Court File and Parties

COURT FILE NO.: CV-18-594810 MOTION HEARD: 20181101 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Zhen Zhang, Plaintiff/Defendant to Counterclaim AND: Ziming Su, Defendant/Plaintiff by Counterclaim

BEFORE: Master P.T. Sugunasiri

COUNSEL: Tan, C. and He, R., Counsel for the Plaintiff/Moving Party Poon, N., Counsel for the Defendant/Responding Party

HEARD: November 1, 2018

Reasons for Decision

[1] The Plaintiff seeks to strike paragraph 19 of the Statement of Defence and Counterclaim (“Defence”) because it purportedly publishes statements protected by settlement privilege. In the alternative, the paragraph should be struck because it pleads evidence contrary to Rule 25.06(1) of the Rules of Civil Procedure.

[2] For the reasons that follow, I grant the Plaintiff’s relief with partial indemnity costs. I strike paragraph 19 of the Defence on the basis that it pleads evidence. I decline to decide whether or not paragraph 19 falls within the umbrella of settlement privilege. That is best left to the trier of fact in the circumstances of this case.

The Transaction

[3] The action arises from a failed real estate transaction between the parties.

[4] On April 25, 2017 the parties entered into an agreement of purchase and sale (“APS”) for a residential property in Vaughan and the Defendant paid a $30,000 deposit. The closing date was July 18, 2017. One term of the APS was that the Plaintiff agreed to allow the Defendant buyer to change or add another buyer to the APS before closing for mortgage approval reasons.

[5] In early July when it became apparent that the Defendant was not able to close on July 18, 2017, the parties negotiated an extension. Some of the details of those negotiations were in the original Statement of Claim. On the insistence of the Defendant, and to avoid a costly motion, the Plaintiff agreed to remove the relevant paragraphs on the basis of settlement privilege (“Amended Claim”).

[6] The new closing date was August 18, 2017. On August 9, 2017, the Defendant wrote to the Plaintiff’s real estate agent asking for the name change amendment form to add his mother so that she could try to obtain a mortgage. The Plaintiff’s agent indicated that the Plaintiff would provide the form if the Defendant paid a further $100,000 deposit toward.

[7] At 11:29 a.m. on the day of closing, counsel for the Defendant advised that the Defendant was unable to obtain mortgage financing. Counsel indicated that he was instructed to “solve the matter in an amicable way and proposed a resolution which involved “mutual releases”. In so proposing, the Defendant invited the Plaintiff to put forward any other conditions to solve the matter amicably (the “Su Offer”).

[8] The Plaintiff responded to the Defendant with two Options (the “Zhang Options”). One of the options was that the Plaintiff would consider consenting to the assignment of the APS to the Defendant’s mother on certain conditions. At 4:35 p.m. on the same day, the Defendant responded to the Plaintiff and asked if one of the monetary conditions proposed for the release could be reduced (the “Su Response”).

[9] Having reached an impasse, the Plaintiff sent a second letter dated August 18, 2018 indicating that the Defendant was now in default of the APS and that he would be commencing the within action (the “Zhang Notice Letter”).

The Defence and Counterclaim (“Defence”)

[10] The relevant paragraphs of the Defence are as follows:

18. On or about August 8, 2017, the Defendant requested Mr. Sun complete an Amendment of the Agreement of Purchase and Sale form to change the name of the purchaser to Huawen Li pursuant to the Purchaser Name Change condition. Mr. Sun replied that he had instructions to advise that the Plaintiff will only consent to change the name of the purchaser to Huawen Li in the Agreement of Purchase and Sale on the condition that the Defendant provides an immediate payment of a further deposit in the amount of $100,000.00 by bank draft to the trust account of Homelife Landmark Realty Inc.

19. On or about August 18, 2017, the Plaintiff through his solicitor, Jack F.S. Lee stated that he “will consider granting consent to assign the [Agreement of Purchase and Sale] to [the Defendant’s] mother” on certain conditions including immediate payment of a further deposit in the amount of $50,000.

20. The Defendant pleads that the Plaintiff committed a breach of contract by refusing to abide by the Purchaser Name Change condition, in a timely manner, as agreed upon by the parties in the Agreement of Purchase and Sale, which caused the Defendant to fail to obtain mortgage financing to complete the transaction.

[11] The Plaintiff takes issue with the fact that paragraph 19 pleads verbatim, a part of the Zhang Options that addresses the assignment of the APS to the Defendant’s mother.

Law and Analysis

[12] Rule 25.11 of the Rules of Civil Procedure provides that the Court may strike out or expunge all or part of a pleading or other document, with or without leave to amend, on the ground that the pleading is scandalous, frivolous or vexatious or is an abuse of process of the court.

[13] The parties agree that a reference to discussions subject to settlement privilege can be considered scandalous, frivolous or vexatious. [1] The parties also agree that the Court is to apply a tri-partite test in determining whether a communication is subject to settlement privilege:

a. A litigious dispute must be in existence;

b. The communication must be made with the express or implied intention that it would not be disclosed to the court in the event negotiations failed; and

c. The purpose of the communication must be to attempt to affect a settlement.

[14] Rule 25.06(1) of the Rules of Civil Procedure states that pleadings shall contain a concise statement of the material facts on which the party relies upon for the claim or defence. In so doing, a party must not plead evidence.

Position of the Parties

[15] The Plaintiff asserts that all three parts of the test are met. Defendant agrees that parts (a) and (b) are met. He disagrees, however, that part (c) is met. He also relies on Rule 25.06(1) to assert that paragraph 19 accords with the rules of pleadings and that in any event, this is not the appropriate time to determine if paragraph 19 is subject to settlement privilege.

[16] I address this latter point first and agree with the Defendant that determining whether or not paragraph 19 is protected by settlement privilege is premature. As such, I do not address the other arguments on whether or not the purpose of the Zhang Options reiterated in paragraph 19 was to attempt to affect settlement. I do however strike the impugned paragraph on the basis that it consists of evidence that need not be in the pleading, especially in light of the Plaintiff’s concerns that it violates settlement privilege. I explain below.

A. The Motion to Strike is Premature

[17] The Defendant relies on Lakeside Steel Corporation et al v Adrian White [2] to argue that it is premature to strike paragraph 19 on the basis of settlement privilege and that the issue is best left to the trier of fact. I agree.

[18] Lakeside is a wrongful dismissal case in which the Plaintiff also sought damages for bad faith (also known as “Wallace damages”). In attempting to plead the Wallace damages, the Plaintiff/employee, Mr. White, pleaded details about a meeting in which he was advised of his termination and the manner of compensation that he would receive. Lakeside argued that this discussion was privileged because they were in furtherance of settlement. White argued that the discussions were not privileged and that he was entitled to rely on the events of that meeting in support of his claim for Wallace damages. Justice Brown held that because whether or not a meeting was conducted on a without prejudice basis was a live issue, it was better to keep the impugned paragraphs and have their admissibility determined by the trial judge.

[19] In the present case, I follow Justice Brown’s lead in declining to make a final determination at this time of whether or not paragraph 19 is subject to settlement privilege. Like in Lakeside, the Defendant relies on the facts alleged in paragraph 19 to support its counterclaim for bad faith damages arising from the manner in which the Plaintiff dealt with its obligations under the APS to allow the Defendant to assign it to his mother. In other words, embedded in the Zhang Options are facts that the Defendant says are material and necessary to support the substantive allegation that the Plaintiff acted in bad faith in performing the contract. Where statements that may have been made during negotiations to stave off impending litigation also form the basis of a substantive claim in the action, the determination of whether or not those statements are protected by settlement privilege is best left to the trier of fact.

B. Paragraph 19 in its current form should be struck

[20] I do strike paragraph 19 however, because it contains evidence contrary to Rule 25.06(1) of the Rules of Civil Procedure. In doing so, I rely on settled law as summarized by Justice Shaw in Jourdain v Ontario [3] at paras. 35-38:

35 As stated by Farley, J. in National Trust Co. v. Furbacher, [1994] O.J. No. 2385 (Gen. Div.) at para. 9, pleadings have a three-fold function. They should:

(1) define with clarity the questions in controversy between the litigants;

(2) give fair notice of the precise case which is required to be met and the precise remedies sought; and

(3) assist the court in its investigation of the truth and the allegations made.

36 To this end, Rule 25.06 provides that a pleading shall contain a precise statement of the material facts upon which a party relies, but not the evidence by which those facts are to be proved. It also provides that conclusions of law may be pleaded only if the material facts supporting them are pleaded.

37 As noted by Master McLeod in City of Toronto v. MFP Financial Services Ltd. (2005), 17 C.P.C. (6th) 338 (Ont. S.C.J.) at para. 15, the distinction between material facts, particulars, and evidence is not a "bright line". He points out that there will be situations where the minimum level of fact disclosure may require a pleading of material facts that might also be regarded as evidence. In this regard, Rule 25.06(8) requires that where intent is alleged, the pleading must contain full particulars of the allegations. The full particulars must set out precisely what the wrongful act is and the when, what, by whom and to whom of the relevant circumstances. See Balanyk v. University of Toronto, [1999] O.J. No. 2162 (S.C.J.) at para. 28.

38 While pleadings must not offend the Rules, it is well established that counsel may frame their pleadings as they deem advisable and this right should not be lightly infringed by the court. The inclusion of unnecessary detail or excessive verbosity in a pleading is not of itself a reason for striking out a pleading. It is incumbent upon the party seeking to strike out pleadings to show that he or she is prejudiced or embarrassed by the pleading or that a fair trial will be delayed by the irregularity. See City of Toronto v. British American Oil Company Limited, [1949] O.R. 143 (Ont. C.A.).

[21] I further rely on Perrell, J.’s summary of the law in Kang v Sun Life Assurance Company of Canada [4] and in particular para. 71 when he states that if a part of a pleading is struck out because it is pleading evidence, then that would not preclude the admissibility of the evidence as proof of the plaintiff’s cause of action. I would add that such admissibility is subject to any privileges or other evidentiary exclusions that the trier of fact applies. I would also add that striking a pleading as evidence does not preclude an exploration of that evidence at discovery. Finally, in addition to the principles noted above and the fact that the difference between material facts and evidence is often not a bright line, the Court must consider the circumstances of the case at bar and the overall justice of granting the relief sought.

[22] Having considered the law and the overall justice of the case, I strike paragraph 19 in its current emanation. This is an instance when a pleading is a material fact as well as evidence. On the one hand, paragraph 19 can be seen as a particularization of the allegation of breach of contract in paragraph 20. On the other hand, the verbatim recounting of what was said can be regarded as evidence of the alleged breach. In ordinary circumstances, I might have left the paragraph intact. However, due to the additional possibility that the paragraph may violate settlement privilege, I err on the side of striking the paragraph as evidence to balance the interests of the parties. There is no prejudice to the Defendant in striking paragraph 19, as he may still explore those discussions at discovery. I specifically canvassed this issue at the hearing. Counsel was not able to point to any prejudice beyond an inability to explore the topic at discovery, which I have concluded to be an unfounded concern. At the same time, striking the paragraph minimizes the public dissemination of what may be privileged communications thereby recognizing the importance of settlement privilege in encouraging parties to have candid settlement discussions.

[23] I also am of the view that striking paragraph 19 does not derogate from the three goals of pleading enunciated by Justice Farley, supra. A breach of contract has already been pleaded in paragraph 20 along with a description in paragraph 18 of one instance of it. The parties clearly know, without the benefit of paragraph 19, what the Defendant is complaining about. Further, paragraphs 18 and 20 gives a trier of fact adequate notice of what the complaint is and what issue needs to be resolved – namely whether or not consenting to a name change was a term of the APS, whether or not the Plaintiff breached that term, and whether or not that lead to damages to the Defendant. The Defendant can attempt to tender the evidence contained in paragraph 19 at a hearing or summary judgment motion in further support of the alleged breach at which time a judge will rule on its admissibility.

Disposition

[24] Paragraph 19 of the Defence is struck without leave to amend. I have signed the order and it is ready for pick up by the Plaintiff.

Costs

[25] The parties argued costs at the hearing and provided costs outlines. The Plaintiff seeks substantial indemnity costs due to a Rule 49 Offer and what he characterizes as egregious conduct by the Defendant. In addition to these submissions, there are several other factors at play. First, most of the time spent by the Plaintiff in both the written and oral submissions was on the argument that paragraph 19 was subject to settlement privilege and should be struck on that basis. I rejected this argument and agreed with the Defendant that such an argument is premature. As such, most of the time spent by the Plaintiff did not lead to his favourable outcome. I have allowed the motion on alternative grounds not found in the Notice of Motion but raised by the Defendant in his materials. Second, I note that in the course of trying to settle this motion, the Defendant conceded to the Plaintiff that paragraph 19 was evidence of the breach alleged in paragraph 20 and that it was not really needed to advance the Defence. Query as to why the Defendant would then go to such lengths to defend the motion. Third, I do not find, however, that the Defendant’s conduct was egregious.

[26] In sum, having regard to Rules 1.04 and 57.01 of the Rules of Civil Procedure and all of the factors relevant to this motion including those specified above, I award partial indemnity costs to the Plaintiff in the all-inclusive, partial indemnity amount of $6400 payable within 30 days of today’s date. Any entitlement to substantial indemnity costs as a result of the Rule 49 offer is mitigated by the fact that the Plaintiff was unsuccessful on his main arguments even though successful in the result.

Original signed “Master P. Tamara Sugunasiri” Date Released: December 3, 2018

[1] See Canadian Gateway Development Corporation v National Capital Commission, 2002 CarswellOnt 2725 at para. 8 (SC Master) as more recently adopted by Master Muir in 2030945 Ontario Ltd v Markham Village Shoppes Ltd, 2013 ONSC 1020 at para. 8 (Master). [2] Lakeside Steel Corporation et al v Adrian White [hereinafter “Lakeside Steel”]. [3] Jourdain v Ontario, [2008] OJ No 2778 (SCJ). [4] Kang v Sun Life Assurance Company of Canada, 2011 ONSC 6335.