Bennington Financial Corp. v. Medcap Real Estate Holdings Inc.: The Limits of the Immediate Disclosure Rule

Over the past several years, much has been made in Ontario about the importance of proper and timely disclosure of settlement agreements amongst parties in litigation proceedings. These disclosure requirements are critically important and present a significant risk both to clients and lawyers if not managed properly and in accordance with the requirements of the Court.

As a reminder to readers, as reaffirmed in March 2018 by the Ontario Court of Appeal’s decision in Handley Estate v. DTE Industries Limited , parties to a settlement agreement in Ontario must immediately disclose the existence of a settlement agreement in circumstances where that agreement alters the litigation landscape. We previously discussed the immediate disclosure of settlement agreements in the context of lien matters here.

Understanding the breadth of these requirements and how the Court interprets this duty is therefore also of significant importance. In that regard, recently in Bennington Financial Corp. v. Medcap Real Estate Holdings Inc., 2024 ONCA 90,[1] the Court of Appeal for Ontario refused to expand the interpretation of the immediate disclosure rule for settlement agreements. In upholding the Superior Court’s findings, the Court reaffirmed that the rule should only be invoked when settlement agreements have the potential to significantly change the litigation landscape. Below, we review the case and consider the implications of this decision for construction disputes.

Background

Bennington Financial Corp involved separate actions initiated by two corporate entities being Bennington Financial Corp. (“Bennington“) and Heffner Investments Limited (“Heffner“), both actions being commenced against Medcap Real Estate Holdings Inc. (“Medcap“). These actions stemmed from alleged defaults by Medcap on equipment leases and collateral mortgages related to fitness equipment and monetary advances which were made to entities controlled by a Mr. Cardillo, who was associated with Medcap and also related fitness chain known as Premier Fitness. The disputes also involved mortgages on a commercial real estate space (discussed in more detail below).

Bennington’s claim related to equipment leases and monetary advances made to Premier Fitness, alleging defaults that led to Medcap owing more than $13 million. These claims were substantiated by collateral mortgages granted by Medcap to Bennington.

For its part, Heffner alleged that it also leased equipment and advanced loans to Medcap, leading to a separate action against Medcap for the recovery of amounts owing.[2]

Mortgages and Property Involvement

A focal point of the disputes was a property located in Hamilton, Ontario owned by Medcap (the “Wentworth Property“). This property was encumbered with multiple mortgages, including those held by 2503866 Ontario Inc. (alleged to be controlled by Mr. Cardillo), Heffner, another company known as Physiomed, and Bennington, with the priority of mortgages in that order. The legitimacy of these mortgages was contested by Medcap, adding another layer of complexity to the litigation.[3]

Settlement Efforts

Over the course of litigation, as is often the case, the parties engaged in settlement discussions, with a pivotal issue being an alleged undocumented agreement among the plaintiffs (Bennington, Heffner, and others) not to settle with Medcap individually. This agreement not to settle purportedly required any settlement with Medcap by any of the executing parties to be collective, encompassing all claims against Medcap.

Medcap’s Motions and Allegations of Abuse of Process

Medcap moved to dismiss or stay the actions of Bennington and Heffner, arguing that the undisclosed agreement among the plaintiffs to require a collective settlement constituted an abuse of process. Medcap’s argument hinged on the immediate disclosure rule – i.e. the principle that settlement agreements reached between some parties to litigation, but not others, must be immediately disclosed to non-settling parties if they “entirely change the litigation landscape”.[4]

Given the nature of this particular “settlement” agreement, Medcap had the dubious task of having to argue not only that the ‘agreement’ changed the litigation landscape, but also that there was in fact a settlement agreement in the first place in order to apply the rule of immediate disclosure.

The Superior Court’s Decision

The issues before the motions judge at the Superior Court were as follows:

1. Was there a settlement agreement;
2. If so, did it change the litigation landscape significantly; and
3. Was the agreement immediately disclosed.

Did a settlement agreement exist?

Heffner contended there was no formal settlement agreement, maintaining that while creditors could negotiate independently with Medcap, the only obligation Heffner had to Bennington, Physiomed and Wilson was to negotiate with Medcap in good faith.[5]  Bennington argued that there was never a true agreement, and that it was at best an understanding each of the parties came to independently, realizing they were better off working together, but they could each negotiate their own settlement.[6] It was on the evidence of Bennington’s affiant, in cross-examination, that the Court found a settlement agreement existed. In essence, the agreement was that Bennington, Heffner and Physiomed agreed to have a united front and to take the position that settlement with Medcap required settlement with all of them; settle with one, settle with all.[7]

Further, the Court found that this agreement, while not formally documented, was sufficiently evidenced by the parties’ actions and statements so as to constitute a “settlement agreement” for the purpose of the test.[8]

Did the agreement change the litigation landscape?

The critical portion of the Superior Court’s analysis was whether the agreement “significantly altered the litigation landscape”. On this point, the Court considered whether the plaintiffs’ agreement changed their adversarial positions into cooperative ones, thereby impacting the fairness and integrity of the court process. The Court also scrutinized whether the agreement incentivized cooperation among the plaintiffs against Medcap, and if it affected Medcap’s ability to defend itself or settle the claims individually.

Given the generality of the language in the phrase “significantly altered the litigation landscape”, the Court considered both the values that the rule is meant to advance, as well as the fact-specific nature of the inquiry. In this regard, the Court concluded that the factors which assist in determining whether a settlement agreement needs to be disclosed immediately include the following:

1. the configuration of the litigation;
2. the claims between the parties;
3. the relationship between the parties and their orientation in the litigation;
4. the terms of the agreement;
5. whether the agreement is inconsistent with the pleadings or with the position(s) taken during litigation;
6. whether the terms of the agreement alter the apparent relationships between the parties to the litigation that would otherwise be assumed from the pleadings or expected in the conduct of the litigation;
7. whether the agreement changes the adversarial position of the parties into a cooperative one whereby the party is incentivized to cooperate with a former adversary;
8. whether the agreement impacts the litigation strategy of the non-settling party; and
9. the values the rule is meant to advance:
   1. preserving fairness to the parties;
   2. preserving the integrity of the court process; and

• allowing the court to know the reality of the adversity between the parties.[9]

Ultimately, the Court concluded that the agreement among the plaintiffs did not fundamentally alter the adversarial relationship among the parties in a way that would significantly change the dynamics of the litigation. On this basis, it did not meet the threshold that would require immediate disclosure.

To the contrary, the plaintiffs’ actions – while coordinated – did not convert their relationship with Medcap from adversarial to cooperative in the context of undermining the fairness or integrity of the litigation process. The plaintiffs remained separate entities with distinct claims, and their agreement to negotiate collectively did not diminish Medcap’s ability to defend itself or engage in settlement negotiations.

Was the agreement disclosed immediately?

Notwithstanding that the Court considered disclosure was not necessary, it nevertheless considered (presumably in the interest of providing fulsome reasons on appeal) the allegations made that the agreement was not disclosed immediately.

Medcap alleged that the agreement should have been disclosed, but was not until cross-examinations on the motion(s). For their part, Bennington and Heffner alleged that Medcap should have known about the agreement from their past conduct. Ultimately, the Court concluded that the agreement was not disclosed immediately, although this point was ultimately moot given the Court’s finding on the prior issue.

With respect to Medcap’s abuse of process claim, the Court emphasized the necessity of balancing the need for disclosure with the parties’ freedom to strategize and negotiate settlements. In that regard, requiring immediate disclosure of the kind of agreement would unduly restrict the parties’ ability to conduct their litigation and negotiate settlements.

The Court stressed that the agreement did not mislead the court or disadvantage Medcap in a manner that would justify labeling the plaintiffs’ conduct as an abuse of process. The essence of the litigation, the claims, and the defenses remained unchanged by the plaintiffs’ agreement. Therefore, the Court dismissed Medcap’s motions to stay or dismiss the proceedings.[10]

Medcap appealed to the Court of Appeal.

The Court of Appeal’s Decision

On appeal, Medcap took a different approach, departing from the approach taken in Superior Court (and most often taken by similarly situated litigants) in respect of altering the litigation landscape. Specifically, counsel for Medcap argued that “agreements that fetter, clog, or frustrate, settlement must be disclosed.” In this regard, Medcap was looking to broaden the rule for immediate disclosure to encapsulate the situation it found itself in with Heffner and Bennington.

The Court did not provide precise definitions for these terms as advanced by Medcap, but concluded that their adoption would represent a “dramatic and unwarranted expansion of the properly narrow rule”.[11] Having refused to broaden the rule, the Court of Appeal therefore agreed with the motions judge and dismissed Medcap’s appeal.

In rendering its decision, the Court considered the purpose of the disclosure rule, emphasizing that it is premised on ensuring the litigation process remains fair and transparent, particularly when agreements may potentially alter the strategic behaviour of parties from being opponents to collaborators.[12]

The core of the Court’s analysis centered on the motions judge’s application of these principles to the facts at hand, particularly among the respondents (Heffner and Bennington) and a third-party creditor.

The Court reviewed the motion judge’s conclusion that the settlement agreement did not require immediate disclosure, observing that his conclusion was based on the finding that the agreement did not compel the respondents to support each other beyond the cooperation typically expected in litigation, nor did it modify their adversarial relationship with Medcap.[13]

Further, the Court found no palpable and overriding error in the motion judge’s finding that the respondents were not adverse to one another and that their collective strategy did not significantly alter the litigation landscape against Medcap. These findings were critical in determining whether the immediate disclosure rule was triggered.[14]

In the result, the Court’s agreement with the motions judge demonstrated that not all agreements among litigating parties necessitate disclosure, let alone immediate disclosure. Rather, the agreements that require such disclosure remain strictly those that transform the litigation landscape in such a way that significantly alters the dynamics of litigation do.

This distinction is vital for maintaining the balance between the strategic freedom of parties to negotiate and settle disputes and the overarching need to ensure fairness and transparency in the judicial process. It also furthers the Court’s general position that the rule, which strictly applied with no discretion, is only to be applied in narrow circumstances.

Commentary

As noted above, the Court of Appeal’s decision in Bennington provides important clarification on the boundaries of the immediate disclosure rule: the rule is invoked only when an agreement shifts the parties’ position from adversarial to co-operative, in a manner that could potentially disadvantage the other parties or mislead the court.

Both the Superior Court and Court of Appeal’s decisions suggest that this distinction is vital in preserving the strategic autonomy of parties engaged in litigation. It acknowledges that while transparency is fundamental, the ability of parties to negotiate, strategize, and settle disputes is equally important.

Autonomy in litigation is essential for allowing parties to effectively manage their strategies within the confines of the Rules of Civil Procedure and established jurisprudence. A lack of autonomy could complicate litigation and settlement processes, potentially hindering cooperation and collaboration among parties and affecting the overall possibility of reaching settlements.

As well, in the construction context, particularly as it relates to lien proceedings that involve multiple claimants and are intended to be conducted as a form of class proceeding, Bennington offers important guidance on the management of settlement agreements and collective bargaining strategies – which is an issue that comes up regularly in such proceedings.

Construction projects often involve a web of contractual relationships, with numerous parties across several levels of the construction pyramid, each potentially holding lien rights in the event of disputes. Given the complexity of these relationships, the principles outlined in this decision reiterate the importance of transparency and the potentially harsh consequences of undisclosed settlement agreements.

That said, this decision also clarifies that such agreements require disclosure only when they transform the litigation landscape in a manner that might disadvantage other parties or mislead the court. This creates a nuanced threshold for determining when the strategic cooperation among lien claimants crosses into territory that could potentially affect the fairness and integrity of the judicial process.

Construction stakeholders often enter into various forms of agreements during the course of litigation, including those aimed at coordinating their approach to settlement negotiations or litigation strategies, as well as agreements by mid-level claimants to settle with their subtrades and take an assignment of the subtrades’ claims. Ironically, rather than potentially “fetter, clog, or frustrate” settlement, such a scenario would arguably facilitate settlement among the remaining parties (insofar as there are fewer of them) and would therefore seem to be on-side of the appellant’s proposed expansion of the immediate disclosure rule.

On the other hand, the Court of Appeal’s decision to reject this broad interpretation nevertheless affirms that construction stakeholders can continue to negotiate and enter into agreements with one another and provides comfort that not all such agreements have the effect of complicating settlement negotiations needs to be disclosed.

Ultimately, because the test for disclosure remains somewhat vaguely worded and heavily fact-dependent, parties will need to remain mindful of whether their settlements meet the threshold for disclosure. While the Court has refrained from expanding the rule to include agreements that merely complicate settlement efforts, parties are still required to disclose any agreements that significantly alter the adversarial dynamics of a case in a way that could disadvantage other parties or mislead the court. It also remains open that the Court may modify the test in future cases, if the fact scenario withstands scrutiny and provides sufficient policy reasons to justify such an expansion.

On this basis, construction industry participants must remain vigilant in settlement processes and continue to carefully consider how their agreements affect the overall litigation landscape, and whether they could be seen as transforming adversarial relationships in a manner that necessitates disclosure. In this regard, we recommend reaching out to qualified counsel to work through settlement agreements and negotiations – particularly when engaged in settlement based processes such as negotiation or mediation.

[1] 2024 ONCA 90 [Bennington Financial Corp].

[2]  2023 ONSC 2742 at paras 8-11 [Bennington].

[3] Ibid at para 12.

[4] Skymark Finance Corporation v. Ontario, 2023 ONCA 234, at para 46.

[5] Bennington, supra note 2 at para 32.

[6] Ibid at para 33.

[7] Ibid at para 35.

[8] Bennington, supra note 2 at paras 32-38.

[9] Ibid at paras 39-69.

[10] Ibid at para 74.

[11] Bennington Financial Corp, supra note 1 at para 15.

[12] Ibid at para 14.

[13] Ibid at para 16.

[14] Ibid at para 17.

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