Side agreements limiting liability as between parties must be immediately disclosed

Aecon Buildings v. Stephenson Engineering Limited, 2010 ONCA 898 deals with the (common) situation where parties agree amongst themselves to limit liability during litigation. By such agreements, parties apparently opposite may have joint interests. The Court says such agreements are proper but must be disclosed immediately:

[13]          We do not endorse the practice whereby such agreements are concluded between or among various parties to the litigation and are not immediately disclosed.  While it is open to parties to enter into such agreements, the obligation upon entering such an agreement is to immediately inform all other parties to the litigation as well as to the court.  As this court said in Laudon v. Roberts (2009), 308 D.L.R. (4th) 422, at para. 39:

The existence of a ["Mary Carter" agreement] significantly alters the relationship among the parties to the litigation.  Usually the position of the parties will have changed from those set out in their pleadings.  It is for this reason that the existence of such an agreement is to be disclosed, as soon as it is concluded, to the court and to the other parties to the litigation.

The reason for this is obvious. Such agreements change entirely the landscape of the litigation.

[14]          In this case, the agreement was not voluntarily produced immediately upon its completion. It was only produced several months after its existence was discovered by the appellant and it was specifically requested.

[15]          Other parties to the litigation are not required to make inquiries to seek out such agreements. The obligation is that of the parties who enter such agreements to immediately disclose the fact.

[16]          Here, the absence of prejudice does not excuse the late disclosure of this agreement. The obligation of immediate disclosure is clear and unequivocal.  It is not optional. Any failure of compliance amounts to abuse of process and must result in consequences of the most serious nature for the defaulting party.  Where, as here, the failure amounts to abuse of process, the only remedy to redress the wrong is to stay the Third Party proceedings and of course, by necessary implication, the Fourth Party proceedings commenced at the instance of the Third Party. Only by imposing consequences of the most serious nature on the defaulting party is the court able to enforce and control its own process and ensure that justice is done between and among the parties.  To permit the litigation to proceed without disclosure of agreements such as the one in issue renders the process a sham and amounts to a failure of justice.
James Morton
1100-5255 Yonge Street
Toronto, Ontario
M2N 6P4

416 225 2777