Having relieved Defendant from a partial default judgment, Mr. Justice Andrew A. Sanfilippo in Natural Energy Systems Inc. v. Hallett, 2019 ONSC 1372 dismissed Defendant’s application for a stay but without substantive determination and without prejudice to Defendant’s opportunity to re-apply after the close of pleadings. In doing so, Sanfilippo J. implicitly authorized Defendant to take further steps in the litigation without any deemed waiver of right to invoke arbitration agreement at a later date and to do so even if the arbitration agreement covered only half of the claims made in the court litigation.
The litigation stemmed from the incorporation of Natural Energy Systems Inc. (“Plaintiff”) and the subsequent activity of two (2) individuals, Mr. Hallett (“Defendant”) and Mr. Greenwood, in their respective roles as officer, director, shareholder and/or creditor of Plaintiff between 2008 and 2017. Sanfilippo J. at paras 5-13 chronicles the key events for that time period.
Defendant’s and Mr. Greenwood’s November 12, 2008 Shareholder Agreement contained a dispute resolution clause at article 10.1:
“All disputes and questions whatsoever which shall arise between any of the parties in connection with this Agreement, or the construction or application thereof or any Section or thing contained in this Agreement or as to any act, deed or omission of any party or as to any other matter in any way relating to this Agreement, shall be resolved by arbitration. …”
Based on disputes better described in Sanfilippo J.’s summary of the key events, and following unsuccessful attempts to resolve those disputes, Plaintiff commenced court litigation by way of a February 28, 2017 Notice of Action followed eventually by a March 30, 2017 Statement of Claim.
Plaintiff’s court litigation, summarized at para. 15 of the reasons, comprised two (2) principal causes of action:
(i) claim for misappropriated funds; and,
(ii) claim for cancellation of securities.
Defendant directed a lawyer (“B”) to deliver a May 8, 2017 Notice of Intent to Defend on Defendant’s own behalf and in Defendant’s own name. B was not retained to represent Defendant and the Notice of Intent to Defend specifically stated that Defendant was acting in person.
On May 8, 2017 Plaintiff advised B who delivered Defendant’s Notice of Intent to Defend that Plaintiff would take no steps in the litigation provided a Statement of Defence was delivered by May 31, 2017. Defendant states that he did not receive Plaintiff’s May 8, 2017 notice from B.
As self-represented party, Defendant did not deliver a Statement of Defence. Without further notice to Defendant, Plaintiff noted Defendant in default but did not serve Defendant with the requisition noting him in default.
On August 15, 2017, without notice to Defendant, Plaintiff applied for partial default judgment. On that date, the court granted Plaintiff’s motion:
(i) ordering Defendant to pay the sum of $170,000.00 plus costs of $1,000.00 with post-judgment interest at two (2) % per year (“Partial Default Judgment”); and,
(ii) allowing Plaintiff to pursue the balance of the relief sought in the Statement of Claim by way of further motion to the court.
Having learned of the Partial Default Judgment sometime in late August 2017, and after certain exchanges with Plaintiff afterwards, Defendant applied to the Superior Court on February 15, 2018 to set aside the Partial Default Judgment
Sanfilippo J.’s principal task centred on whether to grant Defendant’s motion. To do so, he identified the principles applicable to a motion to set aside a judgment under Rules 19.08(2) and (3) of the Ontario’s Rules of Civil Procedure, RRO 1990, Reg 194. He concluded that the determination of Defendant’s motion “should be guided by the principles and five factors” identified in Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194:
“(a) Whether the motion was brought promptly after the defendant learned of the default judgment;
(b) Whether there was a plausible excuse or explanation for the defendant’s default in complying with the Rules;
(c) Whether the facts establish that the defendant had 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 court might make on the overall integrity of the administration of justice.”
The Court of Appeal in Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194 cautioned that those factors are “not to be treated as rigid rules” and that “the presence of 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.”
Sanfilippo J. analysed each of the factors in light of the facts. Of particular interest to arbitration practitioners is the portion of Sanfilippo J.’s analysis dealing with “arguable defence”.
Defendant submitted two (2) arguments:
First, Defendant argued he had an arguable defense against Plaintiff’s claim for misappropriated funds. This claim formed the substance of the Partial Default Judgment. Sanfilippo J. considered (i) at paras 58-75 and concluded that Defendant had established that he had an arguable defense against Plaintiff’s claim for misappropriated funds.
Second, Defendant argued that he sought to defend Plaintiff’s claim for cancellation of securities on the basis that it should be stayed in favour of arbitration. Sanfilippo J. considered (ii) at paras 76-84. He did so in the alternative as he had already made the earlier determination on the claim forming the substance of the Partial Default Judgment.
Defendant’s motion on (ii) relied on Sanfilippo J.’s jurisdiction under section 7(5) of Ontario’s Arbitration Act, 1991, SO 1991, c 17. Sanfilippo J. held that the two claims – misappropriated funds and cancellation of securities – could not be separated.
“[84] I find that the Defendant has an arguable defence that the Plaintiff’s Claim for Cancellation of Securities activates the Arbitration Clause. I conclude that the Defendant does not have an arguable defence that the Plaintiff’s Claim for Misappropriated Funds, itself, activates the Arbitration Clause. However, I find that the Defendant has an arguable defence that the Plaintiff’s Claim for Misappropriated Funds cannot reasonably be separated from the remainder of the claims pleaded by the Plaintiff in its Statement of Claim and thereby activates the Arbitration Clause pursuant to the operation of s. 7(5) of the Arbitration Act, 1991.”
Despite this conclusion, Sanfilippo J. held that Plaintiff and Defendant had not fully argued the actual stay application due to other factors including lack of court time. Their respective submissions were limited to whether Defendant had an “arguable defence” but not the merits of a stay application.
As a half-step, Sanfilippo J. issued an order allowing Plaintiff and Defendant to advance in the court litigation, subject to having the stay decided at a later date. In doing so, he effectively authorized Defendant to continue to take further steps in the litigation but without concern that in the future those additional steps would constitute a waiver of the opportunity to apply for the stay. Rather, the stay would be best argued “after the close of pleadings”.
“[97] Time did not allow for thorough submissions on the stay sought by reason of the Arbitration Clause. The time set aside for the argument of this motion was far-exceeded (more than doubled) in addressing solely the issue of whether the Partial Default Judgment should be set aside, leaving the issue of a stay based on the Arbitration Clause as a second-priority issue, better-suited for determination on full submissions at another time. In this regard, I note that the parties did not cite, argue or refer me to a single case authority pertaining to a stay under s. 7 of the Arbitration Act, 1991 or section 106 of the Courts of Justice Act, R.S.O. 1990, c. C.43. I will not determine the Defendant’s claim for a stay at this time. The determination of whether the requirements necessary for a stay are satisfied are now better-assessed, in the context of this case given the evidentiary record developed on this motion, after the close of pleadings.
[98] I dismiss the stay sought by the Defendant based on the Arbitration Clause, without substantive determination and without prejudice to the Defendant seeking this relief after the close of pleadings.”
Sanfilippo J. determined that Defendant had moved promptly in making his application to set aside the Partial Default Judgment and that the interests of justice favoured granting his application.
He also set terms at paras 90-92 for the efficient use of the evidence collected in preparing for and pleading the motion. He deemed that the affidavits and exhibits filed in the court record could be used at trial in the same manner as an examination for discovery. “As this evidence is available for use at trial, the scope of examinations for discovery shall not repeat questions that have already been asked and answered in the cross-examinations conducted on this motion.“
Section 7(1) of Ontario’s Arbitration Act allows a party to apply for a stay but imposes no clear time period to do so. The section does not set the expiry of a set time period as a condition precedent to the loss of such opportunity other than, at section 7(2), the obligation to bring the motion “without undue delay”.
Contrast section 7(1) of Ontario’s Arbitration Act with section 15(1) of B.C.’s Arbitration Act, RSBC 1996, c 55 which identifies the forfeiture of the stay motion if the party has acted in the litigation:
“15(1) If a party to an arbitration agreement commences legal proceedings in a court against another party to the agreement in respect of a matter agreed to be submitted to arbitration, a party to the legal proceedings may apply, before filing a response to civil claim or a response to family claim or taking any other step in the proceedings, to that court to stay the legal proceedings.”
Along the same lines, see article 622 of Québec’s Code of Civil Procedure, CQLR c C-25.01 which sets specific times (45 or 90 days) by which a stay application must be made.
“Article 622 C.C.P. Unless otherwise provided by law, the issues on which the parties have an arbitration agreement cannot be brought before a court even though it would have jurisdiction to decide the subject matter of the dispute.
A court seized of a dispute on such an issue is required, on a party’s application, to refer the parties back to arbitration, unless the court finds the arbitration agreement to be null. The application for referral to arbitration must be made within 45 days after the originating application or within 90 days when the dispute involves a foreign element. Arbitration proceedings may be commenced or continued and an award made for so long as the court has not made its ruling.
The parties cannot, through their agreement, depart from the provisions of this Title that determine the jurisdiction of the court or from those relating to the application of the adversarial principle or the principle of proportionality, to the right to receive notification of a document or to the homologation or the annulment of an arbitration award.”