By Grace Murdoch
In its recent decision, Skymark Finance Corporation v Ontario, 2023 ONCA 234[1], the Ontario Court of Appeal took the opportunity to comment on the importance of immediate disclosure of settlement minutes to other parties in an action and to clarify the meaning of the phrase “to change the entirety of the litigation landscape”.
The Immediate Disclosure Rule
The immediate disclosure rule provides that that in litigation involving multiple parties, settlement agreements and their terms must immediately be disclosed to all if they change the litigation landscape for the non-settling parties. Though explicit in the title, it bears emphasis that the timeline for doing so is immediate – not “eventual” or “when it is convenient”[2]. A failure to do so constitutes an abuse of process with the resulting remedy of a stay being placed on the non-disclosing party’s claim(s) against the non-settling parties.
Because violation of this rule can result in one of the court’s most severe remedies, careful consideration should be paid to the foundational aspect of the rule – that is, changing the legal landscape. The immediate disclosure rule exists so as to prevent prejudice to non-settling parties who will find themselves entangled in a landscape with shifted adversarial relationships, requiring new strategy. The remedy of staying the action is enforced for the purpose of allowing the court to control its own processes and correct imbalances of justice.[3]
Facts of the Case
Skymark Finance Corporation v Ontario involved a married couple who owned and operated Delhi Farm Equipment Ltd., a farm equipment company (the “Delhi Defendants”). They sought to become involved in the business of selling, importing, and exporting cigarettes and applied to the Ministry of Finance (“MOF”/“Ontario”) for the relevant license which would allow them to engage in such operations. Because the MOF required a $1 million security bond as part of the application, the defendant couple obtained a loan in the amount of $1.2 million from Skymark Finance Corporation (“Skymark”), covering the price of the security bond plus additional fees charged by Skymark.
The loan was in part secured by granting mortgages on properties owned by the wife to Skymark. The terms also required that the couple was to sign an irrevocable Acknowledgement and Direction to the MOF that would return the $1 million to Skymark once the security bond was no longer required.
In a turn of events, the Delhi Defendants defaulted on the mortgage obligations and were returned the money, which they lost shortly thereafter. This resulted in the commencement of two actions: the “Mortgage Action” commenced by Skymark against the Delhi Defendants and the “Main Action” commenced by Skymark against the Delhi Defendants, Ontario, Counsel for the Delhi Defendants (the “Clement Defendants”), and Skymark’s own counsel (the “Korman Defendants”).
Essentially, the Korman Defendants forwarded the $1 million to the MOF in October 2015, but the MOF claimed to have not received the Acknowledgement and Direction. Then, in March 2016, the Delhi Defendants provided a new Letter of Direction to the MOF which would have the effect of forwarding the funds to the Clement Defendants, who were then to forward the funds to Skymark. In the midst of these events, the Delhi Defendants failed to make the required payments to Skymark as part of the mortgage obligation.
In August 2016, the Delhi Defendants requested that the license be cancelled. The money was then forwarded to the Clement Defendants, who forwarded it to the Delhi Defendants (minus legal costs). Shortly after its placement in the Delhi Defendants’ bank account, it had been gambled away. By July 2017, Skymark commenced the Main Action alleging fraudulent conduct by the Delhi Defendants, negligence on the part of the Korman Defendants for failure to forward the Acknowledgement and Direction, and negligence on the part of Ontario and the Clement Defendants for returning the funds to the Delhi Defendants.
The pleadings issued in response can be briefly summarized as follows:
• The Delhi Defendants alleged fraud against Skymark for misuse of the license but did not crossclaim against any other parties.
• The Korman Defendants crossclaimed against Ontario and the Delhi Defendants.
• The Clement Defendants crossclaimed against the Delhi Defendants.
• The Delhi Defendants served statements of defence against these crossclaims, claiming that the Korman and Clement Defendants acted independently and without coercion.
• Ontario did not crossclaim against any party.
In June 2019, Skymark and the wife executed Minutes of Settlement for the Mortgage Action, which had the effect of settling both that action and the Main Action with respect to her involvement. Several conditions were outlined within the Minutes of Settlement, including ones relevant to the Main Action. Specifically, the wife was to: (1) draft an affidavit which could be used by Skymark in the main action, (2) waive solicitor-client privilege with respect to communications with the Clement Defendants, and (3) provide evidence in her examination for discovery in the Main Action consistent with her affidavit. The affidavit was drafted, however, it ended up containing assertions inconsistent with her previous statement of defense in relation to the Clement Defendants’ crossclaim.
Though the affidavit was sent to all other parties in the Main Action, the Minutes of Settlement were not. Even though requests for settlement documents in relation to the Mortgage Action had been requested in examinations for discovery, these requests were refused by Skymark. The Minutes of Settlement were eventually disclosed in February 2020, but were prefaced with an inaccurate statement by Skymark which provided that there were no minutes of settlement relating to the Main Action.
A motion was then brought by the Clement Defendants, the Korman Defendants, and the MOF to stay the Main Action. This was granted by the motion judge who found that the Minutes of Settlement changed the entirety of the litigation landscape for the Clement and Korman Defendants, thus violating the immediate disclosure rule and amounting to an abuse of process.
The Ontario Court of Appeal
Skymark appealed the motion judge’s decision, raising two issues:
(1) That the entirety of the litigation landscape had not been changed because Ontario was unaffected by the non-disclosure
(2) That it had been an error to stay the action against Ontario.
The Court of Appeal began its reasons by pointing out that Skymark’s justification for not immediately disclosing the minutes could not stand, explaining that Skymark could not rely on the “fictional distinction” they drew between the settlement of the Mortgage Action and settlements relating to the Main Action. The minutes did indeed resolve one party’s claim in the Main Action and therefore, could not be said to be unrelated to it.
(1) Did the Entirety of the Litigation Landscape Change?
The Court explained that the immediate disclosure rule is well-established and has been consistently enforced since 2009. Though it has undergone refinement and restatement, its principles in modern-day litigation are clear and unequivocal, requiring immediate disclosure of any agreement/terms between parties which have the effect of changing the entirety of the litigation landscape. The Court of Appeal also commented that this rule is not enforced for the purpose of discouraging settlement, but rather to keep all parties and the court informed where the impact of a settlement creates a fundamental shift in the nature of the litigation.
Determining whether a settlement or agreement changes the entirety of the litigation landscape is a fact-specific determination, which involves assessing whether the agreement “significantly alters the dynamics of the litigation”.[4] Skymark had advanced that a litigation landscape could not be changed in its entirety unless all parties were impacted, but the Court Appeal rejected this narrow interpretation of the analysis. The Court explained that if Skyline’s interpretation were to be accepted, this could result in scenarios where unaffected parties (and the court) proceed through the steps of litigation without knowledge that the relationships between impacted parties have dramatically changed. This would be contrary to the interests of fairness among parties and leave judges with an incomplete understanding of the state of the case they are attempting to resolve.
Even if a court were to ask whether all parties in the case at bar had been impacted, the Court of Appeal found that this question should be answered in the affirmative. Because the Delhi Defendants were at the center of the issues in the Main Action, a change in their objectives and course of action would create implications for all parties involved – even if the implications were not to the same degree. Critically, the wife who had once been an adversary of Skymark had now become an ally, thus fundamentally shifting the dynamics and liability inquiries unbeknownst to the other parties.
It was clear that the Clement Defendants would be impacted by the Settlement Minutes. The affidavit drafted pursuant to the agreement now alleged fraudulent conduct on their part in contrast to the original statement of defence by the Delhi Defendants which simply alleged negligence. The Court of Appeal reasoned that this very change has impacted the Korman Defendants (although in a positive way) because the affidavit allegations shifted the focus of the conflict to the Clement Defendants. More broadly, all defendants, including Ontario, would have been impacted by the wife’s eventual removal from the action in the sense that there would be higher percentages of liability exposure.
(2) Should a Stay of Proceedings have been granted against Ontario?
Given the Court of Appeal’s conclusion that Ontario could be impacted by the settlement, it was necessarily deserving of the same remedy as the other parties. The Court of Appeal was also not willing to accept a result where the immediate disclosure was found to be violated while still allowing the action to proceed against one of the parties.
The decision of the motion judge was therefore upheld, and the appeal dismissed.
Takeaways
As this case illustrates, settlement can have wide ranging implications where multiple parties and multiple actions are concerned. The immediate disclosure rule remains a key tool to ensure procedure fairness and counsel must not delay in acting upon it or construe its principles.
Simply put, when a settlement among certain parties has the effect of significantly shifting dynamics for other parties, the litigation landscape is considered changed. Counsel must then immediately disclose the settlement to all parties and the court in order to avoid a stay being placed on the action.
The Court of Appeal has also noted that counsel may run into difficulty with disclosure where there are issues of privilege involved and recommended that in such cases, the court should be consulted for directions.
[1] Skymark Finance Corporation v. Ontario, 2023 ONCA 234 [Skymark].
[2] Tallman Truck Centre Limited v. K.S.P. Holdings Inc., 2022 ONCA 66 at para 26 [Tallman].
[3] Handley Estate v. DTE Industries Limited, 2018 ONCA 324 at para 45; Tallman, supra note 2 at para. 28; Waxman v. Waxman, 2022 ONCA 311 at paras 24, 45-47; Poirier v. Logan, 2022 ONCA 350 at paras 38-42.
[4] Skymark, supra note 1 at para 54 citing Crestwood Preparatory College Inc v. Smith, 2022 ONCA 743, at para 57.
