COURT OF APPEAL FOR ONTARIO
CARTHY, DOHERTY and MOLDAVER JJ.A.
B E T W E E N:
ANDERSEN CONSULTING
Dana B. Fuller and Alan B. Merskey for the appellant
Respondent
(Plaintiff)
Thomas G. Heintzman, Q.C. and M. Philip Tunley
for Andersen Consulting Canada and
- and -
Andersen Consulting U.S.
ATTORNEY GENERAL OF CANADA
Barry A. Leon and Peter Balasubramanian for Andersen Worldwide, S.C.
Appellant
(Defendant)
HEARD: June 22, 2001
On appeal from the order of Justice Roydon Kealey dated December 8, 2001
MOLDAVER J.A.:
1The narrow focus of this appeal is whether Kealey J. erred in refusing to permit the Attorney General of Canada (the Crown) to amend its statement of defence and counterclaim to plead negligent misrepresentation, professional negligence and conspiracy against Andersen Consulting of Canada (ACC) and to add Andersen Consulting of the United States (ACUS) and Andersen International (AI) as defendants by counterclaim and assert claims against them for negligence and conspiracy.
2For reasons that follow, I am of the view that Kealey J. should have permitted the proposed amendments. Accordingly, I would allow the appeal.
BACKGROUND FACTS
3The litigation between the Crown and ACC has its genesis in a four-phase project known as the Public Service Compensation System (PSCS). Initiated by the Auditor General of Canada in the late 1980s, the project involved the assessment, design, construction and implementation of a computer system capable of automating salary and other forms of compensation for all Crown employees. Although ACC was involved in PSCS from its inception, it is the construction phase of the project that gives rise to the present litigation.
4The construction phase began in August 1993 pursuant to a contract executed by the parties on August 26, 1993. The contract is accurately described by Kealey J. in his reasons as follows:
Needless to say, this is a most comprehensive document. It comprises more than 72 volumes of detailed provisions, technical specifications, standards, procedures, schedules, plans and other materials. Included is a main contract document, 46 pages in length, incorporating 16 annexes, some of which in turn refer to voluminous appendices. The contract price was $48,026,500.60, and the agreed schedule to complete was 32 months.
5In April 1995, the Crown terminated the contract prior to its completion and on June 27, 1996, ACC commenced an action against the Crown seeking damages for wrongful termination. In its statement of defence dated July 29, 1996, the Crown took the position that the termination was justified because ACC had consistently failed to comply with its obligations under the contract and in the Crown's view, it was incapable of doing so. As for the counterclaim, the Crown essentially sought damages arising from ACC's failure to perform the contract.
6The litigation moved along at a snail's pace throughout 1997 and the first half of 1998. In February 1997, ACC served a sworn affidavit of documents which the Crown considered to be unsatisfactory then and now. In February 1998, ACC made some amendments to its claim without objection from the Crown. In May of that year, after advising ACC of its intention to amend its pleadings, the Crown delivered a first draft of a proposed amended statement of defence and counterclaim. The amendments did not include claims in tort or conspiracy, nor did they include a request to add parties.
7Also in May 1998, the Crown moved for disclosure of a complete list of all of ACC’s partners worldwide from June 1989 to April 1995. Binks J., the case management judge at the time, concluded that although a commercial association existed between ACC and ACUS and AI (its extended corporate family), the latter two entities were not parties to the PSCS construction contract or the action as pleaded. Accordingly, he dismissed the Crown's motion.
8That is how matters stood in the summer of 1998 when the parties entered into settlement discussions and agreed to hold the action in abeyance. The settlement discussions lasted from August 1998 to August 1999, during which time the Crown carefully reviewed all of the factual and legal issues arising from the documents produced. The discussions ultimately proved futile and on August 31, 1999, the law firm of Meighen, Demers, newly retained by the Crown as lead counsel, advised ACC of its intention to amend the Crown's statement of defence and counterclaim. To that end, on September 28, 1999, the amended statement of defence and counterclaim that forms the subject matter of this appeal was delivered to ACC's counsel. Given ACC's refusal to consent to the proposed amendments, the Crown moved before Kealey J., the newly-appointed case management judge, for leave to amend its pleadings.
9The motion to amend was initially scheduled for December 8, 1999 in order to accommodate ACC's counsel. It did not proceed on that date due to ACC's last-minute delivery on December 3 of a cross-motion and six volumes of responding material. The matter was finally heard on June 15, and 16, 2000 and Kealey J. released his decision on December 8, 2000.
TORT CLAIMS
Summary of Proposed Amendments
10As against ACC, the Crown seeks to add claims for fraudulent and/or negligent misrepresentation and professional negligence. With respect to the former, the amended pleadings allege that ACC made various representations about the design of the PSCS and Foundation 2.0, the computer assisted software engineering (CASE) tool needed to implement it, which the Crown relied upon and which ACC knew or should have known were false. With respect to the latter, the Crown alleges that ACC was negligent in the work it performed during the construction phase of the PSCS. In this regard, the amended pleadings refer to the duty and standard of care owed by ACC to the Crown and specify 18 instances in which ACC allegedly breached its duty of care.
11As against ACUS and AI, apart from seeking to add both entities as defendants by counterclaim, the amended pleadings assert a products liability claim against them, alleging that they manufactured and authorized the Foundation 2.0 CASE tool for use during the construction phase of the PSCS despite knowing of its inadequacies and deficiencies.
Ruling on Tort Claims
12Kealey J. refused to allow the proposed tort claims because in his view, they were precluded by the terms of the contract which he characterized as "a complete code and the primary and sole source of actionable conduct …". Considering "the whole tenor of the contract", and certain key provisions in it, he concluded that the contract exhibited "an intent to exclude reliance on common law standards". The key provisions to which he referred are sections 19 and 27 headed "Limitation of Liability", section 25 entitled "Liquidated Damages" and section 36 headed "Entire Agreement".
13In sum, based on his assessment of the contract, it was Kealey J.'s view that the parties intended to negative the right to sue in tort and that the proposed claim against ACC for professional negligence was therefore untenable in law. With respect to the claim against ACC for fraudulent and/or negligent misrepresentation, Kealey J. held that the same reasoning applied "even more forcefully" in light of "the 'entire agreement clause' in s. 36 of the contract". In his view, "any claims based on representations by ACC to the Crown clash headlong with s. 36 and are untenable".
14As for the tort claim against ACUS and AI, Kealey J. rejected the proposed amendments on the basis that the Crown was aware throughout that staff from both entities "were directly engaged in supplementing ACC's forces by providing skill and technical know-how to enable fulfillment of the work called for in the contract. They rendered services directly designed to further the contract objectives. Their involvement was promoted and expected by the Crown". In these circumstances, it was Kealey J.'s view that the foreign entities should be treated as third party beneficiaries and afforded the same contractual exemption from tort claims as that afforded to ACC.
ANALYSIS
15In determining that the Crown was foreclosed from suing ACC in tort, Kealey J. interpreted the contract and concluded that it was the intention of the parties to negative the right to sue in tort. It followed, in his view, that the proposed tort claims were untenable in law having regard to the general rule, enunciated in Central Trust v. Rafuse, 1986 CanLII 29 (SCC), [1986] 2 S.C.R. 147 and restated at p. 26 of B.C .Hydro v. B.G. Checo, 1993 CanLII 145 (SCC), [1993] 1 S.C.R. 12 that:
. . . where a given wrong prima facie supports an action in contract and in tort, the party may sue in either or both, except where the contract indicates that the parties intended to limit or negative the right to sue in tort.
16The general rule, sometimes referred to as the rule against concurrent actions, is a sound one and its legitimacy is not contested. At issue is its application in circumstances such as these, where one party seeks to invoke it to either strike out a particular pleading or resist an application by the other side to amend its pleadings. In such circumstances, I believe that the rule should be applied sparingly and only in the clearest of cases. This accords with the general principles applicable to pleadings and the amendment of pleadings, outlined below at paragraphs 34 and 37.
17The present case illustrates the need to proceed with caution. In oral argument, the respondents did not even attempt to justify the motion judge's reliance on ss.19, 25 or 27 of the contract. In effect, they conceded that those clauses either had nothing to do with the "concurrent actions" issue or they were sufficiently ambiguous to be of little or no assistance. Instead, they relied almost exclusively on s.36, the "Entire Agreement" clause, submitting that it was the key provision in the contract that foreclosed the Crown from suing ACC in tort. That section reads as follows:
s. 36 ENTIRE AGREEMENT
The Contract constitutes the entire and sole agreement between the parties with respect to the subject matter of the Contract and supersedes all previous negotiations, communications and other agreements, whether written or oral relating to it, unless they are incorporated by reference in the Contract. There are no terms, covenants, representations, statements or conditions binding on the parties other than those contained in the Contract.
18With respect, it is not at all clear to me how s. 36 can be read to bar a claim against ACC for professional negligence where the claim relates to the negligent performance of work by ACC during the construction phase. Perhaps the parties intended the clause to have that meaning, but that is not something that could be determined at the pleading stage. As for the claim against ACC for fraudulent and/or negligent misrepresentation, while s. 36 would certainly appear to be relevant, there are, in my view, several reasons why it cannot be used at this stage to preclude the proposed amendments.
19First, some of the alleged misrepresentations relate to statements made after the contract had been consummated and while the construction work was being performed. In those circumstances, I question whether s. 36 would apply.
20As for representations made before the contract was finalized, it is well established that disclaimer clauses such as s. 36 cannot be invoked to resist allegations of fraudulent misrepresentation. (See Grossman v. Woolf (1990), 44 C.P.C. (2d) 288 (Div.Ct.)) Although it may have come as a surprise to counsel for the respondents, counsel for the Crown confirmed in oral argument that the proposed pleadings did allege fraudulent misrepresentation against ACC. Accordingly, to that extent at least, s. 36 cannot act as a bar to the proposed amendments.
21Nor, in my view, can it act as a bar at this stage to the alternate claim of negligent misrepresentation. The law is clear that disclaimer clauses such as s. 36 will not bar claims of negligent misrepresentation "where the representation is as to some overriding or collateral matter". (See Hayward v. Mellick (1984), 1984 CanLII 1975 (ON CA), 45 O.R. (2d) 110 at p.117 (Ont.C.A.)) At this juncture, I cannot say with certainty that the alleged negligent misstatements, or at least some of them, do not come within this category. Accordingly, s. 36 cannot be invoked to bar the negligent misrepresentation claim.
22For these reasons, I am of the view that the motions judge erred in refusing to permit the proposed tort claims against ACC on the basis that they are untenable in law. Given this conclusion, it follows that in so far as the tort claims against ACUS and AI are concerned, the motions judge also erred in concluding that those entities could shelter under the terms of the contract.
23Even if the motions judge had been correct in holding that the contract shielded ACC from tort claims, I fail to see how that finding could assist ACUS or AI. The motions judge was of the view that because the Crown knew that employees from those two entities would be performing various duties for ACC, this somehow afforded ACUS and AI the same contractual cover from tort claims as that afforded to ACC. With respect, I do not agree.
24The tort claim pleaded is a products liability claim against ACUS and AI as manufacturers and distributors of a defective CASE tool. That being so, the fact that the Crown was aware that employees from those entities would be assisting ACC in the construction phase of the project would seem to be irrelevant.
THE CONSPIRACY CLAIMS
Summary of Proposed Amendments
25The proposed conspiracy claims assert that ACC, ACUS and AI (the Andersen parties) engaged in two separate conspiracies to injure the Crown by unlawful means. In summary form, the first alleges that the Andersen parties, though fully aware of problems with the Foundation 2.0 CASE tool that made it inadequate for the PSCS project, actively conspired to conceal that information from the Crown to avoid adverse publicity and maintain the marketability of Foundation products. The second alleges that AI and AUS conspired together with ACC to have ACC breach the PSCS contract as part of a "strategy to attempt to eliminate or minimize the impact to Andersen Consulting and shift the blame for delay [in the project] to the Crown". It is further alleged that AI engaged in this conspiracy to avoid having to "subsidize Andersen Canada for each year that the net income of Andersen Canada fell below a reasonably adequate level" and that ACUS did so because it realized that it was not only "losing the prospect of profits [from the project]" but that it could "no longer hope to recoup the substantial amounts . . . it had invested into the PSCS project . . .".
Ruling on Conspiracy Claims
26The motions judge refused to allow the proposed "conspiracy" amendments because in his view, they were "not sufficiently independent of the breach of contract claims to stand on their own as a permissible basis for a separate cause". Rather, he viewed them as being "so entwined in the alleged breach of contract" pleadings that the two causes of action merged. In this regard, citing this court’s decision in Normart Management Ltd. v. West Hill Redevelopment Co. (1998), 1998 CanLII 2447 (ON CA), 37 O.R. (3d) 97, he observed:
… for a conspiracy claim to be permitted to go forward as an alternative claim in a breach of contract action it must be based on conduct distinct from that alleged to constitute the breach itself. As well, interests specific to each of the alleged conspirators must be identified.
27Kealey J. found that the first component was not met because "the alleged conspiratorial acts and objectives are all intricately concerned with matters pertaining to the performance and/or breach of the contract in question". As for the second component, he concluded that the amended pleadings failed to establish a separate or individual interest on the part of ACUS and AI from that of ACC. In this regard, he observed:
Moreover, considering all the evidence and submissions on this aspect of the case, I am satisfied no separate or individual interests existed among the three entities [ACC, ACUS and AI] at any time regarding the subject contract, except its due completion. Each provided needed skill and talent. Each expected proper payment for so doing. Each anticipated enhancement of their good reputation from participation. The presence of some convincing individual motive or separate interest suggesting or supporting conspiratorial conduct in some manner is an ingredient which could help sustain such a plea, but there is a notable absence of these here. (Emphasis added.)
ANALYSIS
28With respect, I am of the view that Kealey J. misconstrued the Normart decision and misapplied the doctrine of merger in finding the conspiracy pleadings unsustainable.
29The issue upon which Normart was decided was the sustainability of the pleadings in that case, not the doctrine of merger. Any discussion in the decision about the doctrine of merger is obiter. 1
30In Normart, the personal claims in conspiracy against the directors of the defendant companies were struck out because the facts underlying the conspiracy allegations were identical to the facts underlying the claims against the companies for breach of contract and breach of fiduciary duty. In other words, as Finlayson J.A. pointed out at p. 102, there were no allegations that the directors engaged in conduct that was "either tortious in itself" or exhibited "a separate identity or interest from that of the corporations such as to make the acts or conduct complained of those of the directing minds. (citation omitted)" Hence, the personal claims in conspiracy were found to be unsustainable.
31That is a far cry from the present case, where the facts pleaded in support of the conspiracy claims against the Andersen parties are very different from the facts pleaded against ACC for the breach of contract claim. The fact that there may be some overlap or that the allegations relate to the same contract is in my view, of no moment. It follows that the motions judge erred in concluding that the conspiracy claims must fail because they were not “based on conduct distinct from that alleged to constitute the breach [of contract] itself.”
32Given the factual differences that exist between the conspiracy allegations and the breach of contract allegations, this court’s decision in Berry v. Pulley (2000), 2000 CanLII 5703 (ON CA), 48 O.R. (3d) 169 makes it clear that the two causes of action can co-exist in law. The relevant passage is found at p. 179, where Sharpe J.A. for the court, observed that:
A claim for tortious conspiracy to deprive a party of contractual rights is plainly distinct from a claim for breach of those contractual rights.
33I am also of the view that the motions judge erred in rejecting the conspiracy claims on the basis that the amended pleadings fail to establish a sufficient separate or individual interest on the part of AI and ACUS from that of ACC. In this respect, the fact that certain employees from the two foreign entities may have performed work for ACC with the knowledge and approval of the Crown does not foreclose the possibility that the same individuals, wearing a different hat, may have acted on behalf of their corporate employers in furtherance of the alleged conspiracies. Unfortunately, it would appear that the motions judge did not appreciate this distinction.
34In relation to this issue, the motions judge was clearly influenced by what he described as the lack of "some convincing individual motive or separate interest suggesting or supporting conspiratorial conduct in some manner" on the part of ACUS and AI. With respect, the pleadings do specify a separate motive for the respective conspirators and it was not for the motions judge to weigh that evidence at this stage and discard it as "unconvincing". Rather, the law is clear that unless the facts alleged are based on assumptive or speculative conclusions that are incapable of proof, they must be accepted as proven and the court should not look beyond the pleadings to determine whether the action can proceed. (See Operation Dismantle Inc. v. The Queen 1985 CanLII 74 (SCC), [1985], 1 S.C.R. 441 at 445 and Prete v. Ontario (1993), 1993 CanLII 3386 (ON CA), 16 O.R. (3d) 161 at p.170 (Ont.C.A.), leave to appeal to Supreme Court of Canada refused (1994), 17 O.R. (3d) xvi.)
35With respect, I view the latter error as symptomatic of the motion judge's erroneous approach to the matter before him. That approach resulted in his weighing evidence, interpreting controversial contractual provisions and making findings of fact, all matters that should have been avoided at the pleading stage. In short, I believe that the motions judge effectively treated the motion to amend as if it were a motion for summary judgment, if not a trial.
36In approaching the matter as he did, the motions judge was clearly concerned about the length and complexity of trials in general and the impact the proposed amendments were likely to have on the length and complexity of the trial in this case. His concerns appear in the following passage near the end of his reasons:
Fundamentally this is a contract action which as originally framed will take a year, perhaps two years, to try. It involves millions of pages of documentation. Pre-trial examinations have been ongoing and will take months to complete. The issues are substantial and complex. Some three years into the litigation, the Crown seeks to effectively reconstitute the whole dispute and add two parties. What is sought is really much more than a mere amendment. I believe, in this type of case the court is required to closely scrutinize the request and refuse it, except perhaps if some unusual factual scenario might dictate otherwise. This is not such a case. While I am mindful of the principle which suggests reluctance to dismiss an action at this stage, I am also of the view that the ever increasing length and complexity of trials compels a court to be vigilant before allowing what is sought as an amendment here. It is important there be some assurance that only meaningful and necessary issues required to fairly and fully try the cause involved in the law suit are permitted to be put forward.
37Without diminishing the concerns raised by the motions judge, they cannot be used to emasculate the well-established rule that amendments like those sought in the present case should be presumptively approved unless they would occasion prejudice that cannot be compensated by costs or an adjournment; they are shown to be scandalous, frivolous, vexatious or an abuse of the court's process; or they disclose no reasonable cause of action. (See generally Atlantic Steel Industries Inc. v. CIGNA Insurance Co. of Canada (1997), 1997 CanLII 12125 (ON SC), 33 O.R. (3d) 12 (Ont.Gen.Div.) and Hunt v. Carey Canada Inc., 1990 CanLII 90 (SCC), [1990] 2 S.C.R. 959 per Wilson J. at p. 980)
38Manifestly, the motions judge was aware of the correct test. Indeed, he enunciated it at the outset of his reasons. Unfortunately however, in the passage quoted at paragraph 34 above, he turned the test on its head and applied a "presumptive refusal" rather than a "presumptive approval" test, stating:
I believe, in this type of case the court is required to closely scrutinize the request and refuse it, except perhaps if some unusual factual scenario might dictate otherwise.
CONCLUSION
39The motions judge refused to allow the proposed amendments because in his view, they were untenable in law. He also found, without explanation or analysis, that "if permitted, they would prejudice and delay the fair trial of the action."
40I have endeavoured to explain why in my view, the impugned amendments are not untenable in law. With respect to the issue of prejudice, as indicated, the motions judge made no finding as to the nature or extent of any prejudice and the respondents have failed to satisfy me that the proposed amendments would occasion any significant prejudice to them.
41Accordingly, I would allow the appeal, set aside the order of Kealey J. and grant the Crown leave to file the proposed amended statement of defence and counterclaim found at Tab 4A of Volume 1 of the Appeal Books.
42In light of this disposition, I am of the view that the Crown should have its costs of the motion and the appeal.
Signed: "M.J. Moldaver J.A."
"I agree J.J. Carthy J.A."
"I agree Doherty J.A."
RELEASED: SEPTEMBER 10, 2001 "JJC:"
Footnotes
- To the extent that Normart stands for the proposition, suggested at p. 106, that when a contract has been breached by two or more persons, an allegation of prior conspiracy to commit the breach means nothing because the agreement merges in the breach, that proposition cannot apply here since the breach alleged is a unilateral one on the part of ACC.
