Zero tolerance policy: Superior Court of Justice strictly applies immediate disclosure rule for partial settlements

Peninsula Employment v Castillo^[1] serves as a cautionary tale to litigants and their counsel about the critical importance of immediately disclosing settlement agreements reached with some, but not all, other parties to litigation.

The Ontario Court of Appeal has repeatedly affirmed the rule that settlement agreements reached between some parties, but not all parties, must be immediately disclosed to non-settling parties if they change the landscape of the litigation by changing the adversarial relationship between some parties into a cooperative one.^[2]

In Peninsula Employment, the Ontario Superior Court of Justice strictly applied this rule with “zero tolerance”^[3] and without regard to potential or actual prejudice in the circumstances of the case, and permanently stayed the plaintiff’s action against the non-settling defendants due to a relatively brief delay in disclosure.

Background

The Plaintiff, Peninsula Employment Services Ltd., entered into settlement agreements with three individual defendants to its action. Non-settling defendants Marc Castillo and Castillo HR Consulting Inc. (collectively, “Castillo”) brought a motion seeking an order staying the Plaintiff’s action for abuse of process due to the plaintiff’s failure to immediately disclose the settlement agreements.

The timeline of each settlement agreement and its subsequent disclosure was as follows:

September 12, 2024: The Plaintiff entered into a settlement agreement with defendant Anita Crawford.

September 16, 2024: The Plaintiff served Castillo with a Notice of Discontinuance in respect of its claim against Ms. Crawford. There was no accompanying message regarding a settlement agreement delivered with the Notice of Discontinuance.

September 20, 2024: The Plaintiff advised counsel for Castillo that it had reached a settlement with Ms. Crawford.

September 24, 2024: The Plaintiff entered into separate settlement agreements with individual defendants Erika Saclayan and Nikki Mathews.

September 25, 2024: The Plaintiff served Castillo with a Notice of Discontinuance in respect of its claim against Ms. Saclayan and Ms. Mathews. Again, there was no accompanying message regarding a settlement agreement delivered with the Notice of Discontinuance.

October 7, 2024: The Plaintiff advised Castillo that it had reached settlements with Ms. Saclayan and Ms. Mathews.

Decision

The Court granted the relief sought and ordered a permanent stay of the Plaintiff’s action due to its failure to immediately disclose the settlement agreements to Castillo.

In his decision, Justice E.M. Morgan held that “strict rule” of immediate disclosure maintains fairness as between remaining parties to the litigation,^[4] and that the “lapses of eight days in respect of the Crawford settlement and twelve days in respect of the Saclayan and Mathews settlements violate this strict rule.”^[5]

Justice Morgan found that due to the Plaintiff’s delay in disclosure, for those periods of eight and twelve days, Castillo was put in a position in which it could not accurately analyze its position and strategize its response.^[6]

Unlike the analysis for most procedural missteps or other delays in litigation (other than the expiry of a statutory limitation period), the analysis here does not include any weighing of prejudice to the defendant against the impact of the stay on the Plaintiff and its right to have its claim heard on the merits. There is no indication in the decision as to whether the litigation was in a stage that called for analysis or strategizing that could have been altered by earlier disclosure of the settlement agreements. Whether Castillo would have suffered potential prejudice or did suffer actual prejudice because of the eight- and twelve-day lapses in disclosure under the specific circumstances of the case at hand does not appear to have been a factor.

Indeed, Justice Morgan ruled that there should be no delay that can be counted in days or weeks at all, and if disclosure is anything but immediate, “the only remedy for this abuse of process acceptable to courts in Ontario is a permanent and non-discretionary stay of proceedings.”^[7]

Key takeaways

• A settlement reached between some, but not all, parties must be immediately disclosed to any remaining parties to the litigation. Considering the comments of Justice Morgan in Peninsula Employment, it is likely the settlement should be disclosed to the other parties the same day the settlement agreement is entered into.
• If you are considering settlement with only some parties to your litigation, you should determine whether the immediate disclosure rule will apply before reaching a settlement. The strict application of this rule may not allow for time to undertake this analysis after settlement is reached.
• If you are a defendant or defendant’s counsel that has learned of a settlement between other parties to the litigation, but that was not immediately disclosed to you, you may have grounds to seek a permanent stay of the action.

If you have questions about this issue or whether the immediate disclosure rule applies to litigation you are involved in, please contact one of the authors of this article to discuss your specific situation.