Handley v. DTE Industries Limited, 2017 ONSC 4349

COURT FILE NO.: 89/11 (Lindsay) DATE: 20170717 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Helen Handley, deceased, by her estate executor Sharon Kruger Plaintiff

– and –

DTE Industries Limited, H&M Combustion Services Ltd., Geo. Williamson Fuels Ltd., and Ultramar Ltd. Defendants

– and –

Kawartha Lakes HVAC Inc., Don Park Inc., and SLM Toronto Inc. Third Parties

COUNSEL: Sean Dewart, for Lawyers Professional Indemnity Company, upon behalf of the plaintiff and H&M Combustion Services Ltd. Donald Dacquisto and Eric Zadro, for George Williamson Fuels Ltd.

HEARD: January 5, 2017

Bale J.:

[1] Geo. Williamson Fuels Ltd. moves for an order staying this action, based upon an agreement between the plaintiff and H&M Combustion Services Ltd. relating to the conduct of the litigation, which was not disclosed to the third parties, or Williamson, for a period of approximately five years.

[2] Although a similar motion brought by the third parties was to be heard at the same time, a settlement of the third party claim was reached prior to the hearing of the motion, resulting in a dismissal of the third party claim, and a payment of costs to the third parties.

[3] For the reasons that follow, it is my view that although the agreement ought to have been disclosed to all parties, and to the court, a stay of the action against Williamson would not be an appropriate remedy, in the circumstances of this case.

Background facts

[4] This action is a subrogated claim brought by the plaintiff’s insurers, Aviva Insurance Company of Canada, for damages arising from a leaking oil tank at the plaintiff’s home. The oil tank had been supplied and installed by H&M Combustion Services Ltd. H&M had purchased the tank from Kawartha Lakes HVAC Inc. And Kawartha had purchased the tank from the manufacturer, DTE Industries Ltd. The oil in the tank was supplied by Geo. Williamson Fuels Ltd. who had purchased the oil from Ultramar Ltd.

[5] In these circumstances, when the action was commenced, there were two potential liability streams: the “tank stream” from H&M through Kawartha to DTE; and the “oil supply stream” from Williamson through to Ultramar.

[6] Aviva commenced the action in August 2009, just prior to the expiry of the limitation period, but there were complications. H&M had been voluntarily dissolved prior to the commencement of the action. DTE Industries Ltd. was insolvent, and did not defend. And neither H&M nor DTE was insured.

[7] The plaintiff changed lawyers in October 2010, following which change her newly appointed counsel determined that Kawartha was potentially liable, but that the limitation period for adding it as a defendant had expired.

[8] In August 2011, just prior to the expiry of the limitation period for claims for contribution and indemnity, Aviva entered into an agreement with H&M, and with James Richards, who had been the sole principal of H&M prior to its dissolution. As of this time, H&M had taken no steps to defend the action. The terms of the agreement were as follows:

• H&M would defend the action, and would commence and prosecute a third party claim against Kawartha and its successors Don Park Inc. and SLM Toronto Inc., in relation to the sale of the oil tank to H&M;
• Aviva would pay $5,000 to counsel retained by Mr. Richards to cover all of [H&M’s] costs of prosecuting the third party claim, and covering all work through completion of examinations for discovery and fulfillment of undertakings, with the parties being at liberty to revisit this arrangement, as might reasonably become necessary;
• Richards would take any necessary steps to revive H&M should that be necessary for the prosecution of the third party claim, subject to the cost of revival which was to be determined by the parties, acting reasonably; and
• all communications between counsel for Aviva, and counsel for H&M, in relation to the prosecution of the third party claim, were to be subject to common interest privilege.

[9] The agreement was not disclosed, at the time, to the third parties, or to Williamson.

[10] Pursuant to the agreement, H&M delivered a statement of defence and crossclaim, and issued a third party claim against Kawartha, and its successors, for contribution and indemnity.

[11] The third parties defended the third party claim, and the main action, in May 2012. In addition, they moved for security for costs on the grounds that H&M was a dissolved corporation with no assets. A consent order was obtained by the third parties, in January 2013, which required H&M to post security for costs in the amount of $20,000, with the funds to be held in trust by Mr. Richards’ counsel. Although the required funds were paid, they were paid by Aviva, rather than by H&M. The source of the funds was not disclosed to the other parties.

[12] Examinations for discovery of all parties were held in 2013 and 2014, and an unsuccessful mediation took place in September 2015.

[13] In February 2016, the third parties brought a motion for an order that H&M be required to post further security for costs, in the amount of $112,778.78.

[14] In March 2016, prior to the hearing of the motion for further security, Aviva and H&M entered into a further agreement with respect to the conduct of the litigation. The terms of the agreement were set out in two separate documents of the same date – the first in letter form, the second an e-mail message. The terms set out in the letter were as follows:

• H&M assigned all of its rights in the law suit to Aviva, including the right to receive all proceeds of H&M’s third party claim; and
• Aviva would indemnify H&M and Richards against all costs and damages, including pre-judgment interest, if same were awarded against H&M in the litigation.

[15] The e-mail contained the following additional terms:

• Aviva would assume responsibility for defending H&M, and prosecuting the third party claim;
• Aviva would be responsible for paying the reasonable costs and disbursements of H&M’s then counsel for representing H&M;
• Aviva would have the right to appoint its own counsel to represent H&M;
• Mr. Richards in his capacity as “former operator/owner” would cooperate with Aviva in relation to the litigation; and
• the parties would disclose the terms of the assignment to the court, and other parties to the proceeding, if such disclosure were determined to be required by law, or to be reasonably necessary.

[16] On the same day as this agreement was reached, counsel for H&M provided the third parties with an undertaking pursuant to which Aviva undertook to pay all costs and pre-judgment interest that might be awarded against H&M. The remaining terms of the agreement between Aviva and H&M were not then disclosed to the other parties.

[17] Based upon Aviva’s undertaking to pay any costs that might be awarded against H&M, the motion for further security for costs was resolved, and a consent order was obtained pursuant to which the funds originally posted as security for costs were to be released to H&M.

[18] Approximately ten days following the March 2016 agreement between Aviva and H&M, counsel for Williamson proposed to counsel for H&M that they share the cost of a defence expert on damages. In response, counsel for H&M disclosed that H&M had assigned its rights in the third party claim to the plaintiff, and could not take a position that was, or might be, adverse to the plaintiff in relation to damages. In addition, counsel noted that the interests of the plaintiff and H&M were aligned “to maximize potential recovery against the co-defendants” (presumably including the third parties).

[19] Counsel for the third parties then wrote to counsel for Aviva, and counsel for H&M, requesting a copy of the assignment agreement, and particulars of all agreements between Aviva and H&M relating to the litigation, including any agreement pursuant to which Aviva had agreed to pay legal fees and disbursements incurred by H&M.

[20] In response, counsel for Aviva provided counsel for both the third parties and Williamson with a copy of the letter setting out the assignment of the third party claim to Aviva, and the agreement of Aviva to indemnify H&M with respect to costs, but not the e-mail of the same date which detailed the terms of the assignment. Accordingly, as of that date, it had not been disclosed that Aviva would be paying H&M’s legal fees and disbursements, or that Aviva had reserved the right to appoint its own counsel to represent H&M.

[21] Over the next three months, counsel for the third parties continued with his requests for further information, without success, and eventually wrote to counsel for both Aviva and H&M advising that he would be bringing a motion for disclosure. In response, he was informed that counsel for Aviva had involved their professional liability insurer, and that he should contact counsel retained by LawPro in relation to the hearing of the disclosure motion.

[22] Counsel for LawPro subsequently disclosed the March 2016 e-mail which set out the terms of the assignment from H&M to Aviva. In addition, he answered some of the questions asked by counsel for the third parties, but took the position that the answers to others were subject to privilege.

[23] In the March 2016 e-mail, in dealing with the payment of H&M’s costs by Aviva, counsel for Aviva had said that Aviva would “continue” to pay H&M’s legal fees and disbursements “as per the parties’ existing arrangement.” Following disclosure of the e-mail, and in response to the claim of privilege advanced by counsel for LawPro, counsel for the third parties requested disclosure of the terms of the “existing arrangement”, and an amended affidavit of documents listing the documents over which the claim of privilege was claimed.

[24] Amended affidavits of documents listing the documents over which privilege was claimed were delivered by the plaintiff and H&M in September 2016, shortly following which the claims of privilege were abandoned, leading to disclosure of the agreement reached between Aviva and H&M in August 2011 – more than five years earlier.

Positions of the parties

[25] Geo. Williamson Fuels argues that Aviva and H&M were parties to an agreement relating to the conduct of the litigation, that immediate disclosure of the agreement was required, and that because of the failure to disclose, the action should be stayed.

[26] The plaintiff and H&M Combustion Services Ltd. argue that the agreement between Aviva and H&M was a litigation funding agreement disclosure of which was not required, but that even if the agreement ought to have been disclosed, a stay of the action against Williamson would be a disproportionate remedy.

Analysis

Whether disclosure of the August 2011 agreement was required

[27] In Aecon Buildings v. Brampton (City), 2010 ONCA 898, relied upon by Williamson, the court stayed third and fourth party claims where a settlement agreement between the plaintiff and defendant was not immediately disclosed to the third and fourth parties. The plaintiff and defendant had agreed that the plaintiff would issue a statement of claim, that the defendant would issue and prosecute a third party claim, and that the damages recoverable by the plaintiff from the defendant would be restricted to the amounts recovered by the defendant from the third or subsequent parties.

[28] The general rule is that a privileged settlement agreement must be immediately disclosed to the non-settling parties, and the court, where the agreement changes the adversarial orientation of the lawsuit, or where the court requires knowledge of the settlement to maintain the fairness and integrity of its process: Moore v. Bertuzzi, 2012 ONSC 3248, at paras. 79 and 99.

[29] Counsel for LawPro argues that the agreement between Aviva and H&M did not alter the adversarial orientation of the lawsuit. He says that unlike in Aecon, the question of damages was not settled or even discussed, and that the plaintiff and H&M were, and remained, adverse in interest until the assignment of the third party claim in 2016. I disagree.

[30] The agreement came about as a result of discussions between counsel for the plaintiff, and counsel for H&M – Christopher McKibbon and Jason Ward, respectively. At the time when these discussions took place, H&M had not defended the action, and counsel noted that it was necessary that the agreement be completed “given the looming limitation period for [a third party claim against] Kawartha HVAC”.

[31] Because H&M had been dissolved prior to the commencement of the action, and at the time of dissolution had no assets, Aviva’s only hope of recovery through the “tank stream” of the litigation was to preserve the claim for contribution and indemnity to which H&M was entitled. Although there is no evidence that James Richards was in any personal jeopardy (i.e. no evidence that there ought to have been assets available at the time of dissolution), Mr. Ward sought a release in favour of H&M and Richards.

[32] McKibbon and Ward discussed the possibility of an assignment of the cause of action against Kawartha for such purposes; however, McKibbon was concerned with the ratio of the Aecon case, and wanted an agreement that would not have to be disclosed.

[33] In concluding that the agreement reached in September 2011 would not require disclosure, McKibbon reasoned that disclosure was not required, because Aviva did not waive any right to collect damages from H&M, or agree to cap its damages, and the litigation landscape would not be altered by the agreement. In his evidence on this motion, he said that Aviva “intentionally maintained this threat over Mr. Richard’s head to ensure cooperation in the pursuit of the third party claim.”

[34] The significance of the fact that the damages recoverable by Aviva from H&M were not capped by the agreement itself is difficult to assess, since as a practical matter, the damages recoverable (in the “tank stream”) were, in fact, capped in the amount recoverable by H&M from the third parties, because H&M itself had no assets. And, I am unable to accept that any real threat was held over Mr. Richard’s head, in the absence of any evidence to support potential liability upon his part.

[35] The agreement provided that Aviva would pay H&M’s counsel his fees and disbursements for the third party claim, and that there would be common interest privilege in relation to communications between counsel for Aviva, and counsel for H&M, in relation to the third party claim. Although by the strict terms of the agreement these provisions related only to the third party claim, given the interrelationship between the main action and third party claim, I cannot accept that adversity was maintained, with counsel for H&M being even partially funded by Aviva, and the parties having agreed that privileged information concerning the litigation would be shared.

[36] While the terms of the written agreement in August 2011 did not include an indemnity with respect to any costs that might be awarded against H&M, since the third party claim was being pursued solely for the benefit of Aviva, and H&M had no means of paying costs, I can infer that the understanding was that had costs been awarded against H&M, they would be paid by Aviva. This inference is supported by the fact that when the third parties requested an order for security for costs, Aviva came up with $20,000 in cash to provide the required security.

[37] In his evidence, Mr. McKibbon says that the adversity between Aviva and H&M is nowhere more obvious than in his examination of Mr. Richards for discovery, because he “was seeking to secure admissions and confirm evidence that was harmful to H&M’s case, based primarily on evidence that could not be seriously disputed by Mr. Richards, or anyone else.” I find this to be unconvincing evidence of adversity. There is no evidence that H&M had any interest in the litigation, and the evidence that “could not seriously be disputed” could presumably have been elicited from Richards (pursuant to his agreement to cooperate), without going through the motions of examining him for discovery.

[38] Agreements between parties to litigation that change the landscape of the litigation are agreements that cause the apparent adversarial orientation of the contracting parties to differ from their actual adversarial orientation.

[39] In his evidence, Mr. McKibbon gives as reasons for rejecting, in 2011, an assignment of the third party cause of action: (1) that the assignment would have had to have been disclosed; and (2) that Aviva wanted to keep “Richards’ feet in the fire.”

[40] However, since Mr. Richards’ cooperation with Aviva was a condition of both the 2011 and 2016 agreements, I can infer that the primary reason for not proceeding with an assignment in 2011 was that Aviva did not want to disclose such an agreement. In other words, Aviva wanted to maintain the appearance of an adversarial orientation different from the understanding that had been reached with H&M. If it were otherwise, why not enter into the assignment, and disclose it?

[41] Taking all of this into consideration, I conclude that there was a settlement between Aviva and H&M that ought to have been disclosed. The settlement may have been conditional upon Mr. Richards cooperating with Aviva in its pursuit of the third parties, but I see no practical difference between the agreement reached in August 2011, and the agreement reached in March 2016, which counsel for LawPro concedes did require disclosure.

[42] Williamson also complains about the length of time that it took for Aviva and H&M to fully disclose the agreement reached in March 2016. However, the fact of an agreement was more or less immediately disclosed, and in all of the circumstances, including the involvement of LawPro, I do not fault the parties for taking the time they did to determine the extent of disclosure required. The litigation did not otherwise continue during this period.

Remedy

[43] In Abarca v. Vargas, 2015 ONCA 4, the court held that an abuse of process does not inevitably lead to the dismissal of the associated claim, and that in each case, the court must assess the gravity of the abuse, bearing in mind the principle of proportionality.

[44] Relying on Aecon, Williamson’s position is that where there is an undisclosed agreement that affects the litigation landscape, the parties to the litigation who were not parties to the agreement are automatically entitled to a stay of the action. I disagree.

[45] In Aecon, the third and fourth party claims were stayed. Brampton, a party to the agreement was the only defendant. The case cannot therefore stand for the proposition that the claims against all parties to the litigation must necessarily be stayed.

[46] The third party claim was in the “tank supply stream” of the litigation. H&M was in the “oil supply stream”, and in terms of potential liability, was unaffected by the third party claim, because the third parties’ liability could not exceed H&M’s liability. On the other hand, for so long as the third parties remained in the action, H&M had the potential advantage of a contribution from them to a settlement of the action.

[47] Williamson argues that because it had been dissolved and had no assets, there was no reason for H&M to continue to be involved in the action, or for the third party claim to be commenced or continued. It argues that the purpose of the agreement was to keep H&M in the action, and to prosecute the third party claim, and that the fact that the third parties were part of the litigation for five years represents a change in the landscape of the litigation, entitling it to a remedy. Again, I disagree.

[48] The reason why the third parties were part of the litigation for five years was that the parties to the litigation (including Williamson) blithely continued to litigate, without regard to the fact that H&M had been voluntarily dissolved prior to the commencement of the litigation, that the third party claim was therefore a nullity, and that as a result, the limitation period had continued to run, and had expired shortly after the third party claim was filed: see 602533 Ontario Inc. v. Shell Canada Ltd., and 465519 Ontario Ltd. v. Sacks, 2015 ONCA 175. There was no reason for any party to spend money litigating the third party claim, except, perhaps, on a motion for an order that it be dismissed.

Disposition

[49] In the result, the motion to stay the action as against Williamson is dismissed. If the parties are unable to agree on costs, I will consider brief written argument, provided that it is delivered to my assistant at Judges’ Reception, Durham Region Courthouse, Sixth Floor, no later than August 18, 2017.

“Bale J.”

Released: July 17, 2017