While litigants with potentially meritorious claims are rarely stopped in their tracks, the Ontario Court of Appeal has confirmed that this is precisely what will happen if a party fails to immediately disclose a critical settlement agreement.

In seven recent decisions, the Court of Appeal has reiterated that failure to comply strictly with this disclosure requirement is an abuse of process for which the only appropriate remedy is a stay of proceedings1.

The question with which litigants continue to grapple is, which agreements require immediate disclosure? Although each case will depend on its facts, the recent case law provides guidance on the factors that courts will consider when assessing whether immediate disclosure is required. Settling parties should pay careful attention to this guidance to avoid the serious consequences that may otherwise ensue.

The immediate disclosure obligation: changing the litigation landscape

The immediate disclosure obligation first arose in the context of Mary Carter and Pierringer agreements, which are types of agreements that enable a plaintiff to settle its claim with some but not all defendants2. The obligation was developed by courts to guard against the risk of abuse of process. The abuse, in this context, is the risk of misleading the court and the parties about the true nature of the adversarial relationships in the litigation, particularly given the impact of those relationships on the strategy and steps to be taken by the non-settling defendants. Thus, at its core, the purpose of the rule is to maintain the fairness of the litigation process, and to ensure that a court can maintain the integrity of its own process3.

More recently, the disclosure obligation has been extended to any agreement between a plaintiff and one or multiple defendants that has the effect of changing the position of the parties to the agreement from an adversarial one into a cooperative one. This, the Court has held, changes the litigation landscape4. If a party fails to immediately disclose an agreement that meets this threshold, it automatically follows that an abuse of process has occurred, and the action must be stayed5.

What constitutes a change to the litigation landscape?

There is no single test to determine whether an agreement has "changed the litigation landscape". However, recent case law provides insight on the factors that courts may consider.

1. The parties' pleaded positions

In two recent decisions, the Court of Appeal provided clarity on the role of the pleadings when assessing disclosure obligations. Unlike earlier decisions—which focused on the effect of the agreement on the parties' positions "as set out in their pleadings"—the Court clarified that a change to the parties' pleaded positions is not required for the immediate disclosure obligation to be engaged6.

A party's pleaded position still remains an "essential starting point" in determining whether there has been a significant change in the adversarial relationship but is not necessarily determinative7. However, the obligation to make immediate disclosure can also arise even before the settling defendants have served their statements of defence8. As the Court recently held: "To hold otherwise could defeat the intent of the disclosure obligation which is to ensure that when parties take steps in the litigation, and when the court makes rulings, the parties and the court are not being actively misled as to the consequences of those steps or rulings"9.

2. Impact on the evidence and the "reality of the adversity" between the parties

The impact of the agreement, if any, on the evidence in the proceeding and the "reality of the adversity" between the parties is also relevant. There are several elements of an agreement that courts may consider, including whether the agreement requires a party to:

  • participate at trial as a witness, even if the claim against it is settled10
  • provide evidence in private to one side or the other, even the claim against it is settled11;
  • assist or cooperate in the prosecution of a remaining defendant12;
  • reverse a prior position or evidence13;
  • commit to a particular version of evidence or promise to side with a particular party expressly or impliedly; or14
  • provide financial or other incentives for the settling party to align themselves with the remaining defendant15.

3. Prejudice is not a relevant factor

The presence or absence of prejudice to a non-settling party is not relevant when determining whether immediate disclosure is required. Nor will courts consider the conduct or intention of the parties, which can lead to some potentially draconian results. In characterizing the principle as a "bright line", the Court of Appeal reiterated that the immediate disclosure requirement means exactly what it says: it "is not a matter of discretion, nor is it a matter of 'context', nor of factual analysis"16.

Key takeaways

  1. The immediate disclosure obligation is a "bright line" principle. This year's decisions serve as an important reminder to litigants about the severe consequences for failing to comply with the immediate disclosure obligation. The obligation is "clear and unequivocal", and courts will take a hardline approach where immediate disclosure of a settlement agreement was required but not made. In those cases, the proceeding will be automatically stayed—there is no room for discretion. However, it remains an open question as to whether a non-settling defendant's failure to raise this argument promptly should inform the court's analysis.
  2. When in doubt, make immediate disclosure. The spate of recent decisions suggests that litigants continue to face uncertainty about the precise scope and application of this disclosure obligation. The parties in three of the five Court of Appeal decisions sought leave to appeal to the Supreme Court of Canada, two of which were denied. It remains to be seen whether the Supreme Court will grant leave in the third case (Poirier v. Logan), and provide further guidance to this important area of the law17. In the meantime, parties may be wise to heed Justice Perell's direction: "As a practice point, however, there is little reason not to disclose a settlement agreement immediately. Even if the agreement is of the type that does not have to be immediately disclosed, then—better to be safe than sorry. As the immediate case demonstrates, the risks of intentionally or unintentionally keeping the settlement agreement a secret are far too risky"18.

Footnotes

1. Tallman Truck Centre Limited v. K.S.P. Holdings Inc., 2022 ONCA 66 [Tallman]; Poirier v. Logan, 2022 ONCA 350 [Poirier]; Waxman v. Waxman, 2022 ONCA 311 [Waxman]; CHU de Québec-Université Laval v. Tree of Knowledge International Corp., 2022 ONCA 467 [CHU]; Hamilton-Wentworth District School Board v. Zizek, 2022 ONCA 638 [Zizek]; Performance Analytics v. McNeely, 2022 ONCA 731 [Performance Analytics]; Crestwood Preparatory College Inc. v. Smith, 2022 ONCA 743 [Crestwood]. In both CHU and Performance Analytics, the Court of Appeal upheld the lower courts' decisions, which refused to stay the proceedings. In CHU, the Court found that the settlement agreement changed the landscape of the litigation, but that the parties complied with their obligation since disclosure of the "essential terms" was "immediate". In Performance Analytics, the Court found that the settlement agreement did not result in a significant change to the litigation landscape and therefore immediate disclosure was not required.

2. As the Court explained in Handley Estate v. DTE Industries Limited, a typical Mary Carter agreement contains the following features: (1) the contracting defendant guarantees the plaintiff a certain monetary recovery and the exposure of that defendant is "capped" at that amount; (2) the contracting defendant remains in the lawsuit; and (3) the contracting defendant's liability is decreased in direct proportion to the increase in the non-contracting defendant's liability. A Pierringeragreement, on the other hand, typically involves a situation where: (1) the settling defendant settles with the plaintiff; (2) the plaintiff discontinues its claim against the settling defendant; (3) the plaintiff continues its action against the non-settling defendant but limits its claim to the non-settling defendant's several liability; (4) the settling defendant agrees to co-operate with the plaintiff by making documents and witnesses available for the action against the non-settling defendant; (5) the settling defendant agrees not to seek contribution and indemnity from the non-settling defendant; and (6) the plaintiff agrees to indemnify the settling defendant against any claims over the by non-settling defendants".See Handley Estate v. DTE Industries Limited, 2018 ONCA 324, footnotes 1 and 2 [Handley Estate].

3. Handley Estate, para. 39; Moore v. Bertuzzi, 2012 ONSC 3248, para. 76

4. Handley Estate, para. 39; Tallman, para. 23; Poirier, para. 47; CHU, para. 55(b)

5. Poirier, para. 41

6. Poirier, paras. 47-48

7. Poirier, paras. 48-49

8. Crestwood, paras. 45-48

9. Crestwood, para. 48

10. Tribecca Finance Corp. v. Harrison, 2019 ONSC 1926, para. 33 [Tribecca]

11. Waxman v. Waxman, 2021 ONSC 2180, para. 39, aff'd Waxman, para. 33

12. Poirier, 2021 ONSC 1633, para. 45; Tribecca, para 33

13. Tallman Truck Centre Limited v. K.S.P. Holdings Inc., 2021 ONSC 984, para. 17, aff'd Tallman, para 16; Performance Analytics Corporation v. McNeely, 2021 ONSC 8297, para. 32 [Performance Analytics]

14.Performance Analytics, para. 32; Waxman, para. 33

15. Waxman, para. 33

16. Zizek, paras 10-11

17. Tallman Truck Centre Ltd. v. K.S.P. Holdings Inc., 2022 CarswellOnt 10610; Poirier v. Logan, 2022 CarswellOnt 12669 (SCC); Waxman v. Elko Industrial Trading Corp., 2022 CarswellOnt 10618 (SCC). The applications for leave to appeal in both Tallman and Waxman were dismissed on October 20, 2022.

18. Poirier v. Logan, 2021 ONSC 1633, para. 61

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.