At our weekly meeting, Samuel Pevalin discussed the recent decision of the Ontario Court of Appeal in 2177546 Ontario Inc. v. 2177545 Ontario Inc., 2023 ONCA 693. In this decision, the Court applied the three-part test established in Celanese Canada Inc. v. Murray Demolition Corp., 2006 SCC 36 for when a party accesses privileged information. The Court mainly focused on fashioning an appropriate remedy. The Court upheld the Application Judge’s remedy to strike the respondent’s response to the application, and have the application proceed undefended.
Background & Procedural History
Paul Halyk is the principal of the appellant company, 2177545 Ontario Inc. Peter Labiris is the principal of the respondent company, 2177546 Ontario Inc.
In 2008, Mr. Halyk and Mr. Labiris’s companies acquired, as tenants in common, a piece of development land.
In 2021, the relationship between the two parties deteriorated, and they brought an application to the Committee of Adjustment to sever the property into two equal parcels. The Partition Application contained both parties’ signatures.
However, Mr. Halyk claimed he did not sign the Partition Application and that his signature was a forgery. The Committee still approved the Partition Application and issued its consent under the Planning Act to sever the Property. Mr. Halyk refused to implement the Consent to Server, which required him to sign the documents to convey the Property into two parcels.
Mr. Labiris brought an application under the Partition Act to sever the property.
During the litigation, Mr. Halyk gained access to Mr. Labiris’ privileged emails, read some, and retained copies of privileged communications about the litigation. The communications included proposed settlement terms and discussions, thoughts on how to negotiate and resolve matters, and strategic advice. Mr. Labiris later suspected Mr. Halyk was acting on confidential information, which was confirmed by an IT technician.
Mr. Labiris brought an application to stay the proceeding. The Application Judge struck Mr. Halyk’s Notice of Appearance in the Partition Application, barred him from filing evidence, and ordered that the Partition Application proceed undefended, subject to leave being granted by the judge hearing the matter.
Mr. Halyk appealed the decision.
Position of the Parties
Mr. Halyk claimed the application judge erred by
- Imposing a remedy that was neither pleaded nor proven by the Respondent; and
- Failed to consider that lesser remedies such as appointing another director or officer of the Appellant to instruct counsel, or appointing a litigation trustee to act on behalf of the Appellant, could cure the prejudice.
Mr. Labiris submitted the Application Judge correctly articulated the legal principles and exercised his discretion in applying them.
Legal Test – Celanese & Continental Currency
Celanese Canada Inc. v. Murray Demolition Corp., 2006 SCC 36 established a three-part test to determine the appropriate remedy when privileged information is received by an opposing party. The test was recently re-iterated in the case of Continental Currency Exchange Canada Inc. v. Sprott, 2023 ONCA 61.
The test is:
- The moving party must establish that the opposing party obtained access to relevant privileged material.
- The risk of significant prejudice is presumed, and the moving party does not have the onus of proving “the nature of the confidential information” disclosed. Rather, the responding party has the onus to rebut the presumed prejudice flowing from receipt of privileged information.
- Fashion an appropriate remedy.
Under part 2 of the test, the responding party can rebut prejudice by identifying with some precision that:
- They did not review any of the privileged documents in their possession;
- They reviewed some documents, but they were not privileged;
- Or the privileged documents reviewed were nevertheless “not likely [to] be capable of creating prejudice.”
Under part 3 of the test, a number of non-exhaustive factors are considered to determine the appropriate remedy. These are:
- How the documents came into the possession of the responding party or their counsel;
- What the responding party and their counsel did upon recognition that the documents were potentially subject to solicitor-client privilege;
- The extent of review of the privileged material;
- Contents of the solicitor-client communications and the degree to which they are prejudicial;
- The stage of the litigation; and
- The potential effectiveness of a firewall or other precautionary steps to avoid mischief.
The first part of the test was not in dispute.
Under the second part of the test, the Court held that the Application Judge made no error in finding the presumption of prejudice test to be met. The Appellant did not rebut the presumption of prejudice because he did not disclose what documents he accessed or what was done with them and when.
The main question on appeal was whether the Application Judge erred in deciding that, under step 3 of the test, striking the Appellant’s evidence and requiring the matter to proceed undefended was the appropriate remedy.
The Application Judge weighed the severity of ordering an undefended hearing, which would deny the Appellant the ability to respond, with the potential harm from granting a remedy allowing the Appellant to “use to his benefit any confidential and prejudicial information he may have accessed.”
The Application Judge ultimately held that access to privileged information risks serious prejudice and warrants an undefended hearing. The Court held the judge’s analysis reflects no error in applying the test articulated in Continental Currency.
While the Appellant argued that because the onus was on the Respondent to show the appropriateness of the remedy, the Respondent must establish with some certainty which documents the Appellant saw and would, therefore, justify the extraordinary remedy. The Court instead held that the Application Judge was correct in finding that requiring the Respondent to put forward evidence that the privileged documents reviewed contained such prejudicial content that the extraordinary remedy was justified would require them to disclose further confidential or privileged materials.
Instead, citing paragraph 45 of Continental Currency, the Court said that relying on the adverse presumption is proper, “even though the burden at the remedy stage shifts to the respondents” to show the appropriate remedy.
The Court cited the case of R. v. Bruce Power Inc., 2009 ONCA 573, stating that “the court may presume that “if the [party in receipt of privileged material] had been able to lead evidence to rebut the presumption of prejudice, it would have done so” and therefore “in the absence of such evidence, the appellant must “shoulder the consequences” at the remedy stage.”
The Court further added the appointment of a litigation trustee would be inappropriate as the Appellant’s affidavits were prepared in the context of already knowing the Respondent’s litigation strategy, including his instructions to his expert witness and negotiation positions, which prejudice cannot be cured by the appointment of a litigation trustee.
- Continental Currency establishes the test for when parties access privileged information;
- An undefended hearing is a remedy available when parties access privileged information.