Tuesday, August 28, 2012

Moore v Bertuzzi - Settlement Privilege

This case involed an appeal from the decision of Master Dash of the Ontario Superior Court of Justice. Master Dash ordered the defendant, Todd Bertuzzi and the defendants Orca Bay Hockey Limited Partnership, Orca Bay Hockey Inc., Vancouver Canucks Limited Partnership and Vancouver Hockey General Partners Inc. (collectively "Orca Bay") to disclose their settlement agreement to the plaintiffs, Steve Moore and his parents.
In February 16, 2004, when Moore was playing with Colorado Avalanche, in a game between the Avalanche and the Vancouver Canucks, Moore checked Markus Nasland, the Canucks' team captain and the league's leading scorer. Nasland was injured but there was no penalty on the play and after the NHL's review Moore was not disciplined. NHL officials warned Canucks' management against any retaliation against Moore.
However, unfortunately for the Vancouver Canucks their General Manager was Brian Burke. Marc Crawford, the Vancouver coach, called the hit by Moore a "cheap shot". Three weeks later on March 8, 2004, in a game in Vancouver between the two teams Bertuzzi jumped on Moore from behind, drove him into the ice. Moore broke his neck and suffered a brain injury. Bertuzzi was suspended by the NHL.
Bertuzzi subsequently pleaded guilty to a criminal charge of assault causing bodily harm. On February 14, 2006, Moore and his parents commenced a civil action against Bertuzzi and Orca Bay. Initially Moore sued Bertuzzi directly and sued Orca Bay for being vicariously liable for Bertuzzi's conduct. Moore sued Bertuzzi for assault and punitive damages claiming $41.5 million. Bertuzzi and Orca Bay delivered statements of defence and cross-claimed against the other for contribution and indemnity.
At discovery, Bertuzzi testified that Crawford told the Canucks players that Moore had to "pay the price". As a result, in February of 2008, the Moores were granted leave to amend the statement of claim to sue Orca Bay directly and not just vicariously. After the amendments, Bertuzzi issued a third party claim against Crawford. Crawford defended the third party claim but did not defend the main action.
On November 17, 2007, Master Dash was assigned as Case Management Master.
On January 26, 2010, the main action was set down for trial and on September 29, 2010, the third party action was set down for trial.
Between July 13 and July 18, 2011, Bertuzzi, Orca Bay and Crawford, signed a settlement agreement to settle the cross-claims and third party claim. They did not advise the Moores that they had settled the claims against each other.
On July 21, 2011, a case conference was held to set trial dates. The defendants did not bring their settlement to the Moores' attention or to the attention of the case conference judge.
Moore and his parents did not find out about the settlement until the defendants obtained an order dismissing the third party action without costs. On September 22, 2011, Moore's lawyer wrote to the lawyers for the other parties and asked them to produce the details of the settlement. The lawyers for Orca Bay and Bertuzzi ignored the letter.
At the motion before Master Dash, Master Dash ordered that the settlement agreement be produced. He concluded that the defendants were disqualified from asserting settlement privilege because their settlement agreement was akin to a Mary Carter agreement. He also concluded that settlement agreements were subject to a case by case privilege with the onus being on the party claiming privilege to show that the "Wigmore" criteria were satisfied.
Justice Perell of the Ontario Superior Court heard the appeal. Justice Perell found that the Master had erred in treating settlement privilege as a case by case privilege rather than as a categorical or class privilege. However, he agreed with the Moores that it was not necessary to decide this point because in either event the defendants were disqualified from asserting privilege for their settlement agreement. He found that there are exceptions to settlement privilege. Mary Carter agreements are just one example of an exception to settlement privilege. In Justice Perell's opinion, Master Dash was correct in ordering that the settlement agreement be disclosed.
Justice Perell's reasons were as follows:
There are certain types of agreements, such as Mary Carter Agreements and Pierrenger Agreements, that the courts have held must be disclosed to the court and to the other parties to avoid an abuse of process.
Mary Carter Agreements
Mary Carter agreements originated in the Florida case of Booth v. Mary Carter Paint Co. (1967). The features of such an agreement are:
1. the settling defendant settles with the plaintiff but remains in the lawsuit and may pursue cross-claims against the non-settling defendants;
2. the settling defendant guarantees the plaintiff a specified monetary recovery;
3. the exposure of the settling defendant is capped at the specified amount;
4. the settling defendant's liability can be decreased in direct proportion to any monetary recovery above the amount that it is offering to pay to the plaintiff; and
5. the non-settling defendants are exposed only to several liability and no longer to joint and several liability.
The structure of a Mary Carter agreement provides an incentive for the plaintiff and the settling defendant to cooperate to maximize the quantum of the plaintiff's recovery because the defendant's liability is capped and the amount it pays to the plaintiff may be reduced in direct proportion to the amount above the capped amount determined at trial to be owed to the plaintiff. The practical effect of this is that the settling defendant shares in the plaintiff's recovery. As a result, Mary Carter agreements must be disclosed because, if undisclosed, these types of agreements distort the "adversarial orientation of the litigation". The abuse is that if the agreement is not disclosed, the judge or jury will have a misleading basis for understanding the evidence since parties that appear to be adversaries are really allies.
In the Canadian case of Pettey v. Avis Car Inc., Justice Ferrier of the Superior Court of Justice held that Mary Carter Agreements were legal in Ontario but they had to be disclosed to the parties and to the court as soon as the agreement was made. The non-settling defendants must be advised immediately because the agreement may well have an impact on the strategy and line of cross-examination to be pursued and evidence to be led by them. The non-settling parties must also be aware of the agreements so that they can properly assess the steps being taken from that point forward by the plaintiff and the settling defendants. Justice Ferrier held that procedural fairness requires immediate disclosure. Most importantly, the court must be informed immediately so that it can properly fulfil its role in controlling its process in the interest of fairness and justice to all parties.
Pierrenger Agreements
Pierrenger Agreements are named after the Wisconsin case of Pierrenger v. Hoger (1963). The features of a Pierrenger Agreement are:
1. the settling defendant settles with the plaintiff;
2. the plaintiff discontinues its claim or action against the settling defendant;
3. the plaintiff continues it action against the non-settling defendants but limits its claim to the non-settling defendants several liability (also called a bar order);
4. the settling defendant agrees to cooperate with the plaintiff by making documents and witnesses available for the action against the non-settling defendants;
5. the settling defendant agrees not to seek contribution and indemnity from the non-settling defendants; and
6. the plaintiff agrees to indemnify the settling defendant against any claims over by the non-settling defendants.
A Pierrenger agreement allows the settling defendant to extract itself from participating in litigation in whole or in part. The practical effect is that there is little reason for the settling defendant to participate. Usually he has settled with the plaintiff and obtained a release and since the plaintiff agrees to sue the non-settling defendants only for their several liability, the settling defendant does not have to be worried about a claim for contribution and indemnity because he is protected by the plaintiff's undertaking to indemnify him from that sort of thing.
In the Canadian case of Noonan v. Alpha-Vico, Master McLeod held that these types of agreements in Canada were legal but that there were several reasons for disclosing them.
First, the amounts received by the plaintiff were relevant to the quantification of the plaintiff's damages and whether the plaintiff had mitigated its loss or received double recovery.
Secondly, non-settling defendants needed to be told about the settlement in order to update their litigation planning and strategy including whether to make their own offer to settle.
Thirdly, the court immediately needed to know the extent to which, if at all, the settlement agreement influenced the adversary system. The court must be able to properly fulfil its role in controlling the adversary process in the interests of fairness and justice to all parties.
Justice Perell held that a case called Aecon Building was an example of the vigour and rigour of the court's insistence on disclosure. The necessity of disclosing the reality of the adversarial orientation of the parties is not confined to the circumstances of Mary Carter agreements or Pierrenger agreements. Other cases have held that non-settling defendants have a right to review the settlement agreements to the extent that the agreements have an impact on litigation strategy, the design of cross-examinations and the evidence to be led at trial.
Caselaw from across Canada suggested there is an over-arching general principle that establishes an exception to the privilege and confidentiality of settlement agreements and is not confined to circumstances of Mary Carter agreements and Pierrenger agreements.
Justice Perell held that the court needs to understand the precise nature of the adversarial orientation of the litigation in order to maintain the integrity of its process, which is based on a genuine not a sham adversarial system in which maintenance of integrity may require the court to have an issue–by –issue understanding of the positions of the parties.
The caselaw establishes that settlement privilege is not absolute and that it admits exceptions where settlement agreements must be disclosed to non-settling parties. Disclosure must be made immediately when the agreement changes the adversarial orientation of the lawsuit or the court needs to know about the settlement in order to maintain the fairness and integrity of the process.
In this case he saw no reason not to disclose the complete details of the settlement agreement between Bertuzzi, Orca Bay and Crawford.

Regards,

Blair

Friday, August 10, 2012

Supreme Court overrules its own decision

In a recent tax case, the Supreme Court of Cananda discussed the circumstances in which it would overrule one of its own prior decisions:

Canada v. Craig (F.C. January 21, 2011)(34144)

"Section 31(1) of the Income Tax Act limits deductible losses “[w]here a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income”.

In Moldowan v. The Queen, [1978] 1 S.C.R. 480, the Court found that a predecessor to s. 31(1) contemplated three classes of taxpayer involved in farming. In the first class are taxpayers for whom farming provides the bulk of income or the centre of work routine. Loss deductions are not limited for this class. In the second are taxpayers who do not look to farming, or to farming and some subordinate source of income, for their livelihood, but carry on farming as a sideline business. For this class, s. 31(1) limits loss deductions. The third class consists of taxpayers who carry on some farming activities as a hobby, not as a business, and whose losses are not deductible in any amount.

In Gunn v. Canada, 2006 FCA 281, [2007] 3 F.C.R. 57, the Federal Court of Appeal adopted a more generous interpretation of what could constitute a combination of farming and some other source of income.In this case, C’s primary source of income came from his law practice. He also had income from investments, stock options, and farming (buying, selling, training and maintaining horses for racing). He deducted losses from the horse‑racing business from his other income in 2000 and 2001. Based on Moldowan, the Minister reassessed and limited the deductions on the grounds that the combination of the law practice and the horse‑racing business was not C’s chief source of income. Following Gunn, the trial judge allowed C’s appeal, finding that the loss deduction limitation in s. 31(1) did not apply. The Federal Court of Appeal dismissed the Minister’s appeal, holding that it was required to follow its prior decision in Gunn."

The SCC held (unanimously) that the appeal should be dismissed.

Justice Rothstein wrote as follows (at paragraphs 24-25, 27-30, 37-47):
“The question of whether this Court should overrule one of its own prior decisions was addressed recently in Ontario (Attorney General) v. Fraser, 2011 SCC 20, [2011] 2 S.C.R. 3. At para. 56, Chief Justice McLachlin and LeBel J., in joint majority reasons, noted that overturning a precedent of this Court is a step not to be lightly undertaken. This is especially so when the precedent represents the considered views of firm majorities (para. 57).Nonetheless, this Court has overruled its own decisions on a number of occasions. (See R. v. Chaulk, [1990] 3 S.C.R. 1303, at p. 1353, per Lamer C.J., for the majority; R. v. B. (K.G.), [1993] 1 S.C.R. 740; R. v. Robinson, [1996] 1 S.C.R. 683.)

However, the Court must be satisfied based on compelling reasons that the precedent was wrongly decided and should be overruled. (See R. v. Salituro, [1991] 3 S.C.R. 654, at p. 665; Minister of Indian Affairs and Northern Development v. Ranville, [1982] 2 S.C.R. 518, at p. 527; Hamstra (Guardian ad litem of) v. British Columbia Rugby Union, [1997] 1 S.C.R. 1092, at paras. 18-19; R. v. Henry, 2005 SCC 76, [2005] 3 S.C.R. 609, at para. 44.)… The vertical convention of precedent is not at issue with respect to the decision as to whether the Supreme Court should overrule one of its own precedents. Rather, in making this decision the Supreme Court engages in a balancing exercise between the two important values of correctness and certainty. The Court must ask whether it is preferable to adhere to an incorrect precedent to maintain certainty, or to correct the error. Indeed, because judicial discretion is being exercised, the courts have set down, and academics have suggested, a plethora of criteria for courts to consider in deciding between upholding precedent and correcting error. (See R. v. Bernard, [1988] 2 S.C.R. 833, at pp. 850-61, Chaulk, at p. 1353, Henry, at paras. 45-46.)

In this case, I am of the opinion that relevant considerations justify overruling Moldowan. First, Moldowan essentially read the combination test out of s. 31(1). In finding that taxpayers in the second class were subject to the loss deduction limitation where farming as a source of income was a sideline or subordinate to another source of income, the necessary inference was that farming had to be the taxpayer’s chief source of income. However, the section provides two distinct exceptions to its loss deduction limitation. One is where farming is the taxpayer’s chief source of income. The second is where the taxpayer’s chief source of income is a combination of farming and some other source of income. By requiring that the second exception apply only where the other source of income was subordinate to the farming source of income, Moldowan collapsed the second exception into the first. Having regard to the words of the provision, these are two separate exceptions to the loss deduction limitation and each must be given meaning.

Second, there has been significant judicial, academic and other criticism of Moldowan from its issuance in 1977. In light of this criticism, it is appropriate for this Court to take notice and acknowledge the difficulties identified with the Moldowan interpretation of s. 31(1).

Third, since Moldowan, this Court has held on a number of occasions that unexpressed legislative intention under the guise of purposive interpretation is to be avoided (Shell, at para. 43).
There is no doubt that s. 31(1) is, as Dickson J. recognized, an awkwardly worded and intractable section and the source of much debate. Nonetheless, the section is clear that two distinct exceptions to the loss deduction limitation can be identified. A judge-made rule that reads one of the exceptions out of the provision is not consistent with the words used by Parliament.… s. 31(1) does not contemplate a simple aggregation of two sources of income, but requires a wider inquiry into the amount of capital, time, effort, commitment and general emphasis on the part of the taxpayer with respect to the sources of income.

There is no requirement that the two sources of income must be connected in order to meet the combination test.However, before going further, two considerations must be borne in mind. First, it is necessary to interpret the provision having regard to its text, context and purpose (Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601, at para. 55). Nonetheless, purposive interpretation cannot justify finding unexpressed legislative intentions. See Shell, at para. 43. Second, the question as to whether the combination of farming and some other source of income constitutes the taxpayer’s chief source of income is a fact-based determination. I see nothing in the words or context in s. 31(1) to support the proposition that farming must be the predominant source of income when viewed in combination with another source, in order to avoid the loss deduction limitation of the section.

It is also not possible to relegate s. 31(1) to applying only to “hobby” or “gentleman” farmers because, for a loss to be deductable at all, farming must be a source of income. A taxpayer who is engaged in farming in a non-commercial manner, with no profit or intention to profit, does not have a source of income from farming and therefore no loss for income tax purposes, limited or not (Stewart v. Canada, 2002 SCC 46, [2002] 2 S.C.R. 645, at paras. 51-54).The provision is addressed to losses from farming businesses.

There is no loss deduction limitation where farming is the taxpayer’s chief source of income. That implies that such a taxpayer is investing significant funds and spending considerable time in that business. Otherwise, it is difficult to see such a business as a chief source of income.I do not think that characterization of farming changes under the combination test. The provision still contemplates that the taxpayer will devote significant time and resources to the farming business, even if he or she will also devote significant time and possibly resources to another business or employment. It seems to me that, as long as the taxpayer devotes considerable time and resources to the farming business, the fact that another source of income produces greater income than the farm does not mean that such a combination is not a chief source of income for the taxpayer.

The approach to the combination question described by Mr. Felesky, Dickson J. and Sharlow J.A., makes sense. It is grounded in the words of s. 31(1), which limits only a taxpayer’s losses “from all farming businesses”. where the taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income. With respect to the combination, a simple aggregation of income from two sources cannot have been contemplated by the section, meaning that factors other than two sources of income alone must be taken into account.

The factors identified by Sharlow J.A., namely, the capital invested in farming and the second source of income, the income from each of the two sources of income, the time spent on the two sources of income, and the taxpayer’s ordinary mode of living, farming history, and future intentions and expectations, are all factors involved in running a farming business together with another source of income. If these factors tend to show that the taxpayer places significant emphasis on both his farming and non-farming sources of income, there is no reason that such a combination should not constitute a chief source of income, avoiding the application of the loss deduction limitation of s. 31(1). The determination is a factual one for the trial judge.Such an interpretation is consistent with the general policy of the Income Tax Act that, subject to specific exceptions, taxpayers may offset losses from one business or source of income against profits from another without limitation (Gunn, at para. 20, citing Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147, at para. 53).

The only restriction in the case of farming losses is that the combination must constitute the taxpayer’s chief source of income. This does not imply that either source of income by the taxpayer need be the predominant source. But it does imply that they must be significant endeavours of the taxpayer.For s. 31 to apply and for a farming loss to be deductible at all, farming must be a source of income. At trial, the Crown conceded that Mr. Craig’s horse-racing operation was a business, as opposed to a personal endeavour, on the test articulated in Stewart. Accordingly, the trial judge did not have to engage in a Stewart analysis of the facts to determine whether Mr. Craig’s horse-racing operation was a source of income, but accepted that it was a business and not a personal endeavour (paras. 41-42). I see no reason to disturb this conclusion.Since the horse-racing activities were a source of income, it remains to determine whether to apply the loss deduction limitation in s. 31(1). Taking a contextual approach to the combination question, the relevant factors to consider are the capital invested in farming and the second source of income; the income from each of the two sources of income; the time spent on the two sources of income; and the taxpayer’s ordinary mode of living, farming history, and future intentions and expectations.

The approach must be flexible, recognizing that not each factor need be significant. The question is whether, looking at these factors together, the taxpayer places significant emphasis on each of the farming business and other earning activity, and if so, the combination will constitute a chief source of income and avoid the loss deduction limitation of s. 31(1).Hershfield T.C.C.J. found that the relevant factors, other than demonstrated profitability, clearly pointed to Mr. Craig’s farming business being more than a sideline business (para. 76). Even though Mr. Craig derived his principal income from the practice of law and the total hours spent at his law practice exceeded that devoted to the farming business, he devoted both a material amount of capital and a very significant part of his daily work routine to the farming business (para. 76).

Hershfield T.C.C.J. found that the horse-racing business was pursued as a major business preoccupation. Mr. Craig’s mornings, evenings and weekends were consumed by a dedication to enhancing the potential profitability of the operation, which was more than a distraction from his normal mode of living or an entertainment or sport (para. 76). Further, Mr. Craig was involved in his farming business beyond the stable and track. Hershfield T.C.C.J. gave weight to the fact that Mr. Craig was an active member of and contributor to the community of standard-bred racing (para. 77). He worked to improve the integrity of standard-bred racing so as to improve the potential profitability of his operation. His knowledge of the horse-racing competitions that were important for profitability was sufficient to place him as chairperson of the industry’s appeal board (para. 77). For these reasons, Hershfield T.C.C.J. determined that the horse-racing operation was a chief source of income on the basis of its contribution to the combination test in s. 31(1).Having considered the relevant factors, Hershfield T.C.C.J. found that farming, in combination with Mr. Craig’s law practice, was a chief source of income, and that the loss deduction limitation in s. 31(1) did not apply to the facts. There is no basis for this Court to disturb Hershfield T.C.C.J.’s factual conclusion and his finding that the loss deduction limitation was not applicable.”

Regards,

Blair