



COURT OF APPEAL FOR ONTARIO

CITATION: 1588444 Ontario Ltd. v. State Farm Fire and
    Casualty Company, 2017 ONCA 42

DATE: 20170118

DOCKET: C61277

Laskin, Feldman and Hourigan JJ.A.

BETWEEN

1588444 Ontario Ltd. dba Alfredos and Vincenzo Spartaco

Plaintiffs (Respondents)

and

State Farm Fire and Casualty Company

Defendant (Appellant)

Thomas J. Donnelly, for the appellant

Gordon A. Marsden and Adam D. Romain, for the
    respondents

Heard: September 9, 2016

On appeal from the order of Justice H.K. OConnell of the
    Superior Court of Justice, dated October 16, 2015.

Hourigan J.A.:

Introduction

[1]

During the late evening hours of June 4, 2006 a restaurant and banquet
    facility operated by the corporate respondent was destroyed by fire. The cause
    of the fire was arson. The premises were insured under a policy issued by the
    appellant.

[2]

Approximately one year later, the respondents sued the appellant,
    seeking indemnification pursuant to the insurance policy it had issued to the
    corporate respondent. The appellant defended the action on the basis that the
    respondents had failed to cooperate with the investigation of the fire and
    failed to produce relevant documentation.

[3]

In January 2015 the appellant brought a motion to amend its statement of
    defence. The effect of the proposed amendments was to abandon the defence of
    non-cooperation and assert a defence that the fire was set by or at the
    direction of the respondents.

[4]

The motion judge dismissed the motion and ordered substantial indemnity
    costs against the appellant. Both parts of that order are appealed.

[5]

For the reasons that follow, I would dismiss the appeal of the order
    refusing leave to amend the statement of defence and would allow the appeal of
    the costs award.

Background

[6]

On June 9, 2006 approximately four days after the fire, a representative
    of the appellant wrote to the corporate respondent stating as follows:

There is a question as to whether the cause and origin of the
    loss was accidental in nature from the standpoint of the insured.

Section I Losses Insured And Losses
    Not Insured

Losses
    Not Insured

21.  dishonest or criminal act occurring at any
    time by you, any of your partners, employees, directors, trustees, authorized
    representatives or anyone to whom, you entrust the property for any purpose
    whether acting alone or in collusion with others.
[Emphasis in original.]

For this reason and for other reasons which may become
    known, you are hereby notified that any action taken by State Farm Fire &
    Casualty Company or its authorized representative to investigate
the cause of the loss, determine the amount of loss
    or damage, or attempt to adjust any claim arising out of the alleged loss shall
    not waive any of the terms or conditions of the policy of insurance described
    above, nor shall such action waive any of your rights under the policy
.

[7]

The same day the individual respondent, Vincenzo Spartaco, the directing
    mind of the corporate respondent, executed a Request for Claim Service and
    Non-Waiver of Rights form, wherein he acknowledged that the appellant might not
    have an obligation to indemnify its insured for claims arising out of the fire.
    Mr. Spartaco also authorized the appellant to, among other things,
    investigate the cause of the fire.

[8]

As part of the appellants investigation of the fire, Mr. Spartaco
    attended at both an interview and an examination under oath. He also signed an
    authorization agreeing to the release of relevant documents to the appellant.

[9]

The appellant retained an engineer to investigate the cause of the fire,
    who concluded that the fire was deliberately set. This was the same conclusion
    reached by the Barrie Police Force and the Office of the Fire Marshall.

[10]

In their statement of claim issued on June 4, 2007 the respondents
    alleged that the appellant wrongfully and unreasonably denied payment under the
    insurance policy.

[11]

The appellant served a statement of defence dated September 14, 2007
    wherein it admitted that the policy provides for coverage for damage caused by
    fire and pleaded that the fire was intentionally set and incendiary in
    nature. The appellant did not take the position in its pleading that the
    respondents, or anyone on their behalf, set the fire. The appellant did plead
    that the respondents had failed to provide sufficient, or any, supporting
    damage documentation and have failed to cooperate in the defendants
    investigation as to the cause of the loss and the quantum of the damages.

[12]

After the close of pleadings, there was delay in conducting the
    examinations for discovery. The source of this delay was twofold. First, Mr. Spartaco
    was out of the country and unable to attend for several months. Second, the
    action was administratively dismissed in December 2009 and the parties took almost
    a year to agree to a consent to set aside the dismissal.

[13]

Discoveries of all parties took place in May 2011. The appellant conceded
    during the discoveries that its only basis for not paying under the policy was
    the respondents non-cooperation and that it was not taking the position that
    the respondents were responsible for setting the fire. Despite this concession,
    during the appellants examination of Mr. Spartaco, it attempted to ask
    questions of him in support of an allegation that he had intentionally set the
    fire. Those questions were refused.

[14]

The appellant brought a motion before Mullins J. to compel Mr. Spartaco
    to answer questions regarding his alleged involvement in the fire. Mullins J.
    denied that portion of the motion on the grounds that the appellant had not
    pleaded that Mr. Spartaco was responsible for setting the fire.

[15]

In a letter dated September 13, 2013 counsel for the appellant provided
    answers to outstanding undertakings. In that letter, counsel confirmed that the
    appellant was in receipt of all necessary documentation and was not waiting to
    receive any further information from the respondents. Further, counsel advised
    that the appellant was not aware of any failure on the part of the respondents to
    comply with the terms of the insurance policy.

[16]

Given these concessions, counsel for the respondents concluded that
    there was no genuine issue requiring a trial regarding the appellant
    indemnifying under the insurance policy, and that the only remaining issue was
    the quantification of damages. On March 20, 2014 counsel for the respondents
    wrote to counsel for the appellant advising him of the respondents position and
    sought dates for a motion for summary judgment. On December 9, 2014 the
    respondents served their motion for summary judgment returnable December 19,
    2014.

[17]

During a court appearance on December 19, 2014 to schedule the summary
    judgment motion, the appellants counsel advised for the first time that his
    client would be bringing a motion seeking leave to amend the statement of defence. 
    Counsel for the appellant eventually served motion materials, which included a
    proposed amended statement of defence. In that new pleading the appellant
    withdrew the allegations of non-cooperation and pleaded instead that coverage
    was being denied on the basis that the respondents had committed arson.

Motion Judges Reasons

[18]

The motion for leave to amend the statement of defence was heard on May
    21, 2015. On October 16, 2015 the motion judge released an endorsement, which
    provided:

Having reviewed the record, the submissions of counsel, and the
    law underpinning Rule 26 motions, this endorsement, to be followed by complete reasons,
    is to alert counsel that the motion is denied.

[19]

In response to this endorsement, the appellant commenced its appeal to
    this court, asserting as its primary ground of appeal that the motion judge had
    failed to provide sufficient reasons.

[20]

On February 12, 2016 after this appeal was perfected, the motion judge
    released his reasons in support of his order dismissing the motion. He found
    that the respondents would suffer actual and presumed non-compensable prejudice
    if leave to amend were granted.

[21]

With respect to actual prejudice, the motion judge found that the
    proposed amendments would have the effect of restarting the litigation process.
    He concluded that the respondents had lost the ability to marshal evidence to
    counter a claim of arson.

[22]

With respect to presumed prejudice, the motion judge found, at para.
    135, that prejudice is presumed given the failure of the Defendant to
    demonstrate that there is no prejudice occasioned by the delay. He also
    concluded that the appellant had failed to provide a reasonable excuse to
    explain its delay.

[23]

The motion judge released a costs endorsement dated April 15, 2016 in
    which he awarded costs to the respondents in the total amount of $40,000. In so
    ruling, the motion judge concluded that that there was unreasonableness
    exhibited by the appellant in the manner in which it conducted the litigation.
    As a consequence of this finding and the motion judges view that this motion
    was more complicated than the average motion to amend, the motion judge found
    that costs higher than partial indemnity are required.

Analysis

1.       Motion to Amend

(a) Legal Principles

[24]

Motions for leave to amend a pleading are governed by r. 26.01, which
    provides:

On motion at any stage of an action the court shall
    grant leave to amend a pleading on such terms as are just, unless prejudice
    would result that could not be compensated for by costs or an
    adjournment.

[25]

The law regarding leave to amend motions is well developed and the
    general principles may be summarized as follows:

·

The rule
requires
the court to grant leave to amend
    unless the responding party would suffer non-compensable prejudice; the amended
    pleadings are scandalous, frivolous, vexatious or an abuse of the courts
    process; or the pleading discloses no reasonable cause of action:
Iroquois
    Falls Power Corp. v. Jacob Canada Inc.
,
    2009 ONCA 517,
75 C.C.L.I. (4th) 1, at paras. 15-16, leave to
    appeal to SCC refused, 2010 CarswellOnt 425, and
Andersen Consulting  v.
    Canada (Attorney Genera
l)
(2001), 150 O.A.C. 177 (C.A.), at para.
    37.

·

The amendment may be permitted at any stage of the action:
Whiten
    v. Pilot Insurance Co.
(1996), 27 O.R. (3d) 479 (Gen. Div.), revd on
    other grounds (1999), 42 O.R. (3d) 641 (C.A.), affd 2002 SCC 18, [2002] 1
    S.C.R. 595.

·

There must be a causal connection between the non-compensable
    prejudice and the amendment. In other words, the prejudice must flow from the
    amendments and not from some other source:
Iroquois
,
at paras. 20-21, and
Mazzuca
v.
Silvercreek Pharmacy Ltd
. (2001), 56 O.R. (3d) 768 (C.A.), at para.
    65.

·

The non-compensable prejudice may be actual prejudice, i.e.
    evidence that the responding party has lost an opportunity in the litigation
    that cannot be compensated as a consequence of the amendment. Where such
    prejudice is alleged, specific details must be provided:
Kings Gate
    Developments Inc. v. Drake
(1994), 17 O.R. (3d) 841 (C.A.), at paras. 5-7,
    and
Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co.
(1995),
    25 O.R. (3d) 106 (Gen. Div.), at para. 9.

·

Non-compensable prejudice does not include prejudice resulting
    from the potential success of the plea or the fact that the amended plea may
    increase the length or complexity of the trial:
Hanlan v. Sernesky
(1996), 95 O.A.C. 297 (C.A.), at para. 2, and
Andersen Consulting
, at
    paras. 36-37.

·

At some point the delay in seeking an amendment will be so lengthy
    and the justification so inadequate, that prejudice to the responding party
    will be presumed:
Family Delicatessen Ltd. v. London (City)
,

2006 CanLII 5135 (Ont. C.A.), at para.
    6.

·

The onus to prove actual prejudice lies with the responding party
:
    Haikola v. Arasenau
(1996), 27 O.R. (3d) 576 (C.A.), at paras. 3-4, and
Plante
    v. Industrial Alliance Life Insurance Co.
(2003), 66 O.R. (3d) 74 (Master),
    at para. 21.

·

The onus to rebut presumed prejudice lies with the moving party:
Family
    Delicatessen
,

at para. 6.

[26]

Bearing in mind these principles, I turn to a consideration of the actual
    and presumed prejudice in the present case.

(b) Actual Prejudice

[27]

On the motion, the respondents filed an affidavit sworn by Adam Romain,
    a lawyer acting for them in this litigation. In that affidavit, Mr. Romain
    testified to the prejudice that his clients would suffer as a consequence of
    the amendments to the statement of defence.

[28]

Mr. Romain swears that the delay in making the allegation of arson
    against the respondents has deprived them of the opportunity to fully
    investigate the fire and attempt to ascertain the identity of the potential
    suspects. In furtherance of that position, he testified that among other
    things, the respondents have lost the opportunity to interview potential
    suspects and review their personal records, canvass the neighbourhood for video
    evidence, and conduct forensic analysis of a broken window at the premises and
    of Mr. Spartacos clothing.

[29]

Mr. Romain does not state that any specific witnesses are no longer
    available. Rather, he says that interviews of available witnesses will be
    hindered by the inevitably faded memories.

[30]

In my view, the respondents have not met their onus of proving actual
    prejudice, and the motion judge made a palpable and overriding error of mixed
    fact and law in concluding otherwise.

[31]

To meet their onus, the respondents were obliged to adduce specific
    evidence of actual prejudice. For example, such evidence could include details
    of witnesses who were available previously but are no longer available. Noting
    that witnesses memories may have faded is really just a generalized
    description of presumed prejudice. Such evidence lacks the required degree of specificity
    to qualify as evidence of actual prejudice.

[32]

I agree with the observation of William J. Poulos in his article
Prejudice:
    Taking a Hard Look at the Merits
(1999),
    22 C.P.C. (4th) 366, at p. 379,
that when it comes to alleging
    actual prejudice in response to a motion to amend:

The specific allegation of prejudice should be detailed in
    sufficient particularity in evidence to allow the opposing party to respond to
    the allegation and to allow the court to take a hard look at the merits of the
    allegation.

[33]

To the extent that there is evidence of specific prejudice in Mr.
    Romains affidavit, e.g. the loss of opportunity to conduct a forensic analysis
    of the scene, I agree with the submission of the appellant that the motion
    judge made a palpable and overriding error of mixed fact and law in failing to
    find that the prejudice does not flow from the proposed amendments.

[34]

It is clear that the respondents were put on notice within days of the
    fire that there was a possibility that the appellant would deny coverage on the
    basis that Mr. Spartaco set the fire. That potential was certainly alive during
    the course of the approximately fifteen months between the date of the fire and
    the service of the statement of defence. Given the warning they received, had
    the respondents wished to protect themselves from an allegation that they were
    responsible for the fire, they could have taken steps to conduct forensic
    investigations. To the extent that they chose not to do so, that was a
    deliberate choice on their part, wholly unconnected to the appellants delay in
    moving to amend the statement of defence. Thus the necessary nexus between the
    delay and the prejudice has not been established.

[35]

To be clear, in reaching this conclusion I am not suggesting that an
    insured in a fire claim is obliged to conduct its own investigation of the
    cause of the fire. However, where an insured is put on notice that a claim may
    be denied on the basis that the arson was caused by the insured and chooses not
    to investigate, the insured cannot later rely on its failure to investigate as
    an example of actual prejudice. This is because the decision not to investigate
    is wholly unrelated to the delay by the insurer.

(c) Presumed Prejudice

[36]

The seminal case in Ontario considering the concept of presumed
    prejudice in the context of a r. 26.01 motion is the
Family Delicatessen
decision. In that case, this court observed that at a certain point after an exceptional
    delay, non-compensable prejudice will be presumed absent evidence to the
    contrary. In other words, after inordinate delay, the presumption in favour of
    granting leave shifts to a presumption that non-compensable prejudice will
    result if leave is granted. This makes sense as a matter of fairness. It would
    be very difficult for a responding party to prove, for example, the generalized
    prejudice that
witnesses memories will be
    diminished after a lengthy passage of time.

[37]

The presumption of prejudice is rebuttable. Where the moving party
    provides an adequate explanation for the delay or tenders evidence that there
    is no non-compensable prejudice, the presumption will be rebutted.

[38]

The court in
Family Delicatessen
did not elaborate on when the
    shift in onus takes place, i.e. the point at which the delay will be so lengthy
    that prejudice will be presumed. It also did not explain what evidence would
    need to be led by the moving party to rebut the onus.

[39]

The Divisional Court elaborated on the concept of presumed prejudice in
Ontario
    (Securities Commission) v. McLaughlin,
2009 CarswellOnt 2694 (Div. Ct.).
    There the court stated, at para. 6, that to rebut the presumption of prejudice,
    a moving party needs to provide some explanation of  the delay in seeking the
    amendments and the presence or absence of prejudice to the opposite party and
    the need to show a nexus between the proposed amendments and the facts or
    evidence said to be recently discovered.

[40]

The respondents submit that the
OSC
case provides a framework
    to determine whether the presumption has been rebutted. They urge the court to
    adopt a three part test that the moving party must satisfy as follows: (i) an
    explanation for the delay; (ii) the absence of non-compensable prejudice to the
    responding party; and (iii) a nexus between newly discovered information and
    the proposed pleading. The respondents submit that unless a moving party can
    adduce compelling evidence on all three parts of the test, then they have not
    rebutted the presumption.

[41]

I would not adopt the rigid test urged upon us by the respondents. In my
    view, the Divisional Court in
OSC
did not purport to establish a
    stringent test for rebutting the presumption. Rather, they were simply
    referencing the types of evidence that might be adduced by a moving party to
    rebut the operation of the presumption.

[42]

In any event, such a rigid test is contrary to the fairness
    considerations that underlie the courts recognition of the concept of presumed
    prejudice in
Family Delicatessen
. It would be inequitable to require a
    moving party to satisfy all three parts of the proposed test in all cases. For
    example, if a moving party were able to establish that the responding party
    would suffer no non-compensable prejudice by reason of the amendment, then it
    would be an odd result if the presumption was not rebutted simply because an
    adequate explanation for the delay had not been established.

[43]

Turning to the facts of this case, I am not satisfied that the motion
    judge erred in finding that there was presumed non-compensable prejudice that
    has not been rebutted.

[44]

The motion to amend the claim was brought approximately nine years after
    the fire and eight years after the commencement of the litigation. While there
    is no hard and fast rule as to what qualifies as inordinate delay, I can see no
    error in the motion judges finding that there was sufficient delay in this
    case to trigger presumptive prejudice.

[45]

In my view, for the reasons that follow, the appellant did not meet its
    onus of rebutting the presumption of presumed prejudice.

[46]

The appellant did not adduce any evidence to establish that the
    respondents would not suffer prejudice by reason of the amendment. For example,
    the appellant did not show that through its own investigation it had retained
    key pieces of evidence or taken witness statements at a time closer to the
    fire, before the passage of time is presumed to have caused evidence to
    disappear and memories to fade. Nor did it explain how information discovered
    through the litigation process resulted in the proposed amendments.

[47]

What the appellant attempted to do was to explain its delay in moving to
    amend the statement of defence. It makes two arguments. First, it says that the
    respondents are responsible for much of the delay in the litigation by reason
    of the unavailability of Mr. Spartaco and the administrative dismissal of the
    action. It also submits that as a result of the decision in
Whiten
, it
    was put in an untenable position because if it alleged arson at the outset of
    the litigation it faced the potential of a punitive damages claim, and if it
    waited to assert the arson defence then it would face a prejudice argument.

[48]

While there was delay attributable to the respondents during the course
    of the litigation, much of the delay was the result of the appellant's
    insistence on examining Mr. Spartaco as if it had pleaded that the respondents
    were responsible for the fire. This led to the appellants unsuccessful
    refusals motion. Moreover, there is no explanation as to why, after that
    refusals motion, a motion was not brought to amend the statement of defence.

[49]

The
Whiten
argument is based upon a misapprehension of that
    case. The facts in that case are very different from the circumstances of the
    present case. In
Whiten
, the insurer persisted with an arson defence
even though the local fire chief, the respondents own expert
    investigator, and its initial expert all said there was no evidence of arson.


[50]

In the present case, all parties knew from the beginning that arson was
    the cause of the fire. The appellant pleaded that the respondents were not
    cooperating with its investigation of the fire. Given this plea and the fact
    that it was common ground that the fire was caused by arson, there was nothing
    stopping the appellant from pleading at the outset, or very early on in the
    litigation, that the respondents were responsible for the fire. It is perfectly
    appropriate to allege arson where there is positive evidence of the arson and
    the insured is not cooperating with the investigation of the fire.

[51]

Further, this is not a case where the appellant was cautious about
    pleading arson but later discovered information that supported the plea. The
    appellant has not pointed to any specific information obtained during the
    course of the litigation that it relies upon in support of its new defence.

2.       Costs Award Below

[52]

The motion judge awarded costs on a substantial indemnity basis on the
    ground that the appellant acted unreasonably in bringing its motion to amend.

[53]

In my view, there were not sufficient grounds to award costs on a
    substantial indemnity basis and the motion judge erred in making the award. The
    court must find that a party has engaged in egregious misconduct in a proceeding
    before a substantial indemnity costs award is justified:
Iannarella v.
    Corbett
, 2015 ONCA 110, 124 O.R. (3d) 523, at para. 139.

[54]

While the appellants conduct in delaying bringing its motion is not
    ideal, it must also be remembered that the respondents were responsible for
    part of the delay in this proceeding.

[55]

Further, and in any event, even an award of costs on a substantial
    indemnity basis must be consistent with the reasonable expectations of the
    parties:
Toronto District School Board v. Molson Breweries Property Ltd.
,
    2009 CarswellOnt 3661 (S.C.), at para. 16. This was a motion to amend a
    statement of defence. While there was a significant litigation history that had
    to be canvassed, the matter was not complex.

[56]

I would set aside the costs award and substitute an award of costs in
    favour of the respondents in the total amount of $20,000.

Disposition

[57]

For the foregoing reasons, I would dismiss the appeal of the order
    dismissing the motion for leave to amend the statement of defence. I would set
    aside the costs award below and substitute an award in favour of the
    respondents in the amount of $20,000, inclusive of fees, disbursements, and
    taxes.

[58]

With respect to the costs of the appeal, the parties agreed that if the
    respondents were successful on the appeal they would be entitled to partial
    indemnity costs of $13,759. Given the divided success on the appeal, I would
    reduce this amount and award the respondents costs of the appeal in the amount
    of $11,000, inclusive of fees, disbursements, and taxes.

C.W. Hourigan J.A.

I agree John Laskin
    J.A.

I agree K. Feldman
    J.A.

Released: January 18, 2017

F.K.


