The “culture shift” to a more accessible civil justice system, as championed in Hryniak v. Mauldin,is alive and well. Courts are increasingly sensitive to the economy of cases, taking into account the efficiency and proportionality of substantive and procedural rights. Today’s emphasis is on reasonable not exhaustive measures.

In O’Connor Associates Environmental Inc. v. MEC OP LLC, the Alberta Court of Appeal overturned the decision of a case management judge who permitted the joinder of third party advisors to a main action between a purchaser and vendor of oil and gas assets. This appellate decision incorporates the Hryniak policy rationale of more efficient judicial processes in its decision strike out all claims against the third parties.

Background

This appeal was brought by third party advisors to an agreement of purchase and sale between the plaintiff, NEP Canada ILC, and the respondents/vendors, Merit Group. The third party advisors were retained by the plaintiff to complete due diligence prior to the close of transaction.

Following the close of transaction, the plaintiff discovered inaccuracies in the assets purchased from the respondents, and sued the respondents for deceit, negligent misrepresentation, breach of contract and unjust enrichment.

The respondents pleaded in the Statement of Defence that the assets were sold “as is, where is”, without any representations. The respondents further pleaded that the plaintiff had expressly covenanted that it would not rely on any representations made by the respondents, but would rely on its own due diligence.

The respondents also issued a Third Party Claim against three of the advisors who had assisted the plaintiff during the due diligence process.  The Third Party Claim alleged that the advisors were in breach of contracts between themselves and the plaintiff, for negligently performing their services and for failing to communicate to the plaintiff their actual knowledge about the assets.

The appellants brought an application to have the Third Party Claim struck on the basis that it failed to disclose a reasonable cause of action and that they were not properly added under Rule 3.44 of the Alberta Rules of Court.

The respondents then brought a subsequent application to amend the Third Party Claim to include a claim of contribution in the event that both the respondents and the third parties are found to have been negligent. The amended Third Party Claim alleged inter alia a new cause of action: breach of duty owed to the respondents for failing to adequately disclose information to the plaintiff.

Case Management Decision

Relying primarily on Canadian Natural Resources Ltd. V. Arcelormittal Tubular Products Roman S.A., the case management judge allowed the respondents’ amendments, including the new duty of care cause of action.

The judge reasoned that there is a reasonable prospect that the new cause of action may succeed, and that it was reasonably possible that a court could hold the third parties partly responsible for the plaintiff’s damages, sufficient to satisfy the requirements of R. 3.44 of the Alberta Rules of Court.

Appellate Decision

The appellate court overturned the case management judge’s decision and concluded:

In summary, there is no reasonable prospect of any findings being made in this litigation that would engage the third parties sufficiently to warrant the extra expense, complexity, and delay that will be caused by these third party notices. [Emphasis added].

A more detailed summary of the court’s analysis follows.

Standard of Review

The court held that a review of the pleadings is a question of law on a standard of correctness. If it is determined that the law was correctly stated, the standard of review of the decision to strike the pleadings is reasonableness.

The application of R. 3.44 of the Alberta Rules of Court is a question of mixed fact and law, which is decided on a standard of palpable and overriding error.

Failure to Disclose a Cause of Action

The court commented that striking pleadings that have no reasonable prospect for success is consistent withHryniak’s call for a culture shift. A pleading may be struck where it discloses no reasonable claim or defence to a claim.

Citing paragraphs 19-21 of R. v. Imperial Tobacco Canada Limited as binding authority for the test for striking out pleadings, the court held that determining whether a novel claim has a reasonable prospect of success requires an analysis of many factors including (a) the clarity of the factual pleadings and, (b) the existence of case law discussing the same or similar causes of action is relevant.

The court cautioned against interpreting the Imperial Tobacco test too strictly (as had been done inArcelormittal Tubular) and promoted a balancing between permitting the development of the common law with novel claims and resisting the temptation to send every case to trial.

Duty of Care

The court moved on to strike out the respondents’ claim that the third party advisors owed the respondents a duty of care.

The duty of care analysis considers whether the relationship between the claimant and the defendant discloses sufficient foreseeability and proximity to establish a prima facie duty of care and, if so, whether there are any residual policy considerations which ought to negate or limit that duty of care.

More specifically:

Proximity: The test for proximity considers the legal relationship between the claimant and the defendant. In this case, third parties were selected, retained, instructed, and paid by the plaintiff.  The advisors’ proximity was to the plaintiff, not the respondents. The respondents could not have had any reasonable expectation that the third parties were protecting their interests of the respondent. The interests involved are contractual interests between the third parties and the plaintiff, which are not proximate to the respondents.

Nature of the relationship: This is a critical component to the duty of care analysis. The court commented that those retained to give advice must be able to do so freely, frankly and without concern for a conflict of interest between the plaintiff and the respondents.

Based on the facts pleaded, the court concluded that there is no reasonable prospect for success of this claim.

Scope of Third Party Claims

The court discussed the limits to the scope of R. 3.44 and identified at least two inappropriate uses of this Rule.

  1. Where the Third Party Claim is being used, in substance, as a defence. For instance, if the respondents gave pertinent information to the third party that the third party neglected to pass on to the plaintiff, the respondents should plead in its defence that the plaintiffs did not rely on its misrepresentations and that the respondents cannot be held liable for miscommunications between the third party and the plaintiff.
  2. Where the plaintiff is legally responsible for the conduct alleged against the Third Party. In this case, the proposed Third Party was clearly an agent of the principal, the plaintiff, as they were retained by the plaintiff to assist with due diligence. The plaintiff bears the responsibility for the actions of its agent.

The court cautioned to protect the flexibility inherent in R. 3.44 from rigid rules at the early stage of pleadings.

Deceit

If deceit is established, reasoned the court, it can be presumed that all parties were deceived, including the third parties. If deceit is not established, and the third party simply failed to pass on pertinent information to the plaintiff, the respondents will not be held liable. The court concluded that the claim of deceit did not justify the third parties being bound in this litigation.

Contract of Purchase and Sale

If the respondents breached a covenant, for whatever reason and regardless of any other contributing factor (such as the plaintiff failing to undertake its own proper due diligence), the respondents can be liable for failure to perform contractual obligations. To that end, again, the court decided that there was no need for the Third Party to be bound in this litigation.

Contracts to provide advice

The respondents claim that there is a contract between the plaintiff purchaser and the third party advisers under which the third party advisers agreed to assist with due diligence. The court rightly held that the contract to provide advice was between the purchaser and the advisors, with no standing to litigate any matter at issue in that contract by the respondents.

The court concluded that “[i]f the respondents are liable to the plaintiff in deceit, or for breach of contract, these collateral contractual arrangements will be of marginal relevant… There is no sufficient reason to join the third parties to this action..”

Unjust enrichment

The court commented that the claim in unjust enrichment is not fully pled, but even if this claim is established, the involvement of the third parties would be of marginal importance. The court decided that there is no need to involve the third party advisers in the litigation.

Tort

The plaintiffs plead, in the alternative, negligent misrepresentation by the respondents. The court recognised the possibility of parallel residual duties in tort as well as a contractual claim in the collateral contract between the plaintiffs and the third party advisors.

The respondents plead, in the alternative, that the plaintiff did not rely on any negligent misrepresentation by the respondents and that the plaintiff covenanted that it would not rely on any representations. This pleading is a complete defence to the claim, and not appropriately raised as an issue in third party proceedings. If the third parties were negligent in not discovering the negligence, the plaintiff would be identified with that alleged negligent of the third parties, making the 3rd party proceedings redundant.

The court recognized the conceptual possibility that both the respondents and the third parties might be severally liable to the plaintiff in tort and that such concurrent liability by the third parties would survive the terms of their retainer agreements. The court determined that a claim in tort would be sufficient to support third party liability under R. 3.44. Interestingly, the court concluded that considerations of proportionality and efficiency preclude the use of the third party procedure in this case. The court stated that the respondents could commence an action against the third parties for contribution after being found liable to the plaintiffs.

Significance of the Case

This case is significant for the lengths a court will go to promote the values articulated and promoted inHryniak. In this new climate, counsel will need to be ready to justify the rationale behind its approach (both procedural and substantive). These days, even the earliest steps in a litigation require a scalpel, not an axe.

Case Information

O’Connor Associates Environmental Inc. v. MEC OP LLC, 2014 ABCA 140

Docket: 1301-0375-AC

Date of Decision: April 29, 2014