COURT FILE NO.: CV-19-0971
DATE: 2021 02 01
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
TECHLANTIC LTD.
Monty Dhaliwal, for the Plaintiff mdhaliwal@pallettvalo.com
Plaintiff
- and -
MODELLISTA AUTO ACCESSORIES INC. and JIYUE ZHAO
Christel Higgs and Megan Patry, for the Defendants christel@mhlawyers.ca
Defendants
HEARD: January 27, 2021
REASONS FOR JUDGMENT
Petersen J.
INTRODUCTION
[1] This is a motion by the Defendants, pursuant to R. 19.08 of the Rules of Civil Procedure, for an Order setting aside a default judgment against them.
PARTIES AND THEIR RELATIONSHIP
[2] The personal Defendant, Jiyue Zhao, is the principal of the corporate Defendant Modellista Auto Accessories Inc. Modellista was in business with the Plaintiff Techlantic Ltd. The precise nature of the business relationship is in dispute.
[3] The Plaintiff asserts that Modellista purchased automotive vehicles in Canada and utilized the Plaintiff’s services to facilitate the exportation of the vehicles to Modellista's clients in China. The Plaintiff alleges that it charged shipping and handling fees to Modellista as consideration for its services. There was no written agreement between the parties, but the Plaintiff claims that, pursuant to a verbal agreement, Modellista incurred unpaid fees in excess of $200,000 between 2016 and 2018. The Plaintiff further claims that Modellista agreed to pay an interest rate of 1.5% monthly (18% per annum) accruing on any overdue accounts.
[4] The Defendants assert that there was no contractual agreement (written or verbal) between Modellista and the Plaintiff. They say Modellista entered into an informal business arrangement, whereby it would introduce Chinese customers to the Plaintiff and locate vehicles in Canada that met the customers' requirements. The Plaintiff would then purchased the vehicles, sell them to the Chinese customers, and arranged for their shipment to China, where the customers picked them up. Modellista received a finder's fee from the Chinese customers for introducing them to the Plaintiff and locating the appropriate vehicle.
[5] The Defendants assert that the money characterized by the Plaintiff as outstanding shipping and handling fees owed by Modellista is actually comprised of vehicle storage fees owed by the Plaintiff's customers in China. Mr. Zhao deposed that the debt in dispute "resulted from the Plaintiff's failure to release several cars from storage to Chinese customers once the import regulations/restrictions had been satisfied in China". He explained that this led to Chinese customers being charged additional storage fees by the Plaintiff, which they refused to pay.
BACKGROUND FACTS
[6] In January 2018, Mr. Zhao exchanged a series of email messages with Tom Van Essen from Techlantic about two vehicles that had arrived in China. In their correspondence, Mr. Van Essen (on behalf of the Plaintiff) asserted that Modellista owed the Plaintiff a large sum of money. Mr. Van Essen's email to Mr. Zhao states that "the amount you owe" is approximately $240,000, but there is no suggestion that the debt was a personal liability. Mr. Zhao was corresponding with Mr. Van Essen on behalf of Modellista. It is clear from the context of the correspondence that the corporate parties were discussing an amount that the Plaintiff claimed was owed by Modellista. Mr. Van Essen advised Mr. Zhao that, given the amount owed, the cars in China would be released only after the Plaintiff received two payments of $70,000 from him/Modellista.
[7] Mr. Zhao responded to Mr. Van Essen that he was "working towards the payment". He explained that he was experiencing financial difficulty but had arranged for a payment of $40,000 to be made to the Plaintiff within two days. He urged Mr. Van Essen not to hold the vehicles in China, as the storage fees would increase his “costs abroad" and further hinder his ability to make payments.
[8] Mr. Van Essen replied that the Plaintiff required security for the amount owed before releasing the vehicles. Mr. Zhao conveyed that he was trying to get a second mortgage loan secured against his personal property in order to pay the Plaintiff but was having difficulty obtaining financing. He assured Mr. Van Essen that he was "eager to clear balance with you".
[9] Mr. Zhao asked whether Mr. Van Essen knew anyone who could provide him with a second mortgage loan at rates similar to bank rates. Mr. Van Essen suggested approaching a credit union. He also proposed that the Plaintiff could take a second mortgage on Mr. Zhao's property for the amount owing.
[10] Mr. Zhao replied, "I will be really appreciated if you can have [the cars] released in time. 2nd mortgage does not come in over night, if you like to sign or make any promise with the payment, I'm more than happy to." Mr. Van Essen then sent Mr. Zhao a Personal Guarantee, which Mr. Zhao promptly executed and returned to Mr. Van Essen on January 25, 2018. Mr. Zhao did not seek legal advice before signing the document. He agreed to guarantee payment of any amounts (both principal and interest) owing to the Plaintiff by Modellista, up to a limit of $240,000.
[11] There is no evidence in the record about what transpired immediately after the Personal Guarantee was executed, but the Plaintiff demanded payment of the outstanding balance from Modellista on October 1, 2018. It advised Mr. Zhao that it would be invoking the Personal Guarantee if no payment was received by October 31, 2018. No payment was made by either Defendant.
[12] The Plaintiff's Statement of Claim ("SOC") against the Defendants was issued on March 5, 2019. The SOC seeks an order against Modellista for payment of $265,712, plus pre-judgment interest at the rate of 1.5% monthly from October 31, 2018. It also seeks an order against Mr. Zhao, pursuant to the Personal Guarantee, of $240,000, plus pre-judgment interest at the same rate and from the same date.
[13] The Plaintiff brought a motion and obtained leave to serve the Defendants by substituted service. Pursuant to the Order for substituted service dated July 12, 2019, the Defendants were served with the SOC on July 29, 2019.
[14] There is no dispute that the SOC came to Mr. Zhao's attention on or about July 29, 2019. Neither he nor Modellista delivered a Statement of Defence (“SOD”). Moreover, they took no steps to convey to the Plaintiff an intent to defend the action.
[15] The Defendants were noted in default and a default judgment was issued against them on October 2, 2019. The default judgment orders: (1) the Defendant Modellista to pay the Plaintiff $269,381.01, (2) the Defendant Zhao to pay the Plaintiff $243,313.97, and (3) both Defendants to pay the Plaintiff's costs of the action in the amount of $1,668.42.
[16] The Defendants were served with the default judgment on October 25, 2019. They took no immediate steps in response to receiving it. The Plaintiff filed a writ of seizure and sale against Mr. Zhao's personal property in Newmarket on October 28, 2019.
[17] The Plaintiff then served the Defendants with two Notices of Examination in Aid of Execution, the first on November 5, 2019 for an examination on January 17, 2020, and the second one on January 22, 2020 for an examination on January 31, 2020. The Plaintiff prudently brought another motion for an order for substituted service to ensure that service of these Notices was effective.
[18] Mr. Zhao received both Notices. He ignored them. He did not appear at the examinations.
[19] The Plaintiff's efforts to enforce the default judgment were interrupted by the COVID-19 pandemic, which resulted in the temporary closure of the Newmarket Sheriff's land enforcement office. In the summer of 2020, the Plaintiff learned that it required a mortgage discharge statement for Mr. Zhao's property in order to enforce the writ of seizure and sale. The Plaintiff brought a motion for disclosure of the discharge statement from Mr. Zhao's bank. The Notice of Motion was served on July 31, 2020.
[20] The disclosure motion was scheduled to be heard on September 3, 2020. The Defendants retained counsel the day before the hearing. Their counsel immediately wrote to the Plaintiff, advising that they opposed the motion for disclosure and intended to defend the action. The next day, the disclosure motion proceeded and the relief sought by the Plaintiff was granted.
[21] The Defendants brought the within motion for an Order setting aside the default judgment on or about November 9, 2020.
ISSUES AND ANALYTICAL FRAMEWORK
[22] The court's task on a motion to vary or set aside a default judgment is to determine whether the interests of justice favour granting the order: Peterbilt of Ontario Inc. v. 156527 Ontario Ltd. (2007), 2007 ONCA 333, 87 OR (3d) 479 (ONCA), at para. 2. The analytical "test" for making this determination is well established in the jurisprudence. The motions judge must consider the following five factors set out by the Court of Appeal for Ontario in Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194, at paras. 48-49:
(i) whether the motion was brought promptly after the defendant learned of the default judgment;
(ii) whether there is a plausible excuse or explanation for the defendant's default in complying with the Rules;
(iii) whether the facts establish that the defendant has an arguable defence on the merits;
(iv) the potential prejudice to the defendant if the motion is dismissed and the potential prejudice to the plaintiff if the motion is allowed; and
(v) the effect of any order the court might make on the overall integrity of the administration of justice.
[23] A defendant need not satisfy all five elements of this test in order to succeed with a motion to set aside a default judgment. The factors are not to be treated as rigid preconditions to the exercise of the court’s discretion, such that the failure to satisfy any one of the supposed preconditions necessitates dismissal of the motion: Peterbilt, at paras. 1-2.
[24] The third factor (i.e., whether the defendant has shown an arguable defence on the merits) may justify the court setting aside a default judgment even though the other factors are unsatisfied in whole or in part. Conversely, a motion to set aside a default judgment may be dismissed if the defendant cannot show an arguable defence, even if the defendant has a valid explanation for failing to comply with the Rules and acted promptly in bringing the motion: Watkins v. Sosnowski, 2012 ONSC 3836, at paras. 23-24. This does not, however, mean that the other elements of the analytical test are to be ignored: Laredo Construction Inc. v. Sinnadural, 2005 CanLII 46934 (ONCA), at para. 25. All five factors must be taken into consideration.
[25] The weight to be given to each factor is a matter of discretion. As the Court of Appeal stated (at para. 50) in Mountain View Farms, the motions judge must consider the particular circumstances of the case to determine whether it is just to relieve the defendant from the consequences of his or her default.
ANALYSIS
Was the Defendants' motion brought promptly after they learned of the default judgment?
[26] The Defendants' motion was not brought promptly. They learned of the default judgment on October 25, 2019. They did not serve their motion to set aside the judgment until November 9, 2020.
[27] The delay (of approximately 9 weeks) from the time that the Defendants retained counsel until the within motion was commended is largely due to sudden and serious health issues that impacted their lawyer's ability to advance the file. The court does not take issue with that relatively short period of delay, particularly since the Plaintiff had been put on notice, by that time, that the Defendants were intending to defend the action.
[28] However, there was a delay of over ten months from the date of service of the default judgment until the Defendants decided to retain counsel. They took no steps whatsoever to deal with the judgment until literally the eve of the motion for disclosure of a mortgage discharge statement, in furtherance of enforcement of the writ of seizure and sale of Mr. Zhao’s property. During that ten-month period, Mr. Zhao ignored two Notices for Examinations in Aid of Execution. He knew that the Plaintiff was taking steps to enforce the judgment, yet he did nothing to challenge it.
[29] The length of the Defendants’ delay in bringing the within motion weighs against them in their motion to set aside the default judgment.
Is there a plausible excuse or explanation for the Defendants' default in complying with the Rules?
[30] The Defendants have not proffered a valid explanation for their default in complying with the Rules. Mr. Zhao deposed that, when he received the SOC, he "felt extremely overwhelmed and confused". He states that he "did not understand the documents" with which he was served and did not know what was required of him. He further states that he "was not cognizant of the implications of not responding". He adds that he was "unable to afford retaining legal representation at that time."
[31] The Plaintiff did not cross-examine Mr. Zhao on his affidavit. His evidence is therefore uncontested. The failure to cross-examine him does not, however, mean that the court is required to accept the plausibility or validity of his explanation for the Defendants' default.
[32] In underscoring the importance of giving serious consideration to the moving party's explanation of the circumstances that led to a default, the Court of Appeal in Laredo Construction, at para. 26, adopted the following passage from the Supreme Court of Canada (in the context of a decision denying an extension of time for filing an application for leave to appeal):
Time limits should mean something. Valid reasons should be given to explain the delay. Our Court must be flexible and fair. Fairness is owed not only to applicants but also to respondents who may very well be significantly inconvenienced by undue or unexplained delays.
[33] Mr. Zhao is an educated individual. He is a professional engineer. English is not his first language, but he is (to borrow his own lawyer's phrase) "very conversant" in English, as evidenced by his email correspondence in the record. He conducted his business with the Plaintiff in English. He does not argue that a language barrier or lack of education prevented him from understanding the SOC when he received it.
[34] The pleadings contained in the SOC may have been confusing to Mr. Zhao because he has no legal training. A significant portion of the pleadings is written in accessible plain language, but there is some legalese that may have been opaque to him as a lay person. I therefore find it plausible that, without assistance, Mr. Zhao may not have fully understood the nuances of the pleadings despite his English fluency. However, the cover of the SOC plainly sets out the nature of the document, what needed to be done by the Defendants, and the consequences of failing to take the requisite next steps.
[35] The SOC is in the standard format required by the Rules. Modellista and Mr. Zhao are prominently named as Defendants in the style of cause. Then, under the title "Statement of Claim" the document states, in block capital letters (on the front page), "TO THE DEFENDANTS", followed by "A LEGAL PROCEEDING HAS BEEN COMMENCED AGAINST YOU". It goes on to explain, "IF YOU WISH TO DEFEND THIS PROCEEDING, you or an Ontario lawyer acting for you must prepare a Statement of Defence in Form 18A,… serve it on the Plaintiff, and file it, with proof of service in this court office WITHIN TWENTY DAYS". The SOC further explains that filing a Notice of Intent to Defend would entitle the Defendants to ten more days within which to file their SOD.
[36] Moreover, the cover of the SOC warns the Defendants, in block capitals letters, "IF YOU FAIL TO DEFEND THIS PROCEEDING, JUDGMENT MAY BE GIVEN AGAINST YOU IN YOUR ABSENCE AND WITHOUT FURTHER NOTICE TO YOU." Finally, it advises the Defendants that, if they are unable to pay legal fees, legal aid may be available by contacting a local Legal Aid office.
[37] I can appreciate that Mr. Zhao felt overwhelmed by the SOC. It showed that the Plaintiff was pursuing him personally for payment of $240,000. A sense of dread and alarm would naturally have ensued. In his state of panic, he may not have been capable of defending the claim without assistance, but it strains credulity to suggest that he was unaware of the need to prepare a defence, or of the potential consequences of failing to do so. These things were spelled out for him in plain language and block capital letters on the cover page of the SOC.
[38] Mr. Zhao is not a lawyer. There is no evidence that he is familiar with court processes. However, if he was unsure about how to proceed in defending the action, he should have consulted a lawyer to obtain an explanation of what he needed to do next. Even if he could not afford to retain counsel to represent the Defendants in the action, he could have sought advice from a lawyer (on a limited retainer) regarding how best to represent himself. If he could not afford even a consultation with a lawyer, then he should have taken steps to connect with resources for self-represented litigants. Instead, he did nothing. He did not even contact the Plaintiff or the Plaintiff's counsel to seek clarification of what the action was about or discuss how they might be able to resolve the dispute without resort to litigation.
[39] The Defendants' counsel submits that Mr. Zhao simply "froze" when he received the SOC. This is not a valid reason for not complying with the Rules. He froze for an inordinately long time. He not only took no immediate steps to defend the action when he was served with the SOC in July 2019, he also took no steps to respond to the default judgment when he was served with it almost three months later. Furthermore, he took no steps after subsequently being served with two Notices for Examinations in November 2019 and January 2020.
[40] Mr. Zhao has not provided an explanation for his ongoing inaction, apart from the COVID-19 pandemic and the arrival of his newborn child. The disruption caused by the pandemic started in mid-March 2020. His child was born in August 2020. These events do not constitute an excuse for his failure to comply with the Rules from July 2019 through February 2020.
[41] Mr. Zhao deposed that, at the time he was served with the SOC (in July 2019), he was unable to afford retaining legal representation. He provided no particulars of his financial circumstances to support this self-serving bald assertion: HSBC Securities (Canada) Inc. v. Firestar Capital Management Corp., 2008 ONCA 894, at para. 28. Furthermore, he said nothing in his affidavit about the state of his finances in the fall of 2019 and in January 2020, when he received a copy of the default judgment and the Notices of Examination.
[42] There is no evidence that Mr. Zhao was confused by the latter documents. It appears that he simply chose to ignore them. His inattention to them and his inaction upon receipt of them are not adequately explained: HSBC, at paras. 17 and 32.
[43] The absence of a plausible and valid excuse for Mr. Zhao's non-compliance with the Rules militates against setting aside the default judgment against him personally. As the principal of Modellista, his failure to advance an acceptable explanation for the Defendants' non-compliance operates against the corporate Defendant as well.
Do the facts establish that the Defendants have an arguable defence on the merits?
[44] The Plaintiff’s causes of action against the two Defendants are different. The claim against Modellista is based on breach of contract, specifically breach of an alleged contract between the Plaintiff and Modellista, according to which Modellista agreed to pay shipping and handling fees in connection with the export of vehicles to China, and agreed to pay interest at the annual rate of 18% on any overdue accounts. There is no claim that Mr. Zhao was a party to the alleged contract between the corporate parties. The claim against Mr. Zhao is based entirely on his failure to satisfy his obligations under the Personal Guarantee that he signed in January 2018.
[45] The Defendants have included in their motion record a draft SOD, which they seek leave to serve and file in the event that the default judgment is set aside. According to the draft SOD, Modellista intends to defend against the Plaintiff's claim by arguing that it was not a party to any contracts between the Plaintiff and its Chinese customers and did not enter into an independent contract with the Plaintiff, either verbally or in writing. Mr. Zhao will similarly rely on this defence in the event of a trial, but he also intends to advance other defences, namely that the Personal Guarantee is unenforceable because it was executed under duress and represents an unconscionable bargain.
[46] On a motion to set aside a default judgment, the defendant is not required to show that his or her proposed defence will inevitably succeed at trial. Rather, the defendant must show that the defence has an air of reality (Mountain View Farm, para. 51) and that there is a genuine issue requiring a trial (Watkins, at para. 24). The Plaintiff argues that the Defendants in this case have failed to discharge the burden of presenting a triable defence to the claims on the merits.
[47] With respect to the claim against Modellista, I agree with the Plaintiff that the corporate Defendant has not advanced an arguable defence. The only defence pleaded by Modellista is that there was no contractual agreement between the corporate parties. Modellista asserts that the money in question (in excess of $240,000, plus accruing compounded interest at the rate of 18% per annum) is owed by the Chinese customers (not by Modellista) to the Plaintiff.
[48] There was no written agreement executed by the corporate parties, so the Plaintiff cannot produce a physical copy of a contract upon which to base its claim. However, the email correspondence between Mr. Zhao (acting as principal of Modellista) and Mr. Van Essen (on behalf of the Plaintiff) in January 2018 constitutes compelling circumstantial evidence of the existence of an unwritten agreement between them.
[49] In that email correspondence, Mr. Zhao repeatedly stated that he was about to make a payment of $40,000 to the Plaintiff. Why would he make a payment on a debt for which his company had no contractual liability? Why would he entertain obtaining a second mortgage on his personal property to pay off a debt for which his company had no contractual liability? Mr. Zhao deposed that, even though he and Modellista were not indebted to the Plaintiff ("it was instead the Chinese customers that were indebted to the Plaintiff"), he felt that he had to make a payment to the Plaintiff in order to resolve the dispute between the Plaintiff and the Chinese customers. He explained that, if the customers in China became dissatisfied with the Plaintiff and stopped importing cars from Canada, there would be no more business for Modellista to do.
[50] Mr. Zhao’s statements are contradicted by the content of his correspondence with Mr. Van Essen. He did not assert, in his email messages, that Modellista owed no money to the Plaintiff. He did not protest when Mr. Van Essen repeatedly stated that he (as principal for Modellista) owed the Plaintiff an approximate sum of $240,000. At not time did Mr. Zhao qualify his statements by suggesting that the payments he was trying to make were despite the fact that the debt in question was not owed by Modellista, but rather by the Chinese customers. On the contrary, he used language in his messages that implicitly acknowledged liability for the debt (e.g. "I'm more eager to clear balance with you").
[51] Moreover, if Mr. Zhao sincerely believed that Modellista was not obligated to pay the money owed to the Plaintiff, why would he have executed the Personal Guarantee? He does not claim to have misunderstood the guarantee. He knew that he was providing security for Modellista’s debt. On his version of the events - if he believed that Modellista was not contractually obligated to pay the outstanding fees on the Plaintiff's accounts - then he engaged in a serious and potentially fraudulent misrepresentation when he purported to provide the Plaintiff with the security it was seeking in order to obtain release of the two vehicles held in storage.
[52] Mr. Zhao's own actions and words are inconsistent with his evidence about the non-existence of an agreement between the Plaintiff and Modellista. The Plaintiff did not need to cross-examine him in order to impugn his credibility on this point. Although credibility issues are often viewed as triable issues, in the circumstances of this case, the documentary motion record is adequate for me have confidence in finding that there is no credible evidence to support Modellista's intended defence.
[53] With respect to the claim against Mr. Zhao personally, he asserts in his affidavit that he executed the Personal Guarantee under duress. He presents no evidence to support this defence. There is no evidence that his will was coerced by the Plaintiff or that he protested signing the Personal Guarantee. On the contrary, the evidence shows that he suggested the Personal Guarantee to the Plaintiff as security for the monies owed by Modellista. He had other avenues available to him to secure release of the two vehicles in China, including obtaining a second mortgage loan on his property to finance payments to the Plaintiff. In these circumstances, duress is not an arguable defence: Gordon v. Roebuck, 1992 ONCA 7442, at paras. 3-6.
[54] It is important to note, however, that Mr. Zhao is not required to demonstrate duress in order to establish that the Personal Guarantee is unconscionable: Uber Technologies Inc. v. Heller, 2020 SCC 16, at para. 70. As the Supreme Court of Canada stated in Uber, at paras. 64-65, the defence of unconscionability requires proof of only two elements, namely an inequality of bargaining power and a resulting improvident bargain.
[55] The Plaintiff argues that the relative bargaining power of the parties in this case is not comparable to that of the food-delivery driver and multinational corporation involved in the Uber case. This is true, but the doctrine of unconscionability is not predicated on a David-and-Goliath scenario. Inequality of bargaining power exists whenever a party cannot adequately protect their interests in the contracting process: Uber, at para. 66. There are no rigid limitations on the types of inequality that fit this description. The inequality may relate to personal attributes or characteristics of the weaker party (e.g. illiteracy) or the stronger party (e.g. wealth, knowledge and experience), or it may arise from situational circumstances that impair the weaker party's ability to contract freely and autonomously: Uber, at paras. 67-69.
[56] Mr. Zhao is not suggesting that personal attributes rendered him vulnerable in the bargain with the Plaintiff. Rather, he relies on the circumstances surrounding the signing of the Personal Guarantee to assert that there was an inequality of bargaining power between him and the Plaintiff at that time.
[57] The evidentiary record establishes that Mr. Zhao did not have the benefit of legal advice prior to signing the Personal Guarantee. The guarantee was drafted by the Plaintiff, who was holding two vehicles as economic leverage to obtain security from Mr. Zhao for the monies owed by Modellista. The hold on the cars was causing Modellista to incur storage expenses in China that it could not afford. More importantly, Mr. Zhao feared his reputation with customers in China would be sullied and his business would be irreparably damaged if the cars were not released promptly to the Chinese purchasers. He deposed that the “continued viability” of his business was at stake. His evidence is that he was desperate to get the cars released and was having difficulty securing a second mortgage on his property to make a payment to the Plaintiff. He deposed that, in the circumstances, he felt he had no choice but to sign the Personal Guarantee.
[58] The Plaintiff elected not to cross-examine Mr. Zhao on his affidavit, so the above evidence is uncontested. Although the evidence may not establish an egregious case of unequal bargaining power, an "overwhelming imbalance of power" is not required to satisfy the doctrine of unconscionability: Uber, at paras. 81-82. The evidence in the motion record before me is sufficient to make out an arguable case that the first element of the doctrine has been met.
[59] The second element of the doctrine of unconscionability, namely the existence of an improvident bargain, is also arguable on the evidence before me. A bargain is improvident if it unduly advantages the stronger party or unduly disadvantages the more vulnerable party: Uber, at para. 74. It need not necessarily be "grossly unfair": Uber, at paras. 81-82. Improvidence must be assessed contextually and measured at the time that the impugned contract is formed: Uber, at paras. 74-75.
[60] In this case, Mr. Zhao signed a Personal Guarantee that unduly disadvantaged him. Among other things, the terms of the Guarantee require him to waive "all defences, counterclaims or offsets that are legally available" to him with respect to the payment of Modellista's debt and "all rights, by statute or otherwise, to require the [Plaintiff] to institute suit against [Modellista], and to exercise diligence in enforcing this Guarantee". It also requires him not to mortgage, sell or transfer "any of [his] assets without prior written consent" of the Plaintiff (emphasis added). These and other draconian terms of the Personal Guarantee make out an arguable case for improvidence. Mr. Zhao's defence of unconscionability therefore has an air of reality.
Is there potential prejudice to either party if the motion is dismissed or allowed?
[61] Clearly, Mr. Zhao will suffer prejudice if his motion is dismissed because the Plaintiff will proceed to enforce the writ of sale against his personal property. Furthermore, the default judgment allows the Plaintiff to collect payment of $269,381.01 from Modellista, in addition to $243,313.97 from Mr. Zhao, even though Mr. Zhao's purported personal liability is based on a guarantee that he provided for Modellista's debt. It would be prejudicial to the Defendants for the default judgment to stand, because the Plaintiff would be able to collect the same debt twice, once from each of them.
[62] The Plaintiff argues that it will be exposed to "significant and unquantifiable potential prejudice" should the default judgment be set aside. The Plaintiff submits that, if the action proceeds to trial, based on the facts alleged by Modellista in the draft SOD, the Plaintiff would be required “to locate and communicate with over sixty (60) customers - the number of unpaid invoices outlined in the Statement of Claim - in China, 3-4 years after the alleged transactions were completed." The Plaintiff adds that this "may be an impossibility", given the passage of time.
[63] The success of the Plaintiff's claim against the Defendants at trial would not be contingent on tendering evidence from all (or any) of the Chinese customers. The Plaintiff could establish the existence and the terms of an unwritten contract with Modellista without having to disprove the existence of contracts between the Plaintiff and the Chinese customers. However, I can appreciate that the Plaintiff may want to strengthen its reply to Modellista’s defence by adducing evidence from customers in China to contradict the Defendants' allegation that the money it was seeking from Modellista was actually owed to the Plaintiff by those customers.
[64] In that regard, the passage of time caused by the Defendants' inaction could complicate and hinder the Plaintiff's ability to gather and present relevant evidence to vigorously pursue its claims. Some prejudice to the Plaintiff, albeit relatively minor, might result. I do not, however, agree with the Plaintiff's submission that the Defendants "would benefit …in a disproportionate way" from an inability to locate material witnesses in China. The Defendants would be equally, if not more, prejudiced from any inability to locate such witnesses, given the defence being advanced by Modellista. A failure to produce such witnesses might result in adverse inferences drawn against the Defendants at trial.
[65] With respect to the claim against Mr. Zhao personally, an Order setting aside the default judgment based on his arguable defence of unconscionability would not result in any prejudice to the Plaintiff's ability to advance its claim. There is no suggestion that relevant documentary evidence has not been preserved or that material witnesses are no longer available or competent to testify.
[66] The Plaintiff argues that it would suffer prejudice if the default judgement against Mr. Zhao is set aside because it incurred costs in obtaining the judgment, filing writs, filing motions for substituted service, scheduling and delivering Notices of Examinations, and filing a disclosure motion, all in pursuit of enforcement of the judgment in question. Such costs are readily quantifiable and can be remedied with an order against the Defendants for payment of the Plaintiff's costs. Given that they are compensable, costs thrown away do not constitute the type of prejudice that would justify denying a motion to set aside a default judgment.
What effect would the court's order have on the overall integrity of the administration of justice?
[67] Rule 19.08 authorizes the Court to set aside or vary a default judgment "on such terms as are just". The Plaintiff argues that the potential prejudice to the Defendants, arising from the way in which the default judgment was drafted, could be remedied by varying the judgment to make the Defendants jointly and severally liable for the debt owed by Modellista to Techlantic. That would deprive the Plaintiff of its current ability to "double dip" and collect on the same debt twice. The Plaintiff argues that such an order would better serve the interests of justice and preserve the integrity of the administration of justice than an order to set aside the default judgment.
[68] The Defendants argue that this case calls out for judicial intervention to prevent inequities that resulted from unequal bargaining power and to protect a vulnerable individual who would otherwise be the victim of an improvident bargain. They argue that the integrity of the administration of justice would be promoted by the court exercising its discretion to set aside the default judgment, granting them leave to file their Statement of Defence, and directing the action to proceed to trial.
CONCLUSION
[69] Taking all the relevant factors into account, I conclude that there is no basis upon which to set aside the default judgment against Modellista. The corporate defendant has no valid explanation for why the default occurred. It did not act promptly once it learned of the default judgment and it has not advanced an arguable defence to the Plaintiff's claim on the merits. Moreover, there would be some (albeit minor) prejudice to the Plaintiff's ability to advance its claim against Modellista if the default judgment were set aside.
[70] Setting aside the default judgment as against Modellista would effectively condone an unexplained lengthy delay and authorize the trial of a claim to which the Defendant has not raised an arguable defence. Justice would not be served by such an outcome. The integrity of the administration of justice would be undermined.
[71] An order setting aside the default judgment as against Mr. Zhao personally would not have a similarly negative impact on the integrity of the administration of justice because Mr. Zhao has an arguable defence on the merits. The Plaintiff would suffer no prejudice if required to pursue its claim against him at trial. Although Mr. Zhao has not presented a valid explanation for his default and did not act promptly to set aside the default judgment, justice would best be served by giving him an opportunity to defend against the claim on the merits at trial.
ORDERS
[72] For the reasons set out above, I conclude that the interests of justice favour varying the default judgment dated October 2, 2019 to set aside the order against Mr. Zhao personally. I therefore make the following orders:
- Paragraph 2 of the default judgment is set aside.
- Paragraph 1 of the default judgment (as against Modellista) remains in force.
- Paragraph 3 of the default judgment is set aside and replaced by the costs order below.
Pursuant to Rule 19.08, which authorizes a motions judge to stipulate conditions on any order to vary or set aside a default judgment, I make the following additional ancillary orders:
- Mr. Zhao must limit his defence to the doctrine of unconscionability. He shall not plead or argue duress and shall not challenge Modellista's liability for the debt that he personally guaranteed in January 2018.
- Mr. Zhao must serve and file a Statement of Defence within 30 days of today's date.
COSTS
[73] There were no Offers to Settle made by the parties that would impact the determination of costs.
[74] The Plaintiff submits that the Defendants should bear its costs regardless of the outcome of the motion. I agree with this submission because the Defendants brought the within motion at the eleventh hour, after the Plaintiff had incurred significant costs in pursuit of enforcement of the default judgment. The Defendants are seeking the court’s indulgence and the Plaintiff should not be liable for costs, even though the Defendants achieved partial success.
[75] With respect to quantum, for the within motion, the Plaintiff claims to have incurred costs of $5,000. From the inception of the action, the Plaintiff claims to have incurred costs on a substantial indemnity basis of $22,000 and on a partial indemnity basis of $17,500 (inclusive of costs thrown away for all steps taken to enforce the default judgment).
[76] The Defendants argue that the amount of costs claimed by the Plaintiff is excessive. Furthermore, they submit that costs should be in the cause.
[77] In my view, costs should be awarded to the Plaintiff against both Defendants, and should be inclusive of prior steps in the proceeding that resulted in costs thrown away (i.e., everything done after the SOC was served). The Plaintiff was successful in defending the motion to set aside the default judgment against Modellista and is therefore presumptively entitled to its costs of that part of the motion on a partial indemnity basis. Mr. Zhao succeeded in part with his motion to set aside the default judgment as against him personally, but his prolonged and unexplained inaction resulted in an otherwise unnecessary motion. Moreover, his unreasonable conduct caused the Plaintiff to incur costs thrown away in pursuit of enforcement of the default judgment against him. He therefore is not entitled to his costs, despite having succeeded in setting aside the default judgment against him personally. Given the absence of a valid explanation for his prolonged inaction, he should bear the Plaintiff's costs thrown away on a substantial indemnity basis.
[78] Unfortunately, neither party complied with Rule 57.01(6). The Plaintiff did not bring an Outline of Costs to the motion hearing. I therefore have no basis upon which to assess the quantum of costs claimed by the Plaintiff, other than my sense of what is fair, proportionate and reasonable, given the nature of the issues in dispute and the work completed by counsel.
[79] After drafting and serving its SOC, the Plaintiff brought a couple of motions (one for substituted service and a contested motion for disclosure that the Plaintiff won). There were no other court appearances. Examinations in aid of execution were scheduled but not conducted. The Plaintiff filed only one affidavit in response to the motion before me. The parties did not conduct cross-examinations of the affiants on the motion. Factums were required. In all these circumstances, I conclude that a fair and proportionate order would hold the Defendants jointly and severally liable for the Plaintiff's costs in the amount of $14,000, all inclusive.
[80] Mr. Zhao deposed that the COVID-19 pandemic has seriously affected the viability of his company's business. The pandemic has created financial stresses for many businesses. In the circumstances, I order that half ($7,000) of the Plaintiff's costs must be paid by the Defendants within 30 days of today's date. The remaining half ($7,000) must be paid within 60 days of today's date.
Petersen J.
Released: February 1, 2021
COURT FILE NO.: CV-19-0971
DATE: 2021 02 01
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
TECHLANTIC LTD.
Plaintiff
- and -
MODELLISTA AUTO ACCESSORIES INC. and JIYUE ZHAO
Defendants
REASONS FOR JUDGMENT
Petersen J.
Released: February 1, 2021