



COURT OF APPEAL FOR ONTARIO

CITATION: Kawaguchi v. Kawa Investments Inc., 2021 ONCA 770

DATE: 20211029

DOCKET: C68577

Feldman, Harvison Young and Thorburn JJ.A.

BETWEEN

Warren Kawaguchi, Kent
    Kawaguchi, Lisa Kawaguchi, Julia

Shimoda and J. & K. Die Casting Limited

Plaintiffs/Responding Parties

(Appellants)

and

Kawa Investments Inc.,
    Lori Kawaguchi, 2708699 Ontario Inc.,

Oscar Lulka, Susan Lulka,
CBRE
    Limited, Carol Trattner,

Rob Ironside
, Top
    Producers Real Estate Inc.

and J. Armand Ardila

Defendants/
Moving Parties

(
Respondents
)

Robert S. Choi and Adam Beyhum, for the appellants

Gavin Tighe and Anna Husa, for the respondents

Heard: April 13, 2021 by video conference

On appeal from judgment of Justice Markus Koehnen of the
    Superior Court of Justice, dated August 3, 2020.

Feldman J.A.:

[1]

The motion judge prevented the appellants, the plaintiffs in the action,
    from discontinuing their action against the respondents, three of the
    defendants in the action. He then granted the respondents motion for summary
    judgment, dismissing the action against them.

[2]

The issues on the appeal are whether the motion judge erred in law by finding
    that the appellants were not entitled to serve a notice of discontinuance under
    the
Rules of Civil Procedure
,

R.R.O. 1990, Reg. 194 (the 
Rules
)
or, alternatively, by setting aside
    the notice of discontinuance as an abuse of process; if not, whether he erred
    by granting summary judgment; and whether he erred by ordering substantial
    indemnity costs.

[3]

For the reasons that follow, I would dismiss the appeal. While the
    motion judge erred in law in his interpretation of rules 23.01(1) and 25.05, by
    finding that the pleadings were closed and therefore the appellants could not
    deliver a notice of discontinuance, he did not err in setting aside the notice
    of discontinuance as an abuse of process and ordering the action be dismissed
    on summary judgment, or in ordering substantial indemnity costs of the action
    and of the motion.

A.

Background Facts and Findings by the Motion Judge

[4]

The appellants are siblings and are the cousins of the defendant Lori Kawaguchi.
    The corporate appellant, J. & K. Die Casting Ltd., (J. & K.) is a Kawaguchi
    family business, as is the corporate defendant, Kawa Investments Inc. (Kawa).
    Both businesses had been operated by the Kawaguchi family for 55 years at the
    time these proceedings arose. The respondents are a commercial real estate services
    and investment firm, and two real estate agents. The defendants Lori Kawaguchi
    and Kawa were not parties on the motions to set aside the discontinuance and
    for summary judgment, and are not respondents on this appeal.

[5]

The dispute arose from the attempted sale of 18 Golden Gate Court in
    Scarborough, the industrial property owned by Kawa, which is the location where
    J. & K. operates its business. Lori Kawaguchi, as president of Kawa, entered
    into a listing agreement with the respondents to sell the property. Lori
    Kawaguchi claims that she owns 50.2% of the shares of Kawa, which she inherited
    on the death of her father in 2012. The individual appellants own the remaining
    49.8% of the shares. The appellants dispute the validity of the share transfer
    to Lori Kawaguchi and therefore, her status and her authority to act on behalf
    of Kawa.

[6]

The listing agreement led to a conditional agreement of purchase and
    sale with a third party, but the listing was terminated when this litigation
    was commenced and the conditional agreement of purchase and sale did not close.

[7]

The appellants claim against the respondents was for breach of contract
    and in tort for failing to investigate and verify Lori Kawaguchis authority to
    enter into the listing agreement on behalf of Kawa.

[8]

The appellants moved in the action for an interim injunction to prevent
    the marketing and sale of the property. In response, the respondents
    voluntarily agreed to cease marketing the property pending the outcome of the
    injunction motion. The injunction was granted against Lori Kawaguchi and
    against Kawa, but denied against the respondents. The judge who heard the
    injunction motion indicated that she viewed the action as having little or no
    merit against the respondents: there was no contract between the appellants and
    the respondents, the documentary evidence showed that Lori Kawaguchi was the
    majority shareholder, and in any event, the realtor respondents could rely on
    the indoor management rule when accepting the listing from Lori Kawaguchi.
[1]

[9]

Following the injunction motion, when the appellants refused to dismiss
    the action against the respondents, the respondents counsel advised that the
    respondents would be moving for summary judgment. In response, the appellants
    served a notice of discontinuance. Counsel for the appellants confirmed to the
    motion judge that the appellants wished to retain the right to recommence the
    action against the respondents in the future.

[10]

The
    respondents proceeded to bring their motion for a declaration that the appellants
    notice of discontinuance was invalid, and for summary judgment dismissing the action
    against them. The issue turned on the interpretation of rr. 23.01(1) and
    25.05 of the
Rules
. The appellants submitted that they were entitled
    to discontinue because pleadings were not closed within the meaning of r. 25.05,
    because the time for delivery of a reply had not expired as against the
    defendants, Lori Kawaguchi and Kawa, who had been late in filing their joint
    defence and counterclaim.

[11]

The
    motion judge rejected that submission, concluding that pleadings closed at
    different times against each defendant, and that as against the respondents, the
    pleadings were closed.

[12]

The
    motion judge found, in the alternative, that if he was incorrect about the
    proper interpretation of the
Rules
, he would set aside the notice of discontinuance
    as an abuse of process and grant summary judgment dismissing the action against
    the respondents. The motion judge found that there was no genuine issue requiring
    a trial arising from the claim that the respondents were negligent by failing
    to conduct due diligence regarding Lori Kawaguchis authority to enter into the
    listing agreement.

[13]

First,
    the fact that Lori Kawaguchi is a director and president of Kawa entitled the
    respondents to rely on the indoor management rule.

[14]

Second,
    the appellant Warren Kawaguchi facilitated showing the property to potential
    purchasers, including accompanying them on showings and directing when showings
    could and could not occur. He never indicated any objection that the listing
    was unauthorized.

[15]

Third,
    the motion judge rejected the one alleged inconsistency in the evidence of one
    of the respondents, Rob Ironside, which counsel identified as the only issue
    that required a trial.

[16]

The
    motion judge concluded that in light of the flimsy nature of the claim, the
    respondents were entitled to a final resolution of the issues raised, and
    should not be exposed to a new action based on the same facts. He therefore
    dismissed the claim against them.

[17]

The
    motion judge also awarded costs to the respondents on a substantial indemnity
    basis. He found that because of the appellant Warren Kawaguchis participation
    in the showing process, the respondents clearly had actual authority from 2 of
    3 directors. Therefore, the action against them was frivolous and vexatious.

B.

Issues

[18]

The
    appellants raise four issues on this appeal:

1.

Did the motion judge err in law by finding that the appellants were not entitled
    to discontinue the action against the respondents because pleadings were closed
    within the meaning of r. 25.05?

2.

Did the motion judge err by setting aside the notice of discontinuance as
    an abuse of process?

3.

Did the motion judge err by granting summary judgment?

4.

Did the motion judge err by finding an abuse of process that justified
    an award of substantial indemnity costs?

C.

Analysis

(1)

Did the motion judge err in law by finding that the appellants were not
    entitled to discontinue the action against the respondents because the
    pleadings were closed within the meaning of r. 25.05?

[19]

The
    first issue before the motion judge was whether the appellants were entitled to
    discontinue the action against the respondents. The issue turns on the
    interpretation of rr. 23.01(1) and 25.05, and in particular, whether pleadings in
    an action remain open as long as they are not complete in respect of any one of
    multiple defendants, or whether they can close in respect of each defendant
    separately.

[20]

The
    two rules read as follows:

23.01(1) A plaintiff may discontinue all or part of an action
    against any defendant,

(a) before the close of pleadings, by serving on all           parties
    who have been served with the statement  of claim a notice of discontinuance (Form
    23A) and     filing the notice with proof of service;

(b) after the close of pleadings, with leave of the   court;
    or

(c) at any time, by filing the consent of all
    parties.



25.05 Pleadings in an action are closed when,

(a) the plaintiff has delivered a reply to every         defence
    in the action or the time for delivery of a          reply has expired; and

(b) every defendant who is in default in delivering  a
    defence in the action has been noted in default.

[21]

The
    motion judge focused on the singular noun a reply in subrule 25.05(a), inferring
    from the use of the singular that pleadings close against each defendant
    separately. He accepted the submission that, were it otherwise, a defendant who
    has defended a multi-defendant lawsuit would be precluded from moving the
    action forward, such as to discovery of documents, until the last defendant had
    defended and the time for reply had expired. With respect to the motion judge,
    this interpretation is incorrect and constitutes an error of law.

[22]

The
Rules
tie the deadline for taking certain procedural steps to the
    defined state of the close of pleadings in only seven contexts: the first is
    determining when a plaintiff may discontinue an action (r. 23.01(1)); the
    second is determining when a party may amend its pleadings without leave or
    consent (r. 26.02(a)); the third is the time by which the parties shall agree
    to a discovery plan (r. 29.1.03(2)); the fourth is the time by which a party
    shall serve its affidavit of documents under the simplified procedure (r.
    76.03(1)); the fifth is the time after which a party may set an action or a
    third party claim down for trial (rr. 48.01 and 29.08(1)); the sixth is the
    time when a defendant may move to dismiss for delay when the plaintiff has
    failed to set the action down for trial (r. 24.01); and the seventh is the latest
    time by which a party to an action may deliver a jury notice (r. 47.01).

[23]

However,
    contrary to the policy justification suggested by the motion judge, there is no
    general requirement that pleadings must be closed for parties to proceed with
    the next steps in litigation. For example, under r. 31.04(1), either party may
    serve a notice of examination after the defendant has delivered a statement of
    defence and, unless the parties agree otherwise, has served an affidavit of
    documents. The pleadings may still be open at this stage, but the
Rules
permit the parties to move forward and initiate examinations.

[24]

I
    see no ambiguity in the wording of r. 25.05. For pleadings to be closed, the
    rule requires that the plaintiff reply to every defence or that the time to
    reply has expired, and that every defendant who has not defended has been noted
    in default. The reference to every defence and every defendant in both
    parts of the rule makes it clear that in a multi-defendant action, in order for
    pleadings to be closed in that action, they must be closed against all
    defendants.

[25]

I
    see no unfairness or disadvantage to a defendant in giving the rule its plain
    meaning. It is important to note that the timing of when pleadings are closed
    is not wholly within the discretion or power of the plaintiff. In the case
    where a plaintiff chooses not to reply to any defence, when the deadline for
    filing a reply has gone by, that timing requirement of the rule will have been
    satisfied. In addition, under r. 19.01, not only can the plaintiff note a
    defendant in default, but a defendant can also move to have another defendant
    noted in default. This would satisfy the second timing requirement of r. 25.05.

[26]

I
    conclude that the motion judge erred in his interpretation of the requirements
    of the rule for delivering a notice of discontinuance. In this case, it is not
    disputed that when the appellants served the notice of discontinuance, although
    the time for delivering a reply had passed in respect of the respondents, the
    time for delivering a reply to the late-filed joint statement of defence and
    counterclaim of Lori Kawaguchi and Kawa had not yet passed. In addition, those
    defendants had not been noted in default. As a result, pleadings in the action were
    not closed and, under r. 23.01(1)(a), the appellants were entitled to serve a notice
    of discontinuance.

(2)

Did the motion judge err by setting aside the notice of discontinuance as
    an abuse of process?

[27]

In
Holterman v. Fish
, 2017 ONCA 769, [2018] 3 C.T.C. 55, leave to appeal
    to S.C.C. refused, 37889 (July 5, 2018), this court discussed when a consent notice
    of discontinuance could be set aside at the request of the plaintiff, in
    exceptional circumstances that arose after the notice was delivered. The
    current appeal does not fall into that category.

[28]

However,
    there is long-standing case law in Ontario, as well as in other provinces, that
    affirms that a court has the authority, in the appropriate circumstances, to set
    aside a notice of discontinuance that was properly delivered under the
Rules
as an abuse of process: see
Angelopoulos v.
    Angelopoulos
(1986), 55 O.R. (2d) 101 (H.C.)
, at 109-10;
Toronto
    (City) v. Abasi
, 1990 CarswellOnt 2289 (H.C.);
Glasjam Investments
    Ltd. v. Freeman
, 2014 ONSC 3878, at paras. 60-62;
Smith v. Dueck
,
    1997 CarswellBC 792 (S.C.), at paras. 22-23;
De Shazo v. Nations Energy Co.
,
    2006 ABCA 400, 401 A.R. 142, at paras. 11-15; and
DLC Holdings Corp. v.
    Payne
, 2021 BCCA 31, 456 D.L.R. (4th) 337 at paras. 31-33.

[29]

In
Angelopoulos
, Henry J. set aside a notice of discontinuance for abuse
    of process. In that case, the wife had commenced a family law proceeding against
    the husband. The wife then moved before a master for relief in accordance with
    the action. That proceeding resulted in a consent order that dealt with much of
    the requested relief, and also restrained the wife from attending at the
    premises of the parties jointly owned business. Following the order, the wife
    nevertheless continued to attend at and to disrupt the business.

[30]

As
    pleadings remained open, the wife served a notice of discontinuance, with the intention
    to avoid the effect of the consent order and to be able to recommence the
    proceedings afresh. Henry J. held that while the
Rules
gave the
    plaintiff the absolute right to serve a notice of discontinuance, he had the
    power to set aside the notice as an abuse of process under r. 1.04, which
    provides:

1.04(1) These rules shall be liberally construed to secure the
    just, most expeditious and least expensive determination of every civil
    proceeding on its merits.

(2) Where matters are not provided for in these rules, the
    practice shall be determined by analogy to them.

[31]

In
    my view, in the circumstances of this case, the motion judge was entitled to exercise
    the same jurisdiction under r. 1.04 as Henry J. did in
Angelopoulos
. By
    seeking an injunction to obtain interim relief based on the merits of the claim,
    the appellants took a significant step in the proceeding. They were successful
    against the main defendants in the action, which accomplished their goal of preventing
    the sale of the property until the authority of Lori Kawaguchi is determined at
    a trial. However, their claim against the respondents was found to have little
    or no merit. Unhappy with that result, and faced with the respondents
    indication that they intended to move for summary judgment, the appellants
    sought to be free to not pursue their claim against the respondents for the
    moment but to be able to recommence the same proceeding on the same facts at a
    future time. In those circumstances, the motion judge was entitled to conclude
    that the notice of discontinuance constituted an abusive use of the
Rules
.

[32]

In
    oral argument on the appeal, appellants counsel postulated that if the
    injunction were to be lifted, the respondents could again accept a listing of
    the property for sale, and that was why the appellants should retain the
    ability to recommence the action against them. However, in those circumstances,
    the action would be based not on the same facts, but on the new facts just
    described. And I would add, it is most unlikely that these respondents
    would accept the listing again until the now-known corporate dispute is
    resolved.

[33]

The
    principle against allowing a plaintiff to discontinue an action once the action
    has proceeded past a certain point has been in place in England and followed in
    Canada since the late 19
th
century: see
Fox v. Star Newspaper
    Company
, [1898] 1 Q.B. 636 (C.A.) at 639, affd [1900] A.C. 19 (H.L. (Eng.));
Schlund v. Foster
(1908), 11 O.W.R. 175 (H.C.), affd 11 O.W.R. 314
    (Div. Ct.);
Blum v. Blum
, [1965] 1 O.R. 236 (C.A.), at 238-39;
Hennig
    v. Northern Heights (Sault) Ltd.
(1980), 30 O.R. (2d) 346 (C.A.), at 353-54;
    and
Sampson v. City of Kingston
, 1981 CarswellOnt 2747 (H.C.), at
    paras. 6-10. In
Fox
,

Lord Chitty summarized the effect of the
Rules of the Supreme Court, 1883
(U.K.), Order 26, r. 1, which dealt
    with discontinuance, as follows:

The principle of the rule is plain. It is that after the
    proceedings have reached a certain stage the plaintiff, who has brought his
    adversary into court, shall not be able to escape by a side door and avoid the
    contest. He is then to be no longer dominus litis, and it is for the judge to
    say whether the action shall be discontinued or not and upon what terms The
    substance of the provision is that, after a stage of the action has been
    reached at which the adversaries are meeting face to face, it shall only be in
    the discretion of the judge whether the plaintiff shall be allowed to withdraw
    from the action so as to retain the right of bringing another action for the
    same subject-matter.

[34]

This
    principle is continued under r. 23.01(1)(a), which allows a plaintiff to
    unilaterally discontinue its action until the close of pleadings. To
    discontinue its action after this stage, a plaintiff must obtain leave of the
    court or the consent of all parties (rr. 23.01(1)(b) and (c)). However, the
    case law demonstrates that in some circumstances, particularly where there are
    judicial orders or findings in the action, a court may find it to be an abuse
    of process for the plaintiff to seek to discontinue the action and to be able
    to recommence the same action, against the same defendant, on the same facts. In
    addition, in those circumstances, issues of
res judicata
and issue
    estoppel could potentially arise.

[35]

I
    see no error in the motion judges exercise of his jurisdiction under r. 1.04
    to set aside the notice of discontinuance in this case as an abuse of process.

(3)

Did the motion judge err by granting summary judgment?

[36]

The
    appellants position is that the motion judge should have found that there was
    a genuine issue requiring a trial, and declined to order summary judgment
    dismissing the action against the respondents. Their action is based on an
    allegation that the respondents should have done more due diligence
    investigation of Lori Kawaguchis authority to enter into the listing agreement
    on behalf of Kawa, and that had they done so, they would have learned about the
    dispute regarding her authority. They also assert that there are other parties
    at CBRE who had had previous dealings with Kawa when it sold another property and
    who knew there were more family members involved, and those parties were
    required to give evidence.

[37]

The
    problem with the appellants position was identified by the motion judge: the
    appellant Warren Kawaguchi was complicit in the respondents attempts to market
    the property by facilitating some showings, and of even more significance, he
    never told the respondents that he or anyone else had any objection to the
    listing or to Lori Kawaguchis authority to act on behalf of Kawa. There was
    therefore no basis for the respondents to suspect any problem, and no basis to
    make any inquiries of Warren Kawaguchi.

[38]

Further,
    any information from other parties at CBRE could have been elicited by way of an
    undertaking on the cross-examination of the respondent, Rob Ironside. A trial
    was not required to elicit this evidence.

[39]

Lastly,
    the motion judge specifically asked counsel to identify any issue requiring a
    trial. The sole issue that counsel relied on was an alleged conflict in the
    evidence of Mr. Ironside, which the motion judge rejected as a conflict.

[40]

I
    see no basis to interfere with the motion judges decision to grant summary
    judgment and dismiss the appellants claim against the respondents.

(4)

Did the motion judge err by finding an abuse of process that justified
    an award of substantial indemnity costs?

[41]

A
    deferential standard applies to appellate review of a discretionary costs award,
    unless it is based on an error in principle or is clearly wrong:
Hamilton v.
    Open Window

Bakery Ltd.
, 2004 SCC 9, [2004] 1 S.C.R. 303, at para.
    27. In this case, the substantial indemnity costs award followed the motion
    judges decision on the merits. That decision was based in part on an error in
    law in the interpretation of when pleadings are closed (r. 25.05), and
    therefore, when a plaintiff may serve a notice of discontinuance (r. 23.01(1)).

[42]

However,
    the motion judges decision to award substantial indemnity costs of the action
    and of the motion was based on his finding of abuse of process in both
    commencing the action against the respondents, which he found to be frivolous
    and vexatious, and in resisting a summary dismissal, given the facts and
    circumstances that were identified by the judge who refused to grant the
    injunction against the respondents.

[43]

Given
    that reasoning, I see no basis to interfere with the decision of the motion
    judge on costs.

D.

Result

[44]

In
    the result, I would dismiss the appeal from the order setting aside the notice
    of discontinuance and granting summary judgment dismissing the action against
    the respondents and from the orders for substantial indemnity costs.

[45]

I
    would award costs of the appeal to the respondents on the partial indemnity
    scale fixed at $8,280, inclusive of disbursements and HST.

Released: October 29, 2021 K.F.

K. Feldman J.A.

I agree. Harvison Young
    J.A.

I agree. Thorburn
    J.A.





[1]
On the record on the motion under appeal, the corporate documents show Lori Kawaguchi
    as a director and president of Kawa, but do not show her as the majority
    shareholder.


