Obligation to Immediately Disclose Settlement Agreement, The Lawyer’s Daily (November 22, 2022)

Obligation to Immediately Disclose Settlement Agreement, The Lawyer’s Daily (November 22, 2022)


(this article originally appeared in the Lawyer’s Daily on November 22, 2022)

By Nikolay Y. Chsherbinin

Where a settlement agreement has the effect of changing entirely the landscape of the litigation in a way that significantly alters the dynamics of the litigation, it must be immediately disclosed to the non-settling defendants. Failure to do so amounts to an abuse of process. The remedy for which is drastic: an automatic and permanent stay of the proceeding.A recent case in point is Crestwood Preparatory College Inc. v. Smith, 2022 ONCA 743, where the Court of Appeal for Ontario held that the obligation of immediate disclosure of a settlement agreement with some of the defendants neither depends on nor requires the delivery of the statement of defence. It reaffirmed that a motion judge is not limited to an examination of the pleadings in order to discern whether the settlement agreement significantly altered the adversarial relationship among the parties.

Smith entailed several litigations in Florida and Ontario, mostly relating to an alleged hate mail campaign against Harold Peerenboom, the chairman of an executive search firm, Mandrake Consultants Corporation (Mandrake), and the founder of various corporate plaintiffs. It was alleged that beginning in June 2011, Peerenboom became the target of a vicious hate mail campaign against himself and his corporations. More than 1,300 letters were sent to him, his family members, business associates, clients, neighbours and employees. The hate mail accused Peerenboom of heinous crimes, including the murder of a former employee and the sexual assault of minors. Peerenboom later learned that David Smith, a former employee, was directly implicated in the hate mail campaign along with his business partner, Thomas Thorney. Smith’s employment with Mandrake had previously been terminated in December 2011, resulting in a settlement agreement.

In August 2017, the first Ontario action was commenced against Smith for the alleged breaches of the non-competition and confidentiality clauses of his settlement agreement. In August 2018, the claim was amended to plead that Thorney knowingly assisted in the breaches and that Smith and Thorney were involved in the hate mail campaign. In August 2018, the second action was commenced against Smith and Mandrake’s competitor, Fish Recruit Inc. (Fish), alleging conspiracy to place job candidates with Fish using Mandrake’s confidential information in breach of Smith’s settlement agreement.

In September 2018, the plaintiffs commenced the third Ontario action against Smith and Thorney in respect of their involvement in the hate mail campaign, with both parties as named defendants. Subsequently, the Ontario actions were consolidated. Peerenboom, along with other plaintiffs, entered into a number of the litigation settlement agreements with the defendants in the Ontario actions, other than Smith, which contemplated the co-operation of the settling defendants with the plaintiffs in the Florida and Ontario actions.

The settlement agreements were not disclosed to Smith. After he learned of their existence, Smith brought a motion for an order staying the action against him on the ground that it is an abuse of process due to the plaintiffs’ failure to immediately disclose the settlement agreements. The motion judge found that the settlement agreements changed the expected relationship between the plaintiffs and certain defendants from an adversarial one to a co-operative one. The judge also found that the settlements were tactical and strategic on the part of the plaintiffs, as was keeping them secret. She explained that the settling defendants’ turning on their co-defendants, Smith, was not a small matter in the litigation landscape.

The motion judge ultimately stayed the action against Smith. The judge rejected the plaintiffs’ argument that the disclosure obligation does not apply where the settling defendant has not yet pleaded in the action and therefore not yet stated whether they are adverse in interest to the position of the plaintiffs.

On appeal, the Court of Appeal upheld the motion judge’s decision. Having conducted a thorough review of the recent jurisprudence on the scope of the disclosure obligation, the court set out the following guiding principles: (a) the clear and unequivocal obligation of immediate disclosure is triggered where a partial settlement agreement entirely changes the landscape of the litigation; (b) the disclosure obligation applies to a Mary Carter agreement (a secret settlement agreement between plaintiff and defendant in a multidefendant case), a Pierringer agreement (an agreement that allows settling defendants to be removed from the action) and any other settlement agreement that has the effect of changing the pleaded or expected adversarial position of the parties into a co-operative one; (c) identifying a change in the parties’ pleaded positions is not an essential part of the disclosure test; (d) parties may bring a motion for direction where the extent of the duty to disclose may be unclear; (e) the absence of the prejudice does not justify late disclosure of such an agreement; and (f) the failure to provide immediate disclosure in these circumstances amounts to an abuse of process where the sole remedy is an automatic stay of proceedings.

Turning to the main issue on appeal, the Court of Appeal explained that the focus of the appeal was the plaintiffs’ proposition that without pleadings by the settling defendants, the obligation of immediate disclosure of a settlement agreement with some of the defendants does not arise. The reason is that without the pleadings one cannot know whether the effect of the settlement agreement is to change the “dynamics of the litigation” or the “adversarial orientation” between the parties.

The Court of Appeal rejected the plaintiffs’ argument stating that the delivery of the statement of defence is not a legal requirement, because the court is not limited to an examination of the pleadings in order to determine whether the settlement agreement significantly altered the adversarial relationship among the parties. The court reaffirmed the test from Aviaco International Leasing Inc. v. Boeing Canada Inc.[2000], O.J. No. 2420, that refers to a change in the “apparent relationships” between any parties “that would otherwise be assumed from the pleadings or expected in the conduct of litigation” [emphasis added by the ONCA]. In other words, the analysis of the relationships among the parties is not limited to what was disclosed in the pleadings.

Relying on its earlier decision, Poirier v. Logan, 2022 ONCA 350, the Court of Appeal reminded that a change in the position of the parties reflected in the pleadings is not an essential part of the disclosure test and is not a condition precedent to the determination that the obligation to disclose has arisen. It explained that to hold otherwise could defeat the intent of the disclosure obligation which is to ensure that when parties take steps in the litigation, and when the court makes rulings, the parties and the court are not being actively misled as to the consequences of those steps or rulings. If they are, the process becomes a “sham and amounts to a failure of justice.”

The Court of Appeal also reaffirmed that the obligation of immediate disclosure of a settlement agreement is triggered even where the claim against the settling defendant is promptly discontinued in exchange for his co-operation in the plaintiff’s action against the non-settling defendants.

Smith is the latest pronouncement from the Court of Appeal on the parameters of the disclosure obligation. There, it restated and reinforced the settled rule, which compels immediate disclosure of a settlement agreement. Failure to disclose amounts to abuse of process and leads to an automatic and permanent stay of the proceeding. It matters not whether prejudice has resulted from non-disclosure, because it is not a factor to be considered.

While the absence of the pleadings is not an impediment when determining whether there is an obligation to disclose a settlement agreement, the status that the parties assume in their pleadings, as either co-operative with or adversarial to the plaintiff’s claim, is an essential starting point in determining whether there has been a significant alteration in the adversarial relationship. If it exists, the pleadings must be consulted, but a motion judge need not supplant the established inquiries with a comparison between the litigation positions reflected in the pleadings and the litigation relationship after the settlement agreement. Nor is the motion judge required to identify specific changes arising from the settlement that have been made to the pleaded factual and/or legal positions of the settling party.

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