Court File and Parties

COURT FILE NO.: CV-22-00687267-0000 DATE: 20240102 ONTARIO SUPERIOR COURT OF JUSTICE

RE: Jonathan Spinks, Sourced Group Inc., Sourced Group Worldwide Inc., Sourced (Singapore) PTE Ltd, Sourced Group Holdings Pty Limited ACN 144 751 422, Sourced Group Services Pty. Ltd ACN 607 300 685, Sourced Group PTY Limited ACN 606 436 033, Sourced Group Unit Trust and Wilson Lee, Applicants -and- Lloyd’s Underwriters, Respondent

BEFORE: Robert Centa J.

COUNSEL: Denise Sayer and Adam Stikuts, for the applicants other than Wilson Lee Aaron Gold, for the applicant Wilson Lee Elizabeth K. Ackman, for the respondent

HEARD: November 2, 2023

Endorsement

[1] Jonathan Spinks and Gavin Dabron carried on business together through a significant number of companies located around the world. Their business relationship broke down and, in 2017, the parties engaged in litigation in Ontario and Australia. In the summer of 2018, Mr. Spinks, Mr. Dabron, and their companies signed minutes of settlement and resolved this litigation through a judicial mediation in Ontario. In the result, Mr. Spinks used one of his companies, Sourced Group Worldwide Inc., to purchase all of Mr. Dabron’s shares at an agreed upon price, and the parties exchanged full and final releases.

[2] In January 2020, Sourced Worldwide purchased a management liability policy of insurance from the respondent, Lloyd’s Underwriters.

[3] In February 2021, Mr. Dabron sued Mr. Spinks, Sourced Worldwide, and the rest of the applicants. Mr. Dabron pleaded that the defendants had breached the minutes of settlement, breached the common law duty of confidence, and committed the tort of intentional infliction of emotional harm. To oversimplify, Mr. Dabron alleged that someone had disclosed to his former wife the price Sourced Worldwide paid for his shares. In this confidentiality claim, Mr. Dabron sought recission of the minutes of settlement and the share purchase agreement, or damages of $3 million.

[4] In June and August 2021, Mr. Dabron significantly amended the statement of claim. He now alleged that Mr. Spinks and Wilson Lee, the Chief Financial Officer for the corporate applicants, had made negligent or fraudulent misrepresentations to E&Y, the jointly retained expert that had prepared a valuation of the company that formed the basis of the resolution of the earlier litigation. In the valuation claim, Mr. Dabron sought recission of the minutes of settlement and the share purchase agreement, or $50 million in damages.

[5] The applicants turned to Lloyd’s to defend the action under the management liability policy. Lloyd’s declined and took the position that the policy covered neither the confidentiality claim, nor the valuation claim. In response, the applicants brought this proceeding seeking a declaration that Lloyd’s has a duty to defend the action.

[6] For the reasons that follow, I dismiss the application. I find that both the valuation claim and the confidentiality claim fall within the policy’s initial grant of coverage. However, I also find that the duty to defend is not triggered because since both claims are excluded from coverage by the prior and pending litigation exclusion clause. In my view, there is no doubt that both the confidentiality claim and the valuation claim they arise directly from the earlier round of litigation among Mr. Dabron and the applicants and are, therefore, excluded from coverage by the express terms of the policy.

The parties and other key figures

[7] The applicants comprise a group of related companies and two individuals with strong ties to those corporations. Sourced Worldwide is an Ontario-based company that runs a global software and cloud computing business. Sourced Worldwide has five relevant subsidiaries, each of which is an applicant. For convenience, I will refer to them collectively as the Sourced Group and as follows:

a. Sourced Ontario refers to Sourced Group Inc. and Sourced Worldwide;

b. Sourced Australia refers to Sourced Group Holdings Pty Limited ACN 144 751 422, Sourced Group Services Pty. Ltd ACN 607 300 685, Sourced Group PTY Limited ACN 606 436 033, and Sourced Group Unit Trust; and

c. Sourced Singapore refers to Sourced (Singapore) PTE Ltd.

[8] The applicant Jonathan Spinks was an officer, director, and shareholder of Sourced Worldwide.

[9] The applicant Wilson Lee was the Chief Financial Officer for Sourced Group.

[10] The respondent Lloyd’s Underwriters issued a management liability policy of insurance to Sourced Worldwide that ran from January 15, 2020, to April 15, 2021, as extended. All the applicants claim coverage under the policy either as the named insured, a subsidiary of the named insured, or an insured person.

[11] Gavin Dabron and Mr. Spinks co-founded the business underlying Sourced Group. The breakdown of their relationship, including their earlier litigation, will be discussed below. For now, it is enough to note that Mr. Dabron has sued the applicants in an action bearing court file number CV-21-00657188-0000. The applicants claim seek coverage under the insurance policy issued by Lloyd’s for Mr. Dabron’s claims against them.

Facts

[12] The business relationship between Mr. Spinks and Mr. Dabron broke down sometime in 2016. That breakdown spawned litigation in Ontario and Australia.

The 2017 actions in Ontario and Australia

[13] In 2016, Sourced Australia removed Mr. Dabron from his management role at Sourced Australia.

[14] In 2017, Mr. Spinks and Sourced Group Inc. commenced litigation against Mr. Dabron in Ontario. They sought relief under ss. 207 and 248 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16, including an order that Mr. Dabron sell his shares in Sourced Group Inc. to Mr. Spinks. [1] Mr. Dabron counterclaimed for relief as a shareholder, pursuant to s. 248 of the OBCA.

[15] In Australia, Sourced Australia commenced litigation against Mr. Dabron and his company, Skinny Dog. [2] Mr. Dabron billed Sourced Australia through Skinny Dog for the management services he had provided up to the date of his termination. In the litigation, Sourced Australia sought repayment of funds that it alleged Mr. Dabron or Skinny Dog took improperly from the Australian companies. The shares of Skinny Dog were owned by Mr. Dabron and his then wife, Leah Dabron.

[16] Mr. Dabron did not make a claim in respect of the termination of his executive role at Sourced Australia in either the Ontario or Australia legal proceedings.

[17] The parties to the 2017 actions agreed to try and resolve their differences. They jointly retained E&Y to prepare a valuation of the various entities in which Mr. Dabron claimed an interest. The parties settled all the litigation among them at a judicial mediation, and signed minutes of settlement on July 3, and August 30, 2018, which included a full and final release. The parties to the minutes of settlement and release were Mr. Spinks and his company Plan2 Consulting Inc., Mr. Dabron and Skinny Dog, Sourced Worldwide, Sourced Group Inc., Sourced Australia, and Sourced Singapore. In the result, Sourced Worldwide would purchase Mr. Dabron’s ownership interest in the various entities.

[18] Well over a year later, Sourced Worldwide obtained the management liability insurance policy at issue in this application.

The current Dabron action

[19] In 2021, Mr. Dabron commenced the action that is the subject of this application. All of the applicants are defendants in the 2021 action, which has two primary components: a confidentiality claim and a valuation claim.

The confidentiality claim

[20] On February 18, 2021, Mr. Dabron issued a statement of claim naming Mr. Spinks and each of the Sourced Group entities as defendants.

[21] Mr. Dabron sought damages for breach of contract, breach of confidence, and intentional infliction of emotional harm. Mr. Dabron sought a declaration that the defendants breached the confidentiality provisions of the minutes of settlement as a result of the unlawful and unauthorized disclosure of the purchase price that Sourced Worldwide paid for his shares. Mr. Dabron sought $3 million in damages, $1 million in punitive damages, or recission of the minutes of settlement and share purchase agreement.

[22] Mr. Dabron pleaded that the minutes of settlement required the parties to maintain the confidentiality of the purchase price for his shares. Sections 15 and 17 of the minutes of settlement signed on August 30, 2018, provided as follows:

15. The parties agree that the fact that Worldwide has purchased Dabron’s shares in Sourced Ontario and Sourced Australia is not confidential. Any Party can disclose that Dabron’s shares were purchased for fair market value based on a valuation completed by an independent valuator as at April 30, 2018. No Party can disclose the quantum of the Final Settlement Amount except to their financial advisors, accountants and legal representatives that are under the same obligation not to disclose the Final Settlement Amount.

16. The Parties agree that save for the matters discussed in paragraph 14 above, the specific terms and content of these Minutes of Settlement (and those contained in the Short Minutes of Settlement, Share Purchase Agreement, and any other related document) are confidential, and shall not be disclosed except to immediate family, financial and other professional advisors (including for the purposes of Spinks raising funds to fulfil his commitments under these Minutes of Settlement), where such third parties are under the same obligation of confidentiality or with the consent of the Parties in writing, or as required by law.

[23] Mr. Dabron pleaded that during his divorce proceedings, he learned that in July 2019, his wife, Leah, “had been told the valuation of Sourced Group which she understood to be the basis of the amount [Mr. Dabron] received.” Leah Dabron was a shareholder in Skinny Dog.

[24] Mr. Dabron did not plead that Ms. Dabron told him the specific source of the information she received. Instead, he pleaded as follows:

20. Leah deposed that she had been told the purchase price by “the other shareholders” of Sourced Group. The source of this information can only be Spinks or someone to whom Spinks disclosed this information, who is subject to the same obligations of confidentiality pursuant to the Minutes of Settlement.

21. Leah has refused to disclose the source of the information during the Australian divorce proceedings. She refused to confirm or deny that she had been in contact with Spinks.

[25] Mr. Dabron pleaded that the defendants were liable for breach of contract, breach of confidence, and Mr. Spinks was liable for intentional infliction of emotional suffering:

24. Spinks and the other defendants breached the Minutes of Settlement by improperly disclosing or causing to be disclosed the purchase price to Leah.

25. By disclosing the purchase price the defendants are also liable for breach of confidence. The purchase price was explicitly confidential. The parties were explicitly required to preserve the confidentiality of the purchase price.

26. Additionally, Spinks is liable for intentional infliction of emotional suffering. Spinks deliberately and intentionally disclosed the purchase price in order to cause harm to Dabron. This has resulted in emotional harm, including stress, anxiety, and distress.

27. Spinks provided information to Leah that Dabron himself was legally prevented from disclosing. Spinks acted in bad faith by taking advantage of this prohibition and using it to harm Dabron. The relationship between Dabron and Spinks, once best friends, ended in acrimony. The resolution of the litigation was meant to put an end to their relationship. Despite this, Spinks decided to breach the Minutes of Settlement to interfere in Dabron’s most private personal affairs, with the intent to cause further harm to Dabron.

[26] Mr. Dabron pleaded that he had suffered significant financial damages from the “unauthorized disclosure.” He also pleaded bad faith conduct by Mr. Spinks in support of his claim for punitive damages.

The valuation claim

[27] Mr. Dabron amended his claim on June 23, 2021, and amended it again on August 20, 2021. The most significant amendments added the valuation claim: a $50 million claim for fraudulent and negligent misrepresentation. Mr. Dabron also added Mr. Lee as a defendant.

[28] Mr. Dabron pleaded that, on May 12, 2021, Sourced Group announced that it had been acquired for more than $90 million, which was significantly higher than the high end of the range of values provided by E&Y ($8.4 million) before the parties settled their litigation in 2018.

[29] Mr. Dabron pleaded that Mr. Spinks and Mr. Lee were responsible for compiling and providing financial information about the Sourced Group to E&Y for its valuation exercise and that they were negligent, or committed negligent or fraudulent misrepresentations in the preparation and delivery that financial information. Mr. Dabron pleaded misrepresentations that included:

a. providing misleading or incomplete financial statements;

b. failing to disclose Sourced Group’s pipeline, including its customers, potential customers and sales opportunities;

c. withholding projected revenues;

d. failing to disclose its business plan, investor exit plan, potential acquirers; and

e. failing to describe Sourced Group’s goodwill accurately.

[30] Mr. Dabron pleaded that without these misrepresentations, E&Y would have ascribed a higher value to Sourced Group and that he would have obtained a higher price for his shares when the 2017 actions were settled at the judicial mediation.

[31] Mr. Dabron pleaded that Sourced Group was vicariously liable for the actions of Mr. Lee when he negligently prepared or misrepresented Sourced Group’s financial information to E&Y.

Legal principles

[32] As mentioned above, the applicants seek a declaration that Lloyd’s has a duty to defend Mr. Dabron’s current action.

[33] The starting premise to determine whether or not Mr. Dabron’s action has triggered Lloyd’s duty to defend is the pleadings rule. If the statement of claim alleges facts that, if true, would require Lloyd’s to indemnify one or more of the applicants, then Lloyd’s is obligated to provide a defence. [3]

[34] The duty to defend is broader than the duty to indemnify. [4] The applicants are not required to prove that the obligation to indemnify will in fact arise in order to trigger Lloyd’s duty to defend. The mere possibility that a claim falling within the policy may succeed will suffice. [5] Put differently, the duty to defend arises when the statement of claim alleges any facts that might fall within the coverage of the policy. [6] The “mere possibility” test is the anchor for consideration in all duty to defend cases. [7]

[35] The pleadings, then, lie at the core of the duty to defend analysis. Where the pleadings are not framed with sufficient precision to determine whether the claims are covered by a policy, the insurer’s duty to defend will be triggered where, on a reasonable reading of the statement of claim, a claim within coverage can be inferred. [8]

[36] Bare assertions advanced in the statement of claim are not necessarily determinative. I am required to look beyond the labels and assess the statement of claim to ascertain the substance and true nature of the claims. [9] As long as one theory of a plaintiff’s claim against an insured might trigger policy coverage, there is a duty to defend. [10]

[37] After assessing the substance and true nature of the claim, I must interpret the insurance contract to see if those allegations raise a claim within the policy. Insurance contracts form a special category of contracts. Courts are to adopt a three-step approach when interpreting insurance contracts. [11] In a recent duty to defend case, the Court of Appeal for Ontario described the applicable three-step approach as follows:

The principles of interpretation applicable to insurance policies are well settled. The primary principle is that when the language of the policy is unambiguous, the court should give effect to its clear language, reading the policy as a whole.

Where the policy language is ambiguous, the general rules of contract interpretation provide guidance, including the rule that effect should be given to the reasonable expectations of the parties, as long as the interpretation is supported by the text of the policy. Similar insurance policies should be construed consistently. These rules should be applied to resolve an ambiguity, not to create one.

Where ambiguity remains after the application of these rules, the contra proferentem rule applies to construe the policy against the maker, the insurer. This gives rise to the precept that coverage provisions are interpreted broadly and exclusions clauses narrowly. [12]

[38] The terms of the policy, considered as a whole, must be examined in light of the surrounding circumstances. [13]

[39] Given the positions of the parties, it will be necessary for me to answer the following questions:

a. Have the applicants satisfied me that there is a possibility that the insuring clauses in the policy provide coverage for the confidentiality claim and/or the valuation claim? This requires me to determine if:

i. the claims arose from a “wrongful act” committed by an insured person; and

ii. the insured person committed the wrongful act in their capacity as an insured person or in the normal course of business.

b. If the claims fall within the initial grant of coverage, has Lloyd’s satisfied me that the confidentiality claim and/or valuation claim are excluded from coverage under the policy because of one of the following exclusion clauses:

i. the breach of contract exclusion clause;

ii. the known matters exclusion clause;

iii. the professional services exclusion clause; or

iv. the prior and pending litigation exclusion clause.

[40] For the reasons that follow, I find that there is a good chance that the valuation claim and the confidentiality claim fall within the policy coverage, but that they are excluded from coverage by the prior and pending litigation exclusion clause.

Do Mr. Dabron’s claims fall within the insuring clauses in the policy?

[41] The applicants bear the onus of demonstrating that Mr. Dabron’s claims fall within one of the two applicable insuring clauses in the insurance policy held in the name of Sourced Worldwide. [14]

[42] Insuring Clause 1 provides directors and officers liability coverage:

Insuring Clause 1: Directors and Officers Liability

Section A: Individual Cover

We agree to pay on behalf of the insured persons all sums they become legally obliged to pay as a result of any claim first made against them and notified to us during the period of the Policy arising out of any wrongful act committed or alleged to have been committed by the insured person acting in their capacity as insured persons or any matter claimed against them solely by reason of them serving in this capacity. [emphasis added]

[43] Lloyd’s concedes that Mr. Spinks and Mr. Lee meet the definition of “insured persons” within Insuring Clause 1. Lloyd’s also concedes that the claims were made during the period of the insurance policy. [15] The dispute between the parties with respect to coverage under Insuring Clause 1 arises from the underlined words above:

a. did the claims arise out any wrongful act?

b. did the insured person commit the wrongful act while acting in their capacity as an insured person?

[44] The second insuring clause provides entity coverage:

Insuring Clause 2: Entity Cover

We agree to pay on behalf of the company all sums it becomes legally obligated to pay as a result of any claim first made against it and notified to us during the period of the Policy arising out of any wrongful act committed by you or on your behalf in the normal course of your business activities. [emphasis added]

[45] Lloyd’s concedes that each member of the Sourced Group meets the definition of company in Insuring Clause 2. [16] Lloyd’s also concedes that the claims were made during the period of the insurance policy. [17] The dispute between the parties with respect to coverage under Insuring Clause 2 arises from the underlined words in each of the insuring clauses above:

a. did the claims arise out any wrongful act?

b. did the person commit the wrongful act while acting in their capacity as an insured person?

Do Mr. Dabron’s claims arise from a wrongful act?

[46] Lloyd’s submits that the confidentiality claim and the valuation claim do not arise from a wrongful act within the meaning of the insurance policy. The insurance policy defines wrongful act as follows:

“Wrongful act” means any:

a) negligent act, error, omission, advice, misstatement or misrepresentation; or

b) breach of trust, neglect or breach of duty, including fiduciary or statutory duty.

[47] There are two branches to the definition of wrongful act. Given the use of the disjunctive “or” between clauses (a) and (b), I find that the confidentiality claim or the valuation claim will fall within the insuring clause if it falls within either clause (a) or (b). Mr. Dabron’s claims do not need to meet both branches of the definition in order for the claims to fall within the meaning of “wrongful act.”

Meaning of clause (a)

[48] With respect to clause (a), Lloyd’s submits that the word “negligent” means only the absence of an intention to cause harm, it does not limit the acts to those within the tort of negligence. I agree. Lloyd’s also submits that the word “negligent” not only modifies the word “act,” but all of the other words in the clause. Lloyd’s submits that that clause (a), properly interpreted, means that “wrongful act means any negligent act, negligent error, negligent omission, negligent advice, negligent misstatement or negligent misrepresentation.” [18] I will assume, without deciding, that Lloyd’s proposed interpretation is correct.

Meaning of clause (b)

[49] With respect to clause (b), Lloyd’s submits that it “makes clear that other non-negligent duties will be covered, but does not include harmful intent.” I disagree.

[50] There is no basis to infer the absence of harmful intent into clause (b). Nothing in the text or structure of this clause supports Lloyd’s submission. If Lloyd’s wished to so dramatically limit the meaning of, for example, “breach of trust” to include only “breach of trust absent the intention to cause harm,” it needed to include language in clause (b) to achieve that result. There is no reason to import the word “negligent” from clause (a) into clause (b) where that word does not appear in the text. I find that the insuring clause (b) includes within the meaning of “wrongful act” any breach of trust, neglect or breach of duty, including fiduciary or statutory duty without limitation.

[51] Lloyd’s submits that phrase “breach of duty” in clause (b) does not include a breach of a contractual duty. Lloyd’s submits that coverage arises from the act being wrongful and independently actionable and cannot include a contract breach. Lloyd’s did not offer Canadian authority for this proposition. [19] I disagree with Lloyd’s submission for three reasons.

[52] First, the policy does not include any language in the definition of “wrongful act” to limit the types of duties that could give rise to a “breach of duty.” Contracts are an obvious source of duties that could be breached by insureds covered by the policy. Lloyd’s could have expressly excluded contractual duties from the definition of breach of duty, but it did not do so.

[53] Second, considering the policy as a whole, several of the exclusions strongly support my conclusion that “breach of duty” in the insuring clause must include contract breaches. The policy expressly excludes breach of a securities contract from coverage under Insuring Clause 1. [20] Similarly, a breach of client contract is excluded from coverage under Insuring Clause 2. [21] In my view, these exclusions would be unnecessary if the definition of “wrongful act” did not include breaches of contract. I am not using these exclusions to create coverage. [22] I am simply interpreting the meaning of “breach of duty” in light of the entirety of the insurance policy, including the meaning to be given to those particular exclusions.

[54] Third, Canadian authority has held that the phrase “breach of duty,” can include breach of contract. In Peterborough (City) v. General Accident Assurance Co., 1998 ONCA 7121, the Court of Appeal for Ontario interpreted the meaning of wrongful act in an errors and omissions liability policy. [23] That policy defined wrongful act as follows:

WRONGFUL ACT shall mean any actual or alleged error or misstatement or misleading statement or act or omission or neglect or breach of duty by the Insureds in the discharge of their duties individually or collectively including the administration of the Insured's employee benefit programmes. [24]

[55] The Court of Appeal held that the definition of wrongful act was very broad, and that “breach of duty” would include breaches of contractual duties:

The policy definition of "wrongful act" is broad. In addition to referring to breaches of duty generally, it also refers to errors and omissions under workers' compensation and unemployment insurance legislation, and to breaches of duty connected with the administration of the City's employee benefit programmes. Thus, a breach of a common law, statutory, or contractual duty could constitute a "wrongful act" under the policy. In my opinion, the assistant city solicitor's error constituted a "wrongful act", as defined in the policy. [25]

[56] I find that in this policy, the phrase “breach of duty” in the definition of “wrongful act” includes breach of contractual duties.

Does the confidentiality claim allege a “wrongful act”?

[57] Lloyd’s submits that the confidentiality claim does not arise from a “wrongful act” within the meaning of Insuring Clause 1. I disagree.

[58] There is no doubt that Mr. Dabron alleges that Mr. Spinks deliberately set out to injure him by sharing the purchase price with Ms. Dabron. However, that is not the only way that Mr. Dabron has pleaded his claim.

[59] Mr. Dabron pleads that the source of the information provided to Ms. Dabron could be Mr. Spinks or someone with whom Mr. Spinks shared the information. Mr. Dabron also pleads that Ms. Dabron did not identify the source of her information:

30. …The source of this information can only be Spinks or someone to whom Spinks disclosed this information, who is subject to the same obligations of confidentiality pursuant to the minutes of settlement.

31. Leah has refused to disclose the source of the information during the Australian divorce proceedings. She refused to confirm that she had been in contact with Spinks.

[60] In addition to pleading that Mr. Spinks acted deliberately and with malice, Mr. Dabron has pleaded an alternative path to establishing the defendants’ liability: disclosure of the purchase price to Ms. Dabron by someone other than Mr. Spinks who may not have been ill-motivated. There is a possibility that Mr. Dabron could prove that the purchase price was shared with him by a third party through a negligent act of Mr. Spinks.

[61] Moreover, Mr. Dabron asserts that he is entitled to damages either due to breach of the minutes of settlement or through a common law breach of the duty of confidence:

45. Spinks and the other defendants breached the Minutes of Settlement by improperly disclosing or causing to be disclosed the purchase price to [Ms. Dabron].

46. By disclosing the purchase price the defendants are also liable for breach of confidence. The purchase price was explicitly confidential. The parties were required to preserve the confidentiality of the purchase price.

[62] Mr. Dabron has, therefore, pleaded that the defendants are liable both for breach of contract (the minutes of settlement) and the common law of breach of confidence. To establish a breach of confidence, three requirements must be met: first, the information conveyed must be confidential; second, it must be communicated in confidence; and, third, it must be misused by the party to whom it was communicated. [26]

[63] A breach of the duty of confidence at common law falls within the meaning of “breach of duty” within the definition of “wrongful act.” The duty of confidence owed by Mr. Spinks arises at common law, not solely from terms of the contract. [27] I find that Mr. Dabron has pleaded a breach of the duty of confidence separate and apart from the breach of the minutes of settlement. A breach of the duty of confidence falls within the meaning of “breach of duty” and, therefore, the definition of “wrongful act” for the purposes of Insuring Clause 1.

[64] Finally, I have found that a breach of contract falls within the meaning of “wrongful act”. Even if Mr. Dabron had only pleaded that Mr. Spinks breached the minutes of settlement, that would fall within the meaning of “breach of duty” and, therefore, the definition of “wrongful act” for the purposes of Insuring Clause 1.

[65] For these reasons, I find that the confidentiality claim arises from a “wrongful act” within the meaning of Insuring Clause 1.

Does the valuation claim allege a “wrongful act”?

[66] Lloyd’s submits that the valuation claim focuses on intentional harm and fraud and, therefore, does not arise from a “wrongful act” within the meaning of the policy. I disagree.

[67] Mr. Dabron has pleaded both fraudulent misrepresentations and negligent misrepresentations against both Mr. Spinks and Mr. Lee. The prayer for relief explicitly seeks “damages for fraudulent misrepresentation and negligent misrepresentation” in the amount of $50 million. Mr. Dabron pleads that there were “material misrepresentations and omissions made to E&Y by Spinks and others, which have had a material impact on the valuation of the Sourced Group.”

[68] Mr. Dabron points to a series of representations made in the management representation letter to E&Y, dated June 12, 2018, all of which he says were untrue. These representations include that all available information was provided to E&Y and that the documents were complete and accurate, that the comments and estimates of management represented their best judgment, and that there were no undisclosed unusual contracts or material changes. Mr. Dabron expressly pleads material facts in support of his negligent misrepresentation claim:

40(a) In the alternative, Lee is liable for negligence and/or negligent misrepresentation in the preparation and delivery of Sourced Group’s financial information to E&Y. Lee owed a duty of care to Dabron, among others, to ensure that the information provided was complete and accurate. Lee fell below the standard of care expected of an accountant providing services as a Chief Financial Officer, which caused Dabron harm.

40(b) In the further alternative, Sourced Group is vicariously liable for the actions of Lee, who was an employee of Sourced Group and/or acting on behalf of Sourced Group and/or acting on behalf of Sourced Group when he negligently prepared and/or misrepresented Sourced Group’s financial information to E&Y. The losses suffered by Dabron arose directly as a result of the negligence, vicariously or otherwise, of Sourced Group.

41. These misrepresentations, whether negligent or fraudulent, were directly relied on by Dabron and caused him to enter into an agreement to sell his interest based on the E&Y valuation. Had Dabron known that his shares were significantly undervalued due to Spinks’ and Lee’s actions, he would not have agreed to the purchase price.

[69] Mr. Dabron pleads that Mr. Spinks and Mr. Lee provided misleading financial information to E&Y and/or withheld material information including that they:

a. provided misleading and/or incomplete financial statements that misrepresented the financial position of Sourced Group;

b. failed to disclose Sourced Group’s true pipeline, including all customers, potential customers, and sales opportunities;

c. withheld projected revenues;

d. failed to disclose its business plan, investor exit plan, potential acquirers; and

e. failed to provide an accurate description of Sourced Group’s goodwill.

[70] I do not accept Lloyd’s submission that there is a stark contrast between the pleading of negligent misrepresentation in paragraphs 40(a) and (b) and the rest of the claim. There is no doubt that Mr. Dabron has pleaded a case of fraudulent misrepresentation against Mr. Spinks and Mr. Lee. However, there is equally little doubt that Mr. Dabron could establish negligent misrepresentation against Mr. Spinks and Mr. Lee on these pleadings, even if he cannot make out the intent required for a finding of fraudulent misrepresentation. No amendment to the pleading would be required for Mr. Dabron to succeed establishing liability for negligent misrepresentation. He has clearly pleaded a negligent misrepresentation case against Mr. Spinks and Mr. Lee.

[71] Even if the fraudulent misrepresentation claims are not covered, that does not oust Lloyd’s obligation to defend or indemnify for the covered claims where, as here, there is no explicit exclusion of all coverage in the event of concurrent claims. [28]

[72] In my view, at least some of the allegations in the valuation claim fall within the meaning of “wrongful act” for the purpose of Insuring Clause 1.

Were the wrongful acts committed by insured persons in their capacity as insured persons or in the normal course of business?

[73] Even if Mr. Dabron’s statement of claim alleges “wrongful acts,” there is no coverage under the policy for those wrongful acts unless the applicants demonstrate that the wrongful acts:

a. were committed by an insured person in their capacity as insured persons (Insuring Clause 1); and

b. were committed by Sourced Group or on its behalf in the normal course of their business activities (Insuring Clause 2).

[74] Lloyd’s submits that there is no possibility the wrongful acts alleged by Mr. Dabron could be found to have been committed by the insured persons in their capacity as insured persons or in the normal course of business. For the reasons that follow, I disagree.

The wrongful acts pleaded in the confidentiality claim

[75] Lloyd’s submits that Mr. Spinks entered into the minutes of settlement in his personal capacity and that if Mr. Spinks breached the minutes of settlement, that is by definition a personal contractual breach and not one as an insured person in the normal business of the companies. I disagree.

[76] It is true that Mr. Spinks signed the minutes in his personal capacity. However, that does not reflect the substance of the minutes of settlement. First, the final minutes of settlement are among the following parties: Mr. Spinks and his consulting firm Plan2 Consulting Inc., Sourced Worldwide, Sourced Group Inc., Sourced Australia, Sourced Singapore, Mr. Dabron and Skinny Dog.

[77] In the final minutes of settlement, the parties agreed that Sourced Worldwide would purchase Mr. Dabron’s shares in Sourced Group Inc. and his shares in an Australian entity. By signing the minutes of settlement, Mr. Spinks released all claims that the Sourced Group entities could have against Mr. Dabron. The minutes of settlement contained a share purchase agreement obliging Sourced Worldwide to purchase Mr. Dabron’s shares and a detailed mutual full and final release that released all of Sourced Groups claims against Mr. Dabron and vice versa.

[78] Regardless of the form of the signature block, it seems apparent that both Mr. Dabron and Mr. Spinks were signing on their own behalf and on behalf of the corporate entities that made up the “Spinks parties” and the “Dabron parties” as they were defined in the minutes of settlement. Each of the corporate entities obtained benefits and provided consideration for what it received through the minutes of settlement. There is no allegation that any of the corporate entities do not consider themselves bound by the minutes of settlement or that their subsequent conduct suggests that they are not bound.

[79] In my view, the fact that the signature block indicates that Mr. Spinks signed on his own behalf and on behalf of Plan2 Consulting is not determinative of whether or not there is a possibility that the confidentiality claim arises out of his conduct in his capacity as an insured person.

[80] At this stage, there is at least a possibility that the disclosure of the information took place in Mr. Spinks’ capacity as an insured person. Mr. Dabron has pleaded that the source of the information provided to Ms. Dabron was Mr. Spinks or someone to whom Mr. Spinks disclosed the information. Mr. Dabron pleaded that during his divorce proceedings, he learned that in July 2019, his wife, Leah (a Skinny Dog shareholder), “had been told the valuation of Sourced Group which she understood to be the basis of the amount [Mr. Dabron] received.” Ms. Dabron refused to disclose the source of her information.

[81] Based on the pleading, it is possible that Mr. Spinks disclosed the information to someone in his capacity as an officer of Sourced Group and for a business purpose, only to have that person disclose the information to Ms. Dabron. That determination must await trial.

[82] There is also the complicating feature that Ms. Dabron was a shareholder in Skinny Dog. Whether or not sections 15 and 17 of the second minutes of settlement preclude giving the minutes of settlement to a shareholder of a party to the settlement, who may also fall within the meaning of an “immediate family member” of a signatory to the minutes of settlement, is a matter for trial.

[83] For now, I am satisfied that there is a possibility that the wrongful acts pleaded in the confidentiality claim may have been committed by an insured person in the normal business of the companies.

The wrongful acts pleaded in the valuation claim

[84] Lloyd’s submits that Mr. Spinks and Mr. Lee were not acting in their capacity as insured persons when they committed the wrongful acts pleaded in the valuation claim. Lloyd’s submits that because the statement of claim alleges that Mr. Spinks and Mr. Lee made the misrepresentations for the predominant purpose of undervaluing the share price and lowering the price that Mr. Dabron would receive for his shares, such actions can only have been taken in their personal capacities. I disagree.

[85] There is no doubt that Mr. Dabron has pleaded that Mr. Spinks and Mr. Lee acted outside of their duties. As set out above, however, Mr. Dabron has also pleaded that Mr. Lee, Mr. Spinks, and the Sourced Group made negligent misrepresentations. Some of the representations relied on by Mr. Dabron appear in the management representation letter, which can only have been signed by Mr. Spinks in his capacity as an officer. Mr. Dabron pleads that Mr. Lee was “providing services as [the Sourced Group’s] Chief Financial Officer” when Mr. Lee negligently harmed him.

[86] Mr. Dabron has pleaded that Mr. Spinks and Mr. Lee caused him harm in the negligent discharge of their duties to Sourced Group. At trial, Mr. Dabron could prove that Mr. Spinks and Mr. Lee acted negligently, or made negligent misrepresentations, while acting solely in their capacity as an insured person. [29] Sourced Worldwide was a named party in the 2017 litigation. Attempts to settle that litigation were clearly in the company’s interests. All members of the Sourced Group had an interest in that litigation being resolved consensually and the E&Y report was prepared on behalf of each member of the Sourced Group and Mr. Spinks. It seems clear that such conduct could be found to be in the ordinary course of business of the Sourced Group.

[87] In my view, the pleading explicitly addresses conduct of Mr. Spinks and Mr. Lee in their capacity as insured persons providing services to Sourced Group in the normal course of their business, even if there are alternative pleadings that, if established at trial, may mean that Lloyd’s is not required to indemnify for that loss.

Conclusion

[88] I find that the applicants have demonstrated that there is a possibility that the valuation claim and the confidentiality claim allege “wrongful acts” within the meaning of the insuring clauses, that those wrongful acts were committed by insured persons, and that they committed those wrongful acts in their capacities as insured persons and in the ordinary course of business.

[89] I find, therefore, that Lloyd’s would be required to defend the confidentiality claim and the valuation claim unless it can demonstrate that the coverage is excluded by one of the exclusion clauses.

Is there an exclusion from coverage?

[90] Since I have found that the applicants demonstrated that there is an initial grant of coverage for the claims, the onus now shifts to Lloyd’s to establish that there is no coverage available by operation of an exclusion clause.

Does the breach of contract exclusion clause exclude coverage for the confidentiality claim from Insuring Clause 2?

[91] Lloyd’s submits that the insurance policy contains an explicit exclusion for breach of contract claims from coverage under Insuring Clause 2. I disagree because I find that this exclusion only applies to claims arising out of the breach of a client contract.

[92] The exclusion, which only applies to Insuring Clause 2 (entity coverage) and does not apply to Insuring Clause 1, reads as follows:

4. Breach of client contract

Arising directly or indirectly out of any unintentional breach of a written contract.

However, this EXCLUSION shall not apply if you would be held liable if there was no written contract in place. [30]

[93] The policy itself specifies how headings shall be used to interpret the policy. The preamble to the management liability policy states:

The Sections of this Policy are identified by the BLUE LINES across the page with the WHITE UPPER CASE PRINT. Clause headings in BLUE UPPER CASE PRINT are for information only and do not form part of the cover given by this Policy. Other terms in bold lower case print are defined terms and have a special meaning as set forth in the DEFINITIONS section and elsewhere.

[94] The introductory words of Exclusion 4 are “Breach of client contract.” Those words are not rendered in white upper-case print within a blue horizontal band, so they are not a section heading. The words are not printed in blue print or upper case print, so they are not a clause heading that is included “for information only.” I accept that in some policies, a clause heading that that is included for information purposes should not be used to interpret the meaning of a policy.

[95] Lloyd’s submits that the heading is not an operative part of the contract. I do not accept this submission. Lloyd’s submission requires me to ignore the word “client,” but Lloyd’s cannot point to any provision of the policy that directs me to do so. Had Lloyd’s wished to achieve this result, it should have printed the heading in blue upper-case print. Moreover, because the policy indicates that certain clause headings are for information purposes only, in my view, clause headings that are not expressly limited in that fashion may be used to interpret the exclusion.

[96] I also do not accept Lloyd’s submission that if the minutes of settlement are not a “client contract” then it cannot be said that the minutes of settlement are part of the Sourced Group’s ordinary course of business. There is no reason to believe that Sourced Group does not enter into a wide variety of contracts that are not client contracts. Commercial leases, agreements for the purchase or rental of equipment, employment contracts, and independent consulting contracts are examples of contracts that would be executed in the ordinary course of business but would not fit within the meaning of client contract.

[97] In my view, it is far from certain that Exclusion 4 excludes a breach of any contract from coverage. I find that the inclusion of the word “client” to modify the word “contract” limits the scope of the exclusion. Lloyd’s has not demonstrated that it is clear from the pleadings that Mr. Dabron’s action falls outside policy coverage because of the breach of client contract exclusion clause. [31]

Does the known matters exclusion clause exclude all coverage for both claims?

[98] Lloyd’s submits that its duty to defend is not triggered because the claim falls outside of coverage because of the known matters exclusion clause. I disagree.

[99] The known matters exclusion clause applies to both Insuring Clauses 1 and 2, and states:

It is understood and agreed that the following EXCLUSION is added to this Policy:

Known matters

Arising directly or indirectly out of the following matters disclosed to us:

Regarding the termination of the business development manager in Australia

SUBJECT OTHERWISE TO THE TERMS AND CONDITIONS OF THE POLICY

[100] The parties have sensibly agreed that Mr. Dabron is “the business development manager in Australia” referred to in the exclusion clause. I do not think that fact alone, however, answers the question regarding whether or not the exclusion applies.

[101] Lloyd’s submits that the known matter “is clearly a reference to the ongoing dispute with Dabron and the [2017 litigation].” Lloyd’s points out that the statement of claim contains a number of references to Mr. Dabron’s termination. Therefore, Lloyd’s submits, the statement of claim arises directly or indirectly out of Mr. Dabron’s termination.

[102] It is necessary to interpret the meaning of this exclusion in light of the rest of the policy. Sourced Worldwide purchased worldwide coverage for “employment practices liability” in its policy with Lloyd’s. That insuring clause reads as follows:

Insuring Clause 3: Employment Practices Liability

We agree to pay on your behalf all sums you become legally obliged to pay as a result of any claim first made against you and notified to us during the period of the policy, brought by an employee, a prospective employee or an independent contractor arising out of any actual or alleged:

a) wrongful dismissal, discharge or termination of employment whether actual or constructive, including breach of hand express or implied contract; or

b) employment related misrepresentations; or

c) sexual or other harassment in the workplace (including the creation of a hostile working environment); or

d) wrongful deprivation of a career opportunity, employment or promotion or failure to grant tenure; or

e) wrongful demotion, evaluation or failure to adopt adequate employment or workplace policies and procedures; or

f) breach of, violation of or non compliance with data protection laws relating to employee data; or

g) retaliation; or

h) infliction of emotional distress; or

i) employment related libel, slander, humiliation or defamation; or

j) disciplinary action; or

k) negligent evaluation; or

l) discrimination; or

m) invasion of privacy; or

n) violation of any law concerning employment or discrimination in employment.

[103] Although the known matters exclusion is not limited to Insuring Clause 3: Employment Practices liability, it seems to me that the interpretation of the language chosen to describe the known matter, namely, “the termination of the business development manager in Australia” should be informed by the worldwide protection for employment practices liability that Sourced Worldwide purchased.

[104] Even if I set aside the language of Insuring Clause 3, I do not see Mr. Dabron’s allegations in the statement of claim as arising directly or indirectly out of his termination or that his termination is synonymous with the 2017 litigation. The earlier litigation was shareholder and corporate litigation. It was not a typical employment law dispute.

[105] As set out above, in 2016, Sourced Australia removed Mr. Dabron from his management role at Sourced Australia. In 2017, Mr. Spinks and Sourced Group Inc. commenced litigation against Mr. Dabron in Ontario. They sought relief under ss. 207 and 248 of the OBCA, including an order that Mr. Dabron sell his shares in Sourced Group Inc. to Mr. Spinks. Mr. Dabron counterclaimed for relief as a shareholder, pursuant to s. 248 of the OBCA.

[106] In Australia, Sourced Australia commenced litigation against Mr. Dabron and his company, Skinny Dog. [32] Mr. Dabron billed Sourced Australia through Skinny Dog for the management services he had provided up to the date of his termination. In the litigation, Sourced Australia sought repayment of funds that it alleged Mr. Dabron or Skinny Dog took improperly from the company.

[107] In my view, the earlier litigation arose out of and focussed on the shareholding and corporate governance issues among the parties. They did not engage matters related to Mr. Dabron’s employment or its termination.

[108] All the alleged misconduct in the current statement of claim relate to actions or statements that took place in June 2018 or later, which was two years after the end of Mr. Dabron’s management role at Sourced Australia.

[109] Mr. Dabron did not make a claim in respect of the termination from his executive role at Sourced Australia in either the Ontario or Australia legal proceedings. He also does not advance any claims connected with his employment in the confidentiality or valuation claims. The damages he seeks in his current action have nothing to do with the termination of his role as an executive.

[110] Mr. Dabron has pleaded certain facts relating to his employment and his termination, but those facts are included to provide narrative and context for the reader. If he excised those paragraphs, his claim would stand on exactly the same footing. The facts related to his termination are unnecessary and mere surplusage. [33] Mr. Dabron does not need to prove any of those facts to be successful in this action.

[111] In order to meet the standard of “arising directly or indirectly out of” a matter, it must be possible to trace a continuous chain of causation unbroken by the interposition of a new act” between the wrongful act and the plaintiff’s injury. [34] I find that Mr. Dabron’s current action is independent of the termination of his employment. The valuation claim arises from an act independent of his employment relationship, namely, the negotiation and resolution of his shareholding relationship with the companies. Similarly, the valuation claim arises of an act independent of the termination of his employment, namely, the alleged breach of duties of confidence owed to him that post-date the resolution of his shareholding. With respect to the claim against Mr. Lee, it relates to the provision of information to E&Y for the purposes of valuing the companies. None of these claims arise directly or indirectly out of the termination of Mr. Dabron.

[112] The current claim is not causally connected, directly or indirectly, with Mr. Dabron’s employment or its termination. The termination of his employment is not a link in an unbroken chain leading to this claim.

[113] I find that Lloyd’s has not demonstrated that it is clear from the pleadings that Mr. Dabron’s action falls outside policy coverage because of the known matters exclusion clause. [35]

Does the professional services exclusion clause exclude coverage for the claim against Mr. Lee?

[114] Lloyd’s submits that the claim against Mr. Lee is excluded by the professional services exclusion clause. I disagree.

[115] The professional services exclusion clause, which applies only to Insuring Clause 1, reads as follows:

2. Professional services

arising directly or indirectly from carrying out, or failing to carry out, professional services for a fee or any act, error or omission relating to a professional service.

[116] Lloyd’s submits that coverage is precluded because Mr. Dabron’s claim “is a claim of professional liability for his failures as an accountant in the services he provided.” Lloyd’s submits that “professional services” means a service “arising out of a vocation or occupation involving specialized knowledge or skills, and the skills are mental as opposed to manual.” [36] Lloyd’s submits that accounting services are professional services and, therefore, there is no coverage of the claim against Mr. Lee. I do not accept Lloyd’s submissions.

[117] First, it is important to start with the policy’s definition of insured persons. It is clear that the policy is designed to provide insurance coverage for professionals and managers, including an in-house general counsel (if one exists):

17. “Insured persons”

means:

a) any past, present or prospective director, officer, general manager, in-house general counsel or manager of the company (or equivalent position in any jurisdiction) including de facto directors; and

b) any employee:

i) acting in a managerial or supervisory capacity or

ii) in an outside directorship position; or

iii) when named as a co-defendant.

[118] Given this definition of insured persons, and given that the policy is a management liability policy, I would be reluctant to adopt Lloyd’s proposed definition of “professional services.” In a policy that is designed to provide coverage to executives and directors of a cloud computing and software business, it makes little sense that coverage would be available for someone exercising their manual skill but not for one exercising mental skill. Such a narrow interpretation would almost completely defeat the purpose of the coverage, which was to protect directors, officers, executives, managers, and supervisors in a software business. All of those persons, presumably, would be providing services using specialized knowledge and mental skills.

[119] It also seems odd that a management liability policy would expressly extend coverage to a person fulfilling the role of in-house counsel, only to then exclude coverage for any work for the business that built on the in-house counsel’s legal training.

[120] It does not appear to be disputed that Mr. Lee acted as the part-time Chief Financial Officer of the Sourced Group or that he did so first through a consultancy agreement and, after 2018, as an employee. He was also a director of the Sourced Group. The mere fact that he was also a Chartered Professional Accountant is not, in my view, sufficient to exclude the claim against him based on the professional services exclusion.

[121] Moreover, I do not accept that Mr. Dabron’s claim against Mr. Lee is fairly described as a claim of professional liability for his failures as an accountant. Mr. Dabron alleges that Mr. Lee was negligent in matters lying at the heart of the role of a Chief Financial Officer, rather than as an accountant. Mr. Dabron has alleged that Mr. Lee is responsible for misrepresentations in the information provided to E&Y including incomplete financial statements; failing to disclose an accurate picture of the sales pipeline; withholding projected revenues; failing to disclose a complete or accurate business plan, investor exit plan, list of potential acquirers, or Sourced Group’s goodwill. Moreover, Mr. Dabron pleads that Mr. Lee was responsible for compiling and providing Sourced Group’s business and financial information to E&Y. This information would have informed the content of the management representation letter dated June 12, 2018. These representations included that all available information was provided to E&Y and that the documents were complete and accurate, that the comments and estimates of management represented their best judgment, and that there were no undisclosed unusual contracts or material changes.

[122] Mr. Dabron alleges that Mr. Lee was negligent in the discharge of a fairly wide range of executive functions and services provided by a Chief Financial Officer. Mr. Dabron’s claim is not limited to an allegation that Mr. Lee committed negligent errors while performing a narrow or technical accounting function.

[123] I find that Lloyd’s has not demonstrated that it is clear from the pleadings that Mr. Dabron’s action falls outside policy coverage because of the professional services exclusion clause. [37]

Does the prior and pending litigation exclusion clause exclude all coverage for both claims?

[124] Finally, Lloyd’s submits that its duty to defend is not triggered because the claim falls outside of coverage by reason of the prior and pending litigation exclusion clause. I agree.

[125] Among the general insurance exclusions, Exclusion 31 excludes coverage under both Insuring Clauses 1 and 2 for claims arising from prior or pending litigation as of June 7, 2018, and reads as follows:

31. Prior and pending litigation

Arising directly from any prior and pending litigation as of [June 7, 2018], or alleging or deriving from the same or generally the same facts as alleged in the prior and pending litigation. For the avoidance of doubt, litigation as used in this exclusion includes administrative or regulatory proceedings or official investigations.

[126] Mr. Spinks and Sourced Group Inc. commenced their application against Mr. Dabron in Ontario on May 1, 2017. Among other things, Mr. Spinks sought an order compelling Mr. Dabron to sell his shares and a declaration that the value of the shares was $10, or $422,000 valued as of August 31, 2016. In his responding pleading, Mr. Dabron asserted that, if he was compelled to sell his shares, the court should order them to be purchased at current fair market value.

[127] The Ontario action (and the Australian action) were resolved when the parties signed minutes of settlement on July 3, 2018, and August 30, 2018. I find that the earlier actions were prior or pending litigation on June 7, 2018.

[128] There are two branches to this exclusion, Mr. Dabron’s current claim will be excluded from coverage if it:

a. arises directly from the prior and pending litigation; or

b. alleges or derives from the same or generally the same facts as alleged in the prior and pending litigation.

[129] I accept Sourced Group’s submissions that the language in the first branch is narrowed by the use of the words “arises directly.” The connection between events required by the words “arises directly” must be stronger than if the policy used the words “arising directly or indirectly” or “in connection with.”

[130] In my view, however, even if I interpret this exclusion clause as narrowly as the text will allow, the valuation claim and the confidentiality claim arise directly from the earlier litigation among the parties and are excluded from coverage.

[131] The applicants submit that Mr. Dabron’s allegations that Mr. Spinks and Mr. Lee negligently or fraudulently provided misinformation to E&Y is an intervening act that breaks the chain of causation between the prior litigation and the current proceeding. I disagree.

[132] In the prior litigation, Mr. Spinks and Sourced Group sought orders compelling Mr. Dabron to sell his shares at a fixed price or, in the alternative, at a price set by the court. Mr. Spinks asked the court to determine the value of companies and, therefore, the value of Mr. Dabron’s shares. As part of this litigation, Sourced Group would have been required to retain an expert to prepare a valuation of the companies and to provide that expert with accurate and complete information to permit that valuation to be completed. The Sourced Group would have been required to produce all relevant documents associated with its value. The completeness and the accuracy of the information provided to the experts would have been the subject of examinations for discovery and cross-examination at trial. After completion of the trial, Mr. Dabron would have the right to seek to have the judgment set aside or varied on the ground of fraud or of facts arising or discovered after it was made.

[133] Mr. Dabron pleads that the parties jointly retained E&Y “in an effort to resolve the dispute” and that “the parties settled the litigation on the basis of the E&Y report.” The fact that the Sourced Group and Mr. Dabron jointly retained E&Y to prepare the valuation of the companies for the purposes of attempting to resolve the dispute does not make that project any less an integral part of the litigation. The Rules of Civil Procedure, R.R.O. 1990, Reg. 194 require mandatory mediation for many proceedings in Ontario. [38] Moreover, mediation is a central feature of the litigation landscape in Ontario. In this case, the parties were able to resolve their disputes through a judicial mediation. The involvement of a judicial mediator, in this case Hainey J., makes crystal clear how the consensual resolution of the dispute is linked to the litigation. Far from being an intervening act, the E&Y report was an integral part of the prior litigation and its resolution.

[134] The fact that Mr. Dabron seeks rescission of the minutes of settlement, release, and share purchase agreement in the current action is also a factor that demonstrates how his current action arises directly from the prior litigation.

[135] Each of the E&Y report, the judicial mediation, and the settlement itself arose directly out of the prior litigation. In my view, the valuation claim arises directly out of the prior litigation.

[136] Similarly, the confidentiality claim arises directly out of the prior litigation. The confidentiality claim is predicated on a breach of the minutes of settlement or a breach of a duty of confidence that arose out of the negotiations leading to the minutes of settlement. In my view, the action for breach of confidence arises directly out of the prior litigation.

[137] To change the context slightly, if Sourced Group had failed to pay the amounts owing to Mr. Dabron for his shares under the minutes of settlement, Mr. Dabron could have commenced an action for breach of the minutes of settlement. It seems to me that such an action would arise directly out of the prior litigation. In my view, the fact that Mr. Dabron’s confidentiality action arises out of a different clause in the settlement, or is for breach of a common law duty arising out of the settlement, does not change that analysis. As discussed above, the act of settling litigation is integrally linked to that litigation. It is not an intervening act.

[138] I find that Lloyd’s has met its burden to show that the duty to defend is not triggered because both the valuation claim and the confidentiality claim are excluded from coverage by virtue of the prior and pending litigation exclusion clause.

[139] The application is dismissed.

Costs

[140] If the parties are not able to resolve costs of this application, Lloyd’s may email its costs submission of no more than three double-spaced pages to my judicial assistant on or before January 9, 2024. Mr. Lee may deliver his responding costs submissions and the remaining applicants may deliver their responding submissions of no more than three double-spaced pages on or before January 16, 2024. No reply submissions are to be delivered without leave.

Robert Centa J.

Date: January 2, 2024

Footnotes:

[1] R.S.O. 1990, c. B.16. [2] Skinny Dog Consulting Pty Ltd CAN 149 903 533. [3] Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, at para. 28; Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801; AIG Insurance Company of Canada v. Lloyd’s Underwriters, 2022 ONCA 699, at para. 44. [4] Monenco, at para. 29; [5] Nichols, at p. 810; Monenco, at para 29; Demme v. Healthcare Insurance Reciprocal of Canada, 2022 ONCA 503 at para. 29; GFL Infrastructure Group Inc. v. Temple Insurance Company, 2022 ONCA 390, at para 25. [6] Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, at para. 78. [7] GFL, at para. 25. [8] Monenco, at para 31. [9] Monenco, at para. 35; Scalera, at para. 84. [10] Thunder Bay Masonic Foundation v. Sovereign General Insurance Company, 2014 ONSC 4142, at para. 12. [11] Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at paras. 27-30; Sky Clean Energy Ltd. (Sky Solar (Canada) Ltd.) v. Economical Mutual Insurance Company, 2020 ONCA 558, 152 O.R. (3d) 159, at paras. 54-56; Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at paras. 21-24; Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, at paras. 49-51; Sabean v. Portage La Prairie Mutual Insurance Co., 2017 SCC 7, [2017] 1 S.C.R. 121, at para. 12; and Geoff R. Hall, Canadian Contractual Interpretation Law, 4th ed. (Toronto: LexisNexis Canada, 2020) at pp. 266-68. [12] SIR Corp. v. Aviva Insurance Company of Canada, 2023 ONCA 778, at para. 40, citing Sky Clean at paras. 54 to 56 [internal citations omitted]. [13] SIR Corp at para. 41; Jesuit Fathers, at para. 27; Carter v. Intact Insurance Company, 2016 ONCA 917, 133 O.R. (3d) 721, at para. 28, leave to appeal refused, [2017] S.C.C.A. No. 53; and MDS Inc. v. Factory Mutual Insurance Company, 2021 ONCA 594, 465 D.L.R. (4th) 294, at para. 78, leave to appeal refused, [2021] S.C.C.A. No. 382. [14] Ledcor, at para. 52 [15] Lloyd’s initially took the position that the valuation claim was not first made within the policy period. However, while my decision was under reserve, the parties identified the existence of an applicable run-off endorsement. On November 14, 2023, counsel for Lloyd’s advised the court that it was withdrawing its submission that the valuation claim was not first made during the life of the policy. [16] Company is a defined term meaning Sourced Worldwide or any subsidiary. [17] As explained in footnote 15, this issue is no longer in dispute. [18] Coast Capital Savings Credit Union v. Liberty International Underwriters 2016 BCSC 655, aff’d 2017 BCCA 362; Doering v. Economical Insurance Group, 2000 ONSC 50980, 20 C.C.L.I. (3d) 278 O.T.C. 579, at para. 6. [19] Lloyd’s cited a 2013 decision of the US district court in California, Lion Corp. v. Navigators Insurance Co. 2013 WL 11024960. [20] The exclusion for acts covered by Insuring Clause 1 states: “1. Breach of a Securities Contract arising out of a breach of any contract relating to the purchase or sale of, or relating to an offer to purchase or sell, any securities, except for the loss the company would be legally liable to pay in the absence of the contract.” [21] The exclusion for acts covered by Insuring Clause 2 reads “4. Breach of client contract arising directly or indirectly out of any unintentional breach of a written contract. However, this EXCLUSION shall not apply if you would be held liable if there was no written contract in place. [22] SIR, at para. 92; Progressive Homes, at para. 27. [23] Peterborough (City) v. General Accident Assurance Co., 1998 ONCA 7121, 108 O.A.C. 361. [24] Peterborough, at para. 15. [25] Peterborough, at para. 25. [26] Lac Minerals Ltd. v. International Corona Resources Ltd., 1989 SCC 34, [1989] 2 S.C.R. 574 at p. 608. [27] Ticketnet Corp. v. Air Canada, 1997 ONCA 1471, 105 O.A.C. 87, at para. 48. [28] Derksen v. 539938 Ontario Ltd., 2001 SCC 72, [2001] 3 S.C.R. 398, at para. 48. [29] Onex Corp v. American Home Insurance Co., 2013 ONCA 117, 114 O.R. (3d) 161, at para. 143, leave to appeal ref’d [2013] S.C.C.A. No. 178. [30] All bolding and full caps text is as it appears in the policy. [31] Monenco, at para. 29. [32] Skinny Dog Consulting Pty Ltd CAN 149 903 533. [33] The Hearing Clinic (Niagara Falls) Inc. v. 866073 Ontario Limited, et al., 2014 ONSC 5831, at para. 1308. [34] Lumbermens Mutual Casualty Co. v. Herbison, 2007 SCC 47, [2007] 3 S.C.R. 393, at paras. 1-14; Citadel General Assurance Co. v. Vytlingam, 2007 SCC 46, [2007] 3 S.C.R. 373, at paras. 2, 3, 35. [35] Monenco (SCC), at para. 29. [36] Monenco Ltd. v. Commonwealth Insurance Co., 1997 BCSC 1397, 42 B.C.L.R. (3d) 280. [37] Monenco (SCC), at para. 29. [38] R.R.O. 1990, Reg. 194, Rule 24.1.