ONCA Clarifies Existing Jurisprudence Regarding the Disclosure of Settlement Agreements

ONCA Clarifies Existing Jurisprudence Regarding the Disclosure of Settlement Agreements

Introduction

The Ontario Court of Appeal’s decision in Poirier v. Logan[1] serves as a stark reminder of the detrimental consequences that result from failing to immediately disclose settlement agreements to non-settling parties.

Background

The respondents, Jeremy Logan and Morey Chaplick, owned the respondent M.C. Capital Corp. (“M.C. Capital”). M.C. Capital ran a wholesale and retail clothing business through Standard Apparel Inc. In 2015, Mr. Logan asked the appellant, Roger Poirier, to buy out Mr.  Chaplick’s shares. Mr. Poirier bought out Mr. Chaplick’s shares and personally guaranteed the debts of the business. The clothing business eventually failed, resulting in significant losses to Mr. Poirier.

Mr. Poirier alleged that he purchased the shares based on fraudulent or negligently misleading corporate financial statements prepared by Jerry Friedberg, an accountant. Mr. Poirier alleged that his lawyer, Hillary Goldstein, who also is Mr. Logan’s wife, breached her retainer agreement and acted in a conflict of interest by failing to disclose relevant information regarding the risks involved in acquiring the shares. Accordingly, Mr. Poirier commenced an action against the respondents, M.C. Capital, Mr. Chaplick, Mr. Logan and Mr. Friedberg, for $3.7 million in damages for fraud, deceit, fraudulent misrepresentation, negligent misrepresentation, unjust enrichment, breach of contract and breach of the duty of good faith. Mr. Poirier also initiated an action against Hillary Goldstein and Buchli Goldstein LLP for $3.7 million in damages for breach of contract, negligence, negligent misrepresentation and breach of the duty of good faith.

Each of the respondents issued crossclaims for contribution and indemnity. However, despite the crossclaims, the respondents cooperated in crafting their defence strategies and deferred discovering one another on their crossclaims.

During discoveries, Mr. Poirier settled his claim against Mr. Friedberg on the basis that Mr. Friedberg would assist in establishing the claims against Mr. Chaplick and Mr. Logan. However, the settlement was not disclosed to the respondents until six months later. After learning about the settlement and when it was entered, the respondents brought motions to dismiss Mr. Poirier’s action as an abuse of process.

Motion Decision

The motion judge ultimately granted the respondents’ stay motions and dismissed the action.

The motion judge relied on multiple authorities, including Handley Estate v. DTE Industries Limited,[2] to apply what he referred to as the “dismissal principle.” According to the motion judge, the dismissal principle stipulates:

When there are co-defendants, and the plaintiff settles with one or more of them but not all of them, and the settlement changes the adversarial orientation of the proceeding, the plaintiff must immediately disclose to the non-settling defendants that (a) there is a settlement and (b) the terms of the settlement that change the adversarial orientation of the proceeding.

In failing to disclose a settlement under such circumstances, the motion judge found that the only available remedy was to stay and dismiss the action. Mr. Poirier appealed the motion judge’s decision to the Ontario Court of Appeal, arguing that the motion judge erred in law by applying an incorrect test and committed palpable and overriding errors of fact.

Appeal

The Ontario Court of Appeal emphatically rejected Mr. Poirier’s submissions and dismissed the appeal, awarding costs to the respondents in the agreed-upon amount. In doing so, the Court of Appeal clarified and added to its existing jurisprudence regarding the disclosure test.

First, the Court of Appeal held that the disclosure test enunciated in Aecon Buildings v. Stephenson Engineering Limited[3] is not a two-part test, contrary to the appellant’s submission. The test asks:

Has the agreement in question changed entirely the landscape of the litigation in a way that significantly alters the adversarial relationship among the parties to the litigation or the dynamics of the litigation?

If the answer to that question is yes, the appellant submitted the court is then required to analyze if the failure to immediately disclose the agreement amounts to an abuse of process that merits a stay of the action. The Court of Appeal rejected this submission, holding that courts are not to analyze whether an abuse process merits a stay in these circumstances.[4] Simply put, if it is found that immediate disclosure of a settlement was required but not made, an abuse of process will be found, and a stay of the proceedings must result.[5] Accordingly, the Court of Appeal held that the usual principles applicable in granting the discretionary remedy of a stay do not apply in these circumstances.[6]

Second, the Court of Appeal held that the disclosure test does not require a party to demonstrate that the settlement agreement altered the adversarial relationship disclosed in the pleadings.[7] While this will often be the case if the disclosure test is satisfied, a finding that the settlement agreement has altered the adversarial relationship disclosed in the pleadings is not a condition precedent in determining that an obligation to disclose has arisen.[8]

Third, in Aecon, MacFarland J.A. opined that without disclosure, the settlement agreement before her rendered the process a “sham.” Contrary to the appellant’s submission, the Court of Appeal held that McFarland J.A. did not build the “sham” feature into the disclosure test but merely commented on the effect that non-disclosure had in that matter.[9]

Conclusion

Poirier shows that the existence of a settlement with terms that alter the adversarial orientation of the litigation must be disclosed to other non-settling parties within the litigation immediately. The Poirier decision is particularly notable because it clarifies and simplifies the disclosure test. Specifically, the decision confirms that a stay of proceedings is not a discretionary remedy where an abuse of process has been found as a result of a party failing to immediately disclose a settlement agreement. The Court of Appeal also added that the disclosure test does not require a party to demonstrate that a settlement agreement altered the adversarial relationship disclosed in the proceedings, nor does it require a finding that the agreement rendered the process a “sham.”

Given the harsh consequences that result from a stay of proceedings, it is advisable to seek direction from the court if there is uncertainty as to whether the disclosure test has been met.[10]

[1] Poirier v. Logan, 2022 ONCA 350 (“Poirier”).

[2] Handley Estate v. DTE Industries Limited, 2018 ONCA 324 (“Handley Estates”).

[3] Aecon Buildings v. Stephenson Engineering Limited, 2010 ONCA 898 (“Aecon”).

[4] Poirier, supra note 1, at paras. 39-41.

[5] Ibid.

[6] Ibid.

[7] Ibid at paras. 47-49.

[8] Ibid.

[9] Ibid at paras. 52-53.

[10] Ibid at para. 72.

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