CITATION: Rob Leone v. Flexity Solutions Inc., 2017 ONSC 1536

COURT FILE NO.: CV-11-425277

DATE: 20170307

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Rob Leone, Plaintiff

AND:

Flexity Solutions Inc. and Peter Stavropoulos, Defendants

BEFORE: Madam Justice Kristjanson

COUNSEL: Sonja Turajlich, for the Plaintiff

Jennifer Whincup, for the Defendants

HEARD: January 27, 2017

JUDGMENT

[1] This is an appeal from a Master on a refusals motion. The Master held that the defendants partially waived solicitor-client privilege, in the course of answering questions on examination for discovery, over instructions given to their lawyers, and what the lawyers said about those instructions. Given the substantive nature of solicitor-client privilege, as well as its status as an evidentiary rule, a partial waiver based on disclosure resulting from an answer given on an examination for discovery must be voluntary, informed, and clear. Whether a partial waiver based on disclosure or an implied waiver based on putting state of mind in issue, the answer must be considered in the context of the material issues defined in the pleadings and the role of the allegedly privileged information in the defendants’ case. I find that the Master erred in law and allow this appeal.

The Facts

[2] Following termination from employment with the defendant, the plaintiff, Mr. Leone, commenced an action against the defendants. As part of the action, Mr. Leone claims that he is a beneficial owner of the company, Flexity, or a shareholder, and that he is owed shares by the company. The defendants take the position that Mr. Leone was entitled to stock options, not shares, and that those options had not vested when his employment was terminated. The issue is one of contractual interpretation.

[3] There is no dispute that the employment contract refers to “shares.” Article 4.5 of the Agreement refers to a “Shares Agreement” and provides, in part, that: “The Employee will be entitled to the shares in accordance with the Shares Plan attached hereto as Schedule ‘D’… Flexity may, in its discretion, amend the Shares Plan from time to time.” Schedule D of the Employment Agreement states, in part, that:

The Employee will be eligible for shares based on the following schedule subject to change – To be executed and refined by legal firm in the next 60 days.

[4] Flexity subsequently introduced an employee trust and stock option plan.

[5] The alleged waiver of privilege was based on the following exchange, which took place in the examination for discovery of the defendant Stavropoulos, who was examined both personally and on behalf of the corporate defendant Flexity:

778. Q. Did you have any discussions with [the plaintiff] Mr. Leone, at any point, you said, “What the documents should have said ‘options’ as opposed to ‘shares’?

A. I said that to everybody. I said “[My lawyer] botched these documents up from the beginning.”

779. Q. Tell me about that discussion, or what you told everybody?

A. It is consistent with what I have been saying to you all along, sir. I have always said to everyone, “These are options. They are options, options, options. You are never going to get to hold them. There are legal reasons why. If I get sued, which I know I will, if I go insolvent, which there is a great probability we may, I don’t want you part of that pool. And, secondly, I don’t want 5 partners or shareholders. I have one and only one, Ron, and that is it.” And he changed that with two at some point in time, but none of the [named persons including Leone] were ever promised shares.

[6] The Master found that this constituted a partial waiver of solicitor-client privilege because the defendant said that he told the plaintiff and others that his lawyer “botched these documents up from the beginning”, which he held to be a reference to the employee trust and to the plaintiff’s employment agreement. The Master held:

In my view, by proffering this as the reason why the employee trust and the plaintiff’s employment agreements say “shares and not exclusively options” the defendants have waived privilege in what instructions they gave Davis LLP about what the plaintiff was to receive on the subject of shares as opposed to share options, and what Davis LLP said about those instructions. These questions should be answered by producing those parts or extracts from the Davis LLP file on the employee trust respecting those subjects. If the answer is that there is nothing in writing on this subject, not even a memo to file confirming instructions, examining counsel may have questions about what oral instructions were given and received as questions properly arising from the answer.

[Emphasis added.]

[7] The Master also directed that the defendants’ lawyer from Davis LLP provide her recollection of what instructions she received from the defendants respecting the creation of the employee trust and, specifically, to what extent those instructions dealt with what employees were to receive through the trust shares or share options or an interest in them.

[8] The defendants allege that the Master erred in law in concluding that there had been a partial or implied waiver of privilege with respect to the instructions they gave their law firm, Davis LLP, about what Mr. Leone should receive on the subject of shares as opposed to share options, and what Davis LLP said about those instructions.

STANDARD OF REVIEW

[9] The decision of a Master is entitled to deference. It should not be interfered with unless he or she made an error of law, exercised discretion based on the wrong principles, or misapprehended the evidence such that there was a palpable and overriding error: Zeitoun v. Economical Insurance Group (2008), 2008 CanLII 20996 (ON SCDC), 91 O.R. (3d) 131 (Ont. Div. Ct.), at paras. 40-43. When a Master has decided a matter of law, which includes whether evidence is privileged, the standard of review is correctness: Roynat Capital Inc. v. Repeatseat Ltd., 2015 ONSC 1108, 125 O.R. (3d) 596, at para. 10.

ANALYSIS

[10] I find that the Master erred in finding a waiver of privilege based on based on Mr. Stavropoulos’ discovery answer. Mr. Stavropoulos was asked about discussions with Mr. Leone regarding whether the documents should have said options, not shares. He replied:

I said that to everybody. I said “[My lawyer] botched these documents up from the beginning.”

[11] This answer on discovery must be situated in the context of the material issues identified in the pleadings, the fact that it was a discovery answer, the substantive nature of solicitor-client privilege, and the evidentiary rule of privilege.

[12] The Supreme Court of Canada has repeatedly held that solicitor-client privilege is a substantive rule of law, and “must be as close to absolute as possible to ensure public confidence and retain relevance. As such, it will only yield in certain clearly defined circumstances, and does not involve a balancing of interests on a case-by-case basis”: R. v. McClure, 2001 SCC 14, 195 D.L.R. (4th) 513, at para. 35. In Ontario (Ministry of Correctional Services) v. Goodis, 2006 SCC 31, 271 D.L.R. (4th) 407, at paras. 20-21, the court made it clear that communications protected by privilege should be disclosed only where “absolutely necessary”, applying “as restrictive a test as may be formulated short of an absolute prohibition in every case.” As a result, motions for production of solicitor-client privileged information based on discovery answers must be carefully evaluated.

[13] The plaintiff argues both implied waiver on the grounds that the defendants have put in issue their state of mind, and partial waiver on the grounds of disclosure. These are both discussed below.

[14] In this case, there is nothing in the defendants’ pleadings that puts the communications with counsel, or an alleged failure of counsel to follow instructions, in issue as a material element of the defence. The defence is based on contractual interpretation. The defendants have not pleaded rectification, mistake, misrepresentation or negligence. There is no claim against the lawyer or law firm in the pleadings, and the lawyer and law firm are not parties in this litigation. There is no indication that the defendants, the parties giving the instructions and receiving a response to those instructions from the law firm, made failure to follow instructions an issue in their defence.

Implied Waiver – Partial Disclosure

[15] The plaintiff argues implied waiver on the basis of partial disclosure. The fact that the alleged partial waiver arose in the course of answering questions on examination for discovery is relevant and important to the contextual analysis. Mr. Stavropoulos was asked about discussions he had. He confirmed that he told the plaintiff and others, on the issue of shares versus options, that the lawyers made a mistake from the beginning. He was asked to recount discussions, and he did so. Whether or not the statement made to Mr. Leone and others was true (in the sense that the lawyers “botched” their implementation of Mr. Stavropoulos’ instructions with respect to the documents) is not an element of the question asked, nor the answer given. It is not part of the defence, but a response to a question about a statement he made. The fact that such a statement was made to Mr. Leone and others—true or not—does not invite a waiver of privilege over exactly what the lawyers were instructed to do, and what they said about their instructions, contrary to the Master’s finding.

[16] I thus find that the Master erred in finding that, in answering a question about discussion he had, that the defendants were “proffering this as the reason why the employee trust and the plaintiff’s employment agreements say ‘shares and not exclusively options.’” There is no pleading of mistake, rectification or reliance, and the answer does not go so far as to make the instructions a material issue in the litigation. What is material and relevant to the litigation is what the employment contract does or doesn’t say, i.e. how it is to be interpreted.

[17] Given the substantive role of solicitor-client privilege, a waiver of privilege on the basis of disclosure in the course of answering questions on discovery must reflect a voluntary, informed, and intentional waiver. Referring to discovery questions about what Mr. Stavropoulos told others about a lawyer’s role does not in this case evidence a voluntary and intentional waiver of privilege. The answer is vague; he did not describe the instructions given, or the law firm’s response. The reference to a lawyer “botching” documents in response to a discovery question, in a case where the lawyer’s conduct is not relevant or material to the pleadings, does not constitute partial disclosure allowing the plaintiff to ascertain the exact nature of instructions given and what the law firm said about those instructions.

[18] As stated by Sulyma J. in R. v. Chan, 2002 ABQB 753, 325 A.R. 208, at paras. 97-98 dealing with an alleged waiver during cross-examination where no objection was raised at the time:

Where disclosure has occurred in cross-examination in response to a direct or indirect question, the answer cannot result in waiver unless it is abundantly clear that waiver was intended …

…there is a danger in holding that waiver of privilege can occur during the course of cross-examination. Witnesses are not necessarily schooled in the subtleties of solicitor-client privilege. Even experienced counsel cannot anticipate the direction that a cross-examination might take. In view of the fast pace of most cross-examinations, it is not surprising that inadvertent disclosure may be made of privileged communications. Given the recognition in recent Supreme Court of Canada cases of the fundamental importance of solicitor-client privilege in the administration of justice, I am of the view there must be an intentional disclosure of advice or the reliance on legal advice as the foundation of a claim or defence in order to find waiver.

[19] The same concerns arise with respect to an answer given on discovery in response to questions. Where the answer does not evidence an informed, voluntary, and clear waiver, and the defendant does not rely on the solicitor-client privileged information as part of his defence, there is no fairness issue that would compel disclosure. In this case, there has been no intentional partial disclosure of communications with the lawyers, and no reliance on privileged communications as the foundation of a defence. The plaintiff has no entitlement to information about these privileged communications and no entitlement to access to the law firm’s files regarding the issues, on the basis of partial disclosure.

Implied Waiver – State of Mind

[20] The plaintiff also argues waiver based on putting in issue the state of mind of Mr. Stavropoulos (i.e., the alleged failure of counsel to follow his instructions as it relates to the issue of giving Leone options rather than shares). However, as stated in Creative Career Systems Inc. v. Ontario, 2012 ONSC 649, 27 C.P.C. (7th) 172, at para. 29:

To justify a party being required to answer questions about the content of privileged communications, the party must utilize the presence or absence of legal advice as a material element of his or her claim or defence. The waiver of the privilege occurs when the party uses the receipt of legal advice as a material fact in his or her claim or defence. While the waiver is a deemed waiver, it requires the intentional act that the party makes legal advice an aspect of his or her case. In Simcoff v. Simcoff, 2009 MBCA 80 (Man. C.A.), Justice Steel made the point neatly at para. 27, where he stated:

27. However, a mere reference to the receipt of legal advice does not constitute waiver. Waiver must involve something more. It requires not simply disclosing that legal advice was obtained, but pleading reliance on that advice for the resolution of an issue.

[21] The same analysis applies to the giving of instructions to counsel, and what the law firm said on receipt of those instructions. Waiver may be implied where a party voluntarily relies on legal advice or communications with solicitors to justify its conduct, and acts in a manner inconsistent with maintaining the privilege, where the state of mind of the party as it relates to communications with solicitors is material to an issue in the litigation.

[22] The defendants are not alleging in this litigation that the lawyers failed to follow instructions; they are defending on the basis of the documents as drafted. A mere reference to communications with lawyers relating to drafting of documents, in the context of the pleadings and issues in this lawsuit, does not put the state of mind of Mr. Stavropoulos in issue as a material element of the defence. The defendants have not voluntarily made the issue of instructions given to the lawyers, and whether or not the lawyers followed instructions, a material element of their defence. There is no issue of inconsistency, or “unfair” litigation advantage, since the defendants in asserting their privilege do not rely on the privileged communications to support their case. Fairness does not require a finding of waiver by implication. Again, the fact that alleged implied waiver on the basis of state of mind arose as a result of answering questions on discovery is a critical element of the analysis.

CONCLUSION

[23] The court provides an important gatekeeper function to avoid inappropriate production of solicitor-client privileged information, while considering fairness and consistency: Roynat at para. 84. On the alleged partial disclosure, I find that there was no voluntary, informed waiver of privilege. On the alleged implied waiver based on state of mind, the instructions given to counsel and counsel’s response are not material elements in the defence, and fairness/consistency do not require disclosure to allow the plaintiff to respond.

[24] A waiver may well be found at a later point in these proceedings, for example, if the defendants amend their pleadings to seek to rely on their alleged instructions to counsel and the alleged fact that their instructions were not followed. However, the reference in the discovery transcript is not enough to support a finding of waiver at present.

[25] In the result, I allow the appeal, with costs. If the parties are unable to agree, the appellant may make brief submissions by March 22, and the respondent by April 5. Materials may be delivered to Judge’s Administration at 361 University Avenue.

Kristjanson J.

Date: March 7, 2017