Court of Appeal for Ontario

Date: 2023-10-23 Docket: COA-23-CV-0860

Harvison Young, Thorburn and Favreau JJ.A.

Between

2177546 Ontario Inc. Applicant (Respondent)

and

2177545 Ontario Inc. Respondent (Appellant)

Counsel: Thomas Curry, Derek Knoke and Nikolas De Stefano, for the appellants Chris Paliare, Daniel Rosenbluth and Janet-Lee Song, for the respondents

Heard: September 21, 2023

On appeal from the order of Justice William S. Chalmers of the Superior Court of Justice, dated July 13, 2023.

Thorburn J.A.

Overview

[1] This appeal concerns the appropriate remedy for accessing an opposing party’s privileged information.

[2] The application judge found that Mr. Halyk, the appellant’s principal, deliberately accessed privileged emails of the respondent.

[3] The application judge struck the appellant’s Notice of Appearance in an Application to Partition the parties’ land (the “Partition Application”), barred the appellant from filing evidence, and ordered that the Partition Application proceed undefended, subject to leave being granted by the judge hearing the matter.

[4] Mr. Halyk does not challenge the finding that he accessed privileged information relevant to this litigation although he disputes that he did so deliberately.

[5] The appellant claims, however, that the application judge erred by (1) imposing a remedy that was neither pleaded nor proven by the respondent, and (2) failing to consider that lesser remedies such as appointing another director or officer of the appellant to instruct counsel, or appointing a litigation trustee to act on behalf of the appellant, could cure the prejudice.

[6] The appellant claims that in imposing the remedy he did, the application judge ignored the fact that the respondent had the onus to demonstrate that striking the Notice of Application was the only available remedy: Continental Currency Exchange Canada Inc. v. Sprott, 2023 ONCA 61, at para. 42, leave to appeal refused, [2023] S.C.C.A. No. 142. The appellant further claims that this remedy imposes new obligations on non-lawyers and creates a “risk of prejudice to the integrity of the justice system.”

[7] The respondent submits that the application judge correctly articulated the legal principles and exercised his discretion in applying them. The respondent notes that an application judge’s exercise of discretion attracts significant deference on appeal and there are no grounds to interfere in this case: National Organized Workers Union v. Sinai Health System, 2022 ONCA 802, at para. 28.

[8] For the reasons that follow, I would dismiss the appeal.

[9] I will begin by setting out the legal test to decide the appropriate remedy where privileged information is received by an opposing party. I will then provide a brief summary of the background evidence, followed by my analysis of the application judge’s reasons.

The Legal Test to Decide the Appropriate Remedy

[10] The test to decide the appropriate remedy where privileged information is received by an opposing party (in this case, the appellant) or its counsel is set out in Celanese Canada Inc. v. Murray Demolition Corp., 2006 SCC 36, [2006] 2 S.C.R. 189, and more recently, in Continental Currency. A breach of privilege “creates a serious risk to the integrity of the administration of justice” and, to prevent this, the courts must act “swiftly and decisively”: Celanese, at para. 34.

[11] This court in Continental Currency, citing Celanese, set out a three-part test for resolving issues of unauthorized access to privileged documents. [1]

[12] At the first stage, the moving party (in this case, the respondent) must establish that the opposing party (in this case, the appellant) obtained access to relevant privileged material.

[13] At the second stage, the risk of significant prejudice is presumed and the respondent does not have the onus of proving “the nature of the confidential information” disclosed: Celanese, at paras. 42 and 48. Rather, the appellant has the onus to rebut the presumed prejudice flowing from receipt of privileged information: Celanese, at para. 48.

[14] The presumption of prejudice can be rebutted by identifying “with some precision” that: (i) the appellant did not review any of the privileged documents in their possession; (ii) the appellant reviewed some documents, but they were not privileged; or (iii) the privileged documents reviewed were nevertheless “not likely [to] be capable of creating prejudice”: Celanese, at para. 53. The evidence must be “clear and convincing” such that “[a] reasonably informed person would be satisfied that no use of confidential information would occur”: MacDonald Estate v. Martin, , [1990] 3 S.C.R. 1235, at pp. 1260-63; see also, Celanese, at para. 42. “A fortiori undertakings and conclusory statements in affidavits without more” do not suffice: MacDonald Estate, at p. 1263.

[15] Where the precise extent of privileged information is unknown and possibly unknowable, “the court should infer that confidential information was imparted unless the solicitor satisfies the court that no information was imparted which could be relevant”: McDonald Estate, at p. 1290. As summarized in Celanese, at paras. 49-51, there are compelling reasons for the presumption of prejudice and the reverse onus on the appellants in receipt of privileged information including:

i. Requiring the respondent whose privileged information has been disclosed or accessed to prove actual prejudice would require them to disclose further confidential or privileged materials;

ii. Placing the burden on the appellant who has access to the privileged information is consonant with the usual practice that “the party best equipped to discharge a burden is generally required to do so”; and

iii. The respondent does not have to bear “the onus of clearing up the problem created by the [appellants’] carelessness”.

[16] The third stage of the analysis is to fashion an appropriate remedy. At this stage, the respondent has the burden to show “special circumstances” where a stay is sought.

[17] A stay is only granted where there is prejudice to the right to a fair trial or the integrity of the justice system and there is no alternative remedy to cure the prejudice: Etco Financial Corp. v. Ontario, [1999] O.J. No. 3658 (S.C.), at para. 3; R. v. Babos, 2014 SCC 16, [2014] 1 S.C.R. 309, at para. 32.

[18] A number of non-exhaustive factors should be considered in determining the appropriate remedy including:

i. How the documents came into the possession of the appellants or their counsel;

ii. What the appellants and their counsel did upon recognition that the documents were potentially subject to solicitor-client privilege;

iii. The extent of review of the privileged material;

iv. Contents of the solicitor-client communications and the degree to which they are prejudicial;

v. The stage of the litigation; and

vi. The potential effectiveness of a firewall or other precautionary steps to avoid mischief: Celanese, at para. 59.

[19] Where the party in receipt of privileged documents fails to identify what documents were reviewed, they put the court in an “invidious position” of being unable to determine the extent of the actual review of the material and the degree of resulting prejudice: Continental Currency at para. 45; Celanese, at paras. 62-63; MacDonald Estate, at p. 1263.

The Evidence in This Case

[20] Paul Halyk is the principal of the appellant, 2177545 Ontario Inc. His former brother-in-law and business partner, Peter Labiris, is the principal of the respondent, 2177546 Ontario Inc. Halyk and Labiris worked together for many years on various real property ventures under the umbrella of the “Zitia Group”.

[21] In July 2008, Mr. Labiris and Mr. Halyk’s companies acquired, as tenants in common, a vacant piece of development land located at 227 Decou Road, Simcoe, Ontario (the “Property”).

[22] When their relationship broke down in 2021, an application was brought before the Committee of Adjustment (the “Committee”) to sever the Property into two equal 51-acre parcels. The Partition Application contains the signatures of both Mr. Labiris and Mr. Halyk. Both Mr. Labiris and his colleague Catherine Cooper swore that they witnessed Mr. Halyk sign the Partition Application.

[23] Mr. Halyk claims that he did not sign the Partition Application and that his signature is a “forgery”. He claims he would not have sought this relief as the value of the Property would be much greater if it were sold as a single unsevered parcel and that if the Property is partitioned, he will not receive the same amount of developable land.

[24] In April 2021, the Committee approved the Partition Application and issued its consent under the Planning Act to sever the Property (the “Consent to Sever”). The Consent to Sever will expire if the terms are not fully implemented by April 21, 2024.

[25] In May 2021, Mr. Halyk appealed the approval of the Consent to Sever to the Ontario Land Tribunal claiming that he had neither signed nor authorized the Partition Application. In January 2022, Mr. Halyk withdrew his appeal but refused to implement the Consent to Sever, by signing the documents to convey the Property into two parcels.

[26] The respondent brought an application under the Partition Act, R.S.O. 1990, c. P.4, to sever the Property.

[27] During the course of this litigation, Mr. Halyk gained access to Mr. Labiris’ privileged emails, read some, and retained copies of privileged communications that pertain to this litigation. They include Mr. Labiris’ proposed settlement terms and discussions with counsel as to how to negotiate with Mr. Halyk in this litigation to try and resolve matters, and strategic advice such as whether the affidavits contain conflicts. The respondents also alleged that during the relevant time period, there may have been emails sent that discussed the focus of cross-examinations.

[28] In March 2023, Mr. Labiris suspected that Mr. Halyk might be acting on confidential information. He therefore contacted Mr. Kopke, a technician who had provided IT services to the Zitia Group. Mr. Kopke advised that he had granted Mr. Halyk full access to Mr. Labiris’ email account in April of 2021 when he attended Mr. Halyk’s house to set up his new home office. This was two weeks after a contested shareholders’ meeting that led to Mr. Halyk beginning an oppression claim in May of 2021.

[29] At the time, Mr. Kopke was unaware that the parties’ relationship had broken down and although he did not specifically recall being asked for access to Mr. Labiris’ account, he stated that “it is my practice to enable access in this manner only if I have been specifically asked to do so by my client.”

[30] Upon discovering that Mr. Halyk had gained access to his confidential information, the respondent commenced an application to stay the appellant’s proceeding. Mr. Halyk’s counsel did not deny that his client had gained access to the email account, although he took the position that the email account was a general email account for the Zitia Group, that Mr. Halyk did not review anything that impacted his litigation strategy, and that it was doubtful that the materials were privileged.

Analysis of the Application Judge’s Decision

The First Stage: The Appellant Accessed Relevant Privileged Information

[31] There is no dispute that the appellant obtained access to some of the respondent’s confidential and privileged information relevant to this litigation and that he did not disclose that he had done so. As noted above, he printed hard copies of some of the documents, including a January 30, 2023 e-mail thread that includes an email from the respondent’s lawyer about an offer to settle with the appellant.

[32] The application judge held that Mr. Halyk intentionally accessed the privileged communications:

Halyk made the decision to go into the zitia@zitiagroup.com e-mail account. When he saw documents what were privileged and confidential, such as communications between Labiris and/or Ms. Cooper and their lawyers, he chose to read the documents. In the case of the January 30, 2023 e-mail thread between Ms. Cooper and Mr. Rosenbluth about the proposed offer to settle, Halyk chose to print and retain a copy. He appears to have attempted to provide at least some of the e-mails to his lawyer. Although Halyk may not have stolen a password or hacked into a computer, his conduct was intentional.

[33] The application judge also noted that the “e-mail about litigation strategy involving a settlement offer is at the high end of the continuum of serious prejudice.”

[34] The burden on the respondent at the first stage is only to demonstrate that “the opposing party obtained access to the privileged material” which is not disputed: Continental Currency at para 33. That onus was satisfied.

[35] Moreover, I see no error in the application judge’s finding that the decision to read, download and print these privileged documents was deliberate as the appellant could not have genuinely believed he had licence to read Mr. Labiris’ privileged emails after the parties were engaged in litigation.

[36] As such, the application judge made no error in finding that the first stage of the test was met.

The Second Stage: There is a Presumption of Prejudice

[37] Second, although Mr. Halyk produced hard copies of four e-mail threads in the application, he did not state in his affidavit or on cross-examination that these were the only four e-mails he reviewed. Nor did Mr. Halyk explain what happened, why, or what he did with the documents he printed. The application judge therefore concluded that Mr. Halyk was not “transparent with respect to the information contained on his electronic devices” and that there was “no reasonable explanation for Halyk to not allow the e-mail drain from his Outlook account.”

[38] The application judge rightly presumed that the extent of review of the privileged material, the content of the solicitor-client communications and the degree to which they are prejudicial, weigh against the appellant: Celanese, at paras. 62-63; MacDonald Estate, at p. 1263.

[39] The appellant could and should have rebutted the presumption of prejudice by disclosing what documents they accessed, what was done with them and when. The appellant did not.

[40] As such, the application judge made no error in finding the presumption of prejudice test at the second stage was met.

The Third Stage: Determining the Appropriate Remedy

[41] The key question on this appeal is whether the application judge erred in deciding that striking the appellant’s evidence and requiring the matter to proceed as an undefended proceeding was the appropriate remedy.

[42] On the application, Mr. Halyk did not address the issue of what remedy was appropriate, except to say that no remedy was warranted. The respondent took the position that the appropriate remedy would be that judgment be granted on its application.

[43] The application judge recognized that granting judgment without giving the appellant a right to respond should be limited to the most exceptional cases and was mindful of the risk of granting judgment without a full record. As such, he held that granting judgment was not the only appropriate remedy.

[44] He noted however, that it would be inappropriate to order a remedy that would allow Mr. Halyk to “use to his benefit any confidential and prejudicial information he may have accessed.” To do so would give the appellant an advantage in the litigation and reward him for accessing and reading e-mails that he would have known were privileged communications not intended for him.

[45] The application judge noted that access to privileged information such as legal advice risks serious prejudice and that since the appellant did not discharge its onus to rebut the presumption of prejudice, the court could draw an adverse inference and presume that the respondent suffered and would continue to suffer significant ongoing prejudice.

[46] The appellant argues, however, that since the onus is on the respondent at this stage to show the appropriateness of the remedy, it was incumbent on the respondent to establish with some certainty the documents the appellant may have seen, in order to show that the prejudice suffered by the respondent justified the extraordinary remedy sought. The appellant claims that the application judge wrongly reversed this onus by relying on the appellant’s failure to rebut the presumption of prejudice.

[47] The application judge’s analysis reflects no error in applying the test articulated in Continental Currency.

[48] The application judge correctly found that to require the respondent to put forward evidence that the privileged documents reviewed contained such prejudicial content that the extraordinary remedy was justified, would require them to disclose further confidential or privileged materials.

[49] As the application judge correctly noted, Continental Currency, at para. 45, specifically states that relying on the adverse presumption is proper, “even though the burden at the remedy stage shifts to the respondents” to show the appropriate remedy.

[50] Because the appellant did not address other possible remedies, the application judge did not address the specific remedies now raised, but did note that,

[T]he information was accessed by the client and not the lawyer. As a result, there cannot be a “firewall”, to insulate the client from the information that may been accessed by the lawyer. Because the information is known by the litigant, he cannot disabuse himself of the knowledge. As noted in Continental Currency:

[50] In imposing a stay of proceedings, the motion judge noted that “even if the [appellants] had new lawyers”, the presumed prejudice to the respondents and the harm to the administration of justice would not be cured as the client, not the lawyer, obtained access to privileged information belonging to the opposing party.

[51] I note that while lesser remedies were ordered in some cases cited by the appellant, in all of those cases, the person who accessed the confidential information disclosed what documents were reviewed such that the court was able “to consider the documents inappropriately accessed in the context of the issues in the litigation, to assess the potential harm” and tailor an appropriate remedy: See O’Dea v. O’Dea, 2019 NLSC 206, at paras. 68-69; Morneault v. Dynacorp Acquisition Ltd., 2006 ABQB 831; and Dixon v. Lindsay, 2021 ONSC 1360.

[52] As this court in Bruce Power observed in upholding a stay of proceedings, the court may presume that “if the [party in receipt of privileged material] had been able to lead evidence to rebut the presumption of prejudice, it would have done so”: R. v. Bruce Power Inc., 2009 ONCA 573, 90 O.R. (3d) 272, at para. 63. In the absence of such evidence, the appellant must “shoulder the consequences” at the remedy stage: Celanese, at paras. 62-63.

[53] In any event, the appointment of a litigation trustee would not obviate the fact that the appellant’s affidavits have already been prepared in the context of the appellant knowing the respondent’s litigation strategy, including his instructions to his expert witness and negotiation positions, which prejudice cannot be cured by the appointment of a litigation trustee. Moreover, even if the affidavits are struck, Mr. Halyk and his experts could prepare new affidavits without which the trustee would have no witnesses to oppose the application.

[54] As such, there were ample grounds to support the application judge’s decision to strike Mr. Halyk’s response to the application and order the matter to proceed before a judge at an undefended hearing. Deference is owed to the application judge’s exercise of discretion and such a remedy is fitting where a party appropriates privileged communications and fails to address the wrongdoing.

Conclusion

[55] For the above reasons, I would dismiss the appeal.

[56] Costs in the amount of $37,500 all inclusive are payable to the respondent as agreed by the parties. As discussed, the parties may file written submissions of no more than five pages to address the issue of whether the cost order should be stayed pending the final decision as to partition of the land.

Released: October 23, 2023 “AHY” “Thorburn J.A.” “I agree. Harvison Young J.A.” “I agree. L. Favreau J.A.”

[1] In what follows in this section, this court’s decision in Continental Currency, at paras. 32-45, is cited, sometimes paraphrased, and sometimes quoted verbatim without block quotes.