Simon's Megalomaniacal Legal Resources

Civil Litigation - Default - Setting Aside (2)

. Trayanov v. Icetrading Inc.

In Trayanov v. Icetrading Inc. (Ont CA, 2023) the Court of Appeal considers the test for setting aside a noting in default:

(2) The test for setting aside a noting in default

[16] Rule 1.04(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 provides that the rules are to be constructed liberally in order to “secure the just, most expeditious and least expensive determination of every civil proceeding on its merits.” Further, in regard to a failure to comply with the rules, r. 2.01(1)(a) provides that a court “may grant all necessary … relief, on such terms as are just, to secure the just determination of the real matters in dispute”.

[17] Rule 18 obliges a defendant to deliver a statement of defence within a prescribed period of time (between 20 and 60 days, depending on where the defendant is served), from the date of service of the statement of claim. Under r. 19.01, the plaintiff may have the defendant noted in default if the defendant fails to respond within the applicable timeline.

[18] The consequences of a defendant being noted in default are significant. Rule 19.02(1)(a) of the Rules of Civil Procedure provides that a defendant who has been noted in default is deemed to admit the truth of all allegations of fact made in the statement of claim. Rule 19.02(1)(b) prohibits a defendant once noted in default from delivering a statement of defence or taking any other step in the action, other than a motion to set aside the noting in default or a default judgment, except with leave of the court or the consent of the plaintiff.

[19] Rule 19.03(1) provides that a noting in default may be set aside by the court “on such terms as are just.” As this court stated in Franchetti, at para. 8, there are several guiding principles that are relevant to that determination, including “the strong preference for deciding civil actions on their merits, the desire to construe rules and procedural orders non-technically and in a way that gets the parties to the real merits, and whether there is non-compensable prejudice to either party.” See also H.B. Fuller Company v. Rogers, 2015 ONCA 173, 386 D.L.R. (4th) 262, at paras. 25-29. And, as this court has stated, “the full context and factual matrix in which the court is requested to exercise its remedial discretion to set aside a noting in default are the controlling factors”: Metropolitan Toronto Condominium Corp. No. 706 v. Bardmore Developments Ltd. (1991), 1991 CanLII 7095 (ON CA), 3 O.R. (3d) 278 (C.A.), at pp. 284-285; see also Nobosoft Corporation v. No Borders Inc., 2007 ONCA 444, 225 O.A.C. 36, at para. 3.

[20] In particular, the following factors are relevant in considering whether a noting in default should be set aside: (1) the parties’ behaviour; (2) the length of the defendant’s delay; (3) the reasons for the defendant’s delay; (4) the complexity and value of the claim; (5) whether setting aside the noting in default would prejudice a party relying on it; (6) the balance of prejudice as between the parties; and (7) whether the defendant has an arguable defence on the merits. These factors are not exhaustive and are not to be applied as rigid rules: Franchetti, at paras. 8, 10; Kisel, at paras. 13-14; Nobosoft, at para. 3; Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194, 119 O.R. (3d) 561, at paras. 48-51.

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[24] First, the motion judge failed to consider the balance of prejudice, which looks to the potential prejudice to the moving party should the motion be dismissed and balances that against the potential prejudice to the respondent should the motion be allowed: see e.g., Mountain View, at para. 49; Peterbilt of Ontario Inc. v. 1565627 Ontario Ltd., 2007 ONCA 333, 87 O.R. (3d) 479, at paras. 2, 6. Contrary to the motion judge’s assertion, the fact that the respondents would suffer no prejudice was a relevant factor that should have been balanced against the prejudice to the appellants.

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[28] Third, the motion judge did not consider whether the appellants had an arguable defence on the merits. While on a motion to set aside a noting in default it is typically not required that a defendant demonstrate an arguable defence, where a defence is put forward, as in this case, it is a relevant factor that should be considered: Nobosoft, at para. 5; Franchetti, at paras. 8, 10, and 14. A review of the statement of claim, the statement of defence and counterclaim, and the parties’ Agreement, as well as the evidence put forward on the motion, suggests that the appellants have not only an arguable defence to the Action, but also an arguable counterclaim.

. Paul’s Transport Inc. v. Immediate Logistics Limited

In Paul’s Transport Inc. v. Immediate Logistics Limited (Ont CA, 2022) the Court of Appeal cited a test for setting aside a default judgment:

[53] The appellants submit that, on the Third Motion, the Motion Judge failed to apply the legal test for setting aside default judgment set out in Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194, 119 O.R. (3d) 561, and, instead, treated the Third Motion as an appeal. They contend that the Motion Judge did not address the ultimate question on a motion to set aside a default judgment, which is “to determine whether the interests of justice favour granting the order” (Mountain View, at para. 47), or consider the factors set out in Mountain View, at paras. 48‑49:

(a) whether the motion was brought promptly after the defendant learned of the default judgment;

(b) whether there is a plausible excuse or explanation for the defendant’s default in complying with the Rules;

(c) whether the facts establish that the defendant has an arguable defence on the merits;

(d) the potential prejudice to the moving party should the motion be dismissed, and the potential prejudice to the respondent should the motion be allowed; and

(e) the effect of any order the motion judge may make on the overall integrity of the administration of justice.

. Leaf Homes Limited v. Khan

In Leaf Homes Limited v. Khan (Ont CA, 2022) the Court of Appeal considered the law of setting aside a default judgment:

[94] Because a motion judge’s decision to set aside a default judgment is a discretionary one, it attracts deference on appeal. The decision should not be interfered with absent an error in law or principle, a palpable and overriding error of fact, or unless the decision is so clearly wrong as to amount to an injustice: Mountain View, at para. 55; HSBC Securities (Canada) Inc. v. Firestar Capital Management Corporation, 2008 ONCA 894, 245 O.A.C. 47, at para. 22, leave to appeal refused, [2009] S.C.C.A. No. 81.

[95] As the motion judge correctly noted, the test for setting aside a default judgment requires the court to consider the following five factors:

(a) whether the motion to set aside the default judgment was brought promptly after the [appellants] learned of it;

(b) whether there is a plausible excuse or explanation for the [appellants’] default in complying with the Rules;

(c) whether the facts establish that the [appellants] have an arguable defence on the merits;

(d) the potential prejudice to the [appellants] should the motion be dismissed, and the potential prejudice to the [respondent] should the motion be allowed; and

(e) the effect of any order the court might make on the overall integrity of the administration of justice.

[96] Two other principles enunciated in Mountain View are also relevant to the proper consideration and disposition of a motion to set aside a default judgment. First, the court’s ultimate task on a motion to set aside a default judgment is to determine whether the interests of justice favour granting the order: at para. 47. Second, an arguable defence on the merits may justify the court exercising its discretion to set aside the default judgment, even if the other factors are unsatisfied in whole or in part: at para. 51. To show a defence on the merits, the appellants need not show that the defence will inevitably succeed but only that it has an “air of reality”: at para. 51.

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[118] First, the motion judge accepted that the respondent would suffer because it would incur further costs. That is an error in principle. For the purposes of this factor, prejudice is something that is not compensable in costs: Peterbilt of Ontario Inc. v. 1565627 Ontario Ltd., 2007 ONCA 333, 87 O.R. (3d) 479, at para. 5; Techlantic v. Modellista, 2021 ONSC 746, at para. 66. It is self-evident that a claim of incurring further costs is one that is compensable by a costs order.

[119] Second, the motion judge accepted the respondent’s bald assertion that witnesses’ memories would have faded by the passage of time. This, too, is an error in principle. Prejudice must be real and not merely speculative: Dentons Canada LLP v. Khan, 2021 ONSC 5261, at para. 32. There is nothing in the record to support the statement that the passage of time had led to problems with witnesses’ memories. There must be something more than a bald assertion that witnesses’ memories will have faded: Ross v. Filip, 2021 ONSC 1496, at para. 108.

5. The effect on the overall integrity of the administration of justice

[120] This factor required the motion judge to consider the global effect of the other factors. Because the motion judge erred in her assessment of the other factors, her decision on this matter warrants no deference.

[121] This factor also reminds us of the court’s ultimate task on a motion to set aside a default judgment: to determine whether the interests of justice favour granting the order: Mountain View, at para. 47. When the factors are considered as a whole, in my view, the integrity of the administration of justice strongly favours setting aside the default judgment. The appellants offer an arguable defence to the Statement of Claim and a compelling reason for judicial examination of the respondent’s actions, both at the time the Agreement was signed and in its sale of the Property at a significantly discounted price. A consideration of the prejudice that each of the parties will suffer reinforces the conclusion that the overall integrity of the administration of justice requires that the default judgment be set aside and the appellants permitted to file their statement of defence and counterclaim.

. Fisher v. Soroka

In Fisher v. Soroka (Ont CA, 2022) the Court of Appeal considered delay as it feeds in the tests for both setting aside default judgment, and relief from forfeiture:

[4] The appellant’s first submission is that the motion judge applied the wrong legal analysis to the extent he used the test for setting aside a default judgment, rather than the analysis for granting relief against forfeiture. We disagree. The motion judge considered the legal analyses applicable to both setting aside a default judgment and granting relief against forfeiture. He cited leading authorities of this court regarding both issues. Both tests were relevant in the circumstances.

[5] In any event, a significant factor in both tests is whether the motion was brought promptly and the moving party’s explanation for the delay: Winters v. Hunking, 2017 ONCA 909, at paras. 12-14; Intact Insurance Co. v. Kisel, 2015 ONCA 205, 125 O.R. (3d) 365, at paras. 12-14; and Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194, 119 O.R. (3d) 561, at paras. 47-50. We see no palpable and overriding error in the findings of the motion judge on the record before him that the motions to set aside were not made with reasonable promptness, and that the appellant’s explanation for the delay was neither plausible nor credible.

. Snell v. SUGI Financial Services Inc.

In Snell v. SUGI Financial Services Inc. (Div Ct, 2022) the Divisional Court found a misapplication of the legal test for setting aside a default judgment, but - on exercising their CJA 134(1)(a) powers - dismissed the appeal regardless:

[2] The Master correctly set out the test to be applied on a motion to set aside a default judgment, citing Peterbilt of Ontario Inc. v. 156627 Ontario Ltd. (2007), 2007 ONCA 333 (CanLII), 87 OR (3d) 479 (CA) and HSBC Securities (Canada) Inc. v. Firestar Capital Management Corp., 2008 ONCA 894, and applying the framework used by D.M. Brown J. (as he then was) in Hanratty v. Woods, 2009 CanLII 43649 (Ont. SCJ):

(a) did the moving parties move forthwith to set aside the default judgment when it came to their attention?

(b) is there a valid explanation from the moving parties for their default?

(c) have the moving parties shown a triable defence to the claims?

(d) do the interests of justice favour setting aside the default judgment?

This is the correct test to apply, and the appellant does not take issue with it.

. Franchetti v. Huggins

In Franchetti v. Huggins (Ont CA, 2022) the Court of Appeal set out law regarding setting aside a noting in default:

The Governing Principles: Setting Aside a Noting of Default

[6] The Rules of Civil Procedure, R.R.O. 1990, Reg. 194 are meant to be taken seriously by plaintiffs and defendants. Under r. 1.04(1), the rules are to be “liberally construed to secure the just, most expeditious and least expensive determination of every civil proceeding on its merits.” Further, with respect to a failure to comply with the rules, the court, under r. 2.01(1)(a) “may grant all necessary…relief, on such terms as are just, to secure the just determination of the real matters in dispute”.

[7] Rules 18.01 and 18.02 oblige a defendant to respond with a statement of defence within 20-30 days of the date the defendant is served with the statement of claim. The consequences of failing to respond can be dire. Under r. 19.01, the claimant may have the defendant noted in default. A defendant noted in default under r. 19.02(1) “is deemed to admit the truth of all allegations of fact made under the statement of claim” and may not otherwise participate in the action, other than by bringing a motion to set aside the noting of default. The next dire consequence is that after noting the defendant in default, in certain circumstances the plaintiff may move for default judgment under r. 19.04.

[8] Under r. 19.03, a defendant noted in default may move to have the noting of default set aside, and this may be ordered “on such terms as are just.” In the context of an action that had been dismissed for delay, Weiler J.A. discussed several guiding principles that are also relevant to setting aside a noting of default: H.B. Fuller Company v. Rogers, 2015 ONCA 173, 386 D.L.R. (4th) 262, at paras. 25-29. These include the strong preference for deciding civil actions on their merits, the desire to construe rules and procedural orders non-technically and in a way that gets the parties to the real merits, and whether there is non-compensable prejudice to either party.

[9] There are many cases discussing the criteria for setting aside a noting of default. See particularly Laskin J.A.’s detailed exposition in Kisel, at para. 13. To summarize the jurisprudence, the following factors have been found to be relevant in considering whether a noting of default should be set aside:

(1) The parties’ behaviour;

(2) The length of the defendant’s delay;

(3) The reasons for the delay;

(4) The complexity and value of the claim;

(5) Whether setting aside the noting of default would prejudice a party relying on it;

(6) The balance of prejudice as between the parties; and

(7) Whether the defendant has an arguable defence on the merits.

[10] These factors are not exhaustive nor are they to be applied as rigid rules. An arguable defence on the merits may justify the court in exercising its discretion to set aside a default judgment, and for that purpose it is sufficient for the defence to have an “air of reality”: Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194, 119 O.R. (3d) 561, at para. 51. However, perhaps because requests to set aside noting in default usually occur early in the litigation process, unlike this case, courts will rarely require a defendant who has been noted in default to show an arguable defence on the merits. In a case such as this one involving a significant delay, the moving party is required to show an arguable case on the merits.