Settling defendant should immediately disclose settlement to other defendants: Ontario CA

It was an abuse of process for a plaintiff to settle with one defendant and not immediately disclose this to other defendants if the settlement agreement changed the litigation landscape in a way that altered the parties’ adversarial relationship or the litigation’s dynamics, the Ontario Court of Appeal has ruled.

In Crestwood Preparatory College Inc. v. Smith, 2022 ONCA 743, Mr. Peerenboom sued Mr. Perlmutter in Florida relating to a hate mail campaign. He filed a separate Florida action against the respondent, a former employee directly implicated in the campaign, and Thomas Thorney. In August 2017, Mr. Peerenboom brought an action against the respondent in Ontario, which alleged breaches of a settlement agreement.

In August 2018, the appellants filed a second Ontario action against the respondent and two other defendants (the Kemble defendants), which claimed further breaches of the settlement agreement. In April 2018, Mr. Peerenboom and Thorney executed a tolling and co-operation agreement relating to the Florida action (the first Thorney agreement), which was not disclosed to the respondent.

In September 2018, the appellants commenced a third Ontario action against the respondent and Thorney in connection with their involvement in the hate mail campaign. In March 2019, the appellants and the Kemble defendants entered into a tolling and cooperation agreement relating to the second Ontario action (the Kemble agreement), which was also not disclosed to the respondent.

In November 2019, Mr. Peerenboom signed, on his own behalf and on behalf of the appellant corporations, the second Thorney agreement, which supplemented and amended the first Thorney agreement to include the third Ontario action. Again, this was not disclosed to the respondent.

In July 2019, the respondent consented to the consolidation of the Ontario actions. In December, the respondent’s new counsel requested all information regarding the Kemble agreement, which was initially refused. The agreement’s terms were later disclosed in response to a stay motion.

In November 2020, the Thorney agreements were produced in the Florida litigation. In February 2021, Thorney’s counsel disclosed the Thorney agreements to the respondent after Mr. Peerenboom had terminated the agreements.

The motion judge granted a permanent stay of the proceedings against the respondent. The judge – relying on Handley Estate v. DTE Industries Limited, 2018 ONCA 324 – found that the Kemble agreement and the Thorney agreements fundamentally changed the litigation landscape by changing the litigation’s dynamics and the expected relationship between the plaintiffs and certain defendants from an adversarial one to a co-operative one.

The judge also cited Magnotta Winery Corporation v. Ontario (Alcohol and Gaming Commission), 2021 ONSC 178, and concluded that the settling defendants were not peripheral but central to the allegations against the respondent regarding the hate mail campaign and the breaches of the settlement agreement. The judge said that the settlements and the decision to keep them secret were tactical and strategic.

Immediate disclosure was proper

The Court of Appeal agreed with the motion judge’s conclusion and dismissed the appeal.

The appellants argued that, without pleadings by the settling defendants, the obligation to immediately disclose a settlement agreement with some defendants did not arise. The appellants reasoned that, without such pleadings, they could not know whether the agreement’s effect was to change the “dynamics of the litigation” or the “adversarial orientation” between the parties.

The appellate court ruled that the motion judge made no errors in applying the case law stating that, where a settlement agreement had the effect of entirely changing the litigation landscape in a way significantly altering the litigation’s dynamics, the agreement should be immediately disclosed to the non-settling defendants.

Failure to disclose amounted to an abuse of process, the appellate court said. In Ontario, the sole remedy that the court could impose for such failure was an automatic stay of the proceedings.

In this case, the appellate court accepted that the respondent did not yet deliver a statement of defence when he learned of the settlements. However, the appellate court found that the fact that the respondent, as the non-settling defendant, suffered no prejudice due to the failure to disclose would not affect its analysis.