Court File and Parties

COURT FILE NO.: 08-CV351936PD2 DATE: 20180723 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

DRAKE HOLDINGS LTD. Plaintiff – and – CHUBB INSURANCE COMPANY OF CANADA Defendant

COUNSEL: S. Dewart and I. McKellar, for the Plaintiff J. Halfnight and N. Shethwala, for the Defendant

HEARD: May 30, 2018

REASONS FOR DECISION

SCHRECK J. :

[1] During the course of ongoing litigation respecting an insurance claim, counsel for the plaintiff disclosed hundreds of documents to counsel for the defendant. He then notified counsel for the defendant that four of those documents were solicitor-client privileged and had been disclosed inadvertently. He demanded that they be returned. Counsel for the defendant refused to return them, but agreed to seal them pending a determination of the privilege issue by the court.

[2] The plaintiff has now brought a motion seeking a declaration that the documents in question are privileged as well as an order removing counsel for the defendant and her firm. The defendant takes the position that the documents are not privileged or, if they are, that the privilege has been expressly or impliedly waived or otherwise lost. It also opposes the removal of its counsel.

[3] The following reasons explain why I have concluded that the documents are privileged and the privilege has not been waived or lost. However, I am of the view that the privilege can be protected by measures short of removing the defendant’s counsel.

I. FACTS

A. Overview of the Litigation

[4] The plaintiff, Drake Holdings Limited, had an insurance policy with the defendant, Chubb Insurance Company of Canada. In September 2006, the plaintiff’s insurance broker notified the defendant of a potential claim based on the actions of a director of one its subsidiaries, Management Surveys Limited (“MSL”). The director, Kevin Anhalt, had allegedly sold software belonging to the company without its permission and had failed to pay royalties owed to the plaintiff. The plaintiff subsequently filed a claim for the losses. The defendant denied the claim.

[5] On April 1, 2008, the plaintiff commenced an action against the defendant. In its Statement of Defence, the defendant took the position that Mr. Anhalt was not an “employee”, as required by the terms of the policy. The defendant also took issue with the plaintiff’s claim that it first discovered the loss in August 2006 and took the position that the action was not commenced within two years after discovering the loss.

[6] In 2010, the defendant retained the firm of Halfnight & McKinlay (“Halfnight”) to represent it on the action. In 2017, the lawyers handling the file joined the firm of Lerners LLP (“Lerners”) but continued to represent the defendant.

[7] In 2012, the plaintiff retained the firm of Kestenberg Siegal Lipkus LLP (“KSL”) to represent it on the action.

B. How the Issue Arose

(i) The Disclosure of Documents

[8] On July 21, 2016, the plaintiff served a motion for summary judgment on the issue of whether its claim was covered by the policy. Among the materials filed in support of the motion was an affidavit by a lawyer, Kimberley Morris. Ms. Morris had been the plaintiff’s outside legal counsel from 1999 to 2009, but had also served on the management board of MSL since 2000, together with Mr. Anhalt. It was in the latter capacity that she gained firsthand knowledge of the facts giving rise to the claim. She is the only witness to have personally dealt with Mr. Anhalt and who can give evidence on whether he was an employee of the plaintiff.

[9] Following Ms. Morris’s cross-examination on her affidavit, counsel for the defendant, Anne Juntunen, who had by then joined Lerners, requested production of Ms. Morris’s file in relation to work she had done for the plaintiff. Counsel for the plaintiff, Aaron Hershtal of KSL, agreed to produce any non-privileged documents in Ms. Morris’s file.

[10] In December 2016, Mr. Hershtal provided Ms. Juntunen with a draft supplementary affidavit of documents which listed 228 relevant, non-privileged documents. It also listed 374 relevant documents over which various types of privilege were claimed. After reviewing this, Ms. Juntunen wrote to Mr. Hershtal requesting that he reconsider his privilege claims with respect to most of the documents. Mr. Hershtal did so, after which he agreed to produce all but 25 of the documents. After Ms. Juntunen took issue with the privilege claims on the remaining 25 withheld documents, Mr. Hershtal agreed to produce most of the remaining documents. Among these documents, which were produced electronically, were four documents identified as Tabs 230, 235, 237 and 238 which are the subject matter of this motion.

(ii) The Claim of Privilege

[11] Upon reviewing the newly produced documents, Ms. Juntunen noticed that one of them, Tab 237, contained a string of email messages that related to the time of the plaintiff’s discovery of the loss and which referred to an attached file. On November 23, 2017, she wrote an e-mail to Mr. Hershtal stating:

In reviewing your recent productions I note the attached email string (Tab 237) in which Dan Fischer states “we were aware that there was a ‘loss’ back on Feb 27, 2006 but not the ‘damages’. See attached.”

There appears to be an Excel file that was once attached to the email string, but I cannot see that it has been produced. Would you please advise whether the attachment has in fact been produced elsewhere and, if not, why the attachment has been withheld?

[12] On November 28, 2017, Mr. Hershtal wrote the following reply to Ms. Juntunen:

Further to your email below, upon further review of the Tabs 230, 235, 237 and 238 it is clear that they contain privileged communications regarding the litigation with Chubb. Accordingly we respectfully request that all copies of the privileged communications be deleted immediately and that you confirm same. In the event that you refuse to delete such privileged communications, I expect that our instructions will be to bring a motion to have your firm removed as counsel for Chubb on [that] basis. I refer you to the attached decision of Justice Van Melle [1] wherein such relief was granted where privileged communications were inadvertently disclosed and counsel refused to return the privileged documents.

In an affidavit filed on this motion, Mr. Hershtal stated that the documents had been produced inadvertently.

(iii) Counsel for the Defendant’s Actions Following the Privilege Claim

[13] Upon receipt of Mr. Hershtal’s e-mail, Ms. Juntunen had hard copies of the four documents placed into sealed envelopes and had the electronic versions permanently deleted. She advised Mr. Hershtal that she intended to retain possession of the sealed documents pending a determination of the privilege issue by a court.

[14] On this motion, Ms. Juntunen swore an affidavit in which she deposed that she had reviewed only Tab 237 and had not reviewed the other three documents over which privilege is claimed. She also stated:

I have not provided my client with copies of any of the disputed documents, nor had I advised my client of the substance of the documents other than in very general terms.

[15] The plaintiff seeks a declaration that the four documents in question were and remain privileged as well as an order removing Lerners as counsel of record for the defendant.

II. ANALYSIS

A. Are the Documents Privileged?

(i) The Nature of Solicitor-Client Privilege

[16] The importance of solicitor-client privilege cannot be overstated. It is not simply a rule of evidence. Rather, it is a substantive rule which gives effect to a fundamental civil and legal right, or, put another way, a principle of fundamental justice: R. v. McClure, 2001 SCC 14, [2001] 1 S.C.R. 445, at para. 24; Lavallee, Rackel & Heintz v. Canada (Attorney General), 2002 SCC 61, [2002] 3 S.C.R. 209, at para. 49.

[17] Not every communication between a lawyer and a client is privileged. The communication must be for the purpose of seeking or giving legal advice and must be intended by the parties to be confidential: McClure, at para. 36. However, given the importance of the privilege, any uncertainty as to the application of the privilege should be resolved in favour of protecting confidentiality: Descoteaux v. Mierzwinski, [1982] 1 S.C.R. 860, at p. 875.

(ii) The Documents in This Case

[18] In this case, the parties agreed that I should review the documents to determine whether they are privileged. I have done so. Tab 230 clearly relates to the provision of legal advice. Tabs 235, 237 and 238 are related and clearly relate to the litigation between the plaintiff and the defendant. Tab 238, which is also reproduced in Tab 237, is clearly marked “Privileged and Confidential – Prepared by Counsel”. I am satisfied that all four documents are solicitor-client privileged.

B. Has the Privilege Been Waived or Otherwise Lost?

(i) Express Waiver

[19] The defendant submits that notwithstanding Mr. Hershtal’s assertion that the documents were disclosed inadvertently, there was an express waiver of privilege in this case. Mr. Halfnight suggests that this can be concluded from the fact that Mr. Hershtal had clearly turned his mind to the issue of which documents were privileged and, having done so, made the decision to turn over the four documents in question.

[20] I agree that the evidence could give rise to a conclusion that there was express waiver, except for the fact that Mr. Hershtal has stated that the disclosure was inadvertent. Inadvertent disclosure is inconsistent with express waiver. If there was express waiver, then Mr. Hershtal’s assertion that the disclosure was inadvertent must be false. However, Mr. Halfnight was very clear that he was not questioning the credibility of Mr. Hershtal’s assertion that the disclosure was inadvertent. I have no reason to doubt the veracity of what Mr. Hershtal has said. Given this conclusion, there cannot be a finding that there was express waiver in this case.

(ii) Implied Waiver

(a) The Requirements for a Finding of Implied Waiver

[21] Waiver of solicitor-client privilege need not be express. In some circumstances, waiver may be implied. What constitutes such waiver was explained in Wigmore on Evidence, vol. 8 (McNaughton rev., 1961), sec. 2327, as adopted in R. v. Youvarajah, 2011 ONCA 654, 107 O.R. (3d) 401, at para. 148:

What constitutes a waiver by implication?

Judicial decision gives no clear answer to this question. In deciding it, regard must be had to the double elements that are predicated in every waiver, i.e., not only the element of implied intention, but also the element of fairness and consistency. A privileged person would seldom be found to waive, if his intention not to abandon could alone control the situation. There is always also the objective consideration that when his conduct touches a certain point of disclosure, fairness requires that his privilege will cease whether he intended that result or not. He cannot be allowed after disclosing as much as he pleases, to withhold the remainder. He may elect to withhold or to disclose, but after a certain point his election must remain final.

[22] While implied or deemed waiver may occur when fairness requires it, it will not be found every time it is determined that disclosure of the otherwise privileged communication would advance some abstract notion of fairness. There must be “some manifestation of a voluntary intention to waive the privilege at least to a limited extent”: S. & K. Processors Ltd. v. Campbell Ave. Herring Producers Ltd., (1983), 45 B.C.L.R. 218 (S.C.), at para. 10; Youvarajah, at para. 149. This voluntary intention can be evinced by making the solicitor-client communication an issue in the proceeding or by voluntarily disclosing some, but not all of the privileged material: Creative Career Systems Inc. v. Ontario, 2012 ONSC 649, 27 C.P.C. (7th) 172, at para. 25; Mediamix Interactive Inc. v. Ontario (Minister of Natural Resources), 2018 ONSC 3920, at para. 24. The defendant submits that both types of implied waiver exist in this case.

(b) Implied Waiver Arising From the Issues Raised by the Plaintiff

[23] The defendant correctly points out that Ms. Morris, who was counsel to the plaintiff, is an important witness in this action. The difficulty that arises in this case is that Ms. Morris played a dual role in relation to the plaintiff. She acted as its external counsel and provided it with legal advice. However, she also served on the management board of MSL. It was in this latter capacity that she interacted with Mr. Anhalt.

[24] While the defendant is correct that the plaintiff relies on statements made by Ms. Morris and communications between her and the plaintiff’s management, this does not, by itself, mean that there was an implied waiver of privilege. Implied waiver does not arise every time a party raises as an issue information it received from a person who happens to be lawyer. Only in circumstances where information constitutes legal advice and is therefore prima facie privileged can raising receipt of that information as an issue constitute implied waiver.

[25] I have reviewed the affidavit of Ms. Morris which the defendant relies on as evidence of implied waiver. In it, she describes Mr. Anhalt’s role on the MSL management board, his relationship to the plaintiff, his conduct, her interactions with him, and his interactions with other employees of the plaintiff. Nowhere does she refer to legal advice she provided to the plaintiff, let alone legal advice respecting the litigation with the defendant, which is the subject matter of the four documents at issue on this motion. In my view, the plaintiff has not raised any issue that could lead to a finding of deemed waiver.

(c) Implied Waiver Arising From Partial Disclosure

[26] The defendant also relies on the fact that the plaintiff has disclosed some communications between Ms. Morris and the plaintiff’s executive. As noted, selective waiver of privilege in relation to some material can constitute implied waiver in relation to other material. As noted, not everything Ms. Morris did for the plaintiff was done in her capacity as a legal adviser. While I have not been provided with most of the disclosed documents, based on the record before this court it does not appear as if any of the disclosed documents contained information respecting legal advice Ms. Morris gave to the plaintiff. In other words, these were not documents in respect of which privilege was waived. Rather, these were documents to which privilege did not attach. As there has not been any waiver of privilege in relation to some material, there is no implied waiver in relation to other material.

(iii) Loss of Privilege Resulting From Reckless Conduct

[27] The defendant also submits that privilege may be lost where the circumstances surrounding the disclosure of documents amount to more than inadvertence and amount to careless or reckless conduct. In this regard, the defendant relies on Chan v. Dynasty Executive Suites Ltd. (2006), 30 C.P.C. (6th) 270 (Ont. S.C.J.), at para. 40 and Earth Energy Utility Corp. v. Maxwell, [2008] O.J. No. 2800 (S.C.J.), at para. 30. There are other authorities that arguably support the defendant’s position: Eisses v. CPL Systems Canada Inc. (2009), 77 C.P.C. (6th) 355 (Ont. S.C.J.), at para. 60; R. v. K.B., 2014 NSPC 23, 345 N.S.R. (2d) 185, at paras. 72-73.

[28] There are several reasons why I do not accept this submission. First, the submission that that Mr. Hershtal’s disclosure of the documents went beyond mere inadvertence and amounted to carelessness or recklessness is without merit. This was a case involving numerous documents and as soon as Mr. Hershtal realized what had occurred, he took steps to recover the documents.

[29] Second, while the authorities listed earlier arguably support the defendant’s position, in my view a closer reading of them leads to the conclusion that they do not. Rather, they appear to state that disclosure that amounts to recklessness may be evidence of an intention to expressly waive privilege. For example, in Earth Energy Utility Corp., the court concluded that the party’s claim that documents had been inadvertently disclosed was really “a strategic maneuver to attempt to have the solicitors for the plaintiff removed from the record on the eve of trial” (at para. 28).

[30] Finally, if I am wrong and the authorities mentioned do stand for the proposition that disclosure through recklessness can amount to waiver, then I must respectfully disagree with them. None of the authorities listed earlier are binding on me and the Supreme Court of Canada has repeatedly held that solicitor-client privilege is a substantive legal right that “must be as close to absolute as possible and should not be interfered with unless absolutely necessary”: McClure, at para. 35; Lavallee, at paras. 36; Alberta (Information and Privacy Commissioner) v. University of Calgary, 2016 SCC 53, [2016] 2 S.C.R. 555, at para. 43; Lizotte v. Aviva Insurance Co. of Canada, 2016 SCC 52, [2016] 2 S.C.R. 521, at para. 60; Canada (Attorney General) v. Chambre des notaires du Québec, 2016 SCC 20, [2016] 1 S.C.R. 336, at para. 28; Canada (Attorney General) v. Federation of Law Societies of Canada, 2015 SCC 7, [2015] 1 S.C.R. 401, at para. 44; Ontario (Public Safety and Security) v. Criminal Lawyers’ Association, 2010 SCC 23, [2010] 1 S.C.R. 815, at para. 75; Canada (Privacy Commissioner) v. Blood Tribe Department of Health, 2008 SCC 44, [2008] 2 S.C.R. 574, at paras. 9-10. The suggestion that a client’s substantive legal right could be lost because of the reckless conduct of his or her lawyer is simply not consistent with this principle.

[31] Based on the foregoing, I conclude that the four documents are subject to solicitor-client privilege and that privilege has not been expressly or impliedly waived or otherwise lost.

C. Should Counsel for the Defendant Be Removed?

(i) The Factors to be Considered

[32] The plaintiff seeks an order removing the defendant’s counsel. Such an order may be appropriate in cases where counsel for one party becomes privy to privileged information: Celanese Canada Inc. v. Murray Demolition Corp., 2006 SCC 36, [2006] 2 S.C.R. 189, at paras. 42-67. The primary purpose of an order removing counsel is to ensure that the party whose privilege was breached does not suffer prejudice as a result, not to punish the other party: Celanese, at para. 54.

[33] The factors a court should consider in deciding whether or not to make an order removing counsel are set out in Celanese, at para. 59, and include (i) how the documents came into the possession of the party or its counsel; (ii) what the party and its counsel did upon recognition that the documents were potentially subject to solicitor-client privilege; (iii) the extent of review made of the privileged material; (iv) the contents of the solicitor-client communications and the degree to which they are prejudicial; (v) the stage of the litigation; (vi) the potential effectiveness of a firewall or other precautionary steps to avoid mischief.

(ii) The Factors Applied

(a) How the Documents Came Into Counsel for the Defendant’s Possession

[34] As discussed earlier, the documents came into counsel for the defendant’s hands due to the inadvertence of the plaintiff’s counsel, not through the fault of counsel for the defendant.

(b) What Counsel Did

[35] The plaintiff submits that Ms. Juntunen ought to have realized the privileged nature of the documents when she reviewed them. I agree.

[36] While Ms. Juntunen was not cross-examined on her affidavit, it is clear that the dispute over privilege between her and Mr. Hershtal leading up to the disclosure of the documents in question related to the issue of whether privilege applied, not whether it should be waived. Ms. Juntunen’s position throughout was that the documents which Mr. Hershtal initially refused to produce were not privileged. For example, in a letter she wrote to Mr. Hershtal on March 2, 2017, she stated:

Drake has claimed solicitor-client privilege over 311 documents listed in Schedule B(a). Of these, many relate to Morris’ business/advisory role with MSL, rather than any legal advice she was asked to provide. Others reflect communications directed to someone other than Morris’ client. Still others consist of agreements and other documents for which there are simply no grounds to expect confidentiality.

Based on this, Ms. Juntunen would have expected to receive documents which did not relate to legal advice given by Ms. Morris. However, Tab 237, the only document that Ms. Juntunen reviewed, clearly does. While Mr. Anhalt is mentioned, the communication is primarily about the claim the plaintiff made to the defendant. As well, Tab 237 incorporates Tab 238, which has the heading “Privileged and Confidential – Prepared by Counsel”. At the very least, Ms. Juntunen ought to have clarified the status of the document with opposing counsel before advising her client of its contents, even in general terms.

[37] After Mr. Hershtal made the claim of privilege, Ms. Juntunen had the documents sealed. However, she refused to delete them as requested by Mr. Hershtal. Instead, she took the position that the documents were not privileged for various reasons, including the meritless suggestion that privilege had been lost as the result of “recklessness”. The plaintiff submits that she ought to have deleted them. I agree that that would have been the better course of action: Celanese, at para. 62. However, Ms. Juntunen did take immediate steps to prevent any further breach of privilege. In terms of prejudice to the plaintiff, I see no practical difference between returning the documents or sealing them as was done.

(c) The Extent to Which the Documents Were Reviewed

[38] Ms. Juntunen reviewed Tab 237, which includes Tab 238, in some detail.

(d) The Likelihood of Prejudice

[39] The defendant submits that the plaintiff has failed to show that it will suffer any prejudice as a result of the defendant’s counsel’s review of the documents. However, in Celanese, the Court likened the situation of a lawyer inadvertently reviewing privileged documents to that in which a lawyer joins a law firm acting against a former client, as was the case in McDonald Estate v. Martin, [1990] 3 S.C.R. 1235. In that situation, the Court held that prejudice to the former client should be inferred unless rebutted by “clear and convincing evidence”: McDonald Estate, at pp. 1260-1262. The same presumption exists in cases where a lawyer inadvertently become privy to privileged communications: Celanese, at paras. 48-52. It follows from this that there is no onus on the plaintiff to establish that the review of the privileged documents will result in prejudice. Such prejudice is to be presumed unless rebutted.

[40] In addition to any presumed prejudice, I note that Tabs 237 and 238 contain legal advice relating to the issue of when the loss giving rise to the claim was discovered. While I am not familiar with the all of the details of the litigation, it seems to me that the defendant’s counsel’s review of the material gives rise to a risk of prejudice.

[41] The issue, then, is whether the presumption of prejudice has been rebutted. In this regard, I note that in Mr. Hershtal’s e-mail of November 28, 2017, he stated that a motion to have Ms. Juntunen’s firm removed as counsel for the defendant would likely be brought if she refused to delete the privileged communications. This suggested that if Ms. Juntunen had returned the documents, no motion to remove her as counsel would have been brought notwithstanding that it was clear from her November 23, 2017 e-mail that she had reviewed at least Tab 237. While Ms. Juntunen did not return the documents, she did seal them. As far as the plaintiff is concerned, any prejudice that has resulted has not increased since Mr. Hershtal sent the e-mail on November 28. The fact that the plaintiff would have been content to have Ms. Juntunen remain on the file despite having reviewed at least some of the documents suggests that the plaintiff does not believe it has been prejudiced.

(e) The Stage of Litigation

[42] Although this litigation has been ongoing for a decade, it is not at a late stage. No trial date has been set. While both parties intend to move for summary judgment, no motion has yet been scheduled.

(f) The Effectiveness of Other Preventive Steps

[43] As noted earlier, the situation in this case bears some similarity to the situation in McDonald Estate and Ms. Juntunen’s position is similar to that of a lawyer who is privy to confidential information about a former client against whom she acts. A lawyer in that situation must be disqualified for the reasons explained in McDonald Estate, at p. 1261:

A lawyer who has relevant confidential information cannot act against his client or former client. In such a case the disqualification is automatic. No assurances or undertakings not to use the information will avail. The lawyer cannot compartmentalize his or her mind so as to screen out what has been gleaned from the client and what was acquired elsewhere. Furthermore, there would be a danger that the lawyer would avoid use of information acquired legitimately because it might be perceived to have come from the client. This would prevent the lawyer from adequately representing the new client. Moreover, the former client would feel at a disadvantage.

[44] However, there are also important differences between this case and the situation in McDonald Estate. Unlike a client’s former lawyer, who would likely be in possession of a significant amount of detailed confidential information, Ms. Juntunen only reviewed two short documents. As a result, it would presumably be easier for her to “screen out” what was gleaned from the documents. The greatest area of risk in this regard would be if Ms. Juntunen found herself examining or questioning any of the plaintiff’s witnesses, where it would be difficult for her to disabuse herself of information obtained from the documents in formulating her questions. I note that Ms. Juntunen clearly viewed these documents as being significant. She sought further information about their subject matter and upon being advised of the privilege claim, she made every attempt to keep and use them to her client’s advantage.

[45] The ultimate question is whether a reasonably informed member of the public would be satisfied that no use of the confidential information would occur: McDonald Estate, at pp. 1259-1260; Celanese, at para. 66. In my view, a reasonably informed member of the public would be so satisfied by the imposition of remedies short of removing Lerners as counsel for the defendant. In my view, the remedies which I outline at end of these reasons are sufficient. However, if it becomes apparent that the steps that have been taken are insufficient to protect the plaintiff’s privilege, it may renew its motion for further relief: Whitty v. Wells, 2016 ONSC 6400, at para. 54.

III. DISPOSITION

[46] For the foregoing reasons, the plaintiff is entitled to the following relief:

(1) A declaration that the documents identified as Tabs 230, 235, 237 and 238 in Schedule B to the plaintiff’s draft supplementary affidavit of documents are and remain subject to solicitor-client privilege.

(2) An order that any copies of the privileged documents in the possession of Lerners be returned to counsel for the plaintiff forthwith without being reviewed by any employee or agent of Lerners and that any electronic version be immediately deleted without being reviewed.

(3) An order that Ms. Juntunen undertake not to directly or indirectly relay to any person any information she possesses as a result of having reviewed the privileged documents.

(4) An order that Ms. Juntunen not conduct any examinations of any of the plaintiff’s witnesses in this matter, including any examination for discovery, cross-examination on any affidavit, or cross-examination at trial and that she not participate in the preparation of such examinations by other counsel.

[47] If the parties are unable to agree on costs, the plaintiff may make written submissions not exceeding three pages, exclusive of a costs outline, within 10 days of the date of these reasons and the defendant may make written submissions of the same length within 10 days of receiving the plaintiff’s submissions.

Schreck J.

Released: July 23, 2018

COURT FILE NO.: 08-CV351936PD2 DATE: 20180723 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: DRAKE HOLDINGS LTD. Plaintiff – and – CHUBB INSURANCE COMPANY OF CANADA Defendant REASONS FOR DECISION Schreck J. Released: July 23, 2018.

[1] 2054476 Ontario Inc. v. 514052 Ontario Ltd., [2006] O.J. No. 4383 (S.C.J.).