The Ontario Court of Appeal recently ordered that an action be stayed (Handley
Estate v. DTE Industries Limited, 2018 ONCA 324) on the basis that certain parties had failed
to comply with their obligation to immediately disclose a “Mary Carter”
agreement. The Court held that by originally denying the motion for a
stay, the motion judge had erred in principle by failing to apply the remedy
for non-disclosure of these types of agreements as specified in a previous Court of Appeal decision called Aecon Buildings v. Stephenson
Engineering Limited (“Aecon”).
In the case, Helen Handley discovered in 2004 that the outdoor oil tank
that she had purchased for her home had leaked and had discharged several
hundred litres of fuel oil into the soil. In 2009, Ms. Handley’s insurer,
Aviva Insurance Company of Canada (“Aviva”), commenced a subrogated
claim against a number of defendants including H&M Combustion Services Ltd.
(“H&M”). H&M had been dissolved in 2007. Aviva
was aware of that fact and pleaded it in the statement of claim. Aviva did
not name as defendants in the action one of the oil tank vendors, Kawartha
Lakes HVAC Inc. (“Kawartha Lakes”), and its corporate successors.
By the time Aviva decided to sue Kawartha Lakes, the limitation period
for the main action had expired. Aviva decided to explore asking H&M to initiate a
third party claim against Kawartha Lakes.
In 2011, counsel for Aviva and H&M negotiated a
litigation agreement. Under the agreement, H&M would defend the
main action and commence a third party claim against Kawartha Lakes and its
successors. Aviva would contribute $5,000 to cover H&M’s costs of
prosecuting the third party claim through examinations for discoveries and
H&M’s principal would revive H&M should that be necessary to prosecute
the third party claim. Aviva and H&M agreed that all
communications between counsel would be subject to common interest
privilege.
At the time, neither Aviva nor H&M disclosed the
litigation agreement (Mary Carter agreement) to the other parties. Such
disclosure did not take place until the fall of 2016 when Aviva and H&M
concluded a further litigation agreement.
In the 2016 Mary Carter agreement, H&M assigned all its
rights to Aviva in the action including the rights to receive all proceeds from
the third party action. Aviva agreed to indemnify H&M and its
principal against all costs and damages that might be awarded against
H&M. Aviva would assume responsibility for defending H&M and
prosecuting its third party claim. Aviva assumed responsibility for all
legal costs and disbursements incurred by H&M’s counsel but reserved the
right to appoint its own counsel. The Court of Appeal held that as a
result of the 2016 Mary Carter agreement for all intents and purposes Aviva
stepped into the litigation shoes of H&M.
As a result of certain steps taken in the litigation, the 2016 litigation agreement first became known to the other parties but the 2011
litigation agreement did not. Finally, both litigation agreements were disclosed. Geo, Williamson Fuels Ltd. (“Williamson”), a defendant and the third parties moved for an order staying the action on
the basis that the failure to disclose the Mary Carter agreements immediately
had effected the “litigation landscape” contrary to the principles set down by
the Court of Appeal in Aecon.
The third party action settled on the eve of the hearing and
only the motion to stay brought by the Williamson proceeded.
The motion judge agreed that the litigation agreements had
not been disclosed contrary to the principles of Aecon, but refused Williamson’s
request for a stay by distinguishing Aecon. He held that Aecon did not
stand for the proposition that the claims against all parties should be
“automatically” stayed. He held that Williamson had suffered no prejudice from the
delayed disclosure of the agreement because as a supplier of the oil in the
tank and not the tank, Williamson was unaffected by the third party claim. There was no reason for Williamson to spend any money litigating the third
party claim because H&M had been dissolved.
On appeal the parties did not dispute the motion
judge’s finding that both litigation agreements should have been disclosed
immediately because they changed the adversarial relationship between Aviva and
H&M. The dispute centered on the appropriate remedy for such failure.
The appeal was heard by Justices Hoy, Simmons and
Brown. Justice Brown wrote the reasons for the court. He held that since 1993, the law in Ontario has
been clear that a Mary Carter type agreement must be disclosed to the court and to
the other parties to the law suit as soon as the agreement is made. The
rationale for immediate disclosure is as follows: “
The existence of a Mary Carter
agreement significantly alters the relationship among the parties to the
litigation. For that reason the agreement must be disclosed to the
parties and to the court as soon as it is made. The non-contracting
defendants must be advised immediately because the agreement may well have an
impact on the strategy and line of cross-examination to be pursued and the
evidence to be led by them. In addition, they must be able to properly
assess the steps being taken from that point forward by the plaintiff and the
contracting defendants. Procedural fairness requires immediate
disclosure. In addition, the court must be informed immediately so that
it can properly fulfill its role in controlling its process in the interest of
fairness and justice to all parties.”
In Aecon the Court of Appeal held that while it is open to
the parties to enter into such agreements, the obligation upon entering into
them is to immediately inform all other parties to the litigation as well as
the court. The reason for this is obvious. Such agreements change
entirely the legal landscape of the litigation.
Justice Brown held that the remedy for failing to
immediately disclose the agreement is to stay the proceeding. He held
that: “The only remedy to redress the wrong of what amounts to an abuse
of process is to stay the claim asserted by the defaulting non-disclosure party
because sound policy reasons support such an approach – only be imposing
consequences of the most serious nature on the defaulting party is the court
able to enforce and control its own process and ensure that justice is done
between and among the parties. To permit the litigation to proceed
without disclosure of such agreements renders the process a sham and amounts to
a failure of justice”.
For those reasons, Justice Brown held that the motion judge
had misdirected himself regarding the principles in Aecon. He erred by
failing to apply Aecon’s remedy of staying the claim of the party that did not
disclose the litigation agreement and amounted to an error of law.
Regards,
Blair
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