Ontario – exceptions to solicitor-client and settlement privileges arise in post-settlement dispute – #410

In Laliberté v. Monteith, 2021 ONSC 14, Madam Justice Sandra Nishikawa ordered Respondent to answer questions and to provide his lawyer’s complete file. First, she determined that Respondent had waived solicitor-client privilege over exchanges relating to a disputed, negotiated settlement.  Though Respondent’s pleadings were “carefully drafted to avoid putting the Respondent’s state of mind, and any legal advice that might have had an impact on his state of mind, at issue”, Respondent’s denials did put in issue his state of mind and his reliance on legal advice in not disclosing facts material to Applicant’s decision to enter into the settlement. Second, Nishikawa J. further held that the record justified applying an exception to settlement privilege, namely where “a party perverts the purpose of a settlement negotiation and attempts to use it to mislead the other party into changing its position”.

Applicant and Respondent engaged in settlement discussions and mediation during which they were each represented by counsel.  On January 30, 2014, Applicant and Respondent entered into minutes of settlement (“Minutes”).  The Minutes were incorporated into an April 8, 2014 separation agreement (“Agreement”).

In February 2015, after signature of the Minutes, Applicant discovered that Respondent had been negotiating the sale of two (2) of his business interests in two (2) corporations, referred to in the reasons collectively as “Green Turtle”.  Respondent’s sale of Green Turtle closed April 14, 2014, two (2) and a half months after signature of the Minutes and a week after signature of the Agreement.  The sale price exceeded $30 million.

Applicant filed a June 26, 205 application to set aside the Agreement alleging that Respondent had materially misrepresented his financial circumstances during negotiations.

An earlier application lead to a bifurcation of the proceedings between Applicant and Respondent.  The first phase addressed the validity of the Agreement.  When ordering the bifurcation, the court ordered Respondent to disclose documents including, among others, financial disclosure involving the Green Turtle sale and Respondent’s financial circumstances as of the date of the Agreement.  The trial on the first phase has been set for at least eight (8) days beginning March 1, 2021.

Respondent was questioned on August 10, 2018 and, after the exchange of affidavits of documents in November 2018 questioned again on January 23, 2020. 

Applicant applied for production of the file of the lawyer who represented Respondent during the settlement proceedings.  Respondent cross-applied for production of the file of the Applicant’s lawyer for the same period.

Nishikawa J. identified three (3) issues involving solicitor-client privilege and settlement discussion:

(i) did Respondent waive privilege over solicitor-client advice received from Respondent’s lawyer during the parties’ settlement negotiations?

(ii) did Applicant waive privilege over solicitor-client advice received from Applicant’s lawyer during the parties’ settlement negotiations?

(iii) are Applicant’s and Respondent’s settlement discussions protected by settlement privilege? If not, should Respondent be compelled to answer questions refused during Respondent’s questioning relating to representations made by Respondent’s representatives during settlement negotiations?

Nishikawa J. first set out the parties’ respective positions at paras 14-15 of her reasons. 

Applicant argued that Respondent be compelled to produce his lawyer’s file “because he has admitted that he intentionally did not disclose the sale and thus waived solicitor-client privilege”.  She added that settlement negotiations between the parties are not protected by settlement privilege.

Respondent maintained that the Agreement was valid and binding and that he had not waived solicitor-client privilege over the advice he received from his lawyer during settlement negotiations.  He argued that that “he has not made an affirmative allegation placing his state of mind in issue”.  In addition, he argued that settlement privilege applied to the matter discussed during the negotiations.

Statutory context for set aside – Because the parties’ dispute involved matrimonial matters, the court can set aside their “domestic contract” under section 56(4)(a) of the Family Law Act, RSO 1990, c F.3:

56(4) A court may, on application, set aside a domestic contract or a provision in it,

(a) if a party failed to disclose to the other significant assets, or significant debts or other liabilities, existing when the domestic contract was made;

(b) if a party did not understand the nature or consequences of the domestic contract; or

(c) otherwise in accordance with the law of contract”.

Nishikawa J. referred to precedents in family law cases imposing a positive obligation on parties to make “complete, fair and frank financial disclosure before a contract is entered into” and, specifically “whether or not a party requests it”. 

Some can argue that the combined application of the express statutory provision in section 56 and the family law precedents may have framed the ensuing analysis and thereby limit its application beyond family law disputes.  Despite the family law context, Nishikawa J.’s reasons at para 19 and following for reasoning still have application outside family law disputes.  They can be read for guidance for disputes involving similar disclosure issues.

(i) Waiver of solicitor-client privilege – At paras 19-52, Nishikawa J. identified the applicable principles and applied them to the applications before her.

Nishikawa J. affirmed the fundamental importance of the solicitor-client privilege, referencing Guelph (City) v. Super Blue Box Recycling Corp., 2004 CanLII 34954 (ON SC) para. 76, but also noted certain “clearly defined exceptions”.

The court must balance the interests of full disclosure for the purposes of a fair trial against preservation of the privilege.  The party seeking to “overcome” the privilege has the onus of establishing compelling disclosure from the party asserting privilege.

Waiver of privilege can be express or implied. “Implicit waiver may arise in two circumstances: (i) waiver by disclosure – once the privileged communication has been disclosed, the privilege attached to it is said to be lost; or (ii) waiver by reliance – by pleading or otherwise relying upon the privileged communication as part of a substantive position taken in the legal proceedings”[.]  Nishikawa J. referred to Guelph (City) v. Super Blue Box Recycling Corp., 2004 CanLII 34954 (ON SC) and Leitch v. Novac, 2017 ONSC 6888 para. 60 which summarized the principles listed by the preceding case.

Referring to Creative Career Systems Inc. v. Ontario, 2012 ONSC 649 para. 30, Nishikawa J. stated that a deemed waiver requires two (2) elements: “(i) the presence or absence of legal advice is relevant to the existence or non-existence of a claim or defence, in other words, the presence or absence of legal advice is material to the lawsuit; and (ii) the party who received the legal advice must make the receipt of it an issue in the claim or defence”[.]

She further determined that waiver can arise when a party has “placed their state of mind at issue and given evidence that they received legal advice which, in part, formed the basis of that state of mind”.  See also Spicer v. Spicer, 2015 ONSC 4175 in which, at para. 13, the court addressed waiver. “A witness can implicitly waive privilege through their conduct by putting the legal advice they received in issue, by relying on a privileged report in advancing their defense or by testifying about privileged communications during direct examination”.

Despite that statement, the court in Spicer v. Spicer, 2015 ONSC 4175 was quick to set limits to such waiver.

[15] The jurisprudence is clear; in the majority of cases, placing state of mind at issue will not amount to waiver. However, where a party has placed its state of mind at issue and given evidence that it received legal advice which, in part, formed the basis of that state of mind, the distinction between state of mind and the legal advice giving rise to it cannot be maintained. See Leggat v. Jennings, 2015 ONSC 237, 65 C.P.C. (7th) 410, aff’d 2015 ONSC 6363, 2015 CarswellOnt 15710 (Div. Ct.), at paras. 33-34, 41 and 44”.

Having identified the applicable principles, Nishikawa J. applied them to the facts before her.

Applicant’s claims raised the tort of deceit or fraudulent misrepresentation which include a knowledge component.  Nishikawa J. agreed with Respondent that “Applicant’s pleading alone cannot put his state of mind at issue”.  She determined that Respondent’s proceedings were “carefully drafted to avoid putting the Respondent’s state of min, and any legal advice that might have had an impact on his state of mind, at issue”.  Nishikawa J. did determine that Respondent’s response to the claims made by Applicant did put his state of mind in issue.

[32] However, in the Answer, the Respondent denies the allegations contained in paras. 26-30 of the Application, which includes the allegation that he knowingly, recklessly and/or deliberately misled the Applicant or, alternatively, that he was negligent in making the representations. The Respondent’s pleading goes beyond denying that the representations were false or that there was no reliance by the Applicant. The Respondent’s state of mind is thus material to his defence”.

The legal advice was therefore central to Respondent’s defence. In addition to the pleadings, Nishikawa J. at para. 35 listed eight (8) instances from Respondent’s questioning which supported her determination. Her further analysis at paras 36-39 confirmed her determination that Respondent had waived his privilege.

[39] Based on the foregoing analysis, I find that [Respondent] has waived solicitor-client privilege because the presence or absence of legal advice is relevant to the existence or non-existence of a claim or defence. Moreover, he has made the receipt of legal advice an issue in his defence by putting his state of mind during the settlement negotiations at issue”.

Unlike the circumstances for Respondent, Applicant’s pleadings did not qualify as waiver.  See paras 45-52. “The Application does not give rise to a waiver of solicitor-client privilege because the Applicant has not pleaded anything to suggest that the receipt of legal advice is material to any of her claims”. As a result, Nishikawa J. dismissed Respondent’s cross-application to access Applicant’s counsel’s files.

(ii) Waiver of settlement privilege – At paras 53-67, Nishikawa J. again identified the applicable principles and applied them.

She sourced the key statement on settlement privilege to Union Carbide Canada Inc. v. Bombardier Inc., 2014 SCC 35 (CanLII), [2014] 1 SCR 800 in which the Supreme Court identified the privilege as protecting communications exchanged between parties attempting to settle a dispute.  “The rationale for settlement privilege is to promote honest and frank discussions between the parties, without fear that the information disclosed will be used against them, in order to encourage settlement. The privilege applies even after a settlement is reached”.

Drawing on Bertram v. Canada, 1995 CanLII 3563 (FCA), [1996] 1 FC 756, Nishikawa J. pointed to an exception which arises where a party “perverts the purpose of a settlement negotiation”, using it to “mislead the other party into changing its position”.

She concluded that “the countervailing interest in ensuring full and frank disclosure in settlement discussions outweighs the public interest in upholding the settlement privilege”.

In regard to seven (7) questions for which Applicant sought orders compelling Respondent to answer, Nishikawa J. ordered Respondent to answer five (5), three (3) of which she reframed.  See paras 64-67.

In addition to those orders to provide answers, Nishikawa J. ordered Respondent to provide a complete file of his previous solicitor in regard to the prior relevant litigation and the Agreement.

urbitral notes – First, some might argue that the combined application of the express statutory provision in section 56 and the family law precedents framed the ensuing analysis and thereby limit its application beyond family law disputes. 

Parties engaged in commercial negotiations ought not dismiss too readily the statutory context flagged by Nishikawa J. at the outset of her analysis. Section 56(4)(a) of the Family Law Act makes express the consequences of a failure to make disclosure.  Even without that express mention, commercial parties ought to anticipate other contexts in which another party make seek similar consequences in regard to a failure to make disclosure of relevant facts material to a key negotiated issue.  As anticipated by section 56(4)(c), other principles of contract law exist to set aside a contract.

Second, para. 76 from Guelph (City) v. Super Blue Box Recycling Corp., 2004 CanLII 34954 (ON SC) provides additional detail setting out the principles:

[76] I distil the following principles from these authorities:

(a) Privilege was originally a law of evidence, but the courts have “extended its application well beyond those limits.” (Solosky, at S.C.R. 839; [Pritchard v. Ontario Human Rights Commission (2003), 2003 CanLII 8701 (ON CA), 63 O.R. (3d) 97 (C.A.), affd. (2004), 2004 SCC 31 (CanLII)] at O.R. 103).

(b) The functional purpose of solicitor-client privilege goes to the very heart of the administration of the legal system.  All persons, whether natural, corporate, or governmental, must have access to expert legal counsel without fear that this recourse may be used to their detriment: Jones v. Smith at S.C.R. 474-475; [R. v. Gruenke, 1991 CanLII 40 (SCC), [1991] 3 S.C.R. 263] at S.C.R. 289.  Solicitor-client privilege is a “fundamental civil and legal right” ([Solosky v. The Queen, [1980] 1 S.C.R. 82], at S.C.R. 839) and is “fundamental to the justice system in Canada” (R. v. McClure, 2001 SCC 14 (CanLII), [2001] 1 S.C.R. 445, per Major J.).

(c) The general statement of the principle in Wigmore still stands as a reasonable summary, in the following terms (Pritchard (C.A.) at O.R. 104-105):

Where legal advice of any kind is sought from a professional legal advisor in [his or her] capacity as such, the communications relating to the purpose made in confidence by the client are at [its] instance permanently protected from disclosures by [the client] or by the legal advisor; except that the protection be waived.

(d) The onus rests on the party asserting privilege to establish that the communications in question are, in fact, privileged: Davies v. American Home Assurance Co. (2002), 2002 CanLII 62442 (ON SCDC), 60 O.R. (3d) 512 (Div. Ct.), per Blair R.S.J. (as he then was).

(e) There are limited circumstances where privileged communications may nonetheless be compelled from a party asserting its privilege.  The first of these is waiver, as is expressed in Wigmore’s statement of the principle, set out above.  Canadian courts have identified a handful of other exceptions to the principle of solicitor-client privilege, including:

i. where the purpose of the privileged communication is to further “unlawful conduct”: Pritchard (S.C.C.) at D.L.R. 8; Solosky at S.C.R. 835;

ii. where public safety is at risk: Smith v. Jones.

iii. where there is a genuine risk of a wrongful conviction: McClure.

iv. where privilege has been abrogated by statute.

(f) Once it is established that a communication is subject to solicitor-client privilege, the onus rests on the party seeking to overcome the privilege to establish that the communication ought to be compelled from the party asserting the privilege: [Jones v. Smith, 1999 CanLII 674 (SCC), [1999], 1 S.C.R. 455], at S.C.R. 475; General Accident Assurance Co. v. Chrusz (1999), 1999 CanLII 7320 (ON CA), 45 O.R. (3d) 321 at 269-370 (C.A.), per Rosenberg J.A.

(g) Solicitor-client privilege attaches equally to communications with in-house and external counsel (provided, of course, that counsel is acting in a legal capacity).  It applies equally to individuals, businesses, public agencies, and governments.  See: IBM Canada Ltd. v. Xerox of Canada Ltd., [1978] 1 F.C. 513 at 516 (C.A.); Toronto-Dominion Bank v. Leigh Instruments Ltd. (Trustee of) (1997), 1997 CanLII 12113 (ON SC), 32 O.R. (3d) 575 at 583-4 (Gen. Div.); R. v. McCarthy Tetrault (1992), 1992 CanLII 8606 (ON SC), 9 C.E.L.R. (N.S.) 12 (Ont. Prov. Ct.)”.