Canada: Beyond "Functional Disclosure" – Ontario Court Of Appeal Applies The Rule From Handley Estate In CHU De Québec-Université Laval V. Tree Of Knowledge International Corp.

In multi-party litigation, situations may arise where one or more defendants are inclined to settle a plaintiff's claims while others are not. In these circumstances, the settling defendant may execute a settlement agreement with the plaintiff called a Pierringer agreement. Essentially, Pierringer agreements allow one or more settling defendants to withdraw from the plaintiff's action while the action continues against the non-settling defendants. Such agreements can be a useful tool because they encourage the partial settlement of claims and may limit a party's risk at trial. But Pierringer agreements also change the adversarial landscape of litigation for a non-settling defendant, so they must be disclosed immediately to the court and other parties to the litigation. This legal requirement is usually referred to as the "rule from Handley Estate" (see: Handley Estate v. DTE Industries Limited, 2018 ONCA 324).

In the Ontario Court of Appeal's recent CHU de Québec-Université Laval v. Tree of Knowledge International Corp. decision, the panel interpreted and applied the rule from Handley Estate. The appeal arose from a motion judge's order dismissing the motion of the appellant defendants to stay or dismiss the action of the respondent plaintiff on the basis that it did not immediately disclose the terms of the Pierringer agreement between the plaintiff and two other defendants in the action. The appellants contended that the plaintiff's failure to immediately disclose the entire agreement constituted an abuse of process.

At the motions level, the key factual question was whether the Pierringer agreement had been "immediately disclosed" pursuant to the rule in Handley Estate. The motions judge found that, the day after it was signed, and two days after it became effective, plaintiff's counsel advised counsel for the non-settling defendants of the existence of the Pierringer agreement and the parties to it. Some days later, and further to a request for the terms of the agreement, plaintiff's counsel provided a draft order setting out relevant terms and served a motion record to approve the Pierringer agreement and amend the plaintiff's pleadings. It was clear from these facts that the plaintiff had settled with two of the defendants; that it would continue its lawsuit against the non-settling defendants; that it intended to bring a motion for approval of the Pierringer agreement; and, that certain of the settling defendants' rights had been assigned to the plaintiff. These features conveyed that the litigation landscape had shifted and the reasons why. Accordingly, the motions judge concluded that the plaintiff was not required to disclose the entire agreement because its "key features" were disclosed to the non-settling defendants "immediately".

On appeal, the appellant defendants argued that it was wrong in law for the motion judge to find that disclosure of the fact of a Pierringer agreement constituted disclosure of its essential terms, arguing these could not be inferred from what had been communicated by the plaintiff. In the result, the Court of Appeal disagreed and dismissed the appeal.

Writing for the Court, Justice Sossin began his analysis by canvassing guiding principles from a series of recent decisions considering the abuse of process that arises from the failure to immediately disclose an agreement that changes the litigation landscape. His Honour held, among other things, that a failure to comply with the obligation of immediate disclosure amounts to an abuse of process and must result in serious consequences including staying the claim by the defaulting non-disclosing party.

Here, the dispute was whether the "piecemeal nature" of the respondent's disclosure, which came through a series of correspondence, was sufficiently "immediate" or not. The Court of Appeal concluded that, in the context of the factual dynamics of the case leading up to the plaintiff's motion to approve the Pierringer agreement, the respondent had immediately disclosed the "essential terms" of the agreement that changed the litigation landscape; and the motions judge correctly concluded that not all terms of the agreement had to be disclosed. Although the Court found that the term relating to cooperation was not immediately disclosed in plaintiff's counsel's initial email advising of the partial settlement, it was disclosed soon after; and, in any event, cooperation between settling parties is generally an inherent feature of Pierringer agreements.

The takeaway here is that the application of the term "immediate disclosure" in the context of a Pierringer agreement will always be a fact-dependent exercise. Courts will review the circumstances surrounding the disclosure of a Pierringer agreement and, if the essential terms have been timely disclosed to non-settling defendants, then the court is unlikely to grant a stay or dismissal to a moving non-settling defendant. In any event, parties to a Pierringer agreement will be wise to disclose as much information to non-settling defendants as is reasonably possible, forthwith, bearing in mind that contractual terms which do not alter the litigation landscape do not need to be disclosed (e.g., the settlement quantum).

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.