Court File and Parties

Court File No.: CV-23-00710960-00CL
Date: March 24, 2025
Superior Court of Justice – Ontario, Commercial List

Between:
Paragon Protection Ltd. and Rosencrantz & Guildenstern Inc., Plaintiffs
and
Tamstu-Harjon Holdings of Canada Limited, Jonathan Rosenthal in his capacity as Estate Trustee of the Estate of Cyril Hirsh Rosenthal, Benjamin Barrett in his capacity as Estate Trustee of the Estate of Cyril Hirsh Rosenthal, and Jonathan Rosenthal, Defendants

and

Tamstu-Harjon Holdings of Canada Limited, Plaintiffs by Counterclaim
and
Rosencrantz & Guildenstern Inc., Paragon Protection Ltd., Ronald J. France, Donna France and Bud Ralph, Defendants by Counterclaim

Before: Frank J. Penny

Counsel:
Kevin Fisher and Eli Bordman for Paragon Protection Ltd., Rosencrantz & Guildenstern Inc., Ronald J. France, Donna France and Bud Ralph
Clifford Cole and Matthew Karabus for Tamstu-Harjon Holdings of Canada Limited, Jonathan Rosenthal in his capacity as Estate Trustee of the Estate of Cyril Hirsh Rosenthal and Benjamin Barrett in his capacity as Estate Trustee of the Estate of Cyril Hirsh Rosenthal

Heard: March 7, 2025

Endorsement

Overview

[1] Both parties bring production motions where the sole issue is “privilege”.

[2] Paragon seeks a further and better Schedule B of Tamstu’s affidavit of documents. Paragon also seeks production of certain documents in related estates litigation. Tamstu says it has already provided a complete and detailed Schedule B and that the documents requested in relation to the estate litigation are protected by joint defence privilege.

[3] Tamstu seeks production of all communications between Paragon and its counsel from 1978 to 2023 based on an implied waiver arising from Paragon’s pleadings. Paragon maintains there has been no waiver of privilege. Tamstu also seeks production and further discovery on documents and communications arising in the 2020/2021 timeframe which Paragon maintains are subject to settlement privilege.

Background

[4] There is a long and tortuous history to these proceedings. The parties filed a staggering amount of material and argument occupied a full day. For present purposes, I will attempt to limit this description of the background to what is strictly necessary to provide context for the issues raised in the motions.

[5] Paragon is a security company owned by the France family. In 1978, Paragon was run by Ron France Senior (Ron Sr.). Ron Sr. died in 1995. Paragon has been run by his son, R.J. France (R.J.), since that time.

[6] Cy Rosenthal (Cy) was an accountant. He and his business partner, Syed Pervez (Syed), provided accounting and other services to Paragon. Cy owned a company called Tamstu. In 1978, Tamstu entered into a Consulting Agreement with Paragon. The meaning, effect and enforceability of the Consulting Agreement is at the heart of this litigation.

[7] The Consulting Agreement provides, among other things, that:

• Tamstu is entitled to 25% of the annual pre-tax profit of Paragon;
• Tamstu made loans to Paragon;
• the remuneration to be paid by Paragon to members of the France family is subject to a cap;
• Tamstu is entitled to a limited veto over certain corporate reorganizations of Paragon including sales of any shares of Paragon; and
• Tamstu is granted an option to acquire 25% of the shares of Paragon in the event of a sale of the business by Paragon to a third party.

[8] Payments were made by Paragon to Tamstu under the Consulting Agreement for about 45 years. Cy became incapable in around 2005 and died in 2008. The payments continued, albeit, according to Paragon, as a gesture of “goodwill”. Cy’s original estate trustees were his brother, Joseph Rosenthal (Joseph) and Syed. Syed continued to do accounting work for Paragon. Cy’s shares of Tamstu represent the principal asset of the Estate. The residuary beneficiaries are Cy’s grandchildren. There was litigation in the estate proceedings between the beneficiaries and the former estate trustees (Estate Litigation). By court order at the end of 2020, Joseph and Syed were replaced as estate trustees by Cy’s son Jonathan Rosenthal (Jonathan) and one of Cy’s grandchildren, Benjamin Barrett (Ben).

[9] Paragon issued a statement of claim against Tamstu in 2023. Paragon claims that the Consulting Agreement “is void and is of no force or effect.” Paragon alleges wrongdoing by Cy/Tamstu that occurred in 1978 and has continued since then. In the claim, Paragon seeks:

• a declaration that the Consulting Agreement is null and void ab initio and that Tamstu is not now and never was entitled to the benefits of the Consulting Agreement;
• disgorgement of all amounts paid to Tamstu in the past 45 years in an amount exceeding $2 million; and
• damages as compensation for an alleged contingent liability for potential additional taxes arising out a payroll scheme, terminated in 2010, whereby Tamstu administered part of Paragon’s payroll but did not remit HST.

[10] Pleadings are closed. The parties have gone through documentary and oral discovery. The present motions for additional production and/or discovery arise out of that process.

The Paragon Motion

[11] Paragon seeks a further and better Sch B to Tamstu’s affidavit of documents. The principal basis upon which it relies for this relief is that the numerical sequence of document identification numbers in Tamstu’s affidavit of documents is interrupted, leaving gaps in that numerical sequence. Paragon argues that this shows that privileged documents have improperly been removed from Tamstu’s Sch B.

[12] Tamstu has provided a perfectly valid explanation for this anomaly. Duplicates, attachments, irrelevant documents account for the fact that initial document identification numbers are not perfectly sequential. Many documents initially inputted into a document management program are not ultimately produced. The sworn evidence is that all relevant documents have been identified in Sch B. Each document is identified by date, the nature of the document, the author, who it is from and to and the nature of the privilege asserted. There is no contrary evidence. Paragon has identified no specific document that is missing from the list and advanced no evidence from which a reasonable inference can be drawn that there are relevant privileged documents not listed.

[13] Paragon’s request for a further and better Sch B is dismissed.

[14] Paragon’s second argument concerns production in this litigation of documents in the Estate Litigation. This category of document includes:

• Tamstu received six tranches of documents from Syed as well as four tranches of documents from Robert O’Brien, the former lawyer for Cy’s estate;
• Mr. O’Brien swore an affidavit on November 29, 2021 which included information regarding an attempted buy-out of Tamstu’s interest in Paragon pursuant to a memorandum of understanding (MOU) with the Office of the Children’s Lawyer (OCL) in the Estate Litigation;
• The MOU provided that the former estate trustees were to seek advice from a lawyer named Dennis Wyslobicky regarding a voluntary disclosure (VD) application to the CRA regarding Tamstu’s obligations relating to the filing of HST and GST returns;
• Cy had failed to file annual corporate tax returns for Tamstu and failed to fulfill Tamstu’s obligations to report and to remit HST and GST in whole or in part for Paragon’s payroll services;
• Cy received “consulting income” outside of his accounting practice from Paragon and, on paper, appeared to be running part of the payroll of Paragon through Tamstu;
• Joseph stated that Paragon had no legal obligation to pay consulting fees following Cy’s death, but that Paragon continued to do so out of goodwill; and
• The parents of the beneficiaries of Cy’s estate instructed the former estate trustees to reject an offer made by Paragon in 2008 for a lump sum payment for the release of Tamstu’s rights under the Consulting Agreement.

[15] Paragon argues that these documents provide insight into:

• How Cy conducted his affairs and his practice as the accountant for Paragon and related parties;
• The negotiation of the MOU and the steps taken pursuant to the MOU thereafter regarding the interpretation of the CA all of which are tied up with Paragon accounting and payroll issues;
• The VD application and its implications on Paragon’s accounting and payroll; and
• How Cy operated Tamstu as it related to Paragon.

[16] Paragon submits, therefore, that these documents are relevant to the issues as pleaded by both Tamstu and Paragon but have not been fully disclosed or properly listed as part of Tamstu’s Schedule B disclosure.

[17] Any analysis of this issue is handicapped by the failure of either party to identify (with a few exceptions) specific documents for which production is demanded/privilege claimed. In the circumstances, I can do little more than offer general guidance as a practical matter based on what is in the record.

[18] Relevance is not the issue on this motion, which is restricted to the question of privilege only. In any event, relevance has already been established by the endorsement of Osborne J. rendered earlier in this action.

[19] Tamstu was neither a trustee nor a beneficiary of Cy’s Estate and does not directly benefit from privileges afforded the Estate. If Tamstu received documents from Syed or from Mr. O’Brien, they must be produced.

[20] Similarly, if Mr. O’Brien filed an affidavit in the Estate Litigation, it must be produced.

[21] If the former estate trustees obtained legal advice from Mr. Wyslobicky concerning Tamstu’s legal obligations to CRA, absent waiver there is no basis for requiring the content of that advice to be produced. However, this advice appears to have been produced in the Estate Litigation to all parties. If that is so, any privilege was waived. The advice must be produced.

[22] Information gathered in the Estate Litigation about Cy’s failure to file Tamstu’s annual corporate tax returns or to report and remit HST on behalf of Tamstu is not privileged and must be produced.

[23] Information gathered in the Estate Litigation about Cy’s consulting income paid to Tamstu, or that Cy was running part of Paragon’s payroll through Tamstu, is not privileged and must be provided.

[24] Information about Joseph’s statements about why Paragon paid consulting fees following Cy’s incapacity and death is not privileged and must be provided.

[25] What the beneficiaries of Cy’s estate told the former estate trustees to do or not do in respect of the Consulting Agreement and Paragon is not privileged and must be provided.

[26] Tamstu’s claims of joint defence privilege are misconceived. Paragon was not a party to the Estate Litigation. Also, the Estate Litigation has been finally resolved.

The Tamstu Motion

[27] Tamstu seeks:

• disclosure of all legal advice received by Paragon in relation to the Consulting agreement from 1978 to and including 2023. The basis for this demand is said to be that privilege has been waived by Paragon’s pleadings and affidavit evidence filed on the motion; and
• production of, and the right to conduct oral discovery about, what are described in the material as the “Rosenthal/GR Documents” including a valuation report referred to as the “2021 Discussion Document”. Paragon resists this demand on the basis that this information is covered by settlement privilege.

[28] With respect to the first issue, the leading case is the decision of Perell J. in Creative Career Systems Inc v Ontario, 2012 ONSC 649. In Creative Career, Perell J. reviewed the general law on waiver of privilege. A party will be deemed to have waived privilege on grounds of fairness and consistency when he or she makes their communication with a lawyer an issue in the proceeding. If a party places its state of mind in issue with respect to its claim or defence and has received legal advice to help form that state of mind, privilege will be deemed to be waived with respect to such legal advice.

[29] However, Perell J. went on to identify “a subtle and profound point” in relation to waiver. There is no waiver of the privilege associated with lawyer/client communications from the mere fact that during the events giving rise to the claim or defence, the party received legal advice, even if the party relied on the legal advice during those events. For a party to have to disclose the content of the legal advice, more is required. A further element must be shown -- that the state of mind involves the party understanding its legal position in a way that is material to the lawsuit. In other words, the presence or absence of legal advice itself must be material to the claims or defence to the lawsuit. The materiality of the legal advice to the claims or defences in the lawsuit makes questions about it relevant. 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: Creative Career, paras. 22 to 29.

[30] Thus, a deemed waiver and an obligation to disclose a privileged communication requires two elements, namely: (1) the presence or absence of legal advice is relevant to the existence or non-existence of a claim or defence; which is to say that the presence or absence of legal advice is material to the lawsuit; and (2) the party who received the legal advice must make the receipt of it an issue in the claim or defence: Creative Career, para. 30.

[31] Paragon’s pleadings include 20 paragraphs that expressly or impliedly plead and rely upon the absence of legal advice, the provision of legal advice, and Paragon’s mistaken belief as to the legal effect of the Consulting Agreement:

• Paragon pleads and relies on the absence of legal advice when it entered into the Consulting Agreement in 1978: statement of claim at paras. 15, 17, 21, 23, and 31, and reply and amended defence to counterclaim at paras. 9, 12, 16, and 17;
• Paragon pleads that it was under a “mistaken belief” about Paragon and Tamstu’s contractual rights under the Consulting Agreement for the 45-year period after entering into the Consulting Agreement due to the absence of legal advice: statement of claim at paras. 41 and 44, reply and amended defence to counterclaim at paras. 65, 71, and 87; and,
• Paragon also specifically pleads and relies on legal advice received from Gardiner Roberts in 2023 (the 2023 GR legal advice) as the explanation for its 45-year delay in commencing this action (i.e., when Paragon allegedly finally understood its true rights and obligations under the Consulting Agreement) and in response to Tamstu’s limitation period defence: reply and amended defence to counterclaim at paragraphs 4, 22, 25, 31-35, 64, and 65.

[32] Paragon’s pleading claims, therefore, as a justification for waiting 45 years to commence its action against Tamstu and Cy’s Estate, that Paragon received no legal advice about the true meaning and effect of the Consulting Agreement in 1978 or at any time thereafter, and that it never understood the true meaning and effect of the Consulting Agreement during 45 years of operation under the Consulting Agreement until 2023, when it received the 2023 GR legal advice.

[33] For the period up to, but not including the 2023 GR legal advice, Paragon has put its state of mind in issue and has directly tied that state of mind to the absence of legal advice and to its alleged “mistaken belief” about the true nature and effect of the Consulting Agreement. This squarely falls within the Creative Career test: (1) the presence or absence of legal advice has been pleaded as relevant to the existence or non-existence of a claim or defence; which is to say that the presence or absence of legal advice is material to Paragon’s lawsuit; and (2) Paragon has made the lack of legal advice about its rights and obligations regarding the Consulting Agreement (until 2023 when, it alleges, its eyes were finally opened by the 2023 GR legal advice) and its alleged “mistaken belief” about the nature and effect of the Consulting Agreement, an issue in its claim and in its response to the limitation defence advanced by Tamstu.

[34] For this reason, I order that all privilege has been waived regarding any communications with any lawyers about the meaning and effect of the Consulting Agreement, and Paragon’s rights and obligations under it (as well as its rights and obligations in relation to Cy, Cy Estate and/or Tamstu) from 1978 up until the time Paragon sought the 2023 GR legal advice (as pleaded in para. 31 of the statement of claim).

[35] Counsel for Tamstu argued strenuously that the waiver should extend to, and include, the 2023 GR legal advice. I cannot agree. While it is true that Paragon has specifically pleaded the 2023 GR legal advice and reliance upon it (as the basis for commencing its claim in 2023), that only satisfies the first condition required by Creative Career, i.e., the fact of the legal advice. The pleading does not, however (unlike Paragon’s state of mind before the receipt of the 2023 GR legal advice), put into issue the content of the 2023 GR legal advice. It simply does not matter what the content of that advice was. Its only relevance, as pleaded, is that it prompted Paragon to commence its claim on the basis of its allegedly new-found understanding of the nature and effect of the Consulting Agreement and its rights and obligations vis-a-vis Cy and Tamstu.

[36] The Tamstu waiver motion is therefore granted in part.

[37] What is sometimes called “settlement privilege” raises a fundamentally different issue than solicitor client privilege. Where communications are exchanged in furtherance of settlement, obviously both parties have access to these communications. The issue is not one of confidentiality between the parties themselves, but of admissibility. The purpose of protecting settlement negotiations is so that parties are free to advance compromise positions without fear of these compromises being used against them in the ongoing litigation (if the matter does not settle) as admissions, etc.

[38] The three-part test for settlement privilege is not in dispute:

• a litigious dispute must be in existence or within contemplation at the time of the communication;
• 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
• the purpose of the communication must be to attempt to bring about a settlement:

See Bellatrix Exploration Ltd v Penn West Petroleum Ltd, 2013 ABCA 10, para 15; Hollinger Inc., Re, 2011 ONCA 579, para 16.

[39] As with the earlier issue relating to Estate documents, it is not entirely clear precisely which documents Tamstu is seeking to pursue as not being covered by settlement privilege. The issue focuses on communications/documents exchanged between Jonathan (who, although a lawyer, was acting in his capacity as Estate Trustee of the Estate, or when he was about to be appointed Estate Trustee) and Bill Bernstein, who was tax and business counsel to Paragon. The communications in issue were exchanged from about September 2020 to somewhere between March and November 2021. Particular emphasis is placed on a buy out proposal, referred to as the “Discussion Document” provided by Mr. Bernstein to Jonathan on March 21, 2021.

[40] RJ says in his affidavit that he had been warned by the prior estate trustees that Jonathan and the Estate beneficiaries were thinking about suing Paragon. He expresses his “understanding” that negotiations between lawyers to resolve any commercial issue are subject to settlement privilege. And, he expresses his view that he “understood” the Jonathan/Bernstein communications and the Discussion Document were exchanged to foster settlement of an emerging potentially litigious dispute between Tamstu and Paragon over the Consulting Agreement.

[41] In the circumstances of this case, litigation was not initiated until December 2022. Notwithstanding RJ’s views and understandings, the issue of settlement privilege must be determined on the basis of proven facts and circumstances and the law.

[42] The discussions in issue took place between two lawyers representing different parties in what was, at the time, a commercial negotiation about what should be done with this longstanding relationship between Tamstu and Paragon given that Cy had died.

[43] None of the documents in issue are marked “without prejudice” or with a similar descriptor. While this fact is clearly not dispositive, it is a relevant consideration. And, in this case, it is all the more so because the two individuals whose communications are in issue were both lawyers who would be expected to be conscious of the purpose of their communications and to structure the form of their communications accordingly.

[44] There is no evidence of any express “threat” of litigation until May 2021, when Jonathan referred to: a) having litigation counsel at Gowlings; b) RJ being in “violation” of the Consulting Agreement; and c) stated “the last thing I wish to do is enter into litigation with RJ and his family but I do have a fiduciary duty to the estate”.

[45] There is no evidence from Mr. Bernstein. The only evidence from the Paragon side is from RJ, who was not a party to the relevant communications and who relies entirely on his subjective beliefs and understandings.

[46] Commercial negotiations over contractual obligations, even those conducted by lawyers, are not subject to settlement privilege. In this case there were two confidentiality agreements executed between these parties to deal with two specific sets of documents over the course of these discussions and negotiations. This shows that the parties were alive to confidentiality concerns and knew what to do when confronted with them. The documents in question on this motion are not subject to any confidentiality agreement.

[47] For purposes of this motion, which is only to conduct oral discovery/obtain answers to questions refused on the basis of settlement privilege, I find that settlement privilege does not apply to any of these communications until May 6, 2021. There certainly was no litigation in existence at this time. Nor, on this record, can I find litigation was within the parties’ contemplation prior to May 6, 2021. There is no express intention that the communications/documents would not be relied upon by either party in the event negotiations failed. Again, on this record I am unable to find a reasonable basis upon which such an intention can be inferred. Finally, I cannot find on this record that the purpose of the communications, up to May 6, 2021 at least, was to attempt to bring about a settlement of contemplated litigation.

[48] I have made these findings expressly “in the context of this motion”. This is because the admissibility of evidence at trial is for the trial judge alone to decide.

Conclusion

[49] Paragon’s motion for a further and better Sch B is dismissed.

[50] Paragon’s motion for production of certain Estate Litigation documents is granted, in part.

[51] Tamstu’s motion for a declaration that solicitor client privilege was waived by Paragon’s pleadings is granted, in part.

[52] Tamstu’s motion for further discovery on the communications and documents over which Paragon sought to claim settlement privilege is granted, in part.

Costs

[53] Paragon’s cost summary totals about $95,000 partial indemnity for both motions. Tamstu’s cost summary shows about $150,000 partial indemnity for both motions. Success was divided to some extent, although each party was substantially successful on at least one material issue. I award $50,000 partial indemnity costs (all inclusive) to Paragon on its motion for production of the Estate Litigation documents. I award Tamstu $75,000 partial indemnity costs (all inclusive) in respect of its motion on waiver and on settlement privilege. This gives rise to a net payment of $25,000 for costs by Paragon to Tamstu, to be made forthwith.

Frank J. Penny
Date: March 24, 2025