Court File and Parties

COURT FILE NO.: CV 22-682038-0000 DATE: 2022-12-09 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Ural Link Ltd. AND: 2380210 Ontario Inc. et al.

BEFORE: Justice J. T. Akbarali

COUNSEL: Yehudah Krauss for the Plaintiff Johnpreet Kang for the Defendant

HEARD: In writing

Endorsement

[1] The plaintiff moves for default judgment on an agreement and guarantee. Service on the defendants was made personally in Alberta on June 22, 2022 in accordance with r. 17.02, that is to say, without leave of the court because leave was not required.

[2] However, the Statement of Claim did not comply with r. 17.04(1) which requires the claim to specifically refer to the provision of r. 17.02 relied on in support of such service.

[3] When a Statement of Claim is served outside of Ontario but within Canada, a statement of defence is due within forty days of service.

[4] Forty days after June 22, 2022 was August 1, 2022 which was a statutory holiday. Thus, the defendants could, in accordance with the rules, be noted in default by August 2, 2022 if they did not serve a statement of defence.

[5] The defendants did not serve a statement of defence. They were noted in default on August 5, 2022.

[6] The affidavit in support of the default judgment motion indicates that the defendants did not respond to the “default notice and this action against them”, and “ignored any further attempts to resolve the dispute”. I assume the default notice referred to is the notice of default provided pursuant to the agreements. There is no evidence as to what “further attempts” were made to resolve the dispute.

[7] Although it is technically permissible under the Rules of Civil Procedure to bring a default judgment motion ex parte, that is not the practice of this court: Casa Manila Inc. v. Iannuccilli, 2018 ONSC 7083.

[8] In addition to my concerns regarding notice, I am concerned by the nature of the contracts. The underlying contract is a Merchant Cash Advance Agreement under which the numbered company defendant received a cash advance of $40,000 from the plaintiff on March 31, 2022 in exchange for $56,000 of the numbered company’s future receivables, to be collected in weekly withdrawals of $2,650 from the numbered company’s bank account. By my calculations, repayment would take place on this schedule at just over 21 weeks, or about five months. If this arrangement were considered a loan, without considering the impact of amortization, or compound interest, the interest rate would be equivalent to almost 100% per annum. The contract indicates that it is not a loan, and that the funds the plaintiff is to receive under it do not include interest. I am not sure that by saying it, the parties can make it so for purposes of the criminal rate of interest provision in the Criminal Code, or for purposes of determining the legality and enforceability of the agreements.

[9] Moreover, the guarantee purports to make the guarantor liable even if the Merchant Cash Advance Agreement is “invalid, void, illegal or unenforceable and notwithstanding whether such agreement was properly completed, entered into or authorized”. Is it possible to legally guarantee an illegal agreement?

[10] I also note that the contract provides that, in an event of default, in addition to its action for breach of the agreement, the plaintiff “shall be entitled to damages equal to the purchase price less the amount received by [it] from remittances to the said date, together with legal costs and a charge amounting to the greater of $500 or 10% of the amount outstanding at the time of the event of default, intended as liquidated damages and not a penalty fee”. Are these really damages, or do these “liquidated damages” amount to a penalty that increases a possibly criminal rate of interest?

[11] In my view, it is incumbent on the plaintiff to satisfy this court that the contract and guarantee are enforceable, and a factum ought to be filed for that purpose, addressing the issues I have raised above.

[12] I make the following order:

(a) The plaintiff shall serve its motion record, together with any supplementary motion record it wishes to file, a factum, and a copy of this endorsement on the defendants on or before January 20, 2023.

(b) The affidavit of service should provide particulars of a basis for a judge to find that the defendants received the motion record, supplementary motion record, factum, and endorsement.

(c) The defendants shall have until February 20, 2023 to notify counsel for the plaintiff that they, or any of them, seeks to respond to the motion for default judgment.

(d) If the defendants do not respond within that time, the plaintiff shall advise me by February 27, 2022 and provide me with a copy of its motion materials by way of email to my assistant. If I remain concerned that the issues I identified above are not thoroughly addressed in the factum, I will consider whether to appoint an amicus to address the enforceability and legality of the contracts. If the plaintiff wishes to make submissions on whether an amicus is required, it may do so in its factum.

(e) If the defendants, or any of them, notify counsel for the plaintiff that they intend to respond to the motion for default judgment, the plaintiff shall request the scheduling of a case conference and notify the motions coordinator that the motion date should be vacated.

(f) The case conference judge may exercise the powers under Rule 50.13 to identify the issues that are contested and explore methods to resolve the issues. If the defendants indicate an intention to move to set aside the noting in default, the case conference judge may refer the motion to set aside the noting in default to an associate justice and provide directions with respect to the timing of that motion and, depending on the outcome, the timing of the plaintiff’s motion for default judgment. Alternatively, the case conference judge may schedule both motions (setting aside the noting in default and default judgment) to be heard together or one after the other by a judge and provide directions about whether the motion(s) will be in writing or by remote oral hearing, and may establish a timetable for the motion(s).

(g) The plaintiff will confirm the motion in the ordinary course.

[13] For clarity, if none of the defendants respond, I shall remain seized of this motion. If any of the defendants participate, I will not remain seized.

Justice J. T. Akbarali

Date: December 09, 2022