



COURT OF APPEAL FOR ONTARIO

CITATION: Service Mold + Aerospace Inc. v. Khalaf, 2019 ONCA
    369

DATE: 20190507

DOCKET: C65964

Doherty, Paciocco and Zarnett JJ.A.

BETWEEN

Service Mold + Aerospace Inc.
,
SMI
    Ventilation Products Inc.
and Service Mold Associates

Plaintiffs (
Respondents
)

and

Nada Khalaf and
Toronto Dominion Bank

Defendants (
Appellant
)

Geoff R. Hall and Nicholas E. Fitz, for the appellant

Myron W. Shulgan and Nicole Marcus, for the respondents

Heard: April 18, 2019

On appeal from the judgment of Justice Pamela L. Hebner
    of the Superior Court of Justice, dated September 12, 2018, with reasons
    reported at 2018 ONSC 5345 and 2017 ONSC 6197.

Paciocco J.A.:


OVERVIEW

[1]

The respondent corporations, Service Mold + Aerospace Inc., and SMI Ventilation
    Products Inc., were defrauded by their bookkeeper, Ms. Nada Khalaf. She
    committed the fraud in two distinct ways. She used forged cheques [the cheque
    fraud] and made additional unauthorized payroll payments into her bank account
    [the payroll fraud]. The respondent corporations sued the appellant, the
    Toronto-Dominion Bank, claiming the appellant bank was strictly liable and
    liable in negligence for the cheque fraud, and liable in negligence for the
    payroll fraud.

[2]

The appellant bank defended both claims based on: (1) a Business Banking
    Agreement [the BBA] containing a verification clause and a limited liability
    clause that it claimed the respondent corporations had signed [the BBA
    defence], and (2) the
Limitations Act, 2002
, S.O. 2002, c. 24, Sched.
    B [the limitations defence]. These were the sole defences to the strict
    liability claim relating to the cheque fraud; it denied negligence on the
    payroll fraud claim.

[3]

The respondent corporations brought a successful motion for partial
    summary judgment based on its strict liability claim relating to the cheque
    fraud. The motion judge found that there was no genuine issue to be tried on
    the appellant banks BBA defence or its limitation defence to the cheque fraud.

[4]

The appellant bank appeals, claiming: (1) the motion judge erred in
    proceeding with a motion for partial summary judgment in the circumstances of
    the case, (2) misapplied the test for discoverability relating to the limitations
    defence, and (3) erred in finding that there was no evidence to support the BBA
    defence.

[5]

For the reasons that follow, I would allow the appeal.

THE MATERIAL FACTS

[6]

The respondent corporations are related manufacturing companies operated
    by Mr. Martin Schuurman. Between 2009 and 2012, they were defrauded, along with
    a third company not involved in these proceedings, by Ms. Khalaf for close to
    $1 million.

[7]

In 2012, Ms. Khalaf was terminated for unrelated reasons. In 2015, the respondent
    corporations received information that Ms. Khalaf had been fired from her subsequent
    employer for forging cheques. This led the respondent corporations to conduct
    an examination that uncovered both the cheque fraud and the payroll fraud that
    she had committed against them.

[8]

The respondent corporations sued Ms. Khalaf. They also sued the appellant
    bank. With respect to the cheque fraud, the respondent corporations claimed
    that the appellant bank was strictly liable under the
Bills of Exchange Act
,
    R.S.C. 1985, c. B-4, s. 48, and liable for negligently failing to review the
    cheques. The payroll fraud claim was based exclusively in negligence. The respondent
    corporations claimed, among other particulars, that the appellant bank breached
    its duty of care in negligently transferring the purported payroll funds into Ms.
    Khalafs account.

[9]

The appellant bank sought to defend both claims based on the BBA defence
    and the limitations defence. With respect to the negligence claims, it also denied
    it breached a duty of care.

[10]

On
    November 2, 2016, the respondent corporations moved for partial summary judgment
    on their strict liability claim relating to the cheque fraud. The appellant bank
    agreed that the provisions of the
Bills of Exchange Act
applied and
    that that unless its BBA defence or its limitations defence succeeded in
    relation to the cheque fraud claim, it would be strictly liable for the cheque
    fraud in the amount the respondent corporations were claiming.

[11]

The
    partial summary judgment motion was heard on April 25, 2017. On October 20,
    2017, the motion judge ruled that there was no genuine issue to be tried
    relating to the appellant banks BBA defence to the cheque fraud claim, because
    there was no evidence that the respondent corporations had signed a BBA
    containing an account verification or limited liability clause. She also held
    that she could not determine the crucial discoverability issue relating to the
    limitations defence to the cheque fraud claim without
viva voce
evidence,
    and so she ordered a mini-trial on the issue of discoverability.

[12]

That
    mini-trial was held on February 20 and 21, 2018. On September 12, 2018, she
    granted partial summary judgment to the respondent corporations in the amount
    of $342,333.68 CAD and $246,094.74 USD. She found that the limitation period
    did not begin to run until early 2015 and had not passed when the statement of
    claim was issued.

ANALYSIS

A.

The Motion Judge Should not have granted Partial Summary Judgment

[13]

The
    standard of review in an appeal from a summary judgment ruling, including
    partial summary judgment rulings, was described concisely in
Baywood Homes
    Partnership v. Haditaghi
, 2014 ONCA 450, 120 O.R. (3d) 438, at para. 30:

In
Hryniak
[
v. Mauldin
,
    2014 SCC 7, [2014] 1 S.C.R. 87], at para. 81, Karakatsanis J. ruled that the
    exercise of powers under the new summary judgment rule attracts appellate
    deference. The question as to whether there is a genuine issue for trial is a
    question of mixed fact and law; in the absence of an extricable error in
    principle, or palpable and overriding error, this determination should not be
    disturbed on appeal.

[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
, 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, 137 O.R. (3d) 561, at paras. 29-33. These
    risks, which require careful consideration by motion judges, were known before
Hryniak
and
Butera
, as illustrated by this courts decision in
Corchis
    v. KPMG Peat Marwick Thorne
, [2002] O.T.C. 475 (C.A.), 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.

[15]

In
    my view, the motion judge erred in ordering partial summary judgment in the
    circumstances of this case. In so doing, the motion judge committed an
    extricable error in principle, as well as palpable and overriding error.

[16]

In
    her initial decision of October 20, 2017, the motion judge asked whether it was
    appropriate to grant partial summary judgment, but referenced only the
    standards for summary judgment, without overtly addressing partial summary
    judgment considerations.

[17]

In
    her September 12, 2018 decision, the motion judge explained why, in her view,
    partial summary judgment was appropriate. After citing the relevant principles
    from
Butera
, including the cautions about partial summary judgment, she
    found the cheque fraud and payroll fraud claims to be distinct, representing
    different causes of action. She noted that she did not hear evidence during the
    motion of the payroll fraud, and said that there was no indication that any
    additional evidence on the cheque fraud would be available at trial. She concluded
    that partial summary judgment could eliminate a single claim enabling the
    subsequent trial to be shorter and more focused, and that this could encourage
    settlement. She then said with respect to the risk of inconsistent findings:

In my view, the commencement of
    the limitation period in respect of the payroll fraud claim may or may not be a
    different date than the commencement of the limitation period in the cheque
    fraud claim. As I said, I heard extensive evidence on the cheque fraud. I did
    not hear similar evidence on the payroll fraud. Although there may be some
    overlap in the evidence, there were possibly different office procedures
    respecting the payroll fraud and possibly different considerations as to when
    the plaintiffs ought to have been aware of the loss.

[18]

In
    my view, the motion judge erred in principle when evaluating the risk of
    overlap in the evidence. She proceeded to partial summary judgment because she
    had not heard evidence about the payroll fraud during the summary judgment
    motion, there was no indication that any additional evidence on the cheque
    fraud would be available at trial, there may or may not be a different date
    for commencement of the relevant limitation periods, and there would only
    possibly [be] different office procedures and possibly different
    considerations as to when the plaintiffs ought to have been aware of the loss.
    Her orientation was wrong. In effect, she looked to see whether overlap had
    been demonstrated. To the contrary, she should not have proceeded to partial
    summary judgment unless she was satisfied affirmatively that the issues before
    her could readily be bifurcated without causing overlap that could lead to
    inefficient duplication or a material risk of inconsistent findings or
    outcomes.

[19]

She
    also made palpable errors in her reasoning. The fact that she heard no evidence
    of the payroll fraud during the partial summary judgment motion is, without
    more, uninstructive on whether she would be apt to hear evidence that would be
    relevant to the limitation period tor the cheque fraud claim during the payroll
    fraud trial.

[20]

More
    importantly, she gave insufficient weight to the risk of overlap in the
    evidence relating to the respective limitations defences. For example, the limitations
    defences to each claim engaged the office procedures in place, and required
    expert evidence that could be furnished by the same expert. Deciding the issue
    in respect of one claim while leaving it open on the other creates the very
    risk of inconsistency that is to be avoided.

[21]

Finally,
    and most critically, the motion judge appears to have failed to recognize that
    the BBA defence was pleaded in response to both claims, not just the cheque
    fraud. As the BBA defence was left open on the payroll claim, the risk of a
    different result went without consideration by the motion judge.

[22]

Together,
    these palpable errors are overriding given their impact.

[23]

This
    case is also illustrative of the delay that partial summary judgment entails. Through
    no fault of anyone, the summary judgment motion has delayed the trial by close
    to two years, leaving aside the seven months it has taken to hear the appeal.
    The motion judge spent over 12 months deliberating in order to write two
    decisions, a significant expenditure of judicial resources. The delay was
    predictable and, in my view, not given adequate consideration, particularly
    when the motion judge came to appreciate after the April 25, 2017 hearing that
    the summary judgment motion would require the scheduling, conduct and
    determination of a mini-trial before the trial itself would move forward.

B.

The Motion Judge misapplied the Test for Discoverablity

[24]

Although
    the foregoing is sufficient to determine the appeal, it is important to say
    something about the motion judges treatment of the test for discoverability.

[25]

The
    two year limitation period that applies in this case begins to run when the
    claim is discovered within the meaning of the
Limitations Act
. A claim
    is discovered when the plaintiff has the knowledge described in s. 5(1)(a), or
    when a reasonable person as described in s. 5(1)(b) ought to have had that
    knowledge. The material section in this case is s. 5(1)(b). It says:

5 (1) A claim is discovered on the earlier of,



(b) the day on which a
    reasonable person with the abilities and in the circumstances of the person
    with the claim first ought to have known of the matters referred to in clause
    (a).

[26]

Section
    5(1)(b) establishes a modified objective test. It seeks to make an objective
    determination by inquiring what a reasonable person ought to have known, but it
    imbues the hypothetical reasonable person with the subjective abilities and  circumstances
    of the person with the claim.

[27]

Here,
    the motion judge held that a reasonable person with the abilities and in the
    circumstances of Mr. Schuurman first ought to have known of the loss suffered
    by the plaintiffs when  alerted to the allegations of fraud brought against
    Ms. Khalaf by a subsequent employer. That was early 2015, meaning that the
    limitation period had not passed when the statement of claim was issued.

[28]

In
    appealing this finding, the appellant bank focused primarily on its claim that
    the motion judge erred in principle by using Mr. Schuurmans abilities and
    circumstances, instead of those of the corporations. It argues that since the
    claim belongs to the corporate plaintiffs, the s. 5(1)(b) test should have
    focused on their abilities and circumstances, not Mr. Schuurmans.

[29]

I
    need not resolve this issue because, in my view, the motion judge clearly erred
    in applying the modified objective test by conducting a purely subjective
    inquiry. Rather than imbuing the hypothetical reasonable person with the
    abilities and circumstances of Mr. Schuurman, she imparted on that person the
    attitudes and practices of Mr. Schuurman, thereby defeating the objective
    reasonableness inquiry.

[30]

She
    said:

The reasonable person standard is
    to be applied taking into account the abilities and the circumstances of the
    person with the claim. It seems to me that when the reasonable person
    standard in the context of s. 5(1)(b) is applied in this case, the
    circumstances of Mr. Schuurman include the organization of his business at the
    time of the fraud. The organization of the business, and particularly the
    bookkeeping part of that business, lacked a segregation of duties. Without a segregation
    of duties as described by Ms. Grogan, the plaintiffs were vulnerable to
    bookkeeper fraud. To put the analysis another way, the abilities and
    circumstances of Mr. Schuurman included his overly trusting, perhaps gullible
    nature and his resultant vulnerability.

[31]

First,
    an issue in the case was whether the respondent corporations failed to know
    what they ought to have known, because the bookkeeping part of their business
    was not monitored as it reasonably should have been. The motion judge begged
    that question by assuming that a reasonable person would have the same bookkeeping
    practices as the respondent corporations had. Simply put, in identifying the
    circumstances of the person that the reasonable person will share with the plaintiff,
    it is an error in principle to infer that the reasonable person would conduct
    itself in the same way that the plaintiff did. To do so is to eviscerate the
    objective component of the test. That is what the motion judge did here.

[32]

Second,
    s. 5(1)(b) is about knowing what one ought to know. In context, the reasonable
    person component of s. 5(1)(b) serves to ensure that the plaintiff acted with reasonable
    levels of prudence and attention in attending to the risk of injury, loss or
    damage. Because the objective component of the test is modified, the degree of
    prudence and attention that can reasonably be expected will vary among persons
    with claims, according to their abilities and circumstances - things such as
    level of intelligence, education, experience, resources, health, power
    imbalances, dependence, and situational pressures or distractions that might
    bear on the ability to appreciate what is happening. It is imperative to
    remember, however, notwithstanding that the term abilities may be wide when
    viewed in isolation, s. 5(1)(b) requires that once material characteristics are
    attributed to the reasonable person, that hypothetical person will remain
    reasonable. If the hypothetical person is imbued with unreasonable imprudence
    or inattention the objective component of the test is defeated, and only one
    result can obtain.

[33]

In
    my view, that is the effect of positing a reasonable person who has an overly
    trusting, perhaps gullible nature. Where a person has the ability to be less
    trusting and less gullible, being overly trusting and gullible are not
    abilities or circumstances. They are attitudes or tendencies that, when
    manifest, could properly be considered to be indicia of unreasonableness.

[34]

In
    my view, the motion judge erred in applying the modified objective test in s.
    5(1)(b).

C.

I Need not decide WHETHER the BBA finding was made in error

[35]

The
    determinations I have already made are sufficient to dispose of the appeal and
    provide sufficient guidance going forward. Since the question of whether the
    companies signed a BBA containing a verification clause and/or limited
    liability clause may be litigated again on what could be a different record, I
    choose not to consider this ground of appeal.

CONCLUSIONS

[36]

I
    would allow the appeal and set aside the partial summary judgment. As agreed
    between the parties, I would set aside the costs order of the motion judge. I
    would also order costs to the appellant bank in the summary judgment motion of
    $50,000 inclusive of applicable taxes and disbursements, and $25,000 costs on
    this appeal.

Released: DD May 7, 2019

David
    M. Paciocco J.A.
I agree. Doherty J.A.
I agree. B. Zarnett J.A.


