Canada: When Can A Lawyer's Representations Repudiate A Binding Settlement Agreement?

Lawyers during litigation at-times provide false or misleading statements. But when do those statements cross the threshold from innocently misleading to fraudulent? The Ontario Court of Appeal recently answered this question in Paulus v. Fleury ("Paulus"),1 therefore shining a light on what is considered to be a notoriously grey area of law. In overturning the motion judge's refusal to enforce a settlement, the Court of Appeal stated that the correct approach to civil fraud in the context of submissions made by counsel is to determine whether the submissions were made (1) on a reasonable basis and (2) in good faith.2

Background

The underlying action arose from a motor vehicle accident. At the pretrial conference, plaintiffs' counsel indicated that they had witnesses, describing them as "good people... independent... solid".3 Believing that the plaintiffs had no connection to these witnesses, the defendants agreed to settle in the amount of $850,000.

Immediately after the pretrial conference, the defence found out that the plaintiffs were acquainted with the subject witnesses. The defence alleged that his clients were fraudulently induced into settling, and repudiated the settlement the following day. Plaintiffs' counsel subsequently moved to enforce the settlement, arguing that their use of the term "independent" signified that the witnesses could provide evidence extrinsic to that of the plaintiffs.

The motion judge refused to enforce the $850,000 settlement. He agreed that the term "independent" likely caused the defendants to think that the witnesses were unaffiliated with the plaintiffs, and as such, would be completely unbiased if called at trial. The motion judge concluded that plaintiffs' counsel's representation at the pretrial effectively amounted to civil fraud.

The Appeal

The Court of Appeal listed the requisite elements of civil fraud:4

  1. A false representation of fact by the defendant to the plaintiff;
  2. Knowledge the representation was false, an absence of belief in its truth, or recklessness as to its truth;
  3. An intention the plaintiff acted in reliance on the representation;
  4. The plaintiff acts on the representation, and;
  5. The plaintiff suffers a loss in doing so.

In addition to finding that plaintiffs' counsel did not have the requisite intent to deceive the defendants (and therefore could not be responsible for civil fraud), the Court of Appeal applied a different approach for deciding whether a lawyer's submissions are fraudulent. Specifically, he implemented the principles of professional responsibility recently outlined by the Supreme Court of Canada in Groia,5 which discussed the necessity to balance a lawyer's duty to advocate fearlessly on behalf of their client and his or her obligation to not deceive the Court. The adversarial nature of litigation inevitably leads to contentious submissions, some of which will ultimately be rejected by a judge. Put bluntly "a contrary opinion expressed in submissions by counsel does not make that counsel guilty of civil fraud where there is a reasonable basis for that opinion".6 The Court of Appeal held that to challenge opposing counsel's integrity so as to vitiate a settlement must "both be made in good faith and have a reasonable basis".7

In Paulus, the Court of Appeal found that there was a reasonable basis for plaintiffs' counsel's submission that the witness was "independent", and that this submission was made in good faith. It was reasonable for plaintiffs' counsel to opine that the relationship between the plaintiffs and the witnesses was independent, especially since he was unaware of the exact nature of this relationship prior to the pretrial. There was also no evidence that his submissions were not made in good faith, as they were consistent with his previous statements that qualified the witnesses as independent.

The Court of Appeal commented as well that the defence lacked the requisite diligence to have the Court set the settlement aside. For example, counsel did not inquire about the witnesses at discovery and agreed to settle despite having concerns about the witnesses' partiality prior to the pretrial conference. The Court of Appeal reminded counsel that "a losing party who seeks to set aside a judgment on account of fraud must establish due diligence on his or her own part, and that the questions to be asked are what did the moving party know, and what ought the moving party to have known".8 The motion judge's order was set aside, and a cost award of $100,000 was given to the appellants.

Conclusion and Implications

Though most unfortunate for the defendant (and the Insurer) in this case, it should be viewed as a welcome development from a professional liability standpoint. The Court of Appeal reaffirmed the Law Society of Ontario's desire to preserve a lawyer's practice and reputation through the recognition that a finding of civil fraud would devastate one's career. In addition, this decision stated in no uncertain terms that lawyers are permitted to opine on issues that are open to debate or have infinite variations between two opposing extremes,9 and should do so without fear of repercussion. However, it is important to note that lawyers can still be held responsible for civil fraud (for example, a lawyer who forges evidence). As such, lawyers must continuously exercise some caution as not outright deceive the Court or opposing counsel.

This is also a cautionary tale for all lawyers looking to settle a matter. The Court implored counsel to exercise due diligence in handling their matters and delay settlement if they have any concerns with regards to their case. Such due diligence includes a thorough investigation of the claim, especially with respect to any disclosure produced by opposing counsel. Simply relying on opposing counsel's representations may expose the lawyer to an array of undesirable consequences, not the least of which is an unhappy client. Paulus demonstrates that repudiating a settlement is quite difficult, and so it's critical that lawyers cover all their bases before reaching a final agreement. Lawyers should thoroughly investigate all witness statements and conduct the necessary background searches if heavy reliance is going to be placed on their anticipated testimony at trial.

Finally, the decision is also a welcome development for all parties and litigants that engage in settlement discussions prior to trial. Parties must know that absent truly extenuating circumstances, settlement agreements will be valid and enforceable. The confidence in the settlement process outside of Court is fundamental to ensuring that the wheels of justice do not screech to a complete halt and cost litigants even more than the process already does.

As the saying old saying goes, don't believe everything you hear... there are three sides to every story.

Footnotes

1.2018 ONCA 1072.

2.Ibid at para 14.

3.Ibid at para 1.

4.Midland Resources Holding Limited v Shtaif, 2017 ONCA 320 at para 162.

5.2018 SCC 27.

6.Supra note 1 at para 26.

7.Ibid at para 84.

8.International Corona Resources Ltd v LAC Minerals Ltd (1988), 66 OR (2d) 610 at pp 622-623.

9.Supra note 1 at para 24.

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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