Canada: The Dire Consequences Of Failing To Immediately Disclose A Settlement Agreement

If you ask most litigators which aspect of their practice keeps them awake at night, nine times out of ten, the answer will be missing a limitation period. This is a valid worry, of course. After all, if the deadline to commence a claim is missed, even by a short window, not only do our clients lose their right to claim damages, but it often results in them turning around and claiming against their lawyers for the lost opportunity.

But aside from limitation periods, the Ontario Court of Appeal has affirmed lately that we will now have something else to worry about. Like a limitation period, this new worry can also result in our clients' lawsuits being stayed entirely and expose us to the consequences that come with it.

In Hamilton-Wentworth District School Board v. Zizek, 2022 ONCA 638, the Ontario Court of Appeal confirmed that when a portion of an ongoing lawsuit settles, the parties to the settlement agreement must disclose it immediately. If the settlement agreement is not immediately disclosed to the court and all other parties to the proceeding, the entire proceeding can be stayed as a result.

In the Zizek decision, the plaintiff commenced an action against multiple defendants in October 2016, alleging fraud. On September 4, 2019, the plaintiff entered a settlement agreement with all the defendants except one. A condition of the settlement agreement was for the settling defendants to provide evidence against the non-settling defendant.

The settlement agreement was not disclosed to the non-settling defendant or the court when it was made. In fact, the non-settling defendant only became aware of the agreement over three months later when the plaintiff served a motion for directions to implement the settlement. The non-settling defendant then brought a motion to stay the proceeding on the basis that the failure to immediately disclose the settlement constituted an abuse of process.

The motion judge dismissed the motion on the basis that the failure to disclose the settlement did not constitute an abuse of process that would warrant a stay. It was also held staying the proceeding would be unjust to the plaintiff.

The Court of Appeal overturned the decision and held that a party's failure to immediately advise other parties of a settlement agreement in and of itself constitutes an abuse of process. It was noted that the motion judge was simply required to follow the well-established principle that sets out the obligations imposed on a party who enters into a settlement agreement, as well as the consequences that arise when those obligations are not followed.

The court was explicit in stating that the principle itself is clear and not optional, nor is it a matter of discretion. Upon entering a settlement agreement, parties are required to immediately inform all other parties of the proceeding as well as the court. In this regard, the Court of Appeal followed its prior reasoning in Aecon Buildings v. Stephenson Engineering Limited, 2010 ONCA 898, where it was held that "any failure to do so will amount to [an] abuse of process and must result in consequences of the most serious nature for the defaulting party."

In the Zizek case, there was a clear failure to notify the non-settling defendant immediately. The fact that the plaintiff needed to seek instructions from the court regarding the implementation of the settlement did not absolve them of their obligation to immediately disclose it, especially after three months had passed. The Court of Appeal ultimately held that the motion judge failed to understand and apply the well-established principle to this case and, thus, reached the wrong conclusion in refusing to grant a stay. The appeal was therefore allowed.

This decision serves as a cautionary tale for litigants. If a settlement agreement is reached for part of a lawsuit, it must be disclosed immediately. If this principle is not followed, the entire proceeding can be stayed as a result.

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