CITATION: Alofs v. Blake, Cassels & Graydon, 2016 ONSC 6907
COURT FILE NO.: 06-CV-322357
DATE HEARD: November 4, 2016
ENDORSEMENT RELEASED: November 8, 2016
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: PAUL ALOFS v. BLAKE, CASSELS & GRAYDON and RACHEL INGRAM
BEFORE: Master R. Dash
COUNSEL: Eli Lederman and Ian MacLeod, for the plaintiff
Daniel Schwartz and Larissa Moscu, for the defendants
REASONS FOR DECISION
[1] This is a motion by the defendants to compel production of documents from the files of the policy manager of the plaintiff’s subrogating insurer over which the plaintiff claims privilege and to examine a representative of the policy manager pursuant to rule 31.03(8).
BACKGROUND
[2] The plaintiff Paul Alofs had been a director and shareholder of Kremeko Inc. In 2003 Alofs sold his shares of Kremeko. Several other shareholders (including one Fiorillo) then purchased additional shares in Kremeko and suffered a loss. The shareholders sued Kremeko, Alofs and other directors by way of application (the “Fiorillo Application”), and then after Kremeko assigned into bankruptcy commenced an action against the directors (the “Fiorillo Action). On June 9, 2009 Newbould J. ordered Alofs and the other directors to pay the Fiorillo plaintiffs approximately $850,000 damages, interest and costs as an oppression remedy under the Business Corporations Act inter alia for failing to call a shareholders’ meeting to approve Alofs’ sale of shares contrary to the company’s bylaws and a unanimous shareholders agreement. He also found Alofs liable in deceit and fraudulent misrepresentation for failing disclose the sale of his shares, but the damages were concurrent for both causes of action without allocation. Alofs alone was ordered to pay $25,000 costs respecting the deceit. The defendant Blake, Cassels & Graydon (“Blakes”) and Rachel Ingram were the lawyers for Kremeko and acted on the share transaction. (Ms. Ingram subsequently became in-house counsel at Kremeko.) There is a dispute whether Blakes also acted for Alofs as director. Three insurers, under management of Encon Group Inc. (“Encon”), paid the judgment in the Fiorillo Action pursuant to a Directors and Officers Liability Policy (“Policy”), other than the $25,000 costs which Alofs paid personally.
[3] In this action Alofs seeks indemnity for his loss based on Blakes’ negligence in structuring the sale transaction. After the insurers paid the Newbould judgment, they sought to advance their subrogated interest in this extant action and amended the statement of claim accordingly. A motion to add the other directors was dismissed as being time barred. In an amended statement of defence, Blakes, in addition to denying the allegations of negligence, pled by way of defence that Alofs failed to mitigate by failing to advance a due diligence defence (relying on Blakes advice) and by abandoning his appeal of the Newbould judgment. Of significance to the motion before me, Blakes also advanced a defence that the Newbould judgment was based on acts of deceit by Alofs and included a finding of unlawful personal gain by Alofs, both constituting exclusions to coverage under the Policy. Blakes therefore asserts that the Fiorillo damages were not a covered loss, the insurers should not have indemnified Alofs under the Policy and having done so, the payment was an ex gratia payment for which subrogation is not available.
[4] On June 22, 2015, on a motion inter alia to compel Alofs to produce the Encon claims file, I held that Encon was the “real plaintiff” and that there were likely documents in the Encon claims file relevant to the mitigation and ex gratia defences – that may explain why decisions were made to pay the Fiorillo judgment despite the exclusions, why the due diligence defence was not pursued and why the appeal was abandoned. I ordered that Encon documents relevant to those defences be listed in Schedule A or B of a further and better affidavit of documents as appropriate, but that any determination of privilege would await another motion. On January 4, 2016 I clarified my earlier order to include all Encon documents from October 2004 when the first claim for coverage was made. Approximately 226 documents were ultimately listed in a new Schedule B1 but not produced on various grounds of privilege.
[5] The motion now before me is brought by Blakes to determine if the privilege was validly asserted to 51 of those documents (considered as 39 documents when documents in an email trail and attachments were considered as a single document with the penultimate email). Alofs asserts both solicitor-client privilege and litigation privilege over each document and settlement privilege over some documents. Pursuant to rules 30.06(d) and 30.04(6) the documents in issue were delivered to me for inspection. The motion also seeks to examine for discovery a representative of Encon pursuant to rule 31.03(8) as a person not a party but for whose immediate benefit the action is brought. That motion is also resisted, or in the alternative a request is made that if the examination is ordered, no directions be given as to the scope of the examination.
IMPORTANT EVENTS IN THE CHRONOLOGY
[6] To determine both solicitor-client privilege and litigation privilege several dates are salient. On October 12, 2004 a demand letter from the Fiorillo plaintiffs (through their counsel Stikeman, Elliot) was sent to Kremeko and the directors. On October 21, 2004 Ms. Ingram, then at Kremeko, put Encon on notice. On November 17, 2004 the Fiorillo Application against Kremeko, Alofs and others was commenced. Communications ensued between Encon and Kremeko and between Encon and Alofs respecting both coverage and defence costs of the application. Encon initially retained Stieber, Berlach to represent its interests and later lawyer Mary Margaret Fox of Borden Ladner Gervais LLP (“BLG”). Alofs retained the law firm of Lenczner Slaght Royce Smith Griffin LLP (hereinafter “LS”) to represent him. On January 20, 2005 LS, on behalf of Alofs, first communicated with Encon and discussions ensued with respect to defence costs. A defence costs application was commenced by LS on behalf of Alofs in August 2005. On October 12, 2005 Justice Siegel ordered Encon to pay all defence costs of the Fiorillo application, stating that the application was in essence an oppression claim.
[7] On February 27, 2006 Kremeko assigned into bankruptcy and on October 5, 2006 the Fiorillo Action was commenced against Alofs and other former directors based on both oppression and Alofs’ deceit and misrepresentations. It is difficult to tell from the materials filed at exactly what point Encon agreed to retain LS to represent Alofs and the directors in the Fiorillo Action, thus commencing a joint retainer of LS by Encon and the directors, but it appears that the issue of retainer and of LS’s costs budget had been under discussion since about January 2006 and that Encon had agreed to retain LS by mid-June 2006.
[8] This action by Alofs against Blakes and Ms. Ingram was commenced on November 16, 2006 (the “Current Action”) and a defence was filed on January 16, 2008, but it appears nothing further was done pending the determination of the Fiorillo Action. The Current Action was commenced by Alofs acting in person, although at some point LS assumed carriage. On June 9, 2009 Justice Newbould released his decision in the Fiorillo Action following trial. As noted, he found all the directors liable for oppression and concurrently found Alofs liable in deceit and misrepresentation. He awarded $849,720 damages, interest and costs inclusive of the special costs award of $25,000 against Alofs for deceit. The damages were concurrent as between all causes of action without allocation. An appeal was apparently filed, but was later abandoned on a date and for reasons never made clear. On a date not disclosed, but apparently before the end of August 2009, Encon paid the Fiorillo judgment other than the special $25,000 cost award that Alofs paid personally.
[9] As appears from the documents I have reviewed, on or about August 31, 2009 Encon began to consider the possibility bringing action against Blakes. It is unclear exactly when Encon determined that it would proceed with its claim against Blakes, however Encon retained LS to represent its subrogated claim by mid-March 2010 and to do so within the Current Action after seeking certain amendments. LS did not communicate the instructions to advance a subrogated claim until it wrote to Lax O’Sullivan Lisus Gottlieb LLP (“LOLG”), the lawyers for Blakes, on April 8, 2010. On January 12, 2012 Master McAfee dismissed a motion to add the other directors as plaintiffs as barred by passage of the limitation period but permitted other amendments to the statement of claim to set out particulars of the Newbould judgment and the subrogated claim. As noted, Blakes then amended the statement of defence and added the defences that formed the parameters of the earlier motion to compel a further and better affidavit of documents. Some of the additional documents listed are the subject of this productions motion to determine issues of privilege.
THE VIABILITY OF THE EX GRATIA DEFENCE
[10] Before turning to the question of privilege attaching to the documents in issue, I wish to dispose of one argument made by Encon relating to relevance. Blakes pleads that the Encon payment of the Fiorillo judgment was not covered by the Policy because of the findings of deceit and private gain by Alofs, both exclusions under the Policy and that as a result, such payment was an ex gratia payment, which cannot be subrogated. Encon says this is faulty reasoning, that Blakes fails to understand the true meaning of subrogation and there is no basis at law to deny subrogation once payment is made, whether or not there may have been a defence to payment based on exclusions in the Policy. They claim there is no defence known to law as an ex gratia defence. Nonetheless, the plaintiff has failed to bring a motion, for example under Rule 21, to strike the impugned pleading as not disclosing any reasonable defence, even if the facts alleged are presumed to be true. If the plaintiff is correct, the pleading itself does not disclose a defence and an evidentiary motion or trial would be unnecessary. It is not my function as a master hearing a productions motion to determine whether Encon can subrogate in the circumstances or whether the defence is viable, as a matter of law or on the facts. The relevance of documents is based on the extant pleadings. The defence is pled. Any evidence that would demonstrate why payment was made under the Policy is relevant.
[11] I would add that had such a motion been brought successfully, such that the ex gratia defence was struck, the documents may have been denied on the basis of relevance and it may have been unnecessary to examine issues of privilege. I must however determine the motion based on the pleadings in their current state. The predicament the plaintiff finds itself in is of its own making as a result of strategic decisions made not to attack the pleadings. That said, should a motion be brought to strike that portion of the statement of defence raising the ex gratia defence prior to any deadline for delivery of the documentation ordered in this endorsement, the plaintiff would be at liberty to bring a motion to stay my order pending the determination of the pleadings motion. It is not my role on the motion before me to determine if a stay is appropriate.
SOLICITOR-CLIENT PRIVILEGE
[12] To be protected by solicitor-client privilege, there must be a communication of a confidential nature made between a lawyer and his client for the purpose of seeking, formulating or giving legal advice.[^1] The privilege extends to the gathering of information or creating of documents to assist the lawyer in providing legal advice.[^2] It extends to the lawyer reporting of events within a legal proceeding. It also extends to notes made by a client or internal communications within a corporate client that memorializes and discusses any legal advice received. Portions of the insurer’s file that involve communications with the insured or any portions of the file that do not involve communications with defence counsel do not trigger solicitor-client privilege.[^3] Communications from or to or notes written by an employee of a corporation who has a business role in the corporation, such as (as in this case) a claims analyst or manager or officer of the corporation who also happens to be a lawyer, are not protected by privilege merely by virtue of that employee having a law degree. Although solicitor-client privilege can apply to in-house counsel, it applies only when they are acting as counsel.[^4] The onus is on the party asserting solicitor-client privilege to provide cogent evidence that a dual role employee was acting as a lawyer and not a business person, in other words to provide evidence that the communication was written in the capacity of a lawyer providing legal advice and not an employee doing the ordinary business of the corporation,[^5] such as, in this case, analyzing a claim and determining if the insurer will provide coverage for a claim or pay defence costs.
[13] A solicitor-client relationship can arise even before a formal retainer is concluded. It begins when lawyer and client begin discussions about the retainer, even if it takes some time to come to terms and agree on the retainer.[^6] Once solicitor-client privilege over protected communications arises it does not end with the litigation for which the advice was given, as in the case of litigation privilege, but exists for all time unless the privilege is waived.
[14] With that in mind I have concluded that it was not until sometime after the October 12, 2005 decision of Justice Siegel on the defence cost application that any solicitor-client relationship began between Encon and LS. Until that time Alofs and Encon were adversaries and LS represented only Alofs. Encon was separately represented by Stieber Berlach and BLG. Although Encon appears not to have retained LS (jointly with Alofs) to defend the Fiorillo Action until mid-June 2006, it was in discussion with LS since approximately mid-January 2006 over the terms of the retainer. I conclude that solicitor-client communications between LS and Encon (and memorializations about such communications) prior to mid-January 2006 are not protected by solicitor-client privilege, but communications after that date are protected.
[15] Blakes argues that that there were two joint retainers. The first was to defend the Fiorillo Action, which I have concluded commenced mid-January 2006 and which ended after that proceeding was determined. They submit that a second joint retainer commenced when the April 8, 2010 letter was written to LOLG advising that LS had been retained to advance a subrogated claim against Blakes. As noted I have determined that it was actually in mid-March when Encon retained LS to pursue its subrogated claim against Blakes. If I accept the two retainer theory I would conclude that the first retainer ended shortly after the June 9, 2009 trial judgment of Justice Newbould. It was represented to me that an appeal had been commenced but was abandoned, although I have not been provided with dates, details or supporting documents respecting that appeal. I had initially considered that the “first” joint solicitor-client relationship may have continued until the appeal was abandoned, but a review of the Encon notes leads me to the conclusion that by June 17, 2009 Encon had concluded that there was no merit in appealing and Encon was considering whether Alofs would be covered under the Policy for the judgment against him. Encon submits that there was only one retainer that started with defending the Fiorillo Action and, upon paying the Fiorillo judgment, continued with its subrogated claim to recover that payment within the Current Action. Unfortunately, Encon has failed to provide evidence of an uninterrupted retainer and my view of the evidence, including the documents provided for my review is that indeed there was a break in the continuum of the retainer. In fact Encon retained a different law firm to provide an opinion on the merits of a claim against Blakes.
[16] I therefore conclude that there were two joint retainers where communications between Encon and LS are protected by solicitor-client privilege as well as notes about those communications or gathering of evidence pursuant to that retainer. Those periods are mid-January 2006 to June 16, 2009 and then mid-March 2010 to date.
[17] Of course all communications between Encon and their other outside counsel, including BLG and memorializations of those communications throughout these proceedings are protected by solicitor-client privilege.
[18] I do not expand the privilege to communications with or notes made by the claims analysts, claims manager and vice-president of claims who happened to be lawyers. Encon has provided no evidence to demonstrate that in communicating with Alofs or with LS when LS was representing only Alofs, or in making decisions about coverage or defence costs and making notations about these decisions, these Encon employees were acting other than in their business role of assessing claims, and determining coverage issues, just as claims analysts and managers who are not lawyers do on a daily basis. In fact all communications by these individuals were concluded below their signatures with reference to their role as claims analysts, managers and vice-presidents and not as counsel. Therefore there is no solicitor-client privilege to their communications or notes unless written to outside counsel.
LITIGATION PRIVILEGE
[19] I must still consider whether notes created and communications made are protected by litigation privilege. Litigation privilege arises only after litigation has commenced or there is a reasonable anticipation of pending litigation and the privilege extends only to documents created for the dominant purpose of that litigation.[^7] The onus is on the party asserting the privilege to provide evidence of when litigation was reasonably anticipated (unless it was extant) and the purpose for which the document was created.[^8] If a document was created for two purposes, the onus is on the party asserting the privilege to provide evidence of the dominant purpose. For example, an insurer has an obligation to assess claims and coverage in a fair manner, consistent with its duty of good faith to its insured. To be protected, the dominant purpose must be defence of the litigation rather than claims and coverage assessment.[^9] In particular, communications with an insured in the course of investigating an action against the insured made in the context of recourse under a policy and compliance or non-compliance with the terms of the policy are not prepared for the dominant purpose of defending the litigation for which coverage is sought and are not shielded by litigation privilege.[^10] Documents created for claims investigation are not protected by litigation privilege simply because there was a contemplation of denial of coverage and anticipated coverage litigation in response to that denial.[^11] Litigation privilege is assessed in the context of contemplation of the litigation in which the insured seeks coverage and not contemplation of litigation between the insurer and insured.[^12]
[20] Further, litigation privilege ends with the final determination of the litigation for which the document was created. There is an exception to allow the privilege to continue when “closely related proceedings” are anticipated or ongoing.[^13] The separate proceedings must involve “the same or related parties and arise from the same or a related cause of action (or ‘juridical source’). Proceedings that raise issues common to the initial action and share its essential purpose would…qualify as well.”[^14]
[21] In the absence of evidence of dominant purpose, and in reviewing the documents in issue, I conclude that the bulk of the claims notes and the communications between Encon claims analysts and managers were prepared for the dominant purpose of claims assessment and determination of whether their insured would be covered for the claims or for defence costs, in the normal course of business of a claims analyst. In other cases, it appears that a detailed review of the Fiorillo claim has been made with the dominant purpose of defending the Fiorillo claim should they be required to defend it, although an ancillary purpose would have been the gathering of information for claims and coverage assessment. I have determined what I believe to be the dominant purpose on a document by document basis. In some cases I have determined dominant purpose by an inspection of the document itself rather than cogent evidence from Encon, which is permissible as an aid to the determination of privilege.[^15] Of course memorialisation of advice and report from Encon’s lawyers is protected by solicitor-client privilege even if not protected by litigation privilege. In some cases it has been necessary to produce parts of documents and redact others.
[22] Litigation privilege over notes and communications that were prepared for the dominant purpose of defending the Fiorillo Application continued into the Fiorillo Action which was clearly a classic case of a closely related proceeding. Most of the parties were identical (although Kremeko was no longer a party) and both proceedings were to recover from Alofs and others the losses suffered by the Fiorillo plaintiffs as a result of the oppression of the directors and the misrepresentations and deceitful acts of Alofs.
[23] Litigation privilege over such documents ended however with the final determination of the Fiorillo Action. Is the Current Action against Blakes a closely related proceeding, such that any litigation privilege is continuing? On one hand, as argued by the plaintiff, the Blakes Action is akin to a third party proceeding in the Fiorillo Action. Both concern the losses suffered by the Fiorillo plaintiffs due to the actions of Alofs and the directors. The Fiorillo Action was concerned with establishing that Alofs and the other directors had oppressed the Fiorillo plaintiffs, inter alia, by failing to call a shareholders’ meeting to approve the sale transaction and by Alofs failure to disclose his sale of shares at the time of the Fiorillo plaintiffs purchasing additional shares and the Current Action is concerned with Blakes negligence in their structuring and oversight of that very sale transaction. The Fiorillo Action was concerned with establishing the liability of Alofs (and others) for the damages suffered by the Fiorillo plaintiffs and the Current Action is concerned with establishing the liability of Blakes to indemnify Alofs for his liability to pay the damages of the Fiorillo plaintiffs. Damages claimed in both actions are identical.
[24] On the other hand, as argued by Blakes, the parties to both proceedings are different. Only Alofs is common to both actions. Blakes was not a party to the Fiorillo Action and Fiorillo is not a party to the Current Action. The Fiorillo Action was about oppression and misrepresentations. The Current Action is about lawyers’ negligence – very different causes of action.
[25] I prefer the argument of the plaintiff. Alofs (and the other directors) were always at liberty to seek indemnification from Blakes by means of a third party claim in the Fiorillo Action. If the Current Action had proceeded as a third party claim to the Fiorillo Action there is no question but that the main action and third party claim would have been considered closely related proceedings, such that any litigation privilege asserted by the defendant Alofs would have been applicable in both directions – as against the plaintiffs and as against the third parties.[^16] Blakes should not be able to take advantage of a procedural decision by Alofs to commence a separate action for indemnification, rather than seek such indemnification by means of a third party claim.[^17] Therefore any documents protected by litigation privilege in the Fiorillo Action continue to enjoy that protection in the Current Action, a closely related proceeding. Blakes does not seek production of documents created specifically for the defence of the Current Action.
SETTLEMENT PRIVILEGE
[26] Are the communications between Encon, or its outside counsel, with LS or Alofs wherein offers are made as to allocation of defence costs protected by settlement privilege? I note that within Schedule B1 settlement privilege is given as a reason for withholding production of only one document, although submissions were made that it applies to other documents. Generally communications or documents setting out offers to settle, whether or not the offers result in a settlement, are protected by settlement privilege. There is an exception where disclosure is necessary to address an overriding interest of justice.[^18]
[27] One example of the exception is where a stranger to the settlement discussions requires disclosure of the settlement documentation for the proper disposition of a proceeding and the benefit to be achieved by correct disposition of the litigation is greater than the injury to the relationship between the parties engaged in the negotiations made by disclosure.[^19] One of the primary purposes of settlement privilege is to prevent disclosure of offers of settlement for the purpose of showing that a party had made an admission of liability or had acknowledged that it had a weak case. Parties can reasonably expect that admissions of liability or confessions of weakness will not be used against them by the opposite party or by third parties in future litigation. If it were otherwise, it would impede parties openly and freely negotiating to settle a dispute.[^20] However, when a stranger to the settlement discussions requires disclosure, in order to fairly prepare or defend its case, disclosure may be in order to provide the parties with an equality of arms, which is fundamental to our concept of a fair trial.[^21]
[28] So, for example in this action, Encon knows why it provided coverage despite the exclusions in the Policy. Blakes does not know why. If the settlement documents offer a light on the reasons, fairness dictates that Blakes should have equal access to those documents. The purpose is not to undermine the bargaining process between Encon and Alofs but to shine a light on material facts that go to a defence raised in the action.
THE SPECIFIC DOCUMENTS
[29] With all of the above in mind, I turn to the specific documents. I will reference the headings set out in Schedule D to the defendants’ factum with documents grouped under one of four headings. My reference to documents 1 to 39 is to “LOLG” numbers in Schedule D. The numbers used in this endorsement do not refer to either the document number from the plaintiff’s affidavit of documents nor tab numbers in the plaintiff’s confidential brief of privileged documents. As noted the defendants do not seek any documents in the plaintiff’s Schedule B or B1 other than these 39 documents and their respective attachments and email trails.
[30] The first heading, entitled “Communications between Encon and an Insured about Encon’s Interpretation of the Policy and Decision Regarding the Applicability of the Policy”, consists of six documents (numbered 1 to 6). They are communications between one of the Encon claims analysts/managers/vice-president of claims and either Mr. Alofs and/or other directors or Ms. Ingram, then in-house counsel with Kremeko. Some of these documents in turn attach communications between Blakes, then representing Kremeko, and either Stikeman Elliot representing the Fiorillo plaintiffs or LS representing Alofs. The communications primarily address issues of coverage and defence costs. They are dated between October 19 and December 21, 2004. They are not protected by litigation privilege as I am not satisfied that they were created for a dominant purpose other than claims assessment, coverage and defence costs in the normal course of business for the claims analysts and managers. They are not protected by solicitor-client privilege since none of the senders or recipients were in a solicitor-client relationship with Encon at the time. All six documents will be produced.
[31] The second heading, entitled “Internal Notes Prepared by Encon, Including Notes Regarding its Conclusions on Applicability of the Policy”, consists of 20 documents (numbered 7 to 26). They are dated between October 21, 2004 and November 2010. It is this category that causes the greatest difficulty in determining whether the dominant purpose was defence of the Fiorillo Application or determination of coverage and defence costs, since both were proceeding contemporaneously. In the absence of detailed evidence from Encon as to dominant purpose on a document by document basis, I have been forced to look to the document itself to make a determination from its contents as to the dominant purpose. In so doing I am granting a significant indulgence to Encon, who bore the evidentiary burden of establishing dominant purpose for each document.
[32] Document 7 dated Oct. 21, 2004 summarizes a conversation with Alofs detailing the factual background to the Fiorillo Application. Its dominant purpose is defence of the Fiorillo Application should that become necessary and is protected by litigation privilege and need not be produced. Document 11 dated Dec. 22, 2004 consists of notes analyzing the Fiorillo affidavit in the Application and is protected by litigation privilege for the same reason.
[33] Document 9, a note to file entitled Claim/incident input dated Dec. 20, 2004 and document 10, a note to file entitled claims resume dated Dec. 21, 2004 appear to deal with both the Fiorillo litigation and coverage issues but the status of both documents is listed at the bottom of each document as “assessing coverage” and as such I conclude the dominant purpose was coverage determination and they shall be produced. Document 12 consists of undated notes said to be created on Dec. 22, 2004 entitled “strategy (coverage)” and it shall be produced for the same reason.
[34] Documents 13 and 15 are notes of April 5, 2005 and May 2005 summarizing conversations with LS (while LS represented only Alofs, not Encon) and are concerned with coverage and obligations to defend Alofs. They were not created for the dominant purpose of defence to the litigation, are not protected by litigation privilege and shall be produced.
[35] Documents 16, 17, 18, 19, 20, 21, 23, 24 and 25 are all notes to the claims files prepared by the claims analysts/managers/officers, called “claims resume”, starting May 24, 2005 and with each subsequent resume, the contents of the earlier resume is repeated with additional notes made on subsequent dates. All or parts of each document, where the dominant purpose is assessing coverage and defence costs shall be produced, subject to redactions as indicated. Documents 16, 17 and 18 all predate Encon’s “first” retainer of LS. They deal with coverage and defence costs issues, which in my view is their dominant purpose. Although there are some references to offers respecting allocation, no claim is asserted in Schedule B to resist production based on settlement privilege. Even if it had been, as earlier set out in my reasons, they fall under an exception to settlement privilege. These four documents shall be produced but for some redactions memorializing instructions or reports from Encon’s lawyers, BLG. Those redactions shall be: (a) on page 2 of May 24, 2005 under the heading “opinion coverage” starting with all words after “her opinion” to the end of the paragraph and (b) under Aug. 15, 2005 after the words “instructed counsel” to the end of the paragraph. Document 19 has the same redactions but by the time of the June 14, 2006 entry, Encon had retained LS and everything following “Received report from counsel” may be redacted on the basis of solicitor-client privilege.
[36] Documents 20, 21 and 23 have the same redactions as document 19, but as well all entries after the June 14, 2006 entry may be redacted on the basis of both litigation privilege and solicitor-client privilege. Document 24 also has the same redactions as documents 20 to 23 but the last entry covered by both privileges is that of June 10, 2009 reporting on the Newbould decision. In my view, based on the evidence and the confidential documents, the “first” retainer with LS had come to an end by the time of the June 17, 2009 entry which reviews the reasons for Encon not appealing the trial decision. That entry however, despite its relevance, has the Fiorillo Action and possible appeal as its dominant purpose and may be redacted based on litigation privilege. The next three entries of July 30, August 6 and the first paragraph of August 31 have coverage, not litigation, as their dominant purpose and they shall not be redacted. The last paragraph of August 31 and the entries of November 30, 2009 and January 30, 2010 deal with action against Blakes and a lawyer’s opinion on Encon’s rights against Blakes and may be redacted based on both litigation privilege and solicitor-client privilege. By the time of the two remaining entries on March 2 and June 10, 2010, Encon had commenced its “second” retainer of LS and those entries may be redacted on both litigation privilege and solicitor-client privilege grounds Document 25 may be redacted in the same manner as 24. The additional entry of Sept. 10, 2010 may be redacted on the same grounds.
[37] Documents 14, 22 and 26 are entitled “Claims Audit” and while I understand why these documents were sought given the paucity of description, I have examined these documents and they consist of tick-box standard forms completed by someone other than the analysts respecting the status of the claim. They contain no relevant information and need not be produced.
[38] Document 8 is a copy of a newspaper article from the December 14, 2004 Globe & Mail. There is no evidence whether it was copied and placed in the claims file for the dominant purpose of coverage assessment or the Fiorillo litigation to assist counsel who may be appointed. The onus was on the party asserting privilege to justify the purpose of placing the article in the file and a review of the document itself does not assist. In any event it is a public document. It shall be produced.
[39] The third heading, entitled “Communications Between Encon and the Lenczner Slaght Law Firm about ‘Insurance Coverage Issues’”, consists of 9 letters, emails, email chains or reports of conversations (numbered 27 to 35). All parties agreed that document 36 from category 4 was of the same nature and should be treated in the same grouping. The communications all run between January 20, 2005 and August 3, 2005. All but document 35 are authored by or sent to the vice-president/claims manager of Encon and one of the lawyers at LS. LS is self-identified right from the initial communication as “counsel to Mr. Paul Alofs” and wrote “regarding Encon’s coverage position.” LS was never counsel to Encon during the period of those communications. Solicitor-client privilege is not engaged. The communications were made for the dominant purpose of assessing coverage and obligations to provide a defence, but not to the defence per se of the Fiorillo Application. Litigation privilege is not engaged. Settlement privilege is not given as a reason for resisting production. Documents 27 to 34 and 36 shall be produced.
[40] Document 35 is a letter dated August 3, 2005 from Mary Margaret Fox of BLG, as lawyer for Encon, to LS, as lawyers for Alofs. It is resisted on the basis of solicitor-client privilege, litigation privilege and settlement privilege. The letter purported to be sent in response to the coverage application commenced by LS on behalf of Alofs. It outlined Encon’s position on coverage restrictions afforded to Alofs under the Policy in relation to the claims in the Fiorillo Application, discussed defence costs and made an offer to settle the issue of defence costs. This is not a communication between solicitor and client and does not engage solicitor-client privilege. Its dominant purpose is to resolve coverage and defence costs issues, not the defence of the Fiorillo Application. It does not engage litigation privilege. It does contain an offer to settle which engages settlement privilege. However, as earlier discussed, there is an exception to settlement privilege where a stranger to the settlement communication requires the document to ascertain the truth in another proceeding (in this case the ex gratia defence) and where this outweighs any expectation of confidentiality as between Ms. Fox and the lawyers at LS. In my view the exception applies and the letter shall be produced. The actual settlement numbers however are not necessary for Blakes to ascertain the reasons for payment and intrusions into the settlement privilege should be restricted to what is necessary. Therefore the actual percentage in the second last paragraph may be redacted.
[41] Category 4, entitled “Other Miscellaneous Documents”, consists of three (formerly four) documents (numbered 37 to 40). Document 37 is a report of a telephone conversation between the Encon claims manager and a lawyer at LS respecting defence costs. It is really part of Category 3 and should treated in the same manner as documents 27 to 34 and be produced.
[42] Document 28 is an on-line print-out of the biography of Ms. Fox of BLG. It is a public document, but as it was gathered to assist in the choice of counsel, it is protected by solicitor-client privilege and need not be produced.
[43] Document 39 is a report from Ms. Fox to her client Encon sent by email dated September 8, 2005. Notwithstanding that the contents may be relevant to coverage issues, it is clearly protected by solicitor-client privilege and need not be produced. Attached to that email is a letter from LS to Ms. Fox responding to her letter marked as document 35 and responds to the coverage offer. Although the email may provide legal advice respecting the attached letter the letter itself as a stand-alone document must be produced for the same reasons as document 35 and with the similar redactions.
THE RULE 31.03(8) EXAMINATION
[44] Although I had on the refusals motion referred to Encon as the “real plaintiff”, I accept that where an insurer is subrogated to the rights of its insured, the claim nonetheless remains that of the insured in whose name and with whose rights the claim must be advanced.[^22] It is only the insured that can assert rights against the defendant, unless there has been an assignment, which is not the case here. It is Alofs that has suffered a loss, although his subrogating insurer paid all but $25,000 of that loss. Although the loss is that of the insured, the insurer can take the benefit of the right that the insured already has against the defendant. The insurers represented by Encon paid approximately 97% of the approximately $850,000 Newbould judgment against Alofs (and others) and they seek to subrogate their claim against Blakes in the name of Alofs. There is no doubt that the subrogating insurers are persons who are not parties to the action but that this action has been brought, or at least continued, for the “immediate benefit” of those insurers within the meaning of rule 31.03(8).[^23] The plaintiff has a right to examine the insurers pursuant to that rule and it is appropriate that a person with knowledge at Encon, who managed the Policy and the claims made under the Policy on behalf of the insurers, be examined for discovery.
[45] The Encon representative would likely have knowledge of material facts going to two defences raised by the defendants: mitigation (failure to proceed with a due diligence defence and failure to pursue an appeal of the Newbould judgment) and the “ex gratia” payment said to have been made despite exclusions in the Policy available to the insurer and the representative may be examined on those issues. At Alofs’ own examination for discovery he knew little or nothing about these issues.
[46] The defendants have set out issues upon which they wish to examine Encon respecting the ex gratia defence. The plaintiff asks that I not define those issues in advance and of even greater importance not set out in advance what may or may not be proper questions. I accede to the latter request. It would not be appropriate that I rule in advance on the propriety of particular questions nor pre-determine whether claims of privilege to the answers to certain questions are appropriate. On the other hand, it is appropriate that I rule on the scope of the examination, but not to the degree of specificity set out in paragraph 110 of the defendant’s factum. The specific areas of enquiry set out at paragraph 110 may be proper, but I decline to make such determination at this time. It is suffice that I set out the scope of the examination as including, but not necessarily limited to, questions related to the initial denial of defence costs, any consideration given to the exclusions in the Policy, and why payment of the loss was made despite those exclusions.
COSTS
[47] It appears there has been a division of success and it may be appropriate to order costs in the cause or no costs. However, if the issue cannot be resolved between the parties, I am prepared to receive costs submissions not to exceed three pages from any party seeking costs within three juridical days together with a costs outline. Responding submissions not to exceed three pages may be made within a further three juridical days.
ORDER
[48] I hereby order as follows:
The plaintiff shall produce to the defendants within 14 days copies of such documents as are required by these reasons.
A knowledgeable representative of Encon Group Inc. shall attend for examination for discovery pursuant to rule 31.03(8) on a date to be agreed, or in the absence of agreement, on a date set out in a notice of examination.
Master R. Dash
DATE: November 8, 2016
[^1]: Canada v. Solosky, 1979 9 (SCC), [1979] S.C.J. No. 130 (SCC) at p. 12 [^2]: Currie v. Symcor, 2008 37901 (ON SCDC), [2008] O.J. No. 2987 (Div. Ct.) at para. 46 [^3]: Caputo v. Novak, 2016 ONSC 4176 (SCJ) at para. 88 and 91 [^4]: Pritchard v. Ontario, 2004 SCC 31 at paras. 27-29 [^5]: Humberplex Developments Inc. v. Trans Canada Pipelines Ltd., 2011 ONSC 4815 (SCJ – Master) at para. 24; Jetport Inc. v. Global Aerospace Underwriting Managers (Canada Ltd.), 2013 ONSC 6380 (SCJ) at para. 62 [^6]: Descoteaux v. Mierzwinski, [1982] S.C.R. 860 at p. 876-77 [^7]: Intact Insurance Co. v. 1367229 Ontario Inc., 2012 ONSC 5256 (SCJ) at para. 26 [^8]: Davies v. American Home Assurance Co., 2002 62442 (ON SCDC), [2002] O.J. No. 2696 (Div. Ct.) at para. 28; General Accident Assurance Co. v. Chrusz, 1999 7320 (ON CA), [1999] O.J. No. 3291 (CA) at paras. 30-33. [^9]: Gabany v. Sobeys Capital Inc., [2002] O.J. No. 3151 (SCJ) at para. 9-10 [^10]: Caputo v. Novak, supra, at para. 90 [^11]: Sky Solar (Canada) Ltd. v. Economical Mutual Insurance Co., 2015 ONSC 4714 (SCJ) at para. 100 [^12]: Whatman v. Selley, [2000] O.J. No. 3155 (SCJ – Master) at para. 14 [^13]: Blank v. Canada, 2006 SCC 39 at paras. 34, 36 and 38 [^14]: Blank v. Canada, supra at para. 39 [^15]: Whatman v. Selley, supra, at para. 21 [^16]: In Rudolph Meyer & Sons Ltd. v. Endurowe Contracting, [2009] O.J. No. 1014 (SCJ) at para. 19, litigation privilege applicable to a fire damage claim in the main action was extended to third party proceedings, both of which were concerned with the cause of the loss. [^17]: I note however that proceeding as a separate action rather than a third party claim prevented Blakes from defending the Fiorillo Action (and possibly raising the due diligence defence) and challenging Alofs liability to Fiorillo for which indemnification is now sought against Blakes. [^18]: Moore v. Bertuzzi, [2012] O.J. No. 2486 (SCJ) at para. 98. [^19]: Moore v. Bertuzzi, supra, at para. 98 [^20]: Ipex v. AT Plastics, 2011 ONSC 4734, [2011] O.J. No. 3631 (SCJ) at para. 49 [^21]: Ipex v. AT Plastics, supra, at para. 55 [^22]: Mason v. Ontario, 1998 1316 (ON CA), [1998] O.J. No. 1866, 39 O.R. (3d) 225 (C.A.) at para. 22 [^23]: See for example Consumers Glass Co. v. Farrell Lines Inc. (1982) 1982 2224 (ON SC), 39 O.R. (2d) 696 (HCJ) at para. 5. Although in Consumers the insurer paid the claim in full, and was thus “fully” subrogated, in my view the principle is the same. Once the Newbould judgment was paid in the matter before me, the action continued substantially for the benefit of the subrogating insurer even though the insured personally paid a small portion of the loss.