold.

[14] Finally, I note that there will be no prejudice to the plaintiffs if the noting in default is set aside that cannot be compensated for by way of an order for costs thrown away. There is no suggestion that witnesses are unavailable or documents have been destroyed. A draft defence has been prepared and can be served immediately. This action has yet to be set down for trial. The prejudice to the moving defendants is obvious if they are not permitted to defend this action on its merits. They will be facing a very significant judgment against them. The preference in our system of civil justice is for a determination of disputes on their merits.

[15] The plaintiffs raised the issue of leave to bring this motion as referred to in the endorsement of Justice Wilson. In my view, leave is implicit in her ruling as she ordered the motion to be brought forthwith. The moving defendants then served their motion materials within six weeks of her order.

[16] For these reasons, I have concluded that it is just in the circumstance of this action that the noting in default of the moving defendants of October 6, 2015 be set aside. The moving defendants shall deliver their statement of defence by February 27, 2019.

[17] The plaintiffs seek their costs thrown away in the substantial indemnity amount of $46,943.64 and partial indemnity of $36,566.85.

[18] In my view, they are entitled to a portion of those costs. The moving defendants have failed to explain their lengthy delay in moving to set aside the noting in default. They argue that the plaintiffs also delayed in bringing their default judgment motion and failed to involve the moving defendants in this action. However, the evidence shows attempts by the plaintiffs to involve the moving defendants. They were advised of the noting in default. Their lawyer was fully aware of the default from at least April 2016. The Rules do not require that notice be given to a party that has been noted in default. The moving defendants ignored their noting in default. If they wanted to be involved in this action they should have moved immediately to set it aside.

[19] Pleadings will now be re-opened. The complexion of the action may change. Further production and oral discovery will likely be required. The late involvement of the moving defendants will certainly result in some inefficiencies. The time spent on the default judgment motion has been wasted. The moving defendants have been afforded a significant indulgence and costs thrown away are the price of that indulgence.

[20] However, much of the time spent by the plaintiffs to date has not been entirely wasted. The examinations for discovery of the other parties were necessary in any event. The time spent on this motion should not be included as the plaintiffs were unsuccessful and the moving defendants requested the plaintiffs’ consent to the order that was ultimately made by the court today. The examination of Mr. Smiciklas may be useful for trial. I am not prepared to order costs thrown away on a substantial indemnity basis. I see no evidence of reprehensible conduct on the part of the moving defendants.

[21] In my view, costs thrown away for one third of the amount requested is fair and reasonable in the circumstances. This takes into account the inefficiencies and the plaintiffs’ lack of success on this motion. The moving defendants shall pay the plaintiffs’ costs thrown away in the partial indemnity amount of $12,000.00 inclusive of HST and disbursements. These costs shall be paid by March 22, 2019. There will be no other order for the costs of this motion.

Released: February 20, 2019 Master R. A. Muir