Daniele et al. v. Johnson et al. [Indexed as: Daniele v. Johnson]

45 O.R. (3d) 498

[1999] O.J. No. 2562

Court File No. 96-CU-113190CM

Div. Ct. File No. 806/97

Ontario Superior Court of Justice

Divisional Court

Then J.

July 6, 1999

Civil procedure -- Pleadings -- Defendants counterclaiming against plaintiffs in personal injury action -- Defendants and plaintiffs' insurer settling counterclaim -- Defendants executing release with respect to counterclaim and any further claims or counterclaims -- Notice of discontinuance filed -- Master refusing to grant leave to defendants to deliver fresh counterclaim and refusing to set aside notice of discontinuance -- Mandatory language of rule 26.01 of Rules of Civil Procedure not creating absolute right of amendment where opposite party not prejudiced -- Court entitled to inquire into merits of amendment to ensure that it is tenable in law -- Master not erring in refusing to allow defendants to deliver fresh counterclaim on basis of release -- Section 278(6) of Insurance Act applying only in cases where insurer makes payment or assumes liability and has rights of subrogation -- Court not having authority to set aside notice of discontinuance where notice has been properly and validly served and filed -- Insurance Act, R.S.O. 1990, c. I.8, s. 278(6) -- Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 26.01.

The defendants in an action for damages arising out of a motor vehicle accident delivered a statement of defence and counterclaim in 1997. A representative of the plaintiffs' insurer met with the defendants to discuss a settlement of the counterclaim. The defendants were not represented by counsel. They accepted $6,000 for a full and final release of any claims against the plaintiffs and the insurer in respect of the accident. A notice of discontinuance was served and filed. The defendants subsequently brought a motion for leave to deliver a fresh counterclaim, for an order that the release did not bar the fresh counterclaim and for an order setting aside the notice of discontinuance. The motion was dismissed. The defendants appealed.

Held, the appeal should be dismissed.

The master did not err in law in refusing to allow the defendants to deliver a fresh counterclaim. The mandatory language of rule 26.01 of the Rules of Civil Procedure does not create an absolute right of amendment for the party seeking to amend a pleading simply because there is a lack of prejudice to the opposite party. Rather, the court is entitled to inquire into the merits of the amendment to ensure that the amendment is tenable in law. Because of the existence of the release, the amendment sought in this case did not meet the required "legal soundness" threshold.

Section 278(6) of the Insurance Act, which provides that a settlement or release given before or after an action is brought does not bar the rights of the insured or the insurer, as the case may be, unless they have concurred therein, only applies in cases where the insurer makes a payment or assumes liability and has rights of subrogation. That was not the case here.

Where a notice of discontinuance has been properly served and filed the court does not have authority to set it aside. In this case, there was no inadvertence, mistake or misapprehension of the client's instructions, and no exceptional circumstance. The master was correct in refusing to grant the defendants' motion to set aside the notice of discontinuance.

APPEAL by the defendants from an order refusing to grant leave to deliver a fresh counterclaim, refusing to order that the release signed by the defendants did not bar a fresh counterclaim and refusing to set aside a notice of discontinuance.

Cases referred to Atlantic Steel Industries Inc. v. Cigna Insurance Co. (1997), 1997 12125 (ON SC), 33 O.R. (3d) 12 (Gen. Div.); Carom v. Bre-X Minerals Ltd. (1998), 1998 14705 (ON SC), 41 O.R. (3d) 780, 41 B.L.R. (2d) 246, 43 C.C.L.T. (2d) 310, 27 C.P.C. (4th) 73 (Gen. Div.); Davis v. Campbell (1986), 1986 2764 (ON CA), 54 O.R. (2d) 443, 20 C.C.L.I. 1, 9 C.P.C. (2d) 48 (H.C.J.); Keneber Inc. v. Midland (Town) (1994), 1994 7221 (ON SC), 16 O.R. (3d) 753 (Gen. Div.); Magee v. Canada Coach Lines Ltd., [1946] O.W.N. 73 (Master); National Gypsum Co. v. Lanzino (1985), 50 C.P.C. 88 (Ont. H.C.J.); Pacific Centre Ltd. v. Micro Base Development Corp. (1990), 1990 1985 (BC CA), 49 B.C.L.R. (2d) 218, 43 C.P.C. (2d) 302 (C.A.); Toronto Hydro-Electric Commissioners v. Budget Car Rental Toronto Ltd. (1983), 1983 1821 (ON SC), 43 O.R. (2d) 539, [1984] I.L.R. 1-1727 (Co. Ct.) Statutes referred to Family Law Act, R.S.O. 1990, c. F.3 Insurance Act, R.S.O. 1990, c. I.8, s. 278(6) Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 26.01

Enio Zeppieri, for plaintiffs (respondents). Robert S. Franklin, for defendants (appellants).

[1] THEN J.: -- This is an appeal by the defendants from an order of Master Polika dated October 15, 1997 refusing to grant leave to the defendants to deliver a fresh counterclaim, refusing to order that the release signed by the Johnsons did not bar the fresh counterclaim, and refusing to set aside the notice of discontinuance.

The Facts

[2] The underlying action was commenced in October 1996 as a result of an automobile accident which had occurred on October 28, 1994. The various plaintiffs claim for damages for personal injury and under the provisions of the Family Law Act, R.S.O. 1990, c. F.3.

[3] The defendants, acting in person, delivered their statement of defence and counterclaim dated January 31, 1997 as well as a notice of defence. The plaintiff, Rosina Daniele, was the driver of one of the vehicles involved in the accident. The plaintiff, Emma Daniele, was a passenger in Rosina Daniele's vehicle. The defendants did not claim contribution and indemnity for their liability for any damages for personal injuries suffered by Emma Daniele in their counterclaim against Rosina Daniele. In the proposed fresh counterclaim, for which leave was sought from the master, the claim was advanced for the first time.

[4] In February 1997, counsel for the plaintiffs referred the defendants' counterclaim to Zurich Insurance. A representative of Zurich, Barry Cook, spoke with the defendant, Hubert Johnson, to attempt to settle the counterclaim. Mr. Cook was referred to the defendants' representative, Mr. Jackson who identified himself as a paralegal.

[5] A settlement meeting was arranged for May 14, 1997 at Zurich's offices. The Johnsons attended but Jackson did not. After waiting 20 minutes the settlement discussions ensued at the Johnsons' suggestion. The Johnsons confirmed that they had retained Jackson to act on their behalf in the action and that they had paid him $3,000. Zurich offered $6,000 for a full and final release of any claims against Zurich in respect of the accident. A release was produced, it was read to the Johnsons and its nature and effect was explained to them. Mr. Cook, in his affidavit of September 16, 1997, deposed that at the meeting he specifically pointed out to the Johnsons "that executing the release would bar them from any further claims or counterclaims as against both the Plaintiffs and Zurich Canada in relation to this motor vehicle accident". He went on to say his intention was "to settle the matter of the counterclaim with the Defendant and avoid Zurich's involvement in the within action". Mr. Cook further stated that he advised the defendants to take the documents to their advisor to have them reviewed.

[6] The Johnsons did not tender their own affidavits in reply to the affidavits filed on behalf of the plaintiffs particularly that of Mr. Cook. There was no material filed to indicate that they were not in a position to personally respond. Counsel for State Farm, the defendants' insurer, filed two affidavits in response. As noted by Master Polika in his reasons:

To the extent Mr. Franklin's second affidavit, which is based largely on information and belief, may contradict that of Mr. Cook, I accept that of Mr. Cook. A careful reading of the solicitor's second affidavit reveals it was crafted to address State Farm's interests. Although Mr. Cook's affidavit of September 16, 1997 was served well in advance Mr. Franklin's responding affidavit does not directly take issue with Mr. Cook's assertions quoted above.

The Proceedings Before the Master

[7] The defendants had applied to the master for leave to file a fresh notice of defence, statement of defence, counterclaim and jury notice. The plaintiffs had brought an action for damages for personal injuries arising from a motor vehicle accident. The plaintiffs had agreed to the delivery of all but the fresh counterclaim and jury notice. The proposed counterclaim sought contribution and indemnity for any damages, interest or costs payable as a result of any injuries sustained by the plaintiffs. The plaintiffs argued that the original counterclaim was discharged and that the fresh counterclaim was barred by a release given by the defendants which provided that it was in respect of damages for personal injury and released the plaintiff from any action or claim for damages where the injury or damages had been sustained as a result of the accident. The defendants argued that the release was not a bar to the counterclaim as it amounted only to a release of the personal injuries of the defendant and that the proposed counterclaim was one for contribution and indemnity and not for damages for personal injuries.

[8] The appellants moved for three orders before Master Polika, namely, an order granting leave to deliver a fresh counterclaim, an order setting aside a notice of discontinuance dated May 20, 1997 and an order that the release dated May 20, 1997 did not bar the proposed fresh counterclaim. The motion was dismissed by the learned master. As he stated at p. 3 of his reasons:

It is clear from the evidence and my findings on the evidence that Zurich Canada and the Johnsons intended by the release to preclude not only the Johnson counterclaim but any further claims or counterclaims. On that basis rectification as granted in Burns v. Wellington Insurance Co. (1994), 16 O.R. (3d) 569, 1994 760 (ON CA), 111 D.L.R. (4th) 260 is not available. In the decision rectification was granted because the parties did not intend to preclude further proceedings which is not the case herein. Similarly the decision in Peter Pan Drive-In Ltd. v. Flamboro Realty Ltd. (1978), 1978 2160 (ON SC), 22 O.R. (2d) 291, 93 D.L.R. (3d) 221 is of no assistance as rectification was granted to reflect a common intention of the parties. The common intention of the parties in this action was to preclude not only the Johnson counterclaim but any further claims or counterclaims against both the plaintiffs and Zurich Canada. The rectification, now sought by State Farm flies in the face of the parties common intention.

The Issues

[9] The issues on appeal may be stated in the form of the following questions:

(1) Did the Master err in law in refusing to allow the defendants to deliver a fresh counterclaim?

(2) Did the Master err in law in failing to find that by virtue of s. 278(6) of the Insurance Act, R.S.O. 1990, c. I.8, the release signed by the defendants did not bar the fresh counterclaim?

(3) Did the Master err in law in failing to exercise his jurisdiction to set aside the notice of discontinuance?

Discussion

(1) The refusal to allow the fresh counterclaim

[10] The appellants submit that Master Polika erred in not allowing them to deliver a fresh counterclaim because he (i) did not apply rule 26.01 of the Rules of Civil Procedure to the case at bar, (ii) did not find that the plaintiffs would suffer prejudice that could not be compensated for by costs or an adjournment, and (iii) entered into a determination of the merits of the amendment.

[11] Under rule 26.01, a court must grant leave to amend a pleading unless there is prejudice that cannot be compensated for by costs or an adjournment. Ordinarily, the court does not inquire into the merits when determining whether leave to amend should be granted: see National Gypsum Co. v. Lanzino (1985), 50 C.P.C. 88 (Ont. H.C.J.). However, where the amendment sought is of such a nature that the granting of leave will be immediately followed by a motion to strike the amendment, then the court should examine the merits of the proposed amendment: see Atlantic Steel Industries Inc. v. Cigma Insurance Co. (1997), 1997 12125 (ON SC), 33 O.R. (3d) 12 (Gen. Div.) at pp. 17-18; Carom v. Bre-X Minerals Ltd. (1998), 1998 14705 (ON SC), 41 O.R. (3d) 780 at pp. 784-85, 41 B.L.R. (2d) 246 (Gen. Div.).

[12] In Keneber Inc. v. Midland (Town) (1994), 1994 7221 (ON SC), 16 O.R. (3d) 753 (Gen. Div.), Howden J. held that "legal soundness" was required when an amendment was sought under rule 26.01. He stated at p. 758:

In other words, amendments, like any other pleading, are subject to the normal rules as to form, relevance and basis in law. Therefore it is not only proper but in the interests of sound judicial process that leave to amend under rule 26.01 not be granted unless the amendment sought is tenable in law.

[13] In my view, it is clear from the cases which have considered rule 26.01 that the mandatory language does not create an absolute right of amendment for the party seeking to amend a pleading merely because there is a lack of prejudice to the opposite party. Rather, the court is entitled to inquire into the merits of the amendment to ensure that it at least meets a basic threshold.

[14] In this case, Master Polika was of the view that the amendment sought by the appellants was untenable in law. As he stated at p. 3 of his reasons:

What is sought herein under the auspices of rule 26.01 is to add a cause of action which has already been determined by agreement of the parties. If the amendment was permitted it would allow the advancement of an untenable claim, that is a claim which clearly has been settled by agreement.

[15] I find no error to the approach taken by Master Polika. The evidence before him indicated that there was a settlement executed between the plaintiffs and the defendants regarding the counterclaim of the defendant. This was the very issue on which the amendment was sought. In considering whether the amendment was tenable, Master Polika was merely following the procedure set out in the case law. In the circumstances, I do not think that it was necessary for the master to have determined whether or not the amendment would prejudice the plaintiffs. The amendment simply did not meet the threshold of "legal soundness" required.

[16] The appellants advance the argument on this appeal that the tenability of the claim was determined on the basis of a settlement agreement which did not reflect the intention of the parties and was, in any event, ambiguous.

[17] The appellants submit that it was not intended by Johnson and Cook that the release would prevent State Farm from bringing a counterclaim for contribution and indemnity in respect of the injuries of the plaintiff, Emma Daniele. Furthermore, the appellants contend that there is an ambiguity in the release signed by Johnson and as such, the ambiguity should be resolved in favour of the appellants under the rule of contra proferentem.

[18] Generally, courts will not speculate as to what was the intention of the parties to an agreement. In this case the appellants were not under any pressure to sign the release and there is no indication that the appellants were not consenting to the terms of the release. Further, the agreement between the parties was reduced to writing and extrinsic evidence is generally inadmissible to contradict the terms of the agreement. I agree with Master Polika that the terms of the release are clear and unambiguous. The release is a final settlement of the counterclaim of any further claims or counterclaims against both the named plaintiff and Zurich Canada.

(2) The effect of s. 278(6) of the Insurance Act

[19] The appellants also advanced the argument that pursuant to s. 278(6) of the Insurance Act, a settlement or release given before or after an action is brought does not bar the rights of the insured or the insurer, as the case may be, unless they have concurred therein. Again I concur with Master Polika and hold that s. 278(6) only applies in cases where the insurer makes a payment or assumes liability and has rights of subrogation. That is not the case here. A helpful discussion of this point is provided by Matlow J. in Toronto Hydro-Electric Commissioners v. Budget Car Rental Toronto Ltd. (1983), 1983 1821 (ON SC), 43 O.R. (2d) 539 (Co. Ct.) at p. 544:

242(6) A settlement or release given before or after an action is brought does not bar the rights of the insured or the insurer, as the case may be, unless they have concurred therein.

However, in my view, s. 242(6) does not assist the insurer because, at the time the release was given, the insurer had not yet made any payment or assumed any liability for making payment and, therefore, it had not yet become subrogated to the rights of Budget against Gundy. By s. 242(1) of the Insurance Act, an insurer does not obtain any rights of subrogation until it "makes any payment or assumes liability therefor". Section 242(1) reads as follows:

242(1) An insurer who makes any payment or assumes liability therefor under a contract is subrogated to all rights of recovery of the insured against any person and may bring action in the name of the insured to enforce those rights.

As well, I think that this interpretation of s. 242(6) is consistent with the object of that subsection and is supported by the judgment of the Divisional Court in Biafore v. Bates-Pasis Leasing Inc. (1976), 1976 801 (ON SC), 11 O.R. (2d) 409, 66 D.L.R. (3d) 225, [1976] I.L.R. 111, especially at p. 410 of the reasons for judgment where Estey C.J.H.C. (as he was then) stated:

We are of the view that both practicality and the balanced reading of s. 240(1) and (6) [now s. 242(1)and (6)] require the interpretation of the section to mean that the effective right of subrogation cannot be destroyed by the execution after payment of a release by the insured alone.

If an insured, in disregard of the potential rights of his insurer, executes a release and thereby destroys his insurer's potential subrogated rights, it may be that he becomes subject to a claim against him by the insurer or that he becomes disentitled to the benefit of the insurance. However, if, as here, a payment is made to an insured in return for a final release at a time before the insurer has become subrogated to the rights of the insured, the recipient of the release should be entitled to take the release at face value without fear of any future claim against him by the insurer.

(3) Refusal to set aside the notice of discontinuance

[20] Finally the appellants argued that the court has inherent jurisdiction to set aside a notice of discontinuance in proper circumstances where the interests of justice require as well as in cases where there has been inadvertence or misapprehension of the circumstances.

[21] I agree with the appellants that in certain circumstances the court can set aside a notice of discontinuance. The case law has set out that in circumstances where the notice of discontinuance is not properly filed or served or where there has been inadvertence or misapprehension the notice of discontinuance can be set aside: see Davis v. Campbell (1986), 1986 2764 (ON CA), 54 O.R. (2d) 443, 20 C.C.L.I. 1 (H.C.J.). However, the case law is also clear that where the notice of discontinuance has been properly and validly served and filed the court does not have authority to set aside the notice of discontinuance: see Magee v. Canada Coach Lines Ltd., [1946] O.W.N. 73 (Master); Pacific Centre Ltd. v. Micro Base Development Corp. (1990), 1990 1985 (BC CA), 49 B.C.L.R. (2d) 218, 43 C.P.C. (2d) 302 (C.A.). This case was not a proper one in which to exercise discretion, since there was no inadvertence, mistake or misapprehension of the client's instructions, and no exceptional circumstance. The appellants knowingly, and after five days of consideration, signed the release. They accepted a $6,000 settlement from the plaintiffs for which the notice of discontinuance was a condition. In my view I find that Master Polika was correct in refusing to grant the appellants' motion to set aside the notice of discontinuance.

[22] For all these reasons I hold that the order of Master Polika dated October 15, 1997 dismissing the appellants' motion for (i) an order granting leave to deliver a fresh counterclaim as set out in Schedule "A" attached to the notice of motion, (ii) an order setting aside the notice of discontinuance dated May 20, 1997; and (iii) an order that the release dated May 20, 1997 does not bar the proposed fresh counterclaim, is correct in law. Accordingly, the defendants' appeal is dismissed with costs to the respondents. The parties may file written submissions with respect to costs within one month of the receipt of these reasons.

Appeal dismissed.