Canada: Court Of Appeal Protects Professionals By Invigorating Rule Allowing Pleadings To Be Struck

On April 29, 2014, the Alberta Court of Appeal released an important decision in the case of O'Connor Associates Environmental Inc. v. MEC OP LLC.

An appeal was brought by O'Connor Associates Environmental Inc. (O'Connor) and Niven Fischer Energy Services Inc. (Niven) (collectively the Third Parties) who had been third-partied into the litigation by the defendants, MEC OP LLC, MEC OP Transaction I ULC and Merit Energy Company LLC (collectively the Defendants).

In the main action, the plaintiff, NEP Canada ULC (NEP or the Plaintiff) sued the Defendants alleging that the Defendants had engaged in deceit, misrepresentation, and other related acts in the context of a sale by the Defendants of significant oil and gas assets to the Plaintiff. The claim was also made for breach of the Purchase and Sale Agreement that governed the sale of the assets. The Plaintiff asserted that the Defendants failed to disclose certain material facts about the assets and that the resulting damage amounted to approximately C$70 million.

The third parties, O'Connor and Niven, were contractual due diligence providers to the Plaintiff. They were retained by the Plaintiff to give various advice relating to the lands and environmental issues surrounding the lands. They had no contractual relationship with the Defendants.

The Defendants advanced their claim against the third parties initially on the basis of a new Rule of Court, Rule 3.44(c). This rule, which is similar in language to Rule 29.01(c) of the Ontario Rules of Civil Procedure, allows a party to be brought into an action as a third party if that party "should be bound by a decision about an issue between the plaintiff and the defendant." After an application was brought by the Third Parties to strike the pleadings, the Defendants then applied to amend its third-party claim to add paragraphs that asserted that an independent duty was owed by the Third Parties to the Defendants. The new paragraphs asserted that the Third Parties owed a duty to the Defendants because "they failed to adequately disclose or communicate information" to the Plaintiff.

The Defendants were successful at first instance in front of the case management judge in amending their pleadings and in defeating the application to have the third-party claims struck. The amendment and the pleading was upheld in part on the basis of an earlier decision of the Court of Appeal, Arcelormittal Tubular Products Roman S.A. v. Fluor Canada Ltd., in which the court had recognized "an arguable independent duty in negligence, despite the absence of a contractual relationship, between a defendant and third party based on their relationship as actors in the same factual milieu." The Third Parties appealed.

Three weeks after argument was heard, the Court of Appeal rendered its decision and determined that there was no basis for a claim against the Third Parties. The Court of Appeal refused to allow the amendments to the pleading and refused to allow the Third Party Claim to survive based on Rule 3.44(c).

In reaching its decision, the Court of Appeal provided important guidance on a number of points as outlined below.

THE LAW WITH RESPECT TO STRIKING PLEADINGS

The Court of Appeal heard the argument after the release of the decision of the Supreme Court of Canada in Hryniak v. Mauldin. In the Hryniak case, the Supreme Court of Canada called for a new approach to summary judgment and "a culture shift . . . in order to create an environment promoting timely and affordable access to the civil justice system . . . moving the emphasis away from the conventional trial in favour of proportional procedures tailored to the needs of the particular case." The Court of Appeal stated that that approach articulated by the Supreme Court of Canada should also be applied to an analysis of whether a pleading should be struck: "Striking pleadings that have no reasonable prospects of success is consistent with this new culture" (paragraph 14).

The court then restated and clarified the test for striking pleadings that had been articulated in the Arcelormittal Tubular case. The court said, "In determining whether a novel claim has a reasonable prospect of success, many factors must be examined. The clarity of the factual pleadings is important. The existence of case law discussing the same or similar causes of action is relevant. As noted in Imperial Tobacco, the Courts must be careful not to inhibit the development of the common law by applying too strict a test to novel claims. However, the Courts must resist the temptation to send every case to trial, even if some legal analysis is needed to determine if the claim has reasonable prospect of success."

The court then applied this restated test for striking pleadings to the facts at hand.

DUTY OF CARE OWED BY THIRD-PARTY CONSULTANTS

The court determined that on the facts, the amendments should not be allowed as the pleading had no reasonable chance of success. The court considered particularly whether third-party consultants, without a contractual relationship with a defendant, owed potential duties in tort to the defendant. Importantly, and helpfully, from the perspective of all consultants, whether lawyers or other professionals, the court strongly rejected the notion that a duty of care lies between a third-party consultant and the opposite party to that retaining the third-party consultant in circumstances such as this. The court noted that the third parties were selected, retained, instructed and paid by the Plaintiff. Their proximity was to the Plaintiff and not the Defendants. The Defendants could not have had any reasonable expectation that the Third Parties were protecting its interests. Indeed, the court says that it would have been unreasonable for that presumption to arise and unreasonable for the Defendants, as vendors in a sale situation, to rely on what the Third Parties were doing. The court also noted that a professional adviser will typically be acting under a contract with its principal. That contract may well limit the liability of those advisers even to the principal itself.

Further, the court said that policy considerations also prevent the recognition of a duty to care in circumstances such as this. In cases involving solicitors or professionals, the court noted that it would be impossible for those professionals to act if they owed duties to the opposite party. The court cited with approval the statement in the case of Kamahap Enterprises Ltd. v. Chu's Central Market Ltd. (1989) that "had they such a duty, they could not safely care also for the interest of their principal, which is, of course, their real function." As a result, the court found there was no reasonable prospect of establishing a duty of care and that the amendments should be struck. That conclusion, delivered as strongly as it is, is salutary to all parties involved in offering professional advice in a purchase and sale context.

RULE 3.44(C)

Finally, the court provided helpful commentary on the meaning and interpretation of Rule 3.44 (c). The rule is a new one to the Rules of Court and appears to expand, potentially greatly, the ambit of allowable third-party claims. The court was careful to suggest that it was not providing principles of general guidance in respect of the interpretation of Rule 3.44(c). At the same time, however, the court provided some clarity through its application of Rule 3.44(c) to these facts.

The court stated that the new Rule 3.44(c) permits a "wider range of third party claims." The rule is now "another potential form of joinder." The court also said, however, that "It does not mean, however, that any potential issue or claim between the parties and non-parties should be joined together using the third party process. At a minimum, the third party notice must disclose a legally recognized claim by either the plaintiff or the defendant against the third party. The complexity, expense, and time demands of an action will vary directly depending on the number of parties and causes of action. At some point issues of proportionality and efficiency dictate that collateral claims be tried on their own. Prevention of multiplicity of proceedings is desirable, but so too is allowing the economic and timely advancement of the original action" (paragraph 26).

The court then determined that Rule 3.44(c) should not be applied in this instance to allow the third-party claim for the following reasons:

  • The prospect of inconsistent findings in this case was largely theoretical. There was no outstanding claim between the Plaintiff and the Third Party advisers. Further, there may not be such a claim depending upon the specific terms of the contract between the Plaintiff and the Third Parties. There might not be any inconsistencies at all.
  • There will be situations where third-party proceedings will always be inappropriate. One is where the third-party claim is, in substance, a defence to the plaintiff's claim. Here, the Defendants had already defended the Plaintiff's action on the basis that the Plaintiff was in receipt of third-party advice and had responsibility to conduct proper due diligence. There was no need for the Third Parties to be involved.
  • Further, third-party proceedings will be inappropriate when the third parties are agents of the plaintiff and the plaintiff is responsible for their conduct. That was the case here.
  • Finally, the various causes of action alleged – deceit, breach of contract, unjust enrichment, and tort – did not require third-party involvement. Any deficiencies in the conduct of the Third Parties could be laid at the feed of the Plaintiff and constitute defences to the various causes of action brought by the Plaintiff. There was no need for the Third Parties to be involved.

CONCLUSION

In the result, as indicated above, the action was struck against the Third Parties. New vigour was attached to the rule allowing pleadings to be struck. The Court of Appeal has indicated that the rules allowing pleadings to be struck on the basis of no cause of action should be given real effect, particularly as a result of the guidance of the Supreme Court of Canada in Hryniak. The Court of Appeal also clarified that a claim will not survive merely because it is novel – there must be substance. Professionals and consultants do not owe duties to the opposite party in a purchase and sale transaction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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