Service Mold + Aerospace Inc. v Khalaf: The Court of Appeal Reviews Partial Summary Judgment and Discoverability

 In Commercial Litigation

In the recent Court of Appeal decision of Service Mold + Aerospace Inc. v Khalaf, the Court of Appeal confirmed its prior guidance on when partial summary judgment is appropriate and also confirmed how the test for discoverability under the Limitations Act is to be applied objectively.

Background

Service Mold + Aerospace Inc. v Khalaf (2019 ONCA 369), a recent Court of Appeal decision written by Justice Paciocco for the Court, was the appeal of a decision granting summary judgment to two corporations that had claimed against a bank in relation to a fraud.

As background, Service Mold + Aerospace Inc. and SMI Ventilation Products Inc. (the “Corporations”), were allegedly defrauded by their bookkeeper, Khalaf (the “Bookkeeper”), by her use of forged cheques (the “cheque fraud”) and additional unauthorized payroll payments she made into her bank account (the “payroll fraud”).

The Corporations sued the Toronto-Dominion Bank (“TD”), claiming that the bank was strictly liable and liable in negligence for the cheque fraud, and liable in negligence for the payroll fraud. TD defended arguing that the Corporations had signed an agreement with a limited liability clause and that the Limitations Act barred the claim.

The Corporations brought a motion for summary judgment.  The motion judge found that there was no genuine issue to be tried in relation to TD’s limitation of liability defence against the cheque fraud claim, as there was no evidence that such an agreement had been signed by the Corporations. Further, the motion judge ordered a mini-trial to determine the issue of discoverability before ruling that there was no genuine issue to be tried relating to TD’s limitation period defence.

The motion judge ultimately granted partial summary judgment to the Corporations and awarded them damages. Of note, the motion judge found that the limitation period did not begin to run until early 2015 and that the Corporations’ claims were not statute-barred. TD appealed.

The Appeal

On the appeal, the Court of Appeal considered whether partial summary judgment was appropriate. After applying the relevant jurisprudence, the Court found that the motion judge had erred in awarding partial summary judgment. Of note, the Court found that the motion judge failed to note and consider that the limitation of liability defence was pleaded in response to both claims, not just the cheque fraud, meaning there was a risk that a different result could be reached on each of the two claims in respect of the limitation issue.

On the limitation issue, the Court of Appeal reviewed the principles of discoverability and found that the motion judge had erred in applying the modified objective test. Specifically, the Court of Appeal took issue with the fact that the motion judge had conducted a purely subjective inquiry by considering the actual attitudes and practices of a specific employee, rather than considering a hypothetical reasonable person with the abilities and circumstances of that employee.

Instead of considering whether the Corporations had been diligent with monitoring its bookkeeping, the motion judge instead assumed that a reasonable person would have had the same bookkeeping practices as the Corporations.

Given the above, the Court of Appeal allowed TD’s appeal and set aside the partial summary judgment.

Key Takeaways

While not ground-breaking, this decision reinforces earlier decisions by the Court of Appeal with respect to the factors to be considered when seeking partial summary judgment. The Court of Appeal confirmed that partial summary judgment must be appropriate in the circumstances in order to be granted. Where there is a real risk that inconsistent or different findings could result between the portion of the claim subject to the motion for summary judgment, and the portion of the claim that proceeds in the normal course, the Court of Appeal has made it clear that partial summary judgment will not likely be appropriate.

On the issue of discoverability, the Court of Appeal provided confirmation that the test to be applied is still the modified objective test, and discoverability should not be based on subjective considerations.

As such, this case provides a warning to corporations and business owners about diligence in monitoring their business affairs and finances, as a failure to exercise reasonable diligence could lead to discoverability issues if a claim is later discovered. When it comes to discoverability, it is not enough for a corporation’s internal processes and policies to be followed if the processes and policies are not objectively reasonable.

This blog post was written by Alexander Bissonnette, a member of the Commercial Litigation team.  He can be reached at 613-369-0358 or at Alexander.Bissonnette@mannlawyers.com.

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