Executive Summary: Key Legal and Evidentiary Issues

• Default judgments were obtained via ex parte applications after defendants' legal documents allegedly went to junk mail folders

• Statement of Claim was fundamentally deficient as it only alleged agreements with GHI, yet judgments were granted against GHS and Anderson who were not parties to those agreements

• Agreements contained mandatory mediation and binding arbitration clauses requiring disputes be resolved in Los Angeles, California, and to be construed under California law

• Defendants raised defences based on a force majeure event (fire destroying the GHI warehouse in Edmonton) and a limited liability provision that would preclude claims for loss of profits

• The separate Deposit Agreement does not contain a mediation prerequisite nor an arbitration clause, and Alberta may assume jurisdiction for deposit recovery as the defendants reside there

• Tri-partite test for setting aside default judgments was applied: arguable defence, non-deliberate default with excuse, and prompt action upon learning of the default

Background and contractual relationship

The Ghaoui Group LLC, the Plaintiff, entered into agreements with Global Health Imports Corporation (GHI) for the supply of surgical gloves. Stephen Anderson was at all material times a Director and Shareholder of GHI and the sole Director and Shareholder of GHS-Global Health Care Solutions Corporation (GHS). Based on representations of Anderson, it was the Plaintiff's understanding that the two corporations and Anderson worked along side one another for the same business purposes. Under the agreements, GHI received a refundable deposit of $361,000 USD.

Failure to perform and partial refund

Ultimately, GHI failed to supply any product. GHI acknowledged its obligation to return the deposit but only refunded $10,000. Thereafter, evidence of further wire transfer payments were sent to the Plaintiff but each of those transactions were cancelled and consequently no further funds were received. The Plaintiff has alleged that GHI and Anderson committed fraud and wire fraud by misrepresenting themselves as the owner of the product to be supplied and providing inaccurate wire receipts and misappropriation of the deposit. No further particulars were set out nor were the Judgments made or sought on the basis of anything other than the breach of the Agreements.

Service and default judgments

The Statement of Claim was sent to the Attorney for Service and there is no dispute that that was legally proper and good service on GHI and GHS. Anderson says that he did not receive the Statement of Claim from his Attorney at the relevant time but now acknowledges that after retaining counsel for this application, on a review of his Junk Mail, he discovered that he had been sent the Statement of Claim on May 29, 2023. The Statement of Claim was served on Anderson by email to an email address contained in the Agreements between the Plaintiff and GHI. He indicated that he did not receive it but now also acknowledges that after retaining counsel, on a review of his Junk Mail, he discovered it had been sent to him on June 2, 2023. Service upon Anderson was validated by Order of July 26, 2023. Anderson says that communications with respect to noting in default, judgments and garnishees in this matter were received in his Junk Mail. Because he receives hundreds of junk emails, he rarely, if ever, reviews his Junk Mail folder as it is typically full of scam emails and marketing junk. Default Judgment was granted against GHI and GHS on July 6, 2023, and a Partial Default Judgment was granted against Anderson on August 21, 2023. Both Judgments were granted in without notice applications after the Defendants had been noted in default.

Defences raised by defendants

The Defendants point to provisions in the Agreements that any dispute is to be mediated and failing agreement that the dispute is to be resolved through a binding arbitration in Los Angeles, California. The Agreements also provide that they are to be construed in accordance with California law and they agree to attorn to the jurisdiction of California courts. No mediation took place and no California law was proven at the Applications for Judgment. The Plaintiff did provide evidence that an attempt to mediate was made but says it was frustrated by the Defendants lack of response. There is a separate Deposit Agreement. It does not have a mediation prerequisite nor an arbitration clause. It does have similar provisions with respect to California law and attornment. In addition, the Defendants raise defences based on a force majeure event being a fire destroying the GHI warehouse in Edmonton, and a limited liability provision which would preclude a claim for loss of profits and other business losses. The Court found it unnecessary to detail further particulars and said only that those defences may be arguable.

Fundamental deficiencies in pleadings

The Judgment granted on July 6, 2023 recites that having been noted in default GHI and GHS were deemed to have admitted the facts alleged in the Statement of Claim. Paragraph 1 of the Judgment says that GHI and GHS have breached their Agreements with the Plaintiff. A similar recital was in Judge Schlosser's Judgment of August 21, 2023 as well as its first paragraph stating that GHI, GHS and Anderson breached their Agreements with the Plaintiff. The difficulty with this is that the Statement of Claim only alleges the Agreements were with GHI. GHS and Anderson cannot be deemed to have admitted facts that have not been alleged. Although there is some evidence presented that Anderson said both corporations worked together, that does not make GHS a party to the Agreements. Corporations are incapable of thought or action and can only act through human agency. It is correct that Anderson was GHI's representative and its directing mind in relation to the Agreements, but that in and of itself does not make him a party to the Agreements nor personally liable under those Agreements.

Ruling and outcome

The Court applied the tri-partite test for setting aside default judgments: (a) does the applicant have an arguable defence; (b) did they not deliberately let the judgment go by default, and have some excuse for the default; and (c) after learning of the default, did they move promptly to open it up. Albeit with some degree of skepticism, the Court accepted Anderson's explanation regarding his email and that the Statement of Claim not coming to his attention. The Court was of the view that he on his own behalf and on behalf of GHI and GHS moved promptly in bringing this application to set aside the Judgments once aware.

With respect to GHS and Anderson, the Statement of Claim is fundamentally deficient. Regardless of the evidence or circumstances, the Judgments against them cannot stand. The Default Judgments against GHS and Anderson are set aside. The Default Judgment as against GHI for the return of the Deposit shall stand inclusive of Judgment Interest Act interest both pre and post Judgment. The balance of the claim against GHI is also set aside. Costs previously awarded shall be set aside with those costs to be considered as part of the balance of the action.

The noting in default of the Defendants arose because of the carelessness of Anderson. Ordinarily in such a circumstance a Plaintiff would be entitled to costs. However, there are some aggravating factors in this case. The pleadings were fundamentally defective and possible defences to the claim were not brought to the attention of the Court. Having regard to all of the foregoing, the Court concluded that the proper disposition is for each of the parties to bear their own costs. The Defendants shall have 30 days from the date an Order is entered to file and serve their Statements of Defence.