Partial Settlements And Other Litigation Agreements In Multi-Party Actions: The Peril Of Non-Disclosure

A recent decision of the Ontario Court of Appeal provides a stark reminder that when a partial settlement or other litigation agreement is reached in multi-party litigation, a critical step of disclosure must be considered. Missing this step can be fatal. Handley Estate v. DTE Industries Limited, 2018 ONCA 324 holds that failing to disclose to the court and the other parties a litigation agreement that alters the adversarial relationship between the contracting parties may jeopardize not only the litigation agreement, but a party's entire position in the lawsuit.

Background

The Handley case arose from the purchase and installation of a new outdoor oil tank at Helen Handley's residence. The tank leaked fuel oil into the surrounding soil. Ms. Handley's insurer, Aviva Insurance Company of Canada, commenced a subrogated claim in her name against the respective parties involved in the sale and installation of the tank, and the sale and delivery of the fuel oil. In effect, Aviva was the plaintiff.

Aviva had not named as defendants in the main action one of the oil tank vendors in the supply chain. By the time it decided to sue the omitted vendor, the limitation period for the main action had expired. Aviva then began to explore the possibility of a third party claim being initiated against the omitted vendor.

As the deadline for issuing a third party claim approached, Aviva and one of the defendants in the main action, H&M Combustion Services Ltd. ("H&M"), struck a litigation agreement that was not disclosed to the court or the other parties. Among the agreement's key terms were that: (1) H&M would defend the main action and commence the third party claim against the omitted vendor; (2) Aviva would contribute $5,000 to cover H&M's costs through the examinations for discovery; and (3) all communications between Aviva and H&M pertaining to the third party claim would be subject to common interest privilege.

Five years later, as the trial date was approaching, Aviva and H&M entered into a second litigation agreement that included the following terms: (1) H&M assigned to Aviva all its rights in the action, including the rights to receive all proceeds from the third party claim; (2) Aviva agreed to assume responsibility for defending H&M and prosecuting its third party claim and agreed to indemnify H&M for any costs or damages awarded against it; and (3) Aviva and H&M agreed to disclose the assignment to the other parties if required by law or...