Setting aside a default judgment is not as difficult as it sounds.
A party might end up with a default judgment against them in a civil case for all kinds of reasons. However, courts are generally inclined to be forgiving when a party can present a reasonable excuse for their previous delinquent behaviour.
As settlers of disputes by occupation, judges are understandably loathe to resolve a case on the basis of one party’s technical faults. It goes against the fundamental nature of their profession, which is to decide matters on their merits, with the best legal case emerging triumphant.
And as the recent case of Li v. Zhu shows, the subjective test that governs a motion to set aside a default judgment gives judges a great deal of latitude to craft a solution that is fair to everyone, taking into account the particular circumstances in front of them.
The facts
The dispute in the case revolved around a residential property in Toronto. Weiyan Li — the owner — hired Scott Zhu (and his company, Guru) in 2017 to demolish the existing building and construct a luxury home.
The relationship went sour about a year in when Li terminated their agreement on the basis of alleged deficiencies and deviations from the original project design. Zhu’s company registered a lien claim against the property, while Li launched a court action against Zhu, claiming his errors would cost around $750,000 to fix. Zhu promptly hired a law firm to defend the action, but eventually lost contact with them after leaving for China when the COVID-19 lockdown resulted in an extended stay.
By May 2022, the associate judge handling the case noted Zhu in default after he had twice failed to appear at court hearings, despite communicating with Li’s counsel in the run-up to the appearances. Li followed up by moving for default judgment, which the judge granted in January 2023 for $750,000 after accepting her claims for breach of contract, conversion, breach of trust and punitive damages.
Zhu subsequently arrived back in Canada to find his bank account frozen and filed his motion to set aside the default judgment, which the judge agreed to hear after he had paid the full $750,000 into court.
The results
Associate Justice Wiebe granted Zhu’s motion in part, noting that Rule 19.08(2) of the Rules of Civil Procedure specifies that default judgments may be set aside or varied by a judge “on such terms as are just.”
The judge also relied on the Court of Appeal for Ontario’s landmark 2022 ruling Paul’s Transport Inc. v. Immediate Logistics Limited, in which it laid out the factors to be considered:
- Whether the motion was brought promptly after learning of the default
- Whether there was a plausible excuse or explanation for the default
- Whether the facts establish that there is an arguable defence on the merits
- The potential prejudice to the unsuccessful party on the motion
- The effect of any order on the overall integrity of the administration of justice
The judge was not prepared to accept Zhu’s excuses for his default — indeed, he found that Zhu had made a conscious choice not to take part in the proceedings until his bank account was frozen.
As a result, Zhu and his company were disqualified from defending the claims related to the breach of contract, for which they had demonstrated no arguable defence on the merits.
However, the associate judge agreed to set aside the default judgment as it related to the claims for conversion, breach of trust and punitive damages — accounting for around $100,000 of the damages — finding that Zhu and Guru had established at least an arguable defence to these allegations on the merits.
“To uphold this aspect of the judgment in the face of what appear to be arguable defences to such allegations of misconduct would, in my view, be an affront to the integrity of the administration of justice,” Associate Justice Wiebe wrote
The lessons
Non-lawyers may be surprised at how rarely a default judgment is upheld once the defaulting party moves to set it aside. But this case is a good illustration of why: both the Rules of Civil Procedure and the caselaw on the topic give judges an extraordinary amount of discretion to craft a solution that is fair to both parties, and in the end, it’s in everyone’s interests to see our legal disputes settled on the merits.
I don’t remember seeing a case like this one, where the judge has parsed out which parts of a default judgment should be set aside based on the relative strength of the defences to individual aspects of the claim. However, it strikes an excellent balance — providing fairness to both parties while narrowing the remaining issues to be decided.
The bottom line for defendants who can provide a reasonable explanation for their own default and any delay in bringing the motion to set aside is that they stand a very good chance of success.
If you have a default judgment that you would like to set aside, please contact us.