Tuesday, April 10, 2018

Failure to Immediately Disclose "Mary Carter" Agreement Will Lead to Stay of Action

The Ontario Court of Appeal recently ordered that an action be stayed (Handley Estate v. DTE Industries Limited, 2018 ONCA 324on 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.



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