Parties to litigation have ongoing disclosure obligations, including a plaintiff’s responsibility to disclose a settlement agreement to other non-settling defendants immediately. This is particularly important as a settlement agreement can drastically change litigation dynamics, particularly concerning the relationship between the plaintiff and the settling defendant and the conduct of the settling defendant throughout the remainder of the proceedings.

The recent case of Crestwood Preparatory College Inc. v. Smith, from the Ontario Court of Appeal, highlights the importance of the disclosure obligations on a plaintiff regarding settlement agreements to non-settling defendants and the consequences if the disclosure obligations are not adhered to.

Plaintiff Entered Into Several Cooperation Agreements With Certain Defendants

Mr. Peerenboom, chairman of the appellant corporations, commenced an action against Mr. Perlmutter relating to a hate mail campaign in Florida. Mr. Peerenboom commenced a second action in Florida against the respondent, a former employee impacted by the campaign, and Thomas Thorney. He filed an action against the respondent in Ontario in August 2017, alleging a breach of a settlement agreement. In August 2018, Mr. Peerenboom filed a second action in Ontario against the respondent and two other defendants, referred to as the “Kemble defendants”), claiming further breaches of the settlement agreement.

In April 2018, Mr. Thorney and Mr. Peerenboom executed a cooperation agreement regarding the Florida proceedings, which was not disclosed to the respondent in this matter. In September 2018, the appellants filed a third action in Ontario against the Respondent and Mr. Thorney. In March 2019, the Kemble defendants and the appellants executed a cooperation agreement regarding the second Ontario action, which was not disclosed to the respondent. In November 2019, Mr. Peerenboom signed an agreement regarding the third Ontario action, which was not disclosed to the defendant.

The respondent consented to the consolidations of the Ontario actions in July 2019. Months later, the terms of the agreements were disclosed in response to a stay motion. In November 2020, the “Thorney” agreements were disclosed to the respondent. However, Mr. Peerenboom terminated the agreement.

Motion Judge Grants Stay of Proceedings

The motion judge relied on the case of Handley Estate v. DTE Industries Limited regarding the situation of a change in “apparent relationships” between parties to litigation which would “otherwise be assumed from the pleadings or expected in the conduct of the litigation”. In this case, the motion judge held that the Kemble and Thorney agreements fundamentally changed the litigation’s dynamics and the anticipated relationships between the plaintiffs and specific defendants from adversarial to cooperative, based on the agreement terms.

The motion judge also stated that the agreements and the decision to keep them secret from the other defendants were “tactical and strategic.”

The motion judge noted that despite the settling defendant not having provided a statement of defence in the proceedings when the agreements were proposed, the other defendants should be entitled to know whether another defendant will be assisting the plaintiff’s claim. The motion judge stated that a finding that the disclosure obligation is not triggered before additional steps, such as production and discovery, are scheduled would go against the purpose of the obligation.

Court of Appeal

The plaintiff appealed, and the Court of Appeal was required to determine whether the motion judge erred in three areas, including:

1. Failing to identify a position from which the settling defendants switched from;
2. Finding that co-defendants are presumed to be in alignment with each other throughout the litigation; and
3. Finding that the requirement for immediate disclosure still applies to settlements regarding defendants against whom an action has been dismissed.

The Court found that the parties’ position, as stated in the pleadings, was not an essential component of the disclosure test and therefore was not a condition precedent to the obligation to disclose. Further, the Court stated that determining otherwise could defeat the intention of the disclosure obligation. The obligation’s purpose is to ensure that when any party takes a step in the litigation or a ruling is made, both the parties and the court are not being misled as to the consequences of these steps or rulings.

Motion Judge Conducted Necessary Inquiry

The appellant claimed that the motion judge failed to conduct the necessary inquiry concerning whether there was evidence to establish that the settling defendants were expected to be in alignment with the respondent in their positions. The appellant argued that the motion judge wrongly relied on the expectation that all defendants involved in joint wrongdoing “would have a common interest in defeating a plaintiff’s claim.”

The Court rejected this argument, seeing it as an attack on inferences made by the motion judge, and found that the motion judge made no palpable error in her review of the evidence, including agreements between the parties.

The motion judge was not required to find any specific representation and decided, based on a finding, that there was a change from an adversarial relationship between the plaintiffs and the settling defendants to a cooperative one. The Court stated that the motion judge was entitled to determine that, in the ordinary course of litigation, the conduct of the settling defendants would not be the same conduct expected of the non-settling defendants.

Immediate Disclosure Requirement Required

On appeal, the appellants claimed that the immediate disclosure requirement does not apply when an action is promptly dismissed against a settling defendant. However, the Court disagreed. The Court stated that the obligation applied to agreements where a claim is dismissed against a settling defendant in exchange for their cooperation in a plaintiff’s action against any non-settling defendant(s).

Therefore, the Court held that the settling defendant still remained a defendant in the action, and the disclosure obligation remained ongoing.

Court of Appeal Upholds Motion Judge’s Decision

Overall, Justice Feldman of the Court of Appeal held that the motion judge did not err in applying the law, as the courts have long established that a settlement agreement of one defendant can significantly alter the litigation landscape. Therefore, it must be immediately disclosed to the non-settling defendant. Failing to disclose a settlement agreement constitutes an abuse of process and automatically results in a stay of the proceeding.

In this case, the fact that the non-settling defendant did not suffer prejudice because the respondent had not yet delivered a statement of defence is irrelevant to the analysis.

Justice Feldman dismissed the appeal with costs fixed at $17,500.

Contact Milosevic & Associates in Toronto For Trusted Advice Settlement Agreements and Appeals

At Milosevic & Associates, our corporate law lawyers have extensive experience assisting clients in complex commercial litigation and representing litigants at an appellant level. Our lawyers utilize their broad range of expertise to ensure that client’s business needs are met and creative solutions are considered. We aim to mitigate legal and financial risks so clients can focus on running their businesses smoothly. Located in Toronto, our firm assists clients throughout the Greater Toronto Area and across Ontario. To speak with a litigation team member, contact us online or call our office at 416-916-1387.