Three-way disputes can become entangled with issues of disclosure and settlement side agreements as we learn from the dispute between GH Asset Management Services Inc. (GH), Jan Ju Lo and Reng Song Lo and J&J Property Management Services Inc.
GH entered into a contract with residential apartment building owners Jan Ju Lo and Reng Song Lo (the Los) for property management services. GH made a verbal agreement with J&J to perform maintenance and renovation services at the building.
J&J was initially paid for its services from rental income it collected on behalf of the Los. However, when the Los started to collect rents directly, GH Asset Management made no payments to J&J for their services.
J&J registered a claim for a lien for its alleged unpaid services, perfecting its lien by commencing an action listing the Los, GH and its principal as defendants.
The Los delivered a statement of defence, counterclaim and cross claim asserting that, among other things, GH acted without its authority in engaging J&J. The Los therefore alleged GH was solely liable for J&J’s damages.
GH and J&J ultimately settled J&J’s claim on March 25, 2019. In exchange for payment, J&J assigned its claims and liabilities to GH and released J&J’s claims against GH and its principal.
This agreement was not disclosed to the Los until Oct. 8, 2020 when GH served a motion record that included a copy of the agreement. The Los brought a motion to permanently stay the lien action on the basis that they had not been given adequate notice or disclosure of the agreement that settled the lien action between J&J and GH.
The Court of Appeal for Ontario gave consideration to the rules established in the 2008 Handley Estate vs. DTE Industries Limited dispute, sometimes referred to as the Handley Principles. When the court rules these principles apply, there is a risk of a permanent stay of the lien proceedings.
Bruce Reynolds, Evan Rankin and Natasha Rodrigues of Singleton Urquhart Reynolds Vogel LLP explain “this rule states that 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.’”
They add the Court of Appeal, “has consistently confirmed its strictness, as well as the draconian mandatory remedy applied in cases of non-disclosure: a permanent stay of the proceeding.”
Sahil Shoor, partner with Gowling WLG, told the Daily Commercial News in the case of GH and the Los, the court ruled the assignment of J&J’s lien to GH “did not automatically alter the dynamics of the litigation.”
Regarding the triggering of disclosure obligations in light of lien assignments, Shoor said, “It is the factual matrix that must be considered. There is no one rule that determines whether a lien assignment must be disclosed. The fact that parties are adverse in interest in pleadings is not determinative that such parties are truly adverse within the context of the litigation as a whole.”
Reynolds, Rankin and Rodrigues explain, “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. 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.”
Nevertheless, the Handley Principles stand as a strict warning.
“The court reinforced that parties must err on the side of caution, as the remedy for non-disclosure is punitive,” said Shoor.
The court also warned that similar agreements in other cases might trigger the Handley rules, write Reynolds, Rankin and Rodrigues.
“Where parties are unclear about their disclosure obligations, they can bring a motion for directions.
“Better to be safe than sorry,” they conclude.
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to email@example.com