Handley comes for lien court

Recent case law from the Court of Appeal for Ontario has repeatedly confirmed the strict rule that settlement agreements which “change entirely” the “litigation landscape” must be immediately disclosed.¹ That case law has now impacted a lien matter for the first time.

In GH Asset Management Services Inc. v. Lo, 2022 ONSC 7218 (“GH Asset”), the Court considered whether disclosure of a settlement and assignment agreement was subject to the immediate disclosure obligation set out in Handley Estate v DTE Industries Limited, 2018 ONCA 324 (“Handley”), and if so, whether such disclosure was timely. The Court ultimately determined that the settlement and lien assignment agreement in question was not a settlement that triggered the immediate disclosure requirement. However, it warned that such agreements may trigger the rule in other cases.

Background

The underlying dispute in GH Asset pertained to work allegedly performed by J&J Property Management Services Inc. (“J&J”) at a residential apartment building owned by Jan Ju Lo and Reng Song Lo (the “Los”). The Los entered into a contract with GH Asset Management Services Inc. (“GH Asset Management”) for property management services for the apartment building. GH Asset Management then, by verbal agreement, engaged J&J to perform maintenance and renovation services at the building.

Though GH Asset Management initially paid J&J for its services from the rental income it collected on behalf of the Los, the Los eventually began collecting the rent directly, and no further payments were made to J&J for the services it rendered. Ultimately, J&J registered a claim for lien for its alleged unpaid services, and perfected its lien by commencing an action listing the Los, GH Asset Management, and its principal, as defendants. The Los subsequently delivered a statement of defence, counterclaim, and crossclaim, asserting among other things, that GH Asset Management acted without its authority in engaging J&J. As a result, the Los alleged that it was solely liable for J&J’s damages.

GH Asset Management and J&J ultimately settled J&J’s claim on March 25, 2019, in a document referred to as a “Deed of Assignment of Lien and Lien Action and Undertaking to Produce Documents” (the “Agreement”).² In exchange for payment, the Agreement provided that J&J would assign its claims and liabilities related to the apartment building to GH Asset Management and release its claims against GH Asset Management and its principal. In the Agreement, J&J also agreed to provide GH Asset Management with documents and an affidavit. As a result of the Agreement, GH Asset Management was both a plaintiff (given the assignment) as well as a defendant to the action.

The Agreement was not disclosed to the Los until October 8, 2020, when GH Asset Management served a motion record that included a copy of the Agreement. The Los ultimately brought a motion to permanently stay the lien action on the basis of inadequate disclosure of the Agreement.

The Handley principles

As set out in Handley and subsequent cases, a settlement agreement which “changes entirely the landscape of the litigation in a way that significantly alters the adversarial relationship among the parties to the litigation or the ‘dynamics of the litigation’” must be immediately disclosed.³ The purpose of the rule is to ensure that other parties receive prompt notification of potential impacts on their litigation strategies, as well as to ensure that the Court can properly control its processes.⁴ Courts need to “know the reality of the adversity between the parties.”⁵.

Over the past five years, the rule has received significant attention from the Court of Appeal for Ontario, which has consistently confirmed its strictness, as well as the draconian mandatory remedy applied in cases of non-disclosure: a permanent stay of the proceeding. The principles have recently been summarized as follows:

1. There is a “clear and unequivocal” obligation of immediate disclosure of agreements that “change entirely the landscape of the litigation.” They must be produced immediately upon their completion;
2. The obligation extends to any agreement between or amongst the parties “that has the effect of changing the adversarial position of the parties into a co-operative one” and thus changes the litigation landscape;
3. The obligation is to immediately disclose information about the agreement, not simply to provide notice of the agreement, or “functional disclosure”;
4. Both the existence of the settlement and the terms of the settlement that change the adversarial orientation of the proceeding must be disclosed;
5. Confidentiality clauses in the agreements in no way derogate from the requirement of immediate disclosure;
6. The standard for disclosure is “immediate,” not “eventually” or “when it is convenient”;
7. The absence of prejudice does not excuse a breach of the obligation of immediate disclosure; and
8. Any failure to comply with the obligation of immediate disclosure amounts to an abuse of process. The only remedy to redress the abuse of process is to stay the claim brought by the defaulting, non-disclosing party.⁶

The Court’s analysis

In GH Asset the Court held that the Agreement did not constitute a settlement which triggered the rule.

The Court distinguished the Agreement from the various settlements at issue in the recent decisions rendered by the Court of Appeal on the basis that, unlike in those cases, there is statutory authority for the assignment of a lien pursuant to the former Construction Lien Act.⁷ Further, the provision in the Agreement requiring J&J to provide evidence and an affidavit was necessary for GH Asset Management to prove the claims J&J assigned to it given that the settlement preceded documentary disclosure by J&J in the action.

As such, the Court found that the Agreement did not alter the adversarial orientation of the parties in a material way:

• the fact that J&J and GH Asset Management were formally adverse in litigation was not “dispositive of the ‘reality of the adversity’ between them” (i.e. the fact that the parties were adverse on the face of the pleadings was not conclusive of the actual litigation landscape);⁸
• GH Asset Management and the Los were already adverse in interest prior to the settlement;
• J&J had not altered its adversarial position: the fact that it was now providing documents and evidence to GH Asset Management, its assignee, was of no moment because the Agreement did not require J&J to tailor any evidence to support GH Asset Management’s newly acquired claim against the Los. It would be open to both the Los and GH Asset Management to argue about how the documents should be treated in determining liability, just as if J&J had remained the plaintiff;
• GH Asset was not involved in preparing the affidavit of J&J’s principal. Unlike some of the other cases decided under Handley, there was nothing in the Agreement suggesting that the settlement was conditional on GH Asset Management’s approval of the affidavit (sometimes referred to as a “proffer” of evidence), a situation which, in some circumstances, may alter the litigation landscape; and
• the position of the Los in the litigation was unchanged because GH Asset Management was simply pursuing J&J’s assigned claim as against them.

Importance

GH Asset is the first decision of which we are aware that applies the Handley principles – which have been the focus of a sea of recent litigation – in the construction lien context. As noted by the Court in this case, “settlement agreements by their nature will have an impact on the litigation landscape,” and “cooperation between litigants does not necessarily fundamentally alter that litigation landscape”.⁹ However, the Court of Appeal has also cautioned that where parties are unclear about their disclosure obligations, they can bring a motion for directions.¹⁰ Given the strictness of the rule and the draconian nature of the remedy, litigants in lien matters would be well advised to become familiar with the Court of Appeal’s recent case law on this issue. As another Court recently held in another Handley decision, “better to be safe than sorry.”¹¹

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Bruce Reynolds is co-managing partner with Singleton Reynolds, Evan Rankin and Natasha Rodrigues are associates with Singleton Reynolds.