Court Reinforces Obligation to Disclose Partial Settlement Agreements

September 14, 2022

In its recent decision of Hamilton-Wentworth District School Board v. Zizek, 2022 ONCA 638, the Court of Appeal added to its recent line of authority with respect to disclosure obligations on a party who enters into a partial settlement agreement, such as a Mary Carter or Pierringer agreement.

Background & Motion

The underlying action, commenced in October 2016, arose from an alleged fraud committed by the various defendants against the plaintiff school board. The action languished until, on September 14, 2019, the plaintiff settled its claim against all the defendants, except the defendant/appellant, Zizek. The settlement stipulated, among other things, that the settling defendants provide evidence for the plaintiff’s claim against Zizek. The plaintiff was aware that the settlement would expand the scope of the alleged fraud underlying the action.

The non-settling defendant, Zizek, was only made aware of the settlement on December 6, 2019, nearly three months later, when the plaintiff served a motion for directions to implement the settlement. In response, Zizek brough a motion to stay the proceeding on the basis that the plaintiff’s failure to immediately disclose the settlement constituted an abuse of process.

The motion judge dismissed the Zizek motion to stay, concluding there was no abuse of process meriting a stay, and that it would not be just to grant a stay. Zizek appealed.

Appeal

The Court of Appeal found that the motion judge misunderstood and failed to apply the well-entrenched principle as to disclosure obligations on a party who enters into a partial settlement agreement, namely for a party to “immediately” advise the other parties of such an agreement, with the failure to do so constituting an abuse of process.

The Court found that the motion judge’s detailed analysis undertaken as to the concept of abuse of process and its origins was not necessary. Rather, all that was required was to follow and apply prior appellate direction as to the requirements flowing from such partial settlement agreements, and the consequence that results if those requirements are not met.

Further, the Court concluded that any unjustness to the plaintiff/respondent to foreclose its action against the non-settling defendant/appellant was of the plaintiff’s own making and, in any event, demonstrating prejudice was not a requirement in such situations.

The Court echoed the principle enunciated in Aecon Building v. Stephenson Engineering Limited[i] (and various subsequent appellate decisions), that:

…the absence of prejudice does not excuse the late disclosure….The obligation of immediate disclosure is clear and unequivocal. It not optional. Any failure of compliance amounts to abuse of process and must result in consequences of the most serious nature for the defaulting party.

The Court held that the disclosure requirement is clear and not a matter of discretion, context or factual analysis. Indeed, the Court noted that a reason for a clear, bright line principle was to avoid such interlocutory proceedings as that before it on the appeal.

In the case at hand, with more than three months passing before the existence of the settlement agreement was disclosed to the appellant, the Court held there was a clear failure with respect to the required immediate notification, and the motion judge thus erred in refusing to grant a stay of the proceeding. The appeal was, accordingly, allowed.

Conclusion

It bears noting that the Court in Zizek referred to and distinguished an earlier decision of the Court of Appeal in CHU de Québec-Université Laval v. Tree of Knowledge International Corp.[ii] from just a few months prior, arising from a dismissal of a non-setting defendant’s stay motion based on the plaintiff’s failure to immediately disclose the terms of a Pierringer agreement against some of the other defendants.

In Tree of Knowledge, the non-settling defendants were made aware of the partial settlement agreement the day after it was signed, and two days after it became effective. Over the course of the following six weeks or so, in response to repeated requests of the non-setting defendants, further information regarding the terms of the settlement agreement were disclosed, including first as part of draft orders and motion material to implement the settlement, and finally with the entire settlement agreement (with only financial terms redacted) being disclosed.

As noted, the one non-settling defendant’s motion for a stay was dismissed, the motion judge finding that the required immediate disclosure had been satisfied and, further, “in the context of factual dynamics” of the case, the essential terms of the settlement revealing the change in the adversarial landscape of the action were also disclosed immediately.

The Court of Appeal in Tree of Knowledge upheld the motion judge’s decision. Among other things, the Court noted: “[t]he application of the term ‘immediate disclosure’ in a particular case…will be ‘fact-dependent’….”

Certainly, the facts of Zizek differ from those in Tree of Knowledge, and understandably ground the distinction drawn between the cases in Zizek. Still, given the contrast between the analysis and outcomes in these cases – the prohibition against discretion, context or factual analysis in Zizek, versus at least some consideration of the “factual dynamics” in Tree of Knowledge – it is perhaps somewhat unclear when a factual analysis can or will be undertaken by a court in such cases.

In any event, the cases serve as a reminder to counsel of the applicable principles and requirements on a party in the context of partial settlement agreements, well-summarized by the Court in Tree of Knowledge, as follows:

There is a “clear and unequivocal” obligation of immediate disclosure of agreements that “change entirely the landscape of the litigation”. They must be produced immediately upon their completion….
The disclosure obligation is not limited to pure Mary Carter or Pierringer agreements. The obligation extends to any agreement between or amongst the parties “that has the effect of changing the adversarial position of the parties into a co-operative one” and thus changes the litigation landscape…
The obligation is to immediately disclose information about the agreement, not simply to provide notice of the agreement, or “functional disclosure”.
Both the existence of the settlement and the terms of the settlement that change the adversarial orientation of the proceeding must be disclosed….
Confidentiality clauses in the agreements in no way derogate from the requirement of immediate disclosure….
The standard is “immediate”, not “eventually” or “when it is convenient”….
The absence of prejudice does not excuse a breach of the obligation of immediate disclosure….
Any failure to comply with the obligation of immediate disclosure amounts to an abuse of process and must result in serious consequences….The only remedy to redress the abuse of process is to stay the claim brought by the defaulting, non-disclosing party. This remedy is necessary to ensure the court is able to enforce and control its own processes and ensure justice is done between the parties….

[i] 2010 ONCA 898.

[ii] 2022 ONCA 467.