Court File and Parties

COURT FILE NO.: CV-17-74 DATE: January 16, 2023 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Matbridge Investments Ltd., Plaintiff AND: Christopher Culligan and The Quiet Coach Inc., Defendants

BEFORE: MacNeil J.

COUNSEL: M. Kelly – Lawyer for the Plaintiff M. Zemel – Lawyer for the Defendant, Christopher Culligan, and appearing as Agent for M. Goyal, Lawyer for the Defendant, The Quiet Coach Inc.

HEARD: October 12, 2022 (by videoconference)

Endorsement

Overview

[1] The Plaintiff, Matbridge Investments Ltd. (“the Plaintiff” or “Matbridge”), makes this motion seeking an order that the Defendants answer undertakings given at examination for discovery involving the delivery of lawyers’ files. The Plaintiff also seeks partial summary judgment in the amount of $37,500.00 pursuant to the terms of a promissory note.

[2] The Defendants, Christopher Culligan (“Dr. Culligan”) and The Quiet Coach Inc. (“TQC”) (collectively, “the Defendants”), oppose the Plaintiff’s motion and make a cross-motion seeking leave to file an amended statement of defence to plead the defence of equitable set-off.

[3] Both parties filed affidavits in support of their motions.

Background

[4] In or around March 2013, Dr. Culligan co-founded TQC with Brett Shellhammer (“Mr. Shellhammer”). At the time of incorporation, Dr. Culligan was appointed sole director of TQC and Mr. Shellhammer was appointed Chief Technology Officer (“CTO”). Mr. Shellhammer was responsible for managing the day-to-day operations of TQC, including the development of the Coach Technology, the hiring and supervising of employees, and administrative operations, such as payroll and government and tax filings.

[5] On or about April 24, 2015, the Plaintiff entered into a Subscription Agreement with TQC for the purchase of common shares. Mr. Shellhammer signed the subscription on behalf of TQC, as Co-Founder and CTO.

[6] On or about February 12, 2016, Mr. Shellhammer signed a promissory note on behalf of TQC in favour of the Plaintiff, for a total of $37,500.00 (“the Promissory Note”). The Promissory Note expressly stated that it is “secured by the FY2015 SR&ED Tax Credit due to The Quiet Coach, Inc. from the Canada Revenue Agency”.

[7] The Plaintiff advanced the sum of $37,500 to TQC pursuant to the Promissory Note. TQC used the funds to pay creditors.

[8] On May 4, 2016, the Plaintiff demanded repayment of the Promissory Note. No payment was made.

[9] In or about May 2016, Mr. Shellhammer was terminated as an officer of TQC.

[10] On January 27, 2017, the Plaintiff commenced the within action claiming, among other things, oppression remedies under the Ontario Business Corporations Act; fraudulent and negligent misrepresentations; breaches of contract; injunctive and declaratory relief; tracing and accounting orders; and general and punitive damages in excess of $600,000.00. The Plaintiff also makes claims against Dr. Culligan personally.

[11] On or about May 1, 2017, Dr. Culligan and TQC delivered a statement of defence denying the claims.

[12] On May 23, 2017, the Plaintiff delivered its reply.

[13] The Plaintiff delivered its affidavit of documents on December 11, 2018. In documents produced by the Plaintiff, the Defendants found a number of emails between Mr. Shellhammer, Ted Schlotzhauer, the President of Matbridge (“Mr. Schlotzhauer”) and Mr. Schlotzahauer’s son that they rely upon to amend their statement of defence.

[14] On October 30, 2019, Mr. Schlotzhauer was examined for discovery as the representative of the Plaintiff.

[15] On October 31, 2019, Dr. Culligan was examined for discovery as the representative of TQC and in his personal capacity. He provided a number of undertakings. Among them were three undertakings to make best efforts to request the production of the files of TQC’s former and current IP lawyers (“the Lawyers’ Files”).

[16] Counsel for the Defendants made inquiries of the three law firms and received from each estimated costs to produce the files that totaled approximately $9,000.00. The Defendants’ counsel advised the Plaintiff’s lawyer of these costs. Neither party would pay the law firms’ fees to obtain the records.

[17] On or about December 6, 2021, the Plaintiff served the within motion. It was initially returnable December 22, 2021.

[18] In or around December 10, 2021, the Defendants retained their current legal counsel as their former lawyer was going to be retiring in 2022. Ms. Goyal and Ms. Zemel wrote to counsel for the Plaintiff advising of same. Ms. Zemel also advised that she was awaiting the transfer of the file from the former lawyer’s office and that the Plaintiff’s motion would have to be adjourned.

[19] On January 13, 2022, with the action nearing its fifth anniversary from commencement, the parties agreed to a consent order which provided that the action would continue to trial in accordance with an agreed-upon timetable.

[20] By letter dated January 26, 2022, Ms. Zemel advised that she had received the files from her client’s former law firm, that they are extensive in volume, and that she was still in the process of reviewing same. She wrote that she expected to provide her client’s answers to undertakings shortly but noted that the Plaintiff had not yet answered any of its undertakings. She requested that those answers be provided no later than February 10, 2022.

[21] On or about February 7, 2022, the Defendants served their answers to undertakings and refusals given at the discovery of Dr. Culligan.

[22] By letter dated February 11, 2022, counsel for the Defendants wrote to the Plaintiff’s counsel advising that they had now had the opportunity to review the matter and had determined that the Statement of Defence needed to be amended to include allegations that Matbridge had conspired with Mr. Shellhammer to cause harm to TQC, including by misappropriating its technology and IP, and by taking steps towards setting up a competing business. They asked if the Plaintiff would consent to the filing of the amended pleading and also proposed a new timetable.

[23] By letter dated February 18, 2022, counsel for the Plaintiff responded and advised that Matbridge would not consent to the proposed amendments to the Statement of Defence and set out the reasons why. He also enclosed a chart providing the Plaintiff’s answers to undertakings given at the discovery of Mr. Schlotzhauer.

[24] Various correspondence was then exchanged between counsel for the parties concerning the bringing of the within motion and timetabling.

[25] On April 29, 2022, the Defendants brought its cross-motion.

[26] As of the hearing date, the Promissory Note had not been repaid and TQC had not received the SR&ED tax credit for the 2015 financial year.

Issues

[27] The following are the main issues to be determined:

(a) Do the Defendants’ undertakings require them to bear the cost of producing the Lawyers’ Files? (b) Should the Defendants be permitted to amend their statement of defence? (c) Should the Plaintiff be granted partial summary judgment in the amount of $37,500.00 pursuant to the Promissory Note?

ANALYSIS

(a) Do the Defendants’ undertakings require them to bear the cost of producing the Lawyers’ Files?

[28] The Plaintiff seeks an order requiring the Defendants to answer outstanding undertakings given at the discovery of Dr. Culligan. More specifically, it wants the Defendants to bear the cost of producing the Lawyers’ Files.

Position of the Plaintiff

[29] It is the Plaintiff’s position that the Defendants gave undertakings to obtain the Lawyers’ Files relating to TQC and its technology and, as a result, they are required to pay the costs involved in obtaining those files. It contends that the Lawyer’s Files will contain relevant information concerning issues in the action, including ownership of the patented technology, who was involved in the preparation of certain documents, and what representations were made to shareholders.

[30] The Plaintiff submits that the Defendants have an obligation to produce all relevant documents; the Lawyers’ Files should be considered to be in the Defendants’ power and control for the purposes of Rule 30.01(1)(b) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194; and Rule 30.03 requires the Defendants to obtain the records at their own expense. The Defendants can recover their costs of obtaining the records later, if they prove successful at trial.

[31] The Plaintiff further argues that the party giving an undertaking ought to pay any costs associated with fulfilling that undertaking.

[32] The Plaintiff asserts that it should not be required to bring a Rule 30.10 third party motion to obtain the records from the law firms since the only issue is who is to pay for the production of same.

Position of the Defendants

[33] The Defendants dispute that they gave undertakings to pay the costs of obtaining the Lawyers’ Files. It is their position that the Plaintiff had actually agreed to pay these costs.

[34] The Defendants submit that their counsel only undertook to request the records from the third-party law firms and to advise Plaintiff’s counsel of the costs associated with producing the files. The Defendants contend that it is undisputed that their counsel requested the Lawyers’ Files and advised Plaintiff’s counsel of the costs to be charged by the three law firms. Therefore, the Defendants assert that they have complied with their undertakings.

[35] The Defendants submit that many of the documents already produced by them were received from or copied to TQC’s law firms. Therefore, it is likely that the Plaintiff has received most, if not all, of the relevant documents contained within the Lawyers’ Files.

[36] The Defendants argue that the cases relied upon by the Plaintiff are mainly personal injury cases where the sought-after medical records were clearly relevant and necessary to the action so it was only fair that the Plaintiff be required to pay for the cost of obtaining them. In this case, the Defendants are responding to the Plaintiff’s action. It is the Plaintiff who is seeking the Lawyers’ Files. Unlike the personal injury cases, the records are not intricately tied to the Defendant’s defence. The contents of the Lawyers’ Files are not clearly relevant to the issues in the litigation, the extent and scope of the relevance of the records is unknown, and it would be unfair to require the Defendants to bear the significant costs of what is essentially a “fishing expedition” by the Plaintiff. The Defendants argue that the jurisprudence on the issue of which party bears the cost of production of documents in the possession of third parties is unsettled when the Rules of Civil Procedure are silent on the issue: see Rheaume v. Foster, 2021 ONSC 5804, at paragraphs 37 to 47. Unlike in simplified procedure cases where Rule 76.03 applies and each party must pay their own costs, there is no such rule in ordinary procedure cases like this one.

[37] The proportionality principle set out in Rule 29.02(3) must be applied to any production order made. Ordering the Defendants to pay for the cost of obtaining the law firm records would be an excessive and unjustified expense.

[38] The Defendants argue that the undertakings given at Dr. Culligan’s discovery were clear and the Plaintiff is now asking the court to override what counsel agreed to at the discovery. The Plaintiff should bring a Rule 30.10 motion to obtain the Lawyers’ Files if it does not want to pay the law firms’ costs.

Discussion

[39] This is a motion to require compliance with an undertaking and not a motion for production under the documentary discovery rules, so I do not need to determine the relevance or non-relevance of records that may be contained within the Lawyers’ Files.

[40] Among the cases relied on by the Plaintiff was that of Mach v. Barmasch, 2018 ONSC 896, wherein the defendants brought a motion requiring the plaintiff to pay for the cost of obtaining records to answer undertakings given. The plaintiff argued that the defendants should pay to the plaintiff the cost of obtaining the records before they were produced. Master McAfee noted that he was not referred to any evidence in the transcript or elsewhere indicating that the defendants agreed to pay for the cost of producing the records and there was no discovery plan wherein the issue of payment was addressed. Since there was no agreement, it was held that the defendants were not required to bear the cost of production at that stage.

[41] I find that Mach is distinguishable from what is before me since, here, the parties specifically discussed the issue of costs relating to the production of the records sought by the Plaintiff.

[42] A review of the transcript of Dr. Culligan’s examination for discovery establishes that the Defendants did not undertake to pay for the cost of producing the Lawyers’ Files. There were separate requests made for the files of each of the three law firms. The exchange between counsel in respect of the first request shows that the Defendants’ lawyer asked if the Plaintiff would cover the costs if there was a cost associated with obtaining the files and counsel for the Plaintiff replied that he would “just need to know what it is in advance … before its ordered” so that he did not find himself “with a client at my doorstep saying, Why did you spend $15,000 on making copies or whatever?”. The transcript further shows that counsel for the Plaintiff advised that the same answer would apply regarding the production of the files from the second and third law firms.

[43] Contrary to the Defendants’ assertion, based on this exchange, I find that counsel for the Plaintiff also did not undertake to pay the costs of obtaining of the records.

[44] Since I have found that there was no undertaking given by the Defendants to pay for the cost of producing the Lawyers’ Files, the Plaintiff’s motion in this regard is dismissed.

(b) Should the Defendants be permitted to amend their statement of defence?

[45] The Defendants seek to amend the Statement of Defence to include the defence of equitable set-off based on emails exchanged between Matbridge and Mr. Shellhammer that they allege show a conspiracy to perform unlawful acts that constitute a breach of contract and give rise to liability for damages to the Defendants. Pleading this defence would mean that, if the Plaintiff is entitled to any damages in the action, the Defendants could argue that those damages are to be set-off against the damages owing to them.

Position of the Plaintiff

[46] The Plaintiff does not oppose the filing of all of the proposed amendments contained in the Amended Statement of Defence. It does oppose the allegations contained in paragraphs 8 and 42 – 48 where it is alleged, among other things, that:

a. Mr. Shellhammer and the Plaintiff conspired to misappropriate TQC’s assets; b. Mr. Shellhammer and the Plaintiff planned to, and did, start a new company that would compete with TQC; c. Mr. Shellhammer and the Plaintiff tried to solicit employees and independent contractors of TQC; d. Mr. Shellhammer and the Plaintiff conspired to cause financial and other harm to TQC by failing to pay salaries, file tax returns, and/or complete applications for the SR&ED Tax Incentive Program; and, e. the Plaintiff breached the non-competition and non-solicitation provisions of the Unanimous Shareholders Agreement.

[47] The Plaintiff argues that these allegations are frivolous, untrue and without merit; and that, other than the emails, there is no other evidence to support the conspiracy allegations. It submits that all of the emails relied upon by the Defendants are from Mr. Shellhammer and none were sent by Mr. Schlotzhauer. Mr. Schlotzhauer’s evidence is that he did not participate in what Mr. Shellhammer was suggesting. The Plaintiff also notes that the Defendants allege they have suffered damages totaling $1.5 million as a result of the alleged conspiracy but no particulars have yet been provided.

[48] The Plaintiff submits that the motion to amend was brought after the expiration of the 5-year deadline to have the matter set down for trial and after a timetable was agreed to in order to have the action set down for trial, so leave to amend should not be granted. Given the Defendants’ delay in making their motion to amend, the Plaintiff submits that prejudice should be presumed. The court should find that that presumption has not been rebutted since the Defendants have not provided a satisfactory explanation for the delay and have not addressed the presence or absence of prejudice to the Plaintiff. The Plaintiff relies on a number of cases where amendments were denied due to the passage of time, including Family Delicatessen Ltd. v. London (City), 145 A.C.W.S. (3d) 1006, 2006 CarswellOnt 1021 (Ont. C.A.), wherein the Ontario Court of Appeal upheld the trial judge’s dismissal of a motion to amend a claim to include new causes of action where the action had been ongoing for six years.

[49] The Plaintiff submits that the proposed allegations are mainly against Mr. Shellhammer who is not a party to the proceedings. If the proposed amendments are permitted, Mr. Shellhammer will need to be added as a party and this will require the parties to reopen the pleadings and reconduct examinations for discovery which will result in significant prejudice to the Plaintiff.

[50] The Plaintiff cites Eftimovski v. Faris, 2013 ONSC 5084, at paras. 45 and 48, wherein the court allowed the defendant Faris to amend his claim to plead equitable set-off holding that the proposed amendment to the statement of defence and counterclaim did not add a new cause of action but sought additional relief based on facts already pleaded and did not add any material facts to those already pleaded. The Plaintiff argues that since the Defendants are adding both new facts and new causes of action to ground the set-off defence, the amendments should not be permitted.

[51] The Plaintiff submits that the emails were discovered more than two years prior to the commencement of the motion to amend. Since the Defendants are proposing a new cause of action after the two-year limitation period has expired, the Plaintiff contends that it is plain and obvious that it cannot succeed: Lo Faso v. Kelton & Ferrcuti Consultants Ltd., 2008 CarswellOnt 3635, [2008] O.J. No. 2461, at paras. 26 and 35.

Position of the Defendants

[52] It is the position of the Defendants that there is no non-compensable prejudice to the Plaintiff if the proposed amendments are allowed. To the contrary, if the amendments are denied, it is the Defendants who will suffer non-compensable prejudice as they will be unable to plead a valid equitable defence.

[53] The test for amending pleadings is low and the default is to grant leave: see Luh v. DiPietro, 2022 ONSC 2719, at paras. 11-13.

[54] The Defendants submit that they are not pleading a new cause of action. They are amending only for the purpose of pleading the defence of equitable set-off in order to reduce any amounts award, if any are found owing. No money will actually change hands. Their defence is not clearly impossible of success and the amendments are not patently ridiculous or incapable of proof. But, in order to properly plead this defence, they also need to add new material facts and a cause of action to ground the new defence. While they intend to plead breach of contract as the cause of action, there is no counterclaim and the Defendants are not seeking actual damages.

[55] Because they are only seeking to add equitable set-off as a defence, the Defendants contend that the proposed amendments are not subject to the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B and are not statute-barred. They rely on Canada Trustco Mortgage Co. v. Pierce, at paras. 43-46, wherein the Ontario Court of Appeal held that “the proposed defence of equitable set-off is not subject to the two-year limitation period in s. 38(3) of the Trustee Act”. The Ontario Court of Appeal cited Lord Denning, who had held that equitable set‑off is a true substantive defence that is not subject to a limitation period, as follows:

In point of principle, when applying the law of limitation, a distinction must be drawn between a matter which is in the nature of a defence and one which is in the nature of a cross-claim. When a defendant is sued, he can raise any matter which is properly in the nature of a defence, without fear of being met by a period of limitation. No defence, properly so-called, is subject to a time-bar. [Emphasis in original.]

[56] The Defendants submit that there was no inordinate or inexcusable delay in seeking the proposed amendments. While the emails grounding the proposed amendments were disclosed in the Plaintiff’s affidavit of documents served in December 2018, it was only when the Defendants’ new lawyers reviewed the file in early February 2022 that the determination was made that amendment of the Statement of Defence was necessary. The Defendants moved diligently to amend the pleading thereafter. They assert that Mr. Schlotzhauer was examined on the content of the emails at his examination for discovery on October 30, 2019 and he gave undertakings regarding the emails. It is the Plaintiff’s obligation to move its action forward but, between October 2019 and December 2021, the Plaintiff took no substantive steps. In addition, the undertakings given at Mr. Schlotzhauer’s discovery were not answered until more than two years later in February 2022. Therefore, the Defendants contend that the Plaintiff cannot properly argue that it has suffered prejudice as a result of delay.

[57] The Defendants further argue that, if they are permitted to amend and the Plaintiff believes it has a cause of action against Mr. Shellhammer, the Plaintiff would not be statute-barred from amending its claim to plead contribution and indemnity against him since the limitation period for its claim would commence on February 11, 2022, when the Defendants first served their draft Amended Statement of Defence.

Discussion

[58] Pursuant to Rule 26.01 of the Rules of Civil Procedure, the court is required to grant leave to amend unless the responding party would suffer non-compensable prejudice, the amended pleadings are scandalous, frivolous, vexatious, or an abuse of the court’s process, or the pleadings disclose no reasonable cause of action: see 1588444 Ontario Ltd. v. State Farm Fire and Casualty Co., 2017 ONCA 42, at para. 25.

[59] Amendments should be in compliance with the applicable pleading rules, including the requirement to plead material facts and the prohibition of pleading evidence. Whether or not the amended pleading will ultimately prove successful is not to be determined on a motion to amend: see Montez (Collingwood South) Inc. v. Holborn Property Investments Inc., 2011 ONSC 6901, paras. 3-4.

[60] As was stated in 1588444 Ontario Ltd., at para. 25, the onus to rebut presumed prejudice lies with the moving party and the onus to prove actual prejudice lies with the responding party.

[61] With respect to presumed prejudice, the leading case in Ontario is Family Delicatessen Ltd., wherein the Ontario Court of Appeal held that, after exceptional delay, non-compensable prejudice will be presumed absent evidence to the contrary. One of the reasons why is the recognition that time diminishes a witness’s memory: 1588444 Ontario Ltd., para. 36. However, the presumption of prejudice can be rebutted where, for example, the moving party provides an adequate explanation for the delay in seeking the amendments or adduces evidence that there is no non-compensable prejudice: 1588444 Ontario Ltd., at para. 37. Non-compensable prejudice does not include prejudice resulting from the potential success of the plea or the fact that the amended plea may increase the length or complexity of the trial: 1588444 Ontario Ltd., at para. 25.

[62] I find that the delay in this case is not inordinate given that the record supports that the emails were produced through the discovery process starting in December 2018, the Plaintiff provided its answers to undertakings in February 2022, and the Defendants’ new lawyers completed their review of the transferred files in February 2022 and, shortly thereafter, notified counsel for the Plaintiff of the Defendants’ intention to amend. (The COVID pandemic also would have accounted for some delay in 2020.)

[63] If I am wrong in my decision in this regard, I find that the Defendants have provided a reasonable explanation for the delay and established that the Plaintiff would not suffer prejudice by reason of the amendments. No trial date has been set and there is no peremptory order estopping the Defendants. The Plaintiff has been aware of the emails that underlie the proposed amendments and Mr. Schlotzhauer has been examined on them, at least to some degree. A review of the pleadings establishes that the validity of the Promissory Note and any payment owing thereunder, and the SR&ED Tax Incentive Program credit, were already issues raised and to be determined in the action. I conclude that the presumption of prejudice has been rebutted.

[64] The Plaintiff has not provided evidence of any actual prejudice to it as a result if the proposed amendments to the Statement of Defence are permitted. For instance, there was no lost opportunity to fully investigate, evidence has not been lost, and witnesses are still available. The Plaintiff has not established that the proposed amendments would have affected the way in which it prosecuted its claim or substantially altered what it has to prove to succeed in its action. Unlike as was found in 1588444 Ontario Ltd., the proposed amendments would not have the effect of restarting the entire litigation process; the Plaintiff can amend its pleadings and, if necessary, additional examinations for discovery can be held.

[65] While the proposed amendments seek to introduce new materials facts and allege a breach of contract resulting in damages to the Defendants, there is no relief or remedy being sought. From a review of Eftimovski, it appears that Faris’s pleading for an accounting or equitable set-off was a remedy claimed in his counterclaim and not strictly a defence set out in his statement of defence. This is distinguishable from the within case where there is no counterclaim. The court in Eftimovski did not analyze or approach the defendant’s claim for equitable set-off framed solely as a defence. A defence is not a cause of action or a claim for a remedy.

[66] Since a new claim for a remedy is not being made against the Plaintiff, based on the Ontario Court of Appeal’s decision in Canada Trustco Mortgage Co. v. Pierce, I find that the amendments are strictly to plead the defence of equitable set-off and are not statute-barred.

[67] I also find that the defence is a tenable one in that the Defendants have shown an equitable ground for being protected from the Plaintiff’s demands; that ground goes to the root of the Plaintiff’s claim; the set-off defence is clearly connected with the Plaintiff’s demand; and the claim and set-off defence arise out of the same shareholder agreement and promissory note: see Wilson v. Medcap, 2021 ONSC 4048, at para. 60.

[68] For the reasons set out above, I grant the Defendants leave to amend the Statement of Defence as requested.

(c) Should partial summary judgment be granted against TQC in the amount of $37,500 in relation to the Promissory Note?

[69] Rule 20.01 of the Rules of Civil Procedure provides that a party may move for summary judgment on part of a claim, with supporting affidavit material or other evidence.

[70] The granting of partial summary judgment is not to be a common occurrence. As the Ontario Court of Appeal explained in Service Mold + Aerospace Inc. v. Khalaf, 2019 ONCA 369, at para. 14:

The principles that guide whether partial summary judgment is appropriate are, however, more complex than those that apply to summary judgment motions generally. In Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, [2014] S.C.J. No. 7, at para. 60, Karakatsanis J. recognized that partial summary judgment may "run the risk of duplicative proceedings or inconsistent findings of fact" at trial. There is also the risk that partial summary judgment can frustrate the Hryniak objective of using summary judgment to achieve proportionate, timely and affordable justice. If used imprudently, partial summary judgment can cause delay, increase expense and increase the danger of inconsistent findings at trial made on a more complete record: Butera v. Chown, Cairns LLP, 2017 ONCA 783, at paras. 29-33. These risks, which require careful consideration by motion judges, were known before Hryniak and Butera, as illustrated by this court's decision in Corchis v. KPMG Peat Marwick Thorne, at para. 3. For this reason, while partial summary judgment has its place, it "should be considered to be a rare procedure that is reserved for an issue or issues that may be readily bifurcated from those in the main action and that may be dealt with expeditiously and in a cost-effective manner": Butera, at para. 34.

Position of the Plaintiff

[71] The Plaintiff argues that payment of the Promissory Note is a simple issue that can be determined on the affidavit evidence before the court and it is appropriate to grant partial summary judgment at this point in time. No additional evidence is needed: the Promissory Note is a debt owing and payment was demanded; the intent regarding the obligations of the parties is clear on the face of the note; the SR&ED tax credit was to secure payment only and the Promissory Note was not conditional on receipt of the tax credit; Mr. Shellhammer had authority to execute the Promissory Note on behalf of TQC; Dr. Culligan was aware that the Plaintiff would be advancing funds to TQC around the time that the Promissory Note was executed; and, Dr. Culligan had sole access to the $37,500.00 once the funds were advanced and he caused TQC to use those funds to pay its creditors.

[72] The Plaintiff argues that equitable set-off is not available against payments owing on promissory notes: Grewal v. Khaira et al., 2021 ONSC 4908, at para. 39; rev’d in part 2022 ONCA 636. So, even if this court allows the Defendants to amend their defence, the Promissory Note issue can still be bifurcated and summary judgment granted. This would create efficiencies at the trial.

[73] In this regard, the Plaintiff cites PBW High Voltage Ltd. v. Metrolinx, 2020 ONSC 56, wherein the court granted the defendant’s motion to amend its defence but continued to hear the plaintiff’s motion for summary judgment on a lien claim and ultimately granted partial judgment in favour of the plaintiff. While the test is different for granting leave to amend and for granting summary judgment, both still require a party to put its best foot forward. Here, the Defendants failed to examine Mr. Shellhammer and have not provided evidence in support of their pleadings as it relates to enforcement of the Promissory Note. For example, they have not led sufficient evidence to show that it is only repayable from the SR&ED tax credit or that Mr. Shellhammer lacked authority to execute the note. The Plaintiff also submits that the Defendants did not present any caselaw to support that conspiracy vitiates Mr. Shellhammer’s authority. Accordingly, it argues that there is no genuine issue requiring a trial.

[74] Counsel for the Plaintiff states that, even if Mr. Shellhammer is found to lack the requisite authority to execute the Promissory Note, the Plaintiff will amend to claim unjust enrichment.

Position of the Defendants

[75] It is the Defendants’ position that this is not the “rare case” where granting partial summary judgment is appropriate. The Ontario Court of Appeal has held that partial summary judgment is “reserved only for an issue or issues that may be readily bifurcated from those in the main action and that may be dealt with expeditiously and in a cost-effective manner”: Butera v. Chown, Cairns LLP, 2017 ONCA 783, at para. 34.

[76] It is the Defendants’ position that the merits of the motion for partial summary judgment should not be considered because the Plaintiff has not established the procedural elements required for such a motion, which are: (a) that dividing the determination of the case into several parts will prove cheaper for the parties; (b) that partial summary judgment will get the parties’ case in and out of the court system more quickly; and (c) that partial summary judgment will not result in inconsistent findings by the multiple judges who will touch the divided case: Malik v. Attia, 2020 ONCA 787, at para. 62.

[77] The Defendants submit that the issue of whether the Plaintiff is entitled to payment on the Promissory Note cannot be readily bifurcated from other issues in the main action. There are genuine issues for trial that involve the Promissory Note, including the liability of TQC and Dr. Culligan, that the trial judge will need to determine in relation to the actions of Mr. Shellhammer and the extent of his authority. Even if the Promissory Note is found to be valid, the Defendants allege that it is not a simple promissory demand note but, rather, is conditional on the receipt of the SR&ED tax credit. The evidence of Mr. Shellhammer, as the person who prepared and signed the Promissory Note, is required and has not been adduced by the Plaintiff on this motion.

[78] The Defendants argue that, if this court grants their motion to amend the Statement of Defence, the Promissory Note becomes even more directly intertwined with the other issues in the main action and cannot be bifurcated from the defence of equitable set-off, especially as it relates to the existence of the alleged conspiracy between Mr. Shellhammer and the Plaintiff to harm TQC.

[79] Finally, the Defendants submit that granting partial summary judgment on the issue of the Promissory Note will not result in efficiencies at trial. The action will still continue to a long trial as this is a complex shareholder dispute that involves governance and ownership in TQC, a startup.

Discussion

[80] The court must analyze the issue from the perspective of whether the issue of the Promissory Note can be easily bifurcated from the issues in the main action; whether there is a risk of duplicative or inconsistent findings at trial; and whether granting partial summary judgment is advisable in the context of the litigation as a whole: see Butera, at paras. 28 and 34.

[81] Based on the issues and the evidence before the court, I am of the view that partial summary judgment is not appropriate in this case.

[82] I find that determination of the issue of whether payment under the Promissory Note is owing cannot be readily bifurcated from the other issues in the main action. I do not agree with the Plaintiff’s characterization of this motion for partial summary judgment as a simple repayment of a promissory note. I am satisfied that the Defendants have, by way of the evidence they have adduced, established that there are genuine issues for trial. In assessing whether the agreement is a conditional or unconditional promissory note, evidence on the language of the agreement, the making of the agreement, and the subsequent conduct of the parties is relevant. There is competing evidence on the issue of the Promissory Note, and viva voce evidence and cross-examinations are required. Further, a determination of this discrete issue could result in inconsistent findings and will not result in any efficiencies at trial.

[83] While the defence of equitable set-off is not available as it relates to payment owing under an unconditional promise to pay, if the Promissory Note is found to be a conditional promise, then the defence may be available: see Grewal, para. 39; and Wilson v. Medcap, at paras. 44-49.

[84] Even if leave to amend the Statement of Defence had not been granted to the Defendants, and even if I accepted that Mr. Shellhammer had authority to execute the Promissory Note, I remain of the view that the issue of whether or not the Promissory Note is an unconditional or conditional promise to pay cannot properly be determined in a summary manner.

[85] Accordingly, I decline to grant partial summary judgment enforcing the Promissory Note.

Disposition

[86] The Plaintiff’s motion is dismissed.

[87] The Defendants’ cross-motion is granted.

Costs

[88] The Defendants were successful on the motions and, as such, are entitled to costs.

[89] I would urge the parties to agree on costs. If they are unable to do so, then costs submissions may be made as follows:

a. By February 6th, 2023, the Defendants shall serve and file their written costs submissions, not to exceed three pages, double-spaced, together with a draft bill of costs and copies of any pertinent offers; and b. The Plaintiff shall serve and file its responding costs submissions of no more than three pages, double-spaced, together with a draft bill of costs and copies of any pertinent offers, by February 20th, 2023; and c. The Defendants’ reply submissions, if any, are to be served and filed by February 27th, 2023 and are not to exceed two pages. d. If no submissions are received by February 27th, 2023, the parties will be deemed to have resolved the issue of the costs and costs will not be determined by me.

MacNEIL J. Released: January 16, 2023