Court File and Parties

COURT OF APPEAL FOR ONTARIO DATE: 20220127 DOCKET: C69194

Huscroft, Trotter and Coroza JJ.A.

BETWEEN

Tallman Truck Centre Limited Plaintiff (Appellant)

and

K.S.P. Holdings Inc. and Secure Capital Advisors Inc. Defendants (Respondent)

Counsel: J. Thomas Curry, Dena N. Varah and Sean Lewis, for the appellant Jeffrey E. Feiner, for the respondent

Heard: January 10, 2022 by videoconference

On appeal from the order of Justice Frederick L. Myers of the Superior Court of Justice, dated February 8, 2021, with reasons reported at 2021 ONSC 984.

Reasons for Decision

[1] Tallman Truck Centre Limited (“Tallman”) appeals from an order staying its action on the basis that it failed to immediately disclose to one defendant, K.S.P. Holdings Inc. (“K.S.P.”), that it had entered into a settlement agreement with the other defendant, Secure Capital Advisors Inc. (“Secure”). Under this settlement agreement, Secure reversed its pleaded position and joined cause with Tallman. The agreement was not disclosed until three weeks after it was made. K.S.P. successfully moved to stay the action, based on the principles in Handley Estate v. DTE Industries Limited, 2018 ONCA 324, 421 D.L.R. (4th) 636.

[2] The following reasons explain why we dismiss Tallman’s appeal.

Background

[3] In the underlying action, Tallman sought to enforce a right of first refusal against K.S.P. in the context of a complex real estate transaction. It claimed damages against Secure in relation to a leaseback agreement that it alleged existed between the defendants, which they both denied in their pleadings.

[4] Tallman brought a summary judgement motion for specific performance of the right of first refusal against K.S.P. In the lead up to this motion, and unbeknownst to K.S.P., Tallman engaged in settlement discussions with Secure, whereby Secure would support Tallman’s summary judgment motion by providing affidavit evidence in which it acknowledged the existence of the leaseback arrangement. In return, Tallman agreed to discontinue the claim against Secure. Additionally, in the event that the summary judgment motion was unsuccessful, and the action continued, Secure had a “continuing obligation to provide support and cooperation to Tallman throughout the Litigation.” Only then would it receive a full and final release, which was being held in escrow by Tallman’s counsel (not counsel on appeal).

[5] The timing of these events is important. The summary judgment motion was scheduled to be heard in December of 2018. In the Spring of 2018, counsel for K.S.P. attempted to contact Secure’s counsel to ascertain whether Secure could provide helpful evidence to K.S.P. concerning the alleged leaseback arrangement, consistent with their pleaded positions. Counsel for Secure did not respond. As it turned out, Secure was in discussions with Tallman.

[6] On April 12, 2018, Tallman’s counsel drafted an affidavit for the principal of Secure to swear, in which he acknowledged the existence of a leaseback arrangement. On May 14, 2018, Secure returned a marked-up copy of the draft. The final version was sworn on May 22, 2018 and was held by counsel for Secure.

[7] The terms of the settlement between Tallman and Secure were formally reduced to writing in a document prepared by Tallman and sent to Secure on June 6, 2018. On June 7, 2018, Secure’s counsel provided written acceptance of the agreement. The motion judge described the upshot of the agreement as follows: “Secure was no longer adverse in interest to the plaintiff. Rather, to obtain its bargained-for release, the quality of its continuing support of the plaintiff was subject to the plaintiff’s approval.”

[8] On June 7, 2018, Secure’s counsel served his client’s affidavit in a responding motion record. The affidavit purported to be sworn “in response to the motion for summary judgment brought by the plaintiff” (emphasis added). In reality, it was sworn in support of the motion. On June 8, 2018, Tallman attempted to discontinue the action against Secure on a “without costs and with prejudice” basis. For technical reasons, the notice of discontinuance was not accepted by the court. Tallman filed another version of this document on June 13, 2018. By June 19, 2018, the notice of discontinuance had still not been accepted by the court. Because pleadings were closed, the consent of K.S.P. was required. Tallman sought K.S.P.’s consent, still not having disclosed the settlement agreement.

[9] By this point in time, counsel for K.S.P. suspected that a settlement had been reached between Tallman and Secure. He wrote to Tallman’s counsel on June 21, 2018, asking for confirmation of this fact. On June 24, 2018, Tallman’s counsel wrote to K.S.P., but did not disclose the settlement agreement. Counsel was more focused on keeping up its end of the bargain with Secure, writing: “In my view, there is no proper basis for you to withhold your consent” to the filing of the notice of discontinuance.

[10] The settlement agreement was finally disclosed on June 27, 2018, three weeks after it was signed by the parties. Apparently, the resistance to earlier disclosure came from Secure’s counsel. Tallman’s counsel eventually persuaded Secure’s counsel that the agreement should be disclosed, not because they were legally obliged to do so, but because it would be tactically advantageous. In a June 27, 2018 email to K.S.P.’s counsel, Tallman’s lawyer provided a copy of the June 7, 2018 agreement. He advised, “We will not be producing any of the other documents you have requested in this regard.” Tallman’s counsel held back the release it held in escrow pursuant to the written settlement agreement. Tallman disclosed the document only after being ordered to do so following a contested motion before a Master.

[11] On the motion to stay the proceedings, counsel for K.S.P. asserted that there was at least an oral agreement as of May 22, 2018 that should have been immediately disclosed. The motion judge did not necessarily reject this submission; instead, he preferred to base his decision on the June 7, 2018 written agreement. He said, “I am therefore not to be taken as finding that there was no disclosable agreement prior to June 7, 2018. I simply choose not to decide that question as it is not necessary in this case.”

Discussion

[12] Tallman submits that the motion judge erred in the following ways. He mischaracterized the nature of the dispute between the parties and erred in finding that the settlement agreement changed the entire litigation landscape between the parties. He erred in finding that the settlement agreement was not disclosed immediately, as contemplated in Handley. He erred in finding that Handley applied to the Pierringer-type agreement in this case, and in finding that the factual circumstances fell within the ambit of Handley. Lastly, to the extent that the facts of this case crossed the line drawn in Handley, the motion judge erred in failing to impose a more measured remedial response, short of a stay of proceedings.

[13] We reject these submissions.

[14] In his oral submissions, Mr. Curry on behalf of Tallman, submits that the motion judge mischaracterized the degree to which the positions of K.S.P. and Secure were mutually antagonistic. This led the motion judge to erroneously find that Secure’s change of position was sufficient to constitute a change to the litigation landscape, as contemplated in Handley and earlier cases: see Aecon Buildings v. Stephenson Engineering Limited, 2010 ONCA 898, 328 D.L.R. (4th) 488, leave to appeal refused, [2011] S.C.C.A. No. 84; Laudon v. Roberts, 2009 ONCA 383, 308 D.L.R. (4th) 422, at para. 39, leave to appeal refused, [2009] S.C.C.A. No. 304.

[15] We do not accept this submission. This basis for challenging the motion judge’s decision was not included in Tallman’s Notice of Appeal. Moreover, Tallman’s factum appears to acknowledge there was such a change, but insists that disclosure had been adequate.

[16] In any event, the motion judge did not misapprehend the nature of the relationship between the defendants. Although there were no cross-claims between K.S.P. and Secure (their dispute having been addressed in earlier litigation that settled), Secure’s realignment with Tallman was a dramatic change from K.S.P.’s perspective. As the motion judge said:

[A]fter the settlement between the plaintiff and Secure, Secure reversed its position and went from opposing the plaintiff to supporting the plaintiff’s claim. It is no longer submitting a position in the litigation that is adverse in interest to the plaintiff.

On June 7, 2018, Secure’s counsel provided a written acceptance. From that point onward at least, Secure was no longer adverse in interest to the plaintiff. Rather, to obtained its bargained-for release, the quality of its continuing support of the plaintiff was subject to the plaintiff’s approval.

[17] It was open to the motion judge to make these findings. The lack of cross-claims between the defendants was not a necessary condition to the application of Handley.

[18] Tallman submits that it did make disclosure – “functional disclosure” – of the settlement agreement on June 8, 2018 when it served its notice of discontinuance on counsel for K.S.P. Combined with the delivery of Secure’s affidavit (which disingenuously purported to respond to the summary judgment motion), the change in the litigation landscape would have been obvious to K.S.P.

[19] It was open to the motion judge to reject this proposition. The motion judge credited K.S.P.’s counsel for his astuteness in realizing that something was amiss when Tallman served the notice of discontinuance. However, he observed, “[b]ut a settlement can have any number of terms.” As he explained:

In my view, in serving Secure's responding motion record and then the notice of discontinuance, the plaintiff and Secure made no disclosure of any settlement agreement. They took steps in the litigation that would lead experienced litigants to infer the existence of a settlement of some kind. That is not disclosure of an agreement that changes the litigation landscape.

Even if KSP's counsel could be said to have been told enough to discern that there was a settlement, nothing in the documents delivered by the plaintiff and Secure disclosed the existence of a litigation agreement under which Secure was obligated to provide ongoing support to the plaintiff's satisfaction.

KSP's counsel was left to divine the nature of the settlement instead of being told about it forthrightly and immediately. [Emphasis added.]

[20] We agree with the motion judge that an obligation of such importance cannot turn on hints offered by opposing counsel. This would leave the matter to guesswork, an especially hazardous situation where counsel is less experienced or when parties are self-represented.

[21] Moreover, this submission does not sit well with the position expressed by Tallman’s counsel at the time – i.e., that it was not legally required to disclose the settlement agreement. There was no evidence that service of the notice of discontinuance and the delivery of the Secure affidavit were meant to function as disclosure. Consequently, even if there were such a thing as “functional disclosure” in this context, in this case it would have amounted to “unintentional functional disclosure.” This is untenable. In reality, the existence of the settlement agreement only became apparent when the parties were in the process of implementing it.

[22] Although counsel for K.S.P. suspected that a settlement had been reached, he had no idea about the terms of the settlement. As counsel for K.S.P. submitted on appeal, without disclosure of the agreement, he would not have known that the affidavit produced by Secure was “a negotiated piece of evidence.” Moreover, while the notice of discontinuance appeared to signal Secure’s departure from the litigation, Secure remained heavily invested in the case by virtue of its contractual obligation to assist Tallman – the release was being held in escrow, its delivery being contingent on Secure’s performance in its new role. All of this was unknown to K.S.P. until three weeks after Tallman and Secure signed their agreement.

[23] Tallman submits that the motion judge erred by applying Handley (which involved a Mary Carter agreement) to the Pierringer-type of agreement in this case. We disagree. The motion judge quoted the following passage from para. 39 of Handley: “The obligation of immediate disclosure is not limited to pure Mary Carter or Pierringer agreements. The disclosure obligation extends to any agreement between or amongst parties to a lawsuit that has the effect of changing the adversarial position of the parties set out in their pleadings into a cooperative one” (emphasis added). As the motion judge said, “That describes exactly what has happened here.”

[24] More broadly, Mr. Curry submits that the litigation conduct in this case does not approach the level contemplated by Handley. He submits that Handley is aimed at rooting out “shams”, and correcting failures of justice. He contends that this case falls far short of that standard. He relies on the short period of time that elapsed between the settlement agreement being signed and its disclosure – just three weeks. He also relies on the motion judge’s finding that Tallman’s counsel had not acted for nefarious reasons; at worst, they appeared to be oblivious to the obligation to immediately disclose the settlement agreement.

[25] We agree with the motion judge’s rejection of this submission. He was aware that Handley involved a “sham process” that had been perpetuated for as long as five years. However, he found that the presentation of Secure’s affidavit was also “a sham” and “studded with pretense.” It was open to the motion judge to make these findings. As he noted, although the failure to immediately disclose a settlement agreement may adversely affect other parties to the litigation, judges may also be impacted. As he wrote:

I, for one, read the evidence before I read the parties’ factums. In preparing for the motion, due to the misleading manner of presentation, I would not have known at the outset, as required, that the defendant Secure was on the plaintiff’s side pursuant to a settlement agreement that requires its support to the plaintiff’s satisfaction. [Emphasis added.]

[26] We also reject the submission that the three-week period between reaching the agreement and disclosing it was negligible and ought not to be caught by the immediate disclosure rule. The standard is “immediate”; it is not “eventually” or “when it is convenient”. As the motion judge said: “The rules really can’t be any clearer. Where an agreement involves a party switching sides from its pleaded position, it must be disclosed as soon as it is made.” Here, Tallman and Secure attempted to implement the settlement agreement before disclosing it to K.S.P. More troubling, it is unclear on this record whether Tallman would have disclosed the agreement had K.S.P.’s counsel not asked for it. Even then, it was disclosed for tactical reasons, not in observance of a legal obligation.

[27] Lastly, Tallman submits that, to the extent that this case crossed the line in the Handley, it did not warrant a stay of proceedings. He relies on the fact that the missteps of Tallman’s counsel were not taken in bad faith, the delay was comparatively brief, and K.S.P. suffered no prejudice as a result of what happened.

[28] This argument was firmly rejected in Aecon, in which MacFarland J.A. held, at para. 16: “Any failure of compliance amounts to an abuse of process and must result in consequences of the most serious nature for the defaulting party.” Reinforcing this principle, in Handley, Brown J.A. confirmed that, “[t]he only remedy to redress the wrong of the abuse of process is to stay the claim asserted by the defaulting, non-disclosing party”: at para. 45. This remedy is designed to achieve justice between the parties. But it does more than that – it also enables the court to enforce and control its own process by deterring future breaches of this well-established rule.

Conclusion and Disposition

[29] The appeal is dismissed. K.S.P. is entitled to costs in the amount of $25,000 inclusive of disbursements and HST.

“Grant Huscroft J.A.”

“Gary Trotter J.A.”

“S. Coroza J.A.”